IN THIS AGE OF ACCOUNTS SOME LITERACY IN ACCOUNTING HAS BECOME A PRIME NECESSITY .

PAUL A SAMUELSON

DEFINITIONS
ACCOUNTING IS THE ART OF RECORDING, CLASSIFING AND SUMMARISING IN A SIGNIFICANT MANNER AND IN TERMS OF MONEY, TRANSACTIONS AND EVENTS WHICH ARE, IN PART AT LEAST, OF FINANCIAL CHARACTER AND INTERPRETING THE RESULTS THEREOF.
THE PROCESSOF IDENTIFING, MEASURING AND COMMUNICATING ECONOMIC INFORMATION TO PERMIT INFORMED JUDGEMENTS AND DECISIONS BY THE USERS OF INFORMATION

TYPES OF ACCOUNTING
FINANCIAL ACCOUNTING. DATES BACK TO THE ADVENT OF JOINT STOCK COMPANIES. IT INVOLVES RECORDING OF TRANSACTIONS AFTER THEY HAVE OCCURRED/ACCRUED. COST ACCOUNTING. DEVELOPED AS A GUIDE TO INDUSTRIAL MANAGEMENT ACTIONS. IT AIMS TO ASCERTAIN COSTS WITH AVIEW TO CONTROLLING IT (COST). MANAGEMENT ACCOUNTING. THIS SYS AIMS AT USING ACCOUNTING INFO AS A DIRECT AID TO MANAGEMENT FOR DECISION MAKING.

ACCOUNTING CONCEPTS
BUSINESS ENTITY CONCEPT. THIS CONCEPT OF ACCOUNTING CONSIDERS AN ENTERPRISE/ BUSINESS AS AN ECONOMIC UNIT SEPARATE AND APART FROM ITS OWNER(S) MONEY MEASUREMENT CONCEPT. ONLY THOSE FACTS WHICH CAN BE EXPRESSED IN TERMS OF MONEY ARE RECORDED. CONTINUITY CONCEPT. IT ASSUMES THAT CONTINUITY OF BUSINESS ACTIVITY IS THE REASONABLE EXPECTATION FOR THE BUSINESS UNIT FOR WHICH THE ACCOUNTING FUNCTION IS BEING PERFORMED.

ACCOUNTING CONCEPTS(CONTD)
MATERIALITY CONCEPT. ITEMS OF SMALL SIGNIFICANCE NEED NOT BE GIVEN STRICT THEORETICALLY TREATMENT. HERE TO DRAW A LINE BETWEEN MATERIAL AND IMMETERIAL EVENTS IS A MATTER OF JUDGEMENT. CONSISTENCY CONCEPT. A SYS OF ACCOUNTING ONCE ADOPTED THE SAME SHOULD CONTINUE TO BE FOLLOWED.

COST CONCEPT. THIS CONEPT STIPULATES THAT AN ASSET IS WORTH THE PRICE PAID OR COST INCURRED TO ACQUIRE IT SUBJECT TO SYSTEMATICALLY BEING REDUCED BY A PROCESS OF DEPRECIATION.

ACCOUNTING CONCEPTS(CONTD)
ACCRUAL CONCEPT. THIS CONCEPT MAKES A DISTINCTION BETWEEN THE ACTUAL RECEIPT/PAYMENT AND THE RIGHT/LEGAL OBLIGATION TO RECEIVE/PAY THAT AMOUNT. PERIODICITY CONCEPT. THERE IS A NEED TO KNOW THE STATE OF THE BUSINESS AT REGULAR INTERVALS. EXTERNAL REPORTING TO THE GOVT/TAX AUTHORITIES/SHAREHOLDERS/CREDITORS IS ALSO NECESSARY.

OBJECTS OF BOOK KEEPING AND ACCOUNTING

1. TO RECORD EACH BUSINESS TRANSACTION AND ANALYSE ITS FINANCIAL EFFECT.

2. TO RECORD THE COMBINED EFFECT OF ALL SUCH TRANSACTIONS OF A GIVEN PERIOD SO THAT THE NET RESULT OF THE TRADING AS WELL AS THE ACCURATE FINANCIAL POSITION OF THE TRADER MAY BE PROMPTLY ASCERTAINED.

DOUBLE ENTRY SYSTEM

1. EVERY FINANCIAL TRANSACTION INVOLVES A TRANSFER OF MONEY OR ITS EQUIVALENT FROM ONE PERSON TO ANOTHER. 2. IT MUST NECESSARYLY, REQUIRE TWO PARTIES. THEREFORE

3. TO DENOTE WHETHER ANY PARTICULAR TRANSACTION HAS RESULTED IN THE RECEIPT OF A BENEFIT OR THE GIVING OF A BENEFIT. 4. THEREFORE IT IS NECESSARY TO DIVIDE EACH ACCOUNT IN TWO SECTIONS

DOUBLE ENTRY SYSTEM (CONTD)

ONE SECTION (THE LEFT HAND SIDE) OF EACH ACCOUNT IS THUS UTILISED FOR RECORDING THE TRANSACTIONS IN RESPECT OF WHICH BENEFIT HAS BEEN RECEIVED BY THAT ACCOUNT, AND THE OTHER SECTION (THE RIGHT HAND SIDE) FOR RECORDING TRANSACTIONS IN RESPECT OF WHICH BENEFITS HAVE BEEN IMPARTED BY THAT ACCOUNT

5. THIS WAY, THE ULTIMATE POSITION OF THAT ACCOUNT COULD BE PERCEIVED

PRINCIPLES & PRACTICE OF ACCOUNTING

THE RECORD MUST BE OF FACTS ONLY AND ACCURATE IN EVERY DETAIL. THE ENTRIES MUST BE SO CLEAR THAT THE EXACT NATURE OF EACH TRANSACTION MAY BE READILY PERCEIVED AT ANY FUTURE DATE. THE BOOKS SHOULD BE SO ARRANGED THAT THE TOTAL RESULT OF ALL THE TRANSACTIONS OR A SERIES OF TRANSACTIONS WITHIN A GIVEN PERIOD, MAY EASILY BE DETERMINED. THE SYSTEM OF ACCOUNTING MUST BE SUCH THAT THE AMOUNT OF LABOUR INVOLVED MAY NOT BE OUT OF PROPORTION TO THE RESULTS OBTAINED.

PRINCIPLES & PRACTICE OF ACCOUNTING (CONTD)

EVERY BUSINESS TRANSACTION HAS A TWO FOLD EFFECT AND THUS IT AFFECTS TWO ACCOUNTS IN OPPOSITE DIRECTION. IF ONE ACCOUNT RECEIVED A BENEFIT THERE SHOULD BE ANOTHER ACCOUNT TO IMPART THE BENEFIT. IT IS THIS RECORDING OF THE TWO FOLD EFFECT OF EVERY TRANSACTION IN TWO ACCOUNTS IS KNOWN AS DOUBLE ENTRY SYSTEM. THE PRINCIPLE OF DOUBLE ENTRTY IS BASED ON THE FACT THAT THERE CAN BE NO GIVING WITHOUT RECEIVING NOR CAN THERE RECEIVING WITHOUT SOME ONE GIVING.

PRINCIPLES & PRACTICE OF ACCOUNTING (CONTD)

THE RECEIVING ASPECT IS KNOWN AS DEBIT AND IS ENTERED ON THE LEFT HAND SIDE OF THE ACCOUNT, OR WHAT IS CALLED THE DEBIT SIDE, MARKED Dr.
THE GIVING ASPECT IS KNOWN AS CREDIT AND IS ENTERED ON THE RIGHT HAND SIDE OF THE ACCOUNT OR WHAT IS CALLED THE CREDIT SIDE, MARKED Cr.

SUBSIDIARY BOOKS
BOOKS LIKE THE PURCHASE BOOK/SALES BOOK/ JOURNAL MERELY FACILITATE THE PREPARATION OF THE ACCOUNTS OR THE LEDGER AND HENCE ARE KNOWN AS SUBSIDIARY BOOKS OR BOOKS OF ORIGINAL ENTRY

JOURNAL
THE JOURNAL IS USED AS THE BOOK OF FIRST ENTRY FOR ALL TRANSACTIONS WHICH CANNOT BE RECORDED IN THE CASH BOOK. ALL NON-CASH TRANSACTIONS SCHOULD BE RECORDED IN THE JOURNAL. FOR PRACTICAL CONVENIENCE THE JOURNAL IS MAINTAINED BY USING A NUMBER OF BOOKS CALLED THE SUBSIDIARY BOOKS. FOR EXAMPLE, THE FOLLOWING SUBSIDIARY BOOKS MAY CONSTITUTE THE JOURNAL FOR AN ENTERPRISE (a) (b) (c) (d) (e) (f) (g) PURCHASE BOOK PURCHASE RETURNS BOOK SALES BOOKS SALES RETURNS BOOK BILLS RECEIVABLE BOOK BIILS PAYABLE BOOK JOURNAL PROPER

PURCHASE BOOK
ALSO KNOWN AS THE PURCHASE JOURNAL, THIS BOOKS IS USED TO RECORD CREDIT PURCHASES OF GOODS ONLY. THE TERM GOODS COVERS ONLY THOSE ITEMS PROCURED BY THE BUSINESS FOR RESALE.

PURCHASE RETURNS BOOKS

THIS SUBSIDIARY BOOKS IS USED TO RECORD THE GOODS PURCHASED ON CREDIT AND SENT BACK TO SUPPLIERS AS NOT CONFIRMING TO SPECIFICATIONS OR FOR ANY OTHER REASON.

SALES BOOK
ALSO KNOWN AS THE SALES JOURNAL, THIS SUBSIDIARY BOOK IS USED TO RECORD ALL SALE OF GOODS ON CREDIT.

SALES RETURNS BOOKS

THIS BOOK IS USED TO RECORD THE TRANSACTIONS RELATING TO GOODS SOLD ON CREDIT AND RECEIVED FROM THE CUSTOMERS AS NOT CONFIRMING TO THE SPECIFICATIONS OR FOR ANY OTHER REASON

BILLS RECEIVABLE BOOK

THE BILLS RECEIVABL OF AN ENTERPRISE CONSIST OF ALL PROMISSSORY NOTES GIVEN OR BILLS OF EXCHANGE ACCEPTED BY CUSTOMERS IN RESPECT OF AMOUNTS DUE FROM THEM. THE BILLS RECEIVABLE BOOK IS USED TO RECORD ALL PROMISORY NOTES GIVEN OR BILLS OF EXCHANGE ACCEPTED BY CUSTOMERS.

BILLS PAVABLE BOOK

THE BILLS PAYABLE CONSIST OF ALL PROMISSORY NOTES GIVEN OR BILLS OF EXCHANGE ACCEPTED BY THE BUSINESS IN RESPECT OF AMOUNTS OWING TO ITS SUPPLIERS. THE BILLS PAYABLE BOOK IS USED TO RECORD ALL SUCH PROMISSORY NOTES GIVEN OR BILLS OF EXCHANGE ACCEPTED BY THE BUSINESS.

JOURNAL PROPER
THIS BOOK IS USED TO RECORD ALL TRANSACTIONS WHICH CANNOT BE INCLUDED IN THE CASH BOOK OR ANY OF THE OTHER SIX SUBSIDIARY BOOKS DISCUSSED SO FAR. THE TRANSACTIONS THAT WILL BE RECORDED IN JOURNAL PROPER ARE, PURCHASE OR SALES OF FIXED ASSETS AND INVESTMENTS ON CREDIT, ADJUSTING ENTRIES, RECTIFICATION ENTRIES ETC.

JOURNALISING THE TRANSACTIONS

RECORDING THE DUAL ASPECTS OF A TRANSACTION IS KNOWN AS JOURNALISING. NORMALLY, IN A BUSINESS IT IS IMPOSSIBLE TO RECORD EVERY TRANSACTION AS A JOURNAL ENTRY. HENCE, SPECIAL JOURNALS SUCH AS PURCHAE BOOK, SALES BOOK ETC ARE USED. ONLY CERTAIN SEPCIAL TRANSACTIONS ARE RECORDED IN THE JOURNAL BOOK. HOWEVER, FOR A CLEAR UNDERSTANDING THE JOURNAL ENTRIES FOR VARIOUS TRANSACTION ARE EXPLAINED.

TRANSACT ASPECTS ION ABC LTD RECEIVED RS. 5,000 FROM GUPTA

ACCOUNT DEBITED

REASON ACCOUNT REASON FOR DEBIT CREDITED FOR CREDIT CASH A/C IS A REAL A/C THE RULE OF DEBIT WHAT COMES IN APPLIES GUPTA & CO GUPTA & CO A/C IS A PERSONAL A/C THE RULE OF CREDIT THE GIVER APPLIES

ASPECT 1 CASH A/C CASH OF RS 5,000 IS RECEIVED. ASPECT 2 THE AMOUNT IS GIVEN BY GUPTA & CO

Transaction Aspects PQR Ltd Purchased Rs 6000 Worth of goods from X CO Aspect 1 Goods worth Rs 6000 is received. Aspect 2 the goods are supplied by X CO

Account Reason for the Debited Debit Inventor y A/C (or purchase s A/C)

Account Credited

Reasonf for the Credit X CO A/C is a personal A/C. The rule of credit the credit the giver Applies.

Inventory A/C or X Co A/C purchases A/C is a real A/C. The rule of Debit what comes in applies.

Transaction Aspects XYZ Ltd. paid the salaries of Rs 15500 to its staff for the Month through bank transfer

Account Reason for the Debited Debit

Account Credited

Reasonf for the Credit Bank A/C is a Real A/C. The rule of Credit what goes out applies

Aspect 1. Salaries Payment of A/C an expense of Rs 15500 Aspect 2. Bank balance is reduce by RS 15500

Salaries A/C is a Bank A/C Nominal A/C. The rule of Debit all expenses applies

CASH BOOK
THE BOOK MEANT FOR RECORDING ALL CASH

TRANSACTIONS IRRESPECTIVE OF ITS NATURE IS

KNOWN AS CASH BOOK. THE LEFT HAND SIDE IS

KNOWN AS THE DEBIT SIDE. THE RIGHT HAND SIDE IS KNOWN AS THE CREDIT SIDE. THE CASH BOOK ALSO RECORDS BANK TRANSACTIONS.

CASH BOOK FOR THE MONTH OF ..

DR RECEIPTS

DATE FROM ON WHAT RV WHOM ACCOUNT NO

LEDGER CASH BANK INITIAL FOLIO NO (RS) (RS)

CR PAYMENTS DATE TO WHOM ON WHAT CHEQUE PV L.F. CASH BANK ACCOUNT NO NO NO (RS) (RS)
INITIAL

PREPARATION OF CASH BOOK

1. 2. 3. 4. 5. 6. 7. TRANSCRIPTION CERTIFICATE. BOOK SL.No. & PAGENUMBERING. AUTHENTICATION. RECORD OF CHECKS. BROUGHT FORWARD CASH AND BANK BALANCES /TOTALS. RECORD TRANSACTIONS CHRONOLOGICALY BANK BALANCE CERTIFICATE AND BRS.

CONTRA ENTRIES
WHEN CASH/CHEQUE IS DEPOSITED INTO

BANK OR CASH IS WITHDRAWN FROM THE BANK, BOTH ENTRIES WILL APPEAR IN CASH BOOK IN THE DEBIT AS WELL AS THE CREDIT

SIDE. SUCH TRANSACTIONS ARE CALLED AS

CONTRA ENTRIES

BALANCING OF CASH BOOK

CASH BOOK IS TO BE RULED OFF AND BALANCED ON THE FOLLOWING OCCASIONS : LAST DAY OF EVERY MONTH. CHANGE OF OFFICER INCHARGE SURPRISE CHECK OF CASH CHANGE OF COMMAND STAFF / INSPECTION VISIT

BANK BALANCE CERTIFICATE IS TO BE OBTAINED AND THE CLOSE OF TRANSACTIONS OF THE DAY PRIOR TO THAT ON WHICH CASH CHECK IS CARRIED OUT. BALANCE SHOWN IN THE BANK BALANCE CERTIFICATE MAY NOT AGREE WITH THE BANK BALANCE AS PER CASH BOOK TO CHECK CORRECTNESS A BANK RECONCILIATION STATEMENT HAS TO BE PREPARED.

BANK RECONCILIATION STATEMENT

LEDGER ACCOUNTS
MARSHALLING OF ENTRIES RELATING TO A PERSON, OR ASSET OR ITEMS OF EXPENSE OR INCOME FOR A PARTICULAR PERIOD IS KNOWN AS AN ACCOUNT.

AN ACCOUNT HAS TWO SIDES/COLUMNS --- THE DEBIT SIDE/COLUMN AND THE CREDIT SIDE/COLUMN
THE BOOK WHICH CONTAINS ACCOUNTS IS KNOWN AS THE LEDGER WHICH IS ALSO KNOWN AS THE PRINCIPAL BOOK.

TYPES OF LEDGER ACCOUNTS

1. PERSONAL ACCOUNT. IT DEALS WITH ACCOUNTS OF INDIVIDUALS LIKE CREDITORS, DEBTORS, BANK ETC. IT SHOWS THE BALANCE DUE TO THESE INDIVIDUALS OR DUE FROM THEM ON A PARTICULARF DATE. 2. REAL ACCOUNT. IT REPRESENTS ASSETS LIKE PLANT AND MACHINERY, LAND AND BUILDINGS, GOODWILL ETC. AS ON A PARTICULAR DATE, THIS ACCOUNT SHOWS THE WORTH OF THE ASSET. 3. NOMINAL ACCOUNT. IT CONSISTS OF DIFFERENT TYPES OF EXPENSES OR INCOMES OR LOSS OR PROFIT. THESE ACCOUNT SHOW THE AMOUNT OF INCOME EARNED OR EXPENSES INCURRED FOR A PARTICUALR PERIOD SAY A MONTH, A YEAR ETC.

LEDGER POSTINGS
WITH THE EXCEPTION OF CONTRA
ENTRIES ALL RECEIPTS AND

PAYMENTS ARE TO BE POSTED TO THE LEDGER ACCOUNTS.

SIX BASIC RULES OF DEBIT AND CREDIT

PERSONAL

ACCOUNTS :-

DEBIT THE RECEIVER. CREDIT THE GIVER.

REAL ACCOUNTS :DEBIT WHAT COMES IN. CREDIT WHAT GOES OUT.

NOMINAL ACCOUNTS :DEBIT ALL EXPENSES AND LOSSES. CREDIT ALL INCOMES AND GAINS.

BALANCING THE ACCOUNTS

THIS REFERS TO THE PROCESS OF ESTABLISHING THE NET VALUE OF A PARTICULAR ACCOUNT. THIS IS DONE BY FINDING OUT THE DIFFERENCE BETWEEN THE TOTAL OF THE DEBIT ENTRIES AND CREDIT ENTRIES IN A PARTICULAR ACCOUNT. THE ACCOUNT WHICH HAS A GREATER DEBIT TOTAL IS SAID TO HAVE A DEBIT BALANCE AND THAT WITH A GREATER CREDIT TOTAL A CREDIT BALANCE