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KEY TERMS used in Accounting

Sl

Terminology

Meaning

Accounting

The process of identifying measuring and


communicating economic information
to permit informed judgements and
decisions by the users of information.

Financial
accounting

The art of recording, classifying and


summarising in a significant manner
and in terms of money transactions
and events which are at least in part of
a financial character and interpreting
the results.

Management
accounting

The presenting of accounting information in


such a way as to assist management
in the creation of the policy and In the
day to day operation of the
undertaking.

Accounting
principles

Rules of action or conduct adopted by the


accountants universally while
recording accounting transactions.

Accounting
concepts

Basic assumptions or conditions upon


which the science of accounting is
based.

Accounting
convention
s

Customs and traditions which guide the


accountants while preparing the
accounting statements.

Cash system of
accounting

A system in which accounting entries are


made only when cash is received or
paid.

Mercantile
system of
accounting

A system in which accounting entries are


made on the basis of amounts having
become due for payment or receipt. It
is also termed as Accrual system of
accounting.

Journal

A book containing a chronological record of


business transactions. It is the book of
original records.

10

Compound
Journal
entry

A Journal entry recording more than one


business transaction occurring on the
same day, the nature of transaction
being the same.

11

Nominal
accounts

These are accounts opened in the books


simply to explain the nature of the
transaction. They include accounts of
all incomes/gains and expenses and
losses.

12

Opening journal
entry

A journal entry passed for bringing forward


balances of assets and liabilities of the
previous period to the current period.

13

Journalizing

The process of recording transactions in the


journal.

14

Personal
accounts

These are accounts of persons with whom


the business deals.

15

Real accounts

These are accounts of tangible objects or


intangible rights owned by an
enterprise and carrying probable
future benefits.

16

Ledger

A book containing different accounts of an


entity.

17

Posting

Transferring the debit and credit items from


the journal to the respective accounts
in the ledger.

18

Trial balance

A statement containing the various ledger


balances on a particular date.

19

Voucher system

A plan and method of procedure for the


verifications, recording and payment
of all items(other than items to be paid
from petty cash)which require
disbursement of cash.

20

Cash journal

A journal meant for recording all cash


transactions.

21

Contra Entry

An accounting entry which is recorded on


both the sides that is the debit and
credit sides of the cash book.

22

Bills journal

A journal meant for recording all


transactions relating to bills of
exchange or promissory notes
received or issued by the business.

23

General journal

A journal meant for recording all such


transactions for which no special
journal has been kept by the
business.

24

Goods journal

A journal meant for recording all credit


transactions relating to goods.

25

Imprest

The amount advanced to the petty cashier in


the beginning of a period. It is also
called as float.

26

Petty cash book

A book meant for recording all petty cash


expenses of the business.

27

Special journal

A journal meant for recording transactions

of a specific type.

28

Accommodation
bill

A bill drawn and accepted for providing


funds to a friend in need.

29

Bills of exchange

An instrument in writing containing an


unconditional order signed by the
marker, directing the said person to
pay a certain sum of money only to or
to the order of a certain person or to
the bearer of the instrument.

30

Cheque

A bill of exchange drawn on a specified


banker and payable on demand.

31

Demand bill

A bill of exchange payable on demand.

32

Promissory note

An instrument in writing containing an


unconditional undertaking, signed by
the marker, to pay a certain sum of
money only to or to the order of
certain person or the bearer of the
instrument.

33

Time bill

A bill of exchange payable after a particular


period of time.

34

Trade bill

A bill drawn and accepted for a genuine


trade transaction.

35

Assets

Tangible objects or intangible rights owned


by an enterprise and carrying probable
future benefits.

36

Adjustment entry

A journal entry passed at the end of an


accounting period to record the
completed portion of an incomplete
continuous event.

37

Balance Sheet

A statement of financial position of an


enterprise as at a given period.

38

Current assets

Cash and other assets that are expected to


be converted into cash or consumed in
the production of goods or rendering
of services in the normal course of
business.

39

Current liabilities

Liabilities payable within a year from the


date of Balance Sheet either out of
existing current assets or by creation
of new current liabilities.

40

Fixed assets

Assets held for the purpose of providing or


producing goods and services and not
held for resale in the normal course of
business.

41

Fictitious assets

Assets not represented by tangible


possession or property.

42

Fixed liabilities

All liabilities other than current liabilities

43

Liabilities

The claims of outsiders (other than owners)


against the firms assets.

44

Liquid assets

Assets which are immediately convertible


into cash without much loss.

45

Manufacturing
account

An account giving the cost of goods


manufactured by the manufacturer
during a particular period.

46

Profit and Loss


account

An account presenting the revenues and


expenses of an enterprise for an
accounting period and shows the
excess of revenues over expenses and
vice-versa. It is also known as Income
statement.

47

Trading account

An account giving the overall result of


trading i.e., purchasing and selling of
goods.

48

Compensating
errors

Errors which compensate each other.

49

Errors of
omission.

Errors committed because of complete


omission of a transaction from the
books of accounts.

50

Errors of
commissio
n

Errors on account of wrong balancing of an


account, wrong posting, wrong carry
forward, wrong totaling etc.

51

Errors of
Principle

Errors committed because of failure to make


a proper distinction between revenue
and capital items.

52

Suspense
account

An account to which the difference in the


trial balance has been put temporarily.

53

Amortization

The process of writing off the intangible


assets.

54

Depletion

The portion of the cost of the natural


resources recognized as an expenses
for each period.

55

Dilapidation

Damage done to a building or other property


during the tenancy.

56

Depreciation

The portion of the cost of tangible operating


assets (other than land) recognized as
an expense for each period.

57

Depreciation
accounting

A system of accounting which aims to


distribute the cost or other basic
values of tangible capital assets(less
salvage, if any)over the estimated
useful life of the asset in a systematic
and rational manner.

58

Accounting ratio

It is the relationship expressed in


mathematical terms between two
accounting figures related with each

other.

59

Balance sheet

A statement of financial position of business


at a specified moment of time.

60

Balance sheet
ratios

Ratios calculated on the basis of figures of


balance sheet only.

61

Composite ratios

Ratios based on figures of profit and loss


account as well as the balance sheet.
They are also known as interstatement ratios

62

Financial
analysis

Critical evaluation of data given in the


financial statements.

63

Financial ratios

Ratios disclosing the financial position or


solvency of the firm. They are also
known as solvency ratios.

64

Financial
statement

An organized collection of data according to


logical and consistent accounting
procedures conveying an
understanding of some financial
aspects of a business firm.

65

Interpretation

Explaining the meaning and significance of


the financial data.

66

Profitability ratios Ratios which reflect the final results of


business operations.

67

Turnover ratios

Ratios measuring the efficiency with which


the assets are employed by a firm.
They are also known as activity or
efficiency ratios.

68

Funds

It refers to working capital of a business.

69

Funds flow
statement

A statement summarizing inflows and


outflows of funds from any business
activity.

70

Working capital

It refers to the excess of current assets over

current liabilities.

71

Cash

It stands for cash and bank balances.

72

Cash flow
analysis

A technique involving analysis of the causes


of flows of cash from one period to
another.

73

Cash flows
statement

A statement depicting changes in cash


position from one period to another.

74

Activity based
costing

The techniques of cost attribution to cost


units on the basis of benefits received
from indirect activities.

75

Back flush
costing

A cost accounting system which focuses on


the output of an organization and
works back to attribute costs to stock
and cost of sales.

76

Cost Sheet

A document which provides for assembly of


different costs in respect of a cost
centre or a cost unit.

77

Direct labour

Labour which takes active and direct part in


the production of a particular
commodity.

78

Direct material

Material which becomes an integral part of


the finished product and which can be
conveniently assigned to specific
physical units.

79

Fixed cost

A cost that remains constant within a given


period of time and range of activity in
spite of fluctuations in production.

80

Life cycle costing The practice of obtaining over their


lifetimes, the best use of physical
assets at the lowest total cost to the
entity.

81

Material

The substance from which the product is

made.

82

Overhead/Indirec
t cost

The expenditure on labour, materials or


services which cannot be
economically identified with specific
saleable cost unit.

83

Semi-variable
cost

A cost containing both fixed and variable


components and which is thus
affected by fluctuations in the level of
activity.

84

Value added
concept

It is the wealth generated by an enterprise


through its operations

85

Variable cost

A cost which tends to vary indirect


proportion to the level of activity.

86

Historical cost of
Inventories

It is the aggregate of cost of purchase, cost


of conversion and other costs incurred
in bringing the inventories to their
present locations and conditions.

87

Inventory

Tangible property to be consumed in


production of goods or services or
held for sale in the ordinary course of
business.

88

Net realizable
value

The estimated selling price in the ordinary


course of business less cost
necessarily to be incurred to make the
sale.

89

Periodic
inventory
system

A system of inventory accounting where the


quantity/value of inventory is found
out only at the end of the accounting
period after having a physical
verification of the units in hand.

90

Perpetual
inventory
system

A method of recording inventory balances


after every receipt and issue to
facilitate regular checking and to
obviate closing down for stocktaking.

91

Budget

A financial and/or quantitative statement,


prepared prior to a defined period of
time, of the policy to be pursued
during that period for the purpose of
attaining a given objective.

92

Budgeting

The art of building budgets

93

Budgetary
control

The establishment of budgets relating to the


responsibilities of executives to the
requirements of a policy and the
continuous comparison of actual with
budgeted results,etiher to secure by
individual action the objective of that
policy or to provide a basis for its
revision.

94

Budget manual

A document which sets outs, inter alia the


responsibilities of the persons
engaged in, the routine of and the
forms and records required for
budgetary control.

95

Budget period

The period for which a budget is prepared


and employed.

96

Fixed budget

A budget which is designed to remain


unchanged irrespective of the level of
activity actually attained.

97

Flexible budget

A budget designed to change in accordance


with the level of activity actually
attained.

98

Forecast

A statement of probable events.

99

Master budget

The summary budget, incorporating its


component functional budgets, which
are finally approved, adopted and
employed.

100 Basic standard

A standard fixed for a fairly long period.

101 Current standard

A standard fixed for a short period.

102 Estimated cost

An estimate of what the cost is likely to be


during a given period of time.

103 Ideal cost

A cost which should be incurred during a


period under ideal conditions.

104 Standard cost

A careful pre-determination of what the cost


should be.

105 Standard costing

A costing system involving the preparation


and use of standard costs, their
comparison with actual costs and the
analysis of variances as to their
causes and points of incidence.

106 Direct labour cost It is the difference between the standard


variance
direct wages specified for the activity
achieved and the actual direct wages
paid.
107 Direct labour
efficiency
variance

It is that portion of direct labour cost


variance which is due to the difference
between standard labour hours
specified for the activity achieved and
actual labour hours expended.

108 Direct labour rate


variance

It is that portion of direct labour cost


variance which is due to the difference
between the standard rate of pay
specified and the actual rate paid.

109 Direct material


cost
variance

It is the difference between the standard


cost of direct material specified for the
output achieved and actual cost of
direct material used.

110 Direct material


mix
variance

It is that portion of direct material usage


variance which is due to the difference
between the standard and actual

composition of mixture.

111 Direct material


price
variance

It is that portion of direct material usage


variance which is due to the reasons
other than change of mix.

112 Direct material


usage
variance

It is that portion of direct cost variance


which is due to the difference between
the standard quantity specified for the
output achieved and the actual
quantity used.

113 Direct material


yield
variance

It is that portion of direct material usage


variance which is due to the difference
between the standard yield specified
and the actual yield obtained.

114 Revision
variances

It is the between the original standard stand


the revised standard cost of actual
production.

115 Variance

The deviation of the actual from the


standard.

116 Variance analysis An analysis of performance by means of


variances. It is used to promote
managements action at the earliest
possible stage.
117 Absorption
costing

A technique under which the cost of a


product is determined after
considering both the fixed and the
variable costs.

118 Break even


analysis

It is one of the techniques used for cost


volume profit analysis. It refers to that
system of analysis which determined
the break-even level and also probable
profit at any level of activity.

119 Break even point

The level of activity at which there is neither


a profit nor a loss.

120 Break even chart

A chart which indicates approximate profit

/loss at different levels of sales volume


within a limited range.

121 Cash break even


point

The level of activity where there is neither a


cash profit nor a cash loss.

122 Cost break even


point

The level of activity where the total costs


under two alternatives are the same.

123 CVP analysis

A management tool showing the relationship


between various ingredients of profit
planning viz., cost, selling price and
volume of activity.

124 Differential
costing

A technique in which only costs and income


differences between alternative course
of action are taken into consideration.

125 Direct costing

A technique under which only direct costs


are considered while computing the
cost of a product. It is different from
marginal or variable costing since all
direct costs need not be variable.

126 Marginal costing

A technique where only the variable costs


are considered while computing the
cost of a product. The fixed costs are
met against the total contribution
given by all the products taken
together.

127 Profit volume


ratio

The ratio establishing the relationship


between the contribution and the
sales value.

128 Decision making

A process of choosing among alternative


courses of action

129 Differential cost

The difference in total between alternatives


computed to assist in decision
making.

130 Relevant cost

The cost pertinent to specific management


decision.

DIFFERENCES BETWEEN MANAGEMENT ACCOUNTING AND


FINANCIAL ACCOUNTING
Point of Difference
Objectives

Analyzing
performance

Data used

Financial accounting
It is designed to supply
information in the form of
profit and loss account
and Balance Sheet to
external
parties
like
shareholders,
creditors,
banks,
investors
and
Government
It portrays the position of
business as a whole. The
financial
statements
shows
the
overall
performance or status of
the business

Management accounting
It is designed for the
internal use by the
management.

It directs it attention to the


various
divisions,
departments
of
the
business and reports about
the
profitability,
performance
etc.
It
provides
detailed
analytical data for these
purposes.
It is concerned with the It is an accounting for
monetary record of past future and therefore, it
events. It a post-mortem supplies data both for

analysis of past activity


and therefore out of date
for management action.
Only economic events
that is which can be
described in terms of
money is measured

Monetary
measurement

Periodicity
reporting

of The income statement and


balance sheet are usually
prepared yearly or in
some cases half-yearly.

Precision

Information
is
more
precise as it is for the
external use

Nature

It is more objective

Legal compulsion

It is more or less
compulsory for every
business on account of the
legal provisions of one or
the other.

present and future duly


analyzed and in detail in
the management language.
The
management
is
equally interested in nonmonetary
economic
events
viz.
technical
innovations, personnel in
the organization, time
value of money etc
Management
requires
information at frequent
intervals and therefore
financial accounting fails
to cater to the needs to the
management.
Information
is
Less
precise
As it is for the internal
use.
It is more subjective
because it is based on
judgment rather than on
measurement.
The management is free to
install or not to install a
system of management
accounting.

Differences between Single Entry and Double Entry system of Bookkeeping


Point of Difference
Recording
transactions

Double Entry System


of The dual aspect is
completely
followed
while
recording

Single Entry System


In case of some
transactions both the
aspects are recorded,

business transactions

while for some only one


aspect is recorded,
while in case of some
other transaction no
recording is done at all.
Maintenance of books
Various
subsidiary No subsidiary books
books viz. sales book, except cash book is
purchases book and maintained
returns book, cash book
etc are maintained.
Maintenance of books All major accounts real, Only personal accounts
of account
nominal and personal are maintained
accounts are maintained
Preparation of trial Trial
balance
is Trial balance cannot be
balance
prepared
to
check prepared hence it is not
arithmetical accuracy of possible to check the
the books of account
accuracy of the books
of accounts.
Accuracy of profits and Trading and profit and Only a rough estimate
financial position
loss account gives the of profit and loss can be
true profit of the made. The statement of
business while balance affairs prepared does
sheet shows the true not show the true
and
fair
financial financial position of the
position of the business. business.
Utility
Large business units It is used by very small
should
compulsorily business units.
adopt double entry
system

Differences between Journal and Ledger


Point of Difference
Book of Entry

Journal
Ledger
It is the book of first or It is the book of second
original entry
and final entry

System of record
Reliability

process

It records transactions
in a chronological order
Journal is more reliable
since entry is first made
here

It records transactions
in a analytical order
It is less reliable as
entry from the records
of journal is simply
posted here.
The
process
of The
process
of
recording transactions recording transactions
is
termed
as in the ledger is called as
journalizing
Posting.

Difference between a Trial and Balance sheet


Point of Difference
Meaning

Objective

Item covered

Preparation

Use

Trial Balance
It is a statement
containing
various
ledger balances on a
particular date

Balance Sheet
It is a statement of
various
assets
and
liabilities
of
the
business on a particular
date.
It is to check the The objective is to
arithmetical accuracy of ascertain the financial
the books of account of position of the business
the business
It contains all items It incorporates only
relating to incomes, assets and liabilities.
expenses, assets and
liabilities
It is prepared before It is prepared not only
preparation
of
the on the basis of trial
balance sheet
balance but also of any
additional information
which may not have
been incorporated in
trial balance.
It is meant only for A balance is prepared

internal use

both for internal as well


as external use.

DIFFERENCE BETWEEN FUNDS FLOW STATEMENT AND INCOME


STATEMENT
POINT OF
DIFFERENCE
FUNDS

FUNDS FLOW
STATEMENT
It deals with the
financial resources
required for running the
business activities. it
explains how were the
funds obtained and how
were they used

INCOME
STATEMENT
IT DISCLOSES THE
RESULTS OF THE
BUSINESS
ACTIVITIES. IE HOW
MUCH HAS BEEN
EARNED AND HOW
IT HAS BEEN SPENT

MATCHING

It matches the funds


raised and funds
applied during a
particular period. The
sources and
applications of funds
may be of capital as
well as of revenue
nature.
Sources are many
besides operations such
as share capital,
debentures ,sale of
fixed assets etc.

It matches th4 incomes


of a period with the
expenditure of that
period which are both
of a revenue nature.

SOURCES

An income statement
which discloses the
results of operations
cannot even accurately
tell about the funds
from operations alone
because of non-fund
item being included
therein.

Difference between cash flow analysis and funds flow analysis

Point of difference
Position

Cash flow analysis


It is concerned only
with the change in cash
position

Record

It is merely a record of
cash receiptsand
disbursements.

Periodicity

It is more useful to the


management as a tool
of financial analysis in
short periods as
compared to funds flow
analysis. It has been
rightly been said that
shorter the period
covered by the analysis
greater is the business
can meet its obligations
maturing after 10 years
from now

Fund flow analysis


It is concerned with
change in working
capital position between
two balance sheet dates.
While studying the
short term solvency of a
business one is
interested not only in
cash balance but also in
the assets which can be
easily converted into
cash.

Differences between Book Keeping and Accounting


Point of Difference
Recording

Book Keeping
It is a mere recording of
business transactions in
appropriate account
books.

Scope

Narrow scope

Accounting
It denotes the recording
of business transactions
in proper books of
accounts as well as the
preparation and analysis
and interpretation of
financial statements
Wider scope

Maintenance of
accounts
Base

Purpose
Nature of work

Person in charge

It maintains information It analyses and


about a business in the interprets the
books of accounts
information maintained
in the books of accounts
Book keeping serves as Accounting starts where
the basis for recording
book keeping ends
transaction for the first
time
Book keeping practices Accounting professes
the principles of
i.e. lays down the
accounting
principles of
The work of
The work in accounting
bookkeeping is of
is of complicated nature
routine nature and so it and so it requires
does not require any
special knowledge and
special knowledge and skill
skill
The book keeping work Accounting work is
is usually performed by done by qualified
book keepers or account accountants
clerks

Differences between Goods and Assets:


Goods
It refers to things in which a
business deals
They are meant for resale
Goods does not include assets and
therefore it is narrow in sense
Goods are tangible
Goods are the items of trading
account.

Assets
It refer to things with which a
business deals
It is meant for use in the business
The scope of the term assets is wider
than that of the term goods and
includes goods
Assets may be tangible and
intangible
Assets are the items of balance sheet

Differences between Assets and Liabilities:


Assets
Assets refer to properties or things
owned by a business and amounts
due to a business from others.
They are useful to a business
Assets such as debtors, bills
receivable, outstanding incomes,
prepaid expenses, loans given to
others etc make others indebted to a
business
A concern must necessarily have
some assets
If the amount of assets of a business
is more than the amount of its
liabilities the financial position or
strength of the business will be
stronger
Accounts of assets show debit
balances

Liabilities
Liabilities refer to amounts due from
a business to others.
Liabilities are a burden to a business
All liabilities make a business
indebted to others

A concern may or may not have


liabilities
If the amount of liabilities of a
business is greater than the amount
of it s assets the financial position of
the business will be weaker
Accounts of liabilities show credit
balances

Differences between debtors and Creditors:


Debtors
A debtor is a person who owes
money to business
A person becomes a debtor of a
business when he has received some
benefit from the business
Debtors constitute assets for a
business
Account of debtors show debit
balances

Differences between Debit and Credit

Creditors
An creditor is a person to whom the
business owes money
A person becomes a creditor of a
business when he has given some
benefit to the business
Creditors constitute liabilities for a
business
Accounts of creditors show credit
balances.

Debit
It refers to the amount of charge
given to an account for some benefit
received by that account
Debit is given to an account when
that account has received some
benefit
The entry for the debit given to an
account is made on the left-hand side
of that account
Debit results in increase in the
amount of an asset, decrease in the
amount of liability, decrease in the
amount of owners capital, and
increase in the amount of an expense
or decrease in the amount of an
income.

Credit
It refers to the amount of discharge
or reward given to an account for
some benefit given by that account
Credit is given to an account when
that account has given some benefit
The entry for the Credit given to an
account is made on the right-hand
side of that account
Credit results in decrease in the
amount of an asset, increase in the
amount of liability ,increase in the
amount of owners capital, decrease
in the amount of an expense or
increase in the amount of an income

Differences between Journal and a Ledger


Journal
It is a book of first, original or prime
entry as all transactions are recorded
first in the journal.
The journal is a subsidiary book,
because it does not provide the final
accounting information relating to
the business.
The journal is only an original record
and not a permanent record.
The journal is a daily record and so
the transactions are entered in the
journal daily.

Ledger
It is a book of final entry as the
transactions are recorded finally in
the ledger
It is a principal book of accounts
because it is from this book that a
trader can obtain final information
relating to this business.
A ledger is the permanent record of
various accounts
But posting from the journal to the
ledger is done periodically; say,
weekly, fortnightly, monthly or
quarterly according to the
convenience and requirements of the

business concern.
In journal the information relating to In ledger it is found in one place
a particular account is not found in
one place
Journal does not provide full
Ledger provides full information
information about a person, an asset, about a person,an asset,an expense or
an expense or an income
an income.
The unit of entries in the journal is a The unit of entries in the ledger is an
transaction
account
As legal evidence journal has greater Considered as a secondary document
weight than ledger
only
Recording of transactions in the
Recording of transactions in the
journal is called journalizing
ledger is called posting
Each entry in the journal shows both Each entry in a ledger account shows
the aspects of a transaction
only one aspect of a transaction
Narration is written in the journal
No narration is written in the ledger
Vouchers, receipts, invoices and
Journal helps the recording of
debit and credit notes help the
transactions in the ledger
recording of transactions in the
journal
Journal may be avoided by a
Ledger is a must for every business
business concern
concern.
Journal is totalled but not balanced
A ledger is balanced
Journal has debit and credit columns
it does not have debit and credit
sides.
In the journal, ledger folio is written
A trial balance cannot be prepared
from the entries in the journal
Final accounts cannot be prepared
from the journal entries

But a ledger has debit and credit


sides
In the ledger, journal folio is written
A trial balance can be prepared from
the balances in ledger accounts.
Final accounts can be prepared from
the ledger account balances.

Differences between Journalising and Posting


Journalizing
It means recording a transaction in

Posting
It means recording a transaction in

the journal
Journalizing is the first stage of
recording a transaction
It is done then and there that is soon
after a transaction has taken place
Journalizing of transactions is done
in the order of dates without any
other considerations
It is made in one place
It is done with the help of vouchers,
receipts, invoices, debit notes and
credit notes

the ledger
Posting is the second stage of
recording a transaction
Posting is generally not made then
and there
Posting is made according to the
nature of the transactions
Posting of an entry in the journal is
made in two different places in the
ledger.
Posting to the ledger is done with the
help of the entries in the journal.

Differences between a Debit Note and a Credit Note:


Debit note
It is prepared by the person who
returns the goods and is sent to the
seller of goods.
It serves as an intimation for the
goods returned
It indicates that the account of the
person to whom the goods are
returned is debited
A debit note is prepared first

Credit note
It is prepared by the person who
receives the goods returned and is
sent to the buyer of the goods.
It serves as intimation for the receipt
of the goods returned.
It indicates that the account of the
person by whom the goods are
returned is credited.
A credit note is prepared after the
receipt of the debit note.
It serves as the basis for the entries in It serves as the basis for the entries in
the purchases returns book of the
the sales returns book of the receiver
sender of the goods.
of goods.

Differences between capital expenditure and revenue expenditure

Capital expenditure
It is incurred for acquiring fixed
assets intended for use in the
business and not for resale.
It is incurred for extending or
improving the existing fixed assets
It adds to the revenue-earning
capacity of a concern
It will increase the value of net assets
The benefit of capital expenditure
extends to more than one year.
It is not a loss to the concern
It will go to the balance sheet.

Revenue expenditure
It is incurred for acquiring or
producing goods meant for sale.
It is incurred for maintaining the
fixed assets in a good working order
It does not add to the revenueearning capacity of a concern
It will decrease the value of the net
assets
The benefit of revenue expenditure is
confined to only one year.
It is a loss to the concern
It will go the trading account or
profit and loss account.

Differences between capital receipts and revenue receipts


Capital receipts
It represents the capital received
from the proprietors, loans or
deposits received, sale proceeds of
investments and fixed assets and
non-recurring receipts such as
legacies, life membership fees etc.
CR are of non-recurring nature. In
other words, they are not received
repeatedly
Some of the capital receipts such as
loans and deposits received are
liabilities
As some of the capital receipts are
liabilities, they have to be repaid
Capital receipts are not incomes to
the concern
Capital receipts will go to the
balance sheet of the concern

Revenue receipts
It represents the incomes, such as
sale proceeds of goods, interest
received, commission received etc.

Revenue receipts are of recurring


nature. In other words, they are
received repeatedly or regularly.
Revenue receipts are not liabilities
As revenue receipts are not
liabilities, they need not be repaid.
Revenue receipts are incomes to the
concern
Revenue receipts will go to the
revenue account of the concern.

Difference between management accounting and financial accounting


Point of difference Financial accounting
Management accounting
Objectives
It is designed to supply information in It is designed principally for
the form of profit and loss a/c and
internal use by the management.
balance sheet to external parties like
shareholders, creditors, banks,
investors and government.
Analyzing
It portrays the position of business as a It directs its attention to the
performance
whole. The financial statements like
various divisions,departments of
income statement and balance sheet
the business and reports about
report on overall performance or status the profitablility,performance etc
of the business.
of each of them.
Financial accounting deals with the
Management accounting
aggregates and therefore cannot reveal provides detailed analytical data
what part of the management action is for these purposes.
going wrong andwhy.
Data used
It is concerned with the monetary
IT is an accounting for future
record of past events. It is a postand therefore it supplies data
mortem anaysis of past activity and
both for present and future duly
therefore out of date for management
anaysed and in detail in the
action.
management language so that it
becomes basis for management
action.
Monetary
In financial accounting only such
It is equally interested in nonmeasurement
economicevents find a place which
monetary economic events viz.
can be described in money.
technical innovations, personnel
in the organization, changes in
the value of money etc. these
events affect the managements
decision and therefore
management accounting cannot
afford ignore them.
Periodicity of
The period of reporting is much longer Management requires
reporting
in financial accounting as compared to information at frequent
management accounting. it is usually
intervals .in management
prepared yearly Or in some cases half- accounting there is more
yearly
emphasis on furnishing
information quickly and at
comparatively short intervals as
per the requirements of the
management.
Precision
There is more emphasis on precision i There is less emphasis on
precision.
Nature
It is more objective
It is more subjective.

Legal compulsion

It is more or less become compulsory


for every business on account of the
legal provisions of one or the other
act.

The business is free to install or


not to install a system of
management accounting.

Fundamentals of Book keeping


Definition and Meaning of Book Keeping
In the words of A.H .Rosenkampff, Book keeping is the art of recording
business transactions in a systematic manner.
Book keeping is the art and science of recording business transactions in
appropriate books of accounts in accordance with the principles of
accountancy for the purpose of ascertaining the profit or loss and financial
position of the business.
In short, book keeping means the recording of business transactions in a set
of account books.
Objects of Book Keeping:
1. To have a permanent record of all the transactions of a business for
future references.
2. To ascertain the net result (i.e. the net profit or the net loss) of the
business for future reference.

3. to know the exact reasons leading to the net profit or the net loss
4. To ascertain what amounts are due to the business and from whom the
amounts are due.
5. To ascertain what amounts are due from the business and to whom the
amounts are due.
6. To know the exact financial position of the business as on a particular
date.
7. To know the progress of the business from year to year.
8. To minimize errors and frauds by facilitating their quick detection.
9. To keep control over the properties and the activities of the business.
10. to have valuable information for legal and tax purposes
11.To have necessary information for future planning.
Is book keeping an art or a science?
An art, generally, refers to action or actual doing. Book keeping involves
actual doing ( i.e. the actual recording of business transaction in account
books). So, book keeping is an art. A Science, usually, refers to any subject
which has a set of accepted principles or rules for application in practice.
Book-keeping has a set of accepted principles or rules for application while
recording the business transactions. So, book keeping is also a science.
Definition and meaning of Accounting
The American Institute of Certified Public Accountants has defined
accounting as the art of recording, classifying and summarizing, in a
significant manner, and in terms of money, transactions and events which
are, in pat at least, of a financial character, and interpreting the results
thereof.
In short, accounting is the recording, classifying and summarizing of
business transactions and interpreting the results thereof.
Essential aspects or features of accounting:
1. Recording: it is the first essential aspect of accounting. it refers to the
entering of business transactions as and when they occur either in a
single book called the journal or in several books called the subsidiary
books or special journals.

2. Classifying: It is the second important aspect of accounting. It refers


to the grouping of transactions or entries of like nature into
appropriate heads by posting or transferring the entries from the
journal or subsidiary books to the appropriate accounts in the ledger.
3. Summarizing: It is third essential aspect of accounting. It means the
preparation and presentation of financial statement.
4. Analysis and Interpretation: It is the last essential aspect of
accounting. It means the drawing of conclusions from the data found
in the financial statements about the profitability and the financial
position of the business.

Branches of Accounting
In order to satisfy the needs of different groups of people interested in the
accounting information, different branches of accounting has been evolved.
There are three branches of accounting. They are:
1. Financial accounting
2. Cost Accounting
3. Management accounting
Financial Accounting:
It is concerned with the recording of business transactions in a set of books
and the periodic presentation of the financial data recorded in the books of
accounts, through financial statement s like the profit and loss account and
balance sheet to outsiders like creditors, shareholders, employees etc.
Cost Accounting:
It is that branch of accounting which is mainly concerned with costing
information which is useful to the management for purpose of cost
ascertainment and cost control.

Management Accounting/managerial accounting:


It is the art or technique of analysis and interpretation and presentation of
facts, results and information revealed by financial accounting, cost
accounting and other books and records kept by the business for the benefit
of persons who are in charge of managing the business. In short,
management accounting is the accounting which provides necessary
information to the management for discharging its functions such as
planning, organizing, directing and controlling more efficiently.

Accounting concepts and Conventions:


To make the language of business or accounting clear to the different groups
or persons, a number of rules or principles have been agreed upon and
followed by accountants in the writing up of accounts and in the presentation
of financial statements. The general rules or principles adopted in accounting
are called accounting standards or accounting principles.
Accounting principles can be divided into :
I Accounting Concepts
II Accounting Conventions
Accounting Concepts:
It means the assumptions upon which accounting is based. They have been
developed by accountants to make accounting convey the same meaning to
all people as far as practicable. There are a number of accounting concepts:
1. Money Measurement Concept or Common Denominator
Concept:

In accounting a record is made only of those transactions or


events which can be expressed in terms of money. Non-monetary events
like the retirement of the managing director of a concern, team work in
the organization, good quality of products or services in the organization
are not recorded.
2. Business Entity Concept or Separate Entity Concept:
In accounting every business undertaking whether it is a soletrading concern or a partnership firm or a joint stock company is considered
as a distinct entity from the persons who own it. As the business and the
proprietors who own the business are regarded as two separate entities the
transactions of the business are distinguished from those of the proprietors
and in the books of the business, accounts are kept only for the transactions
of the business and not for those of the proprietors.
3. Going Concern concept or concept of continuity:
In accounting an enterprise is considered as a going concern( i.e.
a concern that will continue to operate for a fairly long time) and it is
from this point of view, its transactions are recorded in its books.
4. Cost Concept:
According to this concept, an asset acquired by a concern is
recorded in the books of accounts at cost (i.e at the price actually paid for
acquiring the asset). The market price of the asset is ignored, and it is its cost
price that forms the basis for all subsequent accounting for that asset.
5. Dual aspect concept: Equation or accounting equation concept:
Every business transaction always results in receiving of some
benefit of some value and giving of some other benefit of equal value. For
example, when a business purchases goods for cash, it receives goods of
some value and gives cash of equal value. Thus, every business transaction
involves dual or double aspect of equal value. So in accounting a record is
made of the dual or two aspects of each transaction. Each transaction will
always result in equality of assets and liabilities and at any point of time; the
total assets of the concern will be equal to its total liabilities plus the
proprietors capital.
Assets = Liabilities + Proprietors capital
Assets - Liabilities =Proprietors capital
Assets- Proprietors capital= Liabilities

6. Accounting Period Concept:


For measuring the financial results of the business or the working
life of the business is split into convenient periods of time. Such a period
often, is called as accounting period. The length of the accounting period
depends on the nature of the business and the objective of the proprietor
of the business,. The accounting period may be three months, six months,
one year or even two but, usually, one year is regarded as the ideal
accounting. The one year accounting period is also recognized by law.
7. Objective evidence concept:
This concept means that all accounting entries should be
evidenced and supported by business documents such as invoices, vouchers
etc.
This concept also implies that evidences must be completely objective ( that
is, must state the facts as they are without bias or fraud) and must be subject
to verification by auditors.
8. Matching concept or periodical matching concept
Every business man invests money in the business with the main
objective of earning profit. The business demands the details of all revenues
and all expenses. Detailed information about all the items of revenue and all
the items of expenses and losses in necessary, because right business
decision in the right direction can be taken only when detailed information
all items of revenue and expenses are available. To know the net profit and
net loss and the details of all revenues and expenses every business prepares
and presents a statement account known as Income statement or the profit
and loss account. Thus, the net profit or loss of a business is determined by
matching the expenses and losses with the revenues.
9. Realization concept or Revenue Recognition concept:
According to this concept, revenue is recognized or considered as
being earned on the date on which it is realised. Revenue is considered as
being realised not when goods are manufactured or when order is received
or contract is signed but on the date on which goods or services are

transferred to the customer and the customer become legally liable to pay for
them.
10.Accrual Concept:
The accrual concept suggests that when a transaction has been
entered into its consequences will certainly follow. So all the transactions
must be brought into record, whether they are settled in cash or not. It
suggests that an accountant is required to treat as revenues all that items for
which there are the legal right to receive although cash might not have been
received for them. That means, if revenue is earned, but no payment is
received the same should be recorded as revenue.
11.Legal Aspect concept:
This concept means that the accounting records and books should
reflect the legal position. This concept also means that the accounting
records and statements should conform to legal requirements. That is, the
accounting records should be kept and the statements should be prepared in
the manner provided by law. That is by the relevant acts.
Accounting Conventions:
It refers to the customs, traditions, usages or practices followed by the
accountants as a guide in the preparation of financial statements. They are
adopted to make the financial statements clear and meaningful.
Convention of Materiality:
This convention means that a detailed record is made only of those business
transactions which are material (i.e. important). No detailed record is made
of transactions which are trivial (insignificant), as the work of recording the
minute details of such transactions is not justified by the usefulness of the
result.
Convention of Conservatism:
The convention of conservatism means the convention of caution, prudence
or the policy of playing safe. In other words, it means that, in the accounting
records and the financial statements of a business. All the prospective losses,
risks and uncertainties should be taken note of and provided for, but

prospective profits should be ignored. In short, provide for all possible


losses, but anticipate no profits is the implication of this convention. It is on
account of this convention that provision for doubtful debts, provision for
discount on debtors, provision for fluctuations on any investments etc are
made.
Convention of consistency:
It signifies that the accounting practices and methods should remain
consistent from one accounting year to another. for instance, when once a
particular method of depreciation is adopted for a particular fixed asset the
same method should be followed for that asset year after year.

Convention of full Disclosure:


The convention of full disclosure means that the material facts must be
disclosed in the financial statements. For instance, as regards the
investments, not only the various securities held by a concern should be
disclosed but also the mode of their valuation should be stated.
It has been given recognition by the companies act.

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