1Q.
Explain classification of accounts with example and state
the rule of debit and credit.
Ans. Accounts are classified into personal and impersonal. Impersonal accounts are
further classified into Real accounts and Nominal accounts.
A. Personal Accounts are further classified into:
1. Natural Persons: Accounts which relate to individual human beings. Ex Ram,
Sham, shiv,
2. Artificial Persons: Accounts which relate to a group of persons or firms or
institutions. For example- Andhra Bank, Life Insurance Corporation of India,
lions club, L&T Ltd., Wipro Ltd etc.
3. Representative Personal Accounts: These accounts represent a particular
person or group of persons. Ex.,
o Outstanding salary (amount due by business to employee who are
persons)
o Prepaid insurance (amount paid in advance to insurance co., ie., next
year insurance premium paid in the current year)
o Rent receivable (rent due from tenant)
o Commission received in advance (next year commission received in
current year)
B. Impersonal Accounts: Other than personal accounts are grouped as
impersonal accounts Impersonal accounts are further divided into real
accounts and nominal accounts.
1. Real Accounts: Real accounts are related to assets. Assets are the things
which are used in business to generate revenue.
Assets may be classified as:
Tangible Fixed Assets: Assets which can be seen and touch ex., Land and
Building, plant & machine, equipment, furniture and fixtures etc.,
Intangible Fixed Assets: Assets which can’t be seen and touch ex., Good
will, patents, copy rights, trade marks, lease etc.,
2. Nominal Accounts: Nominal accounts relate to expenses, losses,incomes
and gains., for example salaries, wages, rent paid, commission received,
discount allowed discount received, sale of goods, purchase of goods.,
etc.,
Every transaction as two aspects, one is called debit aspect and the other is credit
aspect. Under double entry book keeping system, to identify which aspect is to be
debited or credited, rules of debit and credit are framed. They are:
Type of accounts Dr- Debit Cr- Credit
Real Accounts Asset coming into the Asset going out of the
(Assets-Capital business business
Expenditure)
Nominal Accounts Expenses incurred and Incomes and gains of the
(Revenue expenses, losses suffered by business
Losses, Incomes and business
Gains)
Personal Accounts Debit the person who Credit the person who
(natural, artificial, receives benefit from the gives benefit to the
representative persons) business business
2Q. Pass Journal entries for the following transactions:
Mr. Anil started business with cash ₹ 75,000 on 1st January, 2025. The details of
business transactions for the month of January are as follows. Prepare Journal.
2025
Jan 2nd Purchased Machine 22,000
3rd Purchased goods 12,000
4th Purchased goods from shiva 5,000
5th Sold old furniture 1,000
6th Goods sold to raj 7,000
6th Sales 20,000
7th cash paid to shiva 3,000
8th cash received from raj 4,000
9th cash deposited into bank 5,000
10th cash withdrawn from bank 4,000
11th stationery purchased 500
12th commission received 300
13th salary paid 20,000
14th goods taken from business for personal use 2,000
15th rent received 3,000
Solution:
Journal Entries
Date Particulars LF Dr.
Amount ₹
Cr
Amount ₹
2025 Cash a/c Dr - 75,000
Jan To Capital a/c 75,000
1st (Being capital invested)
2nd Machine a/c Dr - 22,000
To Cash a/c 22,000
(Being machine purchased)
3rd Purchases a/c Dr - 12,000
To cash a/c 12,000
(Being goods purchased)
th
4 Purchased a/c Dr - 5,000
To Shiva a/c 5,000
(Being goods purchased on credit)
5th Cash a/c Dr - 1,000
To Furniture a/c 1,000
(Being old furniture sold)
th
6 Raj a/c Dr - 7,000
To sales a/c 7,000
(Being goods sold on credit)
6th Cash a/c Dr -
To sales a/c 20,000 20,000
(Being cash sales)
7th Shiva a/c Dr - 3,000
To Cash a/c 3,000
(Being cash paid to shiva)
8th Cash a/c Dr - 4,000
To Raj a/c 4,000
(Being cash received from raj)
9th Bank a/c Dr - 5,000
To cash a/c 5,000
(Being cash deposited into bank)
10th Cash a/c Dr -
To Bank a/c 4,000 4,000
(Being cash withdrawn from bank)
11th Stationery a/c Dr -
To cash a/c 500 500
(Being stationery purchased)
12th Cash a/c Dr -
To Commission a/c 300 300
(Being commission received)
13th Salary a/c Dr - 20,000
To Cash a/c 20,000
(Being salary paid)
14th Drawing a/c Dr - 2,000 2,000
To Purchases a/c
(Being goods taken for personal use)
15th Cash a/c Dr - 3,000
To Rent a/c 3,000
(Being rent received)
Working Notes:
Mr. Anil started business with cash ₹ 75,000 on 1 st January, 2025.
cash – Real a/c -asset comes into business – Dr
capital – personal a/c – owner is giving benefit to business - Cr
Jan 2nd Purchased Machine 22,000
Machine-Real a/c-Machine coming into business-Dr
Cash-Real a/c-Cash going out of the business-Cr
3rd Purchased goods 12,000
Purchases-Nominal a/c-purchasing goods is an expense for the business-Dr
Cash-Real a/c-Cash going out of the business-Cr
4th Purchased goods from shiva 5,000
Purchases-Nominal a/c-purchasing goods is an expense for the business-Dr
Shiva-natural personal a/c-shiva is giving benefit to business-Cr
5th Sold old furniture 1,000
Furniture-Real a/c-furniture going out of business-Cr
Cash-Real a/c-cash coming into the business-Dr
6th Goods sold to raj 7,000
Sales-Nominal a/c-selling goods is an income for the business-Cr
Raj-Natural Personal a/c-raj is receiving benefit from business-Dr
6th Sales 20,000
Sales-Nominal a/c-selling goods is an income for the business-Cr
Cash-Real a/c-cash coming into business-Dr
7th cash paid to shiva 3,000
Cash-Real a/c-Cash going out of the business-Cr
Shiva-natural personal a/c-shiva is receiving cash from business-Dr
8th cash received from raj 4,000
Cash-Real a/c-cash coming into business-Dr
Raj-natural personal a/c-raj giving cash to business-Cr
9th cash deposited into bank 5,000
Cash-Real a/c-Cash going out of the business-Cr
Bank-artificial personal a/c-bank is receiving cash from business-Dr
10th cash withdrawn from bank 4,000
Cash-Real a/c-cash coming into business-Dr
Bank-artificial personal a/c-bank is giving cash to business-Cr
11th stationery purchased 500
Stationery-nominal a/c-expense for business-Dr
Cash-Real a/c-Cash going out of the business-Cr
12th commission received 300
Commission-nominal a/c-income for business-Cr
Cash-Real a/c-cash coming into business-Dr
13th salary paid 20,000
Salary-nominal a/c-expense for business-Dr
Cash-Real a/c-Cash going out of the business-Cr
14th goods taken from business for personal use 2,000
Drawing-representative personal a/c-owner is receiving benefit from business-
Dr
Purchases-nominal a/c-expense decrease-Cr
15th rent received 3,000
Rent-nominal a/c-income from business-Cr
Cash-Real a/c-cash coming into business-Dr
3Q. Explain the Concepts and conventions of accounting?
Ans. GAAPs: Generally Accepted Accounting are the rules developed for the
preparation of the financial statements and are called concepts, conventions,
postulated, principles etc., GAAPs are the backbone of the accounting information
system. GAAPs are those rules of action or conduct which are derived from
experience and practice.
The generally accepted accounting principles or practices depends upon how best
they satisfy the following conditions.
a. Relevance: relevance means the principle should ensure that the information
provided is meaningful, useful and relevant to the users of accounting
information.
b. Reliability: The accounting information provided should be trustworthy and
reliable, the information provided should not be influenced by personal bias or
judgement of the person who provide the accounting information.
c. Feasibility: The implementation of principle must ensure less cost and
complexity.
Accounting principles can be broadly classified into accounting concepts and
accounting conventions.
Accounting concepts and accounting conventions have been developed over the
years from experience, usage and necessity and are generally accepted for
recording of transactions and preparation of financial statements.
Accounting concepts: Accounting concepts are the necessary assumptions,
conditions or postulates upon which the accounting is based. Concepts facilitate
communication of the accounting and financial information to all the users of the
financial statements that enables the users to interpret the statements in the same
meaning and context.
The Accounting concepts are as follows:
1. Business Entity Concept: As per this concept, business organizations are
treated as separate entity which can be distinguished from the owners or
stakeholders who provide capital to the business. Business transactions are
kept in business books of accounts and owners personal transactions in
owners personal books of accounts.
2. Money measurement Concept: In accounting all the transactions are
recorded in terms of money. Events and transactions that cannot be
expressed in terms of money are not recorded in the books of accounts.
Receipt of income, payment of expenses, purchase and sale of assets etc.,
are monetary transactions that are recorded in the books of accounts.
Whereas, the event of machinery breakdown is not recorded as it does not
have a monetary value. However, the expenditure incurred for the repair of
the machinery can be measured in monetary value and hence is recorded.
3. Going concern concept: As per this concept it is assumed that the
organization will continue for a long time, unless it is closed as per the law to
which it is subject. The financial statements are prepared at the end of each
financial year to measure the performance of the entity during that period and
not on the assumption of closure or liquidation of the entity.
4. Accounting Period concept or Periodicity concept: As per going concern
concept an indefinite life of the entity is assumed. As the stake holders of the
business organization are interested to know the financial performance of
business, A small fraction of time is chosen out of infinite life cycle of the
business entity for measuring financial performance (profit position) generally
one year period is taken to measure the financial performance of the
business, it may be prepared for quarterly also, 3 months, 6 months or 9
months. As per the income tax act every business unit should prepare
financial statements and pay tax on profits every year.
5. Money measurement concept: In accounting, all the transactions are
recorded in terms of money. Events and transactions that cannot be
expressed in terms of money are not recorded in the books of accounts.
Receipt of income, payment of expenses, purchase and sale of assets etc.,
are monetary transactions that are recorded in the books of accounts.
Whereas, the event of machinery breakdown is not recorded as it does not
have a monetary value. However, the expenditure incurred for the repair of
the machinery can be measured in monetary value and hence is recorded.
6. Cost concept: As per this concept, an asset is ordinarily recorded at the price
actually paid or incurred to acquire it, ie., at the price the asset is purchased.
For all subsequent accounting treatment of the asset the same cost price of
the asset is the basis. The asset recorded at cost at the time of purchase may
systematically be reduced through depreciation.
7. Accrual concept: under the cash system of accounting, the revenues and
expenses are recorded only if they are actually received or paid in cash,
irrespective of the accounting period to which they belong. But under the
accrual concept, occurrence of claims and obligations in respect of incomes
or expenditures, assets or liabilities based on happening of any event,
passage of time, rendering of services, are recorded even though actual
receipts or payments of money are not have taken place. In respect of an
accounting period, the outstanding expenses and the prepaid expenses and
similarly the income receivable and the income received in advance are
shown separately in the books of accounts under the accrual method of
accounting.
8. Matching concept: As per this concept, all expenses matched with the
revenue of that period should only be taken into consideration. In the financial
statements of the organization if any revenue is recognized then expenses
related to earn that revenue should also be recognized. This concept is based
on accrual concept as it considers the occurrence of expenses and income
and do not concentrate on actual inflow or outflow of cash. This leads to
adjustment of certain items like prepaid and outstanding expenses, unearned
or accrued incomes. For example, goods costing Rs. 50,000 purchased, of
which goods costing Rs. 30,000 sold for Rs. 42,000. Profit is Rs. 12,000. It
means business lost goods costing Rs. 30,000 to generate a income of Rs.
42,000. The remaining unsold stock Rs. 20,000 in unexpired cost appear in
balance sheet as an asset. Therefore, according to this concept, incomes are
to be identified with their corresponding expenses or vice versa in a given
period of time.
9. Realization Concept: According to this concept, revenue should be
accounted for only when it is actually realized or it has become certain that
the revenue will be realized. This signifies that revenue should be recognized
only when the services are rendered or the sale is affected. However, in order
to recognize revenue, actual receipt of cash is not necessary, but the
organization should be legally entitled to receive the amount for the services
rendered or the sale affected is to be taken into consideration.
Conventions:
Accounting conventions are the customs or traditions guiding the preparation of
accounts they are adopted to make financial statement clear and meaningful.
Following are the four accounting conventions.
1. Convention of disclosure: Accounting statements should disclose fully and
completely all the significant information, based on which, decisions can be
taken by various interested parties. It involves proper classification and
explanations of accounting information which are published in the financial
statements
2. Convention of Materiality: The materiality principle requires the disclosure of
the significant information, exclusion of which would influence the decisions.
Unimportant and insignificant information are either left out or merged with
other items. Ex., stationery a/c which includes expenses incurred on papers,
a/c books, pens, pencils, computer ribbons etc.,
3. Convention of consistency: The convention consistency facilitates
comparison of financial performance of an entity from one accounting period
to another, which is possible when the accounting principles followed by an
entity are consistently applied over the years. For ex., an organization should
not change its method of depreciation every year. From straight line method to
written down value method or vice versa. Similarly, the method adopted for
valuation of stocks, first in first out (FIFO) or Last in first out (LIFO) should be
consistently followed.
4. Convention of Conservatism: the essence of this principle is “anticipate no
profit and provide for all possible losses”. This means that all prospective
losses are taken into consideration, however, no doubtful income is taken into
consideration in recording of transactions by an entity.
Q4. Explain the steps in ACCOUNTING (ACCOUNTING PROCESS).
The accounting process begins when a financial transaction takes place.
These transactions are to be processed in a systematic manner so as to
provide useful information to the interested parties of the business. According
to the definitions stated above, the accounting process is presented as under:
According to the definitions stated above, the accounting process is presented
as under:
From the above accounting process, the following specific functions of
accounting can be derived:
1.Identifying: Identifying the business transactions from the various sources
as, documents. receipt, invoice, cash memo, counterfoil etc., They serve as
evidence of happening of a transaction/event.
2. Recording: The next function of accounting is to keep a systematic record
of all business transactions, which are identified in an orderly manner, soon
after their occurrence in the journal or subsidiary books.
3. Classifying: This is concerned with the classification of the recorded
business transactions so as to group the transactions of similar type at one
place, i.e., in ledger (a book in which the accounts are maintained) by
extracting the balances/totals of accounts.
4. Summarizing: It is the process of extracting the balances of all accounts
so as to prepare trial balance.
5. Reporting: The classified information available from the trial balance is
used to prepare profit and loss account and balance sheet in a manner useful
to the users of accounting information.
6. Analysing: It establishes the relationship between the items of the profit
and loss account and the balance sheet. The purpose of analysing is to
identify the financial strength and weakness of the business. It provides the
basis for interpretation.
7. Interpreting: It is concerned with explaining the meaning and significance
of the relationship established by the analysis. Interpretation should provide
useful inputs to the users, so as to enable them to take correct decisions from
time to time.
2 Marks Q
1. Debtors: a person who receives a benefit without giving money or money’s
worth immediately, but liable to pay in future or in due course of time is debtor.
Debtors may be a trade debtor or general debtor. Trade debtor is one two whom
goods are sold on credit and general debtor is one from whom some amount is
receivable. Example rent receivable from Ravi. Debtors are shown as an asset in
the balance sheet
2. Creditors: A person who gives a benefit without receiving money are money’s
worth immediately but claim in future is a creditor. Creditors may be trade
creditors are general creditors. A trade creditor is one who supplied goods on
credit to the business and a general creditor is one to whom business owes es.
Loan taken from bank, salaries payable to employees etc.
3. Sales: Sales refer to the amount of goods sold that are already bought or
manufactured by the business. When goods are sold for cash they are called
cash sales. If goods are soled and payment is not received at the time of sale, it
is called credit sales. Total sales include both cash and credit sale.
4. Voucher: It is a written document in support of a transaction. It is a proof that a
particular transaction has taken place for the value stated in the voucher. It may
in the form of cash receipt, invoice, cash memo, bank pay-in-slip, etc., voucher is
necessary to audit the accounts.
5. Receipt: Receipt is an acknowledgement for cash received. It is issued to the
party paying cash. Receipts form the basis for entries in cash board
