UNIT I

BASIC CONCEPTS OF ACCOUNTING

MEANING OF ACCOUNTING
Accounting is the analysis and interpretation of book-keeping records. It includes not only the
maintenance of accounting records but also the preparation of financial and economic information which
involves the measurement of transactions and other events relating to the entity. In India chanakya in his
Arthashastra has emphasized the existence and need for proper accounting and auditing. The modern
system of accounting owes its origin to Pacoili, who lived in Italy in the 18th century. Accounting today
cannot be the same as it is used to be about half century back. In the early stages accounting developed as
a result of the need of the business firms to track of their relationship with outsiders, listing of their assets
and liabilities. In recent years changes in technology has also brought a remarkable change in the field of
accounting. It has come to be recognized as a tool for mastering the various economic problems which a
business may have to face. It systematically writes the economic history of the organization. It provides
information that can be drawn upon by those responsible for decisions affecting the organizations future.

DEFINITION OF ACCOUNTING
According to American Institute of Certified Public Accountant (AICPA), accounting is the art of
recording, classifying and summarizing the financial transactions and communicating the results thereof to
the persons interested in such information.
According to American accounting Association accounting is the process of identifying, measuring and
communicating economic information to permit informed judgments and decisions by users of the
information.

NEED FOR ACCOUNTING

Accounting records business transactions with a view to prepare financial statements. Accounting is
primarily concerned with business as well as non business entities such as schools, colleges, hospitals,
government etc. A businessman who has invested his capital in a business enterprise would like to know
whether his enterprise is making profit or incurring losses; what is his position of assets and liabilities on a
particular date; he would also like to know his capital in the business has increased or decreased and so
on. It communicates the results of the information to various parties like proprietors, creditors, investors,
government and the public. Persons like housewives, government and other individuals make the use of
accounting.
Need for accounting helps to know
 What he/she owns?
 What he/she owes?
 Whether he/she has earned a profit or suffered a loss on account of running a business?
 What is the financial position whether he or she will be in a position to meet all his commitments in
the near future or in a process of getting bankruptcy?

NATURE OF ACCOUNTING
Accounting is often called the language of business. It is one of the means of communicating information
regarding the affairs of the business.
1. Accounting is a process: A process refers to the method of performing any specific job step by step
according to the objectives, or target. Accounting is identified as a process as it performs the specific task
of collecting, processing and communicating financial information. In doing so, it follows some definite
steps like collection of data recording, classification summarization, finalization and reporting.
2. Accounting is a science and an art: Science is knowledge based on well known principles or rulers.
Accounting is, therefore a science because recording, classifying and summarizing of monetary transactions is
done on the basis of certain generally accepted accounting principles or rules. Art is action or doing a thing.
Actual keeping of record of transactions is an art. Hence accounting is both a science and an art. It must be
clearly understood that without the through knowledge of accounting principles-concepts and conventions one
cannot become an efficient accountant. The American Institute of Certified Public Accountants defines
accounting as the art of recording, classifying and summarizing the financial transactions. Accounting helps in
achieving our desired objective of maintaining proper accounts. Art is a technique which helps in achieving a
desired objective.
3. Accounting is means and not an end: Accounting finds out the financial results and position of an
entity and the same time, it communicates this information to its users. The users then take their own
decisions on the basis of such information. So, it can be said that mere keeping of accounts can be the
primary objective of any person or entity. On the other hand, the main objective may be identified as
taking decisions on the basis of financial information supplied by accounting. Thus, accounting itself is
not an objective, it helps attaining a specific objective. So it is said the accounting is ‘a means to an end’
and it is not ‘an end in itself.’
4. Accounting deals with financial information and transactions; Accounting records the financial
transactions and date after classifying the same and finalizes their result for a definite period for
conveying them to their users. So, from starting to the end, at every stage, accounting deals with financial
information. Only financial information is its subject matter. It does not deal with non-monetary
information of non-financial aspect.
5. Accounting is an information system: Accounting is recognized and characterized as a storehouse of
information. As a service function, it collects processes and communicates financial information of any
entity. This discipline of knowledge has been evolved out to meet the need of financial information
required by different interested groups.

DIFFERENCE BETWEEN BOOK KEEPING AND ACCOUNTING

Book keeping Accounting
Book keeping is mainly concerned with recording Accounting is a wider concept and is concerned
of business transactions in a significant and orderly with designing, recording, classifying and
way. summarizing the recorded data and interpret them
for internal and external users
Bookkeeper has no role in accountant’s work of Accountant may supervise the work of book
interpretation. keepers recording work.
Work of book keeper is routine and clerical in Work of accountant is technical in nature and
nature requires high level of knowledge, understanding
and analytical skill.
Book keeping is done in accordance with basic The methods and procedures adopted by
concepts and conventions for all types of accountants may not be the same for all firms.
organizations.

OBJECTIVES OF ACCOUNTING
1. To keep systematic records: Accounting is done to keep systematic record of financial transactions.
In the absence of accounting, it is difficult to memorize all the information through human memory.
2. To protect business properties: This is possible on account of supplying the following information to
the manager or the proprietor. The amount of the proprietors fund invested in the business.
How much the business has to pay to others?
How much the business has to recover from others?
How much the business has in the form of?
a) Fixed assets
b) Cash in hand
c) Cash at bank
d) Stock
3. To ascertain the operational profit or loss: Accounting helps in ascertaining the net profit or loss of
the business. Profit and loss account will help the management, investors, and creditors to know the
financial position of the business. Profit and loss account will help the management, investors, creditors,
government, citizen etc., in knowing whether running of the business has proved to be remunerative or
not. In case it is non profitable, the cause of such state of affairs will be investigated and necessary
remedial steps will be taken.
4. To ascertain the financial position of a business: The profit and loss account gives the amount of
profit or loss made by the business during the particular period. The balance sheet is a statement of assets
and liabilities of the business on a particular date. It is a barometer for ascertaining the financial health of
a business.
5. To facilitate rational decision making: Accounting is the task of collection, analysis and reporting of
information and it helps in rational decision making. The American accounting association has defined the
term accounting is the process of identifying, measuring and communicating economic information to
permit informed judgments and decisions by users of information.

FUNCTIONS OF ACCOUNTING
1. Recording: This is the basic function of accounting. Recording is done in the book “Journal”. This
book may be subdivided into various subsidiary books such as cash journal, purchase journal; sales
journal etc.The number of such books may vary according to the size and nature of the business.
2. Classifying: Classification is done in the book “Ledger”. Classification is concerned with the
systematic analysis of the recorded data, with a view to group transactions or entries of one nature at one
place. E.g. advertising, printing and stationary, traveling expenses etc
3. Summarizing: Summarizing involves presenting the classified data in a manner which is
understandable and useful to the internal as well as external end users of accounting information. It
involves preparation of Trial balance, Income statement and Balance sheet
4. Dealing with financial transactions: It records only those transactions which are related to money.
Transactions which are not of financial character are not recorded in the books of accounts. For example if
a company has a number of trusted employees, it will not be recorded in the books of accounts.
5. Analyzing and interpreting: The data recorded are analyzed and interpreted in a manner that the end
users can judge the profitability position of the business. Analysis means methodical classification of data
given in the financial statements. Interpretation means explaining the meaning and significance of data so
simplified.
6. Communicating: The accounting information after being meaningfully analysed and interpreted has to
be communicated in a proper form and manner top the users. This is done through accounting reports,
income statement, balance sheet and additional information in the form of accounting ratios, graphs etc.

LIMITATIONS OF ACCOUNTING
1) Accounting information is expressed in terms of money. Non money events or transactions are omitted.
2) Fixed assets are recorded in the accounting records at the original cost. The effect of inflation or
deflation is not taken into consideration.
3) Accounting information is sometimes based on estimates i.e., inaccurate.
E.g. it is not possible to predict the degree of accuracy and useful life of an asset for the purpose of
depreciation.
4) Accounting information cannot be used as the only test of managerial performance on the basis of more
profits.
5) Accounting information is not neutral or unbiased: Accountants calculate income as excess of revenues
over expenses. They consider only selected revenues and expenses. They dot involve cost of water
pollution, air pollution, employees injuries etc.
6) Accounting may lead to window dressing: The term window dressing means manipulation of accounts
in such a way as to conceal the vital facts and presents the financial statements in a way to show better
position than what it actually is.
 ACCOUNTING AND OTHER DISCIPLINES
 Accounting and statistics: Both the accountants and statisticians are involved with the collection,
classification, analysis and presentation of data. Accounting has a close relationship with statistics. A
number of statistical techniques are used in collection, analysis and interpretation of accounting data. E.g.
Accounting ratios, standard deviation, capital budgeting, correlation, regression, coefficient of variation
etc.
 Accounting and mathematics: Knowledge of arithmetic and algebra is necessary for accounting
computation and measurements. Dual aspect concept is expressed in the form of a mathematical; equation
i.e. accounting equation. With the advent of the computer, mathematics is becoming a vital part of
accounting. Mathematical techniques are used in accounting. Examples like computation of depreciation,
determination of loan installment.
 Accounting and economics: Economics is concerned with rational decision making regarding
efficient use of scarce resources for satisfying human wants. Accounting is considered to be a system
which provides appropriate information to the management for taking rational decisions. Accountants
record and interpret transactions expressed in money e g cost of goods purchased, prices of goods sold and
values of assets bought and sold and so on. Accounting deals with transactions which are of economic
facts. Much of the data used by the economist is supplied by the accountant.
 Accounting and engineering: Engineers provide estimates on new capital proposals associated with
the plant and machinery. The accountants and engineers must cooperate with each other in bringing about
efficiency in production activities.
 Accounting and management: A large portion of accounting information is prepared for
management decision making. Management accounting processes accounting data for decision making.
This indicates the linkage between management and accounting. Accounting is the essential se4rvice
function of management.

BRANCHES OF ACCOUNTING
 Financial accounting: Accounting designed for outsiders is known as financial accounting. It is
concerned with the recording of business transactions and the periodic preparation of income statement
and balance sheet.
 Management accounting: It is concerned with the interpretation of accounting information to guide
the management for future planning, decision making and control etc. management accounting provides
information to the insiders e.g. owners, managers and employees.
 Cost accounting: It has been developed to ascertain the costs incurred for carrying out various
business activities and helps the management to reduce cost of production.
 Tax accounting: This branch of accounting has grown in response to difficult tax laws such as
income tax, sales tax, excise duties, custom duties etc.
 Social accounting: This branch of accounting is also known as social reporting or social responsibility
accounting. It discloses the social benefits created and the costs incurred by the enterprise.
 National accounting: It means the accounting for the resources of the nation as a whole it has
developed by the economists and statisticians.

DIFFERENCE BETWEEN MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING

Basis Financial Accounting Management Accounting
Definition Accounting designed for outsiders is It is concerned with the interpretation of
known as financial accounting. It is accounting information to guide the
concerned with the recording of management for future planning, decision
business transactions and the periodic making and control etc. management
preparation of income statement and accounting provides information to the
balance sheet. insiders e.g. owners, managers and employees.
Level of details Financial accounting is simply shows Management accounting shows how the
how the business has moved in the past business has to move in future.
Objectives To supply information to external It is to supply information for insiders.
parties like shareholders, creditors,
banks, investors
Analyzing Portrays position of business as a It reports on the profitability, performance of
performance whole various divisions or departments.
Concentration It concentrates on past and looks It concentrates on future and looks forward.
backward
Compulsion Financial accounting is an absolute Management accounting is optional
necessity
Principles used It is meant for outsiders hence it has to It is meant for insiders hence it can frame and
follow accepted principles and adopt its own principles
conventions
Data used It supplies data of past records. It supplies both for present and future duly
analyzed in detail.
Monetary It deals with only those events which It deals with monetary as well as non
measurement can be described in terms of money. monetary events like technical innovations,
change in value of money.
Periodicity of Financial accounts are usually prepared They are prepared at short intervals as per the
reporting yearly or half yearly requirements of management.
Precision Information is precise and most It lays emphasis on precision and approximate
accurate figurers are used.
Nature It is more objective, has rigid approach. It is more subjective, has flexible approach.
Performance Performance appraisal is not applicable. Performance appraisal is applicable.
appraisal

DIFFERENCE BETWEEN FINANCIAL ACCOUNTING AND COST ACCOUNTING

Basis Financial Accounting Cost Accounting
Objectives Financial accounting aims at Cost accounting renders information for the
safeguarding the interest of the business guidance of the management for proper
and its proprietors and others connected planning, organizational control and decision
with it. making.
Mode of Financial accounts are prepared Maintenance of cost records is purely
presentation according to some accepted accounting voluntary and, therefore, there are no statutory
concepts and conventions forms regarding their presentation
Recording In financial accounts the transactions In cost accounts the emphasis is more on
are recorded, classified and analyzed in aspects of planning and control and
a subjective manner. transactions are recorded in an objective
manner
Analyzing profit Financial accounts reveal the profit of Cost accounting shows the profit made on each
the business as a whole. product, job or process.
Periodicity of The income statements and balance Cost accounting is mainly concern reports are
reporting sheet are prepared and presented before frequently submitted to the management and in
the members usually once at the end of some cases they are submitted every week.
the accounting period.
Degree of Financial accounting provides Cost accounting provides information to the
accuracy information which is more useful to the insiders so accuracy is less.
outsider’s hence greater accuracy is
required.
END USERS OF ACCOUNTING INFORMATION:
End users of accounting information are as follows:
 Proprietors: The main objective of every business is to earn profit. Its profitability and financial
soundness matters prime importance to the proprietors who have invested their money in the business.
 Managers: In a sole proprietary business, proprietor is the manager. In case of partnership business
either some or all partners participate in the management of the business. In case of joint stock companies
shareholders are the managers. Accounting information helps the managers to analyze
 Setting objectives or targets for future periods and devising methods for attain those objectives
 Observing and measuring the performance of the various departments
 Evaluating the performance in relation to targets set up.
 Taking corrective action as may be necessary to overcome the shortfalls.
 Creditors and short term lenders: Creditors are those persons who have extended credit to the
company. Short term lenders as commercial banks supply money for short periods to business
organizations. Bankers and suppliers inspect the accounting information before making loans or granting
credit. This helps to ascertain whether the enterprise is in a position to pay its obligations in time.
 Prospective investors: Under this category there are existing shareholders and future shareholders.
They are interested in the future prosperity of the business and dividends.
 Government: The government is interested in the financial statements of the business enterprise von
account of taxation, labor and corporate laws.
 Employees: the employees are interested in the financial statements on account of various profit
sharing and bonus schemes.
 Citizen: An ordinary citizen may be interested in the accounting records of the institutions with which
he comes in contact with daily life e.g. bank, temple, and public utilities such as gas, transport and electric
companies.
 Regulatory agencies: A number of regulatory agencies like Securities Exchange Board of India
(SEBI), the Insurance Regulatory Authority, and the Reserve Bank of India etc need accounting
information for the efficient operation of capital markets.

ROLE OF ACCOUNTANT
Accountants can be broadly classified into two categories:
 Accountants in public practice
 Accountants in Employment.
Accountants in public practice: They provide services for conducting financial audit, cost audit,
designing of accounting system and rendering other professional services for a fee. The accountants in
public practice are known as professional accountants.
Accountants in employment: They are employed in business entities or non business entities. Non
business entities includes government, churches, educational institutions etc
The services of accountants are as follows:
1. Maintenance of books of accounts:
2. Auditing of accounts:
3. Taxation:
4. Financial services
5. Budgeting
1. Maintenance of books of accounts: An accountant keeps a systematic record of the transactions
entered by the business firm or an institution in the normal course of its operation. The advantages of
maintenance of records are
a) Helps to management: accounting is an important managerial tool since it provides information to the
management for its effective functioning such as planning, organizing, directing, coordinating, motivating
and communicating.
b) Replacement of memory: A person cannot remember everything about his business transactions.
Transactions recorded in the books of accounts relieve strain of one’s memory.
c) Comparative study: a system of recording of business transactions will help a business entity to make
a comparative study and evaluation of performance.
d) Acceptance by tax authorities: Properly maintained accounting records are accepted by income tax or
sales tax authorities.
e) Evidence in courts: Properly maintained accounting records are often taken as good evidence by the
court of law.
f) Sale of business: It helps a business entity to fetch a proper price in the event of sale of the business.
2. Auditing of accounts: Auditing is concerned with verification of accounting data for determining the
accuracy and reliability of accounting statements and reports. It may be of two types:
 Statutory audit
 Internal audit
Statutory audit: it is required to be done because of the provisions of law. E.g. under the companies act
every company has to get its accounts audited by a qualified chartered accountant.
Internal audit: internal audit is a review of various operations of the company by a staff specially
appointed for this purpose.
3. Taxation: Accountants also handle taxation matters of a person or a business organization. He also
assists his client/ organization in reducing tax burden and making proper tax planning.
4. Financial services: it provides services like taxation, legal and accounting matters. An accountant also
assists his clients in selecting the most appropriate investment or insurance policy.
5. Budgeting: it means planning of business activities before they occur. The planned activities are
compared with the budgeted activities and if there is any variation, corrective action may be taken.

SYSTEMS OF BOOK KEEPING

Book keeping is the art of recording business transactions in a regular and systematic manner.
There are two systems of book keeping:
 Single entry system
 Double entry system
Single entry system is an incomplete double entry system. According to Kohler it is a system of book
keeping in which, only records of cash and personal accounts are maintained.
Double entry system:
Every transaction has two fold effects in the form of receiving some benefit. This is a perfect, complete
and accurate system of recording business transaction. It is based on dual aspect concept.

DIFFERENCE BETWEEN SINGLE ENTRY SYSTEM AND DOUBLE ENTRY SYSTEM

Basis Double Entry System Single Entry System
Recording of transactions Dual aspect concept completely Dual aspect concept is not
followed while recording business followed for all transactions.
transactions.
Maintenance of books In double entry system various In single entry system no
subsidiary books viz, sales book, subsidiary books except cash in
purchase book, cash book are maintained
maintained.
Maintenance of books of All major accounts real, nominal Only personal accounts are
accounts. and personal are maintained. maintained.
Preparation of trial balance Trial balance is prepared to c heck Trial balance cannot be prepared
arithmetical accuracy of the books
of accounts
Accuracy of profits and Trading & profit and loss account Rough estimate of profit and loss
financial position gives the true profit while the can be made. Statement of affairs
 balance sheet provides the true and does not show the true financial
fair financial position. position.
Utility Large business unit adopt this It is used only by very small
system business units.

DIFFERENCE BETWEEN CASH SYSTEM AND ACCRUAL SYSTEM

Cash System Accrual System
It is a system in which accounting entries are made It is system in which accounting entries are made
only when cash is received or paid. on the basis of amounts having become due for
payment or receipt.
Prepaid, outstanding and received in advance items Prepaid, outstanding and received in advance
are not appearing in the balance sheet. items are appearing in the balance sheet.
Profit and loss account show a lower profit due to Profit and loss account show a high profit due to
the effect on income of prepaid expenses and the effect on income of prepaid expenses and
accrued income. accrued income.
The basis of cash based accounting is not Accrual basis of accounting is recognized by the
recognized by the companies Act, 1956. companies Act 1956.
Cash system is not followed by all concerns. Most of the industrial and commercial firms
follow accrual basis of accounting.
No option is available regarding the method of Accountant has the option to value the
inventory valuation and method of depreciation. inventories at cost or market whichever is less
and also straight line or diminishing balance
method of depreciation.

ACCOUNTING PRINCIPLES AND STANDARDS

Accounting Standards: Accounting standards are written policy documents issued by expert accounting
body or by government or its regulatory body covering such aspects as recognition, measurement,
presentation and disclosure of accounting transactions in the financial statements.
Accounting standards are the codified forms of generally accepted accounting principles. Accounting
standards consists of detailed rules to be adopted for treatment of various items in accounting before the
financial reports are presented to the external and internal users.
Accounting standards are designed to harmonize diverse accounting practices i.e. methods and
procedures, to achieve uniformity and consistency in internal and external reporting practices.
Accounting standards primarily concerned with the financial measurements i.e., operating income and
financial position) and disclosures used in the preparation of different types of financial statements.
Accounting Principles: Accounting principles may be defined as those rules of action adopted by the
accountants universally or Generally Accepted Accounting Principles while recording accounting transaction.
These principles can be classified into two categories.
 Accounting concepts or accounting postulates
 Accounting conventions
A concept is a basic assumption on the basis of which financial statements of business enterprises are prepared.
An assumption is something that is accepted as true without proof.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

Accounting principles follow certain guidelines. The rules that govern how accountants measure progress
ad communicate financial information fall under the heading Generally Accepted Accounting Principles
(GAAP).GAAP comprises of conventions, rules and procedures that constitute accepted accounting
practices at any given time.
GAAP differ from country to country because of the legislative requirements of each country, local
accounting practices, customs, usage and business environment peculiar to that country. E.g. in USA the
financial accounting Standard Board (FASB) set up in 1973 makes major pronouncements called
Statements of Financial Accounting standards. In UK the accounting standard board set up in 1990 issues
financial reporting standards. In India, the accounting Standard Board set up by the Institute of Chartered
Accountants of India issues the accounting standards to be observed by Indian companies.

BENEFITS OF ACCOUNTING STATNDARDS

1. To improve the credibility and reliability of the financial statements. The accounting standards
create a sense of confidence amongst the users of the accounting information by proving a structure of
uniform guidelines which improve the credibility and reliability to the financial information.
2. Benefits to accountants and auditors. The use of accounting standards helps to mitigate the
occurrence of frauds and provide transparency to the accounting data. Hence the accounting standards
benefit not only to the accounting entity but also to accountants and auditors.
3. Determining managerial accountability: Accounting standards are useful in measuring the efficiency
of the management regarding the profitability, liquidity, solvency and general progress off the enterprise.
In the absence of accounting standards it is difficult to evaluate the managerial stewardship because there
is no basis of comparing the financial results of one enterprise with another.
4. Reform in accounting theory and practice: A lot of research work continues to be undertaken to
study the alternative possibilities for defining and measuring the accounting performance.

OBJECTIVES OF ACCOUNTING STANDARDS

1. The main purpose is to provide information to the users as to the basis on which the accounts have
been prepared.
2. Accounting standards remove the effect of diverse accounting practices and policies so that financial
statements become more meaningful and comparable.
3. Accounting standards increase the comparability
4. Accounting standards increase the credibility and understandability

SCOPE OF ACCOUNTING STANDARDS ISSUED BY ICAI

1. Efforts should be made to issue Accounting Standards which are in conformity with the provisions of
the applicable laws, customs, usages and business environment in India.
2. The accounting standards are intended to apply the items which are material. Any limitation with
regard to the applicability of a specific accounting standard will be made clear by the ICAI from time to
time.
3. The ICAI will use its best endeavors to persuade the government, appropriate authorities and business
community to adopt the accounting standards Inorder to achieve uniformity in preparation of financial
statements.
4. The emphasis of the accounting standards would be on account ting principles.
5. The standards formulated by the ASB include paragraphs in bold italic type and plain type, which
have equal authority.
6. Accounting standard Board may consider any issue regarding interpretation of accounting standards.

INTRODUCTION TO ACCOUNTING STANDARDS ISSUED BY ICAI

The Institute of chartered accountants of India (ICAI) has issued 32 accounting standards. While auditing
the accounts, it will be the duty of the auditors to examine whether accounting standard is compiled with
the presentation of the financial statements.
Accounting standards issued by the Institute of Chartered Accountants of India (ICAI)
No Title Mandatory for
accounting period
beginning on or after
AS1 Disclosure of accounting policies 1.4.1991
AS2( Revised) Valuation of inventories 1.4.1999
AS3( Revised) Cash flow statements 1.4.2001
AS4( Revised) Contingencies and events occurring after the balance 1.4.1995
sheet date
AS5( Revised) Prior period and extra ordinary items and changes in 1.4.1996
accounting policies
AS6( Revised) Depreciation accounting 1.4.1995
AS7( Revised) Accounting for Construction contracts 1.4.2003
AS8 Accounting for research and developments ( 1.4.1991
withdrawn w.e.f. 1.4.2003)
AS9 Revenue recognition 1.4.1991
AS10 Accounting for fixed assets 1.4.1991
AS11(Revised 2003) Accounting for the effect of changes in foreign 1.4.2004
exchange rates
AS12 Accounting for government grants 1.4.1995
AS13 Accounting for investments 1.4.1995
AS14 Accounting for amalgamations 1.4.1994
AS15 Accounting for retirement benefits in the financial 1.4.1995
statements of employers( withdrawn w.e.f. 1.4.2006)
AS15(Revised 2005) Employee benefits 7.12.2006
AS16 Borrowing Costs 1.4.2000
AS17 Segment Reporting 1.4.2001
AS18 Related Party Disclosures 1.4.2001
AS19 Leases 1.4.2001
AS20 Earnings per Share 1.4.2001
AS21 Consolidated Financial statements and accounting for 1.4.2001
investments in subsidiaries in separate financial
statements.
AS22 Accounting for taxes on income 1.4.2001
AS23 Accounting for investments in associates 1.4.2002
AS24 Discontinuing operations 1.4.2004
AS25 Interim financial reporting 1.4.2002
AS26 Intangible assets 1.4.2003
AS27 Financial reporting of interests in joint ventures 1.4.2002
AS28 Impairment of assets 1.4.2004*
AS29 Provisions, Contingent liabilities and Contingent 1.4.2004
assets
AS30 Financial instruments: Recognition and measurement 1.4.2011
AS31 Financial instruments: Presentation 1.4.2011
AS32 Financial instruments: Disclosures 1.4.2011
*Mandatory i) for enterprises whose debt or securities are listed on a recognized stock exchange in India
and ii) all other commercial or industrial enterprises whose turnover for the accounting period exceeds 50
Crores.

ACCOUNTING CONCEPTS:
In India there is a basic rule to be followed by everyone that one should walk or drive on his/her left hand
side of the road. It helps in the smooth flow of traffic. Similarly, there are certain rules that an accountant
should follow while recording business transactions and preparing accounts. These may be termed as
accounting concept. Thus, this can be said that: Accounting concept refers to the basic assumptions and
rules and principles which work as the basis of recording of business transactions and preparing accounts.
Accounting concepts are:
Separate Entity Concept: This concept assumes that, for accounting purposes, the business enterprise
and its owners are two separate independent entities. Thus, the business and personal transactions of its
owner are separate. For example, when the owner invests money in the business, it is recorded as liability
of the business to the owner. Similarly, when the owner takes away from the business cash/goods for
his/her personal use, it is not treated as business expense. Thus, the accounting records are made in the
books of accounts from the point of view of the business unit and not the person owning the business. This
concept is the very basis of accounting. Let us take an example. Suppose Mr. Sahoo started business
investing Rs. 100000. He purchased goods for Rs. 40000, Furniture for Rs. 20000 and plant and
machinery of Rs. 30000. Rs. 10000 remains in hand. These are the assets of the business and not of the
owner. According to the business entity concept Rs. 100000 will be treated by business as capital i.e. a
liability of business towards the owner of the business. Now suppose, he takes away Rs. 5000 cash or
goods worth Rs. 5000 for his domestic purposes. This withdrawal of cash/goods by the owner from the
business is his private expense and not an expense of the business. It is termed as Drawings. Thus, the
business entity concept states that business and the owner are two separate/distinct persons. Accordingly,
any expenses incurred by owner for himself or his family from business will be considered as expenses
and it will be shown as drawings.
Significance: This concept helps in ascertaining the profit of the business as only the business expenses
and revenues are recorded and all the private and personal expenses are ignored. This concept restraints
accountant from recording of owner’s private/ personal transactions.
It also facilitates the recording and reporting of business transactions from the business point of view.
It is the very basis of accounting concepts, conventions and principles.
Money Measurement Concept: This concept assumes that all business transactions must be in terms of
money that is in the currency of a country. In our country such transactions are in terms of rupees. Thus,
as per the money measurement concept, transactions which can be expressed in terms of money are
recorded in the books of accounts. For example, sale of goods worth Rs.200000, purchase of raw materials
Rs.100000, Rent Paid Rs.10000 etc. are expressed in terms of money, and so they are recorded in the
books of accounts. But the transactions which cannot be expressed in monetary terms are not recorded in
the books of accounts. For example, sincerity, loyalty, honesty of employees is not recorded in books of
accounts because these cannot be measured in terms of money although they do affect the profits and
losses of the business concern. Another aspect of this concept is that the records of the transactions are to
be kept not in the physical units but in the monetary unit. For example, at the end of the year 2006, an
organisation may have a factory on a piece of land measuring 10 acres, office building containing 50
rooms, 50 personal computers, 50 office chairs and tables, 100 kg of raw materials etc. These are
expressed in different units. But for accounting purposes they are to be recorded in money terms i.e. in
rupees. In this case, the cost of factory land may be say Rs.12 crore, office building of Rs.10 crore,
computers Rs.10 lakhs, office chairs and tables Rs.2 lakhs, raw material Rs.30 lakhs. Thus, the total assets
of the organisation are valued at Rs.22 crore and Rs.42 lakhs. Therefore, the transactions which can be
expressed in terms of money are recorded in the accounts books, that too in terms of money and not in
terms of the quantity.
Significance: This concept guides accountants what to record and what not to record.
It helps in recording business transactions uniformly.
If all the business transactions are expressed in monetary terms, it will be easy to understand the accounts
prepared by the business enterprise.
It facilitates comparison of business performance of two different periods of the same firm or of the two
different firms for the same period.
Going Concern Concept: This concept states that a business firm will continue to carry on its activities
for an indefinite period of time. Simply stated, it means that every business entity has continuity of life.
Thus, it will not be dissolved in the near future. This is an important assumption of accounting, as it
provides a basis for showing the value of assets in the balance sheet; For example, a company purchases a
plant and machinery of Rs.100000 and its life span is 10 years. According to this concept every year some
amount will be shown as expenses and the balance amount as an asset. Thus, if an amount is spent on an
item which will be used in business for many years, it will not be proper to charge the amount from the
revenues of the year in which the item is acquired. Only a part of the value is shown as expense in the year
of purchase and the remaining balance is shown as an asset.
Significance: This concept facilitates preparation of financial statements.
On the basis of this concept, depreciation is charged on the fixed asset.
It is of great help to the investors, because, it assures them that they will continue to get income on their
investments.
In the absence of this concept, the cost of a fixed asset will be treated as an expense in the year of its
purchase.
A business is judged for its capacity to earn profits in future.
Accounting Period Concept: All the transactions are recorded in the books of accounts on the
assumption that profits on these transactions are to be ascertained for a specified period. This is known as
accounting period concept. Thus, this concept requires that a balance sheet and profit and loss account
should be prepared at regular intervals. This is necessary for different purposes like, calculation of profit,
ascertaining financial position, tax computation etc. Further, this concept assumes that, indefinite life of
business is divided into parts. These parts are known as Accounting Period. It may be of one year, six
months, three months, one month, etc. But usually one year is taken as one accounting period which may
be a calendar year or a financial year. Year that begins from 1st of January and ends on 31st of December,
is known as Calendar Year. The year that begins from 1st of April and ends on 31st of March of the
following year, is known as financial year. As per accounting period concept, all the transactions are
recorded in the books of accounts for a specified period of time. Hence, goods purchased and sold during
the period, rent, salaries etc. paid for the period are accounted for and against that period only.
Significance: It helps in predicting the future prospects of the business.
It helps in calculating tax on business income calculated for a particular time period.
It also helps banks, financial institutions, creditors, etc. to assess and analyse the performance of business
for a particular period.
It also helps the business firms to distribute their income at regular intervals as dividends.
Accounting Cost Concept: Accounting cost concept states that all assets are recorded in the books of
accounts at their purchase price, which includes cost of acquisition, transportation and installation and not
at its market price. It means that fixed assets like building, plant and machinery, furniture, etc. are
recorded in the books of accounts at a price paid for them. For example, a machine was purchased by
XYZ Limited for Rs.500000, for manufacturing shoes. An amount of Rs.1000 were spent on transporting
the machine to the factory site. In addition, Rs.2000 was spent on its installation. The total amount at
which the machine will be recorded in the books of accounts would be the sum of all these items i.e.
Rs.503000. This cost is also known as historical cost. Suppose the market price of the same is now Rs
90000 it will not be shown at this value. Further, it may be clarified that cost means original or acquisition
cost only for new assets and for the used ones, cost means original cost less depreciation. The cost concept
is also known as historical cost concept. The effect of cost concept is that if the business entity does not
pay anything for acquiring an asset this item would not appear in the books of accounts. Thus, goodwill
appears in the accounts only if the entity has purchased this intangible asset for a price.
Significance: This concept requires asset to be shown at the price it has been acquired, which can be
verified from the supporting documents.
It helps in calculating depreciation on fixed assets.
The effect of cost concept is that if the business entity does not pay anything for an asset, this item will not
be shown in the books of accounts.
Dual Aspect Concept: Dual aspect is the foundation or basic principle of accounting. It provides the very
basis of recording business transactions in the books of accounts. This concept assumes that every
transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides. Therefore, the
transaction should be recorded at two places. It means, both the aspects of the transaction must be
recorded in the books of accounts. For example, goods purchased for cash has two aspects which are (i)
Giving of cash (ii) Receiving of goods. These two aspects are to be recorded. Thus, the duality concept is
commonly expressed in terms of fundamental accounting equation: Assets = Liabilities + Capital. The
above accounting equation states that the assets of a business are always equal to the claims of
owner/owners and the outsiders. This claim is also termed as capital or owners’ equity and that of
outsiders, as liabilities or creditors’ equity. The knowledge of dual aspect helps in identifying the two
aspects of a transaction which helps in applying the rules of recording the transactions in books of
accounts. The implication of dual aspect concept is that every transaction has an equal impact on assets
and liabilities in such a way that total assets are always equal to total liabilities.
Capital brought in by the owner of the business. The two aspects in this transaction are: (i) Receipt of cash
(ii) Increase in Capital (owners’ equity).
Purchase of machinery by cheque. The two aspects in the transaction are (i) Reduction in Bank Balance
(ii) Owning of Machinery.
Goods sold for cash. The two aspects are (i) Receipt of cash (ii) Delivery of goods to the customer.
Rent paid in cash to the landlord. The two aspects are (i) Payment of cash (ii) Rent (Expenses incurred).
Once the two aspects of a transaction are known, it becomes easy to apply the rules of accounting and
maintain the records in the books of accounts properly. The interpretation of the Dual aspect concept is
that every transaction has an equal effect on assets and liabilities in such a way that total assets are always
equal to total liabilities of the business.
Significance: This concept helps accountant in detecting error.
It encourages the accountant to post each entry in opposite sides of two affected accounts.
Realisation Concept: This concept states that revenue from any business transaction should be included
in the accounting records only when it is realised. The term realisation means creation of legal right to
receive money. Selling goods is realisation, receiving order is not. In other words, it can be said that:
Revenue is said to have been realised when cash has been received or right to receive cash on the sale of
goods or services or both has been created. Let us study the following examples: (i) N.P. Jeweller received
an order to supply gold ornaments worth Rs.500000. They supplied ornaments worth Rs.200000 up to the
year ending 31st December 2005 and rest of the ornaments was supplied in January 2006. (ii) Bansal sold
goods for Rs.100000 for cash in 2006 and the goods have been delivered during the same year. (iii)
Akshay sold goods on credit for Rs.50000 during the year ending 31st December 2005. The goods have
been delivered in 2005 but the payment was received in March 2006. Now, let us analyse the above
examples to ascertain the correct amount of revenue realised for the year ending 31st December 2005. (i)
The revenue for the year 2005 for N.P. Jeweller is Rs.200000. Mere getting an order is not considered as
revenue until the goods have been delivered. (ii) The revenue for Bansal for year 2005 is Rs.100000 as the
goods have been delivered in the year 2005. Cash has also been received in the same year. (iii) Akshay’s
revenue for the year 2005 is Rs.50000, because the goods have been delivered to the customer in the year
2005. Revenue became due in the year 2005 itself. In the above examples, revenue is realised when the
goods are delivered to the customers. The concept of realisation states that revenue is realized at the time
when goods or services are actually delivered. In short, the realisation occurs when the goods and services
have been sold either for cash or on credit. It also refers to inflow of assets in the form of receivables.
Significance: It helps in making the accounting information more objective.
It provides that the transactions should be recorded only when goods are delivered to the buyer.
Accrual Concept: The meaning of accrual is something that becomes due especially an amount of money
that is yet to be paid or received at the end of the accounting period. It means that revenues are recognised
when they become receivable. Though cash is received or not received and the expenses are recognised
when they become payable though cash is paid or not paid. Both transactions will be recorded in the
accounting period to which they relate. Therefore, the accrual concept makes a distinction between the
accrual receipt of cash and the right to receive cash as regards revenue and actual payment of cash and
obligation to pay cash as regards expenses. The accrual concept under accounting assumes that revenue is
realised at the time of sale of goods or services irrespective of the fact when the cash is received. For
example, a firm sells goods for Rs 55000 on 25th March 2005 and the payment is not received until 10th
April 2005, the amount is due and payable to the firm on the date of sale i.e. 25th March 2005. It must be
included in the revenue for the year ending 31st March 2005. Similarly, expenses are recognised at the
time services provided, irrespective of the fact when actual payment for these services is made. For
example, if the firm received goods costing Rs.20000 on 29th March 2005 but the payment is made on
2nd April 2005 the accrual concept requires that expenses must be recorded for the year ending 31st
March 2005 although no payment has been made until 31st March 2005 though the service has been
received and the person to whom the payment should have been made is shown as creditor. In brief,
accrual concept requires that revenue is recognised when realised and expenses are recognised when they
become due and payable without regard to the time of cash receipt or cash payment.
Significance: It helps in knowing actual expenses and actual income during a particular time period.
It helps in calculating the net profit of the business.
Matching Concept: The matching concept states that the revenue and the expenses incurred to earn the
revenues must belong to the same accounting period. So once the revenue is realised, the next step is to
allocate it to the relevant accounting period. This can be done with the help of accrual concept. Let us
study the following transactions of a business during the month of December, 2006 (i) Sale : cash Rs.2000
and credit Rs.1000 (ii) Salaries Paid Rs.350 (iii) Commission Paid Rs.150 (iv) Interest Received Rs.50 (v)
Rent received Rs.140, out of which Rs.40 received for the year 2007 (vi) Carriage paid Rs.20 (vii) Postage
Rs.30 (viii) Rent paid Rs.200, out of which Rs.50 belong to the year 2005 (ix) Goods purchased in the
year for cash Rs.1500 and on credit Rs.500 (x) Depreciation on machine Rs.200. Let us record the above
transactions under the heading of Expenses and Revenue. Expenses Amount Revenue Amount Rs. 1.
Salaries 350 1. Sales 2. Commission 150 Cash 2000 3. Carriage 20 Credit 1000 3000 4. Postage 30 2.
Interest received 50 5. Rent paid 200 3. Rent received 140 Less for 2005 (50) 150 Less for 2007 (40) 100
6. Goods purchased Cash 1500 Credit 500 2000 7. Depreciation on machine 200 Total 2900 Total 3150.
In the above example expenses have been matched with revenue i.e (Revenue Rs.3150-Expenses
Rs.2900). This comparison has resulted in profit of Rs.250. If the revenue is more than the expenses, it is
called profit. If the expenses are more than revenue it is called loss. This is what exactly has been done by
applying the matching concept. Therefore, the matching concept implies that all revenues earned during
an accounting year, whether received/not received during that year and all cost incurred, whether paid/not
paid during the year should be taken into account while ascertaining profit or loss for that year.
Significance: It guides how the expenses should be matched with revenue for determining exact profit or
loss for a particular period.
It is very helpful for the investors/shareholders to know the exact amount of profit or loss of the business.

ACCOUNTING CONVENTIONS
An accounting convention refers to common practices which are universally followed in recording and
presenting accounting information of the business entity. Conventions denote customs or traditions or
usages which are in use since long. To be clear, these are nothing but unwritten laws. The accountants
have to adopt the usage or customs, which are used as a guide in the preparation of accounting reports and
statements. These conventions are also known as doctrine. They are:
Convention of Consistency: It means that same accounting principles should be used for preparing
financial statements year after year. A meaningful conclusion can be drawn from financial statements of
the same enterprise when there is a comparison between them over a period of time. But this can be
possible only when accounting policies and practices followed by the enterprise are uniform and
consistent over a period of time. If different accounting procedures and practices are used for preparing
financial statements of different years, then the result will not be comparable. Generally a businessman
follows the same general practices or methods year after year, for preparing the books of accounts. While
charging depreciation on fixed assets or valuing unsold stock, once a particular method is used, it should
be followed year after year. So that the financial statements can be analysed and compared provided that,
the depreciation on fixed assets is charged or unsold stock is valued by using same method year after year.
This can be further clarified in case of charging depreciation on fixed assets, accountant can decide to
adopt any one method of depreciation such as diminishing value method or straight line method.
Similarly, in case of valuation of closing stock it can be valued at actual cost price or market price,
whichever is less. However, precious metals like gold, diamond, minerals are generally valued at market
price only. Therefore, as per this convention the same accounting methods should be adopted every year
in preparing financial statements. But it does not mean that a particular method of accounting once
adopted can never be changed. Whenever a change in method is necessary, it should be disclosed by way
of footnotes in the financial statements of that year.
Significance: It facilitates comparative analysis of the financial statements.
It ensures uniformity in charging depreciation on fixed assets and valuation of closing stock.
Convention of Materiality: The convention of materiality states that, to make financial statements
meaningful, only material fact i.e. important and relevant information should be supplied to the users of
accounting information. The question that arises here is what is a material fact? The materiality of a fact
depends on its nature and the amount involved. Material fact refers to the information that will influence
the decision of its user. For example, a businessman is dealing in electronic goods. He purchases T.V.,
Refrigerator, Washing Machine, Computer etc. for his business. In buying these items he uses larger part
of his capital. These items are significant items; thus should be recorded in books of accounts in detail. At
the same time to maintain day to day office work he purchases pen, pencil, match box, scented stick, etc.
For this he will use very small amount of his capital. But to maintain the details of every pen, pencil,
match box or other small items is not considered of much significance. These items are insignificant items
and hence they should be recorded separately. Thus, the items that are significantly important in recording
the details are termed as material facts or significant items. The items that are of less significance are
immaterial facts or insignificant items. Thus, according to this convention important and significant items
should be recorded in their respective heads and all immaterial or insignificant transactions should be
clubbed under a different accounting head.
Significance: It helps in minimising errors in calculation.
It helps in making Financial Statements more meaningful.
It saves time and resources.
Convention of Conservatism: This convention is based on the principle that “Anticipate no profit, but
provide for all possible losses”. It provides guidance for recording transactions in the books of accounts. It
is based on the policy of playing safe in regard to showing profit. The main objective of this convention is
to show minimum profit. Profit should not be overstated. If more profit is shown than the actual, it may
lead to distribution of dividend out of capital. This is not a fair policy and it will lead to the reduction in
the capital of the enterprise. Thus, this convention clearly states that profit should not be recorded until it
is earned. But if the business anticipates any loss in the near future, provision should be made in the books
of accounts for the same. For example, valuing closing stock at cost or market price whichever is lower,
creating provision for doubtful debts, discount on debtors, writing off intangible assets like goodwill,
patent, etc. The convention of conservatism is a very useful tool in situation of uncertainty and doubts.
Significance: It helps in ascertaining actual profit.
It is useful in the situation of uncertainties and doubts.
It helps in maintaining the capital at its real value.
Following are the examples of application of conservatism:
1) Making provision for doubtful debts and discount on debtors.
2) Not providing for discount on creditors.
3) Valuing stock in trade at cost or market price whichever is less.
4) Creating provisions against fluctuations in the price of investments.
5) Showing joint life policy at surrender value and not at the paid up amount.
6) Amortization of intangible assets like goodwill which has indefinite life.
Full disclosure: According to this convention the accounting reports should disclose true and fair
information to proprietors, creditors, investors, employees, public and the government. This convention is
very important because most of the big organizations are run by joint stock companies where ownership is
divorced by management.
ACCOUNTING PROCESS
The accounting process is the series of steps followed by the business entity to record the business
financial transactions that include steps for collecting, identifying, classifying, summarizing, and
recording the business transactions in the books of accounts of the company so that the financial
statements of the entity can be prepared. The profits and the business’s financial position can be known
after regular intervals of time.
Steps in Accounting Process
Identify the Transaction: Identifying the business transaction is the initial step in the process of
accounting. The business entity has to identify financial and monetary transactions. Therefore, only those
transactions that are monetary are recorded. Also, the transactions that belong to the business are to be
recorded, and not the owner’s transactions are included in the books of accounts of the business.
Recording of the Transactions in the Journal: After identifying the transactions, the second step of the
accounting process is to create the Journal entry for every accounting transaction. The point of recording
transactions is based on the policy followed by the entity for accounting, i.e. accrual basis or cash basis of
accounting. In the accrual basis of accounting, the revenues and expenses are recorded in the entity’s
books in the period when they are earned and incurred, respectively, regardless of the actual cash receipt
and payment. However, in the case of cash accounting, the transactions are recorded only when the actual
cash is received/paid. In a dual entry system, every transaction affects at least two accounts, i.e., one
account is debited, and another account is credited. For example, if the purchases are made in cash, the
purchases account will be debited (purchases increase), and the cash account is credited (cash decreases).
Posting in the Ledger: After recording the transaction in the Journal, the individual accounts are then
posted in the general ledger. It helps the owner/accountant know each account’s balance individually. For
example, all the debits and credits of the bank account are transferred to the ledger account, which helps to
know the increase and decrease in bank balance during a period. Finally, we can determine the ending
bank balance from it.
Unadjusted Trial Balance: The company’s trial balance is prepared to check whether the debits are equal
to the credits or not. The trial balance’s main purpose is to identify any errors made during the above
process. The trial balance reflects all the accounts balances at the given time. After the preparation of
the trial balance, it is checked that the total of all credits is equal to the total of all debts, and if the total is
not the same, then an error is to be identified and corrected. There can be other reasons for the error, but
firstly, an accountant tries to locate the error by preparing the trial balance. Also, trial balance helps to
know the balances of all accounts in a summarized form.
Adjusting Journal Entries: When the accrual basis of accounting is followed, some of the entries are to
be made at the end of the accounting year, such as entries of expenses that may have been incurred but are
not booked in the Journal and entries of some income that may be earned by the business but are not yet
recorded in the books. For example, the interest amount on a fixed deposit is earned each year, but it is
accumulated in the fixed deposit amount. This interest income is to be recorded in the books of accounts
yearly because the interest is earned yearly, no matter the amount will be received together after the
maturity of the fixed deposit.
Adjusted Trial Balance: After all the adjusting entries are made, again, a trial balance is to be prepared
before preparing the financial statements to check that all the credits are equal to the debits after the
adjustment entries are made.
Preparation of Financial Statements: After all the above steps are completed, the financial statements of
the company are prepared to know the actual financial position, the profitability position, and the cash
flow position of the business. The statements that are prepared for knowing the above positions are a
statement of profit and loss for knowing the profitability position, the balance sheet for getting the
financial position, and the cash flow statement to know the changes in cash flows from the three activities
of the business (operating, investing and financing activities).
Closing Entries: Finally, the accounting cycle ends with this step. These entries transfer the temporary
account balances to a permanent account. The temporary accounts are the accounts whose balances end in
a single accounting year, such as sales, purchases, expenses, etc. These balances are first transferred to the
income statement and then to the permanent account, i.e., the profit/loss is transferred to the retained
earnings account. It should be cleared that only temporary accounts are closed, not the permanent ones
(accounts that are balance sheet accounts such as fixed assets, debtors, inventory, etc.)
After closing entries are made, the trial balance is again prepared to check that the debit equals the credit,
and the accounting cycle starts again with the beginning of another accounting year.

LEDGER POSTING
The business transactions are recorded in various Accounting books. The Accounting process does not
stop here. The transactions are written in several Accounting books in chronological order. Such recording
of business transactions only serves little purpose in the Accounting process. Items of the same name
under all the books need to be recorded under a special place called to Account. Every item has a separate
Account and all these Accounts are recorded in a book called Ledger.
Meaning: All the Accounts recognized based on transactions recorded in different journals will be opened
and maintained in a separate book called Ledger.
So a Ledger is a book of Accounts; in which all types of Accounts relating to assets, liabilities, capital,
expenses and revenues are maintained. It is a complete set of Accounts of a business enterprise.
Ledger is in a book with pages consecutively numbered. It can also be a bundle of sheets.
All the items from the journal are recorded in Ledger Accounts and this process is known as posting
entries from Journal to Ledger Accounts.
Features: A Ledger book is an Accounts book to which various transactions of an enterprise are posted
under different Accounts.
It follows the double-entry system.
It is also known as the Principal book of Account as it is the book of final entry of transactions after the
journal or all-purpose books.
In the Ledger, all the types of Accounts relating to assets, liabilities, capital and revenue are maintained.
It is the only record of the business transaction classified into relevant Accounts.
It facilitates the preparation of financial statements in future.
Format:

Types of Ledger Accounts

1. General Ledger: A general Ledger is the master collection of all the Accounts that summarize all
transactions occurring within an enterprise. There may be a small set of Ledgers that fall under the general
Ledger. The general Ledger is used to record all the transactions in the financial statements of the
business.
It comprises a debit and credit entry for every transaction recorded into it, to match the total debit and
credit balance. It has to match to prepare the financial statements from it.
They are of two types
Nominal Ledger: As the name suggests it contains all nominal Accounts i.e. expense, losses, incomes and
gains. Examples – Salaries, Sales, Purchases, Returns Inward/Outward, Rent, Stationery, Insurance,
Depreciation, etc.
Private Ledger: Private Ledger consists of Accounts that are confidential such as capital, drawings,
salaries, etc. These Accounts are only accessible by selected individuals.
2. Purchase Ledger: Purchase Ledger records all the transactions the company has done with the
suppliers. It shows which purchases are paid and which are outstanding. If the purchasing volume is
relatively low, then there is no need for a purchase Ledger. Instead, this information is recorded directly
within the general Ledger.
Each Account will generally have a credit balance and this shows the amount owed to a supplier by the
business. The Sum of all the money owed by a business to its suppliers is known as Accounts payable.
3. Sales Ledger: If the business just has one customer, it will not need to maintain a sales Ledger but just
one Account in the Nominal Ledger will be enough. But, many businesses sell in credit and have many
customers, for them maintaining a sales Ledger is very important.
This Account records all the transactions in which the goods have been sold to the customer in credit. The
Sum of all the money which has been given on credit is called Accounts receivable.
Importance of Ledger
Ledger is the spine of business Accounting as it has all the records of all the transactions in separate
Accounts. Towards the end of the Accounting period, all Accounts will contain the entire information of
all the transactions relating to it.
1. Core information about business: Ledger provides a comprehensive report of all the transactions which
helps the business to look through the expenses and incomes. If there are any discrepancies are found
amongst both, then necessary actions are taken.
2. Knowledge of book value of assets: Ledger is a hub of all the assets related records of the business.it
keeps a separate Account for each asset and all the transactions relating to it. The book value of any asset
can be derived from the Ledger at any time.
3. Useful for management: Information given by the Ledger Accounts is used further in financial
statements to derive the company’s growth or reasons for any loss. Management can make effective
decisions based on it.
4. Reason for the disparity in expenses or incomes: The Ledger records all the expenses of the business
and all the incomes too. So if there is any difference in their balance, then they have to reevaluate and fix
the problem.

JOURNAL ENTRY
Each journal entry contains the data significant to a single business transaction, including the date, the
amount to be credited and debited, a brief description of the transaction and the accounts affected.
Depending on the company, it may list affected subsidiaries, tax details and other information.
It’s crucial to accurately enter complete journal data so that the general ledger and financial reports based
on this information are also accurate and complete. With modern accounting software, recurring journal
entries may be templated and automatically executed, minimizing the potential for error.
Journal entries are made in chronological order and follow the double-entry accounting system, meaning
each will have both a credit and a debit column.
Rules for Journal Entries
Journal is the book of original entry, in which any business transaction is recorded for the first time and
chronologically. There are rules of debit and credit that apply to such recording. Such rules vary with the
nature of the accounts to be considered in the transaction.
Personal Account: A personal account is that of a person, company, an organization such as a bank, etc.
Debit the Receiver, Credit the giver.
Accounts that fall in this category are: Debtors, Creditors, and so on
Real Account: A Real Account accounts for tangible and intangible items such as inventory, cash, bank
account, plant and machinery, and so on.
Debit what comes in, Credit what goes out
Accounts that fall in this category are: Cash, bank balance, stock of goods, Purchase, Sales, Plant &
Machinery, and so on
Nominal Account: This account accounts for profits, losses, incomes, and gains.
Debit all losses and expenses, and Credit all incomes and gains.
Accounts that fall in this category are Profit, Interest, Dividend, and Depreciation.
ACCOUNTING VOUCHER
There are numerous Accounting vouchers such as cheque book counterfoil, pay-in-slip counterfoil, wages,
and salary sheet, receipt, invoice, bills, and many more used by an organisation. To be precise, one can
say that any written document in support of the accounting entries in the books of account to indicate the
accuracy of the transaction is said to be a voucher.
Vouchers in accounting can be any written document created in support of the entries in the accounting
books and pose the accuracy of the accounting transaction. Vouchers are normally created to adhere to the
control of accounting and financial transactions of any organisation.
Voucher in Accounting
A voucher in accounting is a document normally issued by the accounts payable department to authorise
payments. It can also be termed as a memorandum of liability to any organisation. An accounting
voucher can be seen as a written backup document for the payments done to the suppliers or creditors in
any organisation for the business conducted with the party.
This document plays an important role in initiating the process of clearance of liability. All the other
related documents can be collected and verified with the use of a voucher. The accounting vouchers in
tally also have a hand in putting up the appropriate control mechanism.
The accounts payable department has to ensure that every payment made to the supplier is,
Authorised appropriately
The goods and services are received against the payment
The payment is as per the agreement that pre-exists
When a voucher is issued for payment, it implies that all these prerequisites of the control mechanism
process are fulfilled, and the payment towards the supplier is good to go.
Components of Accounting Voucher
A voucher accounting is typically a part of a manual payment system with a strong control mechanism.
The vouchers are prepared with the help of source documents such as challans, counterfoils, cheque
books, receipts, bank deposit slips, bills, cash memos, and other information. The source documents are
relevant to the financial transaction and also vouch for the existence of such transactions.
The data and information on a voucher normally contain are as mentioned below:
Voucher number
Date and types of accounting vouchers
Credit and debit column
Particulars column- It includes a brief description of the record of the transaction
Identification Number of the supplier
The amount payable in words and figures
Column for total
The due date for payment
Name of the account under which liability is created
Terms and conditions for a discount or other schemes
Approval stamp and signature of accountant
Authorised signature of the higher authority
Receiver's signature
Preparation of the accounting vouchers can be a tricky job. The accountant has to be vigilant while
preparing the vouchers for the transaction that takes place. Every minute detail should be thoroughly
checked and verified. Some of the major points that the accountant should take care of while preparing the
voucher are mentioned below:
The supporting documents should be thoroughly verified.
An authorised signatory should sign the supporting documents of the voucher.
The accountant should use appropriate types of voucher relevant to the transaction.
The credit and debit sides of the voucher should be tallied and balanced.
It is most essential for the accountant to ensure that the voucher has the correct account head mentioned.
This would ensure that the transaction is recorded properly in the books of accounts.
Types of Accounting Vouchers
Along with the knowledge about the meaning of vouchers in accounting, the accountant should also have
thorough knowledge about the types of vouchers. This assists the accountant to prepare an appropriate
voucher with regard and relevant to the financial transaction. Also, different types of vouchers have
different meanings and implications.
Receipt Voucher: The bank or cash receipts are recorded through a receipt voucher. The receipt voucher
is of two types, namely bank receipt voucher and cash receipt voucher. A cash receipt voucher is prepared
for the amount received in cash. The bank receipt vouchers record the receipt of the demand draft or
cheque. This implies that the amount is received in the bank instead of cash.
Payment Voucher: The payment voucher is opposite to the receipt voucher. While receipt voucher poses
the inflow of funds, payment voucher depicts the transactions that have an outflow of funds. The focus of
preparing payment vouchers is to record the cash and bank transactions for payment in an organisation.
Similar to receipt vouchers, payment vouchers are also of two types: bank payment vouchers and cash
payment vouchers. The payments in an organisation through cash are recorded in a cash payment voucher,
while those done through demand draft or cheque are recorded in bank payment voucher.
Journal Voucher: Journal vouchers are also known as transfer vouchers or non-cash vouchers. All the
transactions that do not involve cash or bank transactions or inflow and outflow of amounts are passed
through journal vouchers. They are authentic documentary proof for the financial transaction.
For instance, when the goods are sold on credit and there is no immediate cash or bank transaction, the
journal voucher is prepared for such a transaction. The debtor is debited with the sales amount, and
the sales account is credited to pass the accounting entry.
Sales Voucher: Any sales transaction for the goods and services is passed through a sales voucher. The
sales voucher is prepared to record the cash and credit sales performed in the organisation. The relevant
debtor account is debited, and the sales account is credited. The sales voucher is the proof and acts as
evidence of the sales transaction for goods and services in the organisation.
Purchase Voucher: Purchase voucher records the transaction of purchase of goods and services in an
organisation. The purchase transaction may be through cash or bank or on credit. The relevant supplier is
credited when the purchase happens on credit. The purchase voucher is supported through several relevant
documents such as purchase order, supplier slip, and other documents relevant to the required purchase.
Supporting Voucher: Any transaction that has been undertaken in the organisation in the past is
documented through a supporting voucher. It is written documentary proof for the past events in an
organisation. For example, to support the main voucher, supporting vouchers are attached with the
expense bill. Supporting vouchers such as fuel bills can act as proof of the transportation of an employee.
Importance of Accounting Vouchers
Accounting vouchers have an important role in every kind of audit process and control mechanism. The
veracity of the data and information in an organisation's financial statements are verified and authenticated
through the audit procedures. With the vouchers in place, it becomes simple and easy to conduct the audit
process and authenticate the transactions. Vouchers are requisite and justification for the documents of the
transaction that are performed in the organisation.
Accounting Vouchers are very important for the sustainability of every organisation. It records and tracks
financial transactions and ensures compliance with the law. Also, the accounting vouchers keep the
organisation managed and organised properly and ready for any kind of audit and ensure control.
Different types of accounting vouchers can be used as per the requirement to fulfil the need at hand.
Therefore, we hope you now have a clear understanding of such vouchers and their significance within a
company. The Biz Analyst app proves to be beneficial in this regard. You can create receipts and
payments for accounting securely, along with staying connected to your business and ensuring sales
growth.

TRIAL BALANCE
Trial Balance is basically a statement having a debit side and a credit side where all the debit balances of
journal entries and ledger postings are recorded on the debit side of the trial balance, and all the credit
balances of journal entries and ledger postings are recorded on the credit side of the trial balance. These
postings are recorded in the trial balance to verify and check for the correctness of the journal entries and
ledger postings. This is because if the debit and credit side of the trial balance agrees, then it is assumed
that the journal, subsidiary books, and ledgers are correctly and properly maintained. The main reason for
the trial balance to match is the ‘Double Entry System’ of accounting. According to the double entry
system, every transaction is recorded twice, once on the debit side and the other on the credit side. So, for
every debit entry, there is a corresponding credit entry. Though it is not conclusive proof of the
correctness of all books of accounts because there can be some errors despite the fact that the total of both
sides of the trial balance is matching.
According to Carter – “Trial Balance is the list of debit and credit balances, taken out from ledger. It also
includes the balances of cash and bank taken from cash book.”
Objectives of Trial Balance:
It summarizes the ledger accounts: Ledger accounts are made to record all the transactions related to the
assets, liabilities, expenses, and income of the business with the help of a journal. So, all the debit and
credit side balances of ledgers are transferred to the debit and credit side of the trial balance, respectively.
So, now from the trial balance, it becomes easy to get concrete information of what is the actual status of
the assets, liabilities, expenses or income rather than having abstract access to information. So, trial
balance provides the summary for the ledger accounts.
It helps in determining the arithmetical accuracy of the ledger accounts: The aim of the trial balance
is to check if all the ledger postings are done in a correct and accurate manner. This can be assessed using
the balances of both the debit and credit side of the trial balance. Because if the total on both sides agrees
or equates, then it means that ledger postings are posted in an accurate manner. It also confirms the rules
of the double entry system that all the entries have a double effect.
It guides in preparing final accounts: For every businessman, it is important to know the financial
health of their business. This can be ascertained by preparing financial accounts like Trading Account,
Profit and Loss Account, and Balance Sheet. So, there comes the role of Trial Balance. Once, all the
journal entries have been passed, ledger postings have been recorded, and the trial balance matches, then
all the financial accounts are prepared, thereby that the balances in the trial balance become the base for
recording all the accounting data further in the final accounts.
It helps in allocating the errors: It is important for the trial balance to tally, but if it does not tally, it
implies that certainly there are some errors in the books of accounts. So, it would help to first make the
businessman aware that maybe a few postings have not been well posted or posted with the wrong amount
or in the wrong account, and many other possible errors could be there. So, once the errors are allocated,
and then corrections could be done to remove the errors.
Preparation of Trial Balance
The statement for trial balance can be prepared at any time in the business like at the end of a financial
year, for half yearly, at the end of a quarter, or at the end of every month. But most often trial balance is
prepared at the end of the financial year so that it can be ensured that books of accounts are maintained
with complete accuracy. The statement for trial balance is not prepared as such for a particular period
rather it is prepared on a set date. Following are the three methods for preparing the statement for trial
balance:
Balance Method: While preparing the statement of trial balance under this method, all the ledger
accounts with the debit balances are carried forward to the debit side of the trial balance and all the ledger
accounts with the credit balances are carried forward to the credit side of the trial balance. As the name
suggests, it is a method related to the balances, so the balances are available in the ledger account at the
end after all the adjustments are carried forward to the trial balance. Also, if any of the ledger accounts do
not show any balance i.e. the total on both the debit and the credit side is the same, and then there is no
need to carry it to the trial balance. So, in the end, if the debit and credit side of the trial balance matches,
it can be said that the trial balance has been well prepared.
Total Amount Method: While preparing the statement of trial balance under this method, unlike the
balance method, not only balances rather the total amount on the debit side of the ledger account is
transferred to the debit side of the trial balance and the total amount on the credit side of the ledger
account is transferred to the credit side of the trial balance. Under this method, the statement for trial
balance can be prepared promptly after posting all the entries to ledger accounts before any adjustments
are made to them.
Total-cum-Balances method: Under this method, two methods – ‘Balance Method’ and ‘Total Amount
Method’ are combined to prepare the statement of trial balance. It implies that in total, four columns are
prepared, two columns are for recording the debit and credit balances of ledger accounts and two columns
are for recording the debit and credit totals of various ledger accounts. This method is rarely used and not
so frequently used while making the statement for the trial balance.
Format of Trial Balance according to the Balance Method: