Basics of Accounting – I

FINANCIAL ACCOUNTING / ISU MANUFACTURING

PRITHWIRAJ SEN SARMA

[email protected]

TCS Internal
 Basics of
Accounting - I

CONTENTS

CONTENTS.........................................................................................................................2
FINANCIAL ACCOUNTING............................................................................................3
STRUCTURE OF ACCOUNTING .............................................................................4
RELATION BETWEEN ACCOUNTING AND BOOK KEEPING.............................5
DIFFERENT FORMS OF BUSINESS ORGANISATIONS......................................5
ENTITY CONCEPT (ACCOUNTING CONCEPT)....................................................6
WHAT IS ACCOUNT ? WHAT ARE THE DIFFERENT TYPES OF
ACCOUNTS?......................................................................................................................8
TYPES OF ACCOUNTS.................................................................................................8
GOLDEN RULES OF DEBIT & CREDIT..................................................................10
Some Concepts .................................................................................................................14
Accrual Concept : Revenues and costs are accrued, that is , recognized as they are
earned or incurred (and not as many received or paid) and recorded in the financial
statements of the periods to which they relate...............................................................14
Cash Concept................................................................................................................14
Revenue Transaction & Capital Transaction.............................................................14
TRIAL BALANCE.......................................................................................................25
ASSET & LIABILITY....................................................................................................32
LIABILITY........................................................................................................................34
FINAL ACCOUNTS OF CORPORATES.....................................................................37
SOURCES OF FUND (ALL LIABILITIES)..........................................................38
APPLICATION OF FUND ......................................................................................38

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 Basics of
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FINANCIAL ACCOUNTING

Introduction

It is not easy to provide a concise definition of accounting since the word has
a broad application within businesses and applications.

The American Accounting Association defines accounting as follows:

"The process of identifying, measuring and communicating economic

information to permit informed judgments and decisions by users of the
information.

- It suggests that accounting is about providing information to others.

Accounting information is economic information - it relates to the financial or
economic activities of the business or organization.

- Accounting information needs to be identified and measured. This is done

by way of a "set of accounts", based on a system of accounting known as
double-entry bookkeeping. The accounting system identifies and records
"accounting transactions".

- The "measurement" of accounting information is not a straight-forward

process. It involves making judgments about the value of assets owned by a
business or liabilities owed by a business. It is also about accurately
measuring how much profit or loss has been made by a business in a
particular period.

- The definition identifies the need for accounting information to be

communicated. The way in which this communication is achieved may vary.
There are several forms of accounting communication (e.g. annual report and
accounts, management accounting reports) each of which serve a slightly
different purpose. The communication need is about understanding, who
needs the accounting information, and what they need to know.

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Accounting

Basic Accounting Managerial Accounting

(Accountancy & Book Keeping ) i> Cost Accounting
ii> Management Accounting
iii> Financial Management
iv> Investment Management

Banking WC Mgt. Portfolio Mgt. Fin.Mgt. Strategic Capital

Costing Market

STRUCTURE OF ACCOUNTING

Journal

Ledgers

Trial Balance

Final Accounts

P&L A/c. Balance Sheet

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Fund Flow Analysis

Cash Flow Analysis

Ratio Analysis

Definition of Accounting: The systematic recording, reporting and analysis

of financial transactions of a business.
Working Capital Management: Working capital management involves the
relationship between a firm's short-term assets and its short-term liabilities.
The goal of working capital management is to ensure that a firm is able to
continue its operations and that it has sufficient ability to satisfy both
maturing short-term debt and upcoming operational expenses. The
management of working capital involves managing inventories, accounts
receivable and payable, and cash.

RELATION BETWEEN ACCOUNTING AND BOOK

KEEPING

Accounting is basically the principles, the assumptions and postulates

which determines the way of maintaining accounts.

Book keeping is the practical application of the theories of Accounting.

DIFFERENT FORMS OF BUSINESS ORGANISATIONS

O W N E R (S)

1. Sole Proprietorship … Proprietor

2. Partnership … All Partners
3. Corporate Entity … Share Holders

a) Private Limited
b) Public Limited

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4. Co-Operative Society … Members

5. Hindu Undivided Family Business … All the Family
Members
(co-parceners)

6. State Enterprises … Government

ENTITY CONCEPT (ACCOUNTING CONCEPT)

Business is having its separate legal entity. In the eyes of law though
sole proprietorship or partnerships are identical with the proprietors and
partners but in case of companies, co- operative society and state
enterprises , there is a separate legal entities of the business itself.
The organizations and the owners are not the same. Company can file a
case against Share holders or share holders can file a case against the
company.

- In Entity concept - everyone has a separate legal entity.

- Any accounting , finance or costing matter is done from the

point of view of organization itself and not from the point of
view of owners or share holders.

1. Owners gives the money to the business .

Mr. X Rs.10 A Ltd. (to whom loan is given)

Capital (Liabilities) (as the loan is to be given

back)
(Personal Asset)
(who gives loan)

Loan - External liability - ( Here, loan is to repay with a pre- settled

interest)

Capital (Share ) - Internal liability - (Here full money or major portion is

to be given back.

External liability is preferred first than Internal liability.

Assets are always equal to liability. ∑A = ∑L + ∑C

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Increasing liability means increasing Assets also.

Decreasing liability means decreasing Assets also.

EVENTS & TRANSACTIONS :

• An event which is related to the business is known as

transactions.
• Business Transactions - Any events which affects the financial
condition of the organization is called Business transaction.
• Non Business Transactions - are general events.
• In transaction, both the organizations or unit is affected or both
takes part.

From the followings determine which one is Non Businesss Transaction

and which one is Business Transaction.

1. Mr. X received Rs.10,000 from his company as salary - Business

Transaction.

2. Mr. Ram started a business by investing Rs.1 lakh in cash -

Business Transaction.

3. P. Ltd. Commenced its business with the issue of 1000 equity

share at the rate of Rs.10 within which ½ of the share is taken
by Mr Shyamlal against a Plant and Machinery and remaining ½
part is being taken by the public at large by way of payment
through bank - ( Both are affecting the financial states of the
organization. Both – by cash or kind if it affects the financial
states it is a Business Transaction.)

4. ITC Ltd. Paid Rs.10 per share as dividend to its existing share
holder by issuing bonus share and not by paying cash - Business
Transaction.

5. Mr. Das a Proprietor of a Chartered Account firm withdraw

Rs.10,000 for his personal use - Business Transaction.

6. ITC Ltd. Entered into an MOU with Classic Finance for a deal of
Rs.5.00 crore - Event ( no transaction has started ).

7. A foreign investment is being signed between Govt. of India &

Govt. of USA for 1 billion Rupees. – Event ( no transaction has
started ).

8. Mr. Hari the Purchase Manager, Hindustan Ltd. obtained the

quotation of Milk and Sugar from different vendors and came to
the conclusion that Rs.15 per Kg. of Sugar and Rs.10 per Kg. of

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milk is the best price offered by XYZ Ltd. For a quantity of one
ton each - Event ( no transaction ).

9. A debtor ( from whom the company will receive the money )

acknowledged through a letter about his outstanding of Rs.1 lakh
to C. Ltd. - Event.

10. X Ltd. is having B. Ltd. as debtors for Rs.10,000 as on 1st Jan.,

2000. On 10th Jan. B. Ltd. exchanged a bill of exchange with its
debtors balance of Rs.10,000. - Transaction ( Wealth remains the
same i.e it neither increased nor decreased but internal changes
occurred within the organization).

WHAT IS ACCOUNT ? WHAT ARE THE DIFFERENT

TYPES OF ACCOUNTS?

An account is the summarized statement of business transactions.

(Transactions are recorded in Accounts ) :

TYPES OF ACCOUNTS

Personal Impersonal

Real Nominal
Account Account

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Personal Account - Any Account which deals with the Person or the
Name of an Organization is a Personal Account.

e.g. Bank of India Account, Ram’s Account etc.

Impersonal Account -Any account which is not related to any person or

organization is known as Impersonal Account.

Real Account - Account of any head which deals with Property, Assets ,
Wealth etc. known as a Real Account .

e.g. Bank Account / Cash Account / Debtors Account / Building

Account / Car Account.

Nominal Account - Account of any head which records Expenses and

Losses , Profit or Gains is known as Nominal Accounts.

e.g. Sales Account, Commission Account, Salary Account, Wages

Account etc.

Format of an A/c is as follows :-

BANK ACCOUNT

Dr. Cr.
Dt. Particulars J.F Rs. Debit Particulars J.F Rs.

• Whenever there is a Debit, there is a corresponding Credit i.e. to

say, if one account is debited with X amount, some other
account has to be credited with the X amount. ∑ Dr. = ∑ Cr, at
any point of time in accounting principles.

• Any business transaction always involves at least two accounts.

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SINGLE ENTRY SYSTEM OF BOOK KEEPING – A single entry system is

similar to a check book register and is characterized by the fact that there is
only a single line entered in the journal for each transaction. Each transaction
is recorded in one column of an account as either a positive or a negative
amount in order to represent the receipt or disbursement of cash.

DOUBLE ENTRY SYSTEM OF BOOK KEEPING - Scientific accounting.

When debit is done then a credit is also has to be done. This is called
double entry system.
[ To All Debit, there must be an Equal Credit.]

GOLDEN RULES OF DEBIT & CREDIT

Personal Account :

i) Debit the RECEIVER

ii) Credit the GIVER

Real Account :

i) Debit what COMES IN

ii) Credit what GOES OUT

Nominal Account :

i) Debit ALL EXPENSES & LOSSES

ii) Credit ALL GAINS & INCOMES

Rule of Thumb :
i) Debit all Asset
ii) Credit all Liabilities.

Classify the following accounts into Real, Nominal and Personal

Accounts :-

i) Capital - (Personal A/c. or Real A/c.) / Liabilities (Cr.Balance)

ii) Equity Share - ( Personal A/c. or Real A/c.) / Liabilities
(Cr.Balance)
iii) Loan - (Personal Account ) / Liabilities (Cr.Balance)
iv) Furniture - (Real Account ) / Asset (Dr.Balance)
v) Building - ( Real Account ) / Asset (Dr.Balance)

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vi) Salary - (Nominal Account ) / Expenses (Dr.Balance)

vii) Wages - (Nominal Account ) / Expenses (Dr.Balance)
viii) Dividends - (Nominal Account ) / Expenses (Dr.Balance)
ix) Bills Receivable - (Real Account) / Assets (Dr.Balance)
x) Bills Payable - ( Real Account ) / Liabilities (Cr.Balance)
xi) Commission - (Nominal Account ) / Indirect Expenses
(Dr.Balance)
xii) Sales - (Nominal Account ) / Direct Income (Cr.Balance)
xiii) Opening Stock ( Real Account) / Current Asset (Dr.Balance)
xiv) Closing Stock ( Real Account ) / Current Asset (Dr.Balance)
xv) Cash - ( Real Account ) / Current Asset (Dr.Balance)
xvi) Bank - (Real Account ) / Current Asset (Dr.Balance)
xvii) Bank of India A/c. - (Personal Account)/ Asset (Dr.Balance)
xviii) City Bank Account - (Personal Account ) / (Dr.Balance)
xix) Outstanding Wages Account - ( Nominal Account ) (Cr.Balance)
xx) Mr. Ram Accounting - ( Personal Account ) (Dr./ Cr. Balance)
xxi) Consignment Account - (Personal Account ) (Dr./ Cr. Balance)
xxii) Branch Account - (Personal Account ) (Dr./ Cr. Balance)
xxiii) Higher Purchase Account (Nominal Account)
xxiv) Lease hold property account - (Real Account) ( Fixed Asset ).

From the following Transaction, identify each account and state which
one to be debited and which one is to be credited by applying the
golden rules.

1. Mr Ram started a business with Rs.10,000 as capital

a) Capital Account - credited

b) Cash Account - debited.

Purchase goods worth Rs.1000 from Mr. X in cash –

a) Purchase - Debit
b) Cash - Credit

3. Purchase goods from Mr. X in credit

a) Purchase Account - Debit

b) X Account - Credit.

Purchase machinery worth Rs.2000

Machinery Account – Debited

Cash Account - Credited

Sale goods to Mr. P in cash for Rs.5000

Sales Account - Credited

Cash Account - Debited

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6. Sale goods to Mr. PQ for Rs.5000 in credit -

Mr. PQ Account - Debited

Sales Account - Credited.

Paid Rs.500 to the workers as salary -

Salary Account - Debit

Cash Account - Credit

8. Withdraw Rs.1000 from the business for proprietor’s personal use

-

Drawings Account - Debited

Cash Account - Credited.

Receive Rs.1000 from the Debtors (PQ)

Cash Account - Debit

PQ Account - Credit

From the following transactions of ITC Ltd., make a tabular statement

classifying each account for each transactions & state which account
to be debited and which account to be credited.

1) Issue of 100 equity share @Rs.100 to general public in cash.

Cash Account - Real Account - Debited

Share Account - Liability / Personal Account – Credited

2) Purchase Raw Tobacco from the farmers of Andhra Pradesh for

Rs.5000 in cash.

Purchase Account - Nominal Account - Debited

Cash Account - Real Account - Credited

3) Pay salaries & wages for the year ended amounts to Rs.2000

Salary & wages A/c. - Nominal - Debited

Cash A/c. - Real Account - Credited.

4) Sales to the agent amounts to Rs.1 Lakh

Agents Account - Personal A/c. - Debited

Sales Account - Nominal A/c. - Credited.

5) Paid Sachin Tendulkar 10 Lakhs for advertising their products -

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Publicity Account - Nominal Account - Debited

Cash Account - Real Account - Credited

6) Spent 10 Lakhs for publicity of their brands in different media.

Advertising Account - Nominal Account - Debited

Cash Account - Real Account - Credited

7) Deposited Rs.10 Lakhs into bank from collection.

Bank Account - Real Account - Debited

Cash Account - Real Account - Credited

JOURNAL

Definition : Journal is the Primary Books of Entry where all

transactions are recorded as soon as they occur. Following is the
format of a Journal.

Journal

Date Particulars L Debit (Rs.) Credit (Rs.)

F Dr. Cr.
1.4.200 Cash A/c. ……… …….
0 Dr. To, Capital A/c
(Being cash
introduced by Mr.
Ram as Capital)

5.4.200 Purchase A/c. ……… ………

0 Dr.
To, Cash
(Being cash
purchase done)

6.4.200 Purchase A/c. ……… ……

0 Dr.
To, Mr. X A/c.
(Being credit
purchase done)

The following are the different types of Journals :

1) PURCHASE DAY BOOK – Credit Purchase

2) PURCHASE RETURN BOOK – Credit Purchase Return
3) SALES DAY BOOK – Credit Sales

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4) SALES RETURN BOOK – Credit Sales Return

5) CASH BOOK – All Cash Entry / Cash, Bank & Disc.
A/c.
6) JOURNAL PROPER - All the residual entry goes to
Journal proper - a) Opening
entries
b) Closing entries c) Rectification entries d)
Adjustment entries e) Purchase & Sale of
fixed Asset on Credit.
7) Bills Payable Book – Bills Payable
8) Bills Receivable Book – Bills Receivable

Some Concepts

Accrual Concept : Revenues and costs are accrued, that is , recognized as

they are earned or incurred (and not as many received or paid) and recorded
in the financial statements of the periods to which they relate.

Cash Concept

Revenue Transaction & Capital Transaction.

The financial year in India starts from 1st April and ends on 31st
March. When you have made a credit purchase, you have to write in
that times period or year, or same Financial period only. It is known
as - Accrual Concept.

1) Revenue Expenditure - Any benefit from any expenditure or

any income from any source which expires within a period of 12
months under normal circumstances, it is known as Revenue
Expenditure.

2) Capital Expenditure - If it crosses the barrier of 1 year, it

becomes capital expenditure or capital receipts.

3) Going Concern Concept - We assume that the business will

continue forever. It has a perpetual succession.

LEDGER

Definition : Ledger is a book of account where detailed information in

relation to a particular account is maintained.

e.g Purchase Account ; Capital Account.

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Rent Account , Sales Account etc.

Purchase A/c.

Dr. Cr.
J. J.
Date Particulars F Amount Dat Particulars F Amount
(Rs.) e (Rs.)

CASH BOOK

Cash Book is a Book of primary book of entry where all the receipts
and payments of cash are recorded. Cash book is also known as a
Journalized ledger.

Cash Books are generally of 3 types.

SINGLE COLUMN CASH BOOK (Cash A/c.)

DOUBLE COLUMN CASH BOOK (Cash & Bank A/c.)
TRIPLE COLUMN CASH BOOK (Cash, Bank &
Discount A/c)

In a Single column Cash Book - we record only the Cash records.

In a Double column Cash Book - we record Cash as well as Bank

Transactions.

In a Triple column Cash Book - we record Bank and Cash account and
also we keep a record of Discount A/c.

In corporate world generally a triple column cash book is maintained.

The following is the format of Triple column Cash Book.

At the time of Cash & Bank Transactions, questions of contra balance

will come. Contra entry is identified as ‘C’ in the L.F Column.

Petty Cash Book: A petty cash book is a book of vouchers which are
prepared each time a disbursement is made from petty cash. The voucher
would show the date, amount, recipient, purpose and general ledger account
number relating to the expense. The person giving out the petty cash and the
person receiving the petty cash would sign the voucher and any supporting
documentation (such as receipts) would be attached.

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 Basics of
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CASH BOOK
Dr.
Cr.

Dt Particular L Cash Ban Dis- Dt Particular L Cas Ban Dis-

. s F k coun . s F h k coun
t t

Note :

Discount Received - Credit

Discount Allowed - Debit

Petty Cash Book.

Problem - 1 (Examples)

i) In the books of ABC consultant write up a cash book with

suitable columns Started on 1st Jan’2000 ; Started business with a
capital of Rs.10,000, brought in the form of cheque Rs.5000, cash
Rs.4000 plant & machineries Rs.1000.

ii) On 10th Jan, purchase materials in cash for Rs.500.

iii) 20th Jan, Sales in cash Rs.1000 received by an Account Payee

cheque.

iv) On 25th Jan. deposited Rs.100 into Banks.

v) 28th Jan. received Rs.900 from X. Ltd. for a full settlement

office bill of Rs.1000.

vi) 29th Jan. paid XY Ltd. Rs.2000 on full settlement for a bill of
Rs.2500.

vii) 30th Jan withdraw cash from bank for office use Rs.500.
Dr. Cr.

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Dt. Particulars L Cas Bank Dis- Dt. Particulars L Cas Bank Dis-
F h count F h count
(Rs.) (Rs.) (Rs.) (Rs.)
(Rs.) (Rs.
)
19.1 To, Capital A/c. 400 5000 10.1 By 500
0 Purchase
20.1 To, Sales A/c. 1000 25.1 By Bank A/c c 100
25.1 To, Cash A/c. c 100 29.1 By X Y A/c 2000 50
0
28.1 To,X A/c. (Assu- 900 100 30.1 By Cash A/c. c 500
med recd. by
cheque.)

30.1 To, Bank c 500 By Bal. c/d. 390 4500

(closing 0
bal/)

450 7000 100 450 7000 50

0 0
390 4500
0
1.2 To, Balance
b/d

Problem -

From the following information, prepare a cash book & a Journal

Proper , in the book of XYZ & .Company.

i) Opening balance on 1st Jan, 1999, Cash Rs.100 & Bank R.10,000

ii) 2.1.99 proprietor introduced fresh capital of Rs.20,000 brought in

the form of cash 10,000, motor car Rs.10,000.

iii) 3.1.99 purchased raw material in cash from XYZ & Company
Rs.2000.

iv) 4.1.99 Sales in cash to C.Ltd. received by way of demand draft

Rs.20,000

v) 5.1.99paid X Ltd. a cheque of Rs.50,000 in full statement of his

claim of Rs.55000.

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 Basics of
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vi) 6.1.99 received Rs.10,000 in cash from T. Ltd. in full settlement

of a bill of Rs.10,000.

vii) 7.1.99 purchase from ITC Ltd. Rs.10,000

viii) 8.1.99 sales to HLL Rs.5000 ( take it as credit sales).

ix) 9.1.99 Proprietor withdraw Rs.600 for personal news from the
bank.

• From the Company’s point of view, when money is withdrawn or

business is started - it is to be debited.

• In case of purchase or expenditure, the same is to be credited.

JOURNAL PROPER

Particulars L Debit (Rs.) Credit (Rs.)

F
1.1 Motor Car A/c. 10,000
Dr. 10,000
To, Capital A/c.
(Being Motor Car is
introduced as capital )

2.1 Purchase A/c. 10,000

Dr. 10,000
To, ITC Ltd.
(Being purchase made
on
credit from ITC Ltd.)

3.1 HLL Ltd. A/c. 5,000 5,000

Dr.
Sales A/c.
(Being credit sales to
HLL Ltd.)

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LEDGER

Car Account

Dr Cr
Dt. Particulars L Amount Dt. Particulars Amount
F
To Capital A/c. 10,000 By Balance C/d 10,000

Rs.10,000 Rs.10,00
To Balance B/d 10,000 0

CAPITAL A/C.

Dr. Cr
Dt. Particulars J Amount Dt. Particulars J Amount
F Rs. F Rs.
To, Balance 20,000 By Car 10,000
c/d A/c. 10,000
By Car

20,000 20,000

PURCHASE A/C
Dr. Cr.
Date Particulars L Amount Date Particulars Amount
F Rs. Rs.

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To, ITC Ltd. A/c. 10,000 By Balance c/d 10,000

To, balance b/d 10,000 10,000

SALES A/C
Dr.
Cr.
To, balance c/d, 5000 By HLL A/c.
5000
(Trading A/c.)

5000
5000

ITC Ltd. A/c.

Dr. Cr.

To, Balance C/d, 10,000 By, Purchase 10,000

10,000 10,000
By , Balance b/d 10,000

HLL A/c.

Dr. Cr.

To, Sales A/c. 5000 By balance c/d 5000

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5000 5000

To, balance b/d 5000

Debit (No. of debit balances ) Credit (No. of credit

balances)

(1) Car - 10,000 (1) Capital - 20,000

(2) Purchase - 10,000 (2) Sales - 5,000
(3) HNL - 5,000 (3) ITC - 10,000
(4) Cash - 10,000
35000 35000

Problem - 3 :

A & Co. is a proprietorship concern commenced its business on 1st

April 2000 with a capital of Rs.1 Lakh brought in by
its proprietor by way of Bank Draft.

7/4 - Purchased Raw Materials in cash for Rs.10,000

8/4 - Purchased good from B Ltd. for Rs.10,000
9/4 - Sold to C Ltd. in cash goods worth Rs.25,000
10/4 - Credit Sales to C Ltd another Rs.30,000
10/4 - Rent paid Rs.5000
15/4 - Salary & Wages paid Rs.10,000 (you can assume both
cash & bank)
20/4 - Tax paid Rs.10,000 (In case of tax, you have to
assume through bank unless it is written by cash).
25/4 - Proprietor withdraw Rs.5000 from bank for personal
use. (Here bank means proprietor’s personal savings
account ).
25/4 - Proprietor withdraw Rs.1000 from Companies Bank
account for his own use.
26/4 - Receive Rs.10,000 from C Ltd.
26/4 - Paid Rs.1000 to B Ltd.

Prepare a Cash book and all the ledger accounts.

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Purchase A/c.

Dr. Cr.

To, B Ltd. … 10,000 By Balance C/d …

20,000
To, Cash … 10,000

______ _____
Rs.20,000
Rs.20,000

Sales A/c.
Dr. Cr.
To, Balance C/d. …. 55,000 By Cash A/c. …
25,000
By C Ltd. A/c …
30,000
(Trading A/c.)

Rs.55,000
Rs.55,000

Capital A/c.

Dr. Cr.

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To, Balance c/d. … 1,00,000 By Bank A/c. …

1,00,000

_______
Rs.1,00,000 Rs.1,00,000
By Bal. b/d. 1,00,000

Drawings A/c.

Dr. Cr.

To, Bank A/c. … 1,000 By balance c/d … 1,000

(P/L) or BS
( or by cash)
_______
Rs.1,000 Rs.1,000

Rent A/c.
Dr. Cr.

To, Cash A/c. … 5,000 By balance c/d. … 5,000

(P/L)

______
Rs. 5,000 Rs.5,000

Tax A/c.
Dr. Cr.

To, Bank A/c. 10,000 By balance c/d.

10,000
(P/L)
_______
Rs.10,000 Rs.10,000

B.Ltd.

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Dr. Cr.

To, Bank A/c. 1,000 By, Purchase A/c. 10,000

By balance c/d 9,000

_____
Rs.10,000 Rs.10,000

To, Bal. b/d.

9,000

C. Ltd.

Dr. Cr.

To Sales A/c. 30,000 By Bank A/c.

10,000
By Balance c/d 20,000
______
Rs.30,000 Rs.30,000
To Bal. b/d 20,000

Trial Balance
As on ……………

Dr.
Cr.

Purchase 20,000 Capital 1,00,000

Rent 5,000 Sales 55,000
Salary & Wages 10,000 B. Ltd.
9,000
Tax 10,000
Drawings 1,000
C. Ltd. 20,000
Bank 96,000
Cash 2,000

Rs.1,64,000
Rs.1,64,000

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TRIAL BALANCE

It is a statement prepared from the balance of the ledger account to

verify the arithmetical accuracy of the books of account.

THE ERRORS NOT DISCLOSED BY A TRIAL

BALANCE :
(1) Error of Omission
(2) Error of Commission
(3) Error of Misposting
(4) Errors of Compensation.

THE ERRORS DISCLOSED BY TRIAL BALANCE :

(1) Casting Error ( mistake in addition or subtraction in
Ledger )
(2) Posting Error
(3) Error of Principles – Violation of Principles
(4) Clerical Error
(5) Fraud with mutual undertaking of two or more persons.

The following is the format of Trial Balance.

Name ……..
Trial Balance ……….

Sr. No. Particulars L.F Debit (Rs.) Credit (Rs.)

Manufacturing , Trading , Profit & Loss Account

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For the year ended ……………..

Dr. Cr.
Particulars Amount (Rs.) Particulars Amount
Mfg. To, Purchase 5,00,000 By Cost of
A/c. Production c/d 5,05,000

To, Carriage inward 5,000

5,05,000 5,05,000
Tra- To cost of Pro- 5,05,000 By sales A/c. 10,00,000
ding duction b/d
A/c.
To Carriage 10,000
Outward
4,85,000
To Gross Profit c/d

Rs. Rs.10,00,000 Rs. Rs.10,00,00

0

Profit To Disc. Allowed 1,000 By Gross Profit b/d 4,85,000

&
Loss To Rent paid 50,000 By Discount recd. 2,000
A/c.
To Salaries & 10,000 By Commission 1,00,000
Wages recd.

To Net Profit 5,26,000

(Transfer to
Balance
Sheet)

Rs.5,87,000 Rs.5,87,000

Final Accounts consists of Manufacturing Account, Trading Account,

Profit & Loss Account & a Balance Sheet.

In general , we call final a/c. as P&L Account & Balance Sheet. The
P&L Account is a nominal account from which the business finds out
its gross profit, net profit etc

Again, a Balance Sheet is a statement of Asset & Liabilities which

shows the financial position of the business as on a particular date.

Items of Trial Balance will come either in a Balance Sheet or P & L

Account.

All Revenue Items will come on P & L Account.

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 Basics of
Accounting - I

All Capital Item will come on Balance Sheet.

Revenue Items - Any items whose benefits lasts for 1 year or less than
1 year is known as Revenue Items.

Capital Items - Any Item whose benefits goes on for more than one
year is known as Capital Item.

Whenever, the term salaries & wages are there, you have to assume
that the salaries & wages are paid for office employees and it is to
be considered as indirect expense, so they will be placed in Profit &
Loss Account.

BALANCE SHEET AS ON 1.03.2000

Liability Rupees Asset Rupees

Capital 5,00,000 Plant & Machinery 3,00,000

Net Profit 5,26,000 Motor Car 1,00,000
Sundry Creditors 2,00,000 Sundry debtors 5,00,000
Bank 50,000
Cash 2,76,000
Rs.12,26,000 Rs.12,26,00
0

Manufacturing A/c. - It is the first step of the final accounts. It shows

the manufacturing cost of the concern for the particular period. All
the direct manufacturing expenses & incomes are placed in this
manufacturing account. The following is the specimen manufacturing
account with the common items.

A & Company

Manufacturing A/c.
For the Year ended 31.3.2000
Dr.
Cr.
Particulars Amt Amt Particulars Amt. Amt.
. . (Rs.) (Rs.)
(Rs.) (Rs.)
To Opening Stock 100 By Sales of Scrap 50

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 Basics of
Accounting - I

(Raw Material) (By Product)

Add. Purchase Mfg. Cost c/d 300
200 (Transfer to Trading
(Raw Material) 150 A/C.)
Less, Returns
50

Less, Closing stock 50

Material Consumed 200
To Carriage Inward 50
To Wages (Work) 50
To, 50
(Any other Direct
Factory Expenses) -
Rs. 350 Rs. 350

Trading Account : A Trading Account is the second step of the Final

Account where we find the gross profit or the gross loss from the
direct expenses or direct incomes.

Trading Account

For the year ended 31.03.2000

Dr. Cr.
Particulars Amt. Amt. Particulars Amt. Amt.
(Rs.) (Rs.) (Rs.) (Rs.)

To Mfg. A/c. 300 By Sales 1000

To Opening Stock 100 Less Returns 100 900

(Finished goods)

To Purchase (F.G) 100 Closing Stock (F.G.) 200

To Any other Direct 100

Expenses

To Gross Profit 500

(Transfer to Profit &
Loss A/c.)

1,100 1,10
0

Profit & Loss Account : P&L A/c. in the 3rd part of the Final A/c.
where all the indirect expenses & incomes are recorded to find out

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 Basics of
Accounting - I

the Net Profit or Net Loss. The following is the format of a P&L
Account.

Profit & Loss A/c.

For the year ended 31.03.2000
Dr. Cr.
Particulars Amt. Amt. Particulars Amt. Amt.
(Rs.) (Rs.) (Rs.) (Rs.)
To Salaries 50 By Gross Profit b/d 500
To Rent 20 By Commission 50
To Electricity 30 By Interest 50
To Depreciation 10 By Dividend 100
To Package 10
To Advertisement 10
To Bad Debtor 10
To Commission Paid 10
To Interest Paid 10
To Net Profit c/d 540
(Transfer to P&L
Appropriation A/c.)

700 700

Profit & Loss Appropriation A/c. : It is an Account which show the

apportionment of net profit for the particular year. The format of an
P&L Appropriation A/c. is as follows :-

Profit & Loss Appropriation Account

For the year ends : 31.03.2000
Dr. Cr.
Particulars Amt Amt Particulars Amt. Amt.
. . (Rs.) (Rs.)
(Rs.) (Rs.)
To Drawings / Dividend 100 By Net Profit 540

To Tax A/c. -
To Reserve Account 200

To Balance c/d 240

(P&L A/c.)
Rs. 540 Rs. 540

Balance Sheet

It is ‘Statement ‘ prepared from the balances of the Trial Balance &

Final A/cs. to show the financial condition of business on a particular
day.

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 Basics of
Accounting - I

A & Company
Balance Sheet as on 31.03.2000
Liabilities Rs. Asset Rs.
Capital 10,000 Land & Building 100
Reserves 200 Sundry Debtors 100
P & L A/c. 240 Bank 200
Loans 500 Closing Stock 100
Sundry Creditors 100 Goodwill 5,000
Investment 3,000
Cash 2,540
Rs.11,04 Rs.11,04
0 0

Problem : 1

From the Trial Balance, draw a Trading and P & L Account and a
Balance Sheet.

Sr. Particulars L.F. Debit (Rs.) Credit (Rs.)

No.

1. Capital 10,000
2. Purchase 12,000
3. Sales 25,000
4. Wages 2,000
5. Debtor 15,000
6. Creditor 2,000
7. Rent, Rates & 2,000
Taxes
8. Cash 9,500
9. Bank (Overdraft) 4,000
Rs.41,000 Rs.41,000

Trading & Profit & Loss Account

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 Basics of
Accounting - I

For the year ended ………….

Dr. Cr.
Particulars Amount Particular Amount

To Purchase 12,000 By Sales 25,000

To Wages 2,000
To Gross Profit c/d 11,000
25,000 25,000

Profit & Loss A/c.

Dr. Cr.
Particulars Amount Particular Amount

By G.P b/d 11,000

To Salary 500
To Rent, Rate & Taxes 2000
To Net Profit 8500
(Transfer to Balance
Sheet)

Rs.11000 Rs.11,00
0

Balance Sheet

As on ………………….
Dr. Cr.
Liabilities Amount Asset Amount

Capital 10000 Debtors 15,000

Add. 8500 18500 Cash 9,500
Creditors 2000
Bank Overdraft 4000

Rs.24,500 Rs.24,50
0

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 Basics of
Accounting - I

ASSET & LIABILITY

Asset : The entries on a balance sheet showing all properties, both tangible
and intangible and claims against others that may be applied to cover the
liabilities of a person or business. Assets can include cash, stock, inventories,
property rights and goodwill.

Different types of Assets are as follows :-

ASSETS

Fixed Current Fictitious Contingent

Asset Asset Asset Asset
(Land, Bldg., M/c) (Stock Debtor) (P/L {Dr.}) (Claim receivable
from Law Suit)

Tangible Intangible
Liquid Super Liquid
Asset Asset

A. FIXED ASSET : Fixed Assets are those assets, the benefits of

which last more than 1 year.

Example - Land & Building

Motor Cars
Plant & Machineries
Furniture & Fixture
Long Term Investment.

Tangible Asset : Tangible assets are those assets which one can
see feel and views directly.

Intangible Asset : Intangible assets are those assets which, one

can realize and one can get benefit out of it but can not be
seen or felt but can be realized.

Example : Goodwill
Patent
Trademark
Copy Right.

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 Basics of
Accounting - I

B. CURRENT ASSET : The Current Asset is an asset, the benefit

of which expires within 1 year and these are convertible in cash
if required within the same financial year in general.

Example : Cash
Bank Raw Materials
Debtors Work in Progress
Stock Finished goods
Bills Receivable
Short Term Investment.

Current Assets are classified on the basis of their convertibility

into cash :

Liquid Asset : Debtors, stocks, Bills Receivable will take some

more time to be converted into Bank or Cash. So they are
known as Liquid Assets.

Super Liquid Asset : Cash in hand, Bank balance are liquid in

itself. So these are known as Super Liquid Assets.

C. FICTITIOUS ASSETS : Assets which never exists but still find a

place in the balance sheet is known as a Fictitious Assets. In
other words, these are Negative Assets or no assets. It gives a
loss to the concern. It is beneficial for an organization to have
less amount of Fictitious Asset.

Example : (P & L Account … Dr.)

Preliminary Expenses - Expenses which are incurred while
incorporating a company.

D. CONTINGENT ASSET : Assets which may or may not arise

with the happening of any events are known as Contingent
Asset. Contingent Assets are shown below the total line of
balance sheet because there is no certainty as to whether these
are going to be assets or not. That is to say, it is shown as a
footnote.

Example - Insurance Claim

Lottery Tickets

Goodwill can be classified according to 3 different categories :-

Dog Goodwill
ii) Cat Goodwill
iii) Rat Goodwill

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 Basics of
Accounting - I

Dog Goodwill : These are personalized goodwill which follows with the
individuals or organizations.

-Doctors, Lawyers ( in case of individuals ).

-Localization of Industries.

Cat Goodwill : This is a localized goodwill. It is identified with place.

Rat Goodwill : It is a negative goodwill. If goodwill becomes

‘negative goodwill’. It will come under Fictitious Asset.

Negative Goodwill: A gain occurring when the price paid for an acquisition is
less than the fair value of its net assets.
Depending on the circumstances, this is listed as a separate line item
and usually recognized as income. Negative goodwill can sometimes
occur after a distressed sale. Because of this type of sale almost
always happens under unfavourable conditions, the seller generally
receives a worse price. When the price received is less than the actual
value of its net assets, you have negative goodwill.

LIABILITY
Any obligation to pay is known as Liability.

Liability

Internal Longterm Current Contingent

(Owner’s ) Liability Liability Liability

INTERNAL LIABILITY : These are liabilities of the organization to its

owner. Be it a proprietorship concern, partnership firm or a Body
Corporate.

Capital ( Proprietor & Partnership ) - Reserves

Equity Share (company form of business ) - P & L Account

LONG TERM LIABILITY : The Liability which have to be paid of in more

than 1 year term is considered to be a long term liability.

Term Loan from bank

Debenture
Long Term Loan
Loan from Financial Institution.

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 Basics of
Accounting - I

CURRENT LIABILITIES : The Liabilities which lasts or which is to be paid

of within 1 year is known as Current Liabilities.

Creditor
Bank Overdraft
Bills Payable
Outstanding Expense.

CONTINGENT LIABILITY : The liabilities which may or may not happen in

the happening or non-happening of an event is called contingent
liability.

e.g. Pending Litigation.

* Contingent Liabilities are shown as foot note in Balance sheet.

Note : -

Any recurring expense which should have been paid but not paid is
known as - Outstanding Expenses.
Any expense which you have paid before it occurs is known as pre-
paid expense. This is a Current Asset to be placed in the
Balance Sheet.
Income which should have been received but not received is known as
- Outstanding income. It is also a Current Asset to be placed in
the Balance Sheet.

Problem :

From the following Trial Balance, prepare a Trading Account & Profit &
Loss Account for the year 2000 and a balance sheet on that
date in the books of S K Joshi & Associates.

TRIAL BALANCE
AS ON 31.03.2000

Particulars Debit Credit (Rs.)

(Rs.)
Capital 1,00,000
Drawings 10,000
Purchase 10,00,000
Sales 20,00,000
Debtors 3,00,000
Creditors 2,00,000
Wages 10,000
Salaries 10,000
Rent Paid 5,000
Disc. Allowed 10,000
Disc. Recd. 20,000

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 Basics of
Accounting - I

Furniture & Fixture 20,000

Land & Building 10,000
Plant & Machinery 50,000
Bank Balance 8,00,000
Cash in hand 95,000
Total Rs.23,20,000 Rs.23,20,00
0

Additional Information :-

Depreciate all fixed asset at 10%

Provide provision for doubtful debts at 10%
Closing Stock – 10,000
Outstanding Salaries – 50,000
Accrued Commission - 10,000
(Receivable)

Trading A/c. & P & L A/c.

For the year ended……….
Dr. Cr.
Particulars Amt. Particulars Amt.
Rs. Rs.
To Purchase 10,00,00 By Sales 20,00,000
0
To Wages 10,000 Closing Stock 10,000
To Gross Profit c/d 10,00,00
0
Rs. 20,10,00 Rs. 20,10,000
0
To Salary By Gross Profit b/d 10,00,000
10,000
Outstanding Salary 60,000 By Discount Received 20,000
50,000
To Rent 5,000 By Accrued 10,000
Commission
To Disc. Allowed 10,000
To Depreciation -
Furniture & Fixture – 2000
Building & Land - 1000
Plant & Machinery - 5000 8,000
To Provision for bad & 30,000
doubtful debtors
Net Profit c/d 9,17,000
(Transfer to B.S.)
Rs. 10,30,00 Rs. 10,30,000
0

BALANCE SHEET
As on ………………….

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 Basics of
Accounting - I

Liabilities Amount Asset Amount

Rs. Rs.
Capital 1,00,000 Plant & Machinery- 50,000
Less, Depreciation- 5,000
Add. Net Profit 9,17,000 45,000
10,17,00
0
Less. Drawings 10,000 Land & Bldg. - 10,000
10,07,00 Less, Depreciation - 1,000 9,000
0
Furniture & Fixture - 20,000
Creditors 2,00,000 Less, Depreciation - 2,000 18,000
Outstanding Salaries 50,000
Debtors - 300000
Less, Bad Debt. 30000 2,70,000
Bank 8,00,000
Cash 9,50,000
Accrued Commission 10,000
Closing Stock 10,000
Rs. 12,57,00 Rs. 12,57,00
0 0
Whenever there is an additional information, we have to consider that
item twice unlike the item which were already there in the Trial
Balance which we consider only for once to prepare the final
Accounts. Since, for additional item one have to provide both the
debit and credit entries.

Conservatism Theory in Accounting: Accounting conservatism is traditionally

defined by the adage “anticipate no profit, but anticipate all losses”.
Anticipating profits means recognizing profits before there is legal
claim to the revenues generating them and that the revenues are
verifiable. Conservatism does not imply that all revenue cash flows
should be received before profits are recognized-credit sales are
recognized-but rather that those cash flows should be verifiable.

FINAL ACCOUNTS OF CORPORATES

As per Schedule – VI of the Companies Act. the balance sheet should

be represented in the following orders :-

LIABILITIES ASSETS Rs.

SHARE CAPITAL : FIXED ASSET :

- Equity Share Capital - Goodwill
- Preference Share - Land & Building

37
 Basics of
Accounting - I

- Furniture & Fixtures

- Plant & Machineries

RESERVES & SURPLUS : INVESTMENT :

- Capital Reserves - Short Term Investment
- Revenue Reserves - Long Term Investment
- P & L A/c. (Net Profit)
CURRENT ASSETS :
SECURED LOANS: - Short Term Investment
- Secured Debentures - Sundry Debtors
- Secured Long Term Loans - Cash
- Bank
UNSECURED LOANS : - Bills Receivable
- Unsecured Debentures
- Unsecured Short Term or LOANS & ADVANCES :
Long Term Loans - If company gives some
loans it will come here.
CURRENT LIABILITIES & Advances for Purchase
PROVISIONS : MISC. EXPENSES :
- Sundry Creditors - P & L A/c. (Loss )
- Bills Payable - Patent
- Provision for Doubtful - Copy Right
Debts.
- Preliminary Expenses etc.
* Secured Loan : This loan is taken by mortgaging Fixed Asset.
Interest to be paid to Bank, if any car is purchased from Bank,
otherwise, it would be seized by the bank. It has lower interest
rate.

* Unsecured Loan : It is not considered how this loan would be

used or the person who lent money won’t want back the money
or asset. It has higher interest rate.

NEW VERTICAL FORMAT OF BALANCE SHEET

SOURCES OF FUND (ALL LIABILITIES)

Share Capital - 100

Reserves & Surplus - 100
Secured Loans - 100
Unsecured Loans - 100
400

APPLICATION OF FUND

Fixed Asset - 100

Investment - 100
Current Asset - 200

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 Basics of
Accounting - I

Less, Current Liabilities - 100

& Provision - 100 (Working Capital)
Loans & Advance - 100
Misc. Expenses - 000
400
Note :-

If the problem is given in company form of business try to follow both

the methods of Balance Sheet.

Pvt. Ltd. / Ltd. - If these words are not there, the company would be
Proprietorship or Partnership.

Pvt. Ltd./ Ltd. - Whenever these words are there, it would be a

company form of business.

ADVANTAGES OF FINANCIAL ACCOUNTS :

(1) It shows the detailed record of the day to day
business transaction of an organization.

(2) Profit & Loss assets and Liabilities are shown for the year and
for a particular time.

(3) Financial Accounting is an actual figure based on Actual

happening so the data are reliable.

(4) Final Accounting supplies accounting information like Gross Profit,

Net Profit, Asset, Liabilities, Taxes, Turnovers, Tax Liabilities to
the interested parties like owners, lender, financial institutes, tax
authorities etc.

(5) It is an uniform practice so anybody with accounting background

could understand the position easily.

(6) Now a days sophisticated but simple software accounting

packages are available which makes the accounting job easier &
timely (FACT, TALLX etc.)

LIMITATIONS OF FINANCIAL ACCOUNTING :

(1) Financial Accounting express everything in absolute term so
decision can not be taken perfectly.

(2) Financial Accounting is only a Post-mortem analysis. One can not

express any sort of opinion about it, so it is very rigid.

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 Basics of
Accounting - I

(3) Financial Accounting can always forecast the facts which have
already occurred but it fails to analyze the future.

40