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BBA & MITF SYLLABUS Accountancy- 1 Unit – 1 Accoun ng concepts, conven on & principles Introduc on of accoun ng concept Need of concepts Difference between concept and conven on Important concepts in accoun ng...
BBA & MITF SYLLABUS Accountancy- 1 Unit – 1 Accoun ng concepts, conven on & principles Introduc on of accoun ng concept Need of concepts Difference between concept and conven on Important concepts in accoun ng Exercise Unit -2 Journalising & ledger pos ng Introduc on Defini on of accoun ng characteris cs of accoun ng limita on of accoun ng Important terms of accoun ng Exercise Unit-3 Final Accounts of sole proprietorship & partnership firm What is sole proprietorship? Explana on of partnership Rules of accoun ng Exercise Unit-4 Ra o Analysis Type of ra os Use of ra os Important formulas Prac cal exercise 1 Unit - 1 Accoun ng concepts, conven on & principles Introduc on of Accoun ng Concepts: Accoun ng concepts are ideas, assump ons and condi ons based on which a business en ty records its financial transac ons and organises its bookkeeping. It helps a business interpret and integrate a financial transac on into the accoun ng process. It is important for a business owners and accountants to understand basic concepts to bring about consistency and uniformity in their accoun ng process. In this ar cle, we examine accoun ng concepts and discuss the difference between concepts and conven ons, along with the meaning of a few concepts. What are accoun ng concepts? Accoun ng concepts are theore cal ideas, components and terms that make up the subjects accoun ng, finance and economics. These terms help individuals, businesses or organisa ons systema cally record their financial informa on and transac ons. Accountants use these concepts as guidelines to prepare financial reports and other documents for individuals and businesses. Companies tend to follow accoun ng standards, principles and accoun ng laws of the countries they operate in. These principles include concepts and conven ons that help those companies report transac ons accurately. Concepts and principles are cri cal parts of accoun ng because they set up a universal framework for discussing par cular financial situa ons, rules and theories. The concepts are crucial, as they can help clarify the details of complex transac ons and assist in resolving any disputes that may arise while crea ng financial statements. You could think of these concepts as ‘what accountants do' and accoun ng principles as ‘how they do it.' Why are concepts necessary in accoun ng? 2 Accountants are professionals who record the financial transac ons of a company. Periodic summaries of these transac ons or financial reports give managers, investors, analysts and the government relevant financial informa on about a company. If every business follows an independent system for crea ng and producing summaries and statements, it could lead to discrepancies and increase the scope of fraud and financial mismanagement. To overcome this, accoun ng bodies, governments and regulatory agencies use a universally agreed-upon set of principles to standardise accoun ng prac ses. What is the difference between a concept and conven on? Concepts and conven ons together make up accoun ng principles. Accoun ng concepts are rules and guidelines that a company follows to manage accounts that record financial transac ons. Government bodies and financial ins tu ons legally recognise these concepts, and a legal and regulatory framework complements their func on. One of the primary benefits of these concepts is that they aid in recording financial transac ons based on evidence and leave li le to no chance for personal or professional bias or gain. Accoun ng concepts aid in crea ng standards, resolving poten al disputes and preven ng fraud and irregulari es. Accoun ng conven ons are a set of prac ses that a business en ty follows over a period of me to prepare its accounts. Unlike theore cal concepts, conven ons are a procedure that companies universally follow. The purpose of accoun ng conven ons is to guide accountants while they prepare financial statements. Accoun ng conven ons are dynamic and can change when new concepts and principles emerge. One major advantage of following accoun ng conven ons is that it ensures similar accoun ng prac ses across businesses, making it easy for stakeholders to interpret the financial performance of different companies using the same benchmark. Important concepts in accoun ng Accoun ng bodies classify concepts as based on assump ons or based on principles. Every type of business—including a sole proprietorship, partnership or a public or private company—records its financial transac ons based on these assump ons and principles. These are some of the important concepts in accoun ng: 3 1. Business en ty concept The business en ty, economic en ty or separate en ty concept assumes that a business is independent of its owner. A business may not record its owner's personal expenses, income, liabili es and assets. It aids in tracking a business's expenses, incomes and tax deduc ons without any ambiguity. In addi on, it safeguards a business owner's personal finances and helps build their creditworthiness. It reflects cash flow and financial posi on more accurately. This clear dis nc on helps stakeholders and creditors take appropriate business decisions based on a company's performance rather than the owner's financial posi on. 2. Going concern concept Going concern concept prescribes that accountants prepare financial statements on the assump on that a business may con nue its opera ons for the foreseeable future. Under this concept, the defini on of a foreseeable future is a period of 12 months from the end date of the repor ng period. If a business owner or the management is invested in scaling down business opera ons to zero, they cannot apply the going concern concept for accoun ng. Accountants may no longer apply the going concern concept if a company is: unable to pay dividends unable to raise credit from banks and financial service facing losses and negative operating cash flow facing an adverse financial position unable to pay back crucial debts facing an unfavourable legal or regulatory action against it 3. Money measurement concept This is an accounting concept based on assumption, and it stipulates that companies record only those transactions that they can quantify and measure in terms of money. If they cannot assign a monetary value to a transaction, they do not record it in their annual financial statement. Though these transactions affect a company's financial performance, they may not find a place in financial statements, as monetising them can be challenging. Some examples of non-monetary value include employee competence, product 4 quality, employee efficiency, market sentiment, business productivity and stakeholder satisfaction. 4. Accounting period concept The accounting period concept prescribes a timeframe within which a business records and reports its financial performance for the purview of internal and external stakeholders. An accounting period of a company may coincide with the fiscal year. A company can determine a timeframe for internal reporting, like three or six months, or prepare monthly financial reports to analyse their cash flow positions. The management can determine a convenient accounting period for internal reporting, but the reporting for investor, government and tax purposes is typically for the period of one year. 5. Accrual concept Accrual is a fundamental concept that guides how a business can record cash or credit transactions. Under this concept, a business records a financial transaction in the period it occurs. It does not consider whether the business pays or receives cash at the time of the transaction, or if it pays cash after a certain period. For example, a company records a credit purchase at the time of purchase rather than when it pays back the seller. This helps record and report income, expenses, liabilities and receivables accurately. All modern accounting systems follow the accrual concept in recording financial transactions. 6. Revenue realisation concept Under the revenue realisation or revenue recognition concept, a seller records potential revenue from a transaction, regardless of whether they have or have not received proceeds. The ownership of a product transfers from a buyer to a seller during a sale. A seller recognises the transaction by creating a receivable against the buyer's name in their ledger. An accountant creates another entry when they receive the due amount in the future. 7. Full disclosure concept 5 The full disclosure concept requires a business entity to furnish necessary information for the benefit of those who read financial statements and reports for investment, taxation or audit purposes. This concept aims to provide important financial information to investors, creditors, shareholders, clients, and other stakeholders. Disclosure policies cover revenue recognition, depreciation, inventory, taxes, earnings, stock value, leases and liabilities. 8. Dual aspect concept Dual aspect concept states that every transaction affects two accounts of a business. A business then records both aspects to enable accurate accounting. Every financial transaction has a credit or debit or a giver or receiver aspect. If an accounting process does not represent both, it may lead to faults in the final accounting record. The dual aspect concept is the foundation of the double- entry system of bookkeeping, which is now a standard method for auditing and taxation. 9. Materiality concept The materiality concept prescribes guidelines to identify if a piece of financial information is material and whether it can influence the person reading a company's financial statements. Based on this concept, an accountant or a business may remove negligible transactions that may not have a bearing on final accounts. This concept is open to subjective interpretation and the basis for using the materiality concept varies with the size of a company. While a large company may round off figures in the final accounts to crores, a small firm may round off their figures to lakhs. 10. Verifiable objective evidence concept Under this concept, a business can record only those transactions that they can furnish documentary proof for. Without proper and valid documentary evidence, a transaction can be biased or undependable, and it can increase the scope of financial irregularities. For example, a retail employee may present a bill for purchases and sales, and corroborate it with sale and purchase invoices. 11. Historical cost concept The historical cost concept states that a business may record assets and liabilities at their historical cost rather than their current market or sale value. It helps to maintain consistent, reliable and verifiable financial information. Including the current value of an entity can result in financial irregularities. 6 12. consistency concept According to the consistency concept, once a business has decided on a par cular method for trea ng an accoun ng item, it will treat all similar items in the same way in the futur For e.g. If stock is valued on the basis of FIFO method or Weighted Average Method, then this method once should be adopted cannot be changed. 13. conserva sm concept The conservatism concept is a concept in accounting which refers to the idea that expenses and liabilities should be recognised as soon as possible in a situation where there is uncertainty about the possible outcome and in contrast record assets and revenues only when they are assured to be received. In other words, the principle of conservatism states that, if an accountant has two possible outcomes for any accounting issue, then the accountant must choose that outcome which is most conservative or has the least possible chance of profit. In the worst case scenario, the company should report assets and revenues at understated figures while overstating the liabilities and expenses. For e.g. The original cost of the closing stock is Rs. 1,00,000. While the market price is Rs. 80,000. The stock is shown in the book at market price. 14. matching cost with revenue concept The matching principle is an accoun ng concept that dictates that companies report expenses at the same me as the revenues they are related to. Revenues and expenses are matched on the income statement for a period of me (e.g., a year, quarter, or month). e.g. a firm has paid Rs. 44,000 as 11 months salary, on monthly basis of Rs. 4,000. Here, the salary of 1 month is outstanding so according to this concept 7 including od 1 month outstanding salary total Rs. 48,000 is to be debited to the accounts of that year. Exercise: 1 1. Deprecia on deducted from fixed assets due to – A. Going concern concept B. En ty concept C. Realisa on concept 2. Goodwill wri en off gradually from the books of accounts. A. Conserva sm concept B. Periodicity Concept C. Realisa on Concept 3. Accoun ng transac on should be recorded on the basis of its vouchers A. Realisa on concept B. Objec vity concept C. Periodicity concept 4. In case of large contracts, profit is calculated eventhough when they are incomplete at the end of the year. A. Conserva sm concept B. Periodicity Concept C. Realisa on Concept 5. Expenses due but do not paid for the current year are debited to profit and loss account of the current year. A. Conserva sm concept B. Periodicity Concept C. Matching cost with revenue concept. Answers: 1 – A, 2-A, 3 -B, 4-C, 5-B Exercise: 2 Explain which concept is involved in this statement: 1. In any transac on, the amount debited is equal at to the amount credited. 2. At the close of the year, the total of the balance sheet of both sides will be tallies. 8 3. The amount of the commission on the sales achieved during a par cular year is debited to the year’s profit and loss account only. 4. A trading concerns creates workmen’s compensa on fund in its books. 5. Loss due to fire occurred during a year is debited to that year’s profit and loss account only. 6. Current assets such as debtors are shown at their realisable value. 7. Advance received from customers cannot be credited to sales account. Answers: 1- Dual Aspect, 2- Dual Aspect, 3- Matching cost with revenue. 4- Conserva sm. 5- Matching cost with revenue. 6-Going concern concept and conserva sm. 7- Realisa on principle. Exercise: 3 Mul ple choice ques ons: 1. The deprecia on which is charge on fixed assets are according to which concept? A. Matching cost with revenue concept. B. Conserva sm C. Money measurement D. Going concerns. 2. According to which concept interest on drawing is charged to profit and loss account? A. Conserva sm B. Separate en ty C. Accoun ng period D. Full disclosure. 3. In which principle, pre received income is deducted from the income in profit and loss account? A. Matching cost with revenue. B. Double effect of transac on C. Conserva sm D. Money measurement concept. 9 4. ___________ concept recommends that changes in the prices of fixed assets should not be recorded in the books of accounts. A. Realisa on B. Accoun ng period C. Going concern D. Consistency. 5. As per which concept, the value of closing stock is recorded at lower price between book value and market value. A. Consistency. B. Full disclosure C. Conserva sm D. Realisa on 6. Which concept suggest that work -in- progress account should be recorded on its cost price. A. Full disclosure B. Cost C. Conserva sm D. Going concern 7. Assets = capital+ liability is according to which concept? A. Dual aspect B. Conserva sm C. Money measurement D. Accoun ng period Ans: 1 – D, 2-B, 3 -A, 4-C, 5-C, 6-D ,7-A Exercise: 4 Answer the following ques ons: 1. Explain the meaning of accoun ng concept and why it is necessary? 2. Explain the difference between concept and conven on. 3. Explain the all important concepts of accoun ng. 10 Unit – 2 Journalising & ledger pos ng Introduc on Accoun ng is involved in each business ac vity. It is called an integral part of the business. In a day-to-day business ac vity, there are lots of transac ons which are involved. It is not possible to remember each and every transac on. For that recording system is required. This recording system is called accoun ng. In a non-business ac vity also, where the money is involved, the record is required. At home also we maintain the records of expenses and incomes. From that we can be able to know about monthly budget of a par cular household expenses. From that we can say that, accoun ng is required for all whether it is business organisa on or non-business organisa on. Defini on of Accoun ng Accounting is the process of recording financial transactions pertaining to a business. The accounting process includes summarizing, analysing, and reporting these transactions to oversight agencies, regulators, and tax collection entities. The financial statements used in accounting are a concise summary of financial transactions over an accounting period, summarizing a company's operations, financial position, and cash flows. “Accounting is a process of systematically recording of the monetary transaction of a person or a business relating to a definite time is called accounting.” 11 Characteristics of Accounting: 1. Reliability: Reliability can be defined as the ability to trust. Accounting helps in providing reliable information to businesses. Reliable information should be free of errors and distortions and should correctly represent what it purports to represent. To ensure some reliability, the published facts should be credible, neutral, and verifiable through unbiased events using an identical measurement approach. 2. Relevance: Relevant information is recorded and presented in the process of accounting. For relevant information, facts must be available in a timely manner, they must assist in forecasting and feedback, and should influence customer choices by: (a) helping them form a prediction about the outcome of a past, current or future event; and b) confirming or correcting the previous ratings. 3. Clarity: Accounting helps in providing clear information about all business transactions. It is an art of recording, classifying, and summarising accounting information. 4. Comparability: With proper accounting, records relating to various costs, sales, gross and net profit, etc., can be compared. As such, accounting helps in inter-company and intra-company comparisons. Limitations of Accounting There are some misconcep ons about accoun ng. Like the fact that a Profit & Loss Statement shows the true profit or loss earned in a year, or that a balance sheet perfectly depicts the financial posi on of a firm. Whereas the truth is that accoun ng is not a perfect science or art or language yet. It has been evolving for so many years and con nues to evolve. The limita ons of accoun ng must be studied to understand it be er.. 12 1.Measurability One of the biggest limitations of accounting is that it cannot measure things/events that do not have a monetary value. If a certain factor, no matter how important, cannot be expressed in money it finds no place in accounting. Some very important qualities like management, loyalty, reputation, etc find no place on the balance sheet or the income statement. 2.No Future Assessment The financial statements show the financial position of the firm on the date of preparation. The users of the statement are more interested in the future of the company in the short term and long term. However, accounting does not make any such estimates. And due to the dynamic nature of the business environment, a lot can change between such dates. Auditors sometimes do disclose the important events occurring after the balance sheet date to rectify these limitations of accoun ng. 3. Historical Costs Accounting often uses historical costs to measure the values. This fails to take into consideration factors such as inflation, price changes, etc. This skews the relevance of such accounting records and information. This is one of the major limitations of accounting. 4.Accounting Policies There is no global standard in accounting policies. In India, we follow the Accounting Standards. Americans follow the GAAP and then there are the international standards, namely the IFRS. And if a global company operates in more than one country, there may be confusion. Not all accounting policies follow the same line of thinking, and conflicts may arise due to this. It has long been said that the whole world must agree on uniform accounting policies but this has not happened yet. 13 5.Estimates Sometimes in accounting estimation may be required as it is not possible to establish exact amounts. But these estimates will depend on the personal judgment of the accountant. And estimates are extremely subjective in nature. They are basically a person’s guess of future events. In accounting, there are many cases where such estimates need to be made like provision of doubtful debt, methods of depreciation, etc. 6.Verifiability An audit of the financial statements does not guarantee the correctness of such statements. The auditor can only assure that the statements are free from error to the best of his judgment. 7.Errors and Frauds Accounting is done by humans, so there will always be the scope of human errors. There is also the fear of possible manipulation of accounts to cover up a fraud. Since fraud is deliberate, it is that much harder to spot. This is one of the most dreaded limitations of accounting. Important terms of accoun ng 1. Account : An account is a detailed record of all the money that a business or a person receives and spends. In double entry bookkeeping, every debit or credit in the account is also represented as a credit or debit somewhere else. 2. Entry : A wri en record of a commercial transac on. An accoun ng entry made at the end of an accoun ng period to allocate items between accoun ng periods. In the double entry system, the transac on has two effects – Debit and Credit. 14 3. Business transac on : A Business Transac on is an economic event involving the movement of money, goods, or services, usually between two or more par es. Usually the transac on can be of two types: economic transac on and non economic transac on. The transac on which involve money is called an economic transac on. For e.g. purchase of goods from one company. The transac on which does not involve money is called non economic transac on. For e.g. invita on from friend for dinner. 4. Ledger: A ledger in accoun ng refers to a book that contains different accounts where records of transac ons pertaining to a specific account is stored. 5. Pos ng: Pos ng means, it is an act to give effect to the transac on which is already journalised. It is to be transfer to its respec ve account. 6. Goods : The things which are bought and sold by business are called goods. Goods maybe raw material work in progress of finished goods. In accounting, when goods are purchased it is written as purchases. When goods are sold it is written as sales. It is written as a stock if remain unsold at the end of the year. 7. Purchase : A purchase involves the acquisition of goods or services in exchange for a payment of some kind. The payment is usually in cash or credit. 15 8. Sales: In general business operations, sales refer to any transactions where money or value is exchanged for the ownership of a good or entitlement to a service. In an accounting context, sales refers to a company's revenue earned from the sales of products or services. 9. stock: Goods obtained for resale or manufactured for sale that are yet unsold on any date is known as stock. 10. Assets: An Asset is an item owned or controlled by a business. It has economic value that can be realised by either converting it into cash or generating income for the company. Examples of an asset include the following: Cash and cash equivalents. Furniture Machinery Investments Property Factory Patents Trademark 11. Fixed assets : A fixed asset, also known as a capital asset, is a tangible piece of property, plant, or equipment (PP&E) that you own or manage with expecta ons that it’ll con nuously help generate income. An asset is fixed when it’s an item that your business won’t consume, sell, or convert to cash within the next calendar year. Fixed assets are different than current assets, which are in cash or slated to be converted to cash within the next 12 months. 16 12.Current assets: Current assets are the resources that a business owns and expects to use or sell within a year. Current assets are important to a business because by conver ng them to cash they allow it to pay its day-to-day opera ng expenses, bills and loan payments. 13. Tangible assets: Tangible assets are physical items owned by a company, such as equipment, buildings, and inventory. Tangible assets are the main type of asset that companies use to produce their products and services. 14. Intangible assets: Intangible assets have no physical existence. It can not be touched or seen but they have monetary values. For e.g. goodwill, patent, trademark, and copyright. 15. Fic ous assets : Fic ous assets are those assets which do not have a physical existence and any realisable value but are represented as actual cash expenditure in the financial statements. For e.g. preliminary expenses, debenture discount, adver sement suspense account etc. 16. Capital : Capital is a broad term for anything that gives its owner value or advantage, like a factory and its equipment, intellectual property like patents, or a company's or person's financial assets. Even though money itself can be called capital, the word is usually used to describe money used to make things or invest. It means it is called when the owner brings something in the business in the form of cash or in the form of asset is called capital. 17 17. Drawings: A drawing account is an accoun ng record maintained to track money and other assets withdrawn from a business by its owners 18. Expenses : An expense in accoun ng is the money spent, or costs incurred, by a business in their effort to generate revenues. Essen ally, accounts expenses represent the cost of doing business; they are the sum of all the ac vi es that hopefully generate a profit. 19. Revenue expenditure The expenses which are incurred during the whole month for running of the business is called the revenue expenses. For e.g. salary, rent, insurance premium etc. 20. Capital expenditure: Some expenses are incurred for the buying of an assets which are use for the long term is called capital expenditure. For e.g. purchase of building, land machinery etc. 21. Deferred revenue expenditure: In business, Deferred Revenue Expenditure is an expense which is incurred while accoun ng period. And the result and benefits of this expenditure are obtained over the mul ple years in the future. For example, revenue used for adver sement is deferred revenue expenditure because it will keep showing its benefits over the period of two to three years. 18 22. Revenue or income: Revenue is the total amount of money generated by the sale of goods or services related to the company's primary opera ons. Income or net income is a company's total earnings a er deduc ng expenses. For e.g. Revenue income and Capital income. 23. Revenue income : The income which is generated by day-to-day rou ne transac on is called revenue income. For e.g. rent received, interest, discount, and commission etc. 24. Capital income : Capital income is the income generated through the possession of wealth, such as rental income, gains from selling an asset, dividend income, certain interest income, proceeds from a life insurance contract, and the share of profits of an investment fund. For e.g. Income from sale of an asset. 25. Bad - debts: Bad Debt is that Debt that was previously receivable but now is irrecoverable from that person who was supposed to pay that Debt. This means the Debt becomes Bad as it is unpaid. The reason for this non-payment may be the cause as the Debtors either get bankrupted or have financial problems, say the problem in the collec on by the creditors for various reasons which are not possible. 26. Bad -debt reserve : An allowance for doubtful accounts, also known as bad debt reserve, is money set aside by a company to cover receivables that might not be paid by their customers over a given period. It's the total amount receivables the company never expects to collect. 19 27.Bad -debt recovered : Bad debt recovery refers to a payment received for a debt that had previously been wri en off and considered uncollec ble. Because bad debt usually generates a loss when it is written off, bad debt recovery generally produces income. Rules for Accounting: Types of accounts In financial accounting, every debit or credit transaction entry will belong to one of the three types of accounts: 1. Nominal account A nominal account is a general ledger containing the transac ons of a business, namely – expenses, incomes, profits and losses. It contains all the transac ons that occur in one financial year Examples of nominal accounts are Commission Received, Salary Account, Rent Account and Interest Account. 2. Personal account You can think of a personal account as a general ledger that relates to people, associations, and companies. It can be divided into three subcategories: 20 Ar ficial personal account An artificial personal account represents bodies which are not human beings but act as separate legal entities according to the law. For example, government bodies, hospitals, banks, companies, cooperatives, partnerships, etc. Natural personal account A natural personal account represents human beings—for example, a Capital account, a Drawings account, Creditors, Debtors, etc. Representa ve personal account This type of personal account represents the accounts of natural or artificial entities. However, the transactions in this type of account either belong to the previous or the coming year. For example, a representative personal account can contain information on an employee’s due salary from last year. Also, it can represent the amount of rent a company paid in advance for the coming year. 3. Real account Like the other two, a real account is also a general ledger, but it contains transactions related to the liabilities and assets of a company. The assets, in this case, can be further subdivided into tangible and intangible assets. Tangible assets include land, buildings, machinery, furniture, etc. Alternatively, intangible assets include goodwill, patents, copyrights, etc. 21 Unlike a nominal account, a real account does not close when a financial year completes. Rather, it is carried forward to the following year. In addition, a real account also appears in the company’s balance sheet. Now that you have a clear idea of the types of accounts, let’s take a look at how they relate to the golden rules of accounting. Golden rules of accounting Rule 1: Debit all expenses and losses, credit all incomes and gains This golden accounting rule is applicable to nominal accounts. It considers a company’s capital as a liability and thus has a credit balance. As a result, the capital will increase when gains and income get credited. Inversely, this capital gets reduced when losses and expenses are debited from it. Date Account Debit Credit Rent xx/xx/xxxx Rs.28,000 – Account Cash xx/xx/xxxx – Rs.28,000 Account Rule 2: Debit the receiver, credit the giver 22 The “Debit the receiver, Credit the giver” rule is applicable for personal accounts. When a natural or artificial entity makes a donation to a company, it becomes an inflow. Thus, the receiver must be debited, and the company receiving the donation must be credited in the books. Date Account Debit Credit Amount xx/xx/xxxx of Rs.19,000 – Purchase Present xx/xx/xxxx – Rs.19,000 Shop Rule 3: Debit what comes in, credit what goes out This rule is applicable for real accounts where tangible assets like machinery, buildings, land, furniture, etc., are taken into account. They have a debiting balance by default and debit everything that comes in, adding them to the existing account balance. In a similar way, the account balance needs to be credited when a tangible asset leaves the company. Purchase of Machinery worth Rs. 200000 on cash Machinery Account Dr. 2,00,000 23 To cash Account 2,00,000 These three accounting rules form the basis of bookkeeping. Let’s take an example to put things into perspective. Take a look at the following transactions: Suppose a company named Bha acharya Tiles starts its business with a capital of Rs.2,00,000. It rents property worth Rs.50,000 The firm buys goods worth Rs.1,00,000 from Mahadev Stone Works, on Credit It sells goods worth Rs.1,50,000 Then, it pays Mahadev Stone Works in cash for the purchased goods Furthermore, the company pays Rs.1,00,000 worth of salary to its employees Now, let’s take a look at the different accounts that will be involved and also the types of accounts for each case: Transac ons Involved Accounts Ini al capital of Rs. 2,00,000 Capital Account, Cash Account Rents worth Rs.50,000 Cash Account, Rent Account 24 Purchase of goods worth Rs.1,00,000 Mahadev Stone Works Account, Purchases Account from Mahadev Stone Works Sale of goods worth Rs.1,50,000 Sales Account, Cash Account Cash payment to Mahadev Stone Works Cash Account, Mahadev Stone Works Account for goods purchased Salary payment to employees worth Cash Account, Salary Account Rs.1,00,000 Applying the golden rules of accounting, your journal entries will be in the following ways: Bhattacharya Tiles starts its business with a capital of Rs.2,00,000. As cash is a tangible asset, it will be a part of the company’s real account. Also, capital belongs to the personal account. Therefore, applying the golden rules, you have to debit what comes in and credit the giver. Par cular Debit Credit 25 Cash A/C Dr. Rs.2,00,000 – To capital A/c – Rs.2,00,000 Rents property worth Rs.50,000 Rent is considered as an expense and thus falls under the nominal account. Additionally, cash falls under the real account. So, according to the golden rules, you have to credit what goes out and debit all losses and expenses. Account Type Debit Credit Rent Account Rs.50,000 Cash Account – Rs.50,000 Buys goods worth Rs.1,00,000 from Mahadev Stone Works on Credit When a firm purchases something, it falls under its expenses, and so it falls under the nominal account. Moreover, Mahadev Stone Works will be a part of the personal account. Hence, you have to credit the giver and debit all expenses and losses. Account Type Debit 26 Purchases Account Rs.1,00,000 Mahadev Stone Works Account – Rs.1,00,000 ( cr. ) Sells goods worth Rs.1,50,000 Income generated from the selling of goods falls under the nominal account. Furthermore, cash forms a part of the real account. Therefore, you have to credit all incomes and gains and debit what comes in. Account Type Debit Credit Cash Account Rs.1,50,000 Sales Account – Rs.1,50,000 Pays Mahadev Stone Works in cash for the purchased goods As Mahadev Stone Works falls under the personal account and cash forms a part of the real account, you have to credit what goes out and debit the receiver. Account Type Debit credit 27 Mahadev Stone Works Rs.1,00,000 Account Cash Account – Rs.1,00,000 The company pays Rs.1,00,000 worth of salary to its employees Salary is considered as an expense to a business and thus falls under the nominal account. In addition, cash forms a part of the real account. So, according to the accounting golden rules, you have to credit what goes out and debit all expenses and losses. Account Type Debit Credit Rs.1,00,000 Salary Account Cash Account – Rs.1,00,000 Benefits of the Golden Rules of Accounting Following the golden rules of accounting has these benefits: 28 Proper maintenance of business records For a company’s success, the proper maintenance of its records is critical. Doing so will make sure that the company’s records are stored in a safe, and systematic manner. Comparing financial results The golden rules ensure that financial records are properly recorded. So, businesses can compare their year-over-year financial results in an easier and more efficient way. Calcula ng the valua on of a business When a firm properly calculates its financial statements, it assists in proper business valuation. Furthermore, it helps in getting more investments and thereby expanding the business. Helps in budge ng as well as future projec ons If a business has a sound budget based on proper accounting practices, it can act as a strong foundation for growth. In addition, it assists in more accurate future projections. Evidence during legal cases For quick reference during lawsuits, companies need to record their financial data in a systematic manner. Using accounting golden rules comes in handy in this regard. Assists in tax-related ma ers 29 Properly accounting a firm’s financial statements helps avoid shortfalls in taxes. Improper accounting practices attract huge penalties. It can also impact the firm’s brand value and image. Helps comply with regulatory authori es Proper accounting is of utmost importance when it comes to complying with regulatory authorities. Without proper accounting discipline, it will be difficult for any business to achieve regulatory compliance. Now that you have a clear idea of the golden rules of accounting, you know which type of transaction belongs under which specific account. So, the journal entries on financial transactions shall be accurate and appropriate. 30 Examples related to journal entries : Example 1 Pass the necessary journal entries related to the ‘Opening Entry’. (a) On 1st April 2023, Ram started a business with cash ₹5,00,000. (b) On 1st April 2023, Vinod started business with cash ₹1,00,000, furniture ₹2,00,000, and Building ₹10,00,000. 31 (c) On 1st April 2023, Mohan’s Books of Account shows Cash ₹16,000, Stock ₹54,000, Debtors ₹47,000, Furniture ₹42,000, Creditors ₹37,000, and Capital ₹1,22,000. (d) On 1st April 2023, Amit’s Books of Account shows Cash ₹4,000, Bank ₹10,000, Stock ₹27,000, Debtors ₹23,500, Land and building ₹30,000, Creditors ₹10,000, and Capital ₹1,00,000. 32 (e) On 1st April 2023, Vikas’s Books of Account show, Cash ₹30,000, Bank ₹10,000, Stock ₹80,000, Debtors ₹48,000, Furniture ₹7,200, Creditors ₹25,000, and Bank Loan ₹20,000. 33 Example 2 Pass the necessary journal entries in the books of Reshi Raj, (a) On 1 April 2023, Cash Purchases ₹20,000. (b) On 9 April 2023, Sold goods to Rama at the list price of ₹60,000 at a trade discount of 10%. (c) On 11 April 2023, Vinod sold goods to us worth ₹30,000 at a 10% trade discount. (d) On 18 April 2023, Returned goods to Vinod at the list price of ₹2,000. (e) On 22 April 2023, Paid cash to Vinod ₹24,000 in full settlement. (f) On 25 April 2023, Rama returned goods of list price ₹10,000. (g) On 28 April 2023, Rama paid ₹43,000 in full settlement of his account. Solution: 34 35 36 Example 3 Pass the necessary journal entries in the book of Raghav from the following transactions: (a) On 1 April 2023, Opened a Bank Account by depositing ₹50,000. (b) On 7 April 2023, Goods were brought for ₹10,000, and payment was made by cheque. (c) On 9 April 2023, Ravi (the debtor) directly deposited an amount of ₹40,000 in Raghav’s account. (d) On 15 April 2023, cash withdrawn ₹5,000 for personal use. (e) On 21 April 2023, Sold goods to Ankit for ₹30,000 at a cash discount of 10% and received a cheque for the full amount deposited into the bank the same day. (f) On 26 April 2023, The cheque received from Ankit was dishonored. (g) On 29 April 2023, the Bank charged interest for ₹500. 37 38 Example 4 Pass the necessary journal entries related to the following transactions in the book of R.K. Pvt Ltd. (a) On 1 April 2023, Purchased goods for cash ₹40,000 and paid ₹2,000 for their carriage. (b) On 11 April 2023, Amar who owned ₹20,000 declared insolvent. (c) On 16 April 2023, Machinery bought for ₹5,00,000 and paid ₹25,000 for its installation. (d) On 19 April 2023, Further paid ₹5,000 on the carriage of the machine bought. (e) On 24 April 2023, Purchased bricks and timber for ₹10,00,000 for construction of the building and made payment through cheque. (f) On 29 April 2023, Amar who was earlier declared insolvent paid 30 paise in Rupee 39 40 Example 5 Pass Journal Entries in book Susmita Ltd.: (a) On 1 April 2023, Susmita got 10% interest on the capital of ₹5,00,000. (b) On 9 April 2023, Susmita paid 15% interest on drawings of ₹8,000. (c) On 11 April 2023, the Salary of an employee is due for ₹5,000. (d) On 13 April 2023, Provide 10% depreciation on machinery costing ₹10,00,000. (e) On 19 April 2023, Goods for ₹4,000 were distributed as free samples. (f) On 24 April 2023, Goods worth ₹25,000 were stolen by an employee. (g) On 27 April 2023, Goods worth ₹3,00,000 were destroyed by fire, and the insurance company paid a claim for 60% amount. 41 42 43 Examples Ex -1 Jeyaseeli is a sole proprietor having a provisions store. Following are the transactions during the month of January 2018. Journalise them. Jan. Rs. 1 Commenced business with cash Rs 80,000 2 Deposited cash with bank Rs 40,000 3 Purchased goods by paying cash Rs 5,000 4 Purchased goods from Lipton & Co. on credit Rs 10,000 5 Sold goods to Joy and received cash Rs 11,000 6 Paid salaries by cash Rs 5,000 7 Paid Lipton & Co. by cheque for the purchases made on 4th Jan. 8 Bought furniture by cash Rs 4,000 9 Paid electricity charges by cash Rs.1,000 10 Bank paid insurance premium on furniture as per standing instruc ons Rs.300 Ex – 2 Ananth is a trader dealing in textiles. For the following transactions, pass journal entries for the month of January, 2018. Jan. Rs. 1 Commenced business with cash Rs.70,000 2 Purchased goods from X and Co. on credit Rs. 30,000 3 Cash deposited into bank Rs. 40,000 4 Bought a building from L and Co. on credit Rs.95,000 5 Cash withdrawn from bank for office use Rs. 5,000 6. Cash withdrawn from bank for personal use of Ananthu Rs. 4,000 44 7 Towels given as charities Rs. 3,000 8 Shirts taken over by Ananth for personal use Rs.12,000 9 Sarees distributed as free samples Rs. 3,000 10 Goods (table clothes) used for office use Rs.200 Ex-3 Arun is a trader dealing in automobiles. For the following transactions, pass journal entries for the month of January, 2018 Jan. Rs. 1 Commenced business with cash Rs. 90,000 2 Purchased goods from X and Co. on credit Rs 40,000 3 Accepted bill drawn by X and Co. Rs. 20,000 4 Sold goods to D and Co. on credit Rs. 10,000 5 Paid by cash the bill drawn by X and Co. 6 Received cheque from D and Co. in full settlement and deposited the same in bank Rs. 9,000 7 Commission received in cash Rs. 5,000 8 Goods costing Rs. 40,000 was sold and cash received Rs.50,000 9 Salaries paid in cash Rs. 4,000 10 Building purchased from Kumar and Co. for Rs. 1,00,000 and an advance of Rs. 20,000 is given in cash 45 Ex- 4 Bina is a trader dealing in electronic goods who commenced his business in 2015. For the following transactions took place in the month of March 2018, pass journal entries. March Rs. 1. Purchased goods from Y and Co. on credit Rs. 60,000 2. Sold goods to D and Co. on credit Rs.30,000 3. Paid Y and Co. through bank in full settlement Rs. 58,000 4. D and Co. accepted a bill drawn by Bragathish Rs 30,000 5. Sold goods to L on credit Rs. 20,000 6. Sold goods to M on credit Rs. 40,000 7 Received a cheque from M in full settlement and deposited the same to the bank Rs.39,000 8. Goods returned to Y and Co. Rs.4,000 9. L became insolvent and only 90 paise per rupee is received by cash in final settlement 10. Goods returned by M Rs. 3,000 46 Ex- 5 Vishal is a sole trader dealing in textiles. From the following transactions, pass journal entries for the month of March 2018 March Rs. 1 Commenced business with cash Rs. 90,000 with goods Rs. 60,000 2 Purchased 20 readymade shirts from X and Co. on credit Rs. 10,000 3 Cash deposited into bank through Cash Deposit Machine Rs. 30,000 4 Purchased 10 readymade sarees from Y and Co. by cash Rs. 6,000 5 Paid X and Co. through NEFT 6 Sold 5 sarees to A and Co. on credit Rs. 4,000 7 A and Co. deposited the amount due in Cash Deposit Machine 8 Purchased 20 sarees from Z & Co. and paid through debit card Rs. 12,000 9 Stationery purchased for and paid through net banking Rs. 6,000 10 Bank charges levied Rs.200 47 Ledger pos ng Process of entering all transac ons from the journal to the ledger is called ledger pos ng. In ledger pos ng, the credit and debit items are transferred into the appropriate accounts from the journal. RULES REGARDING POSTING The following rules should be observed while pos ng transac ons in the Ledger from the Journal: (i) Separate accounts should be opened in the Ledger for pos ng transac ons rela ng to different accounts recorded in the Journal. For example, separate accounts may be opened for sales, purchases, sales returns, purchases returns, salaries, rent, cash, etc. (ii) The concerned account which has been debited in the Journal should also be debited in the Ledger. However, a reference should be made of the other account which has been credited in the Journal. For example, for salaries paid, the salaries account should be debited in the Ledger, but reference should be given of the Cash Account which was been credited in the Journal. Ledger Pos ng and Trial Balance (iii) The concerned account, which has been credited in the Journal should also be credited in the Ledger, but reference should be given of the account, which has been debited in the Journal. For example, for salaries paid, Cash Account has been credited in the Journal. It will be credited in the Ledger also, but reference will be given of the Salaries Account in the Ledger. Thus, it may be concluded that while making a pos ng in the Ledger, the concerned account which has been debited or credited in the Journal should also be debited or credited in the Ledger, but reference has to be given of the other account which has been credited or debited in the Journal, as the case may be. This will be clear with the following example. Suppose salaries of Rs 10,000 have been paid in cash, the following entry will be passed in the Journal: Salaries Account Dr. 100000 To Cash Account 100000 In the Ledger two accounts will be opened (i) Salaries Account, and (ii) Cash Account. Since Salaries Accounts has been debited in the Journal, it will also be debited in the Ledger. Similarly Cash Account has been credited in the Journal and, therefore, it will also be credited 48 in the Ledger, but reference will be given of the other account involved. Thus the accounts will appear as follows in the Ledger: SALARIES ACCOUNT Dr. cr. Par culars Rs. Par culars Rs. Cash A/C 10,000 Cash Account Par culars Rs. Par culars Rs. Salary A/C 10,000 Use of the words ‘To’ and ‘By’ It is customary to use words ‘To’ and ‘By’ while making a pos ng in the Ledger. The word ‘To’ is used with the accounts which appear on the debit side of a Ledger Account. For example, in the Salaries Account, instead of wri ng only ‘Cash’ as shown above, the words ‘To Cash’ will appear on the debit side of the account. Similarly, the word ‘By’ is used with accounts which appear on the credit side of a Ledger Account. For example, in the above case, the words ‘By Salaries A/c’ will appear on the credit side of the Cash Account instead of only ‘Salaries A/c’. The words ‘To’ and ‘By’ do not have any specific meanings. Modern accountants are, therefore, ignoring the use of these words. 49 Example Journalise the following transac ons and post them into the Ledger: 1. Ram started business with a capital of Rs 10,000. 2. He purchased furniture for cash Rs 4,000. 3. He purchased goods from Mohan on credit Rs 2,000. 4. He paid cash to Mohan Rs 1,000. 50 51 Example -2 Let us assume ABC Ltd. records the following transactions for the year ending on March 31, 2023: 1. Plant purchased for Rs. 34,000/- through cheque on April 1, 2022. 2. Good sold for cash amounted Rs. 3,900/- on August 18, 2022. 3. Goods sold to MNP Ltd. on credit for Rs. 7,200/- on January 20, 2023. 4. Depreciation charged on Plant Rs. 3,400/- on March 31, 2023. Journal entries in the Books of ABC Ltd. for the year ending March 31, 2023: 52 Ledger pos ng: 53 Example - 3 Sardar Hammad is sole owner of business. He has been started business since 1990. Following are transac on for the month of August 2016, prepare Journal Entry, General Ledgers and Trial Balance. August 2016 Aug 3. Reinvestment in the shape of Cash Rs. 80,000 and Furniture Rs. 20,000. Aug 5. Cash Sales Rs.10,000 and on account Sales Rs.12,000. Aug 6. Bought goods from Ahmed Co. Rs.60,000 paid Rs.15,000 cash and remaining Note payable pay within 30 days. Aug 9. Purchase Office Equipment from Waseem Shah worth Rupees Rs.99,000, a cash down payment of Rs.19,000 and balance will be paid by four installments, first due on 30 August. Aug 21. Goods return by credit customer of worth Rs.12,000. Aug 30. Paid first installment of Rs.20,000. 54 55 Ledger pos ng 56 57 58 Example - 4 Journalise the following transactions, post them into Ledger, balance the accounts and prepare a Trial Balance :− 2017 (₹) March Shyam Sunder & Sons commenced business with cash 80,000 1 2 Purchased goods for cash 36,000 3 Machinery purchased for cash 4,000 4 Purchased goods from : Raghu 22,000 Dilip 30,000 6 Returned goods to Raghu 4,000 8 Paid to Raghu, in full se lement of his account 17,500 10 Sold goods to Mahesh Chand & Co. for ₹ 32,000 at 5% trade discount 13 Received cash from Mahesh Chand & Co. 19,800 Discount allowed 200 15 Paid cash to Dilip 14,850 Discount received 150 20 Sold goods for cash 25,000 24 Sold goods for cash to Sudhir Ltd. 18,000 25 Paid for Rent 1,500 26 Received for Commission 2,000 28 Withdrew by Proprietor for his personal use 5,000 28 Purchased a fan for Proprietor's house 1,200 Solution 59 Journal In the Books of… Date Particulars L.F. Debit Amount (Rs) Credit Amount (Rs) 2017 Mar. 01 Cash A/c Dr. 80,000 To Capital A/c 80,000 (Business started with cash) Mar. 02 Purchases A/c Dr. 36,000 To Cash A/c 36,000 (Goods purchased for cash) Mar. 03 Machinery A/c Dr. 4,000 To Cash A/c 4,000 (Machinery purchased for cash) Mar. 04 Purchases A/c Dr. 52,000 To Raghu’s A/c 22,000 To Dilip’s A/c 30,000 (Goods purchased on credit from Raghu and Dilip) Mar. 06 Raghu’s A/c Dr. 4,000 To Purchases Return A/c 4,000 (Goods returned to Raghu) Mar. 08 Raghu’s A/c Dr. 18,000 To Cash A/c 17,500 To Discount Received A/c 500 (Cash paid to Raghu in full settlement) Mar. 10 Mahesh Chand & Co. Dr. 30,400 To Sales A/c 30,400 (Goods sold to Mahesh Chand & Co. at trade discount) Mar. 13 Cash A/c Dr. 19,800 Discount Allowed A/c 200 To Mahesh Chand & Co. 20,000 (Cash received from Mahesh Chand & Co.) Mar. 15 Dilip’s A/c Dr. 15,000 To Cash A/c 14,850 To Discount Received A/c 150 (Cash paid to Dilip) Mar. 20 Cash A/c Dr. 25,000 To Sales A/c 25,000 (Goods sold for cash) Mar. 24 Cash A/c Dr. 18,000 To Sales A/c 18,000 (Goods sold for cash) Mar. 25 Rent A/c Dr. 1,500 To Cash A/c 1,500 60 (Rent paid) Mar. 26 Cash A/c Dr. 2,000 To Commission A/c 2,000 (Commission received) Mar. 28 Drawings A/c Dr. 6,200 To Cash A/c 6,200 (Cash withdrawn and fan purchased for personal use) TOTAL 3,12,100 3,12,100 Mar.31 Balance c/d 650 Mar.08 Raghu’s A/c 500 Mar.15 Dilip’s A/c 150 650 650 2017 Apr.01 Balance b/d 650 Discount Allowed Account Dr. Cr. Amount Date Par culars J.F. Amount (Rs) Date Par culars J.F. (Rs) 2017 2017 Mar.13 Mahesh Chand & Co. 200 Mar.31 Balance c/d 200 200 200 2017 Apr.01 Balance b/d 200 Mahesh Chand & Co. Dr. Cr. Date Par culars J.F. Amount (Rs) Date Par culars J.F. Amount (Rs) 2017 2017 Mar.10 Sales A/c 30,400 Mar.13 Cash A/c 19,800 61 Discount Mar.13 200 Allowed A/c Mar.31 Balance c/d 10,400 30,400 30,400 2017 Apr.01 Balance b/d 10,400 Rent Account Dr. Cr. Amount Amount Date Par culars J.F. Date Par culars J.F. (Rs) (Rs) 2017 2017 Mar.25 Cash A/c 1,500 Mar.31 Balance c/d 1,500 1,500 1,500 2017 Apr.01 Balance b/d 1,500 Commission Account Dr. Cr. Amount Amount Date Par culars J.F. Date Par culars J.F. (Rs) (Rs) 2017 2017 Balance Mar.26 Mar.31 2,000 Cash A/c 2,000 c/d 2,000 2,000 2017 Apr.01 Balance b/d 2,000 Drawings Account Dr. Cr. Amount Amount Date Par culars J.F. Date Par culars J.F. (Rs) (Rs) 2017 2017 Mar.28 Cash A/c 6,200 Mar.31 Balance c/d 6,200 62 6,200 6,200 2017 Apr.01 Balance b/d 6,200 Sales Account Dr. Cr. Amount Amount Date Par culars J.F. Date Par culars J.F. (Rs) (Rs) 2017 2017 Mar.31 Balance c/d 73,400 Mar.10 Mahesh Chand & Co. 30,400 Mar.20 Cash A/c 25,000 Mar.24 Cash A/c 18,000 73,400 73,400 2017 Apr.01 Balance b/d 73,400 63 Trial Balance as on March 31, 2017 Name of Debit Credit L.F. Accounts Balances Amount (Rs) Balances Amount (Rs) Cash A/c 64,750 Capital A/c 80,000 Purchases A/c 88,000 Machinery A/c 4,000 Dilip’s A/c 15,000 Purchases 4,000 Return A/c Discount 650 Received A/c Discount 200 Allowed A/c Mahesh Chand 10,400 & Co. Rent A/c 1,500 Commission 2,000 A/c Drawings A/c 6,200 Sales A/c 73,400 Total 1,75,050 1,75,050 64
