Financial Accounting II 1

ACCOUNTING

Introduction

Nowadays the main objective of the business is earning profit. A

businessman either purchase or sell the goods or service in order to earn
profit. It is easy to know the profit of the small business. But in large scale
business it is difficult to know the profit or loss because there are so many
transactions in the firm. In order to know the financial position, businessman
maintains accounts. Through this accounting every businessman can know
the financial position of the company. The important objectives of accounting
are

• To ascertain the profit of the business

• To ascertain the financial position of the business.

Accounting is the art of classifying, recording and summarizing all the

money and money’s worth transactions in the business in a significant
manner. Accounting is the process of the maintaining the all transactions in
the books.

Definition:

“Accounting is art of classifying, recording and summarizing in a

significant manner in terms of money or money’s worth transactions which is
in part, at least financial character and interpreting the results their of.”

“Accounting is the art of classifying, recording and summarizing all the

money and money’s worth transactions in the business in a significant
manner.”

Need for Accounting:

To earn profit a businessman will either purchase or sell it in another

market at higher price of will convert the raw materials into finished goods.
In order to achieve the above objective it would be necessary to record
business transactions in a systematic manner. Book keeping and accounting
is the name given to search a system.

Objectives of Accounting:

1. To ascertain whether the business operations have profitable or not:

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Accounting helps us to know whether a business has earned

profits or suffered loss during the accounting period. It will give us an
idea of efficiency of the business. In the process of determination of
profit or loss for the accounting period, a trading and profit and loss
account or an income statement is prepared by matching revenues
and expired costs incurred for earning the revenues.

2. To ascertain the financial position of the business:

Balance sheet or position statement is prepared to give an idea

of the financial position of the business on a particular date. The
financial position of an enterprise is indicated by its assets on a given
data and its liabilities on that date. Excess of assets over liabilities
represent the capital is indicative of the financial soundness of an
enterprise.

3. To generate information:

Accounting records generate information which may be helpful to

various persons in planning, control, evaluation of performance and
decision- making.

Functions of Accounting:

1. Systematic record of business transactions:

To keep systematic record of business transactions, post them to

the ledger and ultimately to prepare the final accounts is the first main
function of accounting.

2. Protecting the property of the business:

To perform this function the accounting has to device such a

system of recording information so that assets of the business are not
put to wrong use and a complete record of the asset of the concern is
available without any difficult.

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3. Communicating the results to interested parties:

This function requires to supply meaning ul information about

the financial activities of the business to the various parties i.e.
owners, creditors, investors, employees, govt., managers, etc at the
right time.

4. Compliance with legal requirements:

The accounting system must be in such a way that it should be

able to comply with the legal requirements. Under various enactments
a business man is required to file various statements like income tax
returns, sale tax, etc.

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Branches of Accounting:

Financial accounting:
The main purpose of this branch accounting is to ascertain profit or
loss during a specific period, to show financial position of the business on a
particular date and to have control over the firm’s property such accounting
records are used to impart useful information to outsiders and to meet the
legal requirements.

Cost Accounting:

The main aim of cost accounting is to ascertain cost relating of various

activities of the business and to have cost control. The cost accountant is
required to assemble and interpret cost data for the use of management in
controlling current operations and in planning for the future.

Management Accounting:

It supplies the management significant information in order to assist

the management to discharge its various functions such as planning, control,
evaluation of performance and decision making, etc.

Advantages of Financial Accounting:

Replacement of memory

Evidence in court

Settlement of taxation liability.

Comparative Study

Sale of Business

Assistance to the insolvent person

Assistance to various parties

Limitations of Accounting:

Record only monetary transactions

Effect of price level changes not considered

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No realistic information

Personal bias of accountant affects the accountant statement.

Permits alternative treatments

No real test of managerial performance

Historical in nature

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Book Keeping:

Book keeping concerned with regarding day to day business

transactions in book of original entry and the ledger. It is a part of account
purpose concerned only with the original records of transactions. Book
keeping provides the basis for accounting. It is performed by book-keepers
or junior clerk. Types of book keeping methods are

Single entry System

Double entry System

Accounting Principles:

Accounting is the language of business to make the language convey

the same meaning to all people. Accountants all over the world follow some
kind of rules, procedures, and principles. The term principle refers to
fundamental belief or a general truth which one are followed in accounting.

Some of the Accounting principles are the Accounting concepts and

Accounting Convention.

Accounting Concepts are

• Business entity concept

• Money measurement concept

• Going concern concept

• Cost concept

• Dual concept

• Accounting period concept

• Realization concept

Accounting Conventions are

• Consistency
• Full disclosure
• Conservatism
• Materiality

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Business entity concept:

According to this concept business the owner take any cash or goods
from business in the form of drawing. Account is debited and cash or goods
account is credit other wise the personal business transaction will get mixed
up account.

Money measurement concept:

While recording the business transaction we don’t record them in

terms of kilograms, meter etc. we record them in a common denomination
so as to see that they became homogenous and meaningful. It is adopted as
the common measuring unit. Hence, regarding is done in terms of standing
currency of the country were the business is setup we have remembered
that only those transactions and events, which can expressed in terms of
money are record in books of account.

Going concern concept:

It is assumed that the business continued for a long time with this
assumptions. Fixed assets are recorded at the original cost keeping this
assumption in view, prepaid expenses are not treated as the expenses of the
year in which they are incurred it is assumed that the business diverse the
benefit out of it in the years to common.

Cost concept:

Usually, all the transactions will be recorded at cost in the books.

However, at the end of every year the accountant show the reduced value of
the asset, after provided descriptions. This approach is preferred because it
is difficult and time consuming ot ascertain the market values.

Dual aspect concept:

According to this concept , each transactions has to be effect the

receiver of the benefit and give of benefit, the receiving aspects in term as
Debit. Where as the give accept as Credit.

Accounting period concept:

Accounting period is the followed by business concerned for

maintaining accounts to know profit or loss. Usually once year will be
accounting period to start from I April and end to 31 March or I January to 31
December.

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Matching concept:

According to this principle, the expenses incurred in a n accounting

period should be matched with a an revenues recognized in that period. If
revenue is recognized on all goods sold during period cost of those goods
sold also be charged to that period.

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Accounting Cycle:

There are four phase in accounting cycle. The following are the four stages in
accounting process

1. Recording the transactions:

The next stage is recording all the business transaction in the

accounts book. It is recorded in the books of original entry. It is
called journal.

2. Classifying the transactions:

The first stage of accounting is classifying all the accounts in

transaction. Classifying all the accounts in the books called
ledger.

3. Summarizing the transactions:

The next step is to prepare a year end summary known as final

account. Before preparing the final accounts we have to prepare
a statement called a Trail Balance.

4. Interpreting Results:

The last phase is analyzing and interpreting the result show by

final account. These involve computation of various accounting
ratios.

Financial Transactions:

A transaction means exchange of goods or service in terms of money or

money’s worth between two parties. Transactions in terms of finance or in
money terms are called as financial transactions. Transactions in business
are in two types

Cash transactions

Credit transactions

Classifications of Accounts:

All business transactions are broadly divided into 3 categories

Those relating to persons in the business

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Those relating to properties, assets.

Those relating to incomes, expenses, losses and gains.

These Accounts have been divided into mainly 3 types. They are

1. Personal Account

2. Real Account

3. Nominal Account

1. Personal Account: Accounts which are related to

persons, names, firms, organization.

E.g.:- Ramu A/c, Seeta A/c, State Bank of India A/c, Capital A/c.

Rule: Debit the Receiver

Credit the Giver
2. Real Account: Accounts which are related to Assets.

E.g.:- Land & Building A/c, Machinery A/c, Cash A/c.

Rule: Debit what comes in

Credit what goes out

3. Nominal Account: Accounts which are related to income,

expenses, loss and profits.

E.g.:- Rent A/c, Discount A/c, Commission A/c,

Rule: Debit all Expenses and losses

Credit all Incomes and Gains

Journal

Journal is the first phase in recording transactions. Journal word derived

from Latin word “Journ” which means ‘a day’. Journal means a day book
where day to day transactions are recorded in chronological order. Journal

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treated as the book of original entry or prime entry of all transactions. All the
business transactions are recorded in this book first. The process of
recording the transactions in journal book is called Journalizing. The entries
made in the book are called “journal entries”.

Journal is the complete and chronological record of all business

transactions. It is called as Book of Original Entry. The process of recording
the transactions in journal book is called Journalizing. The entries made in
the book are called “journal entries”.

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Proforma of Journal

Journal Entries in the books of XXX

Date Particulars L.F.N Debit Credit

o Amount Amount

Ledger Folio No.

Date of Debit Credit
where the
Transaction Amount is Amount is
transaction is
are recorded entered entered
recorded in ledger

In the particular column deals with the accounts effected in

transaction. In first line we write the debit account name with adding “Dr” at
the end and in second line we add “To” in front of the account name. After
entering the Debit and Credit Account names and narration is written after
the accounts name. narration means brief explanation of a entry. Every
journal entry must be followed by narration.

Eg:- Goods Sold for cash

Cash A/c Dr xxx

To Sales A/c xxx
(Being Goods sold for cash)-------------- Narration
Goods A/c:-

In case transaction related to goods we have to use Goods A/c by

following accounting principles. In Accounting, instead of Goods A/c the
following is used

If goods are purchased we use ----Purchase A/c

If goods are sold we use ----Sales A/c

If goods are returned by us ----Purchase Return A/c

If goods are returned to us ----Sales Return A/c

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Composite Journal Entry:-

Some times two or more transactions of the same nature taken place
at same date. Instead of making a separate entry for each transaction it brief
to commons them and give command entry such entry recorded a number of
transactions are term end as compound journal entry. In case of compound
journal entry the total of debit is equal to total of credit. These are some
ways for compound entry

One account may be debited while there are several accounts are
credited

One account may be credited while there are so many accounts

debited.

Several accounts may be debited and also credited.

Eg:- 24- mar Purchased Furniture -25000, Machinery – 15000

Furniture A/c Dr 25000

Machinery A/c Dr 15000

To Cash A/c 40000

(Being Furniture and machinery are purchased)

Discount: Discount is two types Discount Received and Discount Allowed.

Discount Received:

Discount Received is income to the business. It is nominal account. It is

credited in the entry. It is happened only when Cash Paid and Purchase is
made.

E.g.: Cash paid to raju 5000 and discount allowed by him 100

Raju Ac Dr 5000

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To Cash Ac 4900

To Discount Re Ac 100

Discount Allowed:

Discount Allowed is expenses to the business. It is nominal account. it

happens only when Cash is received and Sales Is made. It is debited.

E.g.: Cash received from Raju 5000 and discount allowed 100

Cash Ac Dr 4900

Discount Allow Ac Dr 100

To Raju Ac

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Pro:- Prepare Journal Entries for the following transactions of

Karan Co

March 2008

1 Chandra started business Cash- 100000,Building- 50000,

Furniture- 25000

3 Cash Deposited in bank 10000

5 Goods purchased from Good luck co. 50000

7 Goods sold to bad ltd. 60000

9 Machinery purchased 35000

11 Goods with drawn by owner 3000

13 Goods distributed as sample 2500

15 Cheque received from bad ltd. 30000

17 Cheque received from good luck ltd25000

20 Old newspaper sold 1000

27 Cash withdrawn from bank for personal use 3000

30 Salary paid 15000

Rent paid 2500

Commission paid 1500

31 Discount received 1000

Rent received 500

Commission 2500

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Journal Entries in the books of Karan Co

Date Particulars L.F.No. Amount Amount

2008 Cash A/c Dr 100000

Building A/c Dr 50000
Mar -1 Furniture A/c Dr 25000
To Capital A/c 175000
(Being capital brought
into business)
-3 Bank A/c Dr 10000
To Cash A/c Dr 10000
(Being cash deposited
into bank)
-5 Purchase A/c Dr 50000
To Good Luck A/c 50000
(Being credit purchase
made) 60000
-7 Bad ltd A/c Dr 60000
To Sales A/c
(Being Credit sales 35000
made) 35000
-9 Machinery A/c Dr
To Cash A/c
(Being machinery 3000
purchased with cash) 3000
-11 Drawings A/c Dr
To Purchase A/c
(Being cash withdrew 2500
from bank) 2500
-13 Advertisement A/c Dr
To Purchase A/c
(Being goods distributed 30000
as sample) 30000
-15 Bank A/c Dr
To Bad ltd A/c
(Being cheque received 25000
from bad ltd) 25000
-17 Good luck ltd A/c Dr
To bank A/c
(Being cheque given to
good luck ltd)

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-20 Cash A/c Dr 1000

To Old Newspaper 1000
A/c
(Being old newspaper 3000
-27 sold) 3000
Drawings A/c Dr
To Bank A/c
(Being cash withdraw 15000
-30 from bank for personal 2500
use) 1500
Salary A/c Dr 19000
Rent A/c Dr
Commission A/c Dr 4000
To Cash A/c 1000
-31
(Being expenses paid) 500
Cash A/c Dr 2500
To Rent A/c
To Commission A/c

LEDGER

After recording all the business transactions in Journal, the next stage
is posting the journal to ledger. Journal records all business transactions in
entry level and date wise. After journal it is shown as separate aspects such
as income, expenses, person, assets, etc. As it is difficult to know the
accounts individual balances in journal.

A ledger is a principal book which contains all the accounts individually

like assets, persons, liabilities, income, expenses, etc. It is maintained in
double entry accounting system. This ledger is called as book of final entry. A
ledger account may be defined as a summary statement of all the

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transactions relating to persons, assets, expenses or income which have

taken place during a financial period.

Dr Ledger Proforma
Cr

Date Particulars Amount Date Particulars Amount

Debit Side Credit side

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Dr Cash Ac
Cr

Date Particulars Amount Date Particulars Amount

To Capital By Bank

By Machinery

Dr Capital Ac
Cr

Date Particulars Amount Date Particulars Amount

To Capital By Cash

Dr Drawings Ac
Cr

Date Particulars Amount Date Particulars Amount

To Purchase

Dr Furniture Ac
Cr

Date Particulars Amount Date Particulars Amount

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To Capital

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Dr Building Ac
Cr

Date Particulars Amount Date Particulars Amount

To Capital

Dr Machinery Ac
Cr

Date Particulars Amount Date Particulars Amount

To Cash

Dr Bank Ac
Cr

Date Particulars Amount Date Particulars Amount

To Cash By Bad ltd.

To Good luck

Dr Purchase Ac
Cr

Date Particulars Amount Date Particulars Amount

To Good Luck By Drawings

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Dr Sale Ac
Cr

Date Particulars Amount Date Particulars Amount

By Bad Ltd.

Dr Bad ltd. Ac
Cr

Date Particulars Amount Date Particulars Amount

To Capital

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