Accounting

Definition of Accounting “Is the language of business. Accounting is both art and science keeping
record of financial transactions, processing and analyzing financial information of governmental and non
governmental enterprises.

It is also a process of collecting, recording, sorting, summarizing, presenting and communicating

data to relevant stake holders.

Collection Recording Sorting Summarizin

g

Book Keeping
Some people take “book keeping” and “accounting” as synonymous but they are different from each
other. Book keeping is mainly concerned with recording of financial data relating to the business
operations in a significant manner while Double entry book keeping is the system of recording financial
transaction. Where Debit (Dr.) and Credit (Cr.) is the main player of this system. (We will
follow in next chapter)

Before starting to learn the accounts we should know about few terminologies of accounts clearly. So,
there are some terminologies of account which are important for us.

• Asset : An Asset is something valuable which a business owns or has use of . assets can be divided into
current asset and non current asset.

Current Assets ............................................................................................................................................................

Non Current Asset::.....................................................................................................................................................

• Bad debts : a bad debt is a specific debt which is not expected to be repaid .
• Capital : Capital is an investment of money and other assets with intention of earning a return.
A business of proprietor invest money with intention of earning profit
• Credit : not paid yet , need to pay in future
• Creditors : To whom we should pay
• Discount : Discount is the reduction in the price of goods below the amount at which
those goods would normally be sold to other customers of the supplier. There are two kinds of
discount
• Cash discount :
………………………………………………………………………………………………. ..........................
..................................................................................................................................................
• Trade Discount …………...................................................................................................................................
………………………………………………………………………………………………………………………

• Drawings : Drawings are the amount of money taken out of a business by it’s owner
• Doubtful debts : a doubtful debt is specific debt which may be expected to be repaid.
• Debtors : From whom we should receive the amount
• Goodwill :
• Liability : A liability is something which is owned to somebody else. There are two kinds
of liability
Short Term Liability : ………………………………………………………………………….
…………………………………………………………………………………………………………
• Long Term Liability : …………………………………………………………………………
……………………………………………………………………………………………………….
• Invoice : Invoice is demand for payment

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 • Payables : an account payable results from the purchase by a business of items for later
payment. An account payable is a liability of the business.

• Prepayments : prepayments are payments which have been made in one accounting period,
but should not be wholly or partly charged against profit until a later period, because they relate
to that later period.
• Provision for doubtful debts : provision for doubtful debts is general estimate of the percentage
of debts which are not expected to be repaid.
• Receivables: An account receivable results from the sale by a business of items for later
payment. An account receivable is an asset of a business.

We should handle our accounting system in this way. The process of recording, posting and
summarizing accounting transaction is known as accounting cycle. It is same like the life cycle
of one human being.
Financial Transaction
Monetary Value (Example)

Journalize the
Transaction

Record in Ledger

Preparation of Final Account which consist the

Trading account, Profit and loss account and Balance
sheet

This cycle repeats regularly in one accounting period. Under this process, we should follow some rules and
regulation as well as accounting concepts and convention.
There are few basic accounting concepts:

1. Business Entity Concept: a business, for accounting purposes, is a separate entity from its owners.
2. Money measurement Concept: accounts only deal with items to which a monetary value can be
attributed.
3. Realization Concepts
4. Matching concepts: expenses are recognized in the income statement on the basis of a direct association
between costs incurred and the earning of specific items from income.

Rules and Regulation of Journal entry: There are two kinds of rules of journal entry booking
keeping system or rules of Debit Credit

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 Rules of Debit and Credit
According to classification of account
Increase /Decrease Rule, which is also
Accounting classified on the basis of
Known as modern rule
its nature
in this present accounting
Scenario
Personal Account: Account which is related with
person
Debit Credit
Assets Increase Decrease
Real account: Account which is related with Assets
Expenses Increase Decrease
Income Decrease Increase
Nominal Account : Account which is related with
Liability Decrease Increase
expenses , losses , income and gain
Capital Decrease Increase

Person Account: Account..............................................................................................................................

Person may be tangible or intangible e.g Jack, peter , Hari , Institution and others
Rule: Debit - Receiver
Credit - Giver

Real Account: Account..........................................................................................................................

Asset is something which we can covert in monetary value , for eg . cash, furniture , bank , goodwill and others
Rule: Debit - what comes in
Credit - what goes out

Nominal Account : Account ......................................................................................................................

Rule : Debit : All the expenses and losses

Follow by example : .....
Credit : All the income and gains
Follow by example :......
In the present world of accounting, rules under classification account is not followed. So, we follow increase
decrease rule at the time of double entry book keeping system.

Accounting Equation

As business is a separate entity from its owners and this is the basis of a fundamental rule of accounting, which is
that the assets and the liabilities must always be equal (the accounting equation).

Assets = capital + liabilities

Steps to deal with accounting equation

Step1. Need to deal with effected site between assets, capital and liability
Step2. Then it should be decided whether it will increase or decrease
Step3. If increase need to add, if decreases should subtract

Note: If any expenses is incurred it should be deducted from capital .Similarly if any income is received it should be
added in capital

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Accounting Equation is also called the accounting equation.

Transaction Assets = Capital + Liabilities

+ +
Capital Introduces

+ +
Loan Taken

Expenses - -

Income + +

Purchase of Assets +
-

Sale of Assets +
-

Outstanding Expenses - +

Accrued Incomes + +

Prepaid Expenses +
-
Advance Income + +

Solve the following problem:- HSEB 2056

Furniture purchased worth Rs 5,000
1. Goods bought on cash Rs 6,000
2. Goods sold on credit to Hari (cost Rs 4,000)Rs 5,000
Transaction Assets = Capital + Liabilities

1. Binod Started a Business Rs. 20,0000 Rs. 20,0000 0

Beginning Equation Rs. 20,0000 Rs. 20,0000 0

+ Fur 5,000
2. Furniture Purchased - Cash 5,000 0 0
New Equation Rs. 20,0000 Rs. 20,0000 0

+ Goods 6,000
3.Goods Purchased On Cash - Cash 6,000 0 0
New Equation Rs. 20,0000 Rs. 20,0000 0

4.Goods Sold on credit to Hari and the profit made + Cash 5,000 + Profit 1,000
thereby - Goods 4,000
Ending Equation Rs. 21,000 Rs. 21,000.

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 HSEB 2056
1. Commencement of business with Rs 15,000
2. Payment of rent Rs 1,500
3. Purchased goods from worth Rs 8,000
4. Sold goods to Miss Thapa worth Rs 6,000

Transaction Assets = Capital + Liabilities

SEB 2057
1. Capital introduced Rs 40,000
2. Assets purchased on credit Rs 10,000
3. Cash purchased made worth Rs 15,000
Transaction Assets = Capital + Liabilities

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 HSEB 2058
1. Starting a business with Rs 80,000
2. Purchased of furniture worth Rs 12,000
3. Purchased of goods for Rs 32,000
4. Sold goods on credit for Rs 20,000 (at profit of Rs 4,000)

Transaction Assets = Capital + Liabilities

HSEB 2059
1. Started a business with Rs 25,000
2. Paid wages and salaries of Rs 400
3. Purchased goods for cash amount of 12,000
4. Sold goods to Mrs. Rama for Rs 8,000
Transaction Assets = Capital + Liabilities

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 HSEB 2060
1. Roshan started a business with Rs 35,000
2. Goods purchased for RS 15,000
3. Paid Rs. 1,500 for rent including an advance rent of Rs 500
Transaction Assets = Capital + Liabilities

HSEB 2062
1. Started business with Rs 30,000
2. Salaries paid Rs 5,000
3. Purchased goods for cash Rs 8,000
4. Sold goods costing Rs 3,500 to Kiran for Rs 4,000
Transaction Assets = Capital + Liabilities

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 HSEB2063
Started business with Rs 1,00,000
Goods purchased Rs 60,000
Salary paid Rs 10,000
Paid rent Rs 3,000 including advance of Rs 1,000
Transaction Assets = Capital + Liabilities

Journal Entry
Journal is the important book of under the double entry book keeping system, which is known as the one of prime
entry of our booking keeping system. Journal records all daily transaction of a business in the order in which they
occur. A journal may be defined as a book containing a chronological record of transaction. It is the book in which
the transaction are recorded first of all under double entry book keeping system.

Objectives of Journal Entry

1. To keep the systematic record of financial transaction
2. To show the financial transaction in chronological order
3. To present the necessary information about the financial transaction
4. To use as legal evidence of financial transaction
5. To facilitate the preparation ledger books.

Performa of Journal Entry

Date Particulars LF Dr. Amt Cr Amt.

Date : The date on which the transaction was entered is recorded here
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Particulars : Two aspects of the transaction are recorded in this column
LF : It is not important for us
Dr. Amount : In this Column the amount to be debited is entered
Cr. Amount : In this Column the amount to be credited is entered

Rules for Journal Entry:

We have already discussed about the rules and regulation of journal entry. So see page no 3 and I suggest all of you
to follow the rule of increasing and decreasing for journal entry.

Particulars Debit Credit

Assets Increase Decrease
Expenses Increase Decrease
Income Decrease Increase
Liability Decrease Increase
Capital Decrease Increase

Compound Journal Entry consists of two or more than two simple kind of journal entry. In simply saying it is
combination of two or more than two journal entry.

An Example of compound Journal Entry

• Cash Paid RS. 2,500 to Sambhav on Asad 3,2063 in full settlement of his account Rs. 2,650 .

Individual Entry

Sambhav’s a/c Dr. Rs. 2500

To, Cash a/c Cr. Rs. 2500

Sambhav’s a/c Dr. Rs. 150

To, Discount a/c Cr. Rs. 150

Compound Entry

Sambhav’s a/c Dr. Rs. 2,650

To, Cash a/c 2500
To, Discount a/c 150

Journalize the following transaction

1. Started business with Rs. 50,000 out of which paid in Bank Rs. 10,000.
2. Bought Furniture for Rs. 5,000. and machinery for Rs. 10,000
3. Goods costing Rs. 15,000. bought from Mr. Smith
4. Withdraw for Person use Rs. 1,000.
5. Returned defective goods costing Rs. 2000 to Mr. Smith
6. Cash Rs. 2,000 received from Sanjay and allowed him discount Rs. 100
7. Goods destroyed by fire Rs. 45,000 and insurance company admitted claim for Rs. 40,000
8. Invested in Shares of Himal Cements Rs. 5,000 and paid brokerage charge 10%
9. Anup is declared as insolvent and a dividend of 50% received from him in ful settlement of his debt of Rs.
1,000.
10. Bought goods of Rs. 1,05,000 and received discount him 5%
11. Sold good on credit to Hari Rs. 65,000 and allowed him discount Rs. 5,000.
12. With drawn Rs. 5000 for person use

HSEB 2052
Journalize the following transaction in the books of B.K Bhandari
a) Cheque of Rs. 100 respectively received from SC puri in settlement of a debt now returned dishonored
b) Rs. 60 owing by SK prasad written off as bad debts
c) Anup is declared insolvent and a dividend of 50% received from him in full settlement of his debt of Rs.
1000.
d) Goods worth Rs. 500 were taken away by Mr. BK Bhandari for his domestic use
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 e) Goods returned from JN Sharma Rs. 300

HSEB 2053
Journalize the following transaction
a. Purchased goods worth Rs. 2,000 in cash and received Rs. 200 as discount
b. Paid Rs. 300 for office rent in cash
c. Paid Rs. 1,000 by cheque for full settlement of his credit of Rs. 1,200
d. Received Rs. 1,500 through Bank from B for settlement of the account of Rs. 1,600.
e. Bought office furniture from Z for Rs. 5,000 on credit

HSEB 2058
Journalize the following transaction
a. Unused furniture were disposed off Rs. 2,000.
b. Gateway Limited debtor Rs. 3,000 settled it’s account receiving cash discount of Rs. 125
c. Hari started own business with Rs. 22,000.
d. Amount due from Bhattarai Rs. 5,000 has been witted off as bad debts.
Journalize the following transaction in the book of Mr. Smith
1. Business started with Cash Rs. 15,000 , stock 10,000 , Furniture Rs. 10,000 , Motor vehicle Rs,
1,00,000.
2. He purchased goods costing Rs. 75,000. and paid 65% on cash and remaining on credit from Hari.
3. Cheque paid to Syam Rs. 15,000.
4. Sold good to shyam Rs. 10000 and allowed him discount Rs. 500
5. Depreciation of Furniture Rs. 10,000.
6. Baddebt found Rs. 1,500.

Important Questions to Solve

a. Describe the rules and regulation of Journal entry.

b. Write in brief about the Invoice
c. Explain the following Terms
i) Compound Journal
ii) invoice
iii) Cash Memo
iv) Pay in Slip
v) Cheque
vi) Debit Note
vii) Credit Note
viii) Bills of Exchange

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 Ledger

Ledger is the book which contains various accounts. In other words , Ledger is a set of accounts . It contains all
accounts of the business enterprises. It helps to post the transaction.

Posting means transferring the debit and credit item from the Journal to their respective accounts in the ledger. It
should be noted that the exact names of accounts used in the Journal should be carried to the ledger.

Example

1. Cash Paid to Ram Rs. 1500 . .

Soln : Ram a/c Dr. Rs. 1,500
To, Cash Cr. Rs. 1,500

2. Cash Bought in Business Rs. 15,000.

Soln : Cash a/c Dr. Rs. 10,000
To Capital a/c Cr. Rs. 10,000

3. Bought Furniture on Rs. 12,000.

Soln : Furniture a/c Dr. Rs. 12,000
To Cash a/c Cr. Rs. 12,000
4. Goods purchased on credit from Ram Rs. 12,000.
Soln : Goods a/c Dr. Rs. 12,000
To Ram Cr. Rs. 12,000

Ram a/c
Dr. Cr.

Date Particulars LF Amount Date Particulars LF Amount

1 To Cash a/c 1,500 4 By Goods 12,000
To balance c/d 10,500
Total 12,000 Total 12,000
By Balance c/d 10,200

Cash a/c
Dr. Cr.

Date Particulars LF Amount Date Particulars LF Amount

2 To Capital a/c 1,500 1 By Ram a/c 1,500
3 By Furniture 12,000
To Balance c/d 12,000
Total 13,500 Total 13,500
By Balance c/d 12,000

Capital a/c
Dr. Cr.

Date Particulars LF Amount Date Particulars LF Amount

To balance c/d 10,000 2 By Cash a/c 10,000
Total 10,000 Total 10,000
By balance c/d 10,000

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 Furniture a/c
Dr. Cr.

Date Particulars LF Amount Date Particulars LF Amount

3 To Cash 12,000 By Balance c/d 12000
Total 12,000 Total 12,000
To balance c/d 12,000

Goods a/c
Dr. Cr.

Date Particulars LF Amount Date Particulars LF Amount

4 To Ram a/c 12,000 By Balance c/d 12,000
Total 12,000 Total 12,000
To balance c/d 12,000

Question : Journalize the following Transaction and Record them in Ledger

2063 Rs.
Shrawan 1 Ramesh Started business with 10,000
Shrawan 2 Paid in to Bank 7,000
3 Bought goods for Cash 500
5 Drew Cash from Bank 100
13 Sold goods to Krisha on Credit 150
20 Bought from Shyam goods on Credit 225
24 Received From Krishna 145
Allowed Him Discount 5
28 Paid Shyam Cash 215
Discount Allowed 10
30 Cash sales for the month 800
Paid Rent 50
Paid Salary

Transaction
Credit Cash
Transaction
Transaction

All the credit transactions are recorded in All the Cash Transaction are Subsidiary Books
recorded in Cash Book.

Purchase Books: If Purchased made on credit, there are three Kind of Cash Book
we will our credit purchase transaction 1. Single Column Cash Book
in purchase Book. 2. Double Column Cash Book
- Cash and Bank Column
Sales Books: If sales made on credit, - Cash and Discount Column
we will our credit purchase transaction - Discount and Bank Column
in purchase Book. 3. Triple Column Cash Book
- Column of Cash, Bank and
Discount
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Purchase Return Books: Purchase Returns are
recorded in Purchase return Book

Sales Return Books: All the Sales returns are

recorded in this book

Cash Book is statement of Cash balance , where all cash receipts and payments are recorded.

Important Notes for Cash Book

• All the cash receipts are recorded in debit site of cash book
• and all the cash payments are recorded in credit site of cash book
• Opening balance is also put in the debit site of cash book
• In case of Bank and Cash transaction , we should do contra entry
• Debit site of discount column means expenses (i.e discount allowed) and credit site of discount column of
means income (Discount received)

Performa of cash Book

Single column cash book
Date particulars LF Amount Date Particulars LF Amount

Double column cash book ( With Discount and Amount Column)

Date Particulars LF Amt Discount Date Particulars LF Discount Amt

Double column cash book ( With Discount and Bank Column)

Date Particulars LF Bank Discount Date Particulars LF Bank Discount

Double column cash book (With Cash and Bank Column)

Date Particulars LF Bank Cash Date Particulars LF Bank Cash

Triple Column Cash Book

Date Particulars LF Bank Cas Discount Date Particulars LF Bank Cas Discount
h h

Record the Following transaction in the triple Column Cash Book

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