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1. Fundamental principles and basic concept of Accounting.

Financial Accounting: Nature and scope, Limitations of Financial Accounting,

Basic concepts and Conventions, Generally Accepted Accounting Principles.

Basic concepts of accounting: Single and double entry, Books of original Entry,
Bank Reconciliation, Journal, ledgers, Trial Balance, Rectification of Errors,
Manufacturing, Trading, Profit & loss Appropriation Accounts, Balance Sheet
Distinction between Capital and Revenue Expenditure, Depreciation Accounting,
Valuation of Inventories, Non-profit organisations Accounts, Receipts and Payments
and Income & Expenditure Accounts, Bills of Exchange, Self Balancing Ledgers.

o DO - Debit order
o SO - Standing order
o IS - Insurance
o SF - Service fees
o CO- Credit order


Assets: An asset may be defined as anything of use in the future operations

of the enterprise & belonging to the enterprise. E.g., land, building,
machinery, cash etc.
Equity: In broader sense, the term equity refers to total claims against the
enterprise. It is further divided into two categories (Owner Claim Capital,
Outsiders Claim Liability )
o Capital The excess of assets over liabilities of the enterprise. It is the
difference between the total assets & the total liabilities of the
enterprise. e.g.,: if on a particular date the assets of the business
amount to Rs. 1.00 lakhs & liabilities to Rs. 30,000 then the capital on
that date would be Rs.70,000/-.
o Liability: Amount owed by the enterprise to the outsiders i.e. to all
others except the owner. e.g.,: trade creditor, bank overdraft, loan etc.
Revenue: It is a monetary value of the products or services sold to the
customers during the period. It results from sales, services & sources like
interest, dividend & commission.
Expense/Cost: Expenditure incurred by the enterprise to earn revenue is
termed as expense or cost. The difference between expense & asset is that
the benefit of the former is consumed by the business in the present whereas
in the latter case benefit will be available for future activities of the business.
e.g., Raw material, consumables & salaries etc.
Drawings: Money or value of goods belonging to business used by the
proprietor for his personal use.
Owner: The person who invests his money or moneys worth & bears the risk
of the business.
Sundry Debtors: A person from whom amounts are due for goods sold or
services rendered or in respect of a contractual obligation. It is also known as
debtor, trade debtor, accounts receivable.
Sundry Creditors: It is an amount owed by the enterprise on account of
goods purchased or services rendered or in respect of contractual ob
Deferred expenditure: Deferred expenditure is that amount of expenditure
that has been incurred but not charged to profit and loss account and
postponed for charging against a future period with the argument that the
benefit of the expenditure would last over the future period
o Ex: R&D Expenditure

Financial Accounting:

In business numerous transactions take place every day. The recording of those
business transactions is the main function served by Accounting.


The objectives of accounting can be stated as follows:

1. To maintain systematic records: Accounting is used to maintain
systematic record of all financial transactions like purchase and sale of goods,
cash receipts, cash payments, and various assets and liabilities of the
2. To ascertain net profit or net loss of the business: A proper record of
all, income and expenses help in preparing a Profit and Loss Account.
3. To ascertain the financial position of the business: A systematic record
of assets and liabilities facilitates the preparation of Balance Sheet which
provides the necessary information about the current financial position of the
4. To provide accounting information to interested parties: It provides
information to owners, bankers, creditors, tax authorities, prospective
investors etc in the form of annual report.

In the words of the Committee on Terminology, appointed by the American Institute

of Certified Public Accountants, Accounting is the art of recording, classifying and
summarising in a significant manner and in terms of money, transactions and
events which are, in part at least, of a financial character and interpreting the
results thereof. This is a popular definition of accounting and it outlines fully the
nature and scope of accounting activity.
The scope of accounting can, therefore, be outlined as follows:
1. Identifying the transitions of financial nature with the help of bills and
2. Measuring and expressing in terms of money
3. Recorded in a book called Journal or in one of its sub-divisions.
4. Posting of similar transaction in specific ledger.
5. Summarising the ledgers data periodically (at least once a year) as Profit and
Loss statement to reveal profit or loss and a Balance Sheet to know the
financial position of the business.
6. Analysing the results with the help of statistical tools like ratios, averages,
etc., & communicating in as report to the interested parties.

According to G.A. Lee, the accounting system has following two stages :
Stage i) the making of routine records, in prescribed form and according to
set rules is called Book-keeping.
stage ii) the summarisation as Profit & loss statement and Balance sheet and
interpreting the financial result and further communication to interested
parties is called accounting.

The term Accountancy refers to a systematised knowledge of accounting and is

regarded as an academic subject like economics, statistics, chemistry, etc.

Following people are interested in examining the financial information to study the
present position of business, compare its present performance with that of its past
years, and compare its performance with that of similar enterprises.
Owners: Owners wants to know profit or loss and financial position of the
Managers: Managers use Accounting information to plan, control, evaluate
all business activities and make various decisions.
Lenders: Before lending; money, lenders would like to know about the
solvency (capacity to repay debts) of the enterprise.
Creditors: Creditors too want to know about credit worthiness of the
Prospective Investors: Prospective partners or shareholders would like to
know the safety of the proposed investment.
Tax Authorities: Governments Tax authorities are interested in the financial
statements to assess the tax liability of the enterprise.
Employees: The employees of the enterprise are also interested in knowing
the state of affairs to know safety of their interests.
Branches of Accounting

Following are the special branches of accounting.

Financial accounting: Financial Accounting is mainly confined to the
preparation of financial statements and their communication to the interested
Cost Accounting: The purpose of cost accounting is to analyze the
expenditure to ascertain the cost and fix the prices. It helps in controlling the
costs and providing necessary costing information to management for decision
Management Accounting: The purpose of management accounting is to
assist the management in taking rational policy decisions and to evaluate the
impact of its decisions and actions.
Merits of Accounting
1. Replaces memory: Any information required at any time can be easily
divulged from the accounting records.
2. Provides control over assets: Information about various other assets helps
in making their use in the best possible way.
3. Facilitates the preparation of financial statements: The profit and Loss
account and the Balance Sheet can be easily prepared with the help of
accounting records, which enable the businessman to know the net result of
business operations and the financial position of the business.
4. Meets the information requirements: It helps various interested parties
in their decision making.
5. Facilitates a comparative study: One can easily compare the present
performance of the enterprise with past or similar organisations.
6. Assists the management in many other ways: It helps management in
taking rational decisions and in planning and controlling all business activities.
7. Difficult to conceal fraud or theft: It is difficult to conceal fraud, theft, etc.
because of the periodic balancing of books of account and division of book-
keeping work among many persons
8. Tax matters: Properly maintained accounting records will help in the
settlement of all tax matters with the tax authorities.
9. Ascertaining value of business: In the event of sale of a business firm, the
accounting records help in ascertaining the correct value of business.
10. Acts as reliable evidence: Systematic record of business transactions is
generally treated by courts as good evidence in case of disputes.
Limitations of Accounting

The limitations of accounting are as follows:

1. They do not record transactions and events which are not of a financial
character like quality of human resources, licenses possessed, locational
advantage, business contacts, etc.
2. The data is historical in nature- The accountants adopt historical cost as the
basis in valuing and reporting all assets and liabilities. It is quite possible that
items like land and buildings may have much more value than what is stated
in the balance sheet.
3. Facts recorded in financial statements are greatly influenced by accounting
conventions and personal judgments. Hence, they do not reveal the true
4. Data provided in the financial statements is insufficient for proper analysis
and decision making.

Certain rules and conventions adopted as guidelines for book-keeping and

accounting are termed as Generally Accepted Accounting Principles or Basic
accounting concept. This brings about uniformity in the practice of accounting.
Concepts to be observed at the recording stage
Business Entity Concept: From the accounting point of view every business
enterprise is an entity separate and distinct from its proprietor(s) /owner(s).We
record transactions related to the business only not the personal expenditure of
The owner is treated as a creditor and the capital invested is regarded as a liability.
It applies to all forms of business organisations.
Money Measurement concept: Money is adopted as the common measuring unit
for the purpose of accounting. Because, transaction measured in different unit like
meter, litre, and Kg will be impossible to be worked out.

Non-monetary happenings like death of an efficient manages or the
appointment of an accountant, howsoever important they may be, are not
recorded in the books of account.
The value of money changes over a period of time. That is why the
accounting data does not reflect the true and fair view of the affairs of the
Objective Evidence Concept: All transactions should be evidenced and supported
by documents such as invoices, receipts, cash memos, etc. for their verification by
auditors afterwards. Although, the items like depreciation and the provision for
doubtful debts where no documentary evidence is available, the policy statements
made by management are treated as the necessary evidence.
Historical Record Concept: we record only those transactions which have
actually taken place. It is because accounting records are to be objectively
evidenced and recorded in chronological (date wise) order. Although, we make
provision for some expected losses such as doubtful debts. This is done only at the
time of ascertaining the profit or loss of the business in accordance with
Cost Concept: According to the cost concept, all assets are recorded in books at
their original purchase price. However, the cost of assets may systematically be
reduced from year to year by charging depreciation as a fixed percentage and
shown in the balance sheet at the depreciated value.
Dual Aspect Concept: Every transaction has two-fold effect. For example, if you
purchase a machine increases one assets and decreases another asset i.e. cash.
This principle is the core of double entry book-keeping and if this is strictly followed,
it is called Double Entry System of Book-keeping.

As per the dual aspect concept a contribution to the business, either in cash or kind,
not only increases its resources (assets), but also its obligations (liabilities/equities)
correspondingly. Thus, at a given point of time, the total assets and the total
liabilities must be equal. This equality is called balance sheet equation or
accounting equation.

Liabilities (Equities) = Assets or Capital + Outside Liabilities = Assets

The term assets denotes the resources (property) owned by the business while the
term equities denotes the claims of various parties against the business assets.
Equities are of two types: (i) owners equity, and (ii) outsiders equity. The total
assets of a business will always be equal to its liabilities.

Book-keeping is the art of recording business transactions in a systematic manner.

Broadly, there are two systems of book-keeping:
(i) Double Entry System: Every business transaction has two aspects: (i) the
receiving, and (ii) the giving. When we record the transactions, it effects both the
aspects equally. This method of recording business transactions is called Double
Entry System. Receiving aspect is debited and giving aspect is credited. Thus, for
every debit there will be an equivalent credit.
Advantage of Double Entry System:
1. It provides complete and reliable record of all business transactions because
it records both the aspects.
2. It supplies full information about the incomes, expenses, assets and liabilities
of the business.
3. The arithmetical accuracy of the books of account can be easily verified by
preparing a trial balance.
4. The financial result of business organisations i.e. profit or loss and financial
position can be correctly ascertained.
Single Entry System

It refers to incomplete records or the defective double entry system. The Single
Entry System is a mixture of double entry, single entry and no entry. In such system,
arithmetical accuracy cannot be checked, because a trial balance cannot be
prepared. It also becomes difficult to ascertain the correct amount of profit or loss.
This system is normally followed by small business firms.

An account is a summarised record of all transactions relating to a particular person,

a thing, or an item of income or expense. It is vertically divided into two halves and
resembles the shape of the English alphabet T.


All business transactions are broadly classified into three categories:

(i) Personal Account Accounts in the name of persons, other firms, other
companies or institutions

Example:Rameshs A/c, Hiralal & Sons Account etc.

The accounts which represent expenses payable, expenses paid in advance incomes
receivable, and incomes received in advance are called Representative Personal
Account. For example, Salaries Outstanding Account

(ii) Real Account those relating to property (assets). Examples: Cash Account,
Furniture Account, Machinery Account, Building Account, etc.,

(iii) Nominal Account those relating to incomes and expenses. Examples: Wages
Account, Salaries Account, Commission Received Account, and Interest Received
Note: Real and Nominal Accounts taken together are called Impersonal

For convenience, three different rules have been laid down for the three classes of
accounts :

For Personal Accounts: Debit the receiver and credit the giver.

For Real Accounts: Debit when an asset comes in and credit when goes out.

For Nominal Accounts: Debit all expenses and losses and credit all incomes and

The accounting process consists of the following four stages:

i) Recording the Transactions: All transactions are recorded in the book of
original entry called Journal in a chronological order (datewise) with the help of
various vouchers, such as cash memos, cash receipts, invoices, etc.
ii) Classifying the Transactions: Grouping the transactions of similar nature and
posting them to the concerned accounts in another book called Ledger.
iii) Summarising the Transactions: Then Trial balance is prepared to check
arithmetic accuracy of recording process. Then, we prepare the final accounts
consists of Trading and Profit and Loss Account to reveal profit or loss during the
year and Balance Sheet to know the position of assets and liabilities at the end of
the year.
iv) Interpreting the Results: This involves computation of various accounting
ratios to assess the liquidity, solvency, and profitability of the business. The
balances on various accounts appearing in the Balance Sheet will then be
transferred to the new books of account for the next year, Thereafter the process of
recording transactions for the next year starts again.

Generally Accepted Accounting Principles

o The procedure to record all these transactions is known as Book-
keeping - an activity concerned with the recording of financial data
relating to business operations in an orderly manner
Generally Accepted Accounting Principles (GAAP) is a term used
to describe, broadly, the body of principles that governs the
accounting for financial transactions underlying the preparation
of a set of financial statements.
Efficient system of Book Keeping is necessary for good
o Accounting principles are the rules based on assumptions, customs,
usages and traditions for recording transactions.
o Char of acc principles objectivity, application, reliability, feasibility,
o Accounting concepts separate entity, money measurement, dual
aspect, going concern, cost, accounting period, matching concept,
Separate entity/ business entity concept business is treated as
a unit or entity apart from its owner, creditors and others.
Money measurement - Qualities like workforce skill, morale,
marketleadership, brand recognition, quality of management etc
cannot be quantified in monetary terms and so not accounted
for in books of accounts
The money measurement concept increases the true
understanding of the state of affairs of the business.
Double aspect - every debit, there is a corresponding credit
double entry principle
Going concern - Going Concern Concept does not imply
permanent continuation of the enterprise, indefinitely rather
presumes enterprise will continue for long enough
Cost concept Cost concept brings the advantage of objectivity
in the prep and presentation of financial statements. In the
absence of this concept, accounting records would have
depended on the subjective views of the persons
fixed assets are valued at the historic cost, original price
at which they are acquired, for all the years.
Cost concept is applied to fixed assets only but not on
Current assets
Accounting period concept The longer duration of business is
divided into appropriate periods generally 1year for studying the
After each period, it is necessary to stop and see back
how things have been going. So, it is necessary to
maintain accounts with reference to a specific period.
Matching Concept periodic matching of costs and revenue in
order to make maximum profits and to avoid misleading results.
Matching concept req suitable adjustment for Deferred
Realization concept profit is recognized as and when it is
Sale is deemed to have taken place, when the title to the
property or goods passes from the seller to the buyer
after the buyer receives the goods/ services
Time of transfer of property is material as that point
determines the time of recognition of Profit.
o Accounting conventions conservatism, consistency, materiality,
full disclosure
Conservatism (playing safe)
based on the principle that Anticipate no profit, but
provide for all possible losses.
It provides guidance for recording transactions in the
books of accounts
Objective show minimum profit/ profit shouldnt be
Significance ascertains original profit, helps maintain
capital of enterprise and useful in situations of
uncertainties/ doubts
same accounting principles should be used for preparing
financial statements year after year.
this can be possible only when accounting policies and
practices followed by enterprise are uniform and
consistent over a period of time
Charging depreciation, valuation of unsold/ closing stocks
Types Vertical (same org), Horizontal (time basis),
Dimensional (two orgs of same trade)
Full disclosure
all material and relevant facts concerning financial
statements should be fully disclosed
Full disclosure means that there should be full, fair and
adequate (sufficient) disclosure of accounting information
Significance it helps meaningful comparison of fin stmts
of different business units
to make financial statements meaningful, only material
fact i.e. important and relevant information should be
supplied to the users of accounting information
Material fact means the information of which will influence
the decision of its user.
according to this convention important and significant
items should be recorded in their respective heads and all
immaterial or insignificant transactions should be clubbed
under a different accounting head
Significance it helps minimize errors, make fin stmt
meaningful and save time and resources while accounting

o Accounting Cycle
Opening of balances of accounts, day-to-day business
transactions of accounting year are first recorded in Journal
Periodically these transactions are transferred to concerned
accounts known as ledger accounts
At the end of every year these accounts are balanced & trial
balance is prepared
Then the final accounts viz., trading, profit/loss accounts are
Finally balance sheet made which gives fin position of business
at end of yr
o Final accounts and Balance sheet are the end products of Book Keeping
o Need for GAAP
To be logical & consistent in recording the transaction
To confirm to the established practices & procedures
o Fundamental Assumptions for Accounting/ GAAP
Going concern a balance sheet which is prepared on the basis
of record of facts on historical costs cannot show the true or real
worth of the concern at a particular date. The underlying
principle there is that the earning power and not the cost is the
basis for valuing a continuing business
Business to continue indefinitely; financial and accounting
policies followed to maintain continuity of business unit
Consistency uniformity in accounting processes and policies
from one period to another should be followed so that the results
disclosed in fin stmt will be uniform and comparable.
Accruals - It is the accounting process of recognizing assets,
liabilities or income amounts expected to be received or paid in
Ex - purchases and sales of goods or services on credit,
interest, rent (unpaid), wages and salaries, taxes
Asset Accts tangible and intangible assets
Liabilities Accts fin obligations of the firm to the
Capital accts relates to owners of the enterprise
Revenue accts amount charged for goods sold or
services rendered or permit others to use enterprises
resources for royalty/interest/dividend
Expenses accts amount spent or lost in the process of
earning revenue

Single entry Vs Double entry

Single Entry Double Entry

The system of accounting in which The accounting system, in which every
only one sided entry is required to transaction affects two accounts
record financial transactions is Single (duality) simultaneously, is known as the
Entry System. Double Entry System.
Simple Complex
Type of recording is Incomplete Type of recording is Complete
Errors are Hard to identify Errors are easy to locate
Accounts opened are Personal and Accounts opened are Personal, nominal
cash section (trial balance cannot be and real accounts (trial balance can be
calc) prepared)
Preferable for small enterprises Preferable for big enterprises
Preparation of financial stmt is Preparation of financial stmt is easy
Not suitable for tax purposes Suitable for tax purposes
Revenue (gains) and Expenditure(in Revenue and expenditure are noted in
brackets) are written in serial order two different tables(accounts)
Preferred for companies with cash
basis accounting, few transactions
per day,

Books of original entry

o Accounting journals in which business transactions are initially recorded. The
information in these books is then summarized and posted into a general
ledger, from which financial statements are produced.
o Manual accounting journals (cash journal, purchase journal, general journal,
sales journal, etc.) where financial transactions are recorded for the first time.
In computerized accounting, data is entered only once and is automatically
reflected in all associated 'books.'
Common type of journal used in keeping a chronological record of financial
transactions of a firm not belonging to other (special) journals, or where
no special journal exists
Book of first entry for sales invoices issued to customers for goods
supplied or services rendered. Entries from this journal are posted to
individual customer accounts, their totals are posted to the ledger as a
debit to accounts receivable and as a credit to sales.
Bank Reconciliation - a process that explains the difference between the bank
balance shown in an organization's bank statement, as supplied by the bank,
and the corresponding amount shown in the organization's own [accounting]
records at a particular point of time.
o It may be easy to reconcile the difference by looking at very recent
transactions in either the bank statement or the organisation's own
accounting records (cash book) and seeing if some combination of
them tallies with the difference to be explained.
o Otherwise it may be necessary to go through and match every
transaction in both sets of records since the last reconciliation, and see
what transactions remain unmatched.
o Bank reconciliation statement is a statement prepared on a particular
day to reconcile the bank balance as per Cash book or Bank statement
showing entries causing difference between the two balances.
o Outstanding checks the checks written by the company in the days
immediately before the date of the bank statement will not have
cleared (been deducted from) the checking account. These are called
outstanding checks
o Deposit in the transit - company received money on the closing date
of the bank statement and properly recorded the amount in its records.
However, the money was deposited into the bank too late in the day
and will appear on the next bank statement. This is known as a deposit
in transit.

Not-for-profit Organizations

Organisations which are set up for providing service to its members and the
public in general
o Ex - clubs, charitable institutions, schools, religious organisations,
trade unions, welfare societies and societies for the promotion of art
and culture
The funds raised by such organisations are credited to capital fund or general
fund. The major sources of their income usually are subscriptions from their
members donations, grants-in-aid, income from investments, etc.
The main objective of keeping records in such organisations is to meet the
statutory requirement and help them in exercising control over utilisation of
their funds.
The main sources of income of such organisations are: (i) subscriptions from
members, (ii) donations, (iii) legacies, (iv) grant-in-aid, (v) income from
investments, etc credited to Capital fund/ General fund.
o Surplus generated is added over to the capital fund.
o Earn their reputation on the basis of their contributions to the welfare
of the society rather than on the customers or owners satisfaction.
They are required to maintain a stock register to keep complete record of all
fixed assets and the consumables.
Final accounts of Not-for-profit organization consists of Receipt & payment
acc, Income and Expenditure acc, Balance sheet
Receipts and Payments account
o Prepared at the end of accounting yr. on the basis of cash receipts and
cash payments recorded in the cash book
o Ex1 - subscriptions received from the members on different dates
which appear on the debit side of the cash book, shall be shown on the
receipts side of the Receipt and Payment Account as one item with its
total amount
o Ex2 - salary, rent, electricity charges paid from time to time as
recorded on the credit side of the cash book but the total salary paid,
total rent paid, total electricity charges paid during the year appear on
the payment side of the Receipt and Payment Account
o This account does not show any non cash item like depreciation.
o Features
It is a summary of cashbook receipts are recorded on debit
side and payments are entered on credit side.

Depreciation Accounting (AS6)

Depreciation is a measure of the wearing out, consumption or other loss of

value of a depreciable asset arising from use, effluxion of time or
obsolescence through technology and market changes.
o Depreciation includes amortisation of assets whose useful life is
Depreciable assets are assets expected to be used during more than one
accounting period; have limited useful life; held by enterprise for production/
Useful Life - (i) the period over which a depreciable asset is expected to be
used by the enterprise; or (ii) the number of production or similar units
expected to be obtained from the use of the asset by the enterprise.
Depreciable amount of a depreciable asset is its historical cost, or other
amount substituted for historical cost in the financial statements, less the
estimated residual value.
Factors responsible for depreciation
o historical cost or other amount substituted for the historical cost of the
depreciable asset when the asset has been revalued
o expected useful life of the depreciable asset
o estimated residual value of the depreciable asset
the most appropriate method(s) based on various important factors to find
depreciation are e.g., (i) type of asset, (ii) the nature of the use of such asset
and (iii) circumstances prevailing in the business
the related accumulated depreciation are disclosed in the financial
statements alongwith the disclosure of other accounting policies
depreciation methods used, depreciation rates/ useful lives of the assets if
they are different from the principal rates specified in the statute governing
the enterprise
Valuation of Inventories (AS2) -

Applied for inventories other than work in progress arising in the ordinary
course of business of service providers, construction contracts; shares,
debentures held as stock-in-trade; producers inventories of livestock, agro
and forest produces, minerals, ores, gases etc
Inventories are assets held for sale, in the process of production for sale, in
the form of supplies to be consumed in production process
Inventories incl. goods purchased and held for resale, but not include
machinery spares
Inventories should be valued at lower of cost and net realizable value
o Net Realizable value estimated selling price less estimated costs of
completion/est cost to complete the sale
o Cost of inventories incl. cost of purchase, cost of conversion and other
costs incurred for transit etc
o Exclusions abnormal costs on wastage, labour, prod proc; storage
costs; admin overheads in the process of transit; selling and
distribution costs
Cost formulas
o cost of inventories of items that are not ordinarily interchangeable and
goods or services produced and segregated for specific projects should
be assigned by specific identification of their individual costs
o cost of inventories should be assigned by using the first-in, first-out
(FIFO), or weighted average cost formula - fairest possible
approximation to the cost incurred
o FIFO - inventory which were purchased or produced first are consumed
or sold first
o Weighted average - cost of each item is determined from the weighted
average of the cost of similar items at the beginning of a period and
the cost of similar items purchased or produced during the period
Techniques for measurement standard cost method, retail method
o Standard costs take into account normal levels of consumption of
materials and supplies, labour, efficiency and capacity utilization
regularly reviewed & revised
o retail method is often used in the retail trade for measuring inventories
of large numbers of rapidly changing items that have similar margins
and for which it is impracticable to use other costing methods.
Net Realizable Value
o cost of inventories may not be recoverable if those inventories are
damaged, if they have become wholly or partially obsolete, or if their
selling prices have declined
o Inventories are usually written down to net realisable value on an
itemby-item basis or grouped if they are similar products
o Estimates of net realisable value are based on the most reliable
evidence available at the time the estimates, the purpose for which the
inventory is held
o Materials and other supplies held for use in the production of
inventories are not written down below cost if the finished products in
which they will be incorporated are expected to be sold at or above
Final Statements should disclose
o Accounting policies adopted in measuring inventories, including the
cost formula used
o Total carrying amount of inventories and its classification appropriate
to the enterprise

Journal, Ledger and Trial Balance:

Journal (entries) - a book of accounts in which all day to day business
transactions are recorded in a chronological order/ order of occurrence
o Also known as Book or original record/ Book of primary entry
process of recording transactions in the journal is known as Journalising
Narration brief explanation of a journal entry is known as narration
Format of journal date, particulars, ledger folio, Dr. Amount and Cr. Amount
o Ledger folio - In ledger-folio column we enter the page-number where
the account pertaining to the entry is opened and posting from the
Journal is made
Process of journalizing
o Identify the accounts, Recognize the type of accounts, apply the rules
of debit and credit,
o Rules of Debit and Credit
Assets and expenses accounts are debited if there is an increase
and credited if there is decrease
Liability, capital and revenue accounts are debited if there is
decrease and credited if there is increase
Before making journal entries it is imp to determine kind of accounts to be
debited/ credited
o Debited (Dr.) when amount is received/ about to receive/ expected/
discount/ accrued/ Interest on capital/ Depreciation in the firm are
included in the Dr. column
o Credited (Cr.) amount is given/ vendor/ customer/ rent paid/ sales/
outgoing from the firm are included in the Cr. Column.
Compound/ combined entries If the entities affect more than two
accounts; such entries are called compound or combined entries. If an entry
contains more than one debit/ credit/ both it is Compound Journal Entry
o Compound entries saves time and space and are made in following
When two or more transactions occur on the same day
One aspect i.e., either the debit/ credit is common
Trade discount When the customer buys goods in bulk or in large uantity
some discount may be allowed to him. This is to encourage him to buy more
and more. This discount is called Trade Discount
o No journal entry is made for Trade discount not entered in book of
o But Cash discount is entered in the account books
Adjusting Entries - For matching the cost and revenue, amount of every
expense and revenue should pertain to the period for which accounts are
being prepared. In this regard, a situation may arise if (i) Amount has been
paid or received spanning more than one accounting year (ii) amount of
expense or revenue stands due for the current year. In this case adjustments
to be made, resulting in Adjustment Journal Entry.
o Ex Outstanding expenses, Prepaid expenses, accrued income,
Miscellaneous entries (interest on capital, depreciation, drawings)
Classification of Journal Special Journal (special purpose), Journal Proper
(trans which dont occur frequently)

Ledger (Book of Account)

All the accounts identified on the basis of transactions recorded in different

journals/books such as Cash Book, Purchase Book, Sales Book etc. will be
opened and maintained in a separate book called Ledger
o Ledger is bound book with pages consecutively numbered. It may also
be a bundle of sheets
o Posting is the process of transfer of entries from Journal/Special
Journal books to Ledger
Ledger also known as Principal Book of Accounts permanent record of
business transactions classified into relevant accounts
Importance of Ledger knowledge of business results, knowledge of book
value assets, useful for management, knowledge of financial position, instant
Types of ledgers Assets, Liabilities, Revenue, expenses, Debtors, Creditors,
Posting of Journal Proper into Ledger Procedure:
o For both activities of debit and credit two accounts are opened in
o Item details of first account written to debit side, page no of journal on
ledger in folio column and page no. of ledger from which account is
written in L.F. column of journal
o The same is made for credit side
Balancing of an account
o Difference b/w the total of credits and total of debits of an account,
debit/ credit balance depending on the side that is greater contrary to
other side.

Trial Balance

Trial balance is a stmt which contains balances of all ledger accounts on a

particular date
o Trial balance only proves the arithmetic accuracy of the posting in the
Objectives check arithmetic accuracy, help prepare fin stmts, locate errors,
comparision, make adjustments
Contents/ preparation name of the ledger account, Debit amount and credit
Three methods of preparing trial balance Balance method, totals method,
Balance totals meth
o Balance of each account is extracted and written against each account
o Total of both sides of every account in Ledger is written against their
name of resp account without balancing them in the form of debit and
credit balances resp.
o Trial balance prepared by combining both the above methods
If the totals of two columns of Trial Balance do not agree the amount of
difference is put to suspense A/c and the totals of Trial Balance are equated.
o The suspense A/c is however a temporary arrangement to make the
Trial Balance agree.
o This account will remain till the errors are rectified
the agreement of Trial Balance is not a conclusive proof of the correctness of
recording and posting of business transactions

Rectification of Errors -

accounting errors are the errors committed by persons responsible for

recording and maintaining accounts of a business firm in the course of
accounting process
o Ex - omitting the transactions to record, recording in wrong books, or
wrong account or wrong totalling and so on.
Two types of accounting errors that cause disagreement of trial balance,
that dont affect agreement of Trial Balance
Locating errors
o Checking the columnar totals of trial balance
o Check that the balances of all accounts in Ledger have been written
and are written in the correct column of Trial Balance
o Find the exact fig of the difference and check with the similar amount
missed in the trial balance, a balance which is half the amount of
difference amount written on the wrong side of trial balance
o Recheck the totals of Special purpose books
o Check the balancing of various accounts in the ledger
o If not matched still each and every entry in journal/ ledger to be tallied
When trial balance agrees still, wrong transactions made even if the trial
balance tallied like
o Omission to record a transaction in journal/ SPB goods purchased on
credit but not recorded at all in purchases book
o Recording wrong amount of an item in journal/ SPB sale of 250 on
credit entered in sales book as 550
o Posting the correct amount on correct side but in a wrong account
o An item of capital expenditure recorded as an item of revenue exp. Or
vice versa
The above cases arise as the credit and debit are affected by the same
Various types of errors errors of omission, errors of commission, errors of
o accountant may not record it at all or record it partially. It is called an
error of omission
o When the transaction has been recorded but an error is committed in
the process of recording, it is called an error of commission
Types errors while recording a transaction in SPB, wrong
totaling, wrong balancing, wrong carry forward of balances,
wrong posting
o The capital income and capital expenditure should be recorded as
capital item and revenue income and revenue expenditure should be
recorded as revenue item. If transactions are recorded in violation of
this principle, it is called error of principle

Methods of Rectification of errors Before preparing trial balance (instant

correction, correction in the affected account) & After preparing the trial
balance (through suspense account)
Rectification of errors through suspense account
o Suspense account - if the totals do not agree the difference amount is
written in a new account. This account is called Suspense Account.
Suspense account summarized account of errors/ temporary

Self-balancing ledgers

During non-agreement of trial balance to reduce the trouble and time

involving in locating the errors, the system of multiple ledgers (sectional or
self-balancing) ledgers is employed
In order to make each ledger self-balancing, an extra account called general
ledger adjustment account is opened in each of the sales and bought ledger
(debtor/ creditor ledger)
Part B: Economics and Governance-(120 marks)

2. Comptroller & Auditor General of India- Constitutional provisions, Role and


3. Finance Commission-Role and functions

4. Basic Concept of Economics and introduction to Micro Economics Definition,

scope and nature of Economics, Methods of economic study and Central problems of
an economy and Production possibilities curve

5. Theory of Demand and Supply Meaning and determinants of demand, Law of

demand and Elasticity of demand, Price, income and cross elasticity; Theory of
consumers behaviour-Marshallian approach and Indifference curve approach,
Meaning and determinants of supply, Law of supply and Elasticity of Supply.

6. Theory of Production and cost Meaning and Factors of production; Laws of

production- Law of variable proportions and Laws of returns to scale.

7. Forms of Market and price determination in different markets Various forms of

markets-Perfect Competition, Monopoly, Monopolistic Competition and Oligopoly ad
Price determination in these markets

8. Indian Economy Nature of the Indian Economy Role of different sectors-Role of

Agriculture, Industry and Services-their problems and growth; National Income of
India-Concepts of national income, Different methods of measuring national income
Population-Its size, rate of growth and its implication on economic growth Poverty
and unemployment- Absolute and relative poverty, types, causes and incidence of
unemployment Infrastructure-Energy, Transportation, Communication

9. Economic Reforms in India Economic reforms sice 1991; Liberalisation,

Privatisation, Globalisation and Disinvestment

10. Money and Banking Monetary/ Fiscal policy- Role and functions of Reserve Bank
of India; functions of commercial Banks/RRB/Payment Banks Budget and Fiscal
deficits and Balance of payments Fiscal Responsibility and Budget Management Act,

11. Role of Information Technology in Governance

V Theory of Demand and Supply

Demand - A typical demand curve will be negative sloping as exhibited in this

demand schedule for milk - inverse relationship between the price and
quantity demanded
Determinants of Demand
o The price of the good or service.
o Prices of related goods or services. These are either complementary
(purchased along with) or substitutes (purchased instead of).
o Income of buyers.
o Tastes or preferences of consumers.
o Expectations.
Determinants of supply are input prices, technology, taxes and subsidies,
prices of other goods, producer expectations, no of suppliers,
o Any factor that increases cost of production decreases supply and vice
Law of demand The law of demand is a microeconomic law that states, all
other factors being equal, as the price of a good or service increases,
consumer demand for the good or service will decrease, and vice versa.
o Law of demand was explained by Marshall
o The factors held constant in this relationship are the prices of other
goods and the consumer's income
Giffen goods - a Giffen good is so strongly an inferior good (being more in
demand at lower income) that this contrary income effect more than offsets
the substitution effect, and the net effect of the good's price rise is to
increase demand for it.
o Conditions for giffen goods to exist
They must be a staple good in a poor community with few
The households are so poor they consume only staple goods
Veblen Goods Veblen/ ostentatious good are the one when price rises
people buy more as people think it is more expensive it must be of better

Elasticity of demand (Ed)

measure to show responsiveness/ elasticity of quantity demanded of a good
or service to change in its price. it gives the percentage change in quantity
demanded in response to a one percent change in price.
o PED is always negative except for Veblen/ giffen goods
o Determinants availability of substitute goods, percentage of income,
necessity, duration, brand value, customer/ payer
o If Ed = 0 => perfectly inelastic demand; Ed = -1 => unitary elasticity;
Ed = -inf => perfectly elastic; -1<Ed<0 => inelastic demand;
-inf<Ed<-1 => elastic/ rel elastic demand
o If a product is price inelastic, it means that a change in price will cause
a smaller relative change in quantity, meaning that an increase in
price will dominate the decrease in quantity causing a price increase to
lead to a total revenue increase.
A decrease in price will dominate the increase in quantity
causing a price decrease to lead to a total revenue decrease.
o If a product is price elastic, it means that a change in price will cause a
larger relative change in quantity, meaning that an increase in price
will be dominated by the decrease in quantity causing a price increase
to lead to a total revenue decrease
A decrease in price will be dominated a larger quantity increase
causing a price decrease to lead to a total revenue increase.
o If a price is unit elastic to its demand, then a price increase or
decrease will cause no change in total revenue because the change in
price will be equally balanced with a commensurate change in

Price Elasticity of Demand, Revenue and Profit

o If a product is elastic to increase revenue you reduce price
o The reduction in price increases quantity demanded by a greater
amount therefore increasing revenue
o If a product is inelastic to increase revenue you increase price
o The increase in price reduces quantity demanded by a smaller amount
therefore increasing revenue
o If costs stay the same then these actions will result in greater levels of
profit for the firm
Income Elasticity of Demand
o Measures the responsiveness of demand to changes in income

% change in quantity demanded / % change in income

YED > 0 (positive sign) = Normal goods as income rises

demand rises

YED < 0 (negative sign) = Inferior goods as income rises

demand falls

Cross Elasticity of Demand

o Measures the responsiveness of demand of one good to changes in the
price of another good

% change in quantity of good 1 / % change in price of good 2

Cross elasticity < 0 (negative sign) The goods are compliments

curve has downward slope

Cross elasticity < 0 (positive sign) The goods are substitutes/

alternatives curve has upward slope
Factors that Influence Elasticity of Demand
o Number of substitutes the greater the number of substitutes the
more elastic a product is
o The % of income spent on the product the smaller the % the more
inelastic the good
o The time period the longer this is the more elastic the good is
Luxury or necessity Luxuries tend to be more elastic and necessities more
The law of supply is a fundamental principle of economic theory which
states that, all else equal, an increase in price results in an increase in
quantity supplied. In other words, there is a direct relationship between price
and quantity: quantities respond in the same direction as price changes.
o Variables kept constant - Price of related goods, Condition/Technology
in Production, Sellers Expectations etc
The Supply Curve is generally positively sloped which shows direct
positive relationship between Price and quantity supplied. It clearly indicates
that at higher price, larger quantities are supplied for sale to make more
o Movement along the supply is due to change in either Quantity
Supplied or Price. Movement is extension of supply curve with the
change in Price or quantity supplied
o A shift of the supply curve comes from outside forces such as change
in consumer wants / need / preference / economic changes or changes
due to technology etc. It shows the change in position of Supply
Curve from one place to other.
Factors responsible for shift change in output cost, increase
use of technology in production, change in size of industry
Price Elasticity of Supply it measures the responsiveness of quantity
supplied to change in price, as percentage change in quantity supplied
induced by percentage change in price
o Methods p.c. change method, Geometric method
o Geometric method
Unitary elastic (Es =1) pc change in quan supplied equals pc
change in price
Perfectly Inelastic supply (Es =0) supply remains unchanged
with change in price
Perfectly elastic supply (Es=0) - a slightest fall in price caused
an infinite change in supply, reducing it to zero
Greater than Unitary elastic (Es>1) pc change in quantity
supplied is greater than pc change in price
Less than Unitary elastic (Es<1) pc change in quantity
supplied is less than pc change in price
Supply Schedule: It is the depiction in tabular form; the Price and Quantity
Supplied by an individual firm at a point of time keeping other factors
constant. It is a tabular representation of Law of Supply.
Bills of Exchange
a written order to a person requiring them to make a specified payment to the signatory
or to a named payee; a promissory note