BOOK KEEPING

Need for Accounting

Accounting has been termed as the language
of the business. The basic function of
language is to serve as a means of
communication. Accounting also serves
this function.. It communicates the business
Operations to various parties who have
some stake in the business. Viz., the
proprietor, creditors, investors, Govt. etc.
Accounting may be defined as the
process of recording, classifying,
summarising, analysing, and
interpreting the financial transactions
and communicating the same to the
persons / agencies interested in
such information.
# BK is the art of recording of financial data in a regular and systematic
manner

# A firm has to record the events affecting it in such a way that

a correct picture emerges whenever needed

# Events can be small or big

# If a firm is involved with outsiders in an event, the event becomes

a transaction

# Bulk events of the records of a firm will be with reference to transactions

with others

# There will be events which do not concern outsiders. Such events also
need to be recorded
Book Keeping may be defined as a systematic and
regular recording of events affecting a firm with a
view to obtaining a clear picture of the financial
state of affairs of the firm and of it’s performance
in monetary terms over a period of a time
The objective of book keeping is to present a clear picture of
the financial state of affairs of the firm.

This picture is given by two statements:

1 The first statement summarizes the income and expenses

showing how much profit the firm has earned in a particular
period or how much has been the loss.

2 Second statement sets out what the firm possess ( assets)

how much the firm owes (liabilities) and how much belongs
to the owners (capital)
The first statement is called as Profit and Loss or Income
Statement

The second one is called as “Balance Sheet”

Accounting is the language of business

Affairs of a business unit are made to be understood

to others as well as to those who own or manage it
through accounting information which has to be
suitably recorded, classified and presented.
Concepts
# Business entity concept
# Money measurement concept
# Cost concept
# Going concern concept
# Dual – aspect concept
# Legal position concept
Every account has two "sides", a right side and a left side.
A debit refers to an entry on the left side of an account, and
a credit refers to an entry on the right side of an account.

Double entry bookkeeping requires that for every

transaction, there is an entry to the left side of one
(or more) account, and a corresponding entry to the
right side of another account(s).
Dual aspect concept is the basic concept of accounting.
according to this, every business transaction has a dual
effect.

Example: A starts a business with a capital of Rs.10,000,

There are two aspects of the transaction. On one hand
the business has asset of Rs.10,000, while on the other hand
the business has to pay to the proprietor a sum
Rs.10,000 which is taken as proprietor’s capital.

Capital ( Equities) = Cash (Assets)

10,000 = 10,000

Liabilities + Capital = Assets

 Equities = Assets
Capital of Rs.10,000 = Cash Rs.5000 + Furniture Rs.5,000

Equities = Assets

Capital Rs.10,000 + Bank Loan Rs.30,000 = Cash Rs.35000 + Furn. Rs.5000

Systems of book keeping
Two systems

1 Single entry system

2 Double entry system

Advantages of Double – entry Book – keeping
1 Information about every account
2 Helps to know the Receivables and Payable
3 Arithmetical Accuracy
4 Helps to locate Errors
5 Helps to ascertain Profit/Loss
6 Helps to know the Financial Position
Types of Accounts &
Rules Governing Each Account
1 Personal Account

2 Real Account

3 Nominal account
Personal Account:
These are accounts in the name of persons, firms,
and companies with whom the firm deals.

Rule : Debit the receiver and credit the giver

Real Account :

They are accounts opened in the name of

assets such as land & Buildings, plant &
machinery, furniture, fixtures ,cash etc.

RULE: Debit what comes in and credit what

out
Nominal Account:
This account exists only for namesake. Nominal
accounts can not be seen. Nominal accounts are
opened in the name of expenses, losses, profits
and gains.

Rule: Debit all expenses and losses and credit all

incomes and gains.
Example

From the following transactions find out the nature of

account and also state which account should be
debited and which account should be credited.

a) Rent paid
b) Salaries Paid
c) Furniture purchased for cash
d) Received from Mohan( proprietor)
No. Transaction A/C Nature of Dr. / Cr.
Involved Account
 Transaction A/C Nature of Dr. / Cr.
Involved Account
a Rent Paid Rent A/c Nominal A/c Debit
Cash A/c Real A/c Credit

b Salaries Paid Salaries Nominal A/c Debit

A/c
Cash A/c Real A/c Credit
c Furniture Fur. A/c Real A/c Debit
Purchased Cash A/c Real A/c Credit

d Recd. From Cash A/c Real A/c Debit

Mohan Capital A/c Real A/c Credit
Accounting Cycle
Journal

Ledger
Trading a/c
Trial Balance P&L a/c

Balance sheet
 JOURNAL

Date Particulars Ledger Debit Credit

folio Rs. Rs.
Example
Ram starts a business with capital
of Rs.20,000 on January 1,
2019. Journalize the transaction.
In this case there are two accounts involved:

1. The account of Ram

2. Cash Account

Ram is a natural person and therefore, his account

Is Personal account. Cash account is a Real Account.
As per the rules of Debit and Credit, applicable to
Personal Accounts, Ram is the giver and, therefore,
His account, i.e Capital Account should be credited.
Cash is coming into the business and therefore as per
Rules applicable to Real accounts, it should be debited.

The transaction will now be entered on the journal as

Follows:
Date Particulars L.F Debit (Rs.) Credit
(Rs.)
1-1-19 Cash Account 20,000

To Capital A/C 20,000

(Being commencement
of business)
Example

On July 25,2019, the firm bought furniture

worth Rs.4000 for cash.
Journalize the transaction.
 Journal
Date Particulars Ledger Dr Cr
folio Amount Amount

25-7-19 Furniture 4,000

4,000
To Cash
a/c

(Furniture
bought for
Cash)
1. Furniture is purchased for Rs.1000/-

2.Purchased goods for cash

Rs.5000/-

3. Sold goods to Suri Brothers for

Rs.10,000/-
Problem:
Journalise the following transactions in the books of Suresh.

2014 July 1. Suresh commenced business with Rs.50000/-

2. Deposited into bank Rs.4000/-

3. Purchased goods worth Rs.10,000/- from kamal.

Date Particulars L.F Dr(Rs) Cr(Rs)
2014

July 1 Cash Account Dr 50000

To Suresh capital A/C 50000
(Being Business
Commenced)

July 2 Bank Account Dr 4000

To Cash A/C 4000
(Cash deposited in bank)

July 3 Goods account Dr 10,000

To Kamal A/C 10,000
--------- ----------
Total 64,000 64,000
--------- ----------
In small businesses all transactions
relating to all Purchases, sales etc.,
are recorded in one journal. In case of
larger business organisations, the
journal Is subdivided into different
categories.
Sub divisions of Journal
1 Purchase book
2 Sales book
3 Purchase return book
4 Sales return book
5 Bills receivable book
6 Bills payable book
7 Cash book

Also called as Subsidiary Books

The format of ledger account is of two parts:

1.Left hand side called debit side (Dr)

2.And right hand side called credit side(Cr)

Debit side starts with ‘To’ and

credit side starts with ‘By’
 Ledger
Debit side (Dr.) Credit side(Cr.)
Date Particulars Folio Amt. Date Particulars Folio Amt.
Problem

2014 January 3 Bought goods worth 5000 from kamal

January 8 Bought goods worth 20,000 from Samuel
January 16 Bought goods worth 12,000 from Radha
 Journal
Date Particulars L.F Dr(Rs) Cr(Rs)
2014

Jan 2 Goods or Purchase A/C Dr 30 5000

To Kamal A/C 56 5000

Jan 8 Goods or Purchase A/C Dr 30 20,000

To Samuel A/C 62 20,000

Jan 16 Goods or Purchase A/C Dr 30 12,000

To Radha A/C 74 12,000
--------- ---------
Jan 31 Total for the month 37,000 37,000
--------- ----------
 Purchase Journal

Date Particulars Inv. L.F Rs.

No.
2014

Jan 2 From Kamal & Co 678 5,000

Jan 8 From Samuel & Co 435 20,000

Jan 16 From Radha & Co 542 12,000

----------
Jan 31 Total for the month 37,000
----------
 Purchases Account
Debit side (Dr.) Credit side(Cr.)
Date Particulars Folio Amt. Date Particulars Folio Amt.
2003

31-1-13 As per
purchase book 37,000
 Kamal Account

Debit side (Dr.) Credit side(Cr.)

Date Particulars Folio Amt. Date
31-3-13 By. Purchases 5,000
A/c
Trial Balance
It is a statement containing debit and credit balances
of various accounts taken out from ledger books as
on particular date

A trial balance must agree as on that date

Preparation of Trial Balance
Accounts showing debit balances

1 Debtors accounts
2 Asset accounts such as plant, furniture etc.
3 Expenses accounts
4 Losses accounts
5 Purchase accounts
6 sales returns account
Accounts showing credit balances
1 Creditors account
2 Liabilities account
3 Incomes account
4 Gains account
5 Profit account
6 Loan account
7 Bank overdraft account
8 Sales account
9 Purchase returns account
10 Provisions account
11 Reserve and funds account
Make a trial balance as on 31-12-2018 from the following
information:
Particulars Rs.
Sundry debtors 32,000
Stock(1.1.2017) 22,000
Cash in hand 35
Cash in bank 1,545
Plant and M/c 17,500
Sundry creditors 10,650
Trade expenses 1,075
Sales 2,34,500
Salaries 2,225
Carriage outwards 400
Rent 900
Purchases 2,18,870
Discounts (Dr.) 1,100
Capital 79,500
Business Premises 34,500
Bills Payable 7,500
Trial Balance as on ___________

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

 Dr.(Rs.) Cr.(Rs.)
Sundry Debtors 32,000
Stock(1.1.02) 22,000
Cash in Hand 35
Cash at Bank 1,545
Plant & Machinery 17,500
Sundry Creditors 10,650
Trade expenses 1,075
Sales 2,34,500
Salaries 2,225
Carriage Outwards 400
Rent 900
Bills Payable 7,500
Purchases 2,18,870
Discount 1,100
Capital 79,500
Business Premises 34,500
------------- ---------------
Total 3,32,150 3,32,150
-------------- ---------------
Trading Account
The trading account gives overall result of trading, i.e., purchasing
and selling of goods. In other words, it explains whether purchasing
of goods and selling them has proved to be profitable or not. It takes
into account on the one hand the cost of goods sold and on the other
the value for which they have been sold. In case the sales value is
higher than the cost of goods sold, there will be Profit, while in a
reverse case, there will be Loss.

The profit disclosed by the Trading Account is termed as Gross Profit

similarly the loss disclosed is termed as Gross Loss.
Items to be considered in trading account are:
1 Opening Stock
2 Purchases less returns
3 Wages
4 Carriage Inwards
5 fuel and power
6 Sales less returns
7 any other direct expenses
8 closing stock given as additional information .
 Trading Account for the year ending 31.3.2002

Dr Cr

Rs Rs
To Opening Stock XXX By Sales XXX
Less : Returns XXX XXX
To Purchases XXX
(-) Returns XXX XXX By Closing Stock XXX

To Wages XXX
To Carriage inwards XXX
To fuel & power XXX
To direct expenses XXX

To Gross Profit transferred XXX

to P& L account

XXX XXX
 Trial Balance as on 31.3.12

Dr.(Rs.) Cr.(Rs.)

Discounts allowed 1,500

Discounts recd. 500
Office expenses 2,000
Mfg. expenses 1,200
Bills payable 17,000
Bills receivable 10,000
Cash in hand 4,800
Cash at bank 30,800
Office rent 3,600
Owner’s Capital 1,96,000
Machinery 60,000
Stock(1.4.2011) 32,000
Wages 1,00,000
Carriage inwards 1,000
Salaries 10,000
Factory rent 4,800
Repairs 800
Fuel & Power 5,000
Furniture 11,000
Buildings 80,000
Sundry debtors 40,000
Sales 4,07,200
Purchases 2,44,000
Creditors 25,000
Returns Inwards 7,200
Returns outwards 4,000
6,49,700 6,49,700
 Trading Account for the year ending 31.3.2002

Dr Cr

Rs Rs
To opening stock 32,000 By sales 4,07,200
To Purchases 2,44,000 (-) Returns 7,200 4,00,000
(-) Returns 4,000 2,40,000
To Wages 1,00,000 By Closing stock 40,000
To Mfg. expenses 1,200
To carriage inwards 1,000
To fuel & Power 5,000
To factory rent 4,800

To gross profit transferred

to profit & loss account 56,000

4,40,000 4,40,000
To put this in brief, Net Profit =
Gross Profit + Other Income – Expenses.
Here all expenses relating to office,
selling and distribution are considered.
Profit and Loss Account for the year ending on 31.3.2012
Rs. Rs.
Dr.salaries Cr.
To XXX By Gross Profit XXX
To rent XXX By discounts received XXX
To Insurance XXX By commission recd. XXX
To carriage Outwards XXX By reduction in prov.
To cost of samples XXX for bad debts XXX
To Prov. Of Depreciation XXX Profit on sale of Fixed
To bad debts written off XXX Assets XXX
To Adv. XXX
To Interest XXX
To discounts allowed XXX

To net Profit trans. To

Capital A/C XXX

XXX
XXX
Profit and Loss Account for the year ending on 31.3.2012

Dr. Cr.

Rs. Rs.
To salaries 10,000 By Gross Profit 56,000
To repairs 800 By discounts received 500
To discount allowed 1,500
To office expenses 2,000
To office rent 3,600

To net profit transf. to

capital A/C 38,600

56,500 56,500
 Format of a Balance Sheet
Dr. Cr.

Liabilities Rs. Assets Rs.

Long - Term Liabilities Fixed Assets
Owner’s Capital XXX Plant & Machinery XXX
Add net profit from (-) Depreciation XXX XXX
P&L A/C XXX Furniture & Fixtures XXX
(-) Drawings XXX XXX (-) Depreciation XXX XXX
Bank Overdraft XXX
Current Assets
Current Liabilities Stock XXX
Sundry Creditors XXX Sundry debtors XXX
Bills Payable XXX (-) Prv. forbad debts XXX XXX
Bills Receivable XXX
Outstanding expenses XXX Cash in hand XXX
Cash at bank XXX
Prepaid expenses XXX

TOTAL XXXX TOTAL XXXX

 Balance Sheet as on 31.3.2012

Liabilities Rs. Assets Rs.

 Balance Sheet as on 31.3.2012

Liabilities Rs. Assets Rs.

Long - Term Liabilities Fixed Assets
Owner’s Capital 1,96,000 Plant & Machinery 60,000
Add net profit from Buildings 80,000
P&L A/C 38,600 Furniture & Fixtures 11,000
2,34,600

Current Assets
Current Liabilities Stock 40,200
Sundry Creditors 25,000 Sundry debtors 40,000
Bills Payable 17,000
Bills Receivable 10,000
Cash in hand 4,800
Cash at bank 30,800

TOTAL 2,76,600 TOTAL 2,76,600

 Problem
Trial Balance as on 31-12-2009
Debit Balances Rs. Credit Balances Rs.
Plant & Machinery 80,000 Capital account 1,00,000
Purchases 68,000 Sales 1,27,000
Sales Returns 1,000 Purchase return 1,275
Opening Stock 30,000 Discount recd. 800
Discount allowed 350 Sundry Creditors 25,000
Bank Charges 75
Sundry Debtors 45,000
Salaries 6,800
Wages 10,000
Freight Inwards 750
Freight Outwards 1,200
Rent, rates & taxes 2,000
Advertisements 2,000
Cash in bank 6,900
----------- ------------
2,54,075 2,54,075
------------- --------------

Closing Stock= Rs.35,0000

Problem

From the following trial balance and adjustments of ABC Company, prepare trading
And P&L for the year ended 31-12-01 and Balance Sheet as on that date.

Dr Cr
Sundry Debtors 64,000
Stock(1-1-01) 44,000
Cash in hand 70
Plant & Machinery 35,000
Sundry creditors 21,300
Trade Expenses 2,150
Sales 2,69,000
Salaries 4,450
Carriage Outwards 800
Rent 1,800
Bills Payable 15,000
Purchases 2,37,740
Discounts 2,200
Business Premises 69,000
Capital (1/1/01) 1,59,000
Cash at Bank 3,090
4,64,300 4,64,300
Adjustments:

1. The stock as on 31-12-01 was Rs.24,900

2. Rent was unpaid to the extent of Rs.170
3. Outstanding trade expenses were Rs. 300
4. Write off for bad debts Rs.800
5. Provide 5% for doubtful debts.
6. Depreciate Plant & Machinery @ 10%
7. Business premises are to be depreciated by 2%.
Financial Analysis thru ratios
•Ratio analysis is the process of
determining and interpreting numerical
relationships based on financial
statements

•Ratios helps in understanding the financial

position / health of the company
Liquidity:
Liquidity refers to how well the company
Is in position to meet’s short – term commitments
Such as payment of salaries, taxes and so on.

Profitability:

Refers to how capably the company is conducting

It’s operations in a profitable manner or not .
Solvency:
Refers to the company’s position to meet
it’s Long – term commitments such as
repayment of long – term loans and
so on.

What is a ratio:

It is simply a number expressed in terms of another. It is

A numerical or quantative relationship between two
Variables , which are comparable.
Types of ratios
# Liquidity ratios

# Activity ratios

# Capital structure ratios

#Profitability ratios
Liquidity Ratios
Expresses the ability of the company to meet
short term commitments as when they become
due.

Two Classifications
1. Current Ratio

2. Quick Ratio
Current Ratio
C.R = Current Assets / Current liabilities

C.A = Stock, Debtors, Bills receivable, Cash at hand & bank,

pre paid expenses etc.

C.L = Creditors, Bank overdrafts payable in a period less than

one year, Bills payable, all provisions etc.

If the ratio is 2 : 1 the company’s liquidity position is comfortable .

 Quick Ratio

Q.R = Quick Assets / Current Liabilities

Q.A = Current assets – ( Stock + Prepaid Expenses)

Quick assets are those assets that can be

Converted into cash very quickly.

Norm is 1 : 1
 Balance Sheet of ABC Co. as on 31.3.2012

( Rs in thousands )

Liabilities Rs Assets Rs
Preference Share Capital 100 Land & Bldgs 225
Equity Share Capital 150 Plant & M/C 250
General Reserves 250 Furniture 100
Debentures 400 Stock 250
Creditors 200 Debtors 125
Bills Payable 50 Cash at Bank 250
P&L Account 100 Cash in Hand 125
Bank Loan(Long Term) 200 Prepaid Expns. 50
Marketable Securities 125
1500 1500
Activity Ratios

Activity ratios express how active the company is in terms

Of selling it’s stocks, collecting it’s receivables and paying
It’s creditors

Types

1 Inventory turnover ratio

2 Debtors turnover ratio

3 Creditors turnover ratio

Inventory Turnover Ratio

It is also called stock turnover ratio. It indicates the number of times

The average stock is being sold during a given accounting period.

The higher the ratio, the better is the performance of the firm in selling
It’s stock.

Cost of goods sold

Inv. Turnover ratio = ------------------------
Av. Inventory

Cost of goods sold = Sales – Gross Profit

Opening stock + Closing stock

Av. Inventory = ----------------------------------------
2
Debtor’s turnover ratio:
This ratio reveals , the number of times the average debtors are collected
during a given accounting period. It shows how quickly the company is in
a position to collect it’s debtors.

Debtor’s Turnover ratio = Credit sales / Average Debtors

Credit sales refer to goods sold on credit. Average debtors is the average
of opening and closing balances of debtors.

A high turnover ratio is desirable.

 Capital Structure Ratios (leverage Ratios)

Capital structure ratio or leverage ratio is defined as the

“ the financial ratio which focuses on the long term
Solvency of the firm”. The long term solvency of a firm
Is always reflected in it’s ability to meet it’s long term
Commitments such as interest, principal amount as when due.
Types

1 Debt – equity ratio

2 Interest coverage ratio

3 Ratio of Proprietors funds to total assets

Profitability Ratios
Profitability ratios throw light on how well
the company Is organizing its’ activities in
a profitable manner.