Introduction

Recording of business transactions in a systematic way is

required to know the profit or loss of the business. Accounting is
the tool which thus is required in every business organisation to
record business transactions and preparation of required accounts
Meaning of book keeping

According to Carter “Book keeping is the science and art of

correctly recording in the books of accounts all those transactions
that result in the transfer of money or money’s worth.”
 Meaning of Accounting

 The American Institute of Certified Public Accountants

(AICPA) has defined the Financial Accounting as “the art of
recording, classifying and summarising in a significant
manner in terms of money transactions and events which
in part, at least of a financial character and interrupting the
results thereof.”
 The attributes of accounting are:
 It is the art of recording the business transactions.
 It is the art of classifying the business transactions.
 The transactions of a business must be recorded in
monetary terms.
 It is the art of summarising financial transactions.
 It is an art of analysis and interpretation of these
transactions.
 The results of such analysis must be communicated to the
person who are to make decisions or form judgements.
Objects of Accounting:

 To ascertain whether the business operations have been

profitable or not.
 To ascertain the financial position of the business.
 To generate information.

Functions of Accounting:

 Systematic record of business transactions.

 Protecting the property of the business.
 Communicating results to interested parties.
 Compliance3 with legal requirements.
 Distinction between Book-Keeping and
Accounting
Users of Accounting Information:

 Owners
 Creditors
 Investors
 Employees
 Government
 Public
 Research scholar
 Managers

Branches of Accounting:

 Financial Accounting
 Cost Accounting
 Management Accounting
 Advantages of Accounting
 Replacement of memory
 Evidence in court
 Settlement of taxation liabilities
 Comparative study
 Sale of business
 Assistance to insolvent person
 Assistance to various parties
Limitations of Accounting
 Records only monetary transactions
 Effect of price level changes not considered
 No realistic information
 Personal bias of Accountant affects the accounting statement
 Permits alternative treatments
 No real test of managerial performance
 Historical in nature
 Relationship of Accounting with other subjects:

 Accounting and Economics

 Accounting and Mathematics
 Accounting and Statistics
 Accounting and Law
 Accounting and Engineering
 Accounting and sociology

Basis of Accounting:

 Cash Basis of Accounting

 Accrual basis of Accounting
 Hybrid or Mixed basis of Accounting
 Accounting Equation
Introduction:

 The equation is based on the principal that the accounting

deals with property and rights to property and the sum of
properties owned is equal to the sum of the rights to the
properties. The properties owned by a business are called
assets and rights to properties are known as liabilities or
equities of the business.

 Equities may be divided into equities of creditors representing

debts of the business known as liabilities and equity of the
owner known as capital. Keeping in view the two types of
equities the equation given above can be as under

Assets = Liabilities + Capital

 Rules of Accounting Equation:
 Increases in assets are debits and decreases in assets are
credits.

 Increase in liabilities are credits and decreases are liabilities are

debits.

 Increase in Capital are credits and decreases are Capital are

debits.

 Increase in expenses are debit and decreases in liabilities are

credits.

 Increase in incomes or profits are credits and decreases in

incomes or profits are debits.
 Double Entry System
Introduction:
 The double entry system owes its origin to an Italian merchant
named Luco Pacioli who wrote the first book entitled ‘De
Computis et Scripturis’ on double entry accounting in the year
1494. Double entry system is the method of recording business
transactions in dual way i.e. for every debit there will be equal
amount of credit or in other words when we receive something
we give something in return e.g. when you purchase goods for
cash we receive goods and give cash in return. Thus on any
date the debts will be equal to the credits.
Rules of Double Entry System:
 Personal account – Debit the Receiver Credit the giver
 Real account – Debit what comes in and credit what goes out
 Nominal Account –Debit all expenses and losses and credit all
incomes and gains
 Advantages of Double Entry System:
 Complete record of financial transactions
 Provide accurate information
 Arithmetical accuracy of accounts
 Helpful in preventing frauds and errors
 Helpful in ascertaining profit or loss
 Acceptable by income tax and sales tax authorities.
Disadvantages of Double entry system:
 Maintenance of number of books of accounts
 Costly
 No guarantee of accuracy
Accounting Cycle:
 Recording
 Classifying
 Summarising
 Journal

Source Documents:

 Cash memo
 Invoice or bill
 Receipt
 Pay in slip
 Cheque
 Debit and credit notes
 Rules for Journalising:
Based on Accounting Equation:
 Increases in assets are debits and decreases in assets are
credits.
 Increase in liabilities are credits and decreases are liabilities are
debits.
 Increase in Capital are credits and decreases are Capital are
debits.
 Increase in expenses are debit and decreases in liabilities are
credits.
 Increase in incomes or profits are credits and decreases in
incomes or profits are debits.

Bases on Traditional approach:

 Personal account – Debit the Receiver Credit the giver
 Real account – Debit what comes in and credit what goes out
 Nominal Account –Debit all expenses and losses and credit all
incomes and gains
 Points to be noted before Journalising:
 Capital Account
 Drawing account
 Cash / Credit transactions
 Goods given as charity
 Casts and carry forwards
 Compound journal entry
 Opening journal entry
 Cash discount
 Trade discount
 Purchase of share
 Sale of share
 Expenses incidental to the purchase of fixed assets
 Insurance of life policy
 Carriage paid on buyers accounts
 Goods distributed as free samples
 Bad debts
 Interest due on loans
 Loss of stock by fire
 Commission
 Advantages of Journal:

 Chronological record
 Information of every transaction
 Reduces the possibilities of error
 Helpful in remembering the business transactions

Limitations of Journal:

 Too lengthy
 Difficult to ascertain daily cash balance
 Difficult to post every transaction from journal to ledger
 Ledger and Trial Balance
Ledger:
A ledger account may be defined as a summary statement of all
the transactions relating to a person, assets, expenses or
income which have taken place during a given period of time
and shows their net effect.

Performa of ledger
 Trial Balance

A Trial Balance may be defined as a statement of debit and

credit totals or balances extracted from the various account in
the ledger with a view to test the arithmetical accuracy of the
books.

Methods of trial balance:

 Total Method
 Balance method
 Errors

 Error of omission
 Error of principal
 Compensating error
 Posting an item to the correct side but in the wrong account
 A Wrong entry in a subsidiary book
 Cash Book

A cash book is maintained to record the transactions relating

to cash. As cash control is very essential in a business house,
in order to avoid the embezzlement of cash, maintenance of the
cash book becomes integral part of every business concern.

Kinds of cash book:

 Simple Cash Book

 Two Column Cash Book
 Three column Cash Book
 Multi columnar Cash Book
Subsidiary Cash Book
In order to keep the general ledger free from unnecessary
details separate books are kept for sales , purchases , sales
return , return inward, bills receivable and bills payable.
Purchase Book:
This book is kept to record all credit purchase of goods.
 Sales Book
This book is kept to record credit sales of goods.
 Purchase Return Book
This book keeps records of return of credit purchase of goods.

Sales Return book

This book keeps records of return of credit sales of goods.

Bills receivable book and Bill Payable book

These books keep full record of all the bills accepted and drawn
by the business.

Journal Proper

Only those transactions which can not be recorded in any of the

above mentioned subsidiary books are recorded here e.g.
Opening entries, closing entries, bad debts, credit
purchase/sale of assets etc.
 Final Accounts

Final accounts are prepared to find out profit or loss made by the
business at the end of a regular periodic interval and to
ascertain the financial position of the business on a given date.
Thus final accounts include the preparation of:

 Trading and Profit and Loss account

 Balance Sheet
Balance Sheet
Adjustments

 Closing Stock
 Outstanding expenses
 Prepaid expenses
 Accrued income
 Income received in advance
 Depreciation
 Interest on capital
 Interest on drawings
 Provision for doubtful debts
 Provision for discount on debtors
 Reserve for discount on creditors
 Deferred revenue expenditure
 Loss of stock by fire
 Reserve fund
 Goods distributed as free samples
 Manager’s commission
 Goods on sale or approval basis
 Hidden adjustments
 Depreciation, Provisions and Reserves
Depreciation is a permanent, continuing and gradual decrease in the value
of fixed assets.
Causes of Depreciation:
 Physical Depreciation
 Economic factors
 Time factors
 Depletion
 Accidents

Methods of recording Depreciation:

 Straight line method
 Diminishing balance method
 Sum of digits method
 Annuity method
 Depreciation fund method
 Insurance policy method
 Revaluation method
 Depletion method
 Machine hour rate method
 Provisions and Reserves

 Future is uncertain and to reduce the risk of uncertainly of

business it is necessary to make Provisions and Reserves.
Meaning of Provisions:

If any amount is kept aside for known liability ait is known as

provisions.
Meaning of Reserves:

 If any amount is kept aside for unknown liability ait is known as

Reserves.
 It can be capital reserve or revenue reserve.
 Branches not keeping full system of accounting:-
Following are the main features of such branches:
a) Such branches sell only those goods which are received
from head office and are not usually allowed to make
purchases in the open market except with the express
permission of the head office.
b) Goods are supplied by head office to such branches
either at cost price or at invoice price.
c) All expenses of the branch are paid by the head office.
d) For small expenses either simple petty cash or impress
system is used.
e) The amount received from cash sale or cash received
from the debtors is either remitted to head office daily or
deposited in the account of head office.
f) The branch manager is normally expected to sell the
goods for cash only but he may be authorised to sell
goods on credit in certain cases.
 Voyage Account

Voyage account is prepared by shipping companies

Dealing with large number of ships in the sea.
Voyage
 
 
Name of the Ship
 Voyage in progress
When the voyage is not complete special treatment
is required for the following items:

Freight received on incomplete journey

Expenses related to incomplete journey

Expenses related to freight

Expenses not related to freight

 Insurance claims
Stock Insurance:-

 
The stock kept in business premises is subject to risk of fire to
protect it against such loss the business takes the fire
insurance policy covering the loss of stock by fire in which the
insurance company undertakes to compensate loss of stock by
fire in consideration of payment called premium.
Calculation of the amount of claim of the loss of stock
by fire:

Calculation of GP ratio

Preparation of Memorandum trading Account

Detect the value of stock salvaged from the value of stock

Average Clause:

Value of Stock destroyed X Value of Insurance Policy

__________________________
Value of Stock on the date of fire.
 Consequential Loss Of profit Insurance:

Explanation of certain Terms:

Gross Profit

Net Profit

Insured Standing Charges

Turn Over

Annual Turn Over

Standard Turn Over

Rate of Gross Profit

Indemnity Period
 Computation of Claim for loss of Profit:
Calculate short sales
Calculate gross profit ratio
GP Ratio = Net Profit + Insured Standing Charges
_______________________________ X 100
Sales of the financial year proceeding the year of Fire

Calculation of loss of profit on short sales:

 
Increased cost of working expenses
Actual increased working expenses
Net Profit + Insures constant expenses
______________________________ X Increased working Cost
Net Profit + All constant Expenses
 
Or
Gross profit proceeding on 12 months sales
___________________________________ X Additional Expenses
Gross profit proceeding on 12 months sales + Uninsured expenses
Gross profit on sales from increased working
expense

 
V. Detect the amount of expense saved from the
total claim.

VI. Apply Average clause i.e.

 
Gross claim X Amount of policy
________________
Gross profit on 12 months (Adjusted)
Sales immediately preceding the date of
fire.
 Branch Accounting
Meaning:

When business expands then it open its branches to other

places as it is not possible to meet the demand of the customer
from the single place. To reach close to the customer branches
of the main business is opened in different
places/states/countries etc.
Types of Branches:

 Branches not keeping full system of accounting

 Branches keeping full system of accounting
 Foreign branches
 Branches not keeping full system of accounting:-
Following are the main features of such branches:
a) Such branches sell only those goods which are received
from head office and are not usually allowed to make
purchases in the open market except with the express
permission of the head office.
b) Goods are supplied by head office to such branches
either at cost price or at invoice price.
c) All expenses of the branch are paid by the head office.
d) For small expenses either simple petty cash or impress
system is used.
e) The amount received from cash sale or cash received
from the debtors is either remitted to head office daily or
deposited in the account of head office.
f) The branch manager is normally expected to sell the
goods for cash only but he may be authorised to sell
goods on credit in certain cases.
 Accounting Record for head office or system of
accounting for branch:-

The following are the main ways in which the head office
may keep branch accounts in its books:

 Debtor system
 Final account system
 Stock and debtor system
 Wholesale branch system
(A) Debtor System :

Journal entry

When goods are send to branch

Branch account Dr.
Goods sent to branch account
For return of goods to head office
Goods sent to branch account Dr.
Branch account
For Transferring balance of goods sent to branch
Goods sent to branch account Dr.
Purchases A/c (In trading concern)
Trading A/c (In mgf. Concern)
When cheque or draft is sent for branch expenses
Branch A/c Dr.
Bank A/c
When cheque or draft is received for remittance
Bank A/c Dr.
Branch A/c
For closing balance of assets
Branch Assets A/c Dr.
Branch A/c
For beginning Balance of assets
Branch A/c Dr.
Branch Assets A/c
For closing balance of liabilities
Branch A/c Dr.
Branch Liabilities A/c
For opening balance of liabilities
Branch Liabilities A/c Dr.
Branch A/c
For branch profit
Branch A/c Dr.
General Profit and loss A/c
For branch loss
General Profit and loss A/c Dr.
Branch A/c
 Goods can be invoiced to branch either at cost price or at
invoice price. When it is invoiced at invoice price accounting
adjustments required in head office book are as under:-

For adjustment of excess price of opening stock at branch

Stock reserve A/c Dr.
Branch A/c

For adjustment of excess price of closing stock at branch

Branch A/c Dr.
Stock reserve A/c

For adjustment of excess price of goods sent to branch less

return to head office
Goods sent to branch A/c Dr.
Branch A/c
(B) Final Account System
 According to this system the branch trading and profit and loss
account is prepared at cost price. All the expenses whether
paid by the branch or by H.O. (Head Office) is debited to
trading and profit and loss account.

 The profit calculated here is exactly the same as it is calculated

under debtor system.

 Under this method if branch account is prepared it is

considered as personal account. Under such situation the debit
balance represents the net balance available at the branch at
the end of accounting period.
 (C) Stock and debtor system:

This method is used where branch turn over is

sufficiently large and greater control is required by the H.O.

In this method various accounts are opened for various

transactions such as branch stock account, branch debtors’
account, goods sent to branch account, branch expenses
account etc.
Journal Entries:
For Goods sent to branch
Branch Stock A/c Dr.
Goods sent to branch A/c
For Goods returned by branch
Goods sent to branch A/c Dr.
Branch Stock A/c
 Cash Sales at Branch remitted to H.O.
Branch Cash A/c Dr.
Branch Stock A/c
Credit sales at branch
Branch Debtors A/c Dr.
Branch Stock A/c
Returns from Customers
Branch Stock A/c Dr.
Branch Debtors A/c
Bad debt and discount etc.
Branch expenses A/c Dr.
Branch debtors A/c
Cash Received from branch debtors sent to H.O.
Branch Cash A/c Dr.
Branch debtors A/c
Shortage of goods in branch stock
Branch Profit and loss A/c Dr.
Branch Stock A/c
Surplus of goods in branch stock
Branch Stock A/c Dr.
Branch Profit and loss A/c
Expenses paid by H.O.
Branch Expenses A/c Dr.
Cash A/c
Transfer of Branch Expenses to Branch Profit and Loss
account
Branch P & L A/c Dr.
Branch Expenses A/c
Goods in Transit
Goods in transit A/c Dr.
Branch Stock A/c
Goods lost in transit being abnormal loss
P& L A/c Dr.
Branch Stock A/c

Transfer of branch gross profit

Branch stock A/c Dr.
Branch P & L A/c

Transfer of Branch net profit

Branch P & L A/c Dr.
General P & L A/c
We can have three different situations here:

Goods charged to branch at cost price:

Accounts prepared under this situation are:
Branch Stock Account ( It shows G.P or G.L)
Goods sent to branch account
Branch debtors account
Branch Petty cash account
Branch P & L Account
Branch cash account

Goods sent to branch at sales price:

Accounts prepared under this situation are:
Branch stock account (it shows shortage or surplus)
Branch adjustment account (it shows G.P or G. L)
Goods sent to branch account
Branch profit and loss account
Stock reserve/suspense account
Expenses account, branch debtors’ account, branch cash account,
branch assets account etc.
Journal Entries:
When goods are sent to branch
Branch stock A/c Dr.
Goods sent to branch A/c
When sales are made by Branch
Cash A/c / Debtors A/c Dr.
Branch Stock A/c
When cash is received from debtors
Cash A/c Dr.
Branch debtors A/c
For discount allowed, allowances and bad debts
Branch expenses Dr.
Branch stock A/c
For agreed allowances to customers off selling price already taken
into account while invoicing
Branch adjustment A/c Dr.
Branch Stock A/c
When goods are returned by branch debtors
Branch stock A/c Dr.
Branch Debtors A/c
When goods are returned by branch debtors direct to H.O.
Goods sent to Branch A/c Dr. (cost)
Branch adjustment A/c Dr. (Loading)
Branch Debtors A/c
For normal loss of stock
Branch adjustment A/c Dr. (Invoice price)
Branch Stock A/c
For abnormal loss, waste or leakage or shortage of stock
Branch adjustment A/c Dr. (Loading)
Branch P & L A/c Dr. (cost)
Branch Stock A/c (Invoice price)
When goods are transferred from one branch to another branch
Transferor branch:
Goods sent to branch A/c Dr. (cost)
Branch adjustment A/c Dr. (Load)
Branch stock A/c (invoice price)
Transferee Branch:
Branch Stock A/c Dr. (Invoice price)
Goods sent to branch A/c Dr. (cost)
Branch adjustment A/c Dr. (Load)
For apparent profit over the invoice price
Branch stock A/c Dr.
Branch Adjustment A/c
For branch expenses paid in cash
Branch expenses A/c Dr.
Cash a/c
For closing branch expenses A/c (Excluding cash in hand at the end) to
branch P & L Account
Branch Adjustment A/c (with N.R expenses)
Branch P & L A/c (with Recurring expenses)
Branch expenses A/c
For adjustment of excess price of opening stock
Stock reserve A/c Dr.
Branch adjustment A/c
For adjustment of excess price of closing
Branch adjustment A/c Dr.
Stock reserve A/c
For adjustment of excess price of goods sent to branch
Goods sent to branch A/c Dr.
Branch adjustment A/c
For insurance claim recoverable
Insurance claim A/c Dr.
Branch P & L A/c
For transfer of balance of branch adjustment A/c (That is G. P)
Branch adjustment A/c Dr.
Branch P & L A/c
For transfer of P & L A/c to general P & L A/c (Profit)
Branch P & L A/c Dr.
General P& L A/c
For closing the goods sent to branch account
Goods sent to branch A/c Dr.
Purchases A/c / Trading A/c
When goods are sent to branch at cost plus
certain fixed percentage on a cost:
Account prepared under this method is similar to
the situation as when goods are sent to branch
at sales price, but in this case:
Branch stock account represents either apparent
profit or apparent loss.
Normal loss in this case is entered in the branch
stock account.
Branch adjustment account shows G. P / G.L
Branch P & L Account N.P or N.L
(D) Wholesale branch system:

The goods are sent by the H.O. to the branches at WP

and if all the goods are sold there is no problem but if
some goods remain unsold then unsold goods must
be reduced to cost price by making a stock reserve
and it will be debited to H.O. P & L A/c.
Goods in Transit
In the books of H.O.
Goods in transit A/c Dr.
Branch A/c
Foreign Branches:-
 Presented By

Tajinder Kaur
Assistant Prof. (Commerce)
Post Graduate Govt. College
Sector 11
Chandigarh (UT)