Financial Accounting and

Analysis
Unit-1
 SYLLABUS
Meaning and Scope of Accounting
Evolution of Accounting
Users of Accounting
Basic Accounting terminologies
Principles of Accounting
Accounting Concepts & Conventions
Accounting Equation
Depreciation Accounting
A Housewife
Such a record will help her in knowing about-
(i) The sources from which she received cash and
the purposes for which it was utilised.
(ii) Whether her receipts are more than her
payments or vice-versa?
(iii) The balance of cash in hand or deficit, if any at
the end of a period.
The need for accounting is all the more great for a person who is
running a business. He must know :
(i) What he owns?
(ii) What he owes?
(iii) Whether he has earn a profit or suffered a loss on account of
running a business?
(iv) What is his financial position i.e. whether he will be in a position
to meet all his commitments in the near future or he is in the process
of becoming a bankrupt.
 Meaning and Scope of Accounting
The Committee on Terminology set up by the American Institute of Certified Public Accountants
formulated the following definition of accounting in 1961:
• “Accounting is the art of recording, classifying, and summarizing 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 result thereof.”
• Accounting is simply an art of record keeping.
• The process of accounting starts by first identifying the events and transactions which are of financial
character and then be recorded in the books of account.
• It records transactions in terms of money. All transactions are recorded in terms of common measure
i.e. money which increases the understanding of the state of affairs of the business.
• It records only those transactions and events which are of financial character. If an event has no
financial character then it will not be capable of being measured in terms of money ; it will not be,
therefore, recorded.
• It is the art of interpreting the results of operations to determine the financial position of the
enterprise, the progress it has made and how well it is getting along.
 ORIGIN
AND GROWTH
OF ACCOUNTING
●Accounting was practised in India twenty three centuries ago as
is clear from the book named "Arthashastra" written by Kautilya,
King Chandragupta's minister. This book not only relates to
politics and economics, but also explain the art of proper keeping
of accounts.
●The modern system of accounting based on the principles of
double entry system owes it origin to Lucco Pacioli who first
published the principles of Double Entry System in 1494 at Venice
in Italy.
 Branches of Accounting
Accounting has three main forms or branches viz. financial
accounting, cost accounting and management accounting.
(i) Financial Accounting: It is concerned with record-keeping
directed towards the preparation of trial balance, profit and loss
account and balance sheet.
(ii) Cost Accounting: Cost accounting is the process of accounting
for costs. It is a systematic procedure for determining the unit cost of
output produced or services rendered. The main functions of cost
accounting are to ascertain the cost of a product and to help the
management in the control of cost.
(iii) Management Accounting: Management accounting is primarily
concerned with the supply of information which is useful to the
management in decision-making, increasing efficiency of business
and maximizing profits
 Scope of
Financial
Accounting
 OBJECTIVES OF ACCOUNTING
The objectives of accounting can be given as follows:
• Systematic recording of transactions

• Ascertainment of results of above recorded transactions

• Ascertainment of the financial position of the business –

• Providing information to the users for rational decision-making

• To know the solvency position –

 Functions of Accounting

The following are the main functions of accounting:

(i) Keeping Systematic Records: Accounting is done to keep a systematic record of financial
transactions.
(ii) Protecting and Controlling Business Properties: Accounting helps to see that there is no
unauthorized use or disposal of any assets or property belonging to the firm, because proper records are
maintained. Accounting will furnish information about money due from various persons and money due
to various parties. The firm can see that all amounts due to it are recovered in due time and that no
amount is paid unnecessarily.
(iii) Ascertaining the Operational Profit/Loss: Accounting helps to determine the results of the
activities in a given period, usually a year, i.e. to show how much profit has been earned or how much
loss has been incurred. This is done by keeping a proper record of revenues and expenses of a
particular period and then matching the revenues with the corresponding costs.
(iv) Ascertaining the Financial Position of the Business: Balance sheet is prepared to ascertain the
financial position of the firm at the end of a particular period. It shows the values of the assets and the
liabilities of the business entity.
(v) Facilitating Rational Decision Making: Accounting facilitates collection, analysis and reporting of
information at the required point of time to the required levels of authority in order to facilitate rational
decision making.
 Advantages of Accounting
The following are the advantages of accounting:
(i) Maintenance of Business Records: All financial transactions are recorded in a systematic manner in the
books of accounts so that there is no need to depend upon on memory. It is impossible to remember the
business transactions which have grown in size and complexity.
(ii) Preparation of Financial Statements: Proper recording of transactions facilitates the preparation of financial
statements i.e. the trading and profit and loss account and balance sheet.
(iii) Comparison of Results: Accounting information when properly recorded can be used to compare the
results of one year with those of earlier years so that the significant changes can be analyzed.
(iv) Decision Making: Accounting information helps the management to plan its future activities by preparing
budgets and coordination of various activities in different departments.
(v) Evidence in Legal Matters: Properly recorded accounting information can be produced as evidence in a
court of law.
(vi) Provides Information to Interested Parties: Interested parties like owners, creditors, management,
employees, customers, government, etc. can get financial information about the organization.
(vii) Helps in Taxation Matters: Income tax and/sales tax authorities depend for taxation matter on the accounts
maintained by the business.
(viii) Valuation of Business: When the business is to be sold, the accounting information can be utilized to
determine the proper value of business.
 Limitations of Accounting
The following are the limitations of accounting:
(i) Accounting information is expressed in terms of money: The accountant measures only those events
that are of financial nature i.e. capable of being expressed in terms of money. Non-monetary items or
events which cannot be measured are not recorded in accounting.
(ii) Accounting information is based on estimates: Some accounting data are based on estimates and
some estimates may be inaccurate.
(iii) Accounting information may be biased: Accounting information is not without personal influence or
bias of the accountant. In measuring income, accountant has a choice between different methods of
inventory valuation, deprecation methods, treatment of capital and revenue items etc. Hence, due to the
lack of objectivity income arrived at may not be correct in certain cases.
(iv) Fixed assets are recorded at the original cost: The values of fixed assets change over time and so
there may be a great difference between the original cost and current replacement cost. Balance sheet
may not show true and fair view of the financial position on a particular date.
(v) Accounting can be manipulated: Accounting information may not be used as the only test of
managerial performance as profits can be manipulated or misrepresented.
(vi) Money as a measurement unit changes in value: The value of money does not remain stable. Unless
price level changes are considered in measurement of income, the accounting information will not show
true financial results.
 BOOK-KEEPING
• Book-keeping is mainly concerned with recording of financial data relating to
the business operations in a significant and orderly manner.
• It is concerned with the permanent record of all transactions in a systematic
manner to show its financial effect on the business.
• It covers procedural aspects of accounting work and includes record keeping
function. It is the science and art of correctly recording in books of account all
those business transactions that result in the transfer of money or money’s
worth.
• Book-keeping and accounting are often used interchangeably but they are
different from each other. Accounting is a broader and more analytical subject
 SYSTEMS OF ACCOUNTING
Cash System of Accounting
It is a system in which accounting entries are made only when cash
is received or paid.
No entry is made when a payment or receipt is merely due
It may not treat any revenue to have been earned or even sales to
have taken place unless cash is actually paid by customers.
Similarly, expenses are restricted to the actual payments in cash
during the current year and it is immaterial whether the payments
have been made for previous period or future period.
Cash basis of accounting is incompatible with the matching principle
of income determination. Hence, the financial statements prepared
under this system do not present a true and fair view of operating
results and financial position of the organization.
Accrual System of Accounting:
This is also known as mercantile system of accounting. It is a system
in which transactions are recorded on the basis of amounts having
become due for payment or receipt.
Record the financial effects of the transactions, events, and
circumstances of an enterprise in the period in which they occur
rather than recording them in period(s) in which cash is received or
paid by the enterprise.
The purpose of accrual basis accounting is to relate the revenue
earned to cost incurred so that reported net
income measures an enterprise’s performance during a period
instead of merely listing its cash receipts and
payments.
Accrual basis of accounting recognizes assets, liabilities or
components of revenues and expenses received or paid in
cash in past and expected to be received or paid in cash in
the future.
The following are the essential features of accrual basis:
– Revenue is recognized as it is earned.
– Costs are matched against revenues on the basis of
relevant time period to determine periodic income.
Users of Accounting Information
• Owners/Shareholders • Employees
• Managers • Regulatory Agencies
• Prospective Investors • Researchers
• Creditors, Bankers and • Customers
other Lending
Institutions
• Government:
 Basic
Accounting
Terms
Transaction
It means an event or a business activity which involves
•

exchange of money or money’s worth between parties.

The event can be measured in terms of money and changes the
•

financial position of a person.

E.g. purchase of goods would involve receiving material and
•

making payment or creating an obligation to pay to the supplier

at a future date.
Transaction could be a cash transaction or credit transaction.
•
 These are tangible article or
commodity in which a business
deals. These articles or
commodities are either bought
and sold or produced and sold.
Goods/Services
Services are intangible in nature
which are rendered with or
without the object of earning
profits.
 • Asset is a resource owned by the business with the purpose of
using it for generating future profits.

1. Tangible Assets are the Capital assets which have some physical
existence. They can, therefore, be seen, touched and felt, e.g.
Plant and Machinery, Furniture and Fittings, Land and Buildings,
Books, Computers, Vehicles, etc.
Asset 2. lntangible Assets, they cannot be seen or felt although they help
to generate revenue in future, e.g. Goodwill, Patents, Trade-
marks, Copyrights, Brand Equity, Designs, Intellectual Property,
etc.
3. Fixed Assets
4. Current Assets
5. Ficticious Assets
● An obligation of financial nature to be settled at a
future date. It represents amount of money that the
business owes to the other parties. E.g. when goods
are bought on credit, the firm will create an obligation
to pay to the supplier the price of goods on an agreed
future date or when a loan is taken from bank, an
obligation to pay interest and principal amount is
Liability
created.

Types of Liabilities
● Current Liabilities
● Non-Current Liabilities
Internal Liability
These represent proprietor’s equity, i.e. all those amount which are entitled to the
proprietor, e.g., Capital, Reserves, Undistributed Profits, etc.

Capital
It is amount invested in the business by its owners. It may be in the form of cash, goods,
or any other asset which the proprietor or partners of business invest in the business
activity. From business point of view, capital of owners is a liability which is to be settled
only in the event of closure or transfer of the business.

Working Capital
In order to maintain flows of revenue from operation, every firm needs certain amount
of current assets. For example, cash is required either to pay for expenses or to meet
obligation for service received or goods purchased, etc. by a firm.
Contingent Liability
It represents a potential obligation that could be created
depending on the outcome of an event.
E.g. if supplier of the business files a legal suit, it will not
be treated as a liability because no obligation is created
immediately. If the verdict of the case is given in favour
of the supplier then only the obligation is created. Till
that it is treated as a contingent liability.
 Drawings
It represents an amount of cash,
goods or any other assets which the
owner withdraws from business for
his or her personal use. e.g. if the life
insurance premium of proprietor or
a partner of business is paid from
the business cash, it is called
drawings.
 Debtor
The sum total or aggregate of the amounts which the
customer owe to the business for purchasing goods on
credit or services rendered or in respect of other
contractual obligations, is known as Sundry Debtors or
Trade Debtors, or Trade Receivable, or Book-Debts or
Debtors.
(i) Good debts: The debts which are sure to be
realized are called good debts.

(ii) Doubtful Debts: The debts which may or may not

be realized are called doubtful debts.

(iii) Bad debts: The debts which cannot be realized at

all are called bad debts.
Creditor
A creditor is a person to whom the
business owes money or money’s worth.
e.g. money payable to supplier of goods
or provider of service. Creditors are
generally classified as Current Liabilities.
Capital Expenditure
This represents expenditure incurred for the purpose of acquiring a
fixed asset which is intended to be used over long term for earning
profits there from. e. g. amount paid to buy a computer for office use is
a capital expenditure. At times expenditure may be incurred for
enhancing the production capacity of the machine. This also will be a
capital expenditure.

Revenue expenditure
This represents expenditure incurred to earn revenue of the current
period. The benefits of revenue expenses get exhausted in the year of
the incurrence. e.g. repairs, insurance, salary & wages to employees,
travel etc.
Purchases

The total amount of goods purchased by the firm on cash or credit.

● It does not include purchase of any assets.
● Goods for personal use is not included.
● In trading, purchase consists of goods for resale.
● In manufacturing it consists of :-
■ Raw Materials
■ Semi- finished goods
■ Finished goods
Sales

The total amount of goods sold to the

customers on cash or credit. Goods sent on
consignment and goods sold on hire
purchase basis are excluded from sales.
 Discount
They are of two types-
(a)Trade Discount – It means the discount allowed on printed price at the
time of sales. For example, when a television with printed price of Rs.
20,000 is sold at Rs. 18,000 there is Rs. 2,000 of trade discount. Trade
discount is given to increase the sales.
(b)Cash discount – It means the discount allowed for prompt payment.
When the buyer makes payment within the specified time or on the spot,
cash discount is given. Its purpose is to encourage the customers to make
quick payments for goods purchased.
Goods
• Products in which the business unit is dealing.

Stock/ Inventory-
• Stock includes goods unsold on a particular date.
• It includes opening and closing stock.
• Opening Stock means goods unsold in the beginning of the
accounting period.
• Closing Stock means goods unsold at the end of the
accounting period.
• Revenue-
• The amount receivable or realised from the
sale of goods and earning from interest,
dividend, commission, etc.

• Expenses
• The amount spent in order produce and sell
the goods and services.
• Profit
• The excess of revenue of a period over its related
expenses. It increases the investment of the owner.
• Loss
• The excess of expenses of a period over its related
revenues. It decreases the owner’s equity.
• Gain
• A profit that arises from events or transactions
which are incidental.
 Accounting Principles
● Accounting principles are basic guidelines that
provide standards for scientific accounting
practices and procedures.
● They guide as to how the transactions are to
be recorded and reported.
● They assure uniformity and
understandability.
 Accounting Standards
● Accounting standards are written/policy
documents issued by the government or
professional institutes or other regulatory body
covering various aspects of recognition,
measurement, treatment, presentation and
disclosure of accounting transactions in the financial
statements.
 Accounting Concepts
● Accounting concepts lay down the foundation for
accounting principles.
● They are ideas essentially at mental level and are self-
evident. These concepts ensure recording of financial facts
on sound bases and logical considerations.
● They are considered as postulates i.e. Basic assumptions
or conditions upon which the science of accounting is
based.
 Accounting Conventions
● Accounting conventions are methods or
procedures that are widely accepted. When
transactions are recorded or interpreted, they follow
the conventions.
● They denote the circumstances or traditions
which guide the accountants while preparing the
accounting statements.
 Business Entity Concept

• According to this concept, business is treated as an entity separate from its

owners.
• It is treated to have a distinct accounting entity which controls the
resources of the concern and is accountable thereof.
• Accounts are kept for a business entity as distinguished from the person(s)
owning it. All transactions of the business are recorded in the books of the
business from the point of view of the business.
• The failure to recognize the business as a separate accounting entity would
make it extremely difficult to evaluate the performance of the business
since the private transactions would get mixed with business transaction.
• The overall effect of adopting this concept is:
– Only the business transactions are recorded and reported and not the
personal transactions of the owners.
– Income or profit is the property of the business unless distributed
among the owners.
– The personal assets of the owners or shareholders are not considered
while recording and reporting the assets of the business entity.
 Money Measurement Concept
• Only those transactions, which can be measured in terms of money are
recorded.

• Events which cannot be expressed in money terms do not find place in the
books of account though they may be very important for the business.

• Non-monetary events like, death, dispute, sentiments, efficiency etc. are not
recorded in the books, even though these may have a great effect.
 Periodicity concept
• This is also called the concept of definite accounting period.

• For a business entity it causes inconvenience to measure performance achieved by the entity in the ordinary course of
business.

• So a small but workable fraction of time is chosen out of infinite life cycle of the business entity for measuring performance
and looking at the financial position. Generally one year period is taken up for performance measurement and appraisal of
financial position. However, it may also be 6 months or 9 months or 15 months.

• According to this concept accounts should be prepared after every period & not at the end of the life of the entity. Usually
this period is one calendar year. We generally follow from 1st April of a year to 31st March of the immediately following year.
• The periodicity concept facilitates in:
(i) Comparing of financial statements of different periods
(ii) Uniform and consistent accounting treatment for ascertaining the profit and assets of the business

(iii) Matching periodic revenues with expenses for getting correct results of the business operations
 Accrual Concept
• Under accrual concept, the effects of transactions and other events are recognized on mercantile basis i.e.,
when they occur (and not as cash or a cash equivalent is received or paid).

• They are recorded in the accounting records and reported in the financial statements of the periods to which
they relate.

• Accrual means recognition of revenue and costs as they are earned or incurred and not as money is received or
paid.

• Accrual Concept provides the foundation on which the structure of present day accounting has been developed.

• On the basis of this concept, adjustment entries relating to outstanding and prepaid expenses and income
received in advance etc. are made.

• They have their impact on the profit and loss account and the balance sheet.
 Matching Concept
• In this concept, all expenses matched with the revenue of that period should only be taken into consideration.

• In the financial statements of the organization if any revenue is recognized then expenses related to earn that revenue
should also be recognized.

• This concept is based on accrual concept as it considers the occurrence of expenses and income and do not concentrate
on actual inflow or outflow of cash.

• It is not necessary that every expense identify every income. Some expenses are directly related to the revenue and
some are time bound.

• For example:- selling expenses are directly related to sales but rent, salaries etc are recorded on accrual basis for a
particular accounting period. In other words periodicity concept has also been followed while applying matching
concept.

• Accrual, matching and periodicity concepts work together for income measurement and recognition of assets and
liabilities.
 Going Concern Concept
• Business transactions are recorded on the assumption that the business will continue for a long-time.
• There is neither the intention nor the necessity to liquidate the particular business venture in the foreseeable
future.
• The valuation of assets of a business entity is dependent on this assumption. Traditionally, accountants follow historical cost
in majority of the cases.
• Suppose Mr. X purchased a machine for his business paying ` 5,00,000 out of ` 7,00,000 invested by him. He also paid
transportation expenses and installation charges amounting to ` 70,000. If he is still willing to continue the business, his
financial position will be as follows:

• Now if he decides to back out and desires to sell the machine, it may fetch more than or less than 5,70,000. So his financial
position should be different.

• If going concern concept is taken, increase/ decrease in the value of assets in the short-run is ignored.

• The concept indicates that assets are kept for generating benefit in future, not for immediate sale; current change in the
asset value is not realizable and so it should not be counted.
 Cost Concept
• By this concept, the value of an asset is to be determined on the basis of historical cost, in other words,
acquisition cost.

• When a machine is acquired by paying ` 5,00,000, following cost concept the value of the machine is taken
as ` 5,00,000.

• Current cost of an asset is not easily determinable.

• If the asset is purchased on 1.1.1995 and such model is not available in the market, it becomes difficult to
determine which model is the appropriate equivalent to the existing one.

• Similarly, unless the machine is actually sold, realizable value will give only a hypothetical figure.

• Cost concept is not much relevant for investors and other users because they are more interested in knowing
what the business is actually worth today rather than the original cost.
 Realization Concept
• According to this concept revenue is recognized only when a sale is made.
• Unless money has been realized i.e., cash has been received or a legal obligation to pay has been assumed by the
customer, no sale can be said to have taken place and no profit can be said to have arisen.
• It closely follows the cost concept. Any change in value of an asset is to be recorded only when the business
realizes it.
• When an asset is recorded at its historical cost of ` 5,00,000 and even if its current cost is ` 15,00,000 such
change is not counted unless there is certainty that such change will materialize.
Example: Mr. X purchased a piece of land on 1.1.1995 paying `2,000. Its current market value is 1,02,000 on
31.12.2020. Should the accountant show the land at `2,000 following cost concept and ignoring `1,00,000 value
increase since it is not realized? If he does so, the financial position would be:
 Dual-Aspect Concept
• This concept is based on double entry book-keeping which means that accounting system is set up in such a way that a record is
made of the two aspects of each transaction that affects the records.

• The recognition of the two aspects to every transaction is known as dual aspect concept.

• Modern financial accounting is based on dual aspect concept.

• One entry consists of debit to one or more accounts and another entry consists of credit to some other one or more accounts.

• However, the total amount debited is always equal to the total amount credited.

• Therefore, at any point of time total assets of a business are equal to its total liabilities.

• Thus, this concept expresses the relationship that exists among assets, liabilities and the capital in the form of an accounting equation
which is as follows:

Assets = Liabilities + Capital, or

Capital = Assets – Liabilities

• Since accounting system requires recording of the two aspects of each transaction, this concept shows the effect of each transaction
on them.
 Accounting Conventions
• The term ‘convention’ denotes custom or tradition or practice based on general agreement between the
accounting bodies which guide the accountant while preparing the financial statements.

• It is a guide to the selection or application of a procedure.

• In fact financial statements, namely, the profit and loss account and balance sheet are prepared according to
the accounting conventions.

Accounting Conventions
Disclosure

Consistency

Materiality

Conservatism
 Disclosure
• Apart from statutory requirements good accounting practice also demands all significant information should
be fully and fairly disclosed in the financial statements.

• All information which is of material interest to proprietors, creditors and investors should be disclosed in
accounting statements.

• The accounts must be honestly prepared and they must disclose all material information.

• This convention is gaining more importance because most of big business units are in the form of joint stock
companies where ownership is divorced from management.

• The Companies Act makes ample provisions for disclosure of essential information so that there is no chance
of any material information being left out.
 Consistency
• The consistency convention implies that the accounting practices should remain the same from one year to
another.

• The results of different years will be comparable only when accounting rules are continuously adhered to from year
to year.

• For example, the principle of valuing stock at cost or market price whichever is lower should be followed year after
year to get comparable results.

• Similarly, if depreciation is charged on fixed assets according to diminishing balance method, it should be done year
after year.

• The rationale behind this principle is that frequent changes in accounting treatment would make the financial
statements unreliable to the persons who use them.

• The consistency convention does not mean that a particular method of accounting once adopted can never be
changed.
• When an accounting change is desirable, it should be fully disclosed in the financial statements along with its effect
in terms of rupee amounts on the reported income and financial position of the year in which the change is made.
 Materiality
• According to the convention of materiality, accountants should report only what is material and ignore insignificant
details while preparing the final accounts.

• The decision whether the transaction is material or not should be made by the accountant on the basis of
professional experience and judgment.

• According to materiality principle, all the items having significant economic effect on the business of the enterprise
should be disclosed in the financial statements.

• The term materiality is the subjective term. It is on the judgement, common sense and discretion of the accountant
that which item is material and which is not.

• . For example stationary purchased by the organization though not used fully in the accounting year purchased still
shown as an expense of that year because of the materiality concept.
 Conservatism
• Financial statements are usually drawn up on a conservative basis.
• Conservatism states that the accountant should not anticipate any future income however they should
provide for all possible losses.
• When there are many alternative values of an asset, an accountant should choose the method which
leads to the lesser value. Later on we shall see that the golden rule of current assets valuation - ‘cost or
market price whichever is lower’ originated from this concept.
• The Realization Concept also states that no change should be counted unless it has materialized. The
Conservatism Concept puts a further brake on it. It is not prudent to count unrealized gain but it is
desirable to guard against all possible losses.
• For this concept there should be at least three qualitative characteristics of financial statements,
namely,
(i) Prudence, i.e., judgement about the possible future losses which are to be guarded, as well as
gains which are uncertain.
(ii) Neutrality, i.e., unbiased outlook is required to identify and record such possible losses, as well as
to exclude uncertain gains,
(iii) Faithful representation of alternative values.
FUNDAMENTAL ACCOUNTING ASSUMPTIONS
There are three fundamental accounting assumptions :

(i) Going Concern

(ii) Consistency

(iii) Accrual

If nothing has been written about the fundamental accounting assumption in the financial
statements then it is assumed that they have already been followed in their preparation of financial
statements. However, if any of the above mentioned fundamental accounting assumption is not
followed then this fact should be specifically disclosed.
 ACCOUNTING EQUATION
• All businesses have three parts to their financial
make-up
• The things or the property that the company owns- ASSETS
• The money that the company owes to other people-
LIABILITIES
• The claim of the owner of the business to the assets after the
liabilities are paid- OWNER’S EQUITY OR CAPITAL
ASSETS are the resources owned by a
business
Cash

Account
Receiva Land
bles

Assets
Building
Vehicles
s

Equipm
ents
LIABILITIES are creditor’s claim on Assets
Account
s
Payable

Wages Notes
Payable Liabilities Payable

Taxes
Payable
 Equity is the OWNER’S CLAIM ON ASSETS
• In a business, equity is composed of four parts that either increase or
decrease equity.
Withdrawals: Expenses: What
Capital: What the Revenues: What
What the owner the company pays
owner puts into the company
takes out of the to operate the
the business receives after sales
business business

Decrease Decrease
INCREASE INCREASE
 EQUITY

ASSETS = LIABILITIES + CAPITAL- WITHDRAWAL + REVENUES -

EXPENSE

This Equation must

ALWAYS BE IN BALANCE
Journalise the following transactions, post them in the ledger and balance the
accounts in the books of Mr. Rajesh.
2020 ₹
Jan. 1 Started business with cash 2,00,000
Jan. 3 Purchased goods for cash 60,000
Jan. 5 Sold goods to Shyam 60,000
Jan. 6 Sold goods for cash 20,000
Jan. 9 Received cash from Shyam 40,000
Jan. 13 Goods purchased from Ram 40,000
Jan. 20 Cash paid to Ram 20,000
Jan. 25 Paid office rent 4,000
Jan. 31 Paid salaries to staff 20,000
Jan. 31 Returned goods by Shyam 10,000
Give Accounting Equation for the following
transactions of Jitesh:
– Started business with cash ` 36,000
– Paid rent in advance `800
– Purchased goods for cash `10,000 and on
credit `4,000
– Sold goods for cash `8,000
– Rent paid `2000 and rent outstanding `400
– Bought cycle for personal use `16,000
– Purchased equipment for cash `10,000
– Paid to creditors `1,200
– Some business expenses paid `1,800
– Depreciation on equipment `2,000
Aman had the following transactions. Use accounting equation to show their effect on his assets,
liabilities and capital.

– Brought ` 20,00,000 in cash to start business.

– Purchased Government Bonds for cash ` 1,06,000.

– Purchased an office building for ` 9,00,000 giving ` 6,00,000 in cash and the balance through
a loan.

– Sold Government Bonds costing ` 6,000 for ` 6,500.

– Purchased an old car for `1,68,000.

– Received cash for rent ` 21,600.

– Paid cash ` 3,000 for loan and ` 1,800 for interest.

– Paid cash for office building expenses ` 1,800.

– Received cash for Interest on Government Bonds `1,200.

Prepare the Accounting Equation on the basis of the following transactions:

– Sohan commenced business with `10,00,000

– Withdrew for private use ` 1,700

– Purchased goods on credit ` 14,000

– Purchased goods for cash ` 10,000

– Paid salaries `6,000

– Paid to creditors `10,000

– Sold goods on credit for `15,000

– Sold goods for cash (cost price was `3,000) ` 4,000

– Purchased machinery for ` 45,000