Hsslive Xi Acc CH 1 Binoy George

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HSE-1 Accountancy, Study notes with HomeWorks-2022 Chapter-1
Chapter-1
Introduction to Accounting
This Chapter covers the following areas:
➢ Meaning and definition of accounting

➢ Economic Events
➢ Interested Users of Information
➢ Accounting as a Source of Information
➢ Qualitative Characteristics of Accounting Information
➢ Objectives of Accounting
➢ Role of Accounting
➢ Basic Terms in Accounting (Entity, transactions, assets and its types, liabilities, capital, sales, revenue,
expenses, expenditure, profit, gain, loss, discount voucher, goods, drawings, purchase, stock,
debtors, creditors)
In a business, there are numerous transactions takes place. It is impossible for a business man
to memories all these. He also wants to know the financial position and operating results of the
business. Accounting helps the businessman in this regard.
Accounting is the language of business. It is the systematic process of identifying, recording,

classifying, summarising, interpreting and communicating financial information to users.
Accounting shows the profit earned or loss incurred during the accounting period. It also displays
the value and nature of assets, liabilities and capital. The primary objective of accounting is to
provide accounting information to interested parties to facilitate right business decisions.
Definition
According to 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.”
12-10-22 1 Binoy George

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Business Events
In a business, there are different types of events takes place. Some of them are measurable
in terms of money, others can’t. A business had earned a profit of Rs. 10,000. It is measurable
in terms of money. Appointment of an efficient manager, meeting of managers etc. are events
but can’t be measured in terms of money. So, events happened in a business can be classified
into two:
Economic Events
An economic event is the outcome of certain transactions, which are measurable in terms of
money. All the events which can be measured in terms of money are known as economic
events.
A business had earned a profit of Rs. 10,000. It is the result/outcome of certain transactions
that takes place in a business. It is an economic event because its value can be measurable
in terms of money.
Non-Economic Events
Events which cannot be measured in terms of money are called Non-Economic Events.
Appointment of an efficient manager, change in fashion, a customer visited our shop,death of
an employee, Starting of a new business by the competitor etc. are events but can’t be
measured in terms of money.
Homework-1
Classify the following events into Economic and Non-economic events.
Events
Sale of goods,
Purchase of materials
Appointment of a manager
A customer visited our shop
Quarrel between workers
Strike of employees
Acquisition of plant and machinery.
Resignation of an able and experienced manager

Answer:
No. Economic Events Non-economic Events
1
2
3
4
5
6.
Business Transaction
A business transaction is a financial transaction between two or more parties that
involves the exchange of goods, money, or services. To be considered a business
transaction, the following characteristics must be present:
• The transaction can be measured in monetary terms

• The transaction occurs between the business and a third party
• The transaction is on behalf of the business entity, and it is not for an individual
purpose
• The transaction is recorded by authorized legitimate documents like an invoice,
sale order, receipt, etc. that supports the transaction
• After each transaction, the total assets of a business must be equal to its total
liabilities and capital (Always, ASSET= CAPITAL + LIABILITIES).Therefore ,the
equality of the Balance Sheet cannot be disturbed by any transaction.
For example,
✓ Purchased goods for cash Rs.500
✓ Rent paid Rs.2000
✓ Cash received from Sajan Rs.5000
✓ Sold goods to Bindu Rs. 20000
✓ Cash deposited into SBI Rs.1000
Business transaction may be a cash transaction or a credit transaction.
Homework-2
State whether the following events are business transactions or not?
No. business transactions or not???????? Yes No
1. Purchased goods on credit Rs.500 Yes
2. Applied a bank loan of Rs.2,00,000
3. Purchased goods for cash Rs.2000

4. Received an intimation from BSNL to remit telephone bill for the Yes
month of July 2022 Rs.600.
(Note: Here the business has already received the services provided by the
BSNL. It is just like purchased goods on credit, here services purchased on
credit. It is a business transaction)
5. Salary paid Rs.1000
6. Cash received from Rajesh Rs.20,000
7. Telephone bill paid Rs.600
8 Bank loan of Rs. 2,00,000 sanctioned and taken
9. Sent a quotation to UC College, Aluva to supply 20 tables @

Rs.2,500 each
10 Sold goods to Manoj on credit Rs.500
11 Cash received from Manoj Rs.500
12 Appointed Mr. Suresh as purchase manager
A transaction may be external or internal.
1.External Transactions
Transaction between an outsider and the business is called external transactions. The
outsider/external party may be customer, supplier,Government,bank etc.
The following are the examples of such transactions:

⚫ Purchased goods from suppliers
⚫ Sold goods to customers
⚫ Rent paid to building owner
⚫ Electricity expenses paid
⚫ Salary paid to employees
2. Internal Transactions
An internal transaction is one that occurs entirely between the internal wings of an
enterprise.In other words, internal transaction is an economic activity within in a
business that can affect the accounting equation.
⚫ Supply of raw materials from stores department to the production department.
⚫ department giving office supplies to another department
⚫ charge of depreciation
⚫ amortization of prepaid expenses

Homewok-3
Give 4 examples each for internal and external transactions

Internal Transactions External Transactions
Need for accounting

At the end of an accounting year every businessman wants to know how much profit
the business made last year. Further the owner wants to know the financial position of
the business. In order to ascertain such information, it is essential to keep a complete
and systematic record of each and every business transaction occurred during the year.
Objectives of Accounting
Main objectives of accounting are:
1. Maintenance of records of business transactions

The main objective of accounting is to maintain systematic record of business
transactions and events. Business transactions are recorded in books of account
in monetary terms and in a chronological order.
2. Calculation of profit or loss
The second objective of accounting is to ascertain the net profit earned or loss
suffered on account of business transactions during a particular year. For this
purpose a statement called ‘Income statement’ or ‘Trading and profit and Loss
Account’ is prepared.
Trading and Profit and Loss Account provides the following information:
➢ How much goods have been purchased during a particular year?
➢ How much goods have been sold during a particular year?
➢ How much goods have remained unsold and what is it value?
➢ How much amount has been spent on various heads of expenditure?
➢ How much amount has been earned by various heads of revenue?
3. Determining the Financial Position
The business man wants to know the financial position of the business. For this
purpose, a statement called ‘Balance Sheet’ is prepared, it displays the values of
assets and liabilities of the business.
Provide Information to Various Parties
Accounting is the ‘language of business’. It communicates the relevant
accounting information to various interested parties.

4. Meeting Legal Requirements

Accounting records are accepted as evidence by the court, if they are maintained
systematically. Besides, the law such as Companies Act, Income Tax Act, GST
Act etc. requires timely submission of returns.
5. Assistance to Management
Management often requires financial information for decision making and
ensures efficient management. By providing timely information, accounting
assists the management in the task of planning, controlling and decision making.
Qualitative Characteristics of Accounting Information

Accounting information should be prepared and presented in such a way that it
should be useful to the end users and should possess the following qualitative
characteristics.
1. Reliability
Accounting information must be reliable. Reliability means the users must be able
to depend on accounting information. Reliable information should be free from error
and bias and verifiable. Verifiability means it can be verified from the source
documents such as cash memos, purchase invoices, sales invoices, agreements,
property deed etc. Verifiability ensures the truthfulness of the recorded transactions.
2. Relevance
To be relevant, information is to be available on time and must help in prediction.
Accounting must possess:
1. Confirmatory value – Provides information about past events

2. Predictive value – Provides predictive power regarding possible future events
3. Understandability
Understandability of accounting information means users of accounting information

must interpret it in the same sense as it is prepared and conveyed to them.
4. Comparability
Comparability means that the users should be able to compare the accounting
information of an enterprise of the period either with that of other periods (Intra-firm
comparison) or with the accounting information of other enterprises (Inter-firm
comparison).Use of common unit of measurement and common format of reporting
promotes comparability.

Users of Accounting Information

The accounting information generated by the accounting process is communicated in the form of
reports, statements etc. to the users who need it in different decision situations.
Users of Accounting Information

Internal Users External Users
(Parties within the business (Parties outside the business organization)
organization)
Owners Investors, banks, Shareholders (In case of company,
business is managed by Board of Directors)
Managers Creditors (Banks, financial institutions, debenture holders,
(Plant managers, stores other lenders)
managers, line supervisors etc.
who have direct access to the
books of accounts of the
business.)
Government authorities
Trade Unions, Workers (who have no access to the books of accounts
of the business).
Stock Exchange, SEBI, Registrar of Companies
Researchers
Consumers
General public
Homework-4
Classify the following users of Accounting information’s as Internal users / External
users
Users of Accounting Information Internal Users External Users
Trade Unions External users
Workers
Managers
Line supervisors
Share holders
Owner’s
Investors
Production Manager

Functions of Accounting
1. Measurement: Accounting measures past performance of the business
entity and display its current financial position.
2. Forecasting: Accounting helps in forecasting future performance and
financial position of the enterprise using past data.
3. Decision making: Accounting provides relevant information to the users
of accounts to take correct decisions. Dissemination of information is an
essential function of accounting.
4. Comparison and Evaluation: Accounting assess performance achieved
in relation to target and provide necessary information to managers.
Advantages/ Importance of Accounting

1. Accounting keeps a prompt and systematic record of all transactions.
2. Accounting helps the management in taking business decisions by analyzing
the financial statements and other information.
3. Accounting reports net result of business activities of an accounting period
by preparing Trading profit and loss account.
4. Accounting reports the financial position of the business by preparing a
Balance Sheet at the end of the accounting period.
5. It facilitates comparative study of the performance of the business over different
periods of time and with other firms.
6. Court accepts these records as evidence in case of disputes.
Limitations of Accounting
1. Recording past events
Accounting is historical in nature, i.e. what has happened in the past. From the
decision-making view point, information is needed not only of past but also about
the present and the future.
2. Recording only monetary items
It records only transactions which can be recorded in monetary terms. Qualitative
aspects like managerial skills, services of experts, satisfaction level of firm’s
customers etc. are not recorded.
3. Application of different methods
Use of different accounting methods by different firms reduces the reliability of
accounts.
Accounting Process
In a business there are numerous transactions will take place. It is impossible for the
business man to keep a memory of entire transactions of business. There must be
documentary evidence of every financial transaction. Business transactions like
purchase of goods, sale of goods, payment of wages etc. have an effect on the assets,

liabilities and capital of the business. We can ascertain the result of the business in
terms of profit/loss and value of assets and liabilities, if we maintain systematic and
scientific record (Accounting) of all the transaction of financial nature. Accounting
process can be briefly explained as follows:
Step-1 Identifying business transaction is the first step of accounting. These transactions are
recorded in the subsidiary books and journal proper.
Step-2 With the help of subsidiary book we can prepare Ledger accounts.
Step-3 The balances shown by ledger accounts are used for preparing Trial Balance, which
serves as the basis for the preparation of financial statements.
Step-4 Preparation of Financial Statement-Financial statement is classified as Income

Statement and Position Statement.
Income statement consists of Trading account which shows Gross Profit/Loss and Profit and
Loss Account, which shows Net Profit/Loss.
Finally, Position statement (Balance Sheet) is prepared, which reflects the true position of
Step-5 Analysis of financial statements and report it to various parties. The information helps
them in taking sound and judicious decisions about the business entity.
Step-6 Communicating -It is concerned with the transmission of summarized, analysed and
interpreted information to the end-users to enable theme to make rational decisions.
Accounting Process-Diagrammatic presentation
Identifying and measuring Business Recording:

Transactions
Preparation of Cassh
and Events book,purchase book,sales
book,purchase return
Communicating to users book,sales return
book,journal prper etc
Analysis and interpretation
Summarising-Preparation of (1) Trial Balance (2) Classifying (Posting to ledger)

Trading and Profit and Loss Account (3) Balance Sheet

Book-Keeping, Accounting and Accountancy

The terms ‘Book Keeping and ‘Acccounting’, often considered as same, but it is not
correct. Accounting is a wider concept and includes book keeping also.
Book-keeping
According to JR Batliboi”Book-keeping is an art of recording business dealings in a set
of books”
Book keeping is a part of accounting and it is mainly concerned with recording

transactions in the journal, classifying and summarizing them into accounts through
posting, balancing of accounts and preparation of a trial balance.
Accounting
Accountant’s work goes beyond that of a book-keeper. Accounting starts where
book-keeping ends. It includes the following activities:
1) Summarising-Summarising the classified information in the form of Profit and

Loss Account and Balance Sheet
2) Analysing and interpreting-after reading and analyzing profit and loss
account and balance sheet, accountant find out or drawing out meaningful
information from them.
3) Communication-Here accountant communicate relevant information s to
interested parties.
In actual practice the accounting process includes the book-keeping functions also
because on the basis of book-keeping records ,an accountant prepare financial
statements like Profit and Loss Account, Balance Sheet etc.In a small concern, the
accountant performs the work of book-keeper also.
Difference between Book-keeping and Accounting
Basis Book Keeping Accounting

Stage It is the primary stage and act as Accounting begins where book-
the base for accounting. keeping ends.
Decision Never helps management in Decision making possible on the
making taking decisions. basis of accounting records
Books Journal and Ledger Profit and Loss Account, Balance
prepared Sheet and Cash Flow Statement
Scope Just maintains records of business Preparation of financial statements,

transactions interpreting results and
communicating it to interested parties

Sub Fields Single entry system and double Financial accounting, cost
entry system of book keeping accounting, management accounting,
human resource accounting
Nature Book-keeping work is routine and The accounting work is analytical in
clerical in nature nature.
Accountancy
Accountancy refers to a systematic knowledge of accounting. It tells how to prepare
books of accounts, its principles, techniques etc. It is a discipline just like physics,
chemistry etc. It gives knowledge of how to make accounting works. It is concerned
with book-keeping as well as accounting.
According to Kohler “Accountancy refers to the entire body of the theory and
practice of accounting”
Branches (Sub-disciplines) of Accounting

1. Financial accounting
Financial Accounting is concerned with systematic recording and maintenance of

financial transactions. The main objective of financial accounting is to find out the
result of business operations (profit/loss) and to disclose information about the
financial position (Strength/weakness) of the business. Financial accounting is the
original form of accounting.
2. Cost accounting
This branch of accounting is concerned with ascertaining cost of products,

operations; process etc.The purpose of cost accounting is to analyse the
expenditure so as to ascertain the cost of various products manufactured by the firm
and fix its prices. It also helps in controlling the costs and providing necessary
costing information to management for decision-making.
3. Management Accounting
It is concerned with generating accounting information relating to funds, costs,

profits etc. This information helps the managers to take correct decisions and also
helpful in planning and controlling business operations. Management accounting
draws the relevant information mainly from financial accounting and cost accounting.
Management accounting uses various techniques like ratio analysis, budgetary
control, fund flow statement, cash flow statement etc. Management accounting
generate relevant information like sales forecast, purchase requirements, manpower
needs etc.

Accounting as a Source of Information

Every step in the process of accounting generates information. Accounting process
begins with the identification of transactions and ends with the preparation of financial
statements. Generation of information is not an end in itself. It is a means to facilitate
the dissemination of information among different user groups.
Accounting information should ensure to:
• provide information for making economic decisions;
• serve the users who rely on financial statements as their principal source of
information;
• provide information useful for predicting and evaluating the amount, timing and
uncertainty of potential cash-flows;
Basic Terms in Accounting

Entity
Entity means a reality that has a definite individual existence. Entity may be a person
or business organization like sole trading concern, partnership, company etc.
Business entity means a specifically identifiable business enterprise like Wipro,

Reliance Industries Ltd, ITC Limited, Kalyan Silks etc.
An accounting system is always devised for a specific business entity (also called
accounting entity)
Business Transaction
A business transaction is a financial transaction between two or more parties that

involves the exchange of goods, money, or services.

Business transaction may be a cash transaction or a credit transaction.
Cash Transactions:
A cash transaction is a transaction which involves immediate payment or receipt of
cash. Cash transactions are settled immediately.
Example:
Purchased goods for cash Rs.50,000
Purchased goods from Rajan Stores for Cash Rs.2,000
Paid rent Rs.3,000
Commission received Rs.2,000
Cash received from Suresh Rs.500
Purchased machinery from General stores using debit card Rs.1,00,000.
(The debit card functions the same as cash as it removes the payment for the
machinery immediately from the purchaser's bank account. This is a cash
transaction.)
Paid rent by issuing cheque Rs.2500
Suresh , a customer, directly deposited into our bank account using Google pay
Rs.50,000
Tips to identify a cash transaction:
(i) All transactions in which the word “paid” / “received” is mentioned are deemed cash
transactions (e.g., rent paid, salaries paid, commission received etc.)
(ii) All transactions in which the words “cash or cheque” are used are deemed cash
transactions (e.g., cash received for Rs.1,000 or cheque received for Rs.10,000)
(iii) If cash and a person’s name are mentioned then this will be deemed a cash
transaction (e.g., goods purchased from Hari for cash Rs.3,000)
(iv) Occasionally, nothing is mentioned in a transaction: in such cases, it is a cash

transaction (e.g., goods sold for Rs.4,000)

Credit transactions:
If payment or receipt of cash in result of a transaction is postponed at some future

date, then this transaction will be known as “Credit Transaction.“ It does not involve
immediate payment or receipt of cash. Credit transactions are settled subsequent to
the transaction at a later date.
Tips to identify Credit Transactions
(i) All transactions in which the words “on credit or account” are mentioned are
deemed credit transactions
(e.g., Bought goods on credit/account for Rs.5,000 from Sunil)
(ii) If a transaction involves the name of a person or firm without mentioning the word
“cash,” it will be a credit transaction (e.g., Sold goods to Jagan Rs.8,000)
Homework-5
Classify the following transactions into cash and credit
No Transaction Cash/Credit
1 Started business with cash Rs. 1,00,000 Cash
2 Purchased goods from Kayan Traders Rs.20,000
3 Cash sales Rs.500
4 Sold goods to Biju Rs.200
5 Sold goods to Sunny Rs.400 for cash
6 Purchased furniture from Anand Traders Rs.4,000 for cash
7 Purchased goods Sam traders and paid by cheque Rs.2,000
8 Paid salary by cheque Rs.2,000
9 Bought goods from Suresh Traders Rs.2000

10 Cash deposited into SBI Rs.10,000
11 Commission received Rs.200
12 Purchased goods from Dennies on account Rs.3,000
13 Received cheque from Biju Rs.200
14 Purchased goods from A Ltd using debit card Rs.1,00,000
15 Suresh , a customer, directly deposited into our bank account

using Google pay Rs.50,000
16 Purchased goods from Ravi Rs.5,000
17 Rent Paid Rs.1000
Assets
Assets are material things or possessions or properties of the business including the
amounts due to it from others. Assets help to generate income.
➢ Physical properties include assets like land and building, furniture, motor car,
cash, stock, computers etc. owned by a business.
➢ Rights in certain things called intangible assets such as goodwill, patents,
trademarks etc possessed by the business.
➢ Amount due to the business from others like debtors, bills receivables, accrued
income etc
Examples:
Land and building, Plant and machinery, cash and bank balance, stock, bills
receivable, money owing by debtors etc.
Assets can be classified into the following categories
1. Non-current Assets
2. Current Assets
3. Fictitious Assets

1. Non –Current Assets (Fixed Assets)

Non-current assets are those assets which are held in the business for a long period and are
fixed in nature. Its benefit will last for a long period, i.e, more than one year. They help in the
generation of income and are not meant for resale. They normally can’t be converted into cash
within a year.
Examples-Fixed assets like Land and building, plant and machinery, furniture,
computer, motor vehicles and long-term investment
Non-current assets are further classified into:
(a) Tangible assets
Tangible assets are those assets which have definite shape and physical existence.
They can be seen and touched.
Examples: Land, building, machinery, furniture, cash in hand etc.

(b) Intangible assets
Intangible assets are those assets which do not have physical existence. They cannot
be seen and touched. Businesses can create or acquire intangible assets.
Examples: Patents, good will, trademarks (Vicks,Fanta,Ujala,Lux), Brand

name(Google,Nike,Reliance,ITC,Samsung,apple) computer software, prepaid
expenses etc.
Not only tangible assets, intangible assets also help to generate income to the firm.
2. Current Assets
Current assets are those assets which are meant for sale or which can be converted
into cash within a year. For example, goods are purchased with a purpose to resell and
earn profit, debtors can be converted into cash within a short period.
Examples-Debtors, stock, bills receivable, cash in hand and cash at bank
3. Fictitious Assets
Fictitious assets are neither tangible assets nor intangible assets.
Fictitious assets are certain account balances of certain expenses/losses.They have

no real value but are shown on the asset side of the balance sheet only for technical
reasons.

Examples- heavy advertisement expenditure, discount on issue of debentures,

Preliminary expenses
Note:
Wasting Asset:
A wasting asset is one of the natural resources. When out put is extracted from wasing assets,
its value is come down(exhausted) year after year. Some of the examples of wasting assets are
mines, qurries, oil fields,Natural Gas Deposits etc.. As the asset is extractrd, it depreciates,
eventually having little or no residual value.
Examples: Mines, quarries, oil fields etc.
Homework-6
Classify the following assets as Current and Non-current (Fixed) assets
No. Asset Current Asset Fixed Asset
1 Land Fixed Asset
2 Cash
3 Stock
4 Motor Vehicles
5 Computer systems
6 Goodwill Fixed Asset
7 Long-term investment
8 Debtors
9 Cash at bank
10 Bills receivables
11 Fixtures and fittings
12 Buildings

Homework-7
Classify the following assets as Tangible assets, intangible assets, wasting assets and
fictitious assets
Quarries, Building, Goodwill, Stock, Trade mark, Oil fields, Heavy advertisement expenditure,
Preliminary expenses, Copy right, Land, Furniture, computer, mines, Cash
Tangible assets Intangible assets Wasting assets Fictitious assets
Liabilities
It refers to the amount which the firm owes to outsiders.
It is the amount which a business owes to outsiders either for money borrowed or for goods
or assets purchased on credit or for services received.
They represent creditors’ claims on the firm’s assets.
Liabilities =Assets – Capital
Example-Creditors, Bills Payable, Salary outstanding, Loan from bank
Liabilities can be classified into two:
1. Current Liabilities
2. Non-Current Liabilities
1. Current Liabilities (Short term liabilities)
Current liabilities refer to those liabilities which are to be paid off within a short period,
i.e, within a year.
Example-Creditors, bank overdraft, bills payable, outstanding expenses, short term

loans etc.
2. Non-Current Liabilities (Long term liabilities)

Non –Current liabilities are those liabilities which are to be paid off after a long
period,i.e, more than a year.
Example-Long-term loans, debentures

Note: Contingent Liability (Doubtful liability)
These are not real liabilities. Future events can only decide whether it is really a
liability or not. Due to their uncertainty they are termed as contingent (doubtful)
liabilities. The value of contingent liabilities never shown in the amount column at the
liability side of Balance sheet. It is clearly state as a note inside/outside the Balance
Sheet.
Example:
➢ Value of bills discounted (There is a chance to dishonor it)

➢ Cases pending in the court (Court’s decision may be favorable or unfavorable)
➢ Guarantees undertaken by the business
Homework-8
Classify the following liabilities as Current Liabilities and Non-current (long
term) liabilities
Debentures, Creditors, Long term (10 Year) business loan, Bills payable, outstanding
telephone bill, short term loans, outstanding salary
Current Liabilities Non-current (long term) liabilities
Capital
Cash or assets invested by the owner into the business is known as capital. Capital is
an obligation of the business to the owner. It is the owner’s claim on the assets of the
business. Capital is also known as owner’s equity.
Capital= Assets- Liabilities
Homework-9
Q. Anil started business with cash Rs.1,00,000, Building Rs.2,00,000. Find out the
capital of the firm.

Drawings
Cash, goods or assets withdrawn by the owner from the business for his personal use
is known as drawings. Drawings will reduce the owner’s capital.Any private payments
made out of business funds are also drawings.
Examples:
➢ Amount withdrawn by the owner for his personal use

➢ Goods taken by the proprietor for his personal use
➢ Acquiring personal assets with business funds.
➢ Owner’s income tax paid by the business.
➢ Furniture worth Rs.20000 withdrawn by the owner for his personal use
Homework:10
Calculate the total drawings of Mr. Mohan:
1. Mohan started business with cash Rs.3,00,000

2. Mohan withdrew cash from business for personal use Rs.4,000
3. Withdrew cash from bank for office use Rs.2,000
4. Mohan paid Rs.500 from business for his son’s tuition fees.
5. Withdrew goods worth Rs.200 for domestic use.
6. Paid owner’s house rent Rs.500 from the business.
7. Paid office rent Rs.2000
Sales
Sales means total revenue earned by a business through goods sold or services
provided. Sales may be cash sales or credit sales.
It is the major source of revenue of any business. It is a direct income.
The term ‘sales’ is used only for the sale of those goods which are purchased for resale
purposes. (The term ‘sales’ is never used for the sale of assets).
Examples: Sold goods to Biju for Rs.8,000, Cash sales Rs.5,000
Sales Return (Return inwards)
Sales return or return inwards is that part of sold goods which is actually returned to us
by customers. The return may be due to defective supply of goods, violation of terms
of agreement etc.It should be deducted from sales to calculate Net Sales.
Example: Goods returned by Biju Rs.400

Purchases
It is the major expense of any business. It is the expense incurred for procurement of
goods in a business. The term purchase is used only for the purchase of ‘Goods’. The
term purchases include both cash and credit purchases of goods.
In case of manufacturing concern goods means purchase of raw materials for the
purpose of conversion of finished products and then sale. In case of trading concern
‘goods’ are those things which are purchased for resale. In both the cases the purpose
is to make a profit by its resale
Examples:
➢ Purchased goods from Anju traders Rs.5000

➢ Purchased goods for cash Rs.4000
➢ A furniture merchant purchased chairs for Rs.8000 is considered as purchase
because here chair is his goods and its purpose is to resale and to earn profit.
But if a furniture merchant purchase chairs for his office use, it is never
considered as purchase, its purpose is not resale but helps to generate income.
Here chair is an asset.
Purchase Return
When purchased goods are returned to the supplier’s, it is known as purchase return
or return outwards. It should be deducted from purchase to calculate Net Purchase.
Example: Returned goods to Anju Traders Rs.300
Revenues
Revenue of a business constitutes sales revenue and other revenues. The amount
earned by business by selling its products or providing services to customers are called
sales revenue.
Sales are the major revenue of a business. Other items of revenue common to many
businesses are: commission received, interest received, dividend received, royalties,
rent received etc.
Total Revenue = Sales Revenue + Other Revenue
Expenses
Expenses are costs incurred by a business in the process of earning revenue. It is the
cost of things or services used for the purpose of generating revenue.
Example:
Cost of things like Purchase cost of goods, stationery etc.
Cost of services like salary, advertisement, insurance, electricity, telephone, repairs
etc.

Decline in the value of asset caused by the use of such assets for business like
depreciation.
Expenditure
An expenditure represents a payment with either cash or credit to purchase asset,
goods or services. Expenditure is a wider term than expense. The term expenditure
includes expenses also. Expenditure can be classified into capital expenditure and
revenue expenditure.
Capital Expenditure
Capital expenditure refers to those expenditure which are incurred to acquire fixed
assets and its benefit will last for long time. Capital expenditures are non-recurring in
nature. Its main purpose is to increase the earning capacity of the business.
Example:
Amount spent to purchase fixed assets like land and building, P& M, Furniture,
Goodwill, installation charges of machinery, repayment of bank loan (principal amount)
etc.
Revenue expenditure
The amount spent by the business to purchase goods and to its day-to-day expenses
is called revenue expenditure. They are recurring in nature.
Example: Payment of salary, rent, depreciation of fixed asset, purchase of goods/raw

materials, payment of electricity charges
Revenue expenses are shorter-term expenses that are broken down into two
categories:
Expenditures for generating revenue include expenses required to meet all day-to-
day expenses needed to operate a business.
Example: Salaries, wages, rent, advertisement, depreciation etc.
Expenditures for maintenance of revenue-generating assets Revenue

expenditures are often discussed in the context of fixed assets .It include expenses
like ordinary repair and maintenance costs that are necessary to keep the asset in
working order.

Difference between Capital and Revenue Expenditure

Capital Expenditure Revenue Expenditure
Definition It is the money spent by the firm to It is the money spent by
acquire fixed asset. business entities to meet
the day-to-day expenses.
Purpose To increase the earning capacity To maintain the earning
capacity
Occurrence Non recurring in nature Recurring in nature
Time span It produces benefits over several Its benefit will be consumed
years within an accounting year
Treatment in It appears as an asset in the Balance It appears as an expense in
books of Sheet. the Trading and Profit &
accounts Loss A/C
Potential Long- term benefit for the business Short-term benefit for the
benefits business
Homework-11
Classify the following expenditures as ‘Capital Expenditure and ‘Revenue
Expenditure.
1. Salary paid
2. Interest paid
3. Bank loan repaid
4. Land purchased
5. Bought furniture
6. Interest paid
7. Purchase
8. Wages paid
9. Rent paid
10. Stationery Expenses
11. Advertisement expenses
12. Vehicles purchased
13. Purchased Computer
14. Installation charges of a machinery paid
15. Paid wages for the construction of a building
16. Purchased goods
17. Paid regular repairing charges of a machinery

Capital Expenditure Revenue Expenditure
Classification of receipts:
It is necessary to make a proper distinction between capital receipts and revenue

receipts because the revenue receipts are shown on the credit side of the Trading
and Profit and Loss account whereas capital receipts are shown in the Balance
Sheet. Receipts are classified as:
1 Capital Receipts
2. Revenue Receipts
1. Capital Receipts
Amount received from sale of fixed assets is called capital receipts. Capital
receipts are non-recurring in nature. It should be shown on the Balance Sheet as
increase in liabilities or as reduction in the value of the asset. If the receipts imply
an obligation to return money or amount received from sale of fixed assets is
capital receipts.s
Example for Capital Receipts:
1. Capital contributed by the owner
2. Amount received on sale of fixed assets or investments
3. loan taken from bank
2. Revenue Receipts
Revenue receipts are money received by a business as a result of its normal

business operations like selling its products or providing services. It is recurring
in nature.

If a receipt does not incur an obligation to return the money or is not in the form
of a sale of fixed asset, it is termed as revenue receipts.
Example for Revenue Receipts:
1) Cash received from sale of goods, commission received, interest

received, dividend received, rent received etc.
Homework-12
Classify the following receipts as ‘Capital Receipts and ‘Revenue Receipts.
1. Sales
2. Commission received
3. Sold furniture
4. Rent received
5. Bank loan sectioned and taken
6. Interest received
Deferred Revenue Expenditure
Deferred Revenue Expenditure is a revenue expenditure in nature but it is

charged (written off) in more than one accounting period. The reason is that the
benefit of such expenditure will accrue in more than one financial year.
Example: Large advertisement expenditure.
Profit
Profit is the excess of revenues over expenses in an accounting year. Profit increases
the capital of the owner.
Profit is calculated by deducting the cost from the sale or revenue, which is earned by
the regular business operations.
Gain
A gain is referred to as any economic benefit derived from outside of the usual
business operations. Gain is the profit that arises from events or transactions which
are incidental to business such as profit sale of fixed assets, winning a court case,
appreciation in the value of an asset.
E.g. Consider an investor purchasing 1000 shares of a company at Rs. 15 each (value
= Rs.15000) in 2017 and if the share price in 2018 has increased to Rs.20 each the

value in 2018 is Rs. 20000, where the investor will make a gain of Rs. 5000 if the
shares are sold in 2018.
E.g. If the book value (purchase cost- accumulated depreciation) of a machine is

Rs.2,500 and it was sold for Rs.3,000 then the gain on disposal is Rs.500
Profit Gain
Profit is the excess of total income over Gain is the benefit derived from outside of
total expenses the usual business operations like profit
on sale of fixed assets etc
It is generated from usual business It is generated outside of business
operations operations
Income
Income is the increase in the net worth of an organization either from business activity
or from other activities.
Income=Profit + Gain
Loss
Loss is excess of expenses of a period over its related revenues. It decreases in
owner’s equity. The term loss conveys two different meanings.
First it conveys the result of the business for period when total expenses exceeds total
revenues.
Example-If revenues are 3, 00,000 and expenses are 3, 50,000, the loss will be Rs.50,
000.
Second, It refers to money or money’s worth lost (or cost incurred) without receiving
any benefit in return, e.g., cash or goods lost by theft or a fire accident, etc. It also
includes loss on sale of fixed assets.
Note: It may be noted that losses differ from expenses. Expenses are incurred to
generate revenues whereas losses do not.
Discount
Discount is a rebate or deduction allowed either on the selling price of a product/
services or on the amount due. Discount may be trade discount or cash discount.
Trade Discount-When goods are purchased in bulk quantities, the seller may give
certain concession on the listed price to the buyer. This concession is called trade

discount. Trade discount encourages the customers to buy more. Trade discount
recorded in the books of account as it is deducted in the invoice (bill) itself.
Example-Purchased goods worth Rs 50,000 from Rajan at a trade discount of

10%.Here value of purchase is recorded as Rs.45,000 (50000-5000).Therefore trade
discount Rs.5000 never recorded in the books of account.
Cash Discount-Cash Discount is the deduction given by the seller(Creditor) to the

customer(Debtor) for making prompt (timely) payment. It is always recorded in the
books of account. It is a loss to the creditor (discount allowed) and a gain to the debtor
(discount received). Really it encourages the debtor’s to make prompt payment.
Example-Received cash from Mohan Rs.3850 allowed him discount Rs.150 and settled
his account Rs.4000.
Debtors/Account Receivables
A debtor is a person or other entities who owes money to the business. In other words,
to whom goods or services are sold on credit are called debtors. All debtors are
collectively known as ‘Sundry Debtors’.
Example: Sold goods to Vijayan on credit Rs.40,000.Here Vijayan owes Rs.40,000 to

the business, so he is a debtor.
Creditors/Accounts Payable
Creditor is a person or other entities to whom money owing by the business. The person
or institution from whom goods or services purchased by the firm on credit are called
creditors. All creditors are collectively known as ‘Sundry creditors.
➢ Purchased goods from Meera Traders on credit Rs. 3000.Here business owes
Rs.3000 to Meera traders, so Meera Traders is a creditor to the business.
Homework-13
1.Sold goods to Biju on credit. Is Biju a debtor or creditor to the business??
2.Purchased goods from Sajan Trader’s on credit. Is Sajan trader’s a debtor or

creditor to the business??
3.Rahim sold goods to Salim on credit. Identify the debtor and creditor??
Goods
Goods include all those things which are purchased by the business for resale. It also
include raw materials which are used for producing the finished product.

Example: Kalyan Silks purchased 100 shirts for Rs.12500 from Aravind Mills
Ltd.Here,shirt is the ‘goods’ for Kalyan Silks.
Homework:14
1. Kalayan silks purchased 1000 bedsheets from Bombay Dyeing for sale. Is
bedsheet a ‘goods’ for Kalyan silks??
2. Kalayan silks purchased 10 tables from Aromal Furniture’s. Is Table a ‘goods’ for
Kalyan silks??
3. Chandrika furniture’s purchased 5 chairs from Damro Furniture’s for office use.
Is chair a ‘Goods’ for Chandrika furniture’s??
4. Chandrika furniture’s purchased 100 chairs from Damro Furniture’s for sale. Is
chair a ‘Goods’ for Chandrika furniture’s??
Note: For a furniture dealer, purchase of chairs and tables are termed as goods, while
for other business firms, it is furniture and is termed as an asset. For a stationery trader,
stationery is goods, whereas for others it is expense.
Stock
Stock means unsold goods.
The value of goods remaining unsold at the end of an accounting year is known as
closing stock.
Closing stock in case of manufacturing concern consists of raw-materials; work –in –

progress and finished goods.
Example: Purchased 20 shirts @ Rs.1000 each Rs.20,000. So 15 shirts @ Rs. 1,200 each
Rs.18,000. Closing Stock = 5 (20-15) Shirts @ Rs.1,000 each Rs.5,000
Opening Stock: Opening stock is the value of goods which are ready for sale at the
beginning of an accounting year. Last year’s closing stock will be the opening stock of
next year.
Voucher
Voucher is a documentary evidence of a business transaction. For example, we get
cash memo when we purchased goods for cash, we get an invoice when we
purchased goods on credit, we get a receipt when we made a payment and so on.
Prepared by, Binoy George, HSST, MKNM HSS, Kumaramangalam, Thodupuzha, Idukki Dt.

Father of Accounting- Luca Pacioli
Luca Pacioli-Father of Accounting

He was an Italian Mathematician. In 1494, the first book
on double-entry accounting (Summa de arithmetica,
geometria, Proportioni et proportionalita) was
published by Luca Pacioli. He is considered as ‘Father of
Accounting and Bookkeeping’.
Important Questions:
1. A person who owes money to the business is a ----------
a) Debtor
b) Creditor
c) Supplier
d) None of these Ans: a
2. Amount spent for purchasing fixed asset is a -------
a) Revenue Expenditure
b) Deferred Revenue expenditure
c) Capital Expenditure
d) None of these Ans: c
3. Rajesh, owner, draw Rs.2,000 from the business for paying tuition fees to his
son. This amount is-------
a) Salary
b) Capital
c) Drawings
d) Direct Expense Ans: c
4. ----------is an example for internal users of accounting.
a) Creditors
b) Government
c) Manager
d) Debtor Ans: c
5. Sold goods to Mohan on credit Rs.4,000. Here Mohan is a -----to the business.
Ans: Debtor
6. Find the odd one and state the reason
a) Debtors
b) Creditors
c) Cash at bank
d) Stock Ans: Creditors, all others are current assets.
7. Assets bought for long term use in the business is called…….
Ans: Fixed asset/Long term asset

8. Things or properties of value are called………

a) Assets
b) Liabilities
c) Capital
d) Revenue Ans: a
9. Complete the series based on the hint given:
a. Intangible Asset Goodwill
b. Fictitious Assets ?
c. Current Asset ?
Ans:
a. Intangible Asset Goodwill
b. Fictitious Assets Discount on issue of shares or
debenture, Preliminary Expenses
c. Current Assets Cash, stock, debtors, bills
receivables
10. Explain the main objectives of accounting? (5 Score)
Main objectives of accounting are:
1.Maintaining Accounting records
The main objective of accounting is to maintain systematic record of business
transactions and events.
2.Ascertainment of result
The second objective of accounting is to ascertain the net profit earned or loss
suffered on account of business transactions during a particular year.
3.Determining the Financial Position
The business man wants to know the financial position of the business. For this
purpose, a statement called ‘Balance Sheet’ is prepared, it displays the values of
4.Provide Information to Various Parties
Accounting is the ‘language of business’.It communicates the relevant
accounting information to various interested parties.
5.Meeting Legal Requirements
Accounting records are accepted as evidence by the court, if they are maintained
systematically. Besides, the law such as Companies Act, Income Tax Act, GST
Act etc. requires timely submission of returns.
6. Assistance to Management
Management often requires financial information for decision making and
ensures efficient management. By providing timely information, accounting
assists the management in the task of planning, controlling and decision making.

11. Explain the qualitative characteristics of accounting information?( 5 Score)

1.Reliability: Accounting information must be reliable. Reliability means the
users must be able to depend on accounting information. Reliable information
should be free from error and bias and verifiable.
2.Relevance: To be relevant, information is to be available on time and must
help in prediction.
3.Understandability: Understandability of accounting information means users
of accounting information must interpret it in the same sense as it is prepared
and conveyed to them.
4.Comparability:Comparability means that the users should be able to compare
the accounting information of an enterprise of the period either with that of other
periods (Intra-firm comparison) or with the accounting information of other
enterprises (Inter-firm comparison).
12. Ramesh sold goods on credit to Satheesh Rs.50,000. What relation exist
between them? What are the accounting terms involved in it?
Satheesh - Debtor
Ramesh - Creditor
13. Distinguish between debtors and creditors.
Debtors are the persons who owe an amount to the enterprise for the goods sold
or service provided to them on credit.
Creditor is a person or institution to whom an amount owing by the enterprise
because they have provided a service or goods, or loaned money to the
business.
Example: Ramesh sold goods on credit to Satheesh Rs.50,000. Here Sathesh is
the debtor and Ramesh is the creditor.
14. Give any two examples of revenue?
Examples: Sales, rent received, interest received,commission received, interest
received etc.
15. Distinguish between profit and gain.
Profit is the excess of revenues over expenses in an accounting year. Profit is
calculated by deducting the cost from the sale. Profit is earned by the business
through regular business operations.
A gain is referred to as any economic benefit derived from outside of the usual
business operations. Gain is the profit that arises from events or transactions
which are incidental to business such as profit sale of fixed assets, appreciation
in the value of an asset etc.
Income of the year = Profit + Gain

16. Distinguish between expenses and expenditure?

Expense is the cost incurred in producing and selling the goods and services .
Thus it includes cost of goods sold (purchase and other direct expenses) and
indirect expenses.
On the other hand, expenditure is a wider term which includes expense also.
Expenditure is the amount spent for acquiring assets(capital expenditure), goods
and services (revenue expenses).
17. What do you mean by assets? What are the different types of assets?
18. Give two characteristics of a business transaction?
1) It results in a change in the financial position of the firm, i.e., a change in
the value of some of the assets, liabilities and capital
2) The change may be capable of being expressed in terms of money.
************************************
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HSE-1 Accountancy, Study notes with HomeWorks-2022 Chapter-1

➢ Meaning and definition of accounting

Accounting is the language of business. It is the systematic process of identifying, recording,

According to American Institute of Certified Public Accountants “ Accounting is the art

of recording, classifying, and summarising, in a significant manner and in terms of

12-10-22 1 Binoy George

HSE-1 Accountancy, Study notes with HomeWorks-2022 Chapter-1

12-10-22 2 Binoy George

HSE-1 Accountancy, Study notes with HomeWorks-2022 Chapter-1

• The transaction can be measured in monetary terms

State whether the following events are business transactions or not?

No. business transactions or not???????? Yes No

1. Purchased goods on credit Rs.500 Yes

2. Applied a bank loan of Rs.2,00,000

3. Purchased goods for cash Rs.2000

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HSE-1 Accountancy, Study notes with HomeWorks-2022 Chapter-1

5. Salary paid Rs.1000

6. Cash received from Rajesh Rs.20,000

7. Telephone bill paid Rs.600

8 Bank loan of Rs. 2,00,000 sanctioned and taken

9. Sent a quotation to UC College, Aluva to supply 20 tables @

10 Sold goods to Manoj on credit Rs.500

11 Cash received from Manoj Rs.500

12 Appointed Mr. Suresh as purchase manager

A transaction may be external or internal.

The following are the examples of such transactions:

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HSE-1 Accountancy, Study notes with HomeWorks-2022 Chapter-1

Give 4 examples each for internal and external transactions

Need for accounting

1. Maintenance of records of business transactions

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HSE-1 Accountancy, Study notes with HomeWorks-2022 Chapter-1

4. Meeting Legal Requirements

Qualitative Characteristics of Accounting Information

1. Confirmatory value – Provides information about past events

Understandability of accounting information means users of accounting information

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HSE-1 Accountancy, Study notes with HomeWorks-2022 Chapter-1

Users of Accounting Information

Users of Accounting Information

Users of Accounting Information Internal Users External Users

Trade Unions External users

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HSE-1 Accountancy, Study notes with HomeWorks-2022 Chapter-1

Advantages/ Importance of Accounting

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HSE-1 Accountancy, Study notes with HomeWorks-2022 Chapter-1

Step-4 Preparation of Financial Statement-Financial statement is classified as Income

Accounting Process-Diagrammatic presentation

Identifying and measuring Business Recording:

Analysis and interpretation

Summarising-Preparation of (1) Trial Balance (2) Classifying (Posting to ledger)

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HSE-1 Accountancy, Study notes with HomeWorks-2022 Chapter-1

Book-Keeping, Accounting and Accountancy

Book keeping is a part of accounting and it is mainly concerned with recording

1) Summarising-Summarising the classified information in the form of Profit and

Difference between Book-keeping and Accounting

Basis Book Keeping Accounting

Scope Just maintains records of business Preparation of financial statements,