CHAPTER Introduction to Accounting LEARNING OBJECTIVES The study of this Chapter would enable students to understand: Introduction to Accounting Evolution of Accounting Meaning and Definitions of Accounting Attributes (Characteristics) of Accounting Meaning of Book Keeping, Accounting and Accountancy Difference between Book Keeping, Accounting and Accountancy Functions of Accounting Objectives of Accounting counting Cycle Is Accounting an Artor a Science? Advantages and Limitations of Accounting Users of Accounting Information Branches or Sub-fields of Accounting Systems of Accounting Oo00v000o0Knnn0D0 INTRODUCTION TO ACCOUNTING Accounting is an art of recording, classifying and summarising the financial transactions and events, interpreting the résults thereof and communicating them to the users. Accounting being a medium of communication is known as Language of business. EVOLUTION OF ACCOUNTING Inthe ancient times, Barter System was followed in trade. Gradually, Hundis (Bills of Exchange) replaced barter system and later money (in different forms) came into existence. As the money became the medium of trade settlements, accounting came into existence. Accounting finds its traces to about 7,000 years back in MESOPOTAMIA, a region in West Asia, the place where nomadic tribes began building villages, becoming civilised with a language and rules, and starting modern society. ‘The 4th millennium BC and 3rd millennium BC witnessed the expansion of role of accountants when ruling Iranian leaders and priests appointed people to oversee financial matters. During the 2nd millennium BC, the growth in commerce and business increased the role of accountants, There is evidence that individuals in ancient Egypt held the title "Comptroller of the Scribes". By the time of Emperor Augustus (63 BC — AD 14), the Roman Government had access to detailed financial information. neilpouble Entry Book NEEepHs CAL pane court of Chandragupta inister in cial Management Book, ar to Fine a v ofaccount of aSOvereIgN State 12 In inn. aoe os Count ses it is believed fileA jsth century although hpi that °° jo 5h mse in aly Fra Lea Paci i considered (© : dey no laid the foundation of Double coping, Wn *_, Geometria, Proportionics vn book keeping: In the book, a printed book. The methog an accepted standarg ste fis in the conse , practiced today. ntry Book Keeping, that is P i sn 27 page i ‘ ‘tionalita’, published in 107 nc oO me “plus ant votuced symbols for‘ i a vue a see Paco was widely used in Wester veloped by system of accounting “The second phase of accounting can be al prsiness through managers: Owners Provide’ roamanage the business under their supervision 8 and reporting. managers through accounting ge of accounting is attributed to the development of Joint Stock Companies from about the year 1600 as the requirement of capital increased. It built wider stakeholders seeking financial information. This led to development of accounting systems for intemal (management accounting) and external (financial accounting) purposes. Subsequently as the businesses grew and also the stakeholders accounting and disclosure regulations set in along with external attestation, i.e. audit. Accounting Standards, the guidelines for accounting and preparation of financial statements, i.c,, Balance Sheet and Profit & Loss Account (Statement of Profit & Loss) were formulated. tributed to the era when owners began conducting pusiness and appointed managers ital for the 1 as Paid directions. Controls were exercised on the ‘The third phase and the present sta} Accounting Standards Rules, 2006 are notified under the Companies Act, 2013 to be mandatory forall companies. Subsequently, in the year 2015, Ind~AS (Indian Accounting Standards) were notified. Ind-AS are the Indian Accountit i opti ing Standards equivalent to International Financial (Accounting ia process of recording financi i sana ions and events, summarising them and i the financial informatios invests, goverment agendas, eg) ee etetelders and users, Owners, creditors, ccounting isthe art of re Lc ecordin of money, transactic 8; Classifying and summarising j the hh ae, "ising in a significant manner and in ters the results thereof” ae iereof “ast, of a financial character, and interpretin§ —Ameri ss Process of identifying, measy “rican Institute of Certified Public Accountants ting and com muni oa 7 'nticating economic information to permit Stating diff Of the information» and eee accounting is the proces “on.” —American Accounting Association account inicating financial informat;... > of collecting, retordi unting inform, mation, cording, classifying, summarisit® ‘ation to on: Accountin, ; i users for decision-making Sis an information system that provid®>13 Introduction to Accounting ACCOUNTING PROCESS Financial Transactions Results to Users of ‘Accounting Information an Z==— ATTRIBUTES (CHARACTERISTICS) OF ACCOUNTING ‘The definitions of accounting bring to light the following characteristics of accounting: 1, Identification of Financial Transactions and Events. (Accounting records only those transactions and events which can be measured in terms of money. This attribute involves identifying financial transactions aiid events. For example, an enterprise purchased 500 units of pens (for resale) on Ist April; 2022-for each and paid in cash. All these pens were sole for % 10 each on Ist August, 2022, This starts the process of identifying financial transactions. Financial transactions being purchase and sale of pens. 2, Measuring the Identified Transactions and Events. Accounting measures the transactions and events in terms of a common measurement unit, ie., the currency of a country. Stating differently, financial transactions and events are measured in terms of moiey. “Anevent which cannot be measured in terms of money is not recorded in the books of account. To enhance understanding of concepts, a practical example of Arun, who is incharge of maintaining, accounts of an enterprise, is taken. Arun’will measure the transactions to be recorded, ic, purchase of pens for € 2,000 and subsequently, sale of these pens for € 5,000. However, let's say, the enterprise hired 2 employées. Arun will not record the employment of employees in books of accounts, because it is not a transaction, as no amount has been paid on employment. The hired employees will be paid later as salaries, which will be recorded as expense. a 3. Recording. Recording, is the process of recording business transactions and events ~U financial character in the Book of Original Entry, ie., Journal. 4. Classifying. Classification is the process pf transferring recorded transactions or entries (recorded in Journal) of one nature or relating to one person at one place called Account \ maintained inva Book known as Ledger. Ledger has individual actount-heads to which financial transactions of same fature or person are transferred (posted). Continuing the above example, Arun will transfer or post the Journal entries, i.e, purchase of pens in the Purchases Account, and Sale of pens in Sales Account and cash paid and received in Cash Account. This is called ‘Classifying’ the transactions into separate account Headsing—1SC XI en In nner which is swans | stoments.are Prepared: (in case of Companies), and : us determine Loss Account to determine ; 4, which SI “ DZ ancial statements ‘ ment of profitability i : ra ND ACCOUNTANCY on . — EEN BOOK KEEPING, ACCOUNTING Al ae Ne ~RELAPIONSHIP ae es “ ip between Boo count ‘ccountancy m ‘Accountancy Accounting : Book Keeping & stig Keeping A Book Keepit as a part of accounting and means recording of financial transactions and events ina systematitqnanner in the books of account (Journal) and transferrin, sting) them in the relevant account tn the ledger. Thus, Book Keeping is concerned with: rh = (i) Identifying financial transactions and events; Gi) Measuring them in terms of money; 2 (ii) Recording the identified financial transacti ous incial transactions and events in the books of account, ie, 4 ~R.N, CarterIntroduction to Accounting ‘ecounting As has been discu: ‘ed earlier, Accounting is a process of identifying, recording, classifying, summarising, analysing, interpreting and communicating the financial transactions and events in useful manuer. Accounting is a wider term. It starts where Book Keeping ends. Accountati¢y ~~ . Accountancy means systematic knowledge of accounting. It is an educating, process wherein various aspects of teats ip explined along with the reason and how to maintain the bobks of account and to summarise (transfer or post) the transactions in ledger accounts and communicate it to various users. We can say that “Accountancy is the body of theory and practice of accounting.” Book Keeping is a part of Accounting. Accounting is a part of Accountancy. Difference between Book Keeping and Accountin: 9 F Book Keeping isa process ofidentifying financial transactions and events measurlig thehTif money ¥ ‘terms, recording and classifying (transferring or Posting) them inthe respective ledger account. _| the results thereof to the users. Itisa primary stage itis a secondary stage. It begins where Book Z Keeping ends. ‘Accounting ‘Accounting in addition to Book Keeping is a process of summarising the recorded transactions and events interpreting them and communicating Objective of Book Keeping is to maintain systematic records of financial transactions and events. Objective of accounting is to ascertain net resuits of operations and financial position and tocommunicate information to the users. ‘tbeing a mechanical function can be performed by less experienced staff. Itbeing a specialised function is performed by rained/experienced staf 5. Level of Skills. Book Keeping is routine in nature and, thus, does not require special skills. ‘Accounting requires special sklls and ability to analyse and interpret. Difference between Book Keeping, Account Book Keeping, Accounting and Accountancy are interrelated as well as different as follows \g and Accountancy ‘Book Keeping ‘Accountancy ony F ZO. It involves recording of financial transactions and events in a set of books as per accounting polices. t is application of accounting. It also is application of accountancy. But, after completion of book-keeping process Tt includes theories, principles and system of accountancy, Le, why and how financial transactions are recorded inthe books of account, preparation of financial statements and their analysis. 2, Itis the primary stage of recording, classifying and summarising the transactions, Ttis the secondary stage and starts where Book Keeping ends. > Itis a complete process which includes Book Keeping as well as Accounting. 3. It depends on correct recording of transactions and events. itdepends on Book Keeping. Ttincludes both Accounting and Book Keeping 4, Itis a part of accounting because it involves recording of transactions and events,, classifying them and preparing financial statements, whichis the basis of analysis a function of accounting. it analyses the financial statements made available by the process of book-keeping. Tr involves teaching methodology to record transactions and analysing the financial statements prepared by the process of book-keeping,pouble Entry Book Keeping —ISC XI yl a ] NESS aK ING IN BUS! . oP ? AND ROLE OF account! ction of accounting, is to f£ FUNCTIONS AN eeconds. re PHIMATY eve 50 that net profit or Aornrnining Systematic Ace aunt Financial transactions *7 Ay ate can be ascertained | A ecords ‘i recounting ston ag on 2 Pa" Finn 0 ET nancial postion 80” A gnaicial information, which logs the accounting Perm int often requires Fit nt in tracking and Ae resistance to Management nt often te the in acing an table from the accounting esting the management PY MAKIN sale fom counting lay an eta ed atonal deiion . information for eff ot tax At. CST ACL et, available financia > 1s Act, is aws such as the Companies or The fequirements can Acting Legal Requirements." and period as is prescr Zequire submissions of returns in the form an Pe noe and systematically ‘Systematically te met only if the accounting records are ma n i ene med accounting records also serve as evidence in Courts of law. een Je of accounting in business is that it 1 Facilitating Comparison. An important function oF 916 © Se onal aoe ctenatic record of financial transactions, which, a5 @ result, enables comparison 0 aaa tcutts with those of other Years to identify and tract the business’ progress. Z Communicating Financial Information: Another function of accounting is to communicate the financial information to the users, which may be internal users or external users, such as ‘management, banks employees, government authorities, etc,, which plays an important role in decision-making by such stakeholders. 6,Aixing Responsibility. Accounting helps in determining the profitability of different epartments of an enterprise. This helps in fixing the responsibility of each department head. : ! 2 accounting ccie (eating Accounting Cycle can be described as an accounting process starting from when a transaction. iancial statements with a purpc 7 them before communicating it with the users, s-witi.a purpose {9 analyse and Manageme’ records. It, ‘an important rol ‘Stey i (i) eof accounting cycle are: () Identifying Financial Transactions and Events, (ii) Record: , (ii) Recording, ‘Summarising, (v) Analy lysing and Interpreti i el nt nara nrg and) ps. Accounting Cycle | (Communicating) [ tothe Users Identifying Financial 7 Transactions and Events ‘Analysisand ) interpretation Communicating. Journal 1. Cash Book 2, Purchases Boo m 3, Sales Book 4. Purchases Retum Book 5. Sales Return Book ©. Bils Payable Book 7. Bills Re ceivable B 8. Journal Proper Summarising Til Balance Trading and Prof Babe Sheet Mount Recording Int oe BalIntroduction ta Acconnting aby|? oh OBJECTIVES OF ACCOUNTING the objectives and functions of accounting are inter-related, The objectives of accounting, are: 1 Maintaining Accounting Records. The objective of accounting is to record the financial tra ana events of an enterprise or organisation in the books of account in a 2. Determining Profit or Loss, Determining financial performance, ie, net profit or loss for the accounting period by preparing, Income Statement or Trading and Profit & Loss Account 5. Determining Financial Position. Determining, financial position of the enterprise by preparing Balanee Sheet listing assets, liabilities and the owner's capital as on the date of year end. 4. Facilitating Management. The management often requires financial information for clecision-making, effective control, budgeting and forecasting. Accounting provides financial information (0 assist the management in discharging this responsibility. ». Providing Accounting Information to Users, Yet another objective of accounting is to provide accounting information to stakeholders and various users, both internal and external, who analyse them as per their requirements. IS ACCOUNTING AN ART OR A SCIENCE? auAxtas well as Science. Art is the technique which helps us achieve our desi ‘objectives. Accounting is an art of identifying, recording, classifying an¢ arising the financial transactions. It helps us to know-financial performance and financial position of the business. Any organised knowledge based on principles is a ‘science’. Accounting is also-a science as it, is an organised knowledge based on principles, oe L hewdiryph ‘ oe gh es Explratiin ADVANTAGES OF ACCOUNTING ¥Financial Information about Business. Financial performance during the accounting period, ., profit earned or loss incurred, andalso the financial position as at the end of the accounting period is known through accounting. 2. Assistance to Management, It assists the management in drawing busines. decisions and exercising cofitrol over the affairs of the business. 3. Replaces Memory. Systematic recording of transactions obviates the ne the transactions. The accounting record provides the information required by the management ity to remember from time to time. 4. Facilitates Comparative Study. A systematic record enables comparison of one year's results ‘With those of other years and locate factors leading to the change, if any 5.Facilitates Settlement of Tax Liabilities. A systematic accounting record immensely helps in the settlement of income tax, Goods and Services Tax (GST) and excise duty liabilities since it is a good evidence of the correctness of transactions. 6 Facilitates Loans, Loan is granted by the banks and financial institutions growth prospects which are supported by performance. Accounting makes available the on the basis of information with respect to performance 7. Evidence in Court. Systematic record of transactions is often accepted by the courts of law as good evidence,» 8 Assistance in the Event of Insolvency. Insolvency proceedings involve explaining many transactions that took place in the, pastSystematic accounting records assist in such situation,— depreciation is provide Lit po inthe sZietaemeat ' Double Entry Book Keeping —ISC xy youd) sgsion or retirement or death of a partner aoe f vital importance and use because vita YL unts. ime of pe ti iat record is 0} counting record 9, Helpful in Partnership a ; . solution of the Si to reach a settlement » rm, the: orine: les the basis to re G7 " ACCOUNTIN ; arpa 1 fully exact in spite of the fact-that most fully exa it provid p (ANA ne eae re also made for ing not Fully Exact. Accounting is 08 fy ee a nen sovorded on the basis of evidence, ye transactions are recorde based on which ing the useful life of an asset based on 588. stimating the usel I rf , BIS Value’ of determining profit or Toss. For cram Sete dcbts, estimating net realisal jatar i, providing ee tic. Assets are recorded at historical cost and depreciated " jon snot eat rent values of assets are not reflected. Also their im c : ated wef Sarah a ent values ¢ t es ver their esti st . ul life is estimated to provide depreciation. It makes the given information being unrealistic, st to provide d Sef is Fo Roan ts, Accounting is confined to monetary matters 3. Accounting Ignore itative Elements. iB i H t ing Ignores the Qualitative Ele only therefore qualitative elements like quality of management and staff, industrial rélations Ys 7 like quality « se red, and public relations, ete, are ignor , i 4, Accounting Ignores the Effect of Price Level Changes. Transactions are eee = os red. Money, as a measurem« . chan, cost and accordingly, financial statements are prepa in value frequently, ie., it does not remain stable. Accounting, however, presumes that value of money remains constantly same. . “ ttue and fair view of the financial position of the enterprise, USERS OF ACCOUNTING INFORMATION Internal Users Internal users ees who have access to significant information taken from the accounting records that IS useful for decisoy-fRaking, Following are the internal users and their needs for accounting information. 1. Owners [snes and bear maximum rskand get maxim vera, Metibenent conse cea “ial stre day-to-day operations. 4 © Since ‘owners have invested cay . en anal arr: , peed Information about how much profit is tamed or decitong see 2 loss incurred by the business, ee © Owners also need accounting information to assess safety oftheir money invested in for of capita, the perf * Overs aso need such information to decge whether eneraes nee of the they should invest more capital in the business or Withdraw their invested capital from the business, ; Management needs accounting information to take inPortant decisions to plan future Of the enterprise, i “xPansion, reduction in size, etc. ae 4Introduction fo Accounting ory heotigs v L External Users External users are the users who have access to information taken froma the fin relevant to them. Following are the kinds of external users and their needs accounts that givesinformation accounting information. | 5 COROT LON 4 pes do woe”, wid oe OO t ec eth vey ca 1. Employeex.and Workers. _2. Banks and Financial institutions ¥, Potential Investors TASTE people who work oran —_Banksand financial institutions are Potential investors are the people ‘enerpike and are paid wages, the organisations which provide loans who are ily to invest nthe salaties, bonus, etc as remuneratio’. to business enterprises, enterprise. «Usually, employees are entitled to _¢-Banks and financial institutions « Investorssuch ab banks end Money bonut and incement at the year“ need accounting information to tothe enterprise dalona funds, end. Such bonus and increment is track the progress of the enterprise If required, may be sought om Generally based on performance of sothattheycanimake the following outside partes, Before investing the enterprise. Hence, employees decisions = they Took at safety of investment useaccountinginformationtoknow —_¢ Whether to lend money to the and returns and plan about their remuneration enterprise? a Investars use the financial and future prospects. w/What is the ability of the —~“statements of the enterprise to «Accounting information also ~~ enterprise to repay the loan? assess that t zt shows whether the enterprise has How much money to lend tothe secure. Potential investors use the — complied with the regulations of enterprise? information to decide whether, depositing dues towards Provident _¢/How safeis the loan given by the they shouldinvestin the enterPris Fund,EmployeeStatelnsurance,etc. -_-Banktothe enterprise? ‘or nt : 4 Creditors 5.Gavernment and 5. Public LBesearshers— Creditors supply goods its Authorities — Public in general is Researchers are t and/or services on credit 0 Various Government alsointerested in the people and organisations the enterprise They assess bodies and Authorities use , ancl information ofan who use accounting financial postion from the accounting information to enterprise. information for research final accounts. arrive at various statistics con various accounting which enable policy practices decisions. « Crecitersuse accounting + The Government needs» Public needs information * Researchers | need Intormation to assess financial statements of to assess the enterprises accounting information \ihether they should anenterprseto compile contribution to the to assess. current spp goodsieenices to information regarding econamyinmanywaysie, accounting practices theerterprse on credit. natinalincome,ie, total employment generated their improvement caeeestatements income of the country. bytheenterprise,amount and alignment with Apelpthem to understand This helps them in spent as Corporate Social the evolving world. ability making policy decisions. Responsibility, ete For example, new «The Government «© Publicisalso interested in accounting standards levies various taxes on the financial information _are framed and existing enterprises. To assess of an enterprise to be ones are modified in whether correct amount _awvare about the change accordance with the of taxes have been paid ints management. practical scenarios. by the enterprise, the * Public is also concerned Government Authorities whether the enterprise need the financial is performing its duties statements of the towards keeping the enterprise. ‘environment clean or not ‘what i the pay of the enterNTING 1 u OF ACCON Te to specialised bran, given hangin dc? rich cot i Deals with providing neces) 4 Peformation to the management for discharging their functions | y ) { ‘Accounting } ' eas with maintenance of Books of acount determine anc pertormance an fianc postion ye “Financial Accounting 4a Accountingisconcerned: 3nd interpreting them and communicating withthe reducing wath recording cst eal with recording oe ofa §nd controlling costs ae i < suffered during a period (usually: . d Spec palin ‘on the date when the accounting period ends.» ear) and the fi 2. CostAc¢ounting The lihitation of financial accounting in respect of the informati t of, products or services led to the development of a specialised branch, ie, Cost Accounting. Cost Accounting ie cost of products manufactured or services rendered and hel} management in decision-making (say, pricé fixation) and exercising controls. 3. Manlagément Accounting Matiagement Accounting is the most recenth developed bi i ii ranch of accounting. It is concemed sh ewig acing formation sate ede eI sconce n funds, fits etc__as it enables the managenent-én-decision-making, We may. say that Manages sed anti ee fa the Nee of sine usergroup, ie, the management ee SYSTEMS OF ACcou System: recording transactions in the boo! mans Ks of account are classi 2 Single Entry System, cai Stises and records both aspects id. In this transaction, t° the Double Entry Systet all Aspect Concept” and is ouble Entry System, and . 1. Double Entry System Double Entry System EONS a systeny Debit and Credit Tecorded on the fied into two types: both these ; aspects are recorded mf " lied in accountin,L Introduction to Accounting a 2. Single Entry System system of recording transactions in the books of account may be defined as a Single Entry tem which is an incomplete double entry system. In this system, all transactions are not recorded on the double entry basi Note: Both the above systems have been discussed in later chapters.a) counting Terms LEARNING OBJECTIVES The study of this Chapter would enable students to understand: Event Q Transaction 2 Vouchers 3 Capital Assets (Intangible, Tangible, Fixed, Current, Liquid, Wasting and Fictitious) 1 Liabilities (Internal, External, Current, Long-term and Contingent) Trade Debtors Q Trade Creditors O Purchases a s: Goods Traded in 2 Stock (Raw Material, Work-in-Progress and Finished Goods) O Profit O Loss O Expense O Reve income O Drawings Other Important Terms ‘There are certain basic accounting terms which are used in accounting. It is necessary to understand these terms as they have specific meaning in accounting, The Accounting Terms prescribed in the Syllabus are discussed hereunder: 1. Event, Event is a business event that impacts the Ledger account balances. Event is a happening ot occurrence that results in a transaction and which brings change in the financial position of the entity. An event, if it involves a monetary effect, results into a business transaction which is recorded in the books of account. An event may or may not be a financial event. eqonist” 2. Transaction. It is exchange of money, goods andlor services by an entity. to by the entity having monetary iny ransaction’ is a financial event entered ‘and reco! we in the financial an enterprisé/Some examples of transact pun Ff goods, receipts from debtors, payments to creditors, purchase or sale of xa assets payment of dividend, ete. Gf Gieractpristics of a Transaction (i) Ais for a financial value, ie, for an amount. ed by a source voucher (document) (ii) It is support eg., sale invoice, purchase bills, receipts, debit note, credit note, etc. (iii) Ithas two fold effect in accounting. oti change in the financial position (assets and liabilities) of the entity transaction is a cash transaction if the amount is transacted immediately on entering into a transaction. It is a credit transaction if it is settled at a later date. Ifa transaction is settled partly in cash immediately and partly later, part of transaction for which cash is received is cash transaction and other part is credit transaction.190 x4 pe ratey Hook Keeping prontle ‘ vy taken pee i a ken place 4. Vonchen sw 0 ttn ne sure Vase 116M of rn : an Tn jcyedit Noles, Veneer eared an ently Be og, Ct ; an the basis of wht ni ae : ‘out veditedd Uh io prep i tos ee vom a thas ane debited andl cred a iste tl anon ws nuns ar ee ware ™ ting Vor I se ay = ibistalinl a a and gt deed and ried, . ch ee cl ritton on aniotiier VO" ace vo ata aie Megat anud erected ae weil The a ty be debited 4 The accounts thi her Accounting Your | a y rhe oxeners or praprielar srs in a ay invested in the seb rot the firm, ikisa liability. towel nt = net or tog purpose, owner is separate from the 2 qual to assets ese alten .quity. Irivalwa 4. Capital, Clair of i vnunet th Capital isthe a une pop a py ons) ad elaims £00 Se riabilly because (0 ‘salso known as owner's & pital is n be expressed as! a Liabites | ict give cash or benefit in fixture. ‘anomie resources of the extity which give cas ; Seen ee ince Tegal rights owned by an entity which can be valued in money. In soar onde saying which wil to get cash or benefit in the future is an f hhich will enable the entity r tsar ine wee ney ont ¥ debtors stock of goods, cash, fumniture, machines, building, patents, as xy owed by debtors, etc, are some examples of assets Assets can be classified as: (i) Fixed Assets, Assets owned by the entity or entterpt Fixed Assets are the assets held by an enterprise not for sale but with the purpose to increase the earning, capacity of the but . Fixed assets are further classified into Tangible Fixed Assets and Intangible Fixed As LAM Tangible Fixed Assets. Tangible wts have physical existence, ie., they can be seen and touched. Examples of tangible fixed assets are land, building, plant and machinery, computer, ete, se which are not for resale. xed A\ (bY utangible Fixed Assets, Intangible they cannot be seen and touched. I trademar ‘xed Assets do not have physical existence, i, amples of intangible fixed as Mlwares, ele, ets are goodwill, » patents, computer s Gi) Current Assets, Assets that are held by cash ina short time, iy the entity oF enterprise for resale or conversion into Current Assets are assets hel Id for short-term with nt a bills receivable, bank bi ® purpose to sell or convert them ets are unsold goods (Closing Stock or Inventory), alance, ote ‘ Liquid Assets, Current A\ sets that can be realised, i, iquid Assets are part of the current a short period. Examples are erted into cash in a short period. ca oe that can be realised (converted) into cash in min hand, bank balance, fixed deposits, ot\ 2 &s. outside [ a in shel the or services. Trade Creditor is a person or entity se of goods and/or services. In the above example, purchal sie Accounting Terms (iv) Wasting Assets, Anson the term Wastinyy As Geistng Ane SOnsteption. These a 4s) Lictitions Assets, An , [ Fictitious Assets They are expenditures o lox as expense) in mone th, Fictitious Assets are 6. Liabilities. C Liabilities mean the amount which the (i) Internal Liabilities, Liability towards owners It is a claim of the owner Capital and shown as liability of the enterprise. (i) External Liabilities. Linbilities towards outsi ¢ ‘kw? arises on happening o} ‘n baléodpayable. An example of cor compensation. If the court 1 court ruling is in favour of the enterprise, it is not payable. 7. Trade Debtor. A person or andlor services rendered. Trade Debtor is a person or entity and/or services rendered. For example, being payable after two months, In J Lis sil wr ayablealer ba Myapes In Ba ‘rade Creditor. A person or entity to I Hate % Himited life aml decrease in value by extraction, “is Raving limited life and decreave in value over tiie vith SAMMOL be recycled for generating additional revenne7 wf Coming into existen we those: i, rife sociated with natural sesourcenstiebam-coal, oil, ete Is which are neither Langible assets nor intangible asset vt incurred by the entity but are written off (recongnived mane year/accounting period] ad Vent 2emeay her accumulated losaes or Deferred Rever Spense) not yet written off till the date of Balance: Advertisoment Si 'S oF amounts against the entity or enterprise & Bie propeiaion entity or enterprise owes, [t may be towards the Liabilities can be categorised into: or proprietors. of proprietors against the assets of the enterprise termed as ers. External Liabilities are those liabilities which arise from the credit transactions or loans taken. For example, creditors, bank overdraft, bills payable, outstanding liabilities, ete. External liabilities can be further classified into following: ‘ong-Term or Non-Current Liabilities. These are liabilities which are payable after a period of 12 months from the end of the financial year. For example, peta loans, debentures, Public deposits, etc. ) Current Liabilities. These are liabilities which are payable within a period of 12 months from the end of the financial year. For example, creditors, bank S overdrafts, bills payable, short-term loans, etc. Abii) ‘Contingent Liabilities. A possible liability that becomes a liability on hap Us Contingent Liabilities are those liabilities of the enterprise in which obligation to pay pening of an event, ff a future event. Thus, contingent liability may or may not be ntingent liability is a legal case against the enterprise for culing is against the enterprise, it becomes payable and if entily who owes amount to the enterprise against credit sale of goods who owes amount to the enterprise for credit sale of goods ‘Arun sold goods to Pawan for % 10,000, amount tugtion, Pawan is a trade debtor of Arun tones ‘oom amodfat is owed against credit purchase of goods andl to whom the enterprise owes an amount for credit Arunisa trade creditor of Pawan,Double Entry Book Keeping —1SC Xt course of business: aid in the ordinary vanufacture of goods, ss of gots 10 1 vesale or FOF 1 4, purchases. 18 pres 8 of goods Or re Or ret purchase, Goods se term ‘Purchases’ MEAN POT Ty jncluces BOW Por ods purchased on credit ie, he term ‘Puc ile goods ie, raw material TM Me called cash purchases prurchased pn date, are called credit purcha: si FO ae en i return of goods purchased for Te notas per specifications Prrchases Return, Ii 3 oan, ey aE specification atch reared dot TT A equ or Return soods purchased may nown as or are defective. Goods returned are of goods in the ordinary co¥ / ed sal goods dealt in by the enterprise i ar moods manufactured. The term ‘Sales’ includes both eat goods are sold against cash, they are known ascash sales butif go seeps received at a later date, it is known as credit sales Sales Return, It is return of goods sold. 1d when returned by the purchaser are termed as Sales Ret -se of business: nee «, sale of goods purchased hh and credit sales. When .ds are sold and payment 10. Sales. It ‘The term ‘Sales’ means sal turn or Returns Inward. Goods sol 11. Goods Traded in. Items that are purchased with the purpose to sell Goods Traded are the goods purchased with the purpose of reselling. In other words, they are the products in which an enterprise is dealing or trading in. For example, for a stationer, stationery is goods, whereas for others, it is an expense (not purchases). 12: Stock (Inventory). Goods remaining unsold or unused in manufacturing as on a particular date. Stock inventory) is the tangible asset held by an enterprise for resale in the ordinary course iness or for ti of goods meant for salg-Stock e opening stock or closing sto. Josing stock of one peri openin, stock of the next period. Tyedlesing od becomes the opening SAN nent period In case of a trading concern, it comy which are lying unsold at the end o} Stock in the case of a manufacturi finished goods. They are discusse Raw Materials. i Ate Materials. Raw Material is a material or gu ‘manufacturing of goods. A; u fter the i materials is often changed tosuita parece thata raw material shall be prises closing stock in hand or the amount of goods f an accounting period of goods traded in, ing concem is of raw materials, -d hereunder: work-in-progress and ibstance used in production or rocess, the form or shape of raw Particular requirement 800s traded infor the dealer of ‘shoul be kept in mind Beasic Accounting Terms 25 Finished Goods. ri process of noe ited goods ate the goods which have undergone complete Wacturing and are ready for sale but are yet tobe old. Continuing the ok manufacturer has completed the manufacturing process, ie,, notebooks are ready fiahed roots for sale. The stock of notebooks ready for sale is the stock of above example, rofit. Excess of revenue 13. P f revenue over expenses Profit is categorised into: ( Gross Profit. Exces af revenue (sales) over cost of goods 5 108 Profit = Sales — Cost of coset arene - i ost of Goods Sold = Opening Stock + Purchases + Direct Expenses ~ Closing Stock. w Ne Profit. Excess of revenue (sales) ad other incomes over direct and indirect expenses nes Poo he profit eames after allowing for all expenses both direct and indirect 8) and other incomes. It increases owners’ equity, iz., capital. 14, Loss. Excess of expenses over revenue (sales) and other incomes. Los is i of expenses of a period over revenues (sales) and other incomes for the period. It decreases owner's equity, ie,, capital. It also refers to money or money's worth lost (or cost incurred) against which the enterprise receives no benefit, ¢.g., cash or goods lost in theft, loss on sale of fixed assets, etc. 15, Expense. Cost of operations incurred to earn revenue and other income, Cost of operations incurred to generate revenue and other incomes. It includes both direct and indirect costs, whether paid or not. Examples of, expense are payment of salaries, Pad Pecievalle | ale [even lie 1 received or receiunble against sale of goods andlor-s wages, rent, etc. sain ordinary 16. Revenue. Ay course of business. (Reveraeis the gross inflow of cash, receivables or other consideration eamed by the R “enterprise from the sale of goods and/or services rendered in its ordinary course of business Examples of revenue are amount received or receivable from sale of goods, rent, commission, et cai Revenue is the gross inflow of cash, receionbles or other cons activities of an enterprise from the sale of goodsaffom the rendering of servic by others of enterprise resources yielding interest, royalties and dividends. ‘a —Accounting Standard 9 issued by ICAL ng in the ordinary s, and from the use leration a a 17, Income. Excess of revenue (sales) and other incomes over total expense. * Income is the profit earned during a period. It is revenue and other incomes less expenses. For example, goods costing % 15,000 are sold for € 21,000 and % 2,000 is interest earned on fixed deposits. The cost of goods sold, i., € 15,000 is expense, sale of goods, ie,, € 21,000 is revenue and interest earned % 2,000 is other income. The difference, i.c., € 8,000 is income. It can, therefore, be expressed as Income = Revenue + Other Incomes ~ ExpenseDouble Entry Book Keeping—ISC xy oyu Use. Jor for perse sy oy the proprie pert tale | : the proprietor oF Tof the owners. 26 car aneet al tor or a par Amore. pr asset whieh capital is 8 Anis the amount of goods reduces Fase, Drawing personal 1 i syllabus but are important to understand, Other Important Terms oseribed in the: ‘eunting Tors are not preserib able to a specified article or product Pollowing Ac attribut eo neurred on OF } This the amount of expenditure incur sain i erating Activities. ‘ syns witich are not its Operating 2 Sih a om i as which are incidental to business such as sale of . ox from transactions which a 8 aed gher than its book value. Iie profi tho i investment or fixes : turned and includes both capital and revenue expenditure. / one red for the value received. An expenditure / 3. Expenditure. ! Expenditure js the amount spentor liability incu may be categorised into: {)-Cipital Expenditure, Amount spent on acquiring fixed assets. sch wil vee Capital Expenditure isthe amount spent on purchasing assets which will give benefit of enduring nature, i¢., over a number of accounting periods. It means expenditure incurred on acquiring fixed assets or for their improvement. Examples are: purchase i of machinery to manufacture goods, purchase of furniture or computers to conduct business. Capital expenditure is shown on the assets side of the Balance Sheet, aff Revenue Expenditure. Cost that is charged as expense. Revenue Expenditure is the amount spent to purchase goods and/or services that are consumed during the accounting period. Revenue expenditure does not increase the caring capacity but maintains it in the current year, 4. Discount. Reduction in the price of goods or in amount. Discount is reduction in the price of goods or amount due by the seller of goods and/or sepvices. we discount by the purchaser of goods Cash Discount, Deduction allowed in the amount due, Cash Discount means disc unt allowed by the seller for making timely payment. It is al ‘ou rw ller for ing ti pe i ment. © Rebate. Discount ally Rr reasons other than for COUN is a reasons al fer than for whic aon for which Trade Dis, lowed. & & & a z Ss 3 = B a = g g & & 8 g 2 2 z g 5 2 = = s Z a > 8 3 e a g allowed for the rea sons For example, discount allowed or recei sell iedg, Account. A summarised recon o Account isa summa head. It records not only the a Cash Account wil show purchases, sales ‘vant transactionsat one place relating to ticul: med ofr lating toa particular IT eleant of transactions but also their effect and direction. For ae val cath received and paid. A Fixed Asset Account will reciation of fixed assets, 9, Books of Account. Books in which transaction ded. sactions are recorded Books of Account me; ax's @ system of records, which records and explains the financial transactions of a busine: siness. When ci in which transactions are meee, “tet © books of account, it means Journal and Ledger example, 10. Entry. A transaction and event when recorded i apd nee "when recorded in the books of account is known as an Entry. An account has two parts, ie, debit wight ae the oan ie, debit and credit. The left side is the debit side while the debit side Of the accom a at account is to be debited, then the entry is posted to the count. In such an event, it is said that the account is debited, 12. Credit. creat ti wight side of an account. If an account is to be credited, then the entry is posted it side of the account. In such an event, it is said that the account is credited. 13. Proprietor. A person owning business and investing therein. The person who owns and makes investment and bears all the risks connected with the business is called the Proprietor. 14. Receivables. Amounts owed to the firm. ‘The term ‘Receivables’ is a broader term than the term ‘Trade Debtors’. It includes debtors, bills receivables, advances, etc. 15, Payables. Amounts owed by the firm. The term ‘Payables’ is a broader term than the term "Trade Creditors’. It includes amount payable to creditors, lenders, employees or government towards taxes, ete 16. Bill of Exchange. An unconditional order in writing. ABill of Exchange is an unconditional order in writing given by the creditor to the debtor and accepted by him (debtor) to pay on demand or after a certain period, a certain sum order of a specified person or to the bearer. of money to or to the 17. Promissory Note. Promissory Note is promise to p: 18. Bill Receivable. Bill Receivable means a bill of be received on the specified date. ay in writing given by the debtor to the creditor exchange accepted by a debtor, the amount of which will 19, Promissory Note Receivable. Promissory Note Receivable means written promise received from a debtor to pay the specified amount on the specified date. 20. Bill Payable. Bill Payable means a bill ofexchange, the amount of which will be payable on the specified date“ Double Entry Book Keeping ys. ‘ 28 21. Promissory Note Payable. : Promissory Note Payable means written promise given fo a creditor to pay the Specify amourfit on the specified date wr accident, 22, Depreciation. 7 value of asscts.duc.to its-wear and-tear ar oisolescenc an asset because of usage oF with passage of ty Depreciation is decrease in the value of —ar obsolescence or accident '23-~Cost of Goods Sold. Cost of goods attributable to goods sold. HchubeF4 Cost of Goods Sold is the direct cost of the goods and/or services sold 24. Bad Debts. Amount not recoverable. Bad Debt is the amount that has become irrecoverable. It is a business loss and is debiteg to Profit & Loss Account. 25. Insolvent. Insolvent is a person or entity who is unable to pay his/its debts, 26. Solvent. Solvent is a person or entity who is in position to pay his/its liabilities. 27. Book Value. Value of an asset in the books of account. It is the amount at which an item exists in the books of account. 28. Investments. Asset purchased or amount placed in bank or securities purchased to earn income, Investment means investing funds with the expectation to eam return. Commonly, it refers to shares and debentures, mutual funds, bonds issued by the financial institutions and by the government. Investments are not expected to be sold within a year. 29. Balance Sheet. A statement showing assets, liabilities and capital. It is a statement of the financial position at a given date, which shows its assets, liabilities, ital, reserves and other account balances at their book values. G Ly jo Batty An economic entity. An entity means an & ic ., Bajaj _Auto, Maruti, TISCO). An entity may be a business entity or non-business entity, Business en entity TTC Ltd. means a §Double Entry Book Keepins 150 xy Principles amie ettled ground or rules which are followed in ac courting ing and Nature of A yosed as adopted oF prop ‘American insti conduct Meanit are the general law or rule action or theno nies of Account uct or practice ay be de nay accounting transaction’ abilities, expens alisable value and fixed! ned as those rules of ws. they are pavsof cond principles coring Accounting tems of assets Ik tuniversaty for Fee 1s for treating vari recorded at fower of its cost OFF | life, ete Features of Accounting Prineiples: 1. Accounting principles are man a 2. Accounting principles ae flexible ss ey-mast.ve cee ee . oi nce of accounting principles usually depends on how they 3. The general acceptance of acc clevance, objectivity and feasibility ua atandwtetaes revansc nisne revant ey esutininermation est i, Relevance. Accounting princh cof accounting information. ; ote | (ay objective. Accounting principles are objective, if they are not influenced by the personal bias of the the accounting information. be applied without undue complexity and cost, | | persons preparing Feasible. Accounting principles are feasible, ACCOUNTING PRINCIPLES OR CONCEPTS ;pts are the assumptions or propositions based on which financial Accounting principles or conce] transactions are recorded and financial statements are prepared. Stating differently, they are principles or rules of accounting. These principles or rules are followed so that the financial statements are prepared on same basis and uniformly understood by the user. ifthey can ‘The accounting principles or concepts are: 1. Going Concern Concept 2. Accounting (Business) Entity Concept 3. Money Measurement Concept 4. Accounting Period (or Periodicity) Concept 5. Complete or Full Disclosure Concept 6. Revenue Recognition or Realisation Concept 7. Verifiable Objective (Evidence) Concept 8. Matching Concept or Matching, Principle 9. Historical Cost Concept 0. Accrual Concept 11. Dual Aspect Concept 12. Materiality Concept 13. Consistency Concept 14. Conservatism or Prudence Concept 15, Timeliness 16. Industry Practice 17. Substance Over Legal FormConcern Concept, Accrual Conca 09 ‘rual Con Gold ced by the Accounting Standang pt 0d coo a by the enterprises in pre fas 14 Consistency Conc —— el een sg ey af nial cn a I sco THESE CONCEP in ere NA en oe pred thre ee 1 Gap carried for a foreseeable ions be i fl for Period at the present rhe in the books of account prestuming that business ness or bring a level of operations. The comers or management a ‘own significantly the level of its operations. pital expenditure, i.e, expenditure that will give seat of enduring nature, ie, for 1 Period and revenue expenditure, iz., one whose penefit will be exhausted within the year. iris on the basis of this concept that fi Fixed assets . tematic manner ae are record aT arople, a machineries estimated useful life Without were peeved Cina te Mejnated useful life of 7 yea a 120000 (Cesidual value being € 10,000) and having Sanner to determine profit or loss for each =<. off in the next 10 years in a systematic 2 nce at Entity Concent or Business Entity Concept ines ‘counting entity and transactio aia pont of business. ins are recoriied in the books of account from the view According to this Concept, business is separate and distinct from its owners. Transactions are recorded in the books of account from the business point of view. Owners being separate and distinct from the business, amount due to them is shown as a liability (capital or Ioan) of the husiness. Their Capital Accounts with the business are credited with the capital introduced, profit earned during the year, ete,, and debited by the amount of drawings. For example, Param starts a business and introduced capital of 1,00,000 by cheque. Since, the firm has received the amount, it will debit Bank ‘Account and credit Param’s Capital Account. Thus, a transaction is recorded in the books of the firm from firm’s point of view The financial position and financial performance (profit or loss for the year) of business cannot be known in the absence of this concept " ons, i, sole proprietorship, partnership This concept applies to all forms of business organisati ora company. 3.Money Measurement Concept Transactions and events are recorded in the pooks of account in money terms hich can be measured and expressed and events w! ; ‘ccount because, money is the common tre ansactions ‘actions, This concept makes accounting in the books of at According. to this Concept, ing the trans: in terms of money are recorded. s ‘ Measuring unit for recording and repr t suffers from two major limitations ‘nformati ingful. However Beco ot recorded, saimore ee cannot be measured in terms of money are not mecrde (i) Transactions and events that x rterprise. For example, quality of sta be to ; ; . howsoever important they IT use the salty cannotbe messuredinterms a shown in the financial statet ate valde 25 the transactions are senda fa Pea (ii) Money is considered ee subsequent changes In the money value the transaction date amte Entry Book K ferplge SCX Double En? 34 onths jodicity) Concert reriod of 12 10 - 4. Accounting Period (Period ier periods stally Per" ree But, it is always better to " si broke into small business is infil Lift ofthe busines life of @ sen Concept cre sition ‘ife an enterpri; pt stion ro gap ie of a ener once or Periicty CONTR ar intervals, The ee vais is more useful for the users jervalsi he end of the life of the business : sriodically, Acxoning to Going Consern © ara © financial performane eview the finar : Ao ing Period C Selo rerpat its performance iS F fn tements at regular in able at # Accoring t the Acsoul ig broken into smaller P i formation provided by the financial statene™ 5 lee of tion than the informat al imenting hameedy of accounting informatio tng pei) 2 st s prepared every year Financial Statements Prep: i formation kers, require the int especially the management and banker I wopsiam na of the users. Many ott ar intervals go that decisions can be 2 ss ee s at regular intervals 5 " Fron a seo sc information at regular intervals to assess Eerformance, fads Manager en erm as well as long-term), bankers require ar ng ins short-term as account sear smary the Government has to assess the tax dus periodically. Similarly, isclosure Concept ; ea a alg complete and full disclosure of all material items in an understandable Ea Concept cf Complete Disclosure or Full Disclosure, holds that “there should be complete and understandable reporting on the financial statements of all significant information relating to the economic aftr ofthe entity.” Apart from legal requirements, good accounting practice requires all material and significant information be disclosed, Such information is disclosed by way of ‘notes to the financial statements. For example, it would be appropriate to show interest received and interest paid separately as income and expense instead of showing them at net amount, The practice of appending notes to the financial. statements (such as about Contingent Liabilities or market value of investments) is because of the concept of full disclosure. 6. Revenue Recognition or Realisation Concept Revenue is recognised when itis earned, whether received or not, our Teceipt of an, amount are two Separate ag] An enterprise sells goods in February, the groomed en On thot na Hissobecatethelegalotg en established foe nn” ed a ebruary, 2022. April, a Let February, 2022 in the books of ve the amount 1Y, 2022. 2022, on sale havin, se has been established in May, 999 °°" ade because the, account in May, r Ge Tre ot as ac su ac