SUBJECT: ACCCOUNTANCY

MODULE 1(THEORY)

PREPARED BY
NIHARIKA DAS
ASSISTANT PROFESSOR
DEPARTMENT OF HUMANITIES AND
SOCIAL SCIENCES
ASSAM ENGINEERING COLLEGE
 Concept and classification of Accounts, Transaction, Double Entry system of Book
Keeping, Golden rules of Debit and Credit, Journal-Definition, advantages,Procedure
ofJournalising,Ledger, advantages, rules regarding Posting, Balancing of Ledger
accounts, Trial Balance-Definition, objectives, procedure of preparation.
Definition of Accounting Definition by the American Institute of Certified Public
Accountants (Year 1961):
*Accounting is the art of recording. classifying and summarizing in a significant manner and
in terms of money. transactions andevents which are, in part at least, of a financial character.
and interpreting the result thereof.
The main objectives of accounting are:
1)To know the complete and permanent record of cach transaction of the businessfor future
reference.
2) To ascertain the number of debtors and creditors.
3) Toascertain the profit or loss of the any organization at any given period of time.
4) To ascertain the financial position of the organization on any particular date.
5)To ascertain the tax liability of the organization under the Income Tax Act 1961.

Concept of Book keeping:

Book-keeping is that branch of knowledge which tells us how to keep a record of business
transactions. It is often routine and clerical in nature. It is important to note that only those
transactions related to business which can be expressed in terms of money are recorded. The
activities of book-keeping include recording in the journal, posting to the ledger and
balancing of accounts. BookDKeeping is a systematic manner of recording transactions
related to business in the books of accounts.
In Book Keeping, transactions arerecorded in the order of the dates. An Accountant is a
person who records the transactions in the books of the business and is expected to show the
financial results of a business for every financial year. A financial year in India is followed
from 1 April to 31 March. BookOKeeping is an art as well as a science. It is the art of
recording day to day business transactions in the books of accounts in a scientific and
systematic manner.

Basis Book keeping Accounting

Objective
Record the business transaction Classify summaries and interpret the
business transaction to find out the
accuracy of recorded data.
Scope Its scope is limited It has wider scope as compared to
book- keeping.
Level of The clerical works relating to Accounting is related to reporting and
work recording ete. is done at this interpretation of recorded data.
level
Usefulness It is useful for recording and It is useful for managerial decision
preservation of transactions. making purpose
Information Itis a primary record of the Accounting is a source of financial
business transactions. information.
System
 TRANSACTION
1t means an event or a business
between parties. The event canactivity which involves
be measured in terms exchange
of money or
of money and changesmoney's worth
position of person e.g. purchase of
a the financial
payment or creating an obligation to paygoods
to the
would involve receiving material and making
supplier at a future date. Transaction could be
a cash transaction or credit
transaction., When the parties settle the transaction
making payment in cash or by cheaue. it is called a cash immediately by
payment settled at a future date as per
is transaction. In credit transaction, the
agreement between the parties.
Features of Double Entry System
Every transaction has two-fold aspects. i.e. one party giving the benefit and the
receiving the benefit. other
Every transaction is divided into two aspects. Debit and
and the other account is to Credit. One account isto be debited
be credited.
Every debit must have its
corresponding and equal credit.
CONCEPT OF ACCOUNT
"An account is defined as a
e.g. when the
summarized record of transactions related to a person or a thing
business deals with customers and suppliers, each of the
will be a separate account. customers and suPplier
" The account is also related to things - both
tangible and
equipment, brand value, trademarkS etc are some of the things.intangible. e.g. land, building,
When a business transaction
happens, one has to identify the 'account' that will be affected by it and then apply the rules
to decide the accounting treatment.
It is the record of money received and
money paid.
TYPES OF ACCOUNTS

(1) Personal Account: As the name suggests these are accounts

related to persons.
(a) These persons could be natural persons like Suresh's A/c, Anil's alc, Rani's A/c ete.
(6) The persons could also be artificial persons like companies, bodies corporate or
association of persons or partnerships etc. Accordingly, we could have Videocon Industries
Alc, Infosys Technologies A/e, Charitable Trust A/c, Ali and Sons trading A/c, etc.
(c) There could be representative personal accountsas well. Although the individual identity
of persons related to these is known, the convention is to reflect them as collective accounts.
e.g. when salary is payable to employees, we know how much is payable to each of them, but
collectively the account is called as 'Salary Payable Ale". Similar examples are rent payable,
Insurance prepaid, commission pre-received etc. The students should be careful to have
clarity on thistype and the chances of error are more here.
(2) Real Accounts: These are accounts related to assets or properties or possessions.
follows: -
Depending on their physical existence or otherwise, they are further classified as
(a) Tangible Real Account Assets that have physical existence and can like.
be seen, and
Alc, Cash Alc, Vehicle A/c, and the
touched. e.g. Machinery A/c, Stock
These represent possession of properties that have no
(b) Intangible Real Account in terms of money and have value attached
to them
physical existence but can be measured
 C.g.
Goodwill A/c,
A/cand the like. Trade mark A/c, Patents &
(3) Nominal Copy Rights A/e, Intellectual Property Rights
gains e.g. SalaryAccount: These accounts are
of Ratesrelated
and Wages Alc, Rent to or losses and incomes or
expenses Expenses
received A/c, Loss by fire Alc etc. A/c, Travelling Ale, Commission
Meaning of Debit and Credit :
Debit and Credit, are
of each financial
key parts of any
knowledge of whattransaction.
accounting
For maintaining entry. These are the fundamental -effectl
is Debit and what is Credit. correct accounting records, you must have full
cOLDEN RULES OF DEBIT AND
CREDIT
Typesofaccount Golden rules
1.Personalaccount Debit-thereceiver

Credit -the giver

2. Realaccount
Debit-whatcomesin
Credit- whatgoesout
3.Nominalaccount Debit -theexpensesorlosses

Credit-theincomesorgains
Cardinal Rules of Debit and Credit:
Assets Liabilities

Increase Decrease Increase Decrease

Debit Credit Credit Debit

Expenses/Loses Capital

Decrease Increase Decrease

Increase

Credit Credit Debit

Debit

Income/Gain

Increase Decrease

Credit Debit
 Journal-Booksofori
It is a book of ginalentryentriny which the
original
they take place.
Transactions are originally transactions are recorded first of all, as and when
Journal is sub-divided recorded in a
into a number ofchronological (day-to-day) order
books.
Sub-Journals as special purpose subsidiary known

FeatJourunalreisorsabookicharnawhictercihtsthicetsofransactajourionnsaral erecordedforthefirst ime,asand when theytakeplace.

AjItmoaiurnntalaiinsstonlheiyabookof
Ajournalis adailyaccountingrecord. primary entry.
dentityofeach transactionand providesacomplete pictureofthesameinoneentry:
EaIthnetjocrhuraensactnnatrly,tirniaotnhnwhiseajcoturiocnhinsasalcalirsefroleelcd'ooweNrdareddrbyaaintiaobcn".hrireofnolexploagincaatiloonofrder.
LEDGER

A ledger in accounting refers to a book that

transactions pertaining to a specific account arecontains
stored.
different accounts where records of
It is also known as the book of final
entry or principal book of accounts. It is a book
credited are stored. where all transactions either debited or
A ledger account is a combination of all the ledgers and
contains
accounting activities of an organization. It is regarded as theinformation
most
related to all the
important book in
accounting as it helps in creating a trialbalance that acts as a precursor to the preparation of
financial statements.
The information stored in a ledger account contains both starting and ending balances which
are adjusted during the course of the accounting period with respective debits and credits.
A ledger contains different components which include the various transaction elements such
as date, amount, particulars and 1.f (ledger folio). Individual transactions are contained within
a ledger account and are identified by atransaction number or any other typeof notation.
Ledger Format
The ledger consists of two columns prepared in a Tformat. The two sides of debit and credit contain
date, particulars, folio number and amount columns. The ledger format is as follows.
Name of the Account
Cr.
Dr.
|J.F. Amount Date Particulars JF Amort
Date Particulars

Ledger Account Example

accounts
rollowing are some examples of ledger
1. Accounts receivable
2. Cash
 3. Depreciation
4. Accounts
5. payable
6. Salaries and wages
Revenue
7. Debt
8. Inventory
9. Stockholders' equity
10. Office
expenses
Trial balance:

1a batance may be defined as a statement which contains

On a parucular date. Trial Balance consists of adebit column balances of all ledger accOunts
with all debit balances or
accOuntS and credit column with all credit halances of accounts. The totals of these columns
if tally it is presumed that
ledger has been maintained correctly.
Objectives of Preparing a Trial Balance
Following are the objectives of preparing Trial Balance
)) To Check Arithmetical Accuracy: Arithmetical accuracy in ledger posting meais
WTiting correct amount, in the correct account and on its correct side while posting
transactions from various original books of accounts, such as Cash Book, Purchases Book,
Sales Book, etc. It also means not only the correct balance of ledger account but also the
totals of the special purpose Books.
() To Help in Preparing Financial Statements: The ultimate objective of the accounting is
to prepare financial statements i.e. Trading and Profit and Loss Account, and Balance sheet
of a business enterprise at the end of an accounting year. These statements contain balances
of various ledger accounts. As Trial Balance contains balances of all ledger accounts, in
financial statements the balances of ledger accounts are carried from the Trial balance for
proper analysis.
(iii) Helps in Locating Errors: If total of two columns of the trial balance agrees it is a proof
two columns do
of arithmetical accuracy in the ledger posting. However, if the totals of the
the
not tally it indicates that there are some mistakes in the ledger accounts. This prompts
accountant to find out the errors.
balances of one year with the
(iv) Helps in Comparison: Comparison of ledger account
taking some important
corresponding balances with the previous year helps the management
Balances of the two years.
decisions. This is possible by using the Trial
Making Adjustments: While making financial statements acjustments
() Helps in
closing stock, prepaid eXpenses, Outstanding expenses etc are to be made. Trial
regarding adjustments in preparing the financial
in identifying the items requiring
balance helps
statements.