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Accountancy Meaning:
Accounting is the process of recording financial transactions pertaining to a business. The accounting
process includes summarizing, analyzing and reporting these transactions to oversight agencies, regulators
and tax collection entities. The financial statements used in accounting are a concise summary of financial
transactions over an accounting period, summarizing a company's operations, financial position and cash
flows
Definitions:
Accounting is commonly known as the "language of business". It is a means through which information
about a business entity is communicated. ... Accounting comprises 4 phases. It involves: a) recording, b)
classifying, c) summarizing, and d) interpreting, financial information arising from business transactions &
events.
Accounting is a process of identifying and measuring quantitative financial activities and communicates
these financial reports to the decision-makers.
Accounting is the systematic recordation of the financial transactions of a business. The recordation
process includes setting up a system of record keeping, tracking transactions within that system, and
aggregating the resulting information into a set of financial reports.
Accounting is one of the key functions for almost any business. It may be handled by a bookkeeper or an
accountant at a small firm, or by sizable finance departments with dozens of employees at larger companies.
The reports generated by various streams of accounting, such as cost accounting and managerial accounting,
are invaluable in helping management make informed business decisions.
Classification of Accounts:
It’s no secret that the world of accounting is run by credits and debits. Debits and credits make a book’s
world go ‘round.
Before we dive into the golden principles of accounting, you need to brush up on all things debit and credit.
Debits and credits are equal but opposite entries in your accounting books. Credits and debits affect the five
core types of accounts:
Assets: Resources owned by a business which have economic value you can convert into cash (e.g., land,
equipment, cash, vehicles)
Expenses: Costs that occur during business operations (e.g., wages, supplies)
A debit is an entry made on the left side of an account. Debits increase an asset or expense account or
decrease equity, liability, or revenue accounts.
A credit is an entry made on the right side of an account. Credits increase equity, liability, and revenue
accounts and decrease asset and expense accounts.
The golden rules of accounting also revolve around debits and credits. Take a look at the three main rules of
accounting:
Accounting Concepts
1. Business entity concept: A business and its owner should be treated separately as far as their financial
transactions are concerned.
2. Money measurement concept: Only business transactions that can be expressed in terms of money are
recorded in accounting, though records of other types of transactions may be kept separately.
3. Dual aspect concept: For every credit, a corresponding debit is made. The recording of a transaction is
complete only with this dual aspect.
4. Going concern concept: In accounting, a business is expected to continue for a fairly long time and
carry out its commitments and obligations. This assumes that the business will not be forced to stop
functioning and liquidate its assets at “fire-sale” prices.
5. Cost concept: The fixed assets of a business are recorded on the basis of their original cost in the first
year of accounting. Subsequently, these assets are recorded minus depreciation. No rise or fall in market
price is taken into account. The concept applies only to fixed assets.
6. Accounting year concept: Each business chooses a specific time period to complete a cycle of the
accounting process—for example, monthly, quarterly, or annually—as per a fiscal or a calendar year.
7. Matching concept: This principle dictates that for every entry of revenue recorded in a given
accounting period, an equal expense entry has to be recorded for correctly calculating profit or loss in a
given period.
8. Realization concept: According to this concept, profit is recognized only when it is earned. An advance
or fee paid is not considered a profit until the goods or services have been delivered to the buyer.
Accounting Conventions
There are four main conventions in practice in accounting: conservatism; consistency; full disclosure; and
materiality.
Conservatism is the convention by which, when two values of a transaction are available, the lower-value
transaction is recorded. By this convention, profit should never be overestimated, and there should always be
a provision for losses.
Consistency prescribes the use of the same accounting principles from one period of an accounting cycle to
the next, so that the same standards are applied to calculate profit and loss.
Materiality means that all material facts should be recorded in accounting. Accountants should record
important data and leave out insignificant information.
Full disclosure entails the revelation of all information, both favorable and detrimental to a business
enterprise, and which are of material value to creditors and debtors.
Accounting process:
Journal Entries:
• A journal entry records a business transaction in the accounting system for an organization. Journal
entries form the building blocks of the double-entry accounting method that has been used for centuries
to keep financial records.
Ledger accounts
• A ledger is a book or collection of accounts in which account transactions are recorded. Each account
has an opening or carry forward balance, would record transactions as either a debit or credit in
separate columns and the ending or closing balance.
• Each account has opening and carry forward balance would record transactions as either debit or
credit in separate columns.
Types of Legers
1. General Ledger:
Each month all journals are totaled and posted to the General ledger. The purpose of general ledger is
therefore to organize and summarize the individual transactions listed in the all journals.
2. Debtors Ledger:
The debtors’ ledger accumulates the information from sales journal. The purpose of this is to provide
knowledge about which customers owe money to business and how much.
3. Creditors Ledger:
The creditors’ ledger accumulates the information from purchase journal. The purpose of this is to provide
knowledge about which suppliers the business owes money to, and how much.
Format:
Rules of Ledger:
Trial Balance
• A trial balance is a list of all the general ledger accounts contained in the ledger of a business. This
list will contain the name of each nominal ledger account and the value of that nominal ledger
balance. Each nominal ledger account will hold either a debit balance or a credit balance.
Financial Statements
• Financial statements are formal records of the financial activities and position of a business, person,
or other entity. Relevant financial information is presented in a structured manner and in a form
which is easy to understand
Cash book:
Meaning:
A cash book is set up as a subsidiary to the general ledger in which all cash transactions made during
an accounting period are recorded in chronological order. Larger organizations usually divide the cash book
into two parts: the cash disbursement journal, which records all cash payments, and the cash receipts journal,
which records all cash received into the business.
The cash disbursement journal would include items such as payments made to vendors to reduce accounts
payable, and the cash receipts journal would include items such as payments made by customers on
outstanding accounts receivable or cash sales.
The primary goal of a cash book is to manage cash efficiently, making it easy to determine cash balances at
any point in time, allowing managers and company accountants to budget their cash effectively when need
be. It is also much faster to access cash information in a cash book than by following the cash through a
ledger.
All transactions in the cash book have two sides: debit and credit. All cash receipts are recorded on the left-
hand side as a debit, and all cash payments are recorded by date on the right-hand side as a credit. The
difference between the left and right sides shows the balance of cash on hand, which should be a net debit
balance if cash flow is positive
Cash book is a special type of book that is only concerned with the recording of cash transactions of an
organisation. It performs the dual role of both journal and a ledger for all the cash transactions taking place in
a business organization.
A cash book records all the cash receipts on the debit side and all the cash payments of the organisation on
the credit side.
Single column cash book: Single column cash book is also called a simple cash book. It presents entries for
cash received (receipts) on the left side or debit side and cash payments on the right hand side or credit side.
The bank transactions and the discounts that are given for transactions will be featured in separate ledger
accounts in case of single-column cash books.
Cash books are updated on a daily basis in some business firms. The most striking feature of a cash book is
that it can never have a credit balance. It should always show a debit balance.
Double Column cash book: In a double column cash book, there is an additional column that is reserved for
the discounts. Therefore, in a double-column cash book, also known as two-column cash book, the cash
receipts and transactions are recorded in one column while the second column records discounts received and
discounts provided.
Discount being a nominal account the discount provided is placed on the debit side of the cash book while
discount received is placed on the credit side of the cash book.
At the end of the accounting period, both the columns are balanced, and the closing balances are transferred
appropriately.
Triple column cash book: In a triple column cash book, the two columns are similar to the double column
cash book. While the additional column is for bank transactions.
Due to the advances in the banking industry, most firms deal in cheques and therefore, the presence of a bank
column in a cash book is helpful in understanding the transactions properly.
Petty cash book: Petty cash book, as the name suggests, is for very small transactions that take place in an
organisation. Such transactions can occur in a day and are repetitive in nature, which can put undue load on
the general cash book. For this reason, it is maintained separately.
Rectification of errors
Rectification of errors is referred to as the procedure of revising mistakes made in recording transactions.
These mistakes can occur while posting entries to ledger accounts, classifying accounts, carrying balance
forward, etc.
Rectification of errors that do not influence the trial balance include errors that involve errors on both sides
of debit and credit and can be rectified by passing a journal entry.
These errors impact two accounts simultaneously and are therefore known as two-sided errors. The errors can
occur both on the debit and credit side of the account and need to be corrected or rectified by passing a
journal entry to correct the debit and credit.
An error can be rectified by reversing the impact of wrong entry on debit and credit side and restoring the
correct debit and credit entry.
Whenever there is excess credit or shortage in debit, then debiting the concerned account is done, similarly
when there is shortage of credit and excess of debit, then the concerned account should be credited.
Example
Credit sales to Rajesh of ₹ 5,000 were not recorded in the sales book. Rectify the error.
Rectification of errors that influence the trial balance occurs on any one side of the trial balance and such
errors can only be rectified by passing a journal entry along with opening of a suspense account.
Such errors are also known as one sided errors as it impacts only one side of the account (either debit or
credit). Such errors are rectified by adding a note in account or by passing a journal entry by creation of a
Suspense account.
The process of rectification is as follows:
Record them into the journal and show postings in the ledger and balance the accounts.
17th : Cash paid for the purchase of bicycle for Ramu's son 1,500
V/
Amount Amount
Date R Particulars L/F
(Dr) (Cr)
No.
[Being the amount received from Mr. Ramu, the proprietor as his
capital contribution vide receipt no:___ dated:__]
[Being the value of stock purchased from Mr. Manu vide bill no:___
dated:__]
[Being the value of stock sold to Mr.Sonu vide bill no:___ dated:__]
V/
Amount Amount
Date R Particulars L/F
(Dr) (Cr)
No.
[Being the value of stock sold to Mr. Tanu for cash vide receipt
no:___ dated:__]
[Being the value of stock returned to Mr. Manu vide bill no:___
dated:__]
[Being the value of stock Purchased from Mr. Zenu vide bill no:___
dated:__]
V/
Amount Amount
Date R Particulars L/F
(Dr) (Cr)
No.
– 10,000
To Cash a/c
[Being the amount paid to Mr. Manu vide voucher no:___ dated:__]
[Being the value of stock Sold to Ms.Zane vide bill no:___ dated:__]
[Being the value of stock returned from Mr. Sonu vide bill no:___
dated:__]
[Being the amount of cash received from Ms. Jane vide cash receipt
no:___ dated:__]
[Being the amount of stock taken by Ramu for domestic use vide
bill no:___ dated:__]
Journal in the books of M/s Rama & Sons
for the period from July 1st, _5 to July 31st, _5
V/
Amount Amount
Date R Particulars L/F
(Dr) (Cr)
No.
[Being the amount of stock returned to Mr. Zenu vide bill no:___
dated:__]
[Being the amount of cash received from Mr. Sonu vide cash receipt
no:___ dated:_]
V/
Amount Amount
Date R Particulars L/F
(Dr) (Cr)
No.
[Being the amount of cash paid for bicycle purchases for proprietor's
son vide voucher no:___ dated:__]
[Being the value of stock sold for cash vide receipt no:___ dated:__]
General Ledger
[Books of Mr. Ramu]
Cash a/c
dr
dr
tl 1,24,500 tl 1,24,500
Capital a/c
DrCr
tl 75,000 tl 75,000
Goods/stock a/c
DrCr
DrCr
tl 70,500 tl 70,500
Manu a/c
DrCr
tl 25,000 tl 25,000
Sonu a/c
DrCr
tl 20,000 tl 20,000
DrCr
tl 15,000 tl 15,000
Furniture a/c
DrCr
tl 15,000 tl 15,000
Zenu a/c
DrCr
tl 12,000 tl 12,000
DrCr
tl 13,500 tl 13,500
Drawings a/c
DrCr
tl 18,000 tl 18,000
Machinery a/c
DrCr
tl 18,000 tl 18,000