Accounting

Basics of Financial
Accounting
(MBBA128L)
Course Instructor:
Dr. Rajat Kumar Soni
Introduction
05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 2

Development of Accounting
Accounting’s history can be The accounting US government Different acts, law, rules of
But the father of modern accounting is
traced back thousands of years profession is begins charging practices are there, and
Italian ‘monk’ Luca Pacioli, who in 1494
to the cradle of civilization in formally recognized income tax to fund different Institute were also
first described the system of double-entry
Mesopotamia and is said to in the establishment the upcoming World founded to build strong
bookkeeping used by Venetian merchants
have developed alongside of the professional war and need for accounting framework for
in his Summa de Arithmetica, Geometria,
writing, counting and money. title of certified accountant arises business Community. Like
Proportioniet Proportionalita.
public accountant in ICAI, ICMAI, ICSI, IBBI etc
1896.
The early Egyptians and While he was not the inventor of

American Association Public IBM introduced first
Babylonians created auditing accounting, Pacioli was the first to
Accountants (AAPA) was large computers and
systems, while the Romans describe the system of debits and
established in 1887 and in accountant were the first
collated detailed financial credits in journals and ledgers that is
India the Institute of to use them
information. still the basis of today's accounting
Chartered Accountants of
systems.
India established in 1949.
Presentably Accounting is developed as a
Some of the first accountants were employed mature discipline of knowledge, having
around 300 BC in Iran, where tokens and With the onset of the industrial revolution in 1760, there
various sub-field like Financial Accounting,
bookkeeping scripts were discovered. Around the was a proliferation of companies and the need for more
Cost & Management Accounting. Various
first millennium the Phoenicians invented an advanced accounting systems. The development of
supporting sub area of knowledge is also
alphabetic system for bookkeeping, while the corporations also created larger groups of investors, and
developed to provide support to accounting
ancient Egyptians may have even assigned more complex structures of ownership, all requiring
system. Accounting Standards, Auditing etc.
someone the role of comptroller. accounting systems to adapt.
MEANING AND SCOPE OF ACCOUNTING
Accounting
• Is an ‘Art’ and ‘Science’
• of recording, classifying, summarizing, analyzing and interpreting
• Monetary and partial monetary data
• Into books of accounts
• For the purpose of portraying the financial performance and financial position
• of any business concern.

Process of Accounting
Generating Using
Financial Financial
Information Information
Recording Analyzing
Classifying Interpreting
Summarizing Communication

Accounting Process Flow Chart
Business Transactions
Recording Journal Entries
Classifying Ledger Accounts
Summarizing Trail Balance
Analyzing Final Accounts
Interpretation Financial Report

Identification of transaction
Input Accounting Cycle Output
Identification Recording of Preparation Preparation Communicating information

Posting to
of transactions of of final to users
ledger
economic in the books trial balance accounts
events and of original
transactions entry Internal Users External Users
measured in ▪ Board of Directors ▪ Investors
financial terms ▪ Partners ▪ Lenders
▪ Managers ▪ Suppliers
▪ Officer ▪ Govt.
agencies
▪ Customers

Objective of ACCOUNTING
• Systematic recording of transactions
• Ascertainment of results of above recorded transactions
• Ascertainment of the financial position of the business
• Providing information to the users for rational decision-making
• To know the solvency position
Objectives of Accounting
Systematic Recording Ascertainment of Ascertainment of Communication of

of Transactions Results Financial Position Information
Book-keeping: Manufacturing, Balance Sheet Financial Reports

Journal, Leader an Trading, Profit and
Trial Balance Loss Account

Functions of Accounting
• Measurement: Accounting measures past performance of the business entity and depicts its
current financial position
• Forecasting: Accounting helps in forecasting future performance and financial position of the
enterprise using past data and analysing trends.
• Decision-making: Accounting provides relevant information to the users of accounts to aid rational
decision-making
• Comparison & Evaluation: Accounting assesses performance achieved in relation to targets and
discloses information regarding accounting policies and contingent liabilities which play a
important role in predicting, comparing and evaluating the financial results.
• Control: Accounting also identifies weaknesses of the operational system and provides feedbacks
regarding effectiveness of measures adopted to check such weaknesses.
• Government Regulation and Taxation: Accounting provides necessary information to the
government to exercise control on the entity as well as in collection of tax revenues.

Book-keeping
• Book-keeping is an activity concerned with the recording of financial data relating to business
operations in a significant and orderly manner.
• It covers procedural aspects of accounting work and embraces record keeping function.
• Obviously, book-keeping procedures are governed by the end product, the financial statements.
Objectives of Book-keeping:
• Complete Recording of Transactions – It is concerned with complete and permanent record of all
transactions in a systematic and logical manner to show its financial effect on the business.
• Ascertainment of financial Effect on the Business – It is concerned with the combined effect of all
the transactions made during the accounting period upon the financial position of the business as
a whole.

Difference between Book-keeping and Accounting
S.No Book-keeping Accounting
1 It is a process concerned with recording of It is a process concerned with summarizing of
transactions. the recorded transactions.
2 It constitutes as a base for accounting. It is considered as a language of the business.
3 Financial statements do not form part of this Financial statements are prepared in this
process. process on the basis of book-keeping records.
4 Managerial decisions cannot be taken with Management takes decisions on the basis of
the help of these records. these records.
5 There is no sub-field of book-keeping. It has several sub-fields like financial
accounting, management accounting etc.
6 Financial position of the business cannot be Financial position of the business is
ascertained through book-keeping records. ascertained on the basis of the accounting
reports.

Sub-Fields of Accounting
Accounting
Financial Management Cost Accounting Special Human

Accounting Accounting Responsible Resources
Accounting Accounting

Users of Accounting Information
USERS OF ACCOUNTING
INFORMATION
Investors Employee Leader Suppliers Customers Government Public Management

and and their
Creditors agencies

Difference between Double entry system and single-entry system
Points Single Entry System Double Entry System
1 Based on the cash book Based on the principles of debit and credit
2 Simple and easy to maintain More complex and requires proper knowledge
3 Records only cash and personal accounts Records all types of accounts and transactions
4 Provides limited financial information Provides comprehensive financial information
5 Suitable for small businesses Suitable for large businesses and organizations
6 No trial balance or balance sheet is prepared Trial balance and balance sheet are prepared
7 Lacks internal control measures Offers better internal control measures
8 Does not conform to accounting principles Conforms to accounting principles
9 Does not require specialized software Often requires specialized accounting software
10 Difficult to detect errors and frauds Errors and frauds can be detected more easily

Limitations of Accounting
Variability Measurability
Error and Frauds No futures

Assessment
Limitations of
Window Dressing Accounting Historical Cost
Incomplete Accounting
Information Policies
Others Personal Bias

Accounting Principles
Entity concept
Money measurement concept
Periodicity concept
Matching concept
Accounting
Cost concept
Realisation Concept
Dual aspect concept
Going Concern Accrual Consistency Conservatism
Materiality
Fundamental Principle
Journal Entry

Method of Journal Entry
Golden Rule
Accounting Equation

Categorization of Account for the Purpose of Journal Entry
Account
Personal Impersonal
Account Account
Natural Artificial Representative Real Account Nominal

Personal Personal Personal Account
Account Account Account

Categorization of Account for the Purpose of Journal Entry
A word in a transaction represents any person, legal entity and group of
persons should be recognized as Personal Account
Personal A/C • Natural Personal
• Artificial Personal
• Representative Personal
A word in a transaction represents Goods and Asset (or Combinations of

Real A/C
assets or goods) should be consider as Real Account
Nominal A/C A word in a transaction represents Income, Gain, Profit, Expense and
Loss should be consider as Nominal Account

Golden Rule for Journal Entry
Personal A/C Debit – The Receiver (or Debit the receiver of the benefit)
Credit – The Giver (or Credit the giver of the benefit)
Debit – What Come in

Real A/C
Credit – What Goes out
Debit – All expenses and losses

Nominal A/C Credit – All income and gains

Format of Journal Proper Book
Date Particulars L.F. Debit Amount Credit Amount
1 April Cash A/C………………………………………………………………………..… Dr. 500
To Ram A/C 500
(Being Cash received from Ram)
2 April Vijay A/C…………………………………………………………………...……… Dr. 1000
To Cash A/C 1000
(Being paid to Vijay)
3 April Purchases A/C……………………………………………………………….…….. Dr. 10000
To Cash A/C 10000
(Being goods purchased 0f costing 10000)
4 April Purchases A/C ……………………………………………………………..……… Dr. 10000
To Ramesh A/C 10000
(Being goods purchased costing from Ramesh on credit)
5 April Vijay A/C………………………………………………………………………….…Dr. 25000
To Sales A/C 25000
(Being goods sold to Vijay on credit)
6 April Machine A/C…………………………………………………………………………Dr. 100000
To Cash A/C 100000
(Being Machine purchased at cost of 1000000)
9 April Cash A/C…………………………………………………………………………….. Dr. 7000
To Commission A/C 7000
(Being Commission received )
Balance c/d 557500 557500

500 rupees received from Ram
Cash Ram
Real Personal
Is the cash come in or goes out? Whether the Ram is a giver or receiver
Cash Comes in Ram is a giver

Debit – What Come in Debit – The Receiver
Debit Credit
Credit – What Goes out Credit – The Giver
1000 rupees Paid to Vijay
Cash Vijay
Real Personal
Is the cash come in or goes out? Whether the Vijay is a giver or receiver
cash Goes out Vijay is a Receiver
Debit – What come in Credit Debit Debit – The Receiver

• Purchases A/C word
should be used
instead of Goods
Goods purchased of costing 10000 rupees
while making the
Journal Entry.
• It helps us to
understand purpose Goods Cash
receiving or delivering
the goods
Real Real
Is the Goods come in or goes out? Is the cash come in or goes out?
Goods Comes In Cash Goes out
Debit – What come in Debit – What come in

Debit Credit
Credit – What Goes out Credit – What Goes out
• Sales A/C word
should be used
instead of Goods
Goods sold of price 25000 rupees
while making the
Journal Entry.
• It helps us to
understand purpose Goods Cash
receiving or delivering
the goods
Real Real
Goods Goes out Cash Comes In

Credit Debit
• When the purchase is
made on credit, then
we do not need to
recognize or open cash
Goods purchased of costing 10000 rupees from Ramesh
a/c in Journal entry
Cash
• If the name of a person
is given in a purchase
transaction and no Goods Ramesh
information is given
about cash payment,
then purchase should
be consider as credit Real Personal
purchase
Is the Goods come in or goes out? Whether the Ramesh is a giver or receiver
Goods Comes In Ramesh is a giver
Debit – What come in Debit Credit Debit – The Receiver

• When the sales is made
on credit, then we do
not need to recognize Goods sold of price 25000 rupees to Vijay
or open cash a/c in
Journal entry
Cash
• If the name of a person
is given in a sales
transaction and no Goods Vijay
information is given
about cash received,
then sales should be
consider as credit sales Real Personal
Is the Goods come in or goes out? Whether the Vijay is a giver or receiver
Goods Goes out Vijay is a receiver

Machine Purchased cost of 100000 rupees
Machine Cash
Real Real
Machine comes in Cash Goes out
Debit – What come in Debit Credit Debit – What come in

Furniture Purchased cost of 100000 rupees
Furniture Cash
Real Real
Furniture comes in Cash Goes out

Credit – What Goes out Debit Credit
Rent paid of Rupees 6000
Rent Cash
Nominal Real
Is the Rent here income or expense Is the cash come in or goes out?
Rent is expenses here Cash Goes out

Debit – All expenses and losses Debit – What come in
Debit Credit
Credit – All income and Gains Credit – What Goes out
• If the name of a
person is given in a
transaction related Rent paid of Rupees 6000 to Ram
to expenses and
incomes, then is no
need recognize or
open person’s or
personal account
Rent Cash Ram
• Until the expenses is
due but not paid in
cash
Nominal Real
Rent is expenses here Cash Goes out

Debit Credit
transaction related Rent is due of Rupees 6000 to Ram
to expenses and
incomes, then is no
need recognize or
Cash
open person’s or
personal account
Rent Ram
due but not paid in
cash
Nominal Personal
Is the Rent here income or expense Whether the Ram is a giver or receiver of benefit
Rent is expenses here Ram is a giver of benefit

Debit – All expenses and losses Credit Debit – The Receiver of benefit
Debit
Credit – All income and Gains Credit – The Giver of benefit
Commission received of Rupees 1000
Commission Cash
Nominal Real
Rent is income here Cash Comes in

Credit Debit
transaction related Commission received of Rupees 6000 from Vijay
to expenses and
incomes, then is no
need recognize or
open person’s or
personal account
Commission Cash Vijay
due but not paid in
cash
Nominal Real
Rent is income here Cash Comes in

Credit Debit
transaction related Commission is earned but not received in cash of Rupees 3000 from Ajay
to expenses and
incomes, then is no
need recognize or
Cash
open person’s or
personal account
Rent Ajay
due but not paid in
cash
Nominal Personal
Is the Rent here income or expense whether the Ram is a giver or receiver of benefit
Rent is income here Ajay is a Receiver of benefit

Debit – All expenses and losses Debit Debit – The Receiver of benefit
Credit
Credit – All income and Gains Credit – The Giver of benefit
Prepaid Expenses Accrued Income
Outstanding Unearned/Advance
Expenses Income

• Record all the • We can not write the
transactions in the name of the owner
books of business Rajat Stated his business by investing 400000 in the books of his
taken place between business.
Owner and its own
business • We can use
representative words
• Because owner and like Capital and
its business are Rajat Cash Drawings
separate entity
Personal Real
whether the Rajat is a giver or receiver? Is the cash come in or goes out?
Rajat is a giver cash come in

Debit – The Receiver Debit – What come in
Credit – The Giver Credit Debit
Bank Related Transactions

1000 Cash deposited in Bank
Cash Bank
Real Personal
Is the cash come in or goes out? whether the Bank is a giver or receiver?
Rent is income here Bank is a receiver

5000 rupees Deposited in Bank
Cash Bank
Real Personal
Is the cash come in or goes out? Whether the Bank is a giver or receiver
Cash goes out Ram is a Receiver

Credit Debit
1000 rupees withdraw from Bank A/C
Cash Bank
Real Personal
Cash come in Bank is a giver

Credit Debit
500 rupees received from Ram via UPI
Cash Ram
Bank
Personal Personal
Whether the Bank is a giver or receiver Whether the Ram is a giver or receiver
Bank is a Receiver Ram is a giver

Debit – The Receiver Debit – The Receiver
Credit – The Giver Debit Credit
Credit – The Giver
1000 rupees debited from Bank for Insurance Premium
Cash Bank Insurance
Personal Nominal
Whether the Bank is a giver or receiver Whether the insurance Premium is expense or income
Bank is a giver insurance Premium is expense

Debit – The Receiver Debit – All expenses
Credit – All income
1000 rupees Commission credited into Bank A/C
Cash Bank Commission
Personal Nominal
Whether the Bank is a giver or receiver Whether the Commissions expense or income
Bank is a Receiver Commissions is Income

Debit – The Receiver Debit – All expenses
Credit – The Giver Debit Credit
Credit – All income
Cheque Related Transaction

Cheque of 500 rupees received from Ram
Cash Ram
Real Personal
Is the cash come in or goes out? Whether the Ram is a giver or receiver
Cash Comes in Ram is a giver

Debit Credit
Cheque of 500 rupees (received from Ram) deposited to Bank
Cash Bank
Real Personal
Cash Comes in Ram is a Receiver

Credit Debit
Cheque of 500 rupees received from Ram deposited to Bank on same date
Ram Bank
Personal Personal
Whether the Ram is a giver or receiver? Whether the Bank is a giver or receiver
Ram is a Giver Bank is a Receiver

Cheque of 500 rupees directly by Ram deposited into our Bank Account
Ram Bank
Personal Personal
Whether the Ram is a giver or receiver? Whether the Bank is a giver or receiver
Ram is a Giver Bank is a Receiver

Payment made by cheque1000 rupees Paid to Vijay
Bank Vijay
Personal Personal
Whether the Vijay is a giver or receiver Whether the Vijay is a giver or receiver
Vijay is a Receiver Vijay is a Giver
Debit – The Receiver Debit Credit Debit – The Receiver

Credit – The Giver Credit – The Giver
Complex Entry

books of business Rajat Stated his business by investing 400000 in the books of his
taken place between rupees Cash, Machinery costing 200000 business.
Owner and its own
its business are Rajat Cash & Machinery Drawings
separate entity
Personal Real
whether the Rajat is a giver or receiver? Is the Cash & Machinery come in or go out?
Rajat is a giver Cash & Machinery come in

Credit Debit
Credit – The Giver Credit – What Goes out
books of business Rajat Started his business by investing own 400000 and in the books of his
taken place between business.
600000 taken as loan from bank
Owner and its own
its business are Rajat Cash Drawings
separate entity
Personal Real
whether the Rajat is a giver or receiver? Is the cash come in or goes out?
Rajat is a giver cash come in

Rajat
40000
0
Business
Bank
60000 0

Goods purchased of costing of 10000 rupees from Ram but 5000 paid in cash
Debit – What come in

Ram for reaming 5000
Goods Cash for 5000 only

Personal
Real Real Whether the Ram is a giver or receiver
Is the Goods come in or goes out? Is the cash come in or goes out? Ram is a Giver
Debit
Debit – The Receiver
Debit Credit Credit – The Giver
Discount related Transactions
• There is two types of discount; Trade Discount and Cash Discount
• We never record the Trade discount in the books of accounts
• Cash discount must be recorded in the books of accounts

• No need to record
trade discount in the
books of account
Goods purchased of costing 10000 rupees at trade discount of 10 %
• Only need to subtract Transaction value is only

the amount of trade
discount from cost of =10000 – (10000*10)/100
the product Goods Cash
= 9000
Real Real

Debit Credit
• No need to record
trade discount in the
books of account
• But the cash discount

Goods purchased of costing 10000 rupees at trade discount of 10 %
must be recorded in and avail cash discount of 2% by making instant payment
the books of accounts
Cash Discount Discount (180)
Transaction value is only = (9000 * 2) / 100
Goods Cash = 180
=10000 – (10000*10)/100 Cash need to pay
Nominal
= 9000 – 180
= 9000 = 8820
Real (9000) Real (8820)
Is the Discount here income or expense
Discount Is gain here

Gain
Debit – What come in Debit Credit
Credit
Drawings
1000 Drawn from business for personal use

Drawing A/C…………………………….. Dr.
School fee paid of 5000 rupees To Cash/Bank
(Being money withdrawn for personal use)
Furniture purchased for home of rupees 10000
Drawing A/C…………………………….. Dr.

Goods costing 3000 taken for personal use To Goods A/C
or
Furniture costing 3000 taken for personal use To Purchases A/C
or
Any asset costing 10000 taken for personal use To Furniture or Asset A/C
(Being goods or asset taken for personal use)
Charity
1000 paid as charity to community trust
Charity A/C…………………………….. Dr.

To Cash/Bank
(Being 1000 paid as charity )
• Charity is expenses
• Related to your business not personal
Goods costing 2000 given as charity expenses
Charity A/C…………………………….. Dr.

To Purchases A/C (Goods)
(Being Goods costing 2000 given as charity)

Exercise
Record the following transactions in the books of “M/s Albert & Brothers”.
1. Albert starts business with Rs. 50,000.
2. He opens a SBI saving bank account and deposits Rs. 20,000.
3. Bought furniture for Rs. 5,000, machinery for Rs. 10,000.
4. Purchased goods for Rs. 14,000.
5. Sold goods for Rs.8, 000.
6. Purchased goods from Malhotra & Company for Rs. 11,000.
7. Paid telephone rent for the year by Cheque Rs. 500
8. Bought one typewriter for Rs. 2,100 from ‘Universal Typewriter Co’. on credit.
9. Sold goods to Keshav Ram for Rs. 12,000.
10. Sold goods to Rajesh Kumar for Rs. 2000 cash.
11. Amount withdrawn from bank for personal use Rs. 1,500.
12. Received cash from Keshav Ram Rs. 11,900 and discount allowed Rs. 100.
13. Paid into bank Rs. 5,800.
14. Goods worth Rs. 1,000 found defective were returned to Malhotra & Co. and balance of the amount due to them settled by issuing a
cheque in their favour.
15. Bought goods worth Rs. 2,100 from Ramesh and supplied them to Suresh at Rs. 3,000. ‘
16. Suresh returned goods worth Rs. 100, which in turn were sent to Ramesh.
17. Issued a cheque for Rs. 1,000 in favour of landlord for rent for April.
18. Paid salaries to staff Rs. 1,500.
19. Received from travelling salesman Rs. 2000 for goods sold by him, travelling expenses Rs. 100
Ledger

Rules to prepare Ledger Book
• The entry we made in ledger book is called Ledge posting
• Prepared using Journal entry data as a base
• Ledger book is bifurcated two sides namely Debit side and Credit side
• Both the side have four columns respectively Dates, Particulars, J.F. and Amount
• First thing we have to decide which account (summary related to which account we want to
prepare
• Suppose, if decided to prepare cash Account, then we have to recognize all the journal entries
having cash account or all the journal entry in which the cash account had opened
• Then we have to post all the recognized journal entry (Having cash account) into ledger book

How can we post
• Just look at a Journal and identify the side of cash account in that particular Journal Entry
• Is it Debited in that Journal entry or Credited in that particular Journal entry.
• If it is Debited, then go to the debit side of cash account in ledge book and post what was
written at opposite side (or credit side).
• If it is Credited, then go the Credit side of cash account in ledge book and post what was
written at opposite side (or Debit side)
• On writing any thing (or name of account) on Debit side use the prefix TO
• On writing any thing (or name of account) on Credit side use the prefix BY

Format of Ledger Posting
Dr. Cash Account Cr.

Dates Particulars J.F. Amount Dates Particulars J.F. Amount
1 April To Capital A/C 400000 4 May By Vijay A/C 1000
15 May To Bank Loan A/C 600000 8 Aug By Purchases A/C 10000
31 Dec To Ram A/C 500 13 Nov By Machine A/C 100000
31 Mar By Balance c/d 889500
1000500 1000500
1 April To Balance b/d 889500

How to post Journal entry into Ledger Account
Date Particulars L.F. Debit Amount Credit Amount
1 April Cash A/C………………………………………………………………………..… Dr. 500
To Ram A/C 500
(Being Cash received from Ram)
2 April Vijay A/C…………………………………………………………………...……… Dr. 1000
To Cash A/C 1000
(Being paid to Vijay)
4 April Purchases A/C ……………………………………………………………..……… Dr. 10000
To Cash 10000
(Being goods purchased costing from Ramesh on credit)
9 April Cash A/C…………………………………………………………………………….. Dr. 7000
To Commission A/C 7000
(Being Commission received )
Balance c/d 18500 18500
Dr. Cash Account Cr.

1 April To Ram A/C 500 2 April By Vijay A/C 1000
To Commission A/C 7000 By Purchases A/C 10000

Rules of Closing Ledger Accounts
• As per the fundamental of accounting the debit and credit side of ledger is always be equal
• But practically it is no possible in most of the cases
• Then What can we do?
• Then we suppose to calculate the sum of both side separately and because both side are not
equal, means sum of a side is greater than other side
• We are need to write greater sum amount at both the sides of amounts column as sum of both
the sides (Debit and Credit) and definitely there will be difference in one side which shorter.
• If the Sum of Debit side is greater than Credit the balance will at Credit side, and it must
consider as Debit balance because the debit side is greater than credit side and it has more
balance amount then credit side.

Rules of Closing Ledger Accounts
• If the Sum of Credit side is greater than Debit side the balance will at Debit side, and it must
consider as Credit balance because the Credit side is greater than Debit side and it has more
balance amount then Debit side.
• Balancing of Ledger account are mostly done at last date of financial year (e.g 31 March )
• Balancing figure of Personal Account and Real Account is named as Balance c/d and must
be transfer to next year’s ledger book into the same account with named as Balance b/d
• Balancing figure of Nominal Account is named as Trading A/C and Profit & Loss A/C and
must be transfer to trading and P&L account for the calculation for profit or loss
• All the direct expenses, direct incomes, sales, purchases, sales return and purchases return
account must be closed with Trading A/C
• Rest of the nominal account or Indirect income and expenses account must be closed with
Profit & Loss account

Understanding
• Balancing figure of ledger account further used to prepare the Trail balance (summary) and
Final Account ( Profit & Loss account and Balance)
• Balancing figure of Personal Account and Real Account will use in the Balance Sheet
• Balancing figure of Nominal Account is used Trading A/C and Profit & Loss A/C
• All the Asset always have Debit balance

• All the Liabilities always have Credit balance
• All the Expenses and Losses always have Debit balance
• All the Income and Gains have Credit balance
• Goods Account further bifurcates into:
a. Purchases A/C- Debit balance (close with Trading A/C)
b. Sales A/C- Credit balance (close with Trading A/C)
c. Purchase Return A/C- Credit balance (close with Trading A/C or Purchases A/C)
d. Sales Return A/C- Debit balance (close with Trading A/C or Sales A/C)
Understanding
• Personal A/Cs (Ram, Vijay, Bank etc.) if having Debit balance consider as Assets like
Debtors, Prepaid Expenses, Accrued Income
• Because all these person or group of person are suppose to pay our business in futures
• Personal A/Cs (Ram, Vijay, Bank etc.) if having Credit balance consider as Liabilities like
Creditors, Outstanding Expenses, Unaccrued Income
• Because our business is suppose to pay to all these person or group of person
• Balancing figure of Personal Account and Real Account will use in the Balance Sheet
• Balancing figure of Nominal Account is used Trading A/C and Profit & Loss A/C
• Balancing figure of Nominal Account is transfer to Trading A/C and Profit & Loss A/C
that is the reason all the expenses and income account is nominal account because they all are
suppose close at end of the year when accountants close the account transfer of these the
balances by transferring into Trading and Profit & Loss account for calculation of
Profit/Loss. This why the balances of Nominal account not shows in balance sheet and not
transferred to next year’s ledger book
Closing of Ledger Account
• If the account is Personal and Real Account, then only, the difference of balance
(Balancing Figure- with posting Balance c/d) between the debit and credit side must be
transfer to next year’s ledge books into similar account with the posting balance b/d

Dr. Rent Account Cr.
1 April To Cash A/C 10000
1 May To Cash A/C 10000 31 March By Profit & Loss A/C 120000
1 June To Cash A/C 10000 (Transfer to P&L)
1 July To Bank A/C 10000
1 August To Cash A/C 10000
1 September To Bank A/C 10000
1 October To Bank A/C 10000
1 November To Bank A/C 10000
1 December To Cash A/C 10000
1 January To Bank A/C 10000
1 February To Cash A/C 10000
1 March To Bank A/C 10000
120000 120000
• If the account is Nominal Account, then the difference of balance between the debit and
credit side must be transfer to Profit and loss account for the calculation of profit or loss
(for clear understanding read rules related to closing of ledger accounts).

Dr. Purchases Account Cr.
18April To Cash A/C 10000
11 May To Ram A/C 20000 31 March By Trading A/C 240000
21 June To Ajay A/C 35000 (Transfer to trading account
7 July To Bank A/C 40000 For calculation of Trading
9 August To Cash A/C 15000 Profit)
12 September To Vijay A/C 3000
31 October To Vijay A/C 11000
10 November To Suresh A/C 16000
30 December To Ajay A/C 18000
13 January To Bank A/C 28000
14 February To Cash A/C 45000
2 March To Vijay A/C 1000
240000 240000

Trail Balance

What is Trail Balance
• Preparation of trial balance is the third phase in the accounting process.
• After posting the accounts in the ledger and closing ledger account, a statement is prepared to
show separately the debit and credit balances extracted from ledger book.
• This a statement is known as the trial balance.
• Trial balance contains various ledger balances on a particular date, especially at end of the
year
• It forms the basis for preparing final statement i.e. profit and loss statement and balance
sheet.
• Because both the side of account are and if both side of trail balance tallies, it means that the
accounts are arithmetically accurate but certain errors may still remain undetected.
• Therefore, it is very important to carefully journalise and post the entries, following the rules
of accounting.
Objectives of Preparing the Trial Balance
• Trial balance enables one to establish whether the posting and other accounting processes
have been carried out without committing arithmetical errors. In other words, the trial
balance helps to establish arithmetical accuracy of the books..
• Financial statements are normally prepared on the basis of agreed trial balance; otherwise the
work may be cumbersome. Preparation of financial statements, therefore, is the second
objective.
• The trial balance serves as a summary of what is contained in the ledger; the ledger may have
to be seen only when details are required in respect of an account.

Purpose of Preparing the Trial Balance
Phase of the
Accounting
Process
Basis for Ledger balances

preparing the
Trail of the Particular
Final Accounts Balance date
Check the
arithmetical
accuracy of the
Books

Format of Trial Balance
Trail Balance
(as on 31 March 2024)
S. No. Ledge Account Name or Particulars L.F Dr. Amount Cr. Amount
1 Cash -
2 Bank -
3 Purchases -
4 Sales -
5 Purchases Return -
6 Sales Return -
7 Ram -
8 Vijay -
9 Rent Received -
10 Commission Paid -
11 Discount Received -
12 Salary -
13 Building -

The under mentioned points need to be noted
A trial balance is prepared as on a particular date which should be mentioned at the top.
In the second column the name of the account is written.
In the fourth column the total of the debit side of the account concerned or the debit balance, if
any is entered.
In the next column, the total of the credit side or the credit balance is written.
The two columns are totalled at the end.

The first and third column needs no explanation.

Limitations of Trial Balance
Despite the fact that Trail Balance check the arithmetic accuracy of Books, One should note that
the agreement of Trial Balance is not a conclusive proof of accuracy.
In other words, inspite of the agreement of the trial balance some errors may remain. These may
be of the following types:
• Transaction has not been entered at all in the journal.

• A wrong amount has been written in both columns of the journal.
• A wrong account has been mentioned in the journal.
• An entry has not at all been posted in the ledger.
• Entry is posted twice in the ledger.
Note: Still, the preparation of the trial balance is very useful; without it, the preparation of
financial statement, the profit and loss account and the balance sheet, would be difficult.

Rules of Preparing the Trial Balance
While preparing the trial balance from the given list of ledger balances, following rules should
be taken into care:
• The balances of all (i) assets accounts (ii) expenses accounts (iii) losses (iv) drawings (v)
cash and bank balances are placed in the debit column of the trial balance.
• The balances of all (i) liabilities accounts (ii) income accounts (iii) profits (iv) capital are
placed in the credit column of the trial balance.
• Sales and Purchases Return should also placed into the Credit side
• Purchases and Sales Return account should also placed into the Debit Side

Recognized Account usually having Debit or credit Balances
• Cash • Bank Overdraft • Purchases Return
• Building • Sundry Expenses • Salary
• Rent Paid • Advance to Mr. Gupta • Wages
• Commission Received • Land • Salary & Wages
• Sales • Bills Receivable • Wages & Salary
• Debtors • Interest Received • Factory Expenses
• Bills Payable • Dividend Received • Closing Stock*
• Stationary • Trade Payables • Rent & Rates
• Commission Paid • Discount Allowed • Electricity Charges
• Furniture • Discount Received • Tax
• Creditor • Insurance Paid • Drawings
• Bank Loan • Interest on Investment • Provision for Doubtful
• Investment • Purchases Debts
• Capital • Due from Customer • Returns Inward (SR)
• Bank Balance • Sales Return • Returns Outward (PR)

Recognized Account usually having Debit or credit Balances
• Cash • Bank Overdraft • Purchases Return
• Building • Sundry Expenses • Salary
• Rent Paid • Advance to Mr. Gupta • Wages
• Commission Received • Land • Salary & Wages
• Sales • Bills Receivable • Wages & Salary
• Debtors • Interest Received • Factory Expenses
• Bills Payable • Dividend Received • Closing Stock*
• Stationary • Trade Payables • Rent & Rates
• Commission Paid • Discount Allowed • Electricity Charges
• Furniture • Discount Received • Tax
• Creditor • Insurance Paid • Drawings
• Bank Loan • Interest on Investment • Provision for Doubtful
• Investment • Purchases Debts
• Capital • Due from Customer • Returns Inward (PR)
• Bank Balance • Sales Return • Returns Outward (SR)

Purchases Account may also be Credited into the books of Accounts
Usually, the Purchases account debit in the books of Accounts but in some cases purchases account
also get credited to adjust or to calculate actual purchases used for trading process:
Goods Cost 1000 loss by fire Goods Cost 1000 loss by Theft
Loss by Fire A/C……………………….. Dr. Loss by Theft A/C……………………….. Dr.

To Purchases A/C To Purchases A/C
Goods Cost 1000 taken for personal use Goods Cost 1000 Given as Charity
Drawings A/C………………………….. Dr. Charity A/C…………..………………….. Dr.

To Purchases A/C To Purchases A/C
Goods Cost 1000 given as sample Goods Cost 10000 remained Unsold and
considered as Closing stock
Specimen or Advertisement A/C……….. Dr.
Closing Stock A/C……………………….. Dr.
To Purchases A/C
To Purchases A/C
Adjusted Trial Balance (Through Suspense Account)
Usually, Both the side of trail tallies with each other
In the other cases, It must be considered as arithmetic error of account, or the amount debited in
journal proper is not equal to amount credited in journal proper.
In these cases, Accountants are supposed to figure out mistakes and rectify it before preparing
the final accounts
• But if there is scarcity of time and any a how accountant are requiring to prepare the final
accounts before addressing mistake detected by trail balance
• In this case the difference of trail trial balance shown as Suspense Account or hen the trial
balance is tallied by transferring the difference of debit and credit side to an account known
as suspense account.
• This is a temporary account opened to proceed further and to prepare the financial statements
timely.
Subsidiary Books

Subsidiary Books
Journal Principle Subsidiary

Proper Book Book
• Ledge Book • Purchases Book, Sales
• Cash Book Book, Purchases Return
Book, Sales Return Book
• Bills Receivable Book
and Bills Payable Book
• Pity Cash Book

For recording
opening entry,
Financial Books
closing entry,
adjustment Purchases Book
entry and any Journal Proper
transaction not
recorded in Purchases Return Book
Subsidiary
Book Financial Book Subsidiary Books Sales Book
Sales Return Book

Cash Book
Bills Receivable Book
Bills Payable Book
Single Column Dual Column Triple Column Pity Cash Book

For recording all the For recording all the For recording all the Cash, For recording all small transactions
cash transactions cash transactions and Bank and Discount related related to cash which is material to
Bank transaction transaction record individually in Journal Proper
Purchases Book
• Purchase Book is prepared by the firms to record the credit purchase of goods.
• Purchase of goods for cash and purchase of other things other than goods are not recorded in the
purchase book.
• Cash purchases are recorded in Cash Book and other things are recorded in Journals and
respective Ledgers.
• The invoice received from suppliers with the net amount after trade discount helps to record the
credit purchases in the Purchase Book.
• Purchase Book is prepared because it becomes easier, and we can have a periodic total of credit
purchase of goods.
• It helps to know and check the price charged for goods.
• It also reduces to burden to pass journal entries for each credit purchase of goods.
• The Purchase Book is totaled at the end of the specified period (week, month, or year), and it is
posted to Purchase Account.

Purchases Book
•It maintains clear and organized records of all purchases made by the company.
•It ensures accountability in the procurement process by documenting supplier transactions.
•Purchase Book aids in maintaining accurate financial records, and facilitating account reconciliation.
•It tracks expenses related to the acquisition of goods and services.
•Purchase Book creates an audit trail for financial transactions, ensuring transparency.
•It helps in managing and tracking company assets.
•It assists in monitoring and controlling expenses within budgetary constraints.
•Purchase Book maintains historical purchase data for future reference and analysis.
.

Purchases Book

Sales Book
• Buying and Selling are the two main constituents of a business.
• Goods are sold by a company on either cash or credit basis.
• Recording of cash sales and credit sales takes place in different subsidiary books.
• All the credit sales of goods are recorded in the ‘Sales Book’, whereas all the cash sales of the
goods are recorded in the ‘Cash Book’.
• Importantly, the credit sales of anything other than goods, i.e., assets are directly recorded to
‘Journal’ and not in ‘Sales Book’.
The following transactions are not recorded in the Sales Book:

• Cash Sales: All the cash sales of the goods are recorded in the ‘Cash Book’, and not in the ‘Sales
Book’.
• Sale of Assets: Any sale of assets either in cash or credit is not recorded in the ‘Sales Book’.

Sales Book
• The entries in the Sales Book are recorded on the basis of the sales invoices issued by the company
to its customers at the time of sales.
• Generally, every company makes a minimum of two copies of the sales invoice.
• One is to give to the purchaser of the goods, and the other to maintain the internal records and pass
respective entries in the Sales Book.
• Sales invoices contain all the important information related to sales, i.e., date, name of the
customer, quantity of the goods sold, rate, gross amount, discount allowed, the tax levied, and the
net amount of sales.

Sales Book

Petty Cash Book

Financial Statements

Rectification of Errors

Depreciation

Financial Statements
of Joint Stock
Company

Cash Flow Statement

Ratio Analysis

Annual General Report

Accounting

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Basics of Financial

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 2

The early Egyptians and While he was not the inventor of

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 4

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 5

Recording Journal Entries

Classifying Ledger Accounts

Summarizing Trail Balance

Analyzing Final Accounts

Interpretation Financial Report

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 6

Input Accounting Cycle Output

Identification Recording of Preparation Preparation Communicating information

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 7

Systematic Recording Ascertainment of Ascertainment of Communication of

Book-keeping: Manufacturing, Balance Sheet Financial Reports

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 8

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 9

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 10

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 11

Financial Management Cost Accounting Special Human

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 12

Investors Employee Leader Suppliers Customers Government Public Management

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 13

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 14

Error and Frauds No futures

Others Personal Bias

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 15

Money measurement concept

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 17

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 18

Natural Artificial Representative Real Account Nominal

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 19

A word in a transaction represents Goods and Asset (or Combinations of

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 20

Debit – What Come in

Debit – All expenses and losses

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 21

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 22

Cash Comes in Ram is a giver

cash Goes out Vijay is a Receiver

Debit – What come in Credit Debit Debit – The Receiver

Goods Comes In Cash Goes out

Debit – What come in Debit – What come in

Goods Goes out Cash Comes In

Goods Comes In Ramesh is a giver

Debit – What come in Debit Credit Debit – The Receiver

Goods Goes out Vijay is a receiver

Debit – What come in Credit Debit Debit – The Receiver

Machine comes in Cash Goes out

Debit – What come in Debit Credit Debit – What come in

Furniture comes in Cash Goes out

Rent is expenses here Cash Goes out

Rent is expenses here Cash Goes out

Rent is expenses here Ram is a giver of benefit

Rent is income here Cash Comes in

Rent is income here Cash Comes in

Rent is income here Ajay is a Receiver of benefit

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 37

Rajat is a giver cash come in

05/03/2024 Basics of Accounting-BBA II Semester 2023-2026 39

Rent is income here Bank is a receiver

Debit – What come in Credit Debit Debit – The Receiver

Cash goes out Ram is a Receiver