INTRODUCTION TO ACCOUNTING

The purpose of any business is to make profits for that some business activities are to
be conducted. You may involve in transactions daily. Any human activity directed at
making profit is called business. Business is of different types. It may be trading
activity or manufacturing activity. Business may require capital which may be owner‟s
capital and borrowed capital. Transactions involve exchange of value like purchase of
goods, sale of goods for cash or credit and payment of expenses in the course of
production and distribution.

History of Accounting:

Accounting is as old as civilization itself. From the ancient relics of Babylon, it

can be will proved that accounting did exist as long as 2600 B.C. However, in modern
form accounting based on the principles of Double Entry System came into existence in
17th Century. Fra Luka Paciolo, a mathematician published a book De computic et
scripturies in 1494 at Venice in Italy. This book was translated into English in 1543. In
this book he covered a brief section on „book-keeping‟.

Origin of Accounting in India:

Accounting was practiced in India thousand years ago and there is a clear
evidence for this. In his famous book Arthashastra Kautilya dealt with not only politics
and economics but also the art of proper keeping of accounts. However, the accounting
on modern lines was introduced in India after 1850 with the formation joint stock
companies in India.

Accounting in India is now a fast developing discipline. The two premier Accounting
Institutes in India viz., chartered Accountants of India and the Institute of Cost and
Works Accountants of India are making continuous and substantial contributions. The
international Accounts Standards Committee
(IASC) was established as on 29th June. In India the „Accounting Standards Board
(ASB) is formulating
„Accounting Standards‟ on the lines of standards framed by International Accounting
Standards
Committee.\

BOOK-KEEPING AND ACCOUNTING

Book – Keeping: Book – Keeping involves the chronological recording of financial

transactions in a set of books in a systematic manner.

Accounting: Accounting is concerned with the maintenance of accounts giving stress to

the design of the system of records, the preparation of reports based on the recorded date
and the interpretation of the reports.

DIFFERENCE BETWEEN BOOK-KEEPING AND ACCOUNTING:

BOOK-KEEPING ACCOUNTING

Concerned with recording of Concerned with classifying, summarizing, analyzing and

1
transactions interpreting the data and communicating to the end users

Book-keeper maintains the

2 Accountant maintains the accounts of whole organization
accounts of particular section
 He works under an
3 He directs and reviews the work of book-keeper
accountant

He has higher level of knowledge, conceptual

He has limited knowledge 4
understanding, analytical skills

His work is clerical in nature 5 His work is executive in nature

SYSTEMS OF BOOK-KEEPING:

1. Single entry system

 It is incomplete system of double entry system.
 Only cash and personal accounts are maintained.
2. Double entry system
 It is only the system that records two aspects of a transaction.
 In this system, the transactions are recorded with the help of “Debit-
Credit rules”.

Definition of Accounting:

American Institute of Certified Public Accountants (AICPA): “The art of recording,

classifying and summarizing in a significant manner and in terms of money transactions
and events, which are in part at least, of a financial character and interpreting the results
thereof.”
 Thus, accounting is an art of identifying, recording, summarizing and interpreting
business transactions of financial nature. Hence accounting is the Language of
Business.

1.Cash system: Only cash related transactions are recorded. Usually, Government and
some professionals use this type of accounting system. Receipts and payments account
is prepared. It does not present true picture of the financial position of a company.

2.Accrual system: It is also known as mercantile system of accounting. It considers

outstanding expenses and incomes It provides clear picture of financial position of a
firm. Company‟s Act recommended this system to all companies.

BRANCHES OF ACCOUNTING

The important branches of accounting are:

1. Financial Accounting: The purpose of Accounting is to ascertain the financial results

i.e. profit or loass in the operations during a specific period. It is also aimed at knowing
the financial position, i.e. assets, liabilities and equity position at the end of the period.
It also provides other relevant information to the management as a basic for decision-
making for planning and controlling the operations of the business.

2. Cost Accounting: The purpose of this branch of accounting is to ascertain the cost of
a product / operation / project and the costs incurred for carrying out various activities.
It also assist the management in controlling the costs. The necessary data and
information are gatherr4ed form financial and other sources.
3. Management Accounting : Its aim to assist the management in taking correct policy
decision and to evaluate the impact of its decisions and actions. The data required for
this purpose are drawn accounting and cost-accounting.

FUNCTIONS OF AN ACCOUNTANT

The job of an accountant involves the following types of accounting works :

1. Designing Work : It includes the designing of the accounting system, basis for
identification and classification of financial transactions and events, forms, methods,
procedures, etc.

2. Recording Work : The financial transactions are identified, classified and recorded in
appropriate books of accounts according to principles. This is “Book Keeping”. The
recording of transactions tends to be mechanical and repetitive.

3. Summarizing Work : The recorded transactions are summarized into significant form
according to generally accepted accounting principles. The work includes the
preparation of profit and loss account, balance sheet. This phase is called „preparation
of final accounts‟

4. Analysis and Interpretation Work: The financial statements are analysed by using
ratio analysis, break-even analysis, funds flow and cash flow analysis.

5. Reporting Work: The summarized statements along with analysis and interpretation
are communicated to the interested parties or whoever has the right to receive them. For
Ex. Share holders.

In addition, the accou8nting departments has to prepare and send regular reports so as
to assist the management in decision making. This is „Reporting‟.

6. Preparation of Budget : The management must be able to reasonably estimate the

future requirements and opportunities. As an aid to this process, the accountant has to
 prepare budgets, like cash budget, capital budget, purchase budget, sales budget etc.
this is „Budgeting‟.

7. Taxation Work : The accountant has to prepare various statements and returns
pertaining to incometax, sales-tax, excise or customs duties etc., and file the returns
with the authorities concerned.

8. Auditing :It involves a critical review and verification of the books of accounts
statements and reports with a view to verifying their accuracy. This is „Auditing‟.

USERS OF ACCOUNTING INFORMATION

1. Managers : These are the persons who manage the business, i.e. management at the
top, middle and lower levels. Their requirements of information are different because
they make different types of decisions.

Accounting information also helps the managers in appraising the performance of

subordinates. As such Accounting is termed as “ the eyes and ears of management.”

2. Investors : Those who are interested in buying the shares of company are naturally
interested in the financial statements to know how safe the investment already made is
and how safe the proposed investments will be.

3. Creditors : Lenders are interested to know whether their load, principal and interest,
will be paid when due. Suppliers and other creditors are also interested to know the
ability of the firm to pay their dues in time.

4. Workers : In our country, workers are entitled to payment of bonus which depends on
the size of profit earned. Hence, they would like to be satisfied that he bonus being paid
to them is correct. This knowledge also helps them in conducting negotiations for
wages.

5. Customers : They are also concerned with the stability and profitability of the
enterprise. They may be interested in knowing the financial strength of the company to
rent it for further decisions relating to purchase of goods.
6. Government: Governments all over the world are using financial statements for
compiling statistics concerning business which, in turn, helps in compiling national
accounts. The financial statements are useful for tax authorities for calculating taxes.

7. Public : The public at large interested in the functioning of the enterprises because it
may make a substantial contribution to the local economy in many ways including the
number of people employed and their patronage to local suppliers.

8. Researchers: The financial statements, being a mirror of business conditions, is of great

interest to scholars undertaking research in accounting theory as well as business affairs
and practices.

ADVANTAGES OF ACCOUNTING

1. Provides for systematic records: Since all the financial transactions are recorded in
the books, one need not rely on memory. Any information required is readily available
from these records.

2. Facilitates the preparation of financial statements: Profit and loss accountant and
balance sheet can be easily prepared with the help of the information in the records.
This enables the trader to know the net result of business operations (i.e. profit / loss)
during the accounting period and the financial position of the business at the end of the
accounting period.

3. Provides control over assets:Book-keeping provides information regarding cash in

had, cash at bank, stock of goods, accounts receivables from various parties and the
amounts invested in various other assets. As the trader knows the values of the assets he
will have control over them.

4. Provides the required information: Interested parties such as owners, lenders,

creditors etc., get necessary information at frequent intervals.

5. Comparative study: One can compare the present performance of the organization
with that of its past. This enables the managers to draw useful conclusion and make
proper decisions.
6. Less Scope for fraud or theft: It is difficult to conceal fraud or theft etc., because of
the balancing of the books of accounts periodically. As the work is divided among
many persons, there will be check and counter check.

7. Tax matters: Properly maintained book-keeping records will help in the settlement of
all tax matters with the tax authorities.

8. Ascertaining Value of Business: The accounting records will help in ascertaining the
correct value of the business. This helps in the event of sale or purchase of a business.

9. Documentary evidence: Accounting records can also be used as an evidence in the

court to substantiate the claim of the business. These records are based on documentary
proof. Every entry is supported by authentic vouchers. As such, Courts accept these
records as evidence.

10. Helpful to management: Accounting is useful to the management in various ways. It

enables the management to assess the achievement of its performance. The weakness of
the business can be identified and corrective measures can be applied to remove them
with the helps accounting.

LIMITATIONS OF ACCOUNTING

1. Does not record all events: Only the transactions of a financial character will be
recorded under book-keeping. So it does not reveal a complete picture about the
quality of human resources, location advantage, business contacts etc.

2. Does not reflect current values: The data available under book-keeping is historical
in nature. So they do not reflect current values. For instance, we record the value of
stock at cost price or market price, whichever is less. In case of, building, machinery
etc., we adopt historical cost as the basis. In fact, the current values of buildings, plant
and machinery may be much more than what is recorded in the balance sheet.

3. Estimates based on Personal Judgment: The estimate used for determining the
values of various items may not be correct. For example, debtor are estimated in
 terms of collectability, inventories are based on marketability, and fixed assets are
based on useful working life. These estimates are based on personal judgment and
hence sometimes may not be correct.

4. Inadequate information on costs and Profits: Book-keeping only provides

information about the overall profitability of the business. No information is given
about the cost and profitability of different activities of products or divisions.

ACCOUNTING PRINCIPLES

Accounting principles are the rules and regulations which are followed by the accountants
at the time of recording the accounting transactions. They help in measuring, recording
and summarizing the transactions. These principles are termed as “ Generally Accepted
Accounting Principles (GAAP) “ which are basic assumptions.

AccountingConcepts:

1. BusinessEntityConcept: In this concept “Business is treated as separate from the

proprietor”. All the Transactions recorded in the book of Business and not in the
books of proprietor. The proprietor is also treated as a creditor for the Business.

2. GoingConcernConcept: This concept relates with the long life of Business. The
assumption is that business will continue to exist for unlimited period unless it is
dissolved due to some reasons or the other.

3. MoneyMeasurementConcept: In this concept “Only those transactions are recorded

in accounting which can be expressed in terms of money, those transactions which
cannot be expressed in terms of money are not recorded in the books of accounting”.
4. CostConcept: Accounting to this concept, can asset is recorded at its cost in the books
of account. i.e., the price, which is paid at the time of acquiring it. In balance sheet,
these assets appear not at cost price every year, but depreciation is deducted and they
appear at the amount, which is cost, less classification.

5. AccountingPeriodConcept: every Businessman wants to know the result of his

investment and efforts after a certain period. Usually one-year period is regarded as an
ideal for this purpose. This period is called Accounting Period. It depends on the
nature of the business and object of the proprietor of business.

6. DualAspectConcept: According to this concept “Every business transactions has two

aspects”, one is the receiving benefit aspect another one is giving benefit aspect. The
receiving benefit aspect is termed as “DEBIT”, where as the giving benefit aspect is
termed as “CREDIT”. Therefore, for every debit, there will be corresponding credit.

7. MatchingCostConcept: According to this concept “The expenses incurred during an

accounting period, e.g., if revenue is recognized on all goods sold during a period, cost
of those good sole should also be charged to that period.

8. RealizationConcept: According to this concept revenue is recognized when a sale is

made. Sale is considered to be made at the point when the property in goods posses to
the buyer and he becomes legally liable to pay.

AccountingConventions:

1.FullDisclosure: According to this convention accounting reports should disclose fully

and fairly the information. They purport to represent. They should be prepared
honestly and sufficiently disclose information which is if material interest to
proprietors, present and potential creditors and investors.
The companies ACT, 1956 makes it compulsory to provide all the information in the
prescribed form.
2.Materiality: Under this convention the trader records important factor about the
commercial activities. In the form of financial statements if any unimportant
information is to be given for the sake of clarity it will be given as footnotes.

3.Consistency: It means that accounting method adopted should not be changed from
year to year. It means that there should be consistent in the methods or principles
followed. Or else the results of a year Cannot be conveniently compared with that of
another.

4. Conservatism: This convention warns the trader not to take unrealized income in to
account. That is why the practice of valuing stock at cost or market price, whichever is
lower is in vague. This is the policy of “playing safe”; it takes in to consideration all
prospective losses but leaves all prospective profits.

ELEMENTS OF FINANCIAL STATEMMENTS

Entity:- An entity is an economic unit which performs economic activities. Ex: Tata
Steel, H.M.T. Ltd.

Business transaction:- A transaction is an exchange of goods or services for cash or

credit. It involves transfer of money or money‟s worth that brings about change in the
financial position of a business.

Trade debtors:- Trade debtors are the persons from whom the amount are due for goods
sold or services rendered on credit basis.

Trade creditors:- Trade creditors are those to whom the amounts are due for goods
purchased or services rendered on credit basis.

Goods:- Goods are those with which the business firm trades. They are meant for resale.

Assets:- Assets are those which yield future economic benefits.

Current Assets:- current assets are those assets which are held in cash or which are
likely to be converted into cash during the financial year.
Fixed Assets:- Fixed assets are those assets which are not held for resale in normal
course of business.

Tangible Fixed Assets:- The assets that can be visible, seen and touched are called as “
Tangible Fixed Assets”.

Intangible fixed assets:- The assets that cannot be visible, seen and touched are called as
“ Intangible Fixed Assets”.

Liabilities:- The financial obligations of the firm are called liabilities.

Current Liabilities:- The liabilities which fall due in a short period are known as “
Current Liabilities”.

Long term liabilities:- The liabilities which fall due for payment in a relatively short
period are called as long term liabilities.

Purchases:- The total amount of goods obtained by an enterprise for resale either for cash
or credit.

Sales:- The amount for which goods are sold or services are rendered either for cash or
credit is called as sales.

Expenditure:- The amount incurred in the process of acquiring goods, assets or services.

Revenue:- The amount charged for the goods sold or services rendered by an enterprise.

Capital: Capital is the amount invested by the owner/propietor in the firm. It is a liability
to the firm.

Drawings: cash or goods withdrawn by the proprietor from the Business for his personal
or Household is termed to as “drawing”.

Reserve: An amount set aside out of profits or other surplus and designed to meet
contingencies.

Account: A summarized statements of transactions relating to a particular person, thing,

Expense or income.
 Discount: There are two types of discounts..

cash discount: An allowable made to encourage frame payment or before the expiration
of the period allowed for credit.

Trade discount: A deduction from the gross or catalogue price allowed to traders who
buys them for resale.

CLASSIFICATION OF ACCOUNTS

All business transactions are classified into three categories:

1.Those relating to persons(Natural persons, artificial persons and representative persons)

2.Those relating to property(Assets)

3.Those relating to income & expenses

Thus, three classes of accounts are maintained for recording all business transactions. They
are:

1.Personal accounts

2.Real accounts

3.Nominal accounts

1.PersonalAccounts:Accounts which are transactions with persons are called “Personal

Accounts” . In accounting, all natural persons and all the firms are considered as persons.

A separate account is kept on the name of each person for recording the benefits received
from ,or given to the person in the course of dealings with him.

E.g.: Krishna‟s A/C, Gopal‟s A/C, SBI A/C, Nagarjuna Finanace Ltd.A/C, Obul Reddy
& Sons A/C , HMT Ltd. A/C, Capital A/C, Drawings A/C etc.
2.RealAccounts: The accounts relating to properties or assets are known as “Real
Accounts” .Every business needs assets such as machinery , furniture etc, for running its
activities .A separate account is maintained for each asset owned by the business .

E.g.: cash A/C, furniture A/C, building A/C, machinery A/C etc.

3.NominalAccounts:Accounts relating to expenses, losses, incomes and gains are known

as “Nominal Accounts”. A separate account is maintained for each item of expenses,
losses, income or gain.

E.g.: Salaries A/C, stationery A/C, wages A/C, postage A/C, commission A/C, interest
A/C, purchases A/C, rent A/C, discount A/C, commission received A/C, interest received
A/C, rent received A/C, discount received A/C.

Before recording a transaction, it is necessary to find out which of the accounts is to be

debited and which is to be credited. The following three different rules have been laid
down for the three classes of accounts….

DEBIT, CREDIT RULES

Debit the receiver

Personal Accounts

Credit the giver

Debit what comes in

Real Accounts

Credit what goes out

 Debit all expenses/losses

Nominal Accounts

Credit all incomes/gains

Identification of the accounts involved in each transaction:

1. Consider that the transaction is committed by the firm and it is being recorded in the
books of the firm.

2. see whether it is cash transaction or credit transaction.

a. A transaction that refers to a person and doesn‟t refer to the term “ cash “ is called
credit transaction

b. A transaction which is not credit transaction is called cash transaction

3. If the transaction is credit one, first find whether the „ personal A/C‟ is to be debited
or credited and next find which account is to be credited or debited.

4. If it is a cash transaction, first find whether the „ cash A/C‟ is to be debited or

credited and next find which account is to be credited or debited.

5. Debit means entering the amount on the left side of an account.

6. Credit means entering the amount on the right side of account.

 ACCOUNTING EQUATION

The basic accounting equation, also called the balance sheet equation, represents the
relationship between theassets,liabilities, andowner's equityof a business. It is the
foundation for thedouble-entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as further more.

Assets = Liabilities + Equity

In a company,capitalrepresents the shareholders' equity. Since every business transaction

affects at least two of a company‟s accounts, the accounting equation will always be “in
balance,” meaning the left side should always equal the right side. Thus, the accounting
formula essentially shows that what the firm owns (its assets) is purchased by either what
it owes (its liabilities) or by what its owners invest (its shareholders equity or capital).

For example: A student buys acomputerfor Rs.1000. To pay for the computer, the
student uses Rs.400 in cash and borrows Rs.600 for the remainder. Now hisassetsare
worth Rs.1000,liabilitiesare Rs.600, and equity Rs.400.

The formula can be rewritten:

Assets - Liabilities = (Shareholders' or Owners' Equity)

Sometimes we expand the Accounting Equation to show all the Equity components. This

is called the Expanded Accounting Equation.

Now it shows owners' interest is equal toproperty(assets) minusdebts(liabilities). Since in

a company, owners areshareholders, owner's interest is calledshareholders' equity.
Everyaccountingtransactionaffects at least one element of the equation, but always
balances. Simplest transactions also include:
Example 1: Prepare the Accounting Equation on the basis of following:

1. Mr. Shiraz Khan started business and introduced capital Rs. 1,00,000 in cash.

2. Purchased goods in cash Rs. 50,000.

3. Purchased from Bismillah Furnitures Rs. 20,000.

4. Sold goods costing Rs. 25,000 for Rs. 35,000.

5. Paid Bismillah Furnitures in cash.

Example 2: Prepare the Accounting Equation on the basis of following:

1. Issuing shares for cash or other assets Rs.6000

2. Buying assets by borrowing money Rs.10000
3. Selling assets for cash Rs. 900
4. Buying assets by paying cash Rs.600 and by borrowing money 400. 5.Earning
revenues Rs.700
 JOURNAL

The first step in accounting therefore is the record of all the transactions in the books of
original entry viz., Journal and then posting into ledges.

The word Journal is derived from the Latin word „journ‟ which means a day. Therefore,
journal means a „day Book‟ in day-to-day business transactions are recorded in
chronological order.

Journal is treated as the book of original entry or first entry or prime entry. All the
business transactions are recorded in this book before they are posted in the ledges. The
journal is a complete and chronological(in order of dates) record of business transactions.
 It is recorded in a systematic manner. The process of recording a transaction in the
journal is called “JOURNALISING”. The entries made in the book are called “Journal
Entries”.

The proforma of Journal is given below.

Date Particulars L.F Debit Amount Credit Amount

Dr Cr
Date Particulars LF Amount Amount
2015 Jan 1 Cash A/C 10000 10000
Dr
To Capital A/C
(Being the business started)
“2 5000
Bank A/C 5000
Dr
To Cash A/C
(Being Cash deposited in the bank) 3000 3000
“5
Purchases A/C
Dr
To Cash A/C
(Being purchases made on the cash basis)
Journalize the following examples:

Example 1. Journalize the following transactions in the books of Mr.

Ram

Solution:Journal entries in the book of Mr.Ram

2015 Jan 1 Business started with Rs. 10,000

“ 2 Cash deposited in the bank Rs. 5,000
“ 5 Purchases Rs. 3,000
“ 8 Sales Rs. 4,000

“ 10 Cash drawn from the bank Rs. 1,000

Cash A/C 4000
Dr
“8 To Sales A/C 4000
(Being sales made on the cash basis)
Cash A/C 1000
Dr
“ 10 1000
To Bank A/C
(Being cash withdrawn from the bank)

Example 2. Journalize the following transactions in the books of Sri Laxmi & Co.
2015 Jan 1 Business started with Rs. 10,000 Cash and Furniture Rs. 5,000
“ 2 Goods purchased from Mr. Sathish Rs. 2,000
“ 5 Rent paid Rs. 1,000
“ 8 Goods sold to Mr. Ramya Rs. 4,000
“ 10 Goods sold and cheque received Rs. 1,000
Example 3. Enter the following transactions in Journal
2015 Jan 1 Purchased office furniture Rs. 2000 and paid through cheque.
“ 2 Cash sales Rs. 3000
“ 5 Wages paid Rs. 1000
“ 8 Telephone bill paid Rs. 500

“ 10 Cash sales Rs. 2000 and credit sales Rs. 2000 to Sunil.
Example 4. Journalize the following transactions.
2015 Jan 1 Salaries paid Rs. 2000
“ 2 Paid for advertisement Rs. 3000
“ 5 Purchased a car for office use Rs. 100000
“ 8 Paid insurance premium Rs. 500

“ 10 Returned goods to Suresh Rs. 100

Example 5. Journalize the following transactions.
2015 Jan 1 Goods returned from Ram Rs. 200
“ 2 Cash withdrawn for personal use Rs. 3000
“ 5 Loan borrowed from SBH Rs. 100000
“ 8 Interest received Rs. 500

“ 10 Discount paid Rs. 100

 SUBDIVISION OF JOURNAL

Small businesses record all transactions in a single journal but large companies record
their transactions in different journals according to their nature. The journal is sub-
divided into eight parts. They are;

1. Purchase book (where all credit purchases are recorded)

2. Sales book (where all credit sales are recorded)

3. Purchase returns book (where the particulars of goods returned to suppliers

are recorded)
 4. Sales returns book (where the particulars of goods returned from customers
are recorded)

5. Bills receivable book (where the details of bills received are recorded)

6. Bills payable book (where the details of bills payable are recorded)

7. Cash book (where all the cash transaction are recorded)

8. Proper journal (where the transactions which are not recorded in the above

books are recorded) Record the following transactions in the three columnar

(cash, Bank, Discount columns) cash book.

Example 1. Prepare a three columnar cash book.

2015 Jan 1 Manmohan started a business with cash balance of Rs. 10,000 and paid
into bank Rs.
8,000.

3 Bought office furniture by cheque Rs. 3000

5 Sold goods for cash Rs. 1000

8 Anand paid Rs. 600 and was allowed a discount of Rs.60

12 A cheque received from Mani for Rs. 690 and allowed him a discount of
Rs. 10; the cheque was deposited into bank.

18 Cash withdrawn from bank for office use Rs. 1000

24 Received a cheque for sales Rs. 1200

20 Drew cash for personal use Rs. 100; Salaries paid Rs. 500.
Example 2.

2015 Jan 1 ABC firms has cash in hand Rs. 4,000 and balance at bank Rs. 5,000.

2 Deposited cash Rs. 3,500 into bank.

8 Bought goods worth Rs. 8000 from Ram.

10 Sold goods worth Rs. 15000 for cash.

12 Sold goods to Suresh for Rs. 5000

15 Paid Rs. 2000 to Ram on account

18 Withdrew Rs. 1000 from bank for personal use

20 Settled Ram account; he allows a discount of Rs. 200

 23 Suresh paid Rs. 4900 in full

settlement of account 25 Withdrew Rs.

2000 from bank for office use

Prepare a three columnar cash book.

LEDGER

All the transactions in a journal are recorded in a chronological order. After a certain
period, if we want to know whether a particular account is showing a debit or credit
balance it becomes very difficult. So, the ledger is designed to accommodate the various
accounts maintained the trader. It contains the final or permanent record of all the
transactions in duly classified form. “A ledger is a book which contains various
accounts.” The process of transferring entries from journal to ledger is called
“POSTING”.

Posting is the process of entering in the ledger the entries given in the journal. Posting
into ledger is done periodically, may be weekly or fortnightly as per the convenience of
the business. The following are the guidelines for posting transactions in the ledger.
 1. After the completion of Journal entries only posting is to be made in the ledger.

2. For each item in the Journal a separate account is to be opened. Further, for each
new item a new account is to be opened.

3. Depending upon the number of transactions space for each account is to be

determined in the ledger.

4. For each account there must be a name. This should be written in the top of the
table. At the end of the name, the word “Account” is to be added.

5. The debit side of the Journal entry is to be posted on the debit side of the
account, by starting with “TO”.

6. The credit side of the Journal entry is to be posted on the debit side of the
account, by starting with “BY”.

Proforma for ledger: LEDGER BOOK-------------- Account

Date Particulars JF Amount Date Particulars JF amount

To By

Example:

Enter the following transactions in journal and post them into ledger:

2017 Jan. 1 Mr. Rameh started business with

cash Rs.100,000 2 He purchased
furniture for Rs.20,000

3 He purchased goods for Rs.60,000

5 He sold goods for cash Rs.80,000
6 He paid salaries Rs.10,000 Solution:
 Journal Entries
Date Particular L.F Amount Amount
2017
Jan. 1 100,000
Cash A/C .....................................................Dr. 100,000
To Capital
2 (Being capital brought in) 20,000
Furniture A/C.................................................Dr. 20,000
To Cash A/C
3 (Being furniture purchased for cash) 60,000
Purchases A/C...............................................Dr. 60,000
To Cash A/C
5 (Goods purchased for cash) 80,000
Cash A/C......................................................Dr. 80,000
To Sales A/C
6 (Sold goods for cash) 10,000
Salaries A/C..................................................Dr. 10,000
To Cash A/C
(Salaries paid)

Ledger

Cash Account
Date Particular Amount Date Particulars Amount
2017 2017
Jan.1 To Capital A/C 100,000 Jan.2 By Furniture A/C 20,000
Jan.5 To Sales A/C 80,000 Jan.3 By Purchases A/C 60,000
Jan.6 By Salaries A/C 10,000
By Balance c/d 90,000
180,000 180,000
Capital Account
Date Particular Amount Date Particulars Amount
2017 2017
Jan.6 To Balance c/d 100,000 Jan.1 By Cash A/C 100,000
100,000 100,000
Furniture Account
Date Particular Amount Date Particulars Amount
2017 2017
 Jan.2 To Cash A/C 20,000 Jan.6 By Balance c/d 20,000
20,000 20,000

Purchases Account
Date Particular Amount Date Particulars Amount
2017 2017
Jan.3 To Cash A/C 60,000 Jan.6 By Balance c/d 60,000
60,000 60,000

Sales Account
Date Particular Amount Date Particulars Amount
2017 2017
Jan.6 To Balance c/d 80,000 Jan.5 By Cash A/C 80,000
80,000 80,000

Salaries Account
Date Particular Amount Date Particulars Amount
2017 2017
Jan.6 To Cash A/C 10,000 Jan.6 By Balance c/d 10,000
10,000 10,000

TRIAL BALANCE

According to double entry system every debit has corresponding credit. All the debit
balances are equal to credit balances. If they don‟t agree, it is understood that some
mistakes are committed somewhere. Trial Balance is a statement in which debit and
credit balances of all ledger accounts are shown to list the arithmetical accuracy of the
books of accounts.

Features of trial balance

 It is not account.
 It contains debit and credit balances of accounts.
  It helps in preparation of final accounts.
 Both debit and credit side of a trial balances are always equal.
Format of the trial balance
Particulars Debit Particulars Credit
Amount Amount

Balances of all assets, xxxx Balances of all liabilities, xxxx

Expenses, Losses Incomes, Gains, Reserves

(Or)

Particulars Debit Credit

Amount Amount

Format of Trial Balance as on December 31st, 201X

Debit balances Rs Credit balances Rs
Debtors xxxx Creditors xxxx
All assets xxxx All liabilities xxxx
All expenses xxxx All incomes and gains xxxx
All losses xxxx Profits account xxxx
Purchases xxxx Loan account xxxx
Sales returns xxxx Bank over draft xxxx
Drawings xxxx Sales xxxx
stock xxxx Purchase returns xxxx
Bills receivables xxxx Provision for doubtful debts xxxx
Prepaid expenses xxxx Provision for discount on debtors xxxx
Incomes receivables xxxx All reserves and surpluses xxxx
All intangible assets xxxx Bills payables xxxx
Outstanding expenses xxxx
Incomes received in advance xxxx
Capital xxxx
xxxx xxxx

Prepare the Trial Balances for the following examples:

Example 1. Prepare a trial balance as on 31-12-2014 from the below information.
Particulars Rs Particulars Rs
Sundry debtors 32000 Bills payable 7500
Stock 22000 Purchases 218870
Cash in hand 35 Cash at bank 1545
Plant and machinery 17500 Sundry creditors 10650
Trade expenses 1075 Sales 234500
Salaries 2225 Carriage outward 400
Rent 900 Discounts Dr 1100
Capital 79500 Premises 34500

Example 2. Make a trial balance from the below balances of accounts.

Particulars Rs Particulars Rs
Capital 100000 Machinery 30000
Stock 16000 Wages 50000
Carriage inward 500 Salaries 5000
Factory rent 2400 Repairs 400
Fuel and power 2500 Buildings 40000
Sundry debtors 20000 Sales 203600
Purchases 122000 Creditors 12500
Returns outwards 2000 Returns inwards 3600
Drawings 2000 Discount allowed 750
 Discount received 250 Office expenses 1000
Manufacturing expenses 600 Bills payable 3000
Bills receivable 5000 Cash in hand 2400
Cash at bank 15400 Office rent 1800

FINAL ACCOUNTS

In every business, the business man is interested in knowing whether the business
has resulted in profit or loss and what the financial position of the business is at a given
time. In brief, he wants to know (i)The profitability of the business and (ii) The soundness
of the business.

The trader can ascertain this by preparing the final accounts. The final accounts
are prepared from the trial balance. Hence the trial balance is said to be the link between
the ledger accounts and the final accounts. The final accounts of a firm can be divided
into two stages. The first stage is preparing the trading and profit and loss account and the
second stage is preparing the balance sheet.

TRADING ACCOUNT

The first step in the preparation of final account is the preparation of trading
account. The main purpose of preparing the trading account is to ascertain gross profit or
gross loss as a result of buying and selling the goods.

Finally, a ledger may be defined as a summary statement of all the transactions relating to
a person , asset, expense or income which have taken place during a given period of time.
The up-to-date state of any account can be easily known by referring to the ledger.

PROFIT AND LOSS ACCOUNT:

The business man is always interested in knowing his net income or net profit.Net profit
represents the excess of gross profit plus the other revenue incomes over administrative,
sales, Financial and other expenses. The debit side of profit and loss account shows the
expenses and the credit side the incomes. If the total of the credit side is more, it will be
the net profit. And if the debit side is more, it will be net loss.

Format of Trading and Profit & Loss A/C of ……….for the year ending
……………..
To Advertisement xxxx By Commission received xxxx
To Carriage outward xxxx By Net loss (c/d) xxxx
To Bad debts xxxx xxxx
To Repairs xxxx xxxx
To Depreciation xxxx xxxx
To Discount allowed xxxx xxxx
To Commission allowed xxxx xxxx
To Interest paid xxxx xxxx
To Provision for doubtful debts xxxx xxxx
To Postage xxxx xxxx
To General expenses xxxx xxxx
To Net profit (c/d) xxxx xxxx
xxxx xxxx
BALANCE SHEET:
The second point of final accounts is the preparation of balance sheet. It is prepared often
in the trading and profit, loss accounts have been compiled and closed. A balance sheet
may be considered as a statement of the financial position of the concern at a given date.

A balance sheet is an item wise list of assets, liabilities and proprietorship of a business at
a certain state.

Balance Sheet of……………....company as on ……………..

Capital & Liabilities Amount Assets Amount
Capital xxxx Land and buildings xxxx
Add: Net profit xxxx Furniture xxxx
xxxx Plant and machinery xxxx Less: Drawings
xxxx xxxx Land xxxx
Loans xxxx Vehicles xxxx
Bank Over Draft xxxx Debtors xxxx
Bills payable xxxx Investments xxxx
Creditors xxxx Bills receivables xxxx
Outstanding expenses xxxx Goodwill xxxx
Incomes received in advance xxxx Patents xxxx
All reserves xxxx Copyright xxxx
Trade marks xxxx
Prepaid expenses xxxx
Incomes receivables xxxx
Securities xxxx
Closing stock xxxx
Cash in hand xxxx
Cash at bank xxxx xxxx xxxx IMPORTANT
ADJUSTMENTS:

1. Outstanding expenses

a) Add to respective expense account in Trading & Profit & Loss account

b) Show as a liability in Balance Sheet

Note:- If it is given only in trial balance, show as a liability in the balance sheet

2. Prepaid expenses
 a) Deduct from the respective expenses account in Trading and P/L account

b) Show as an asset in Balance Sheet

Note:- If it is given only in trial balance, show only as an asset in B/S

3. Accrued incomes or incomes receivables

a) Add to the respective income A/C in P/L Account

b) Show as an asset in B/S

Note:- If it is only given in trial balance, show as an asset in B/S

4. Incomes received in advance

a) Deduct from the respective income A/C in P/L Account

b) Show as a liability in B/S

Note:- It is given only in trial balance, show as a liability in B/S

5. Closing stock

a) Show on the credit side of trading A/C

b) Show as an asset in B/S

Note:- If it is given only in trial balance, show as an asset in B/S

6. Interest on capital
a) Show on the debit side of P/L A/C

b) Add to capital in B/S

Note:- If it is given only in trial balance, show only in P/L A/C

7. Depreciation

a) Show on the debit side of P/L A/C

 b) Deduct from respective asset in B/S

Note:- If it is given only in trial balance, show only on the debit side of P/L A/C)

8. I) Bad debts ( when given only in adjustments)

a) Show on the debit side of P/L A/C

b) Deduct from debtors in B/S

II) Bad debts ( when given only in trial balance )

Show on the debit side of P/L A/C only

III) Bad debts ( when given in both trial balance and adjustments)

a) Add “ Bad debts given in adjustments” to “ Bad debts in trial balance” on the debit
side of P/L
A/C

b) Deduct “ Bad debts in adjustments” from the debtors in B/S

9.Provision/Reserve for bad debts (RBD)

A) When RBD is given only in trial balance

a)Deduct from the debtors in B/S

B)When RBD is given only in adjustments

a) Show on the debit side of P/L A/C

b) Deduct from the debtors in B/S

C)When RBDs are given in both trial balance (RBD old) and adjustments (RBD
New)
 a) Compare both RBDs, show the difference on the debit side of P/L A/C if RBD
new is excess than RBD old. Show the difference on the credit side of P/L A/C in
RBD old is excess than RBD new.

b) Deduct always only RBD new from debtors in B/S

PROCEDURE FOR PREPARING TRADING ACCOUNT

1. Show opening stock and net purchases ( purchases less purchase returns) on the
debit side.

2. Show net sales (sales – sales returns) and the closing stock given in the
adjustments on the credit side.

3. Show all the direct expenses with adjustments on the debit side.

4. Balance the account and carry forward the balance to P/L A/C

PROCEDURE FOR PREPARING PROFIT AND LOSS ACCOUNT

1. Show all the remaining expenses with adjustments on the debit side.

2. Show all the remaining incomes with adjustments on the credit side

3. See whether all adjustments are taken once in any of the Trading Account and
Profit & Loss Account

4. Balance the P/L A/C and transfer the balance to capital in B/S

PROCEDURE FOR PREPARING BALANCE SHEET

1. Show all the assets with adjustments on the assets side.

2. Show all the liabilities with adjustments on the liabilities side.

3. See whether all items of trial balance are taken once and whether all adjustments
are taken twice.

4. Add both the columns of assets and liabilities.

 Example 1: From the following trial balance and
additional information of Mr. Arun, prepare his final
accounts for the year ending 31-3-2015.

2. Wages outstanding Rs. 1000.

 Example 2: From the following data and additional
information of Mr. Kiran, prepare his final accounts for the
year ending 31-3-2015.
Building 70000 Carriage inwards 1291
Furniture 1640 Establishment expenses 2135
Debtors 15600 Carriage outwards 800
Creditors 18852 Insurance 783
Stock 15040 Interest (Cr) 340
Cash in hand 988 Bad debts 613
Cash at bank 24534 Audit fee 400
Bills receivables 5844 General expenses 3050
Purchases 85522 Discount (Dr) 945
Sales 121850 Investments 8922
Capital 92000 Returns inwards 285
Bills payable 6250 Rent 900
Adjustments:
1. Stock on 31-3-2015 was Rs. 35000.
2. Prepaid insurance Rs. 100.
3. Depreciation on furniture Rs. 10%
4. Interest accrued but not received Rs. 100
Example 3: From the following trial balance and additional
information, prepare final accounts for the year ending
31-12-2014.
Particulars Rs Particulars Rs
Sundry debtors 64000 Discount received 9000
Stock (1-1-2014) 44000 Bank over draft 15000
Cash in hand 3160 Long term loan 25300
Wages 35000 Sales 365000
Trade expenses 2150 Capital 150000
Gas, water, power 4450
Sales returns 800
Bank charges 1800
Purchases 237740
Advertisements 2200
Premises 160000
Drawings 9000

564300 564300
Adjustments:
1. Bank charges outstanding Rs.150,
2.Write off bad debts Rs. 500
3. Provide 5% for doubtful debts.
Example 4: From the following data prepare final accounts for the year
ending 31-122014.
Particulars Rs Rs
Drawings and capital 12000 80000
Opening stock 12000
Investments 30600
Stationery 12000
Carriage 3000
Returns 6000 2600
Purchases and sales 120000 160000
Loans 2400 10000
Debtors and creditors 60000 25000
Discount allowed 2200
Freight in 10400
Freight out 6000
Charity 28000
Reserve for doubtful debts 2000
Bills payables 25000
304600 304600
Adjustments:
1. Closing stock Rs. 20000
2. Appreciate investment by 10%
3. Maintain reserve for doubtful debts at the rate of 5%
4. Provide 5% as interest on capital
 ACCOUNTING PROCESS/CYCLE

Accounting process involves a sequence of activities which are repeated in every

accounting period. So it is known as accounting cycle.

Journalizing

Final Ledger
Accounts Posting

Trial
Balance