Additional Content for Earlier Topics (Chapter 1 to 22)
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Additional Content for Earlier Topics (Chapter 1 to 22)
CHAPTER 1
Introduction to Financial Accounting
Book keeping
The first step in the accounting process is identifying and recording of transactions in the books of accounts. This is necessary for any business as the transactions happening in a business entity must be recorded so that the information is available for further analysis.
Book-keeping is the process of recording financial transactions in the books of accounts. It is the primary stage in the accounting process. It includes recording the transactions and classifying the same under proper heads.
- Preparation of Trial balance is covered under Book-keeping. The preparation of Financial Statements i.e., P&L account & Balance sheet are part of Accounting.
- Bookkeeping is base of accounting & Accounting is considered as language of business.
- The owners, the management, investors & employees of the enterprise are known as Internal users of Accounting Information.
- The Govt., Lenders, suppliers, customers are known as External users of Accounting Information.
- The stewardship accounting is the root of financial accounting system.
CHAPTER 2
Basic accounting terms
Depreciation
It refers to the gradual reduction in the value of fixed assets due to usage and passage of time.
Bad debt
It is a loss to the business arising out of failure of a debtor to pay the dues. It is irrecoverable debt.
Stock/Inventory
Unsold goods lying in a business on a particular date are known as stock/Inventory.
Investment
Expenditure on assets held to earn interest, income, profit or other benefits.
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CHAPTER 3
Accounting Concepts
Accounting concepts are the basic assumptions or conditions upon which accounting has been laid. Accounting concepts are the results of broad consensus. The word concept means a notion or abstraction which is generally accepted. Accounting concepts provide unifying structure to the accounting process and accounting reports.
Accounting Concepts Diagram
The page contains a visual diagram titled “Accounting Concepts”. Its visible structure and labels are:
ACCOUNTING CONCEPTS
Verifiable Objective Going Concern
Revenue Recognition Consistency
Dual Aspect Accrual
Matching Business Entity
Historical Cost Money Measurement
Accounting Period
BASIC ACCOUNTING ASSUMPTIONS
The visible explanatory labels in the diagram are:
- Verifiable Objective — Every record must have a supporting evidence.
- Revenue Recognition — Recognise the Revenue when sale is entered into.
- Dual Aspect — Every Transaction affects two accounts.
- Matching — Current Period Expenses are to be Matched with Current Period Revenues.
- Historical Cost — Assets are recorded at Cost.
- Accounting Period — 1 Year = 1 Accounting Period.
- Going Concern — Business shall continue for a foreseeable future.
- Consistency — Similar Accounting Policies to be followed every year.
- Accrual — Transaction is recorded when it is entered into and not when settlement takes place.
- Business Entity — Owner and Business are two separate entities.
- Money Measurement — Only Monetary transactions are to be recorded.
Matching Concept
Income made by the enterprise during a period can be measured only when the revenue earned during a period is compared with the expenditure incurred for earning that revenue.
Broadly speaking revenue is the total amount realised from the sale of goods or provision of services together with earnings from interest, dividend, and other items of income.
Expenses are cost incurred in connection with the earnings of revenues.
Costs incurred do not become expenses until the goods or services in question are exchanged.
Cost is not synonymous with expense since expense is sacrifice made, resource consumed in relation to revenues earned during an accounting period.
Only costs that have expired during an accounting period are
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considered as expenses.
For example, if a commission is paid in January, 2002, for services enjoyed in November, 2001, that commission should be taken as the cost for services rendered in November 2001.
On account of this concept, adjustments are made for all prepaid expenses, outstanding expenses, accrued income, etc, while preparing periodic reports.
Accrual Concept
Accrual concept makes a distinction between the receipt of cash and the right to receive it, and the payment of cash and the legal obligation to pay it.
This concept provides a guideline to the accountant as to how he should treat the cash receipts and the right related thereto.
Accounting Standards
Accounting Standards provide the framework and norms to be followed in accounting so that the financial statements of different enterprises become comparable.
It is necessary to standardise the accounting principles to ensure consistency, comparability, adequacy and reliability of financial reporting.
CHAPTER 5
Double Entry System in Accounting
Representative personal accounts
These are the accounts which represent persons natural or artificial or a group of persons.
Example: Outstanding salaries account, Prepaid rent account.
When expenses are outstanding, it is payable to a person. Hence, it represents a person.
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(i) Single entry
Single entry is an entry in which only two accounts are involved, one account is debited and another is credited.
(ii) Compound entry
Compound entry is an entry in which more than two accounts are involved. Either more than one account is debited or more than one account is credited or both.
IMPORTANT CONSIDERATIONS FOR RECORDING THE BUSINESS TRANSACTIONS
Trade Discount
Trade discount is usually allowed on the list price of the goods.
It may be allowed by producer to wholesaler and by wholesaler to retailer for purchase of goods in large quantity.
It is not recorded in the books of account and entry is made only with the net amount paid or received, for example, purchased goods of list price Rs. 8,000 at 15% trade discount from X.
In this case the following entry will be passed:
Purchases Account Dr. 6,800
To X 6,800
(Being goods purchased at 15% trade discount Less list price)
Amount paid or received in full settlement or cash Discount
Cash discount is a concession allowed by seller to buyer to encourage him to make early cash payment.
It is a Nominal Account.
The person who allows discount, treat it as an expenses
Image/Table — Classification of Accounts
The page contains a question followed by a solution table.
Question:
Classify the following into personal, real and nominal accounts.
(a) Capital
(b) Building
(c) Carriage inwards
(d) Cash
(e) Commission received
(f) Bank
(g) Purchases
(h) Chandru
(i) Outstanding wages
Solution:
| Sl. No. | Items | Classification |
|---|---|---|
| (a) | Capital | Personal account |
| (b) | Building | Real account |
| (c) | Carriage inwards | Nominal account |
| (d) | Cash | Real account |
| (e) | Commission received | Nominal account |
| (f) | Bank | Personal account |
| (g) | Purchases | Nominal account |
| (h) | Chandru | Personal account |
| (i) | Outstanding wages | Personal account |
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The person who allows discount, treat it as an expenses and debits is his books and it is called discount allowed and the person who receives discount, treat as an income and it is called discount received and credits in his books of account “Discount Received Account.”
For example, X owes Rs. 6,000 to Y. He pays Rs. 5,950 in full settlement against the amount due.
In the books of X the journal entry will be:
Y A/C Dr. 6,000
To Cash Account 5,950
To Discount Received account 50
(Being Cash paid and discount received)
In the books of Y
| Particulars | Rs. |
|---|---|
| Cash Account Dr. | 5,950 |
| Discount Allowed Account Dr. | 50 |
| To X | 6,000 |
(Being cash received and discount allowed)
Goods distributed as free samples
Sometimes business distributes goods as free samples for the purpose of advertisement.
In this case Advertisement Account is debited and Purchases Accounts is credited.
For example, goods costing Rs. 8000 were distributed as free sample. to record this transaction following entry will be passed:
Advertisement Account Dr. 8,000
To Purchases Account 8,000
Bad Debts
Sometimes a debtor of business fails to pay the amount due from him. Reasons may be many e.g., he may become insolvent or he may die.
Such irrecoverable amount is a loss to the business.
To record this following entry will be passed:
Bad Debts Account Dr.
To Debtor’s Account
Bad Debts Recovered
When any amount becomes irrecoverable from any costumer or debtor his account is closed in the books.
If in future any amount is recovered from him then his personal account will not be credited because that does not exist in the books.
So the following entry is passed:
Cash Account Dr.
To Bad Debts Recovered Account
Loss of Goods by Fire/Accident/theft
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A business may suffer loss of goods on account of fire, theft or accident.
It is a business loss and a nominal account.
It also reduces the goods at cost price, and increases the loss/expenses of the business.
The entry will be passed as:
Loss by fire/Accident/theft Account Dr (for loss)
Insurance Company Account Dr. (for insurance claim admitted)
To Purchases Account
Sale of Asset/Property
When the asset of a business is sold, there may occur a profit or loss on its sale.
It should be noted carefully that sales account is never credited on the sale of asset.
The journal entry is:
(i) In case there is a profit on sale of Property/Assets
Cash/Bank Account Dr.
To Asset/Property Account
To Profit on sale of Asset Account
(ii) In case there is a loss on sale of asset
Cash/Bank Account Dr.
Loss on sale of Asset Account Dr.
To Asset Account
CHAPTER 6
Voucher Approach in Accounting
Debit note
A buyer may return the goods to the seller in various situations such as when goods are defective or damaged, goods do not meet the specifications, etc.
When goods are returned by a buyer, the buyer prepares a debit note and sends it to the seller.
It contains details such as the description of the goods, quantity returned and also their value.
Two copies are prepared in general; one copy is sent to the seller and another one is retained by the buyer.
It is a document issued by a buyer stating the amount owed by the seller.
A debit note is also called as debit memo.
Credit note
It is a statement prepared by the seller who receives back from his customer the goods sold.
It contains details such as the description of the goods, quantity returned and also their value.
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It is a document sent by a seller to the buyer, stating that a certain amount is owed to the buyer.
It is also called as credit memo.
Pay-in slip
When cash or cheque is deposited in bank, a form is to be filled by a customer and submitted to the banker along with cash or cheque.
This is called as pay-in slip or deposit slip.
The main part of this will be retained by the bank and the counterfoil duly stamped and signed by the banker is returned to the customer.
CHAPTER 8
SUBSIDIARY BOOKS
The books in which transactions are first recorded are called subsidiary books.
Subsidiary books are sub-divisions of journal in each of which transactions of similar nature are recorded.
These are the books of prime entry.
Instead of recording in one journal, the transactions are recorded in a number of prescribed books.
Diagram — Subsidiary Books
The page contains a diagram showing:
TRANSACTIONS
/ \
/ \
Cash transactions Credit transactions
| |
Cash book --------------------------
| | | | | |
Purchases book
Purchases returns book
Sales book
Sales returns book
Bills receivable book
Bills payable book
Journal proper
CHAPTER 9
CASH BOOK
Double column cash book
Double column cash book can be either Cash & Discount or Cash & Bank, depending on what the entity has done.
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CHAPTER 10
TRIAL BALANCE
Suspense account
After transferring all the ledger account balances, if the trial balance does not tally, steps must be taken to locate and rectify errors.
If the errors cannot be rectified, then trial balance is tallied by transferring the difference between the total of debit balances and the total of credit balances to a temporary account, called suspense account for timely preparation of the financial statements.
If the trial balance shows lesser debit total, suspense account will be debited.
Similarly, if the trial balance shows lesser credit total, suspense account will be credited.
Later, when errors are located and rectified, the trial balance will get tallied.
CHAPTER 12, 13
TRADING ACCOUNT AND PROFIT & LOSS ACCOUNT
ADJUSTMENT ENRIES
Closing Stock
This is the stock which remained unsold at the end of the accounting period.
Unless it is considered while preparing the trading account, the gross profit shall not be correct.
Adjusting entry for closing stock is as under:
Closing stock Account Dr.
To Trading account
(Being closing stock brought in to books)
Treatment in final accounts
(i) Closing stock is shown on the credit side of Trading account.
(ii) At same value it will be shown as an asset in the balance sheet.
Income Received in Advance
Income received but not earned during the current accounting year is called as income received in advance.
For example, if building has been given to a tenant on Rs.2,400 p.a. but during the year Rs.3,000 has been received, then Rs.600 will be income received in advance.
In order to bring this into books of account, the following adjusting entry will be made at the end of the accounting year:
Rent A/c Dr. Rs.600
To Rent Received in Advance A/c Rs.600
The two-fold effect of this adjustment will be:
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(i) It is shown on the credit side of Profit and Loss account by way of deduction from the income, and
(ii) It is shown on the liabilities side of the Balance Sheet as income received in advance.
Depreciation
Depreciation is the reduction in the value of fixed asset due to its use, wear and tear or obsolescence.
When an asset is used for earning purposes, it is necessary that reduction due to its use, must be charged to the Profit and Loss account of that year in order to show correct profit or loss and to show the asset at its correct value in the Balance Sheet.
Suppose machinery for Rs.10,000 is purchased on 1.1.98, 20% p.a. is the rate of depreciation.
Then Rs.2,000 will be depreciation for the year 1998 and will be brought into account by passing the following adjusting entry:
Depreciation A/c Dr. Rs. 2,000
To Machinery A/c Rs.2,000
The two-fold effect of depreciation will be:
(i) Depreciation is shown on the debit side of Profit and Loss Account, and
(ii) It is shown on the asset side of the balance sheet by way of deduction from the value of concerned asset.
Provision for Discount on Debtors
It is a normal practice in business to allow discount to customers for prompt payment and it constitutes a substantial sum.
Sometimes the goods are sold on credit to customers in one accounting period whereas the payment of the same is received in the next accounting period and discount is to be allowed.
It is a prudent policy to charge this expenditure (discount allowed) to the period in which sales have been made, so a provision is created in the same manner, as in case of provision for doubtful debts i.e.
Profit and loss account Dr.
To provision for discount on debtor’s account
(Being provision for discount on debtors provided)
Treatment in final accounts
(i) Provision for discount on debtors is a probable loss, so it should be shown on the debit side of Profit and Loss account.
(ii) Amount of provision for discount on debtors is deducted from sundry debtors on the assets side of the Balance Sheet.
Note: Such provision is made on debtors after deduction of further bad debts and provision for doubtful debts because discount is allowable to debtors who intend to make the payment.
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CHAPTER 14
BALANCE SHEET
Fictitious Assets
Fictitious assets are not assets at all since they are not represented by any tangible possession.
They appear on the asset side simply because of a debit balance in a particular account not yet written off.
For Example, E.g., advertisement expenditure to the extent not written off, discount on issue of debentures, etc.
Marshalling of assets and liabilities
The arrangement of assets and liabilities in a particular order is called marshalling of the Balance Sheet.
Assets and liabilities can be arranged in the Balance Sheet into two ways:
- In order of liquidity.
- In order of permanence.
When assets and liabilities are arranged according to their reliability and payment preferences, such an order is called liquidity order.
When the order is reversed from that what is followed in liquidity, it is called order of permanence.
In other words, assets and liabilities are listed in order of permanence.
1. Liquidity Order
The page contains an image-based Balance Sheet format titled:
Balance Sheet (In order to Liquidity) as on …
| Liabilities | Amount (In ₹) | Assets | Amount (In ₹) |
|---|---|---|---|
| Current Liabilities | Current Assets | ||
| Fixed Liabilities | Investments | ||
| Capital | Fixed Assets |
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2. Permanence Order
The page contains an image-based Balance Sheet format titled:
Balance Sheet (In order to Permanency) as on …
| Liabilities | Amount (In ₹) | Assets | Amount (In ₹) |
|---|---|---|---|
| Capital | Fixed Assets | ||
| Fixed Liabilities | Investments | ||
| Current Liabilities | Current Assets |
CHAPTER 22
PUBLIC FINANCIAL MANAGEMENT SYSTEM
- J&K has become first UT in country to operationalise PFMS at district level.
VISUAL / DIAGRAM / TABLE CHECK
The uploaded document contains the following image-based content, all represented above in text/Markdown form:
-
Page 63 — Accounting Concepts diagram
- Central heading: Accounting Concepts.
- Branches: Verifiable Objective, Revenue Recognition, Dual Aspect, Matching, Historical Cost, Accounting Period, Going Concern, Consistency, Accrual, Business Entity, Money Measurement.
- The diagram also groups these under Basic Accounting Assumptions as shown in the source.
-
Page 65 — Classification of Accounts table
- Includes the nine items: Capital, Building, Carriage inwards, Cash, Commission received, Bank, Purchases, Chandru, Outstanding wages.
- Classifications: Personal, Real, Nominal as shown in the source.
-
Page 68 — Subsidiary Books diagram
- Transactions split into Cash transactions and Credit transactions.
- Cash transactions → Cash book.
- Credit transactions → Purchases book, Purchases returns book, Sales book, Sales returns book, Bills receivable book, Bills payable book, Journal proper.
-
Page 71 — Balance Sheet in Liquidity Order
- Liabilities: Current Liabilities, Fixed Liabilities, Capital.
- Assets: Current Assets, Investments, Fixed Assets.
- Amount columns are blank in the source format.
-
Page 72 — Balance Sheet in Permanence Order
- Liabilities: Capital, Fixed Liabilities, Current Liabilities.
- Assets: Fixed Assets, Investments, Current Assets.
- Amount columns are blank in the source format.
No other separate image-based tables or diagrams were visible in the supplied document.
