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Chapter 1 — Introduction to Accounting

Accounting: A process of identifying, measuring, recording business transactions and communicating the required information to interested users.

Accounting as a source of information: It is an information system that identifies, measures, records and communicates economic events of an organisation to interested users.

Qualitative characteristics: (i) Reliability (ii) Understandability (iii) Relevance (iv) Comparability.

Objectives: (i) Maintain records of business, (ii) Calculate profit or loss, (iii) Depict the financial position, (iv) Make information available to various users.

Role of accounting: Language of business; historical record; current economic reality; information system; service to users.

Branches: Financial Accounting, Cost Accounting, Management Accounting.

Interested users:

  • Internal: CEO, CFO, VPs, Business Unit / Plant / Store managers, line supervisors.
  • External: Shareholders, creditors (banks, lenders), tax authorities, regulatory agencies (Registrar of Companies, SEBI), labour unions, trade associations, stock exchange, customers.

Basic Accountancy Terms — One-line Definitions

  • Entity — Any business or organisation treated as separate from its owner.
  • Transaction — Any financial event that changes the value of assets, liabilities, or capital.
  • Assets — Valuable resources owned by a business.
  • Capital — The amount invested by the owner in the business.
  • Liabilities — Amounts the business owes to others.
  • Sales — Goods sold or services provided to customers.
  • Revenues — Total income earned from business activities.
  • Expenses — Costs incurred to run the business.
  • Expenditure — Spending money to buy assets or services.
  • Profit — Excess of revenue over expenses.
  • Gain — Extra income from non-regular activities.
  • Loss — Excess of expenses over revenue.
  • Discount — Reduction in the price of goods or services.
  • Voucher — A written document supporting a business transaction.
  • Drawings — Goods or cash taken by the owner for personal use.
  • Purchases — Goods bought for resale.
  • Debtor — A person who owes money to the business.
  • Creditor — A person to whom the business owes money.

Chapter 2 — Theory Base of Accounting

GAAP: Rules/guidelines for recording & reporting to bring uniformity.

Key accounting concepts:

  • Business entity: Business separate from owners.
  • Money measurement: Only transactions measurable in money are recorded.
  • Going concern: Business will continue indefinitely.
  • Accounting period: Time span for preparing financial statements.
  • Cost concept: Assets recorded at cost (acquisition + costs to bring to use).
  • Dual aspect: Every transaction has two-fold effect: Assets = Liabilities + Capital.
  • Revenue recognition: Record revenue when realised.
  • Matching concept: Match expenses with revenues of the period.
  • Full disclosure: Material facts must be disclosed in financial statements.
  • Consistency: Uniform accounting policies over periods.
  • Conservatism: Avoid overstating profits.
  • Materiality: Focus on material facts only.
  • Objectivity / Verifiability: Entries free from bias and verifiable.

Systems of accounting: Double entry (complete — two-fold effects) and Single entry (incomplete records).

Basis of accounting: Cash basis (record when cash changes hands) and Accrual basis (recognise revenues and costs when they occur).

Accounting standards: Written statements of uniform rules for preparation of consistent financial statements.

GST (Goods and Services Tax): Destination-based tax on consumption; components: CGST, SGST, IGST. Characteristics and advantages: single procedure, reduces cascading, widens tax base, increases revenue and efficiency.

Advantages of GST

  1. The introduction of GST has removed many different indirect taxes on goods and services.
  2. GST has reduced the cost and effort of tax compliance and encouraged voluntary tax payment.
  3. GST has eliminated the cascading effect of taxation (tax on tax).
  4. GST has widened the tax base and increased revenue for both the Central and State governments.
  5. GST improves economic efficiency and supports smoother business operations.

Chapter 3 — Recording of Transactions I

Source documents / vouchers: Evidence of transactions — cash memos, invoices, pay-in-slips, cheques.

Accounting equation: Assets = Liabilities + Capital.

Rules of debit and credit (summary):

  • Assets: Debit increases, Credit decreases.
  • Expenses/Losses: Debit increases, Credit decreases.
  • Capital: Debit decreases, Credit increases.
  • Income/Gain: Debit decreases, Credit increases.
  • Liabilities: Debit decreases, Credit increases.

Journal: Book of original entry; transactions recorded chronologically. Journalising: Recording in the journal.

Posting: Transferring journal entries to individual ledger accounts. Narration: Brief description of transaction. Ledger folio: Page number of ledger account.

Ledger: Principal book containing all accounts — analytical record (may be bound register, cards or separate sheets).

Imprest system of petty cash: Petty cashier is given fixed sum (imprest amount) for small payments; replenished periodically.

Distinction between Journal and Ledger
Aspect Journal Ledger
Entry Type The Journal is the book of first entry (original entry). The Ledger is the book of second entry.
Record The Journal is the book for chronological record. The Ledger is the book for analytical record.
Legal Importance As a book of source entry, the Journal has greater importance as legal evidence. The Ledger has less legal importance compared to the Journal.
Basis of Classification Transactions are the basis of classification in the Journal. Accounts are the basis of classification in the Ledger.
Recording Process The process of recording in the Journal is called Journalising. The process of recording in the Ledger is known as Posting.

Chapter 4 - Recording of Transactions-II

Journal Proper: Transactions that cannot be recorded in any special journal are recorded in a journal called the Journal Proper.

Cash Book: A book used to record all cash receipts and payments. It is also called the book of original entry.

Types of Cash Book

  • Single Column Cash Book: Records all cash transactions of the business in chronological order.
  • Double Column Cash Book: Has two columns of amount on each side of the cash book (Cash and Bank columns).

Petty Cash Book: A book used to record small cash payments.

Purchase Journal: A special journal in which only credit purchases are recorded.

Sales Journal: A special journal in which only credit sales are recorded.

Purchases Return Book: A book in which return of merchandise purchased is recorded.

Sales Return Book: A special book in which returns of merchandise sold on credit are recorded.

Contra Entry: In a double column cash book, some transactions relate to both sides; these are called Contra entries.
Example: Cash deposited into bank, Cash withdrawals from bank for office purposes.

Chapter 5 — Bank Reconciliation Statement (BRS)

BRS: Statement prepared to reconcile bank balance as per cash book with balance as per passbook (bank statement), showing items of difference. Prepared by the customer / account holder.

Causes of differences: Timing differences (cheques not yet presented / not yet collected), bank errors, business errors.

Common items:

  • Cheques issued by the business but not yet presented for payment.
  • Cheques paid into bank but not yet collected/credited.
  • Direct debits by bank (on behalf of customer).
  • Amounts directly deposited in bank account.
  • Interest, dividends collected by bank.
  • Direct payments made by bank on behalf of customer.
  • Dishonoured cheques / bills discounted returned.
Particulars
Balance as per cash book
+ Cheques issued but not presented
+ Dividends collected by bank
- Cheque deposited but not credited
- Bank charges debited by bank
= Balance as per passbook

Chapter 6 — Trial Balance & Rectification of Errors

Trial balance: Statement showing debit and credit balances of ledger accounts.

Objectives: (i) Ascertain arithmetical accuracy of ledger, (ii) Help locate errors, (iii) Assist in preparing final accounts.

Types of errors:

  • Errors of commission — wrong recording, totalling, balancing.
  • Errors of omission — transaction omitted wholly or partly.
  • Errors of principle — wrong classification between revenue & capital.
  • Compensating errors — two or more errors that cancel each other out.

Suspense account: Temporary account used to record difference in trial balance until errors are found and rectified.

Format (example rows): Cash, Capital, Bank, Sales, Wages, Creditors, Salaries, Long-term loan, Furniture, Commission received, Rent, Debtors, Bad debts, Purchases, etc.

Chapter 7 — Depreciation, Provisions & Reserves

Depreciation: Decline in value of tangible fixed assets due to wear & tear, passage of time, expiration of rights, obsolescence or abnormal factors.

Need for depreciation: Matching costs with revenue, tax considerations, true & fair financial position, compliance with law.

Features: Decline in book value, continuing process, expired cost, non-cash expense.

Factors affecting amount: Cost, estimated useful life, probable salvage value.

Depletion: For natural resources (mines, quarries).

Amortisation: Writing off cost of intangible assets (patents, copyrights, goodwill).

Methods of depreciation:

  • Straight Line (Fixed instalment): Equal depreciation each year (simple, suitable where useful life is estimable).
  • Written Down Value (Reducing balance): Depreciation on book value; amount reduces year by year; accepted for tax purposes.

Difference (summary): SLM charges on original cost (constant annual charge); WDV charges on book value (declining charge); tax recognition differs.

Provisions: Charge against profit created for likely liabilities (e.g. provision for depreciation, doubtful debts, taxation).

Reserves: Appropriation of profit to strengthen finances (general reserve, specific reserves such as workmen compensation fund, investment fluctuation fund, capital reserve).

Financial Statements — I & II

Revenue expenditure: Benefit extends up to one accounting period (salaries, rent) — recorded in trading & profit & loss account.

Capital expenditure: Benefit extends over more than one accounting period (acquisition of fixed assets) — recorded in balance sheet.

Comparison (capital vs revenue expenditure):

  • Capital increases earning capacity; capital is non-recurring; benefits >1 year; recorded in balance sheet.
  • Revenue incurred to maintain earning capacity; recurring; benefits in one year; recorded in trading & P&L.

Objectives of financial statements: Present true & fair view of financial performance and position.

Elements: Trading & Profit & Loss Account (Income statement) and Balance Sheet.

Key formulas:

  • Gross Profit = Sales − (Purchases + Direct Expenses)
  • Net Profit = Gross Profit + Other Incomes − Indirect Expenses
  • Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses − Closing Stock
  • Operating Profit (EBIT) = Net Profit + Non-Operating Expenses − Non-Operating Incomes

Adjusting entries (common):

  • Closing stock: Closing Stock A/c Dr. To Trading A/c
  • Outstanding expenses: Concerned Expense A/c To Outstanding Expense A/c
  • Prepaid expenses: Prepaid Expense A/c Dr. To Concerned Expense A/c
  • Accrued income: Accrued Income A/c To Concerned Income A/c
  • Income received in advance: Concerned Income A/c To Income Received in Advance A/c
  • Depreciation: Depreciation A/c To Concerned Asset A/c
  • Bad debts: Bad Debts A/c To Debtors A/c