Q.1 : What is Book Keeping ?

Ans : Book keeping is the process of systematically recording the financial transactions of a
business so as to show how the transactions relate to each other.

There are two types of book keeping system

a) Single Entry System : A single-entry bookkeeping system is a method of bookkeeping
relying on a one-sided accounting entry to maintain financial transaction. It does not
follow the basic principles of accounting. It does not consider the dual effect of the
transaction.
b) Double Entry System : The Term “Double Entry” means that every transaction affects at
least two accounts. Double entry also means that one of the accounts must have an
amount entered as a debit and one of the accounts must have an amount entered as a
credit. For any given transaction, the debit amount must equal the credit amount.

Q.2 : What is Accounting ?

Ans : Accounting is the process of identifying, measuring and communicating economic

information to permit informed judgments and decisions by users of the information.
Accounting also includes the preparation of statements concerning assets, liabilities and the
operating results of a business.

The Main Objectives of accounting include :

a) To maintain systematic records
b) To protect business properties
c) To determine the operational profit or loss
d) To ascertain the financial position of business
e) To facilitate rational decision making

Q.3 : What are the System of Accounting ?

Ans : Accounting system is followed majorly in two ways :

a) Cash System : This is a system in which accounting entries are made only when cash
is received or paid. No entry is made when a payment or receipt is merely due.

b) Mercantile or Accrual system : This s a system in which accounting entries are

made on the basis of amount having become due for payment or receipt. Under the
accrual basis, revenues are reported when they are earned, not when the cash is
received. Similarly, expenses are reported when they are incurred, not when they
are paid.
Q.4: What Are The Business Entities ?

Ans : There are three types of business entities

a) Sole Trader (Owned by one person)
b) Partnership (Owned by more than one person)
c) Company (Owned by shareholders or Members)

The financial statements of sole traders & partnerships are completely private. Only the owners
and the taxman can demand to see them. Banks may also have access for loan purpose.
The financial statements of company sent to shareholders and may also be publicly filed.

Q.5: Who are the users of the Financial Statements?

Ans : The Main users and needs are noted below

a) Managers : Managers need financial information for planning and decision making.
b) Shareholders : Shareholders and potential shareholders need financial information for
investment decision.
c) Employees : Employees and their representatives need financial information to
safeguard their jobs and income.
d) Lenders : Lenders need financial information to safeguard loans that they have made or
intend to make.
e) Government Agencies : Government agencies need financial information to monitor the
economy and to collect tax.

Q. 6: What are the financial statements?

Ans : The Main financial statements are

a) Balance Sheet : The Balance Sheet is a statement of assets and liabilities at a point in
time (The balance sheet date). Balance sheet shows the financial position of an
enterprise.
b) Income Statement : The income statement summarises income and expenditure over a
period of time. If income exceeds expenditure there is a profit, if vice versa there is a
loss. The income statement measures the financial performance of an enterprise over a
period of time.

Q. 7: What is IASC, IAS, IASB, IFRS & GAAP ?

Ans :
IASC : International Accounting Standards Committee
IASB : International Accounting Standards Board (Former IASC)
IAS : International Accounting Standards
IFRS : International Financial Reporting Standards (Former IAS)
GAAP : Generally Accepted Accounting Practice (GAAP) is a combination of legislation, accounting
standards, stock exchange requirements and other acceptable accounting practices.
Q.8 : What Is Capital Expenditure, Revenue Expenditure, Capital Receipt and Revenue
Receipt?

Ans : Capital Expenditure : Expenditure on the acquisition of non-current assets required for
use in the business and expenditure on existing non-current assets aimed at increasing the
productivity or earning capacity of the business is known as capital expenditure.
Capital expenditure enhances the value of non-current assets and subsequently total assets value.
Capital expenditure appears generally as a non-current asset in the balance sheet. Capital
expenditure is non-recurring in nature.

Following are some of the common examples of capital expenditure:-

1) Cost of machinery purchased
2) Installation charges of machinery purchased
3) Customs duty on imported machinery
4) Expenses on a foreign tour to purchase machinery
5) Legal expenses to acquire a building
6) Expenses to obtain a license for starting a factory
7) Cost of improvement in electric wiring system
8) Purchase of a patent right
9) Purchase of technical know-how
10) Repair of a second-hand machine before put to use

Revenue Expenditure : Revenue expenditure is the expenditure which is incurred to carry out
the normal day-to-day activities of the company. They are incurred to maintain existing
productivity or earning capacity of the company. Revenue expenditure appears generally as
expenses on the debit side of trading and profit and loss account. Revenue expenditure is
recurring in nature.

The expenditure incurred for the following purposes will be treated as revenue expenditure.

 Expenditure incurred for the purpose of floating assets i.e., asset for resale purpose such
as cost of merchandise, raw-material and stores required for manufacturing process.
 All establishment and other day-to-day expenses incurred in the conduct and
administration of the business such as salaries, rent, taxes, postage, stationery, bank
charges , insurance, advertisement charges etc.
 Expenditure incurred to maintain the fixed assets in proper working condition such as
repair, replacement and renewals of building, furniture, machinery etc.

Capital Receipts: Capital Receipts are the income generated from the non-operating sources,
which are having a long term effect. They are generally part of financing and investing activities
rather than operating activities. The capital receipts either reduces an asset or increases a
liability. Capital receipts are non-recurring in nature and generally appear as liabilities in the
balance sheet.
The receipts can be generated from the following sources:

 Issue of Shares
 Issue of debt instruments such as debentures.
 Loan taken from a bank or financial institution.
 Government grants.
 Insurance Claim.
 Additional capital introduced by the proprietor

Revenue Receipt: Revenue receipts are the receipts which occur from activities which are part
of the normal trading activities of the company. They arise from the operating activities of
business. Revenue receipts are recurring in nature and generally appear as income on the credit
side of trading and profit and loss account.

Following are some of the common examples of revenue receipts:-

1) Sale of goods and services
2) Interest on investments received
3) Rent received
4) Commission received
5) Insurance claim for stock damaged

Q.9 : What is Deferred Revenue Expenditure?

Ans : It is that type of revenue expenditure which is incurred during a particular year but benefit
of which may extend to a number of years. The whole amount of such expenditure cannot be
treated as the expenditure of the year in which it is incurred. Therefore a portion of such
expenditure is charged every year to profit and loss account and remaining portion is shown on
the asset side of the balance sheet.

Examples Of Deferred Revenue Expenditure:-

Following are some of the common examples of deferred revenue expenditure:-

 Preliminary expenses which are incurred at the time of starting the company
 Heavy advertising expenses to launch a new product the benefit of which will come in
the future years
 Discount on issue of shares
 Research and development expenses
 Q.10 : What is Balance Sheet Equation?

Ans : The Balance sheet equation is

Assets = Owner’s Capital + Liabilities or Assets = Owner’s Equity + Liabilities

This also known as accounting equation.

Q.11 : What is Asset?

Ans : An asset is an item that is controlled by a business and which will bring future economic
benefits to the business. They may be tangible (physical, like a machine) or intangible
(Untouchable, like a patent).

Types of assets are :

Current Assets : Current Assets are cash and other assets that a company can reasonably expect
to convert to cash, sell or consume within one year or its normal operating cycle.

Examples of current assets and the typical order of liquidity include:

1. Cash and cash equivalents - currency, bank deposits and various marketable securities
2. Accounts receivable – credit sales that have not been collected yet.
3. Inventories – items that have been purchased or manufactured for sale
4. Prepaid expenses - future expenses that have been paid in advance such as insurance premium

Non-Current Assets : A non-current asset is any asset acquired for retention and not held for
resale in the normal course of trading.

For most firms, non-current assets consist mainly of property, plant and equipment. Intangibles are
non-current assets e.g. goodwill, legal rights such as patents or copyrights.

Q.12 : What is Liability?

Ans : Liabilities are the financial obligations of an enterprise, e.g. to suppliers, to lenders and in
the case of bank loan or overdraft, to bank.

There three main classifications of liabilities are:

 1. Current Liabilities (Short-Term Liabilities) are liabilities that are due and payable
within one year. Examples of current liabilities are trade creditors, bills payable, outstanding
expenses, bank overdraft etc.
2. Non-current Liabilities (Long-Term Liabilities) are liabilities that are due after one
year or more. They are generally used for the purchase of fixed assets. For example, long-term
loans, bonds payable, Deferred tax liabilities, Mortgage payable, debentures, etc.
3. Contingent Liabilities are liabilities that may or may not arise depending on a certain
event. Examples of contingent liabilities are Lawsuit proceedings, Product warranty claims,
Guarantee for loans.

Q.13 : What is Capital?

Ans : The money invested in the business by the individual, the partners or the shareholders is
referred to as the capital.

Owned Capital: The amounts and other resources employed in the business which belong to the
owner of the business are together called owned capital.

Loaned Capital: The amounts and other resources employed in the business which are borrowed
by the owner of the business from outside persons or organizations are together called loaned
capital.

Working Capital: Working capital is a measure of a firm’s ability to pay off short term debt and
have enough money to finance its day to day business operations. The formula to calculate
working capital is

Working Capital = Current Assets – Current Liabilities

Q.14 : What is Owner’s equity, Shareholder’s equity, Net Book value, Net worth?

Ans : Owner’s equity: Owner’s Equity is defined as the sum total of business capital and the
earnings retained after paying all the liabilities. Owner’s Equity is also known as Net Asset, Net
Book Value and shareholder’s equity (in case of company), Net Worth (In Case Of Sole
Traders).

Let’s take an example in which the capital available to a company at the beginning of a new
financial year is $500,000. Now suppose that the owner contributes additional $30,000 to the
capital. And the company’s net income (retained earnings) by the end of the year is $70,000. At
the end of the financial year,

Owner’s Equity = $500,000 + $30,000 + $70,000 = $600,000

Suppose that the owner withdraws $20,000 for his personal use during the year. The result would
be,
 Owner’s Equity = $600,000 – $20,000 = $580,000

So, what is owner’s equity finally?

Owner’s Equity = Equity (Previous Year Balance) + Capital Added During the Year+ Retained
Earnings + Present Year Net Profit –Withdrawals

There are two Sources of owner’s equity-

1) Contributed Capital: Capital that owners have invested in the business is called contributed
capital. It also known as Paid-In-Capital. Capital Stock and treasury Stock are the contributed
capital. Capital stock and treasury stock both describe two different types of a company's
shares. Capital stock is the total amount of shares a company is authorized to issue, while
treasury stock is the number of shares a company holds in its treasury. Treasury stock is
essentially capital stock that has been bought back or was never issued to the public.
2) Retained Earnings: Retained Earnings (RE) are the portion of a business’s profits that are not
distributed as dividends to shareholders but instead are reserved for reinvestment back into the
business. Normally, these funds are used for working capital and fixed asset purchases (capital
expenditures) or allotted for paying off debt obligations.

 Capital of a business entity is a special liability. It is the amount that the business owes
back to the owner of the business.
 In Balance Sheet the valuation is on a “Historical” not a “Market Value” basis.
 In Balance Sheet the least liquid assets are listed first, followed by the more liquid assets.
 The Income statement is divide into two parts : the first part shows the calculation of the
gross profit and the 2nd part calculate the net profit by subtracting the expenses from the
gross profit.
 Wages relate to payments to third parties (employees) and represent a deduction or
charge in arriving at net profit.
 Amounts paid to the proprietor (even if he calls them “salary) must be treated as
drawings. It would be wrong to treat drawings as a business expense. The whole of the
profit belongs to the proprietor and the drawings are that part of the profit the proprietor
chooses to withdraw.
 Every transaction affects at least two accounts. One of the accounts must have an
amount entered as a debit and one of the accounts must have an amount entered as a
credit. For any given transaction, the debit amount must equal the credit amount. This is
called the dual aspect of the transaction.
 Gross Profit is the difference between sales proceeds and the cost of goods sold (Cost of
sales)
 Net Profit is the gross profit less the expenses of the business.
Q.15 : What is Debit Note and Credit Note?

Ans: Debit Note: A debit note (also known as debit memo) can be issued from a buyer to their
seller to indicate or request a return of funds due to incorrect or damaged goods received, purchase
cancellation, or other specified circumstances.

There are several reasons in which a debit note should be issued. Some common scenarios when to
issue a debit note include:

 Goods received are damaged or defective

 The purchaser has been overcharged
 The invoice value is incorrect (due to extra goods being delivered, or goods are charged
at lesser value, etc.)

Credit note: A credit note is also known as a credit memorandum. This is a commercial
document that the supplier produces for the customer to notify the customer that a credit is being
applied to the customer for various reasons.

The reasons normally include the following:

 the customer returned the goods or rejected the services for any number of reasons
 the goods were damaged in some way, usually during transit
 there was a mistake in the price on the original invoice
 the customer overpaid the original invoice

On the credit note, the supplier will list the products, quantities and product or service prices that
were agreed-upon by both parties. It will normally reference the original invoice and state the
reason for the credit note.

Normally, a debit note is issued when there is a return outward (purchase return) while in the
case of return inward (sales return) credit note is issued. In a transaction, when the buyer returns
the goods to the seller, the buyer will issue a debit note and the opposite party will issue a credit
note in exchange for the debit note. Hence, they are the two aspects of the same transaction.

The following are the differences between debit note and credit note:

1. A memo sent by one party to inform the other party that a debit has been made to the seller’s
account, in buyer’s books, is known as Debit Note. A commercial document which is sent by one
party to inform the other party that a credit has been made to buyer’s account, in seller’s books
is known as Credit Note.
2. Debit Note is written in blue ink while Credit Note is prepared in red ink.
3. Debit Note is issued in exchange for Credit Note.
4. Debit Note represents a positive amount whereas Credit Note prepares negative amount.
5. Debit Note reduces receivables. On the other hand, Credit Note reduces payables.
6. On the basis of the Debit Note, purchase return book is updated. Conversely, sales return book
is updated with the help of a Credit Note.
 Q.16 : What are the types of account and what is the golden rule of accounting?

Ans: There are three types of accounts:

1. Real Account
2. Personal Account
3. Nominal Account

Real Account : A Real Account is a general ledger account relating to Assets and Liabilities other
than people accounts. These are accounts that don’t close at year end and are carried forward.

Golden rule: Debit what comes in, Credit what goes out

This rule is applicable on the transactions like purchase of an asset, sale of an asset, depreciation Charged
on an asset, and dispose of an asset.

The example of assets on which the Real Account is applicable:- Land and Building, Furniture,
Plant and Machine, Vehicles, Cash, Trademarks, Copyright

Personal Account: A Personal account is a General ledger account connected to all persons like
individuals, firms and associations.

Golden rule: Debit the receiver and credit the giver

This rule is applicable to all Individual. The individuals are three types shown as following: –

 Examples of Persons: – Amanpreet, Jazz, Pawan Kumar, Vijay, Amir Khan. Etc.
 Examples of Artificial persons: – Ram And Sons., HAPPSS Store., Bank A/c (SBI),
Reliance Industries Ltd. Etc.
 Examples of Representative persons: – Outstanding Salary, Prepaid Expenses,
Accrued Income, Pre- received Income, Etc.

Nominal Account: A Nominal account is a General ledger account pertaining to all income,
expenses, losses and gains.

Golden rule: Debit all expenses and losses, Credit all incomes and gains
Example of all accounts on which the Nominal Account is applicable:-

 Expenses Accounts: –Salary, Wages, Purchases, Electricity bill, Telephone and mobile
Rent, Transportation charges, Rent Paid, Etc.
 Incomes Accounts: – Sales, Commission Received, Rent on sublet building received,
Etc.
 Losses Accounts: – Loss on sale of an asset, Loss by Theft, Loss by fire, loss by an
accident, Etc.
 Profits Accounts: – Profit on sale of an asset, Etc.

Modern Rules of accounting (Classification of Accounts):

As per modern rules of accounting, transaction will be categorised into 6 heads or

accounts and any increase or decrease in such account will either be debited or credited
in the manner shown in the table given below:
Q.17 : What is Journal?

Ans: Journal is a primary book where all business transactions are recorded in chronological
order. A journal is often defined as the book of original entry. When the transactions are
recorded in the journal, they are called as Journal Entries and the process of recording
transactions in the journal is called Journalizing.
There are two types of the journal which are Special Journal and General Journal.

Special Journals also known as subsidiary books are

Sales Day Book - The Sales day book is the book of original entry for Recording the Credit
Sales. No Cash Sales are recorded in the Sales Day book that is also called Sales Journal.
Purchase Day Book - The Purchase Day book records Credit Purchases and it is also called
Purchases Journal. Cash Purchases are not recorded in this journal.
Return Inwards Book - The Return Inwards Journal or Return Inwards Day book is used to
record the inward returns.
Return Outwards Day Book - The Return Outward Journal or Day book is used to record
the Outward returns.
Cash Book - Record all Cash & Cheque transactions for the Receipts & Payments.

General Journal: General journal shows non cash transactions excluding purchases, sales and
returns of goods. Transactions recorded in the general journal are:

 Asset sales
 Depreciation
 Interest income and interest expense
 Stock sales

Stock is the amount of capital paid into a business by its investors. Stock is divided into shares,
which are held by investors in the form of stock certificates.
Q.18 : What is Ledger?

Ans: An accounting book of final entry where transactions are listed in separate accounts. The process
of recording journal entries into the ledger is called posting. There are three types of ledger

1. Sales Ledger or Debtors’ Ledger

It is a grouping of all accounts related to customers to whom goods have been sold on credit
(Credit Sales). Sum of all the money owed to a business by their customers is shown here and is
termed as Accounts Receivable, Trade Debtors or Sundry Debtors.

2. Purchase Ledger or Creditors’ Ledger

It is a grouping of all accounts related to sellers from whom goods have been purchased on credit
(Credit Purchases). Sum of all the money owed by a business to their sellers is shown here and is
termed as Accounts Payable, Trade Creditors or Sundry Creditors.

3. General Ledger

Companies usually make a single general ledger which includes 2 additional subtypes of ledgers
i.e. nominal ledger and private ledger. These two may or may not be included in the list for
different types of ledgers in accounting.

Nominal Ledger – It contains all nominal accounts i.e. expense, losses, incomes and gains
Examples – Salaries, Sales, Purchases, Returns Inward/Outward, Rent, Stationery, Insurance,
Depreciation, etc.

Private Ledger – Private ledger consists of accounts which are confidential in nature such as
capital, drawings, salaries, etc. These accounts are only accessible by selected individuals.

https://www.accountingcapital.com/other-topics/why-is-depreciation-not-charged-on-land/

1. Business: –

An organization or economic system where goods and services are exchanged for one another or
for money.
The business has a different identity in the eyes of law.
Like:- ABC ltd., HAPPSS Store, bharaj Hospital, S.D. College, or every type of shop, hotel,
hospital, college, factory, offices.

2. Proprietor/Owner: –

Who runs an organization and invest their money in business. An owner has the right to take any
decision for their business.

He has a different identity for their business.

Like: – Amanpreet Kaur, Sarabjit Singh, etc.

Business, Proprietor, capital and drawing – Financial Accounting Terminology

3. Capital: –

In accounting, capital means anything brought by the owner into the business in cash or in
kind(any item). In other words, capital means that balance amount of assets which is left after a
substructing amount of liabilities from total assets.

4. Drawing: –

Any withdrawal by the owner from the business in cash or in kind(any item) is called Drawing.

5. Business Transactions: –

Any type of dealing with goods or services between business to any other business or an
Individual for cash or credit is called Business Transaction.
 Business
Transactions -Financial Accounting Terminology

Like: Purchase of Assets, Getting work done from Workers and paid wages to them.

6. Accounts: –

A record of financial transactions for an Asset, Individual, Organization, Expense or Income.

A transaction is recorded with debit and credit entries.

Like: –

1. Asset – Plant and Machine A/c, Building A/c, Land A/c, Debtors A/c, Cash A/c.
2. Individual – Mr Sarb A/c, Mr Pawan A/c, Mr Balijit A/c, Mr Abhi A/c, Mrs Jasmeet A/c.
3. Organization – A&B Pvt. Ltd. A/c, HDFC Bank A/c, HAPPSS Store A/c, Jagdarshan A/c
4. Expense – Salary A/c, Wages A/c, Freight A/c, Commission A/c, Rent A/c,
5. Income – Rent Received A/c, Commission Received,

7. Debit: –

Meaning of Debit is adding an amount of cash or fund into the expenses or assets accounts and
subtracting from the owner’s equity, liabilities or income accounts. ‘Debit’ word comes from the
Latin word debate which means to owe. The word Debit is also abbreviated as “Dr.” It is always
operated opposite to the Credit. It is always shown on the left side of the ledger accounts.

8. Credit: –

Meaning of Credit is adding an amount of cash or fund into the owner’s equity, liabilities or
income accounts and subtracting from the expenses or assets accounts. The word Credit is also
abbreviated as “Cr.” It is always operated opposite to the Debit. It is always shown on the Right
side of the ledger accounts.
9. Goods: –

Those items which are purchased by Business only for sale (not for the use or to consume.)And
purchased to produce another item from it.

Like: –

1. A car painter to buy wood to make furniture or Fixture.

2. A Shop-Keeper buy products to sell it out to consumer (End User)

10. Purchase: –

When Business buy only goods is purchase.

When buying any other assets than it is not a purchase for the business.

11. Sale: –

When Business sell only goods is Sale.

When selling any other assets than it is not a Sale.

12. Purchase Return / Return outwards: –

When Business received goods not according to sample than it will be returned to the
vendor/supplier.

13. Sale Return / Return Inwards: –

When Customer/consumer returned goods to us is called sale return/return inwards.

14. Assets: –

Something valuable that a business owns, get benefits from it in future or has use of in
generating income. As further explained in the following diagram.
 Assets
Charts-Financial Accounting Terminology

15. Liabilities: –

Something valuable that a business owes(Loans) have to pay in future. As further explained in
the following diagram.

Liabilities Charts-Financial Accounting Terminology

16. Stocks/Inventories: –

Material or Items which are owns by the business for manufacturing. In manufacturing Business,
it has three types of following.
Inventories or Stock -Financial Accounting Terminology

17. Trade Receivables: –

Trade
receivable -Financial Accounting Terminology

The amount receivable from the sale of goods only.

18. Trade Payables: –

The amount payable against the purchase of goods only.

19. Cost of Goods Sold (COGS): –

 In Manufacturing: –

It means that the value of the stock which business had paid to produce these products.

 In trading: –

It means that the value of the stock which business had paid to purchase it, the cost of reach these
products to store (Freight Inwards Etc.).

20. Expenditure: –

<

p style=”padding-left: 30px;”>It is the amount which already spent or due but not spent
(Liability) on goods and services. These are two types: –

1. Revenue Expenditure: –

It is the amount which already spent or due but not spent (Liability) on goods and services which
are consumed within the current period. (It Means 1 Financial Year i.e. 01/04/__ to 31/03/__ ).

Like: – Paid Salary/Wages to Employer in C/Y, Rent of Office for C/Y, Commission on Sale For
C/Y, all expenses have come under this.

2. Capital Expenditure: –

It is the amount which already spent or due but not spent (Liability) on goods and services which
are/will be used and gets benefit from it in the current year and in Future years also.

Like: – Spent to purchase a new Land and Building. Purchase and Creation of All assets and
Come under this.

21. Expenses: –

Expenses are that amount which is paid or due to paid for goods and services which are
consumed in the current year. It is also called revenue expenditure.therse are two types as
explained in the following diagram: –
22. Incomes: –

Incomes are that amount which received or due to receive for the sale of goods and services in
the current year and also called revenue. This is two types as explained in the following diagram:
–

23. Revenues: –

Revenue is the income that a business has from its normal business activities, usually from the
sale of goods and services to customers Means Direct Income.
24. Profit: –

It is in excess of incomes over expenses.

These are two types: –

1. Gross Profit: –

It is excess of Direct incomes over Direct expenses.

2. Net Profit: –

It is an excess of Total incomes over total expenses.

25. Loss: –

It is excess of Expenses over Incomes.

These are two types: –

1. Gross Loss: –

It is excess of Direct Expenses over direct Incomes.

2. Net Loss: –

It is an excess of Total Expenses over Total Incomes.

26. Gain:-

Business gets to profit from the sale of old assets it is called gain.

27. Discount: –

Business purchase or sell goods at a price less than the Actual Sale price. The difference between
the actual and new sale price is called the discount. These are two types shown as following: –

1. Trade Discount: –

Discount giving or getting at the time of sale or purchase is called a trade discount. This will not
be shown in books.

2. Cash Discount: –

Discount giving or getting at the time of payment is called a trade discount. This will be shown
in books.