Af Session 1

PAN African eNetwork
Project
Masters of Business Administration (IB)
Accounting and Finance
Semester - I
Dr. N N Sen Gupta
Copyright Amity University
1
Accounting:
The American Institute of Certified Public
Accounts (AICPA) has defined accounting as
the art of recording, classifying and
summarizing in a scientific manner and in
terms of money; transactions and events which
are in part at least of a financial character and
interpreting the results thereof.
Introduction to financial
accounting
Accounting is a language of
business.
As fundamental
function of a language is to serve
as a means of communicating the
matters relating to business
operations.
Meaning and definitions

Book Keeping:
Book Keeping is an activity primarily related
with recording of financial transactions of a
business concern in a set of books in a
scientific manner.
Meaning and definitions

Accounting:
The American Institute of Certified Public
Accounts (AICPA) has defined accounting as
the art of recording, classifying and
summarizing in a scientific manner and in
terms of money; transactions and events which
are in part at least of a financial character and
interpreting the results thereof.
Features of Accounting
Recording Journalizing
Classifying Ledger
Summarizing Trial Balance
Interpreting
Explaining the
significance
of
the
financial statement
Need for Accounting

- Profit
- Future Planning
- Limited Memory
To know the business positions
To keep others informed
Objectives of Accounting:
To make decisions
To make systematic record of the
resources and obligations
To ensure effective direction and
control
To ascertain financial positions of the
business
To provide useful information to
interested parties
Branches of Accounting:
I
II
III
Financial accounting
Cost Accounting
Management Accounting
Limitations of Accounting:
Records only those transactions that
can be measured in money terms.
It records transactions at cost. The
effects of change in prices are not
shown
anywhere.
Every chance of manipulation of
accounting profits by the accountant.
It is only a post-mortem report.
Uses of parties interested in accounting information
Importance of Accounting:
Internal users or parties
External users or parties
- Owners of shareholders
- Management
- Employees
- Creditors
- Government
- Consumer
- General public
- Other parties
a. Tax authorities
b. Stock Exchanges
c. Political Parties
d. Trade Union
The profession of Accounting

Accounting team can be classified in two groups
Bookkeepers
Recording
the
transactions and posting than into ledger
The Accountants - Prepare the financial
statement
Prepare report and interpret them
Basis of Accounting
-
The Institute of Chartered Accountants of India (ICAI),

together with the Institute of Cost and works Accountants of
India (ICWAI) has issued guidelines on the basis of which the
professional accountants prepare financial statements of
business houses in conformity with the accounting standards
issued by the Institute and other professional bodies.
Basis of Accounting:
Cash basis
Accrual basis
Mixed basis
Accounting Equations
Accounting equations means recording of
entries in a way that the assets equal
equities.
Assets = Equities
Equities = Owners Equity + Liabilities
Assets = Owners Equity + Liabilities
System of Book Keeping:

Single Entry System
Double Entry System
Purely based on accounting principles
Every debit there is corresponding credit.
Double entry system does not mean the two entries
a transaction should be made in two different
accounts on the same side; but in two different
accounts on opposite sides for an equal amount.
Stages of Double Entry

System
There are three stages which are as under:
All the in transactions should be recorded in either in

journal or in subsidiary.
All the entries in the journal or subsidiary books

should be posted to the concerned ledger accounts.
The preparation of profit and loss accounts is to

ascertain the trading result and the balance sheet to
know the financial position of the business.
Nature of Accounting
Certain things are common in business

Business enters into contract with other persons a
firms whose transactions are recorded in personal
account.
Every business owns or posses certain properties.
These assets are recorded in real account.
Every business earns income and incurs expenses
such transaction in recorded in nominal account.
Type of Accounts
Type of Accounts
Personal Accounts
Natural
Account
Artificial
Account
Impersonal Accounts
Representative
Real
Account
Tangible
Account
Intangible
Account
Expense
Account
Account
Nominal
Account
Incomes
Account
Rules of Account:
Every business transaction has two aspects:
- Receiving Aspects is debited
Giving Aspects is credited
Rules of Account:
Personal Account:
Real Account:
Nominal Account:
- Debit the receiver

- Credit the giver
- Debit what comes in
- Credit what goes out
- Debit all expenses and losses
- Credit all incomes and gains
Concept underlying the

Financial Statement
A financial statement is an organized collection of
data according to logical and consistent accounting
procedures. Its purpose is to convey an
understanding of some financial aspects of a
business firms.
The financial statements generally refer these basic

statements:
(i)
(ii)
(iii)
(iv)
The Income Statement (Profit and Loss Account)

The Balance Sheet (Financial Position of a
Business as a specified moment of time)
A statement of retained earnings (Profit and Loss
Appropriation Account)
A statement of changes in financial positions
a.
Change in the firms working capital (fund
flow statement)
b.
Change in the firms cash positions (cash
flow statement)
c.
Change in the firms total position
Financial statement is affected

by:
(i) Recorded fact
(ii) Accounting Conventions
(iii) Personal Judgement
Limitations of Financial
Statements:
Financial statements are prepared with the object of
presenting a periodical review or reports on the progress
by the management and deal with the
(i)
Status of the investments in the business and
(ii)
Results achieved during the period under review.
These are the Limitations:

Profit shown is the profit and loss account and financial
position as depicted in balance sheet is not exact.
Financial statements are prepared on the basis of certain
accounting concepts and conventions (going concern,
conservation)
Many items are left & personal judgement of the
accountant (i.e. method of depreciation, mode of
amortization of fixed assets, treatment of different revenue
expenditure)
Disclose only monetary facts.
Users of Financial
Statements Users of Financial Statements
Internal users or parties

or parties
-Owners/Shareholders
-Managements
-Employee
External users
-Creditors
-Government
-Consumers
-General
public
-Other
Parties
Generally Accepted Accounting

Principles (GAAP):
The origin GAAP is 1920s where the speculative activities
excesses in the stock market. The reasons for the crash of
economies were the absence of uniform and stringent
financial reporting requirements. Taking the serious view of
this, the American Institute of Accountants which renamed
AICPA, created a Committee in 1930s to cooperate with the
New York Stock Exchange with the aim of establishing
standards to be followed for all accounting practices and
procedures.
Generally Accepted Accounting

Principles (GAAP):
Generally Accepted Accounting Principle (GAAP) are
concerned with the measurement of economic activity
recording, disclosing, preparation and presentation of
information in form of financial statements.
They
encompass the conventions; rules and procedures
necessary to define accepted accounting principles at a
particular time. They also includes the broad guidelines
of general application but also detailed practices and
procedures.
Sources of GAAP
The authentic and authoritative sources of GAAP are:
American Institute of Certified Public Accounts (AICPA)
Financial Accounting Standard Board (FASB)
Government Accounting Standard Board (GASB)
International Accounting Standard (IAS)
Pronouncements of Securities and Exchange Commission (PSEC)
Various Publications of Professional Organisations
Various books, articles and Committee reports on accounting that
contain expressions of GAAP which are authentic.
Accounting Conventions
Generally accepted accounting
practice
1. Business entity
2. Historical cost
3. The monetary unit
4. Going concern
5. Accounting period
Accounting Conventions
Accounting Doctrines
Recommended principles that Accountants
should follow1. Full disclosure
2. Consistency
3. Materiality
4. Conservatism
5. Objectivity
Accounting Doctrines
Who Needs
Accounting
INTERNAL
Managers, supervisors, directors
Who Needs Accounting

EXTERNAL
Investors, creditors, lenders, Customers
Statutory authorities eg: tax office, payroll tax, ABS
Type of Accounts
Type of Accounts
Personal Accounts
Natural Account
Artificial Account
Impersonal Account
Representative
Account
Real Account
Tangible Account
Intangible Account
Nominal Account
Expense Account
Incomes Account
Classification Of Accounts
1.
2.
3.
Personal Accounts
1. Debit is the receiver
2. Credit is the Giver
Real Accounts
1. Debit what comes in
2. Credit what goes out
Nominal Accounts
1. Debit- Expenses & Losses
2. Credit- Income & Profit
Final Account
Process Of Accounting
1. Journal
2. Ledger
3. Trial balance
4. Adjustments
5. Trading & P/L
6. Balance Sheet
Accounting Cycle
2.
Journalize
3. Post
1.Analyze
Transactions
4. Unadjusted
trial balance
8.Close
Start the
next cycle
5. Adjust
7. Prepare
finance
statements
6. Adjusted
trial balance
Numerical
Journalize the following transactions, post them in the
Ledger and balance the accounts on 31st January.
Ram started business with a capital of Rs. 10,000.
He purchased goods from Mohan on credit Rs. 2,000.
He paid cash to Mohan Rs. 1000.
He sold goods to Suresh Rs. 2000.
He received cash from Suresh Rs. 3000.
He further purchased goods from Mohan Rs. 2,000.
He paid cash to Mohan Rs. 1000.
He further sold goods to Suresh Rs. 2000.
He received cash from Suresh Rs. 1000.
Particulars
Cash Account
To Capital Account
(Being commencement of business)
L.F.
Dr.
Debit Amount
(Rs.)
Credit Amount
(Rs.)
10000
10000
Purchase Account
To Mohan
(Being purchase of goods on credit)
Dr.
Mohan
To Cash
(Being payment of cash to Mohan)
Dr.
Suresh
To sales
(Being goods sold to Suresh)
Dr.
Cash Account
To Mohan
(Being cash received from Suresh)
Dr.
2000
2000
1000
1000
2000
2000
Purchase Account
Dr.
To Mohan
(Being purchase of goods form Mohan)
3000
3000
2000
2000
Mohan
Dr.
To Cash Account
(Being payment of Cash to Mohan)
1000
Suresh
To Sales Account
(Being goods sold to Suresh)
Dr.
2000
Cash Account
To Suresh
(Being cash received from Suresh)
Dr.
Total
1000
2000
1000
1000
24000
24000
Ledger
Cash Account
Dr.
Date
Particulars
Cr.
Amount
(Rs.)
To capital A/C
10000
1000
To Suresh
3000
1000
To Suresh
1000
14000
Feb.1
To balance b/d
12000
Date
Jan.31
Particulars
Amount
(Rs.)
12000
CAPITAL ACCOUNT
Dr.
Date
Jan
31
Cr.
Particulars
To Balance c/d
Amount
(Rs.)
Date
10000
Particulars
By Cash A/c
10000
Amount
(Rs.)
10000
10000
Feb 1
By Balance b/d
10000
PURCHASE ACCOUNT
Dr.
Date
Cr.
Particulars
To Mohan
To Mohan
Amount
(Rs.)
Date
Particulars
Amount
(Rs.)
2000
Jan 31
By Balance c/d
4000
2000
4000
Feb 1
To Balance b/d
4000
MOHAN
Dr.
Cr.
Date
Particulars
Amount
(Rs.)
To Cash
Date
Particulars
Amount
(Rs.)
1000
By Purchases
2000
To Cash
1000
By Purchases
2000
To Balance c/d
2000
4000
4000
By Balance b/d
2000
SURESH
Dr.
Date
Cr.
Particulars
Amount
(Rs.)
To Sales
Date
Particulars
Amount
(Rs.)
2000
By Purchases
3000
To Sales
2000
By Purchases
1000
To Balance c/d
4000
4000
SURESH
Dr.
Cr.
Date
Particulars
Amount
(Rs.)
Jan
31
To Balance c/d
4000
Date
Particulars
Amount
(Rs.)
By Suresh
2000
By Suresh
2000
4000
4000
Feb. 1
By Balance b/d
4000
TRIAL BALANCE
as on 31st January
Particulars
Cash Account
Capital Account
Purchases Account
Mohan
Sales Account
Debit (Rs.)
Credit (Rs.)
12000
10000
4000
2000
4000
16000
16000
Thus, the two sides of the Trial Balance tally. It means
the books of accounts are arithmetically accurate.
Problem I
Journalize the following transactions and post them into the Ledger:
1999
Rs.
Jan 1
Surendra started business with cash
5000
Jan 2
Goods purchased from Prasad on credit
200
Jan 3
Goods sold to Prem
500
Jan 4
Goods purchased from Sohan for cash
400
Jan 5
Paid for wages
50
Jan 15 Goods purchased from Prem
100
Jan 17 Goods sold to Om
Jan 21 Goods purchase from Charanjit
Jan 23 Paid for interest
Jan 24 Goods purchased from Om
200
Jan 28 Cash received from Prem
Jan 31 Cash paid to Charanjit
Jan 31 Paid for Rent
300
15
100
300
10
50
Problem 2
On 1st January, 1999 the following were the ledger balances of Rajan & Co. Cash in hand Rs.
900; Cash
at bank Rs. 21,000; Soni (Cr.) Rs. 3000; Zahir (Dr.) Rs.2,400; Stock Rs. 12,000; Parsad (Cr.)
Rs. 6,000;
Sharma (Dr.) Rs. 4,500; Lall (Cr.) Rs. 2,700; Ascertain capital.
Transactions during the month were:
1999
Rs.
Jan 2
Bought goods for Prasad
2700
Jan 3
Sold to Sharma
3000
Jan 5
Bought goods of Lall for cash, paid by cheque
3600
Jan 7
Took goods for personal use
200
Jan 13
Received from Zahir in full settlement
2350
Jan 17
Paid Soni in full settlement
2920
Jan 22
Paid cash for stationery
50
Jan 29
Paid to Prasad by cheque

2650
Discount allowed by him
Jan 30
Provided interest on capital

100
Rent due to landlord
200
Journalize the above transactions and post to the ledger and prepare a Trial Balance.
50
Preparation of Financial Statement
Dr. N. N. Sengupta
Accounting cycle involved the following stages:
1.
Recording of Transactions: This is done in the book

termed as Journal.
2.
Classifying the Transactions: This is done in the book

termed as Ledger.
3.
Summarizing the Transactions: This includes

preparation of trial balance profit and loss account
and balance sheet of the business.
Accounting cycle involved the following

stages:
Interpreting
the
results:
This
involves
computation of various accounting ratios etc. to
know about the liquidity solvency and profitability
of business.
Journal
Journal is defined as a book containing a
chronological record of transactions
It is the book in which the transactions are recorded

first of all under the double entry system.
This is a book of original record.
The recording of transactions in journal is termed as

Journalizing
The Proforma of Journal

Date
Particulars
L.F.
(1)
(2)
(3)
Debit
(Rs.)
(4)
Credit
(Rs.)
(5)
1.
Date: The Date on which transaction was

entered is recorded here.
2.
Particulars: The two aspects of transaction

are recorded in this column i.e. the
details regarding accounts which have to
be debited and credited.

3. L.F.: It means ledger folio. The
transactions entered in the journal are later

on posted to the ledger.
4. Debit: In this column, the amount to be

debited is entered.
5. Credit: In this column, the amount to be
credited is shown.
Compound Journal Entry
Sometimes there are a number of transactions

on the same date relating to one particular
account or of one particular nature. Such
transactions may be recorded by means of
single journal entry instead of passing several
journal entries.
It may be recorded in any of the following

three ways:
Compound Journal Entry

I
A particular account may be debited while

several other accounts may be credited.
ii.
One particular accounting may be credited

while several other accounting may be
debited.
iii.
Several accounts may be debited and several

there accounts may be credit.
Position
Ledger isLedger
a book which
contains various
accounts.
It may be also called ledger is a set of

account.
Ledger may be kept in any of the

following two forms
i. Bound Ledger
ii. Loose leaf ledger
Posting
The term Posting means transforming the

debit and credit items from the journal to
their respective accounts in the ledger.
Posting may be done at any time. However,

it should be completed before the financial
statements are prepared.
Posting
The Posting may be done by the book-keeper
from the journal to the ledger by any of the
following methods:
i.
He may take a particular side first. For

example, he may take the debits first and
make the complete postings of all debits from
the Journal to the Ledger.
Posting
ii.
He may take a particular account and post all

debits and credits relating to that account appearing
on one particular page of the Journal. He may then
take some other accounts and follow the same
procedure.
iii.
He may complete postings of each journal entry

before proceeding to the next journal entry.
Relationship between Journal and Ledger
Both Journal and Ledger are the most

important books used under Double Entry
System of Book-keeping.
Journal is the book of first or original entry,

while the ledger is the book of second entry.
Journal Records Transactions is a

chronological
order, while the ledger
records transactions is a
analytical order.
Journal is more reliable as compared to the

ledger since it is the book in which the entry
is passed first of all.
The processing of recording transactions is

termed is journalizing while the process of
recording transactions is the ledger is called
as posting.
Rules Regarding Posting
The following rules should be observed while

posting transactions in the ledger from the
Journal:
i.
Separate accounts should be opened in the

ledger for posting transactions related to
different accounts recorded in the
Journal.

ii. The concerned account which has been
debited in the Journal should also be debited
in the ledger. However, a reference should
be made of the other accounts which has
been credited in the Journal.
iii.
The concerned account, which has

been credited in the Journal should also be
credited in the Ledger, but reference should
be given of the account, which has been
debited in the
Journal
Use of the words To and By

It is customary to use words to and by
while making posting in the ledger.
The word to is used with the accounts

which appear on the debit side of a Ledger
Account.
Similarly, the word by is use with the

accounts which appear on the credit side
of the ledger account.
Cashbook
Cashbook is a special journal in which all
cash transactions are recorded directly.
Cashbook shows the cash receipts and
the cash payments. The Cashbook
resembles a ledger with the debit and
credit sides, and the balance represents
cash on hand at the end of the accounting
period.
Kinds of Cashbook
Simple Cashbook/Single Column Cashbook
Double Column Cashbook
Three Column Cashbook
Simple Cashbook
In Simple Cashbook all the cash transactions

are recorded in chronological order. All cash
receipts are entered on the debit side and cash
payments on the credit side of the Cashbook.
The difference between the two sides is the cash
in hand.
Simple Cashbook
CashBook
Dr.
Particulars
Date
L.F.
Rs.
Date
Cr.
Particulars
L.F.
Rs.
This Cashbook is an extension of simple

Cashbook. An additional column is maintained
to record discount involved in the settlement of
debtors and creditors in the double column
Cashbook.

Cashbook
Dr.
Date
Particulars
L.F.
Discount
Rs.
Cash
Rs.
Date
Cr.
Particulars
L.F.
Discount
Rs.
Cash Rs.
The Three Column Cashbook is accounts for

cash and bank with additional information about
discount allowed and discount received.

Cashbook
Dr.
Date
Receipts
Discount
allowed
Cash Bank
Cr.
Date
Receipts Discount
allowed
Cash
Bank
Contra Entries
If a transaction affects both cash account and

bank account in the opposite sides, the entry for
recording the transaction is called a contra entry.
Entries which are made on both sides of the
Cashbook are called contra entries. No ledger
posting is required, because both aspects of the
transaction are recorded in the Cashbook itself.
This fact I indicated in the Cashbook by writing
C in L.H. column.
Contra Entries
Dr.
Date
Cashbook
Particulars
L.F
Discount
Allowed
Cash
Bank
Date
Cr.
Particulars
L.F
Discount
Allowed
Cash
Bank
Petty Cashbook
The Petty Cashbook would contain a number of

analytical columns for grouping the various
expenses under a few classifications which
would facilitate subsequent posting into the
General Ledger.
Analytical Petty Cashbook

Amount
Received
Date
Particulars
Total
Amount
paid
Postage and
Telegrams
Printing and
Stationery
Carriage
Traveling
Expenses
Sundry
Expenses
Subsidiary Books
All non-cash transactions should be recorded in

the journal. The journal is inadequate as the
single book of the original entry when the
transactions are voluminous in number. The
journal is divided into divisions and they are
commonly termed as subsidiary books. Some of
the subsidiary books are:
Subsidiary Books
Purchase Book
Purchase Returns Book
Sales Book
Sales Return Book
Bill Receivable Book
Bills Payable Book
Journal Proper
Purchase Book
Also known as the Purchases Journal, this book is used to
record credit purchases of goods only.
Purchase Book
Date
Particulars
(Name of Supplier, etc.)
L.F.
Inward Invoice No.
Amount
Rs.
Purchases Returns Book

This subsidiary book is used to record the goods purchased on credit
and sent back to suppliers as not conforming to specifications or for
any other reason.
Purchases Returns Book

Date
Name of Supplier
L.F.
Debit Note No.
Amount
Rs.
Sales Book
Also known as the Sales Journal, this subsidiary book is used to
record the sale of goods on credit.
Sales Book
Date
Name of Customer
L.F.
Outward Invoice No.
Amount
Rs.
Sales Returns Book

This book is used to record the transactions relating to goods sold on
credit and received back from the customers as not conforming to
the specifications or for any other reason.
Sales Returns Book

Date
Name of Customer
L.F.
Credit Note No.
Amount
Rs.
Bills Receivable Book

The Bills Receivable of an enterprise consists of all Promissory Notes
given or Bills or Exchange accepted by customers in respect of
amounts due from them.
Bills Receivable Book

S.No.
Date
From Whom
Received
Acceptor
Date
of Bill
Term
Date of
Maturity
L.F.
Where
Payable
Amount
Rs.
How
Disposed
Trial Balance
Trial Balance is a statement containing the various

ledger balances on a particular date.
Proforma of Trial Balance
Trial Balance
As on 31st January in(Rs.)
Particular
Debit
Credit
(1)
(2)
(3)
Trial Balance
1.
Under this head we take the ledger account

in which the balance is brought down either
on debit or credit side.
2.
it is the amount in debit side of particular

ledger account.
3.
It is the amount is credit side of a particular

ledger account.
Objective of Preparing a Trial

Balance:
-
Checking of the arithmetical accuracy of

the accounting entries.
Basis for financial statements
Summarized ledger
Methods of Preparing Trial Balance:

i.
Total Method: In case of this method the totals of

debit and credit of the accounts are shown in the
Trial Balance.
ii.
Balance Method: In case of this method, the

balance of the ledger accounts are shown in the
respective debit and credit column of the trial
balance.
The total of the balance of the debit column must
be equal to the total balance of credit column.
Trial Balance and Adjustments

Before an accountant can proceed to prepare
the financial statements from the trial balance,
he has to process some additional information,
which he either already knows or receives from
some other divisions or departments. The
following are a few examples showing where
adjustment entries would be required:
Particulars
L.F.
Dr. (Rs)
1. Capital Account
13,400
2. Sales Account
15,300
3. Shyams Account
1,500
4. Discount Account
300
5. Purchases Account17,000
6. Salaries Account
500
7. Drawings Account5,000
8. Rams Account
400
9. Cash in hand
900
10.
Bank Overdraft 4,100
11.Furniture A/c
8,000
33,20033,200
Cr. (Rs)
Closing Inventory
The value of closing inventory will be brought
into the books of accounts through the following
journal entry:
Closing Inventory A/C Dr.
To Trading A/c
While the closing inventory appears on the credit
side of the trading account to reduce the cost of
goods sold, it also appears as an asset in the
balance sheet.
Outstanding or Accrued Expense

The nominal accounts record the actual expense
paid during the accounting period. However,
prior to the preparation of the financial
statements, it must be ensured that all expenses
which have fallen due to be paid but which have
not been paid during the accounting period are
also brought into the books to help in the proper
matching of revenues and expenses.
The adjusting journal entry to record any

outstanding or accrued expense is
Expense A/C
Dr.
To Outstanding Expense A/C

While the amount of expense taken from the trial
balance will be increased by the amount
outstanding and shown in the trading and profit
and loss account, the actual outstanding will be
shown as a liability in the balance sheet.
In the subsequent accounting period, the
outstanding expense liability will be transferred to
the expense or nominal account and will be set-off
by the entry of actual payment when it is made.
Prepaid Expense
Certain expenses paid may relate to more than one

accounting period. In such cases, it is necessary to
identify that portion of the expenditure for which the
benefit is yet to be received by the concern and
treat that part of the expenditure as prepaid.
Prepaid Expense
The journal entry to record any prepaid expense
is:
Prepaid Expenses A/C
Dr.
To Expenses A/C

balance in the prepaid expense account will be
transferred back to the expense account.
Outstanding or Accrued Income
An income appearing in the ledger account may not

represent the income that must have been received
during the year. If a portion of an income has not
yet been received or is outstanding as at the end of
the accounting period then the outstanding amount
must be brought into books.
To record any outstanding income in the books

of accounts, the journal entry is:
Outstanding Income A/C

To Income A/C
Dr

While the interest received will be increased to
shown in the profit and loss account, the
outstanding interest account will be listed as an
asset in the balance sheet.

amount in the Outstanding Interest A/C will be
transferred to Interest Received A/C and the
actual receipt of the interest will offset the former
transfer entry.
Income Received in Advance

While preparing
the financial
statements,
adjustments may be necessary in respect of any
incomes received in advance.
The entry to adjust for the income received in
advance will be.
Subscriptions A/C Dr.
To Subscriptions received in Advance A/C
Income Received in Advance

With the posting of the above journal entry, the
subscriptions account will be shown n the profit
and loss account and in the balance sheet, the
subscriptions received I advance will be listed as
a liability.
Provisions for Bad Debts
The sales revenue recorded in the books of

accounts of an organization represents the
amount realized/to be realized from the sale of
goods. When goods are sold on credit it may
sometimes happen that even though customers
bought them with every intention of paying for
them, (owing to certain subsequent change in
circumstances.) they may not be able to fulfill
their obligations.

The journal entry to record the above loss would
be:
Bad Debts A/C

To X A/C
Dr.
Please not that the sales account remains

unchanged. However, in the income statement,
while sales revenue will appear at the full figure,
the bad debts will appear as a loss and thus the
reduction in the amount realized will be account
for. The Accounts Receivable account will also
appear in the balance sheet at the realizable
value.
Provision for Bad and Doubtful Debts

When bad debts are expected to occur in the
future: (a) the exact amount of loss may not be
known and (b) a particular debtors account
cannot be identified to write-off the expected
loss or even if the debtors account can be
identified, a reduction in claim can be given
effect to only when it becomes one hundred
percent certain.
Provision for Bad and Doubtful Debts

For creating the provision for bad and doubtful
debts, the journal entry is:
Profit and Loss A/C

Dr
To Provision for Bad Debts A/C
Estimating Bad and Doubtful Debts

Any one of the following methods may be used to
estimate the amount of possible bad debts.
Bad debts may be estimated as a percentage of total

sales during the year. This method can be used only
when there are no cash sales or such sales are
negligible.
Bad debts may be estimated as a percentage of credit

sales.
Estimate bad debts as a percentage of receivables

outstanding at the end of the accounting period.
Estimating Bad and Doubtful Debts
The percentage used will be based on the

Judgement of the management and the past
experience with regard to bad debts.
Treatment of Bad Debts when a Provision for

Bad Debts Exists
The following details are available:
Bad debts during the year
Accounts receivable as on date
PQR Ltd., would like to maintain the provision at % of sundry debtors.
The accounts receivable of as on date is after accounting for the bad debts .
When bad debts occurred, the following entry would have been passed.
Bad Debts A/c

Dr.
To sundry Debtors A/c
Treatment of Bad Debts when a Provision

for Bad Debts Exists
Since a provision for bad debts to the extent
already exists, the actual bad debts will be
transferred at the end of the year to this
provision account and not to the profit and loss
account. The entry for the transfer will be,
Provision for Bad Debts A/c
To Bad Debts A/c

At this point the provision account will appear as
under:
Provision for Bad Debts Account
Dr.
Particulars
Cr.
Rs.
Particulars
Rs.

Since the provision has been utilized to the
extent . The remaining setting off any bad debts
in the forthcoming year. However, PQR Ltd.,
wishes to maintain the provision at % on
debtors.
So, the balance required in the
provision account as on date is % of total debtor

To bring up the provision to the required balance
a further appropriation to be made from the
profit and loss account.
Entry will be:

Profit and Loss A/c Dr.
To Provision for Bad Debts A/c

The provision account, after posting this entry, will appear as
follows:
Provision for Bad Debts Account

Dr.
Cr.
Particulars
Rs.
Particulars
Rs.
The balance sheet will again show the Accounts Receivable at their
realizable value.
Recovery of Bad Debts Written off
Sometimes, an amount written off as bad debts

may be subsequently recovered. Any such
recovery must be treated as a windfall and
transferred to the Profit and Loss Account as a
gain:
Recovery of Bad Debts Written off

The journal entries will be,
At the time of receipt of the amount
Cash A/c
Dr.
To Bad Debts Recovered A/c
At the end of this financial year,

Bad Debts Recovered A/c Dr.
To Profit and Loss A/c
Provision for Discounts on Accounts

Receivable
The organization which allow the facility of
making payments before the due date and
enable their debtors to avail of cash discount,
must take into account the possible amount of
discounts that may be allowed on closing
debtors in the forthcoming year.
This is
necessary to show the closing debtors at their
realizable value.
Reserve for Discounts on Accounts Payable

Organizations may like to show the sundry
creditors in the balance sheet at the net payable
value by estimating in advance the amount of
cash discounts that may be received at the time
of settlement of amounts due. This is usually
done by creating a reserve for discounts on
creditors and then transferring the discounts
received to such reserves. Since, income in
respect of discounts receivable is recognized in
advance,
Reserve for Discounts on Accounts Payable

The journal for creation of the reserve will be:
Reserve for Discount on
Accounts Payable A/c

Dr
To Profit and Loss A/c
Meaning and Scope

of Accounting
1. Accounting covers only the

following activities:
(a) Recording and classifying
(b) Recording, Classifying,
Summarising and analysing
(c) Summarising, Analysing and
Interpreting
(d) Identifying, Measuring and
Communication
2. An economic event that

involves transfer of
money or money worth is(a)
(b)
(c)
(d)
Financial transaction
Barter
Settlement
Receipt/Payment
3. Sale of goods to Ram for

Cash Rs.1,000 is a
(a)
(b)
(c)
(d)
Cash transaction
Credit transaction
Barter
Internal Event
4. Current Assets are those

assets(a) Which can be converted into cash
with 12 months.
(b) Which can be converted into cash
within
a
period
normally
not
exceeding 12 months
(c) Which can be converted into cash
within an operating cycle which normally
does not exceed 12 months
(d) Which are held for their conversion into
cash within an operating cycle which
normally does not exceed 12 months
5. Fixed Assets are those

assets(a) Which can not be converted
into
cash
with 12 months.
(b) Which can be converted into cash
after
12 months.
(c) Which can be converted into cash
after
the expiry of operating cycle.
(d) Which are not held for their conversion
into
cash within an operating cycle which
6. Capital is the (a) Excess of external liabilities over the

assets.
(b) Excess of assets over the external
liabilities
(c) Excess of external liabilities over the
assets.
(d) Excess of assets of over the internal
liabilities
7. Drawing represent (a) Cash withdrawn for office

use
(b) Cash withdrawn for
personal use
(c) Goods withdrawn for
personal use
(d) (b) & (c)
8. A person who owes

money to the firm is -
(a)
(b)
(c)
(d)
A creditor
A debtor
An investor
A lender
9.
A person to whom
money is owed by the
business (a)
(b)
(c)
(d)
A creditor
A debtor
A borrower
A customer
10. Income is reflected in

the form of -
(a) Inflow of assets incurrence of

liabilities
(b) Outflow of assets or decrease
in liabilities
(c) Inflow of assets or decrease
in liabilities
(d) Outflow of assets or
incurrence of liabilities
11. Expenses are reflected

in the form of (a) Inflow of assets or incurrence of
liabilities
(b) Outflow of assets or decrease in
liabilities
(c) Inflow of assets or decrease in
liabilities
(d) Outflow of assets or incurrence
of liabilities
Thank You
Please forward your query
To: Nnsengupta@gmail.com
CC: manoj.amity@panafnet.com
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Meaning and definitions

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Meaning and definitions

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Need for Accounting

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Uses of parties interested in accounting information

Internal users or parties

External users or parties

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The profession of Accounting

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The Institute of Chartered Accountants of India (ICAI),

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System of Book Keeping:

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Stages of Double Entry

All the in transactions should be recorded in either in

All the entries in the journal or subsidiary books

The preparation of profit and loss accounts is to

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Certain things are common in business

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- Debit the receiver

Concept underlying the

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The financial statements generally refer these basic

The Income Statement (Profit and Loss Account)

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Financial statement is affected

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These are the Limitations:

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Internal users or parties

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Generally Accepted Accounting

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Generally Accepted Accounting

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Who Needs Accounting

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Paid to Prasad by cheque

Provided interest on capital

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Preparation of Financial Statement

Accounting cycle involved the following stages:

Recording of Transactions: This is done in the book

Classifying the Transactions: This is done in the book

Summarizing the Transactions: This includes

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Accounting cycle involved the following

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