Basic Accountancy

MB000

By Dr. VINEET CHOUHAN

Ancient time
Limited Persons and Transactions

Ram no of
(A trader) Customers

Customers were limited so he can remember

the transactions with customers
Ancient time
After some time
Persons and Transactions

Ram no of
(A trader) Customers

Customers were increased so he can not

remember the transactions with customers
 THE PROBLEM
 How the records of all customers can be
maintain
 An Idea is Needed
• The need of proper recording is suggested
by Chanakya in india

Modern Accounting
• An Expert comes with the idea
• In 1494 the idea comes and
expert was Lucas Paceoly
 Double Entry System
He has written the book “The compaset
Scriptures”
This book is the base of the English
system of accounting
 Generally Accepted Accounting
Principle (GAAP)
Rule of Science: Fixed and can be

prove at any time any place

Gravitational force can be

prove at any time any place
Rules of Accounting can be proved in certain
fixed condition so in place of principle of
accounting we say GAAP
 Accounting Concepts
 Money Measurement Concept:
 Monetary transactions are written only
(Money & Transaction Both)
&

Ex: Death of all Managing Director in Accident

not be written since it has no monetary value
but it Will be Reflected in the value of share
price
 Separate Entity Concept
 Business and Businessman are separate
entities
 Transaction are recorded for Business
only. Businessman ≠ Business
≠

Ex: Capital invested and Drawings

 Going Concern Concept
 Business is to be continued for a substantial
period and it will not wind up.
 Capital and Revenue expenditure are
classified
 EX. We invest in factory building
Machine, Furniture, Etc.

Why?
Accounting Period Concept

A Real Profit can be judge only with

the difference of capital at beginning
and at the end
Business goes on for fairly long time
so it cannot be judged. Shareholders
wants to know the profit so the life of
company is divided into accounting
period of one year i.e., from 1st April to
31st March next year
 Cost Concept
 Each assets or Liabilities are written on its
cost while recording in the books
 Types of cost of Assets
Market value
Sale Price
Govt. Valuation
Purchase Price/ cost Price
Ex. Computer price
Purchased price 1,00,000
Sale price after 1 year 40,000
Dual Aspect Concept
• Dual Effect of one transaction
• Double entry system is used so in every
transaction two parties are involved.
• Giver & Receiver

• Debit side & credit side

Basic accounting equation=
Capital+ Liabilities=Total Assets
Accounting Conventions

• CONSISTANCY
• Method and System of Accounting Should
be consistent and no frequent changes are
allowed
• Ex. Once a company sold goods
with guarantee. it can not be
taken back after sale
Ex. The rate of Depreciation cannot
be Changed frequently
Materiality Convention

 According to this Convention the

accountant should attach important and
to the material details and ignore
insufficient detail.
 Ex. Purchase of a tool , pen/ Lock, etc.
Disclosure convention

 Transparency in accounting work.

 True and fair result must be shown in
final accounts for all the users.
 Each impotent information is to be
supplied with the final accounts.
companies view users perception
 Conservatism Convention
Traditional Approach
Anticipate loss but Do not anticipate the
Profit
Provision for Doubtful debts can be made
with provision for discount on debtors
(Loss)

But provision for discount on creditors can

not be made (Income)
 Accounting
“Accounting is the art of recording,
Classifying & Summarising in a significant
manner & in terms of Monetary Transaction
& Events which are in part or at least of a
financial character & interpreting the result
there of .”

----American Institute of Certified

Public Accountants
Accounting Characteristics
Art- Best method of doing the work
Art of Recording
Classifying
Summarising in a significant manner
Monetary Transaction & Events
Interpreting the result
 Basic Accounting Terminology
Work of Accounting is defined under it. Two
types of work is being done:

1.Bookkeeping: 2.Accounting:
i To maintain the i To present the result
books of accounting
ii Primary recording ii After Bookkeeping
iii Trial Balance and
Final Accounts
iii Journal and
ledger
 Capital
 Amount invested by the owner
 Sole trader: cash with business has
started
 Partnership: Cash invested by
all partners
 Company:
 Share capital
 Authorized Capital
 Issued Capital
 Subscribed Capital
 Paid up capital
 Indian and Foreign Capital
 Assets
 Things which have been purchased for
long term use of the company
 Types: Tangible Assets like-
Building, Furniture, motor car, Plant and
machinery

Cont….
 Intangible Assets
 Which can not be seen, touched or felt
 Patent, Trade Mark, Copyright, Goodwill,
Publication right etc.
 Current and fixed Assets
 Assets which can be converted into cash
in one accounting year are current assets.
Like Cash & Bank Balances, Debtors, Bills
receivable, etc.
 Assets which is purchased for the period
of more than one year or for long term are
fixed in nature.
Like : Building, Plant, Furniture
Machinery, etc.
 Indian and foreign Assets
 Assets which has physical existence in
India called Indian assets.

 Assets which has physical existence

outside India called foreign assets for an
Indian company

Rs
India
 Liabilities
 If any amount of the company is due to
any outsider person other than for
Capital, that will be called as liabilities.
 It is of two types
 Long term liabilities
 Short term liabilities
 Long term liabilities
 It includes the liabilities which can not be
settled within one accounting year. Like
Bank loan, long term loan from public,
Debentures, loan from financial
institution, etc.
 Short term liabilities
 The liabilities which are to be paid
with in one accounting year called
short term liabilities. Like Creditors,
Bank Overdraft, Bills Payable, short
term credit, etc.
Debtors (Current Assets)

Those person or Institutions who have

purchased our goods and have not
paid the full amount called debtors.

It also include those persons who have

to pay us any amount due to any other
reason except sale of goods.
 Creditors (Current Liabilities)
 Creditors are those persons who have sold
their goods on credit to us.
 It also include those person whose money is
due from us for any other reason.
 Revenue
 It is inflow of cash due to business events. It can
also define as excess of cash inflow than outflow.
 There are two types of Revenues. Purchase

 Income Revenue:
Sale
Due to business event.
 Capital Revenue: Make
Not due business event, but due to special
causes, like from sale of assets.
 Expenses
 The amount spent for
business events are expenses.

It is of three types
1. Revenue Expenditure

2. Capital Expenditure

3. Differed revenue expenditure

 Revenue Expenditure

These expenditure were made
for normal business activity.

like: Rent, Wages, Printing,

Stationary, normal repair,
Material Purchase etc.
 Capital Expenditure
 Expenditure paid for purchase of the
goods of fixed nature (Assets).
 Also include the expenditure
paid at the time of purchase
of assets or a big expenditure
on repair
 Like for purchase of Building cost of
building and legal charges.
Differed Revenue Expenditure
 These are revenue expenditure
basically but it is made for a
very big amount and its
benefit can be received by
the company for many years.
 Like Heavy advertisement of a
company in its first year, Preliminary
expenses, etc.
Basic Accounting Equation
 It is based on Dual aspect concept
 Classification of Assets, liabilities and Capital is
discussed under it.
Total Assets= Capital + External Liabilities.

 Total Assets are classified in fixed and current assets

 External liabilities are classified in external and
internal liabilities.
 Income is added in Capital, while Expenses are
deducted from Capital
 Assets classification
 Fixed Assets Current Assets
 Land & Building ◄ Cash balance
 Plant & Machinery ◄ Bank Balance

 Furniture and fixtures. ◄ Closing Stock

 Investment ◄ Debtors
◄ Bills Receivable
 Motor car & Delivery
◄ any other current assets
van
 Etc.
Liabilities & Capital Classification
 Sundry Creditors  Capital
 Bills Payable  Profit on Sales+
 Bank Overdraft or loss -
 Drawing -
 Bank loan  Income tax -
 Long term Loan  Income +
 Expenditure -
Effects
Effects of
of Transactions
Transactions on
on Owner’s
Owner’s Equity
Equity
Owner’s Equity

Decreased by Increased by

Owner’s Owner’s
withdrawals investments
Expenses Revenues

Net
income
 The
The Accounting
Accounting Equation
Equation

Assets = Liabilities + Owner’s Equity

The
The resources
resources
owned
owned by
by aa
business
business
 The
The Accounting
Accounting Equation
Equation

Assets = Liabilities + Owner’s Equity

The
The rights
rights of
of the
the
creditors,
creditors, which
which
represent
represent debts
debts
of
of the
the business
business
 The
The Accounting
Accounting Equation
Equation

Assets = Liabilities + Owner’s Equity

The
The rights
rights of
of the
the
owners
owners
 Format of basic accounting structure
S Transacti Assets Capital + Liabilities
. on =
N cash stock Credit Bank
. ors loan

1 Started 50,00 0 50,000 0 0

business 0
with cash
On November 1,
2005, Chirag
begins a business
that will be
known as
chouhan’s
solution
a. Chirag
a. Chirag deposits
deposits $25,000
$25,000 in
in aa bank
bank
account in
account in the
the name
name of
of Chouhan
Chouhan
Solutions.
Solutions.

Assets = Owner’s Equity

Bank Chirag’s Capital
= 25,000 Investment
a. 25,000
by Chris
Clark
b. Chouhan
b. Chouhan solutions
solutions exchanged
exchanged $20,000
$20,000 for
for
land.
land.

Assets = Owner’s Equity

Bank + Land Chirag’s Capital
Bal. 25,000 = 25,000
b. –20,000 +20,000
Bal. 5,000 20,000 25,000
 c. During
c. During the
the month,
month, Chouhan
Chouhan Solutions
Solutions
purchased supplies
purchased supplies for
for $1,350
$1,350 and
and agreed
agreed
to pay
to pay the
the supplier
supplier in
in the
the near
near future
future ((on
on
account).).
account
Owner’s
Assets = Liabilities + Equity
Accounts Chirag’s
Bank + Supplies + Land Payable Capital
=
Bal. 5,000 20,000 25,000
c. + 1,350 + 1,350
Bal. 5,000 1,350 20,000 1,350 25,000
 d. Chouhan
d. Chouhan Solutions
Solutions provided
provided services
services
to customers,
to customers, earning
earning fees
fees of
of $7,500
$7,500
and received
and received the
the amount
amount inin cash.
cash.
Owner’s
Assets = Liabilities + Equity
Cash& Accounts Chirag’s
Bank + Supplies + Land Payable Capital
Bal. 5,000 1,350 20,000 = 1,350 25,000
d. + 7,500 + 7,500 Fees
earned
Bal. 12,500 1,350 20,000 1,350 32,500
 e. Chouhan
e. Chouhan Solutions
Solutions paid
paid the
the following
following
expenses: wages,
expenses: wages, $2,125;
$2,125; rent,
rent, $800;
$800;
utilities, $450;
utilities, $450; and
and miscellaneous,
miscellaneous, $275.
$275.
Owner’s
Assets = Liabilities + Equity
Bank& Accounts Chirag’s
Cash + Supplies + Land Payable Capital
Bal. 12,500 1,350 20,000 1,350 32,500
e. – 3,650 = –2,125 Wages
– 800 Rent
– 450 Util.
– 275 Misc.
Bal.8,850 1,350 20,000 1,350 28,850
 f.f. Chouhan
Chouhan Solutions
Solutions paid
paid $950
$950 to
to
creditors during
creditors during the
the month.
month.

Owner’s
Assets = Liabilities + Equity
Bank& Accounts Chirag’s
Cash + Supplies + Land Payable Capital
Bal. 8,850 1,350 20,000 = 1,350 28,850
f. – 950 – 950
Bal. 7,900 1,350 20,000 400 28,850
 g. At
g. At the
the end
end of
of the
the month,
month, thethe cost
cost
of supplies
of supplies on
on hand
hand isis $550,
$550, so
so
‘$800 of
‘$800 of supplies
supplies were
were used.
used.
Owner’s
Assets = Liabilities + Equity
Bank& Accounts Chirag’s
Cash + Supplies + Land Payable Capital
Bal. 7,900 1,350 20,000 = 400 28,850
g. – 800 – 800 Supplies
expense
Bal. 7,900 550 20,000 400 28,050
 h. At
h. At the
the end
end of
of the
the month,
month, Chirag
Chirag
withdrew $2,000
withdrew $2,000 inin cash
cash from
from the
the
business for
business for personal
personal use.
use.
Owner’s
Assets = Liabilities + Equity
Bank& Accounts Chirag’s,
Cash + Supplies + Land Payable Capital
Bal. 7,900 550 20,000 = 400 28,050
h. –2,000 –2,000 With-
drawal
Bal. 5,900 550 20,000 400 26,050
 Problem no. 2
• Ram started business with Rs 500,000
• Purchased furniture for Rs 30000
• Purchased goods for Rs 10000 cash
• Purchased goods of Rs 12000 credit from Q
• Sold the goods of 12000 into Rs 19000
• Purchased goods of Rs 30000 half cash half
credit
• Sold goods costing Rs 10000 in to Rs 22000 to
Rafiq.
• Paid expenses of Rs. 10000 for rent and Rs
5000 for salaries.
• Purchased goods of Rs 15000 from Mukesh
• Withdrew goods of Rs 5000 for personal use
 Problem no. 3
1 Mohan started business with 50,000, cash and
building of 3,00,000.
2 He deposited 10,000 into Bank of India.
3 He purchased goods of 1,50,000 from ram.
4 He purchased goods of 5000 and furniture of
10,000.
5 He sold goods of 50,000 in 90,000.
6 He sold goods of 1100 in 1800 to ‘M’ in cash.
7 He paid 2000 as salaries and 3000 as wages.
8 He purchased goods of 20000 from ‘N’
9 He paid 50,000 to ram.
10 He withdrew 5 000 cash and goods of 3000 for
personal use.
 Problem 4
• Rahim Started business with cash of
300,000 and furniture of 50,000 and
building of 4,00,000
• He purchased …………
 Types of
Accounts

Personal Real Nominal

 Personal Accounts
 It includes the accounts of the person and
accounts of those expenses which are due.

 Like Persons : Ram, Shyam, Mohan, etc.

 Bank accounts: Bank of Baroda, etc.
 Companies: Ram ltd., Shyam ltd., M/s Ram and
Sons.
 Expenses: Outstanding Salary, Prepaid Insurance,
Accrued Interest, Unearned Commission, etc.
 Real Accounts
 Accounts of Goods  Accounts of Assets

 Fixed Assets like:

 Purchase Plant and machine,
 Sales furniture, land and
Building, etc.
 Purchase Return
 Current assets like
 Sales Return cash.
 Nominal Accounts
 Accounts of Income  Accounts of
Expenses

 Like: rent received,  Like : Salary,

commission Rent,
received, subsidy Commission,
received, etc. Discount, Postage,
Printing, etc.
 Rules of Debit and Credit

 Personal Real Accounts  Nominal

Debit all
Debit giver expenses /
Debit Comes In
Credit Receiver losses
Credit Goes out
Credit all
incomes/
profits
 List of 30 items
S Name of Types of Dr.
• 10 examples of N account account Or
Personal account Cr.

1 Machine Real Dr.

• 10 of real &
2 Ram Personal DR
&
• 10 of nominal
CR
accounts
 System of Accounting
Journal
Ledger
Trial Balance
Final Accounts
Interpretation of final account
 Procedure of journal entry
1. To search out two accounts
1. Cash and Credit transaction
2. To remember the accounts used for
goods
2. To search out the types of the two accounts.
3. To apply rules of Debit and Credit
4. To pass the entry in journal
 Example
Purchased goods of Rs. 20000 from Ram

1. Credit Transaction
2. Purchase account
3. Ram account
4. Purchase= Real Account= Goods comes
in Means Dr.
5. Ram = Personal Account= Giver =Cr.
 Journal of Ram
Da Particular L Dr. Cr.
te f amount amount

Total
 Journal of Ram
Da Particular L Dr. Cr.
te f amount amount
2008 Cash a\c Dr 5,00,000
1April
To Ram’s Capital 5,00,000
(Being Business started with cash)
2 ” Purchase a/c Dr 30,000
To cash 30,000
(Being Goods purchased in cash)

Total 5,30,000 5,30,000

 Closing Entry: To Close last year
books of accounts
Da Particular L Dr. Cr.
te f amount amount
Creditors a/c Dr
Bank loan a/c Dr
Capital a/c Dr
To Machine
To Plant
To Furniture
To Cash
To other Assets
(Being books of accounts closed)

Total
 Opening Entry: to open current
year accounts of Balance sheet
Da Particular L Dr. Cr.
te f amount amount
Machine a\c Dr
Plant a\c Dr
Cash a\c Dr
Other Assets a/c Dr
To Creditors a/c
To Bank loan a/c
To Capital a/c
(Being opening entry made )

Total
Special Entries: 1. Loss of Goods
Da Particular L Dr. Cr.
te f amount amount
Lost by Fire Account 10,000
Dr 10,000

To Purchase a/c
(Being goods lost by fire) 1900
Lost by Theft a/c Dr. 1900

To Purchase a/c
(Bing goods lost by theft)
 If goods were Insured
Da Particular L Dr. Cr.
te f amount amount
Insurance Claim A/c Dr 11,900
11,900
To Loss by fire/theft
(Being insurance claim admitted)
Insurance Company a/c Dr 8,000
Profit & Loss 3,900
11,900
Dr
To insurance claim
(insurance claim accepted & loss
transferred)
 Charity and Free Sample
Da Particular L Dr. Cr.
te f amount amount
Charity a/c Dr 5,000
To Purchase / Cash a/c 5,000
(Being Goods/cash given as
charity)
Free Sample a/c Dr 3,700
3,700
To Purchase / Cash
(Being goods Distributed as free
sample)
For Collection and Payment of Sales Tax

Da Particular L Dr. Cr.

te f amount amount
Cash / Ram a/c Dr 11,100
To Sales a/c 10,000
To Sales Tax a/c (@ 11%) 1,100
(Being Goods sold and Sales Tax
Collected)
1,100
Sales Tax Account Dr 1,100
To Cash a/c
(Being Sales Tax Paid in Govt. a/c)

Total
 Ledger of Ram
Date Particular L Dr Date Particular L Cr.
F Amount F Amount