INTRODUCTION TO ACCOUNTANCY AND MANAGEMENT

Accounting - The process or work of keeping financial accounts.

Bookkeeping - The activity or occupation of keeping records of the financial affairs of a

business.

The following are the main objectives of accounting:

1. To maintain full and systematic records of business transactions:
ADVERTISEMENTS:

Accounting is the language of business transactions. Given the limitations of human memory, the main
objective of accounting is to maintain ‘a full and systematic record of all business transactions.

2. To ascertain profit or loss of the business:

Business is run to earn profits. Whether the business earned profit or incurred loss is ascertained by
accounting by preparing Profit & Loss Account or Income Statement. A comparison of income and
expenditure gives either profit or loss.

3. To depict financial position of the business:

A businessman is also interested in ascertaining his financial position at the end of a given period. For this
purpose, a position statement called Balance Sheet is prepared in which assets and liabilities are shown.

Just as a doctor will feel the pulse of his patient and know whether he is enjoying good health or not, in
the same way by looking at the Balance Sheet one will know the financial health of an enterprise. If the
assets exceed liabilities, it is financially healthy, i.e., solvent. In the other case, it would be insolvent, i.e.,
financially weak.

4. To provide accounting information to the interested parties:

Apart from owner of the business enterprise, there are various parties who are interested in accounting
information. These are bankers, creditors, tax authorities, prospective investors, researchers, etc. Hence,
one of the objectives of accounting is to make the accounting information available to these interested
parties to enable them to take sound and realistic decisions. The accounting information is made available
to them in the form of annual report.
 Difference between Bookkeeping and accounting:

Definition
Bookkeeping is mainly related to identifying, measuring, and recording, financial transactions

Accounting is the process of summarizing, interpreting, and communicating financial transactions which were classified in the ledger account
Decision Making
Bookkeeping-Management can't take a decision based on the data provided by bookkeeping
Accounting-Depending on the data provided by the accountants, the management can take critical business decisions
Objective
The objective of bookkeeping is to keep the records of all financial transactions proper and systematic

The objective of accounting is to gauge the financial situation and further communicate the information to the relevant autho rities
Preparation of Financial Statements
Bookkeeping-Financial statements are not prepared as a part of this process
Accounting-Financial statements are prepared during the accounting process
Skills Required
Bookkeeping doesn't require any special skill sets

Accounting requires special skills due to its analytical and complex nature
Analysis
The process of bookkeeping does not require any analysis
Accounting uses bookkeeping information to analyze and interpret the data and then compiles it into reports
Types
Basically there are two types of bookkeeping - Single entry and double entry bookkeeping

The accounting department does preparations of a company's budgets and plans loan proposals
Bookkeepers and Accountants
Bookkeepers are required to be accurate in their work and knowledgeable about financial topics. Bookkeepers work is usually overseen by an accountant
Accountants with sufficient experience and education can obtain the title of Certified Public Accountant (CPA)

The nine limitations of accounting are;

1. Recording only monetary items.
2. Time value of money.
3. Recommendation of alternative methods.
4. Restrain of accounting principles.
5. Recording of past events.
6. Allocation of problem.
7. Maintaining secrecy.
8. Tendency for secret reserves.
9. Importance of form over substance.

These limitations are stated below;

1. Recording only monetary items
As per accounting principles only the events measurable in terms of money are recorded in the books of accounts. But events of
great importance if not measurable in terms of money are not accounted for.
For that reason recorded accounting information fails to exhibit the exact financial position of a business concern.
2. Time Value of Money
Under accounting system money value is treated constant. But the value of money always changes due to inflation. Under existing
accounting systems accounts are maintained considering historical cost ignoring current changed value.
As a result the accounts maintained fail to exhibit the exact financial position of a business concern.
3. Recommendation of alternative methods
There exists application of alternative methods in determining depreciation of assets and valuation of stock etc.
Information regarding activities of business is expressed in a misleading way if an alternative method is used to achieve a particular
object.
4. Restrain of Accounting Principles
Exhibited accounting information cannot always exhibit true and fair picture of a business concern owing to limitations of ac counting
principles used.
For example,
Fixed assets are shown after deducting depreciation. In case of inflation, the value of fixed assets shown in the accounts does not
correspond to the real position.
5. Recording of past events
 In Accounting past events are accounted for. But naturally there is no system of recording events that may occur in future.
6. Allocation of problem
Allocation process is an important problem in accounting system. The value of fixed assets is exhausted charging
depreciation for allocated period.
The useful life of fixed assets is fixed up hypothetically which does not stand accurate in most cases.
7. Maintaining secrecy
Secrecy cannot be ensured for involvement of many employees in accounting work although maintaining secrecy is
very important.
8. Tendency for secret reserves
Often management creates secret reserves intentionally by increasing or decreasing assets and liabilities for which
total financial picture of an organization is not reflected.
9. Importance of form over substance
At the time of preparing accounts for a particular period emphasis is laid on form, table etc. instead of giving importance t o exhibition
of substantial information.
As per Company Act, preparation of balance sheet in the prescribed form is mandatory.
Although there are some limitations in present accounting system, accounting in the present day world has generally been accepted
as a recognized profession.
Efforts are on throughout the world to overcome these limitations. Economic activities of any society without accounting are neither
possible nor legal.

Basic accounting terminology:

1. Accounts receivable (AR)
Accounts receivable (AR) definition: The amount of money owed by customers or clients to a business after goods or services have been delivered and/or used.
2. Accounting (ACCG)
Accounting (ACCG) definition: A systematic way of recording and reporting financial transactions for a business or organization.
3. Accounts payable (AP)
Accounts payable (AP) definition: The amount of money a company owes creditors (suppliers, etc.) in return for goods and/or services they have delivered.
4. Assets (fixed and current) (FA, CA)
Assets (fixed and current) definition: Current assets (CA) are those that will be converted to cash within one year. Typically, this could be cash, inventory or accounts
receivable. Fixed assets (FA) are long-term and will likely provide benefits to a company for more than one year, such as a real estate, land or major machinery.
5. Asset classes
Asset class definition: An asset class is a group of securities that behaves similarly in the marketplace. The three main asset classes are equities or stocks, fixed
income or bonds, and cash equivalents or money market instruments.
6. Balance sheet (BS)
Balance sheet (BS) definition: A financial report that summarizes a company's assets (what it owns), liabilities (what it owes) and owner or shareholder equity at a
given time.
7. Capital (CAP)
Capital (CAP) definition: A financial asset or the value of a financial asset, such as cash or goods. Working capital is calculated by taking your current assets
subtracted from current liabilities—basically the money or assets an organization can put to work.
8. Cash flow (CF)
Cash flow (CF) definition: The revenue or expense expected to be generated through business activities (sales, manufacturing, etc.) over a period of time.
9. Certified public accountant (CPA)
Certified public accountant (CPA) definition: A designation given to an accountant who has passed a standardized CPA exam and met government-mandated work
experience and educational requirements to become a CPA.
10. Cost of goods sold (COGS)
Cost of goods sold (COGS) definition: The direct expenses related to producing the goods sold by a business. The formula for calculating this will depend on what is
being produced, but as an example this may include the cost of the raw materials (parts) and the amount of employee labor used in production.
11. Credit (CR)
Credit (CR) definition: An accounting entry that may either decrease assets or increase liabilities and equity on the company's balance sheet, depending on the
transaction. When using the double-entry accounting method there will be two recorded entries for every transaction: A credit and a debit.
12. Debit (DR)
Debit (DR) definition: An accounting entry where there is either an increase in assets or a decrease in liabilities on a company's balance sheet.
13. Diversification
Diversification definition: The process of allocating or spreading capital investments into varied assets to avoid over-exposure to risk.
14. Enrolled agent (EA)
Enrolled agent (EA) definition: A tax professional who represents taxpayers in matters where they are dealing with the Internal Revenue Service (IRS).
15. Expenses (fixed, variable, accrued, operation) (FE, VE, AE, OE)
Expenses (FE, VE, AE, OE) definition: The fixed, variable, accrued or day-to-day costs that a business may incur through its operations.
 Fixed expenses (FE): payments like rent that will happen in a regularly scheduled cadence.
 Variable expenses (VE): expenses, like labor costs, that may change in a given time period.
 Accrued expense (AE): an incurred expense that hasn’t been paid yet.
 Operation expenses (OE): business expenditures not directly associated with the production of goods or services—for example, advertising costs, property taxes or insurance
expenditures.
16. Equity and owner's equity (OE)
Equity and owner's equity (OE) definition: In the most general sense, equity is assets minus liabilities. An owner’s equity is typically explained in terms of the
percentage of stock a person has ownership interest in the company. The owners of the stock are known as shareholders.
17. Insolvency
Insolvency definition: A state where an individual or organization can no longer meet financial obligations with lender(s) when their debts come due.
18. Generally accepted accounting principles (GAAP)
Generally accepted accounting principles (GAAP) definition: A set of rules and guidelines developed by the accounting industry for companies to follow when reporting
financial data. Following these rules is especially critical for all publicly traded companies.
19. General ledger (GL)
General ledger (GL) definition: A complete record of the financial transactions over the life of a company.
20. Trial balance
Trial balance definition: A business document in which all ledgers are compiled into debit and credit columns in order to ensure a company’s bookkeeping system
is mathematically correct.
21. Liabilities (current and long-term) (CL, LTL)
Liabilities (current and long-term) definition: A company's debts or financial obligations incurred during business operations. Current liabilities (CL) are those debts
that are payable within a year, such as a debt to suppliers. Long-term liabilities (LTL) are typically payable over a period of time greater than one year. An example
of a long-term liability would be a multi-year mortgage for office space.
22. Limited liability company (LLC)
Limited liability company (LLC) definition: An LLC is a corporate structure where members cannot be held accountable for the company’s debts or liabilities. This
can shield business owners from losing their entire life savings if, for example, someone were to sue the company.
23. Net income (NI)
Net income (NI) definition: A company's total earnings, also called net profit. Net income is calculated by subtracting total expenses from total revenues.
24. Present value (PV)
Present value (PV) definition: The current value of a future sum of money based on a specific rate of return. Present value helps us understand how receiving $100
now is worth more than receiving $100 a year from now, as money in hand now has the ability to be invested at a higher rate of return. See an example of the time
value of money here.
25. Profit and loss statement (P&L)
Profit and loss statement (P&L) definition: A financial statement that is used to summarize a company’s performance and financial position by reviewing revenues,
costs and expenses during a specific period of time, such as quarterly or annually.
26. Return on investment (ROI)
Return on investment (ROI) definition: A measure used to evaluate the financial performance relative to the amount of money that was invested. The ROI is
calculated by dividing the net profit by the cost of the investment. The result is often expressed as a percentage. See an example here.
27. Individual retirement account (IRA, Roth IRA)
Individual retirement account (IRA) definition: IRAs are savings vehicles for retirement. A traditional IRA allows individuals to direct pre-tax dollars toward
investments that can grow tax-deferred, meaning no capital gains or dividend income is taxed until it is withdrawn, and, in most cases, it’s tax deductible. Roth
IRAs are not tax-deductible; however, eligible distributions are tax-free, so as the money grows, it is not subject to taxes upon with-drawls.
28. 401K & Roth 401K
401k & Roth 401k definition: A 401K is a savings vehicle that allows an employee to defer some of their compensation into an investment-based retirement
account. The deferred money is usually not subject to tax until it is withdrawn; however, an employee with a Roth 401K can make contributions after taxes.
Additionally, some employers chose to match the contributions made by their employees up to a certain percentage.
29. Subchapter S corporation (S-CORP)
Subchapter S corporation (S-CORP) definition: A form of corporation (that meets specific IRS requirements) and has the benefit of being taxed as a partnership
versus being subject to the “double taxation” of dividends with public companies.
30. Bonds and coupons (B&C)
Bonds and coupons (B&C) definition: A bond is a form of debt investment and is considered a fixed income security. An investor, whether an individual, company,
municipality or government, loans money to an entity with the promise of receiving their money back plus interest. The “coupon” is the annual interest rate paid on
a bond.

Business transaction: The accounting definition of a business transaction, according to the online Business Dictionary, is "an economic event
that initiates the accounting process of recording it in a company's accounting system."

Fictitious assets: Asset created by an accounting entry (and included under assets in the balance sheet) that has no tangible existence or
realizable value but represents actual cash expenditure

Tangible and Intangible assets:

A tangible asset is an asset that has a physical form. Tangible assets include both fixed assets, such as machinery, buildings and
land, and current assets, such as inventory.

The opposite of a tangible asset is an intangible asset. Nonphysical assets, such as patents, trademarks, copyrights, goodwill and
brand recognition, are all examples of intangible assets.

Capital meaning: Wealth in the form of money or other assets owned by a person or organization or available for a purpose
such as starting a company or investing.

Equity: The value of the shares issued by a company.

What is a 'Liability'

A liability is a company's financial debt or obligations that arise during the course of its business operations. Liabilities are settled
over time through the transfer of economic benefits including money, goods or services. Recorded on the right side of the balance
sheet, liabilities include loans, accounts payable, mortgages, deferred revenues and accrued expenses.

What are 'Current Liabilities': Current liabilities are a company's debts or obligations that are due within one year,
appearing on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts.
Fixed liabilities : A fixed liabilities are a debt, bonds, mortgages or loans that are payable over a term exceeding one year. These
debts are better known as non-current liabilities or long-term liabilities. Debts or liabilities due within one year are known as
current liabilities.

Goods: Any tangible thing that is not money or real estate.

cost definition
In accounting, cost is defined as the cash amount (or the cash equivalent) given up for an asset. Cost includes all costs necessary to get an asset in
place and ready for use. For example, the cost of an item in inventory also includes the item's freight-in cost. The cost of land includes all costs to get
the land ready for its use

Sales: the exchange of a commodity for money; the action of selling something.

Purchase returns
A purchase return transaction is when the buyer of merchandise, inventory, fixed assets, or other items sends these goods back to the seller.

*Inventory or stock is the goods and materials that a business holds for the ultimate goal of resale.

Revenue: The income generated from sale of goods or services, or any other use of capital or assets, associated with the main operations of an
organization before any costs or expenses are deducted. Revenue is shown usually as the top item in an income (profit and loss) statement from which
all charges, costs, and expenses are subtracted to arrive at net income. Also called sales, or (in the UK) turnover.

Expenses : An expense is defined as an outflow of money or assets to another individual or company as

payment for an item or service.

Expenditure : Payment of cash or cash-equivalent for goods or services, or a charge against available funds in settlement of an obligation as
evidenced by an invoice, receipt, voucher, or other such document

Losses : In financial accounting, a loss is a decrease in net income that is outside the normal operations of the business.

Profit : Accounting profit is a company's total earnings, calculated according to generally accepted accounting principles
(GAAP). It includes the explicit costs of doing business, such as operating expenses, depreciation, interest and taxes.

Profit : The flow of cash or cash-equivalents received from work (wage or salary), capital (interest or profit), or land (rent).
Accounting: (1) An excess of revenue over expenses for an accounting period. Also called earnings or gross profit. (2) An amount by which total
assets increase in an accounting period.

Gain : In financial accounting, a gain is the increase in owner's equity resulting from something other than the day to day earnings
from recurrent operations, and are not associated with investments or withdrawals.

Debators : A debtor is a person or entity that owes money. In other words, the debtor has a debt or legal obligation to pay an
amount to another person or entity.

Creditors : A creditor is an entity, a company or a person of a legal nature that has provided goods,
services, or a monetary loan to a debtor

Accounts payable (AP) is money owed by a business to its suppliers shown as a liability on a company's balance sheet. It is
distinct from notespayable liabilities, which are debts created by formal legal instrument documents

What are 'Receivables'

Receivables is an asset designation applicable to all debts, unsettled transactions or other monetary obligations owed to a
company by its debtors or customers. Receivables are recorded by a company's accountants and reported on the balance sheet,
and they include all debts owed to the company, even if the debts are not currently due.
 Accounting year : An accounting year is the period of time over which a company gathers and organises
its financial activity. The information gathered during an accounting period (also called the accounting
year because it is determined by a company's fiscal year) is used to create both internal and external
annual reports that are published at the close of the accounting period.

Drawings refers to the act of withdrawing cash or assets from the company by the owner(s) for personal
use. Drawings can occur by withdrawing cash from a business account, but can also include anything that
is considered a business asset, such as products or equipment that is removed from the business for
personal use by the owners.

Voucher : A voucher is an internal document describing and authorizing the payment of a liability to a supplier. It is most commonly used in a

manual payment system. A voucher typically contains the following information:

 The identification number of the supplier

 The amount to be paid

 The date on which payment should be made

 The accounts to be charged to record the liability

 Any applicable early payment discount terms

 An approval signature or stamp

Entry : A journal entry, in accounting, is the logging of a transaction into accountingjournal items. The journal entry can consist of

several recordings, each of which is either a debit or a credit.

What is the definition of proprietor?

In business, the term proprietor comes from the sole proprietorship business entity type. This form of company is

unincorporated and only has one owner, the sole proprietor. Although this type of entity is easy to setup and operate,

it isn’t preferred for most businesses because it doesn’t provide any liability protection. All of the income and losses

are attached to the owner, personally. Thus, if a customer sues the company, he can affectively sue the owner for his

personal assets.

ACCOUNTING CONCEPTS:

The money measurement concept

The money measurement concept states that a business should only record an accounting transaction if it can be expressed in terms of money.

This means that the focus of accounting transactions is on quantitative information, rather than on qualitative information. Thus, a large

number of items are never reflected in a company's accounting records, which means that they never appear in its financial statements.

Examples of items that cannot be recorded as accounting transactions because they cannot be expressed in terms of money include:
 Employee skill level

 Employee working conditions

 Expected resale value of a patent

 Value of an in-house brand

 Product durability

 The quality of customer support or field service

 The efficiency of administrative proce sses

Going Concern Concept : The going concern concept of accounting implies that the business entity will continue its
operations in the future and will not liquidate or be forced to discontinue operations due to any reason. A company is a going concern if no

evidence is available to believe that it will or will have to cease its operations in foreseeable future.

Cost concept

The cost concept of accounting states that all acquisition of items (such as assets or things needed for expending) should be recorded and retained

in books at cost. Thus, if a balance sheet shows an asset at a certain value it should be assumed that this is its cost unless it is categorically stated

otherwise.

Dual aspect concept

May 06, 2018

The dual aspect concept states that every business transaction requires recordation in two different accounts. This concept is the basis of double

entry accounting, which is required by all accounting frameworks in order to produce reliable financial statements. The concept is derived from

the accounting equation, which states that:

Assets = Liabilities + Equity

The accounting equation is made visible in the balance sheet, where the total amount of assets listed must equal the total of all

liabilities and equity

What is the Matching Concept in Accounting?

The matching concept is an accounting practice whereby firms recognize revenues and their related expenses in the same accounting period. Firms report revenues, that is,
along with the expenses that brought them.

The purpose of the matchingconcept is to avoid misstatingearnings for a period. Reporting revenues for a period without reporting all the expenses that brought them could
result in overstated profits.

ACCOUNTING PERIOD :
An accounting period is the span of time covered by a set of financial statements. This period defines the time range over which business

transactions are accumulated into financial statements, and is needed by investors so that they can compare the results of successive time periods

It is the period for which books are balanced and the financial statements are prepared. Generally, the accounting period consists of 12 months.

However the beginning of the accounting period differs according to the jurisdiction.

REALIZATION CONCEPT :

The realization principle is the concept that revenue can only be recognized once the underlying goods or services associated with

the revenue have been delivered or rendered, respectively. Thus, revenue can only be recognized after it has been earned.

OBJECTIVITY CONCEPT :

The objectivity principle states that accounting information and financial reporting should be independent and

supported with unbiased evidence. This means that accounting information must be based on research and facts, not

merely a preparer’s opinion. The objectivity principle is aimed at making financial statements more relevant and

reliable.

ACCURAL CONCEPT :

Accrual concept is the most fundamental principle of accounting which requires recording revenues when they are earned and not

when they are received in cash, and recording expenses when they are incurred and not when they are paid. The benefit of the accrual

approach is that financial statements reflect all the expenses associated with the reported revenues for an accounting period.

ACCOUNTING CONVENTIONS-

Convention of disclosure
The convention of disclosure requires that all material facts must be disclosed in the financial statements. For example, in case of sundry debtors not only the
total amount of sundry debtors should be disclosed, but also the amount of good and secured debtors, the amount of good, but amount of unsecured debtors and
amount of doubtful debts should be stated.This does not mean disclosure of each and every item of information. It only means disclosure of such information
which is of significance to owners, investors and creditors.

Convention of consistency

In accounting, the convention of consistency is a principle that the same management accounting principles should be used for
preparing financial statements over a number of time periods.
 Convention of conservatism

This accounting convention is generally expressed as to “anticipate all the future losses and expenses, without considering the
future incomes and profits unless they are actually realized.” This concept emphasizes that profits should never be overstated or
anticipated. This convention generally applies to the valuation of current assets as they are valued at cost or market price whichever
is lower.

Convention of Materiality

This accounting convention proposed that while accounting only those transactions will be considered which have material impact
on financial status of the organization and other transactions which have insignificant effect will be ignored.. It gives rel ative
importance to an item or event.

Basis of accounting
The basis of accounting refers to the methodology under which revenues and expenses are recognized in the financial statements of a business.

When an organization refers to the basis of accounting that it uses, two primary methodologies are most likely to be mentioned:

 Cash basis of accounting. Under this basis of accounting, a business recognizes revenue when cash is received, and expenses when bills are paid .

This is the easiest approach to recording transactions, and is widely used by smaller businesses.

 Accrual basis of accounting. Under this basis of accounting, a business recognizes revenue when earned and expenses when expenditures are

consumed. This approach requires a greater knowledge of accounting, since accruals must be recorded at regular intervals. If a business wants to

have its financial statements audited, it must use the accrual basis of accounting, since auditors will not pass judgment on financial statements

prepared using any other basis of accounting.

Cash basis vs. accrual basis accounting

The cash basis and accrual basis of accounting are two different methods used to record accounting transactions. The core und erlying difference
between the two methods is in the timing of transaction recordation.

Under the cash basis of accounting

1. Revenues are reported on the income statement in the period in which the cash is received from customers.
2. Expenses are reported on the income statement when the cash is paid out.
Under the accrual basis of accounting
1. Revenues are reported on the income statement when they are earned—which often occurs before the cash is received from the customers.
2. Expenses are reported on the income statement in the period when they occur or when they expire—which is often in a period different from when the payment is
made.

Debits and credits

 A debit is an accounting entry that either increases an asset or expense account, or decreases a liability or equity account. It is positioned to the left in an

accounting entry.

 A credit is an accounting entry that either increases a liability or equity account, or decreases an asset or expense account. It is positioned to the right in an

accounting entry.
Classification of accounts

Real accounts
Real accounts (also termed as permanent accounts) are the accounts that have their existence even after the close of accounting period. In the next account
period, these accounts start with a non-zero balance carried forward from the previous accounting period. Examples of such accounts include machinery account,
land account, furniture account, cash account and accounts payable account. Usually, real accounts are listed in the balance sheet of the business so they are
sometime referred to as balance sheet accounts.

Nominal accounts
Nominal accounts (also termed as temporary accounts) are the accounts that are closed at the end of accounting period. In the next account period, these
accounts start with a zero balance. Accounts of income, gains, expenses and losses are nominal accounts. Nominal accounts are normally used to accumulate
income and expense data to be used for the preparation of income statement or trading and profit and loss account so they are sometime referred to as income
statement accounts. Examples of such accounts include sales, purchases, gain on sale of an asset, wages paid and rent paid etc.

Personal accounts
Personal accounts are the accounts that are used to record transactions relating to individual persons, firms, companies or other organizations. Examples of such
accounts include Mr. X account, modern enterprises account and city bank account etc.

The Golden Rules of Accounting

1. Debit The Receiver, Credit The Giver

This principle is used in the case of personal accounts. When a person gives something to the organization, it becomes an inf low and
therefore the person must be credit in the books of accounts. The converse of this is also true, which is why the receiver needs to be debited.

2. Debit What Comes In, Credit What Goes Out

This principle is applied in case of real accounts. Real accounts involve machinery, land and building etc. They have a debit balance by
default. Thus when you debit what comes in, you are adding to the existing account balance. This is exactly what needs to be done. Similarly
when you credit what goes out, you are reducing the account balance when a tangible asset goes out of the organization.

3. Debit All Expenses And Losses, Credit All Incomes And Gains

This rule is applied when the account in question is a nominal account. The capital of the company is a liability. Ther efore it has a default
credit balance. When you credit all incomes and gains, you increase the capital and by debiting expenses and losses, you decrease the capital.
This is exactly what needs to be done for the system to stay in balance.

The golden rules of accounting allow anyone to be a bookkeeper. They only need to understand the types of accounts and then diligently apply t he rules.

What is a journal?

In accounting and bookkeeping, a journal is a record of financial transactions in

order by date. A journal is often defined as the book of original entry.

A journal is a detailed account that records all the financial transactions of a business, to be used for future reconciling

of and transfer to other official accounting records, such as the general ledger.

Journal entry format

A journal entry is used to record the debit and credit sides of a transaction in the accounting records. It is used in a double-entry accountingsystem,

where both a debit and a credit are needed to complete each entry. The essential elements of the journal entry format are as follows:
 A header line may include a journal ent ry number and entry date. The number is used to index the journal entry, so that it can be properly stored and

retrieved from storage.

 The first column includes the account number and account name into which the entry is recorded. This field is indented if it is for the account being

credited.

 The second column contains the debit amount to be entered.

 The third column contains the credit amount to be entered.

 A footer line may also include a brief description of the reason for the entry. An entry in the foo ter line is highly recommended, since there are so many

journal entries that it is easy to forget why each entry was made.

Thus, the basic journal entry format is:

Debit Credit

Account name / number $xx,xxx

Account name / number $xx,xxx

The structural rules of a journal entry are that there must be a minimum of two line items in the entry, and that the total amoun t entered in the debit

column equals the total amount entered in the credit column.

What is a 'Cash Book'

A cash book is a financial journal that contains all cash receipts and payments, including bank deposits and withdrawals. Entries in the cash
book are then posted into the general ledger.

Types of Cash Books

1. Single Column:

This type of cash book is very simple because it is similar to the cash account. it has only one column on both sides. Debit side of cash book
shows the all receipt and credit side shows all the payment made.

2. Double Column:

Double Column Cashbook has a two account column on both sides of the cash book. it is three Type shown as below:

1. Discount and Cash Column

2. Bank and Cash Column
3. Discount and Bank Column
In Single column cash book, it not possible to record full transaction because we did not have any column for recording the amount of
discount. So We have to prepare double column cash book.

3. Triple Column
Every Businessman has a minimum of on current account in the bank. it is a very convenient way for him to get paid by cheque and make
payment to others by cheque. So, he has to record these payments and receipts in the cash book for this an additional column will require
name bank column. So now total three column will be required to record proper payment and receipts in the cash book these are shown
below

1. Cash Column
2. Bank Column
3. Discount Column

Meaning of Subsidiary Books:

Subsidiary Books are those books of original entry in which transactions of similar nature are recorded at one
place and in chronological order. In a big concern, recording of all transactions in one Journal and posting
them into various ledger accounts will be very difficult and involve a lot of clerical work.

This is avoided by sub-dividing the journal into various subsidiary journals or books. The subdivisions of
journal into various subsidiary journals for recording transactions of similar nature are called as ‘Subsidiary
Books.’

Purchases returns journal is a book in which goodsreturned to the supplier are recorded. This book is also known as returns outwards

and purchases returns day book. Goods once purchased on credit may subsequently be returned to the seller for certain reasons.

A record kept by a business of what it buys on credit each day: All credit purchasesof goods are recorded in the purchase book.

The sales book is a manually-maintained ledger in which is recorded the key detailed information for each individual credit sale to a
customer, including: Customer name. Invoice number. Invoice date. Invoice amount.

Ledger account records increases and decreases in each balance sheet item, classified under assets, liabilities, or owners' equity.

Introduction and Objectives of Trial Balance

A trial balance is a list of debit and credit balances of all the ledger accounts extracted on a given date. It is not an account
rather only a statement. It is not a part of books of accounts maintained under double entry system. It is the statement of
debit and credit balances of all the assets, liabilities, capital, incomes and expenses. It is prepared in a separate sheet of
paper to verify the arithmetical accuracy of books of account.

"Trail balance is the list of debit and credit balances, taken out from the ledger, it also includes the balances of cash
and bank taken from the cash book," - R. N. Carter

The main objectives of preparing the trial balance are as follows:

1. To obtain summary information: The trial balance provides summary information of all the ledger accounts in one place. It presents the balances of
all the assets, liabilities, capital, incomes and expenses relating to a particular date.
2. To help in making composition and decision: The trial balance helps in comparing the balances of assets, liabilities, capital, incomes, and
expenses between two different periods. Such comparison helps in making a proper judgment of different activities of the business and arriving at
important decisions.
3. To check arithmetical accuracy: The trial balance checks the arithmetical accuracy of the books of accounts. It checks whether the total of debit
balances equals the total of credit balances or not. If the trial balances agree, it proves the arithmetical accuracy. If it does not agree, it includes the
existence of errors in the books of accounts, which are to be located and rectified.
4. To facilitate for preparing the final accounts: The trial balance serves the basis for preparing the final accounts. From the trial balance, the
balances of incomes and expenses are placed on the trading and profit and loss accounts and the balances of assets, liabilities and capital are placed
on the balance sheet.
5. To help for locating and rectifying errors: The trial balance helps to locate the accounting errors at an early stage. It's disagreement is the signal
for the existence of accounting errors in the books of accounts, which compels to locate and rectify them in future.
6. To help in minimizing errors and frauds: The trial balance helps in minimizing the different types of accounting errors and frauds. If the errors and
frauds are committed, the trial balance disagrees. Hence, it gives moral pressure to the accounting personnel to maintain books of accounts with great
care and honesty.
Methods of Preparing Trial Balance:
There are three methods for the preparation of trial balance. These methods are:

1. Total or gross trial balance

2. Balance or net trial balance
3. Total - cum - balance trial balance

The method 1 and 2 are described below:

Total or Gross Trial Balance:

Under this method the two sides of all the ledger accounts are totaled up. Thereafter, a list of all the
accounts is prepared in a separate sheet of paper with two "amount" columns on the right hand side. The
first one for debit amounts and the second one for credit amounts. The total of debit side and credit side
of each account is then placed on "debit amount" column and "credit amount" column respectively of the
list. Finally the two columns are added separately to see whether they agree of not. This method is
generally not followed in practice.

Balance or Net Trial Balance:

Under this method, first of all the balances of all ledger accounts are drawn. Thereafter, the debit
balances and credit balances are recorded in "debit amount" and "credit amount" column respectively and
the two columns are added separately to see whether they agree or not. This is the most popular method
and generally followed.

The various Steps involved in the preparation of Trial Balance under this method are given below:

1. Find out the balance of each account in the ledger.

2. Write up the name of account in the first column.
3. Record the account number in second column.
4. Record the debit balance of each account in debit column and credit balance in credit column.
5. Add up the debit and credit column and record the totals.

Depreciation
Definition: The monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This decrease is measured as
depreciation

Description: Depreciation, i.e. a decrease in an asset's value, may be caused by a number of other factors as well such as unfavorable
market conditions, etc. Machinery, equipment, currency are some examples of assets that are likely to depreciate over a specific period of
time. Opposite of depreciation is appreciation which is increase in the value of an asset over a period of time.

What are Financial Statements?

Definition: Financial statements are reports prepared by a company’s management to present the financial performance
and position at a point in time. A general-purpose set of financial statements usually includes a balance sheet, income
statements, statement of owner’s equity, and statement of cash flows. These statements are prepared to give users outside
of the company, like investors and creditors, more information about the company’s financial positions. Publicly traded
companies are also required to present these statements along with others to regulator agencies in a timely manner.
What Does Financial Statements Mean?
Financial statements are the main source of financial information for most decision makers. That is why financial accounting
and reporting places such a high emphasis on the accuracy, reliability, and relevance of the information on these financial
statements.

Capital expenditure
Capital expenditure or capital expense (capex) is the money a company spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles,
equipment, or land.[1][2] It is considered a capital expenditure when the asset is newly purchased or when money is used towards extending the useful life of an
existing asset, such as repairing the roof.

What is a revenue expenditure?

A revenue expenditure is a cost that is expensed in the accounting year in which it is incurred. In other
words, the cost will be matched with the revenues of the accounting year in which the expenditure took
place. Revenue expenditures are often discussed with costs spent on fixed assets after they have been placed in service.
Capital receipts refer to those receipts which either create a liability or cause a reduction in the assets of the government. They are non-
recurring and non-routine in nature.

Revenue receipts refer to those receipts which neither create any liability nor cause any reduction in the assets of the government. They
are regular and recurring in nature and government receives them in its normal course of activities.

Trading Account
Trading Account Meaning:
In investment terminology, the term Trading Account refers to funds and/or securities deposited with a financial institution or broker for the purpose of speculation.
A Trading Account is usually overseen by an investment dealer, fund manager or personal trader

Or

Definition and Explanation:

The account which is prepared to determine the gross profit or gross loss of a business
concern is calledtrading account.

It should be noted that the result of the business determined through trading account is not
true result. The true result is the net profit or the net loss which is determined through
profit and loss account. The trading accounting has the following features:

1. It is the first stage of final accounts of a trading concern.

2. It is prepared on the last day of an accounting period.
3. Only direct revenue and direct expenses are considered in it.
4. Direct expenses are recorded on its debit side and direct revenue on its credit side.
5. All items of direct expenses and direct revenue concerning current year are taken
into account but no item relating to past or next year is considered in it.
6. If its credit side exceeds it represents gross profit and if debit side exceeds it shows
gross loss.
Gross Profit

Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs
associated with providing its services. Gross profit will appear on a company's income statement, and can be calculated with this
formula: Gross profit = Revenue - Cost of Goods Sold.

Purpose of a Trading Account

A trading account holds money for your financial goals.

Financial statements need to be written after considering certain accounts and trading accounts is one of them. There are som e useful
purposes of creating this account as:

 Measuring the current state of any business: A company develops and achieves its goal with the help of gross profit earned
after a certain time period. Definite expenses in order to increase sell rates are done from this gross profit. In general, if that
ratio is between twenty to thirty percent then these expenses are covered easily. The debit and credit accounts need to be
balanced and if the debit account is overflowing then as a result a company will find gross loss rather than gross profit. This is
calculated with the help of trading accounts.
 Inclusive of necessary expenditure to increase production rate: Just buying raw materials doesn’t end a trading account. It
also bears those expenses done to increase the quality of goods manufactured. That might require various other materials and
expenses. This way a company will have an increased rate of direct expense which will proportionate with manufacturing cost.
This is how any new goods will bear an increase both in their production cost and rate.
 A clear idea on direct expense: Trading account bears all record of direct expenses such as fares, taxes etc. These direct
expenses are shown and added as a cost required for production. This way a firm will notice those expenses and their necessity
for production. If any of those direct expense have come to bear less importance and can be avoided they can be substituted in
their next accounting year.
 Accounting for sold goods and their cost: The firm needs to calculate their gross profit or loss in order to understand their
progress. This is done with the entries of trading account. From the beginning of opening an account and then closing it with
mentioning necessary purchases, expenses and calculating cost of manufacturing will help a company decides on its sell price.
Only after the deduction of production cost from selling cost, one firm can calculate their gross profit or loss.
 Toward a better performance: Trading account helps in calculating gross profit or loss rate. This is of a huge importance
since this manipulates a firm to decide on their future plans on business strategies to improve their current state. Any comp any
bears the expenses with a gross profit which is compared with their net sales.

Definition of net profit

 The profit of a company after operating expenses and all other charges including taxes, interest and depreciation have been deducted from total
revenue. Also called net earnings or net income. If expenses and charges exceed revenue, the company incurs a net loss.

Or Definition

Often referred to as the bottom line, net profit is calculated by subtracting a company's total expenses from total revenue, thus showing what the
company has earned (or lost) in a given period of time (usually one year). also called net income or net earnings.

Definition of 'Balance Sheet'

Definition: Balance Sheet is the financial statement of a company which includes assets, liabilities, equity capital, total debt, etc. at a point in
time. Balance sheet includes assets on one side, and liabilities on the other. For the balance sheet to reflect the true pict ure, both heads
(liabilities & assets) should tally (Assets = Liabilities + Equity).

Description: Balance sheet is more like a snapshot of the financial position of a company at a specified time, usually calculated after ev ery
quarter, six months or one year. Balance Sheet has two main heads –assets and liabilities

Characteristics of Balance Sheet:

The characteristics of balance sheet are enumerated:
(a) A Position Statement:
A Balance Sheet is a position statement as it contains the assets, liabilities and proprietors’ fund at a particular
point of time stating the financial position as a whole.
(b) A Periodical Statement:
Since it is prepared at the end of a particular period, i.e., the financial position at a particular date, it is called a
periodical statement. In short, it exhibits the true and fair view of state of affairs of a firm at a particular point
of time.

(c) An Unallocated Cost Statement:

It is an unallocated cost statement in the sense that the assets which appear in the Assets side of the balance
sheet are unallocated portion of various costs which will be written-off in future.

(d) A Complementary Statement:

It is, no doubt, a complementary statement to Income Statement and not a competing one.

(e) An Interim Report:

Balance Sheet is an interim report as it is prepared for a particular period only stating the financial position.
But the business has its perpetual life. So, one year’s report may be considered an interim report.

The purpose of the balance sheet

The purpose of the balance sheet is to reveal the financial status of a business as of a specific point in time. The statement shows what an entity
owns (assets) and how much it owes (liabilities), as well as the amount invested in the business (equity). This information is more valuable when
the balance sheets for several consecutive periods are grouped together, so that trends in the different line items can b e viewed.

Annual report -

An annual report is a comprehensive report on a company's activities throughout the preceding year. Annual reports are
intended to give shareholders and other interested people information about the company's activities and financial performance.
They may be considered as grey literature.

Accounting equation
The basic accounting equation, also called the balance sheet equation, represents the relationship between the assets, liabilities, and owner's equity of a
business. It is the foundation for the double-entry bookkeeping system. For each transaction, the total debits equal the total credits. It can be expressed as further
more.

In a corporation, capital represents the stockholders' equity. Since every business transaction affects at least two of a company’s accounts, the accounting
equation will always be “in balance,” meaning the left side should always equal the right side. Thus, the accounting formula essentially shows that what the firm
owns (its assets) is purchased by either what it owes (its liabilities) or by what its owners invest (its shareholders equity or capital).

Or

https://debitoor.com/dictionary/accounting-equation

Difference Between Trial Balance and Balance Sheet

BASIS FOR
TRIAL BALANCE BALANCE SHEET
COMPARISON

Meaning Trial Balance is the list of The Balance sheet is the

all balances of General statement which shows the
assets, equity and liabilities of
 BASIS FOR
TRIAL BALANCE BALANCE SHEET
COMPARISON

Ledger Account. the company.

Division Debit and Credit columns Assets and equity & liabilities
heads

Stock Opening stock is Closing stock is considered.

considered.

Part of Financial No Yes

Statement

Objective To check the arithmetical To ascertain the financial

accuracy in recording and position of the company on a
posting. particular date.

Balances Personal, real and Personal and real account are

nominal account are shown.
shown.

Preparation At the end of each month, At the end of the financial year.
quarter, half year or
financial year.

Use Internal Use External Use

Key Differences Between Trial Balance and Balance Sheet

1. Statement of debit and credit balances were taken from general ledger is known as Trial Balance. Statement of assets and
equity & liabilities is known as Balance Sheet.
2. Trial Balance does not include closing stock while the Balance Sheet does not include opening stock.
3. Trial Balance checks the arithmetical accuracy in the recording and posting while balance sheet is prepared to determine
the financial position of the company on a specific date
4. Trial Balance is prepared after posting into ledger whereas Balance Sheet is prepared after the preparation of Trading and
Profit & Loss Account.
5. The Balance Sheet is the part of the Financial Statement while Trial Balance is not a part of the Financial Statement.
6. Balances of all personal, real and nominal account are shown in the trial balance. On the contrary, Balance sh eet shows
the balances of personal and real account only.
7. The trial balance is prepared at the end of each month, quarter, half year or the financial year. Conversely, the balance
sheet is prepared at the end of each month.
8. The trial balance is prepared for internal use only, however, the balance sheet is prepared for both internal and external
use, i.e. to inform outside parties about the financial condition of the entity.

Difference Between Balance Sheet and Profit & Loss Account

Comparison Chart

BASIS FOR PROFIT AND LOSS

BALANCE SHEET
COMPARISON ACCOUNT

Meaning A statement that shows company's Account that shows the

assets, liabilities and equity at a company's revenue and
specific date. expenses over a period
of time.

What is it? Statement Account

Represents Financial position of the business Profit earned or loss

on a particular date. suffered by business for
the accounting period

Preparation Prepared on the last day of Prepared for the

financial year. financial year.

Information Assets, liabilities, and capital of Income, expenses, gains

Disclosed shareholders. and losses.

Accounts Accounts shown in the Balance Accounts transferred to

Sheet do not lose their identity, Profit and Loss account
rather their balance is carry are closed and cease to
forward to next year as opening exist.
balance.

Sequence It is prepared after the preparation It is prepared before the

of Profit & Loss Account. preparation of Balance
Sheet.

Key Differences Between Balance Sheet and Profit & Loss

Account
1. The Balance Sheet is prepared at a particular date, usually the end of the financial year while the Profit and Loss account is
prepared for a particular period.
2. The Balance Sheet reveals the entity’s financial position, whereas the Profit & Loss account discloses the entity’s financial
performance, i.e. profit earned or loss suffered by the business for the accounting period.
3. Balance Sheet is a statement of assets and liabilities. In contrast, Profit & Loss Account is an account.
4. A Balance Sheet is a gives an overview of assets, equity, and liabilities of the company, but the Profit and Loss account is a
depiction of entity’s revenue and expenses.
5. Accounts which are transferred to profit and loss account are closed and lose their identity. On the contrary, those
accounts which are transferred to Balance sheet do not cease to exist rather their balance is carried forward to the next
accounting year and considered as opening balances.
6. The Balance sheet is prepared on the basis of the balances transferred from the Profit and Loss account.

Q.What is 'Cash Flow'

Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business. At the most fundamental level, a
company’s ability to create value for shareholders is determined by its ability to generate positive cash flows, or more specifically, maximize
long-term free cash flow.

Or

Definition: The amount of cash or cash-equivalent which the company receives or gives out by the way of payment(s) to creditors is known
as cash flow. Cash flow analysis is often used to analyse the liquidity position of the company. It gives a snapshot of the amount of cash
coming into the business, from where, and amount flowing out.