TULSIAN’S

FINANCIAL
ACCOUNTING

Dr. P.C. TULSIAN

M.Com., Ph.D., FCA, PGDFM
Additional Director (Former)
Board of Studies
The Institute of Chartered Accountants of India
Head
Department of Commerce
Ramjas College
University of Delhi
DELHI

S. CHAND & COMPANY LTD.

(AN ISO 9001 : 2000 COMPANY)
RAM NAGAR, NEW DELHI - 110 055

Created with Print2PDF. To remove this line, buy a license at: http://www.software602.com/
 S. CHAND & COMPANY LTD.
(An ISO 9001 : 2000 Company)
Head Office: 7361, RAM NAGAR, NEW DELHI - 110 055
Phone: 23672080-81-82, 9899107446, 9911310888
Fax: 91-11-23677446
Shop at: schandgroup.com; e-mail: info@schandgroup.com
Branches :
AHMEDABAD : 1st Floor, Heritage, Near Gujarat Vidhyapeeth, Ashram Road, Ahmedabad - 380 014,
Ph: 27541965, 27542369, ahmedabad@schandgroup.com
BENGALURU : No. 6, Ahuja Chambers, 1st Cross, Kumara Krupa Road, Bengaluru - 560 001,
Ph: 22268048, 22354008, bangalore@schandgroup.com
BHOPAL : Bajaj Tower, Plot No. 243, Lala Lajpat Rai Colony, Raisen Road, Bhopal - 462 011,
Ph: 4274723. bhopal@schandgroup.com
CHANDIGARH : S.C.O. 2419-20, First Floor, Sector - 22-C (Near Aroma Hotel), Chandigarh -160 022,
Ph: 2725443, 2725446, chandigarh@schandgroup.com
CHENNAI : 152, Anna Salai, Chennai - 600 002, Ph: 28460026, 28460027, chennai@schandgroup.com
COIMBATORE : Plot No. 5, Rajalakshmi Nagar, Peelamedu, Coimbatore -641 004, (M) 09444228242,
coimbatore@schandgroup.com (Marketing Office)
CUTTACK : 1st Floor, Bhartia Tower, Badambadi, Cuttack - 753 009, Ph: 2332580; 2332581,
cuttack@schandgroup.com
DEHRADUN : 1st Floor, 20, New Road, Near Dwarka Store, Dehradun - 248 001,
Ph: 2711101, 2710861, dehradun@schandgroup.com
GUWAHATI : Pan Bazar, Guwahati - 781 001, Ph: 2738811, 2735640 guwahati@schandgroup.com
HYDERABAD : Padma Plaza, H.No. 3-4-630, Opp. Ratna College, Narayanaguda, Hyderabad - 500
029,
Ph: 24651135, 24744815, hyderabad@schandgroup.com
JAIPUR : A-14, Janta Store Shopping Complex, University Marg, Bapu Nagar, Jaipur - 302 015,
Ph: 2719126, jaipur@schandgroup.com
JALANDHAR : Mai Hiran Gate, Jalandhar - 144 008, Ph: 2401630, 5000630,
jalandhar@schandgroup.com
JAMMU : 67/B, B-Block, Gandhi Nagar, Jammu - 180 004, (M) 09878651464 (Marketing Office)
KOCHI : Kachapilly Square, Mullassery Canal Road, Ernakulam, Kochi - 682 011, Ph: 2378207,
cochin@schandgroup.com
KOLKATA : 285/J, Bipin Bihari Ganguli Street, Kolkata - 700 012, Ph: 22367459, 22373914,
kolkata@schandgroup.com
LUCKNOW : Mahabeer Market, 25 Gwynne Road, Aminabad, Lucknow - 226 018, Ph: 2626801,
2284815, lucknow@schandgroup.com
MUMBAI : Blackie House, 103/5, Walchand Hirachand Marg, Opp. G.P.O., Mumbai - 400 001,
Ph: 22690881, 22610885, mumbai@schandgroup.com
NAGPUR : Karnal Bag, Model Mill Chowk, Umrer Road, Nagpur - 440 032, Ph: 2723901, 2777666
nagpur@schandgroup.com
PATNA : 104, Citicentre Ashok, Govind Mitra Road, Patna - 800 004, Ph: 2300489, 2302100,
patna@schandgroup.com
PUNE : 291/1, Ganesh Gayatri Complex, 1st Floor, Somwarpeth, Near Jain Mandir,
Pune - 411 011, Ph: 64017298, pune@schandgroup.com (Marketing Office)
RAIPUR : Kailash Residency, Plot No. 4B, Bottle House Road, Shankar Nagar, Raipur - 492 007,
Ph: 09981200834, raipur@schandgroup.com
RANCHI : Flat No. 104, Sri Draupadi Smriti Apartments, East of Jaipal Singh Stadium, Neel Ratan
Street, Upper Bazar, Ranchi - 834 001, Ph: 2208761, ranchi@schandgroup.com
(Marketing Office)
SILIGURI : 122, Raja Ram Mohan Roy Road, East Vivekanandapally, P.O., Siliguri,
Dist., Jalpaiguri, (W.B.) (M) 09051064326 (Marketing Office)
VISAKHAPATNAM: Plot No. 7, 1st Floor, Allipuram Extension, Opp. Radhakrishna Towers,
Seethammadhara North Extn., Visakhapatnam - 530 013, (M) 09347580841,
visakhapatnam@schandgroup.com (Marketing Office)
© 2011, Dr. P.C. Tulsian
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system or transmitted, in any form or by any means, electronic, mechanical, photocopying,
recording or otherwise, without the prior permission of the Publishers.
First Edition 2011
ISBN : 81-219-3608-X Code : 07 520
PRINTED IN INDIA
By Rajendra Ravindra Printers Pvt. Ltd., 7361, Ram Nagar, New Delhi -110 055
and published by S. Chand & Company Ltd., 7361, Ram Nagar, New Delhi -110 055.

Created with Print2PDF. To remove this line, buy a license at: http://www.software602.com/
 PREFACE
This book adopts a fresh and novel approach to the study of Financial Accounting for the
students of B.Com. It has been written in a “Teach Yourself Style”, strictly following a
student friendly approach and is essential meant to serve as a tutor at home.
The Distinct features of the book are as follows:
Pedagogical Features
 Simple Language: The Text is presented in the simplest language, meant to serve
beginners.
 Heading for each Paragraph: Each paragraph has been arranged under a suitable
heading for easy retention of concepts.
 Tabular Form: Wherever possible the text matter relating to a particular topic/sub-
topic has been presented in a Tabular Form.
 Eye-catching Screens: All important equations, formulae, figures and practical steps
have been presented in screen format to catch the eye.
 Uniform Format of Chapter: Each chapter has been uniformly organised under
five headings, viz., Text supported by suitable Illustrations, Solved Problems, B.Com
Examination Problems, Theoretical Questions and Practical Questions.
Distinctive Features
 30 Exhibits: To acquaint students with various accounting treatment and formats.
 250 Illustrations: To aid better understanding of the text.
 250 Solved Problems: Along with necessary working notes and alternative solutions
(if any).
100 B.Com Examination Problems with full solutions
 250 Very Short Answer Type Questions: To enable students to test their under-
standing of the subject.
 250 Short Answer Type Questions.
 100 Essay Type Questions.
 500 Practical Questions.
 Appendix-I: Important Distinctions
 Appendix-II: Important Short Notes
I am confident that all these features would make this book an invaluable asset to
students learning Financial Accounting.
I wish to express my Sincere thanks to several individuals who have been a souce of
inspiration and support both personally and professionally including Shri R.P. Tulsian,
Shri S.C. Gupta, Shri Naresh Gupta, Shri N.K. Kakkar, Shri N.D. Vohra, Shri S.C. Garg,
Shri N.K. Aggarwal, Shri K.B. Gupta, Shri M.M.Goyal, Shri Sandeep Aggarwal, Mrs.
Renu Gupta, Mrs. Sushma Aggarwal, Mrs. Himanshu Garg, Mrs. Poonam, Mrs. Indu Jain,
Shri P.V. Khatri , Mrs. Madhu Gupta, Mrs. Kusum Gupta, Shri S.K. Grover, Shri V.K.
Jain, Shri Harpal Singh, Shri Pradeep Aggarwal , Shri J.M. Gupta, Shri N.K. Puri, Shri
Y.P. Tyagi, Shri R.D. Arora, Shri S.L. Gupta, Shri S.K. Gupta, Shri Rajeev Goel.
I must conclude that this book would never have been written without the support,
encouragement and prodding of our family members. Many thanks to all of them.
Any suggestion for improvement will be gratefully acknowledged and appreciated.

(iii)

Created with Print2PDF. To remove this line, buy a license at: http://www.software602.com/
 SYLLABUS
B.Com. Part I
Paper-II
TULSIAN'S FINANCIAL ACCOUNTING
Duration: 3 hrs. Max. Marks: 75
Lectures: 75
Objective: To make the student familiar with generally accepted accounting principles of
financial accounting and their applications in business organizations excluding corporate
entitles.
Unit–I
(i) Financial Accounting: Nature and scope, Limitations of Financial Accounting.
(ii) Basic Concepts and Conventions. Accounting Standards: Meaning, Procedure for
issue of Accounting Standards in India, Significance, Generally Accepted Account-
ing Principles (GAAP).
(iii) Accounting Process: From recording of transactions to preparation of final accounts.
10 Lectures
Unit–II
(i) Final Accounts of a Sole-Trader.
(ii) Final Accounts of Not-For Profit Organisations: Meaniing and features.
(iii) Preparation of Income and Expenditure Account and Balance Sheet: From receipts
and payments account with additional information and vice-versa.
Preparation of Balance Sheets (opening and closing) from receipts and payments
account and income expenditure account and additional information.
(iv) Accounts from incomplete records: statement of affairs method and final account
method. 15 Lectures
Unit–III
Depreciation Accounting: Meaning of depreciation, causes, objects of providing deprecia-
tion, factors affecting depreciation, accounting treatment including provision for
depreciation accounting. Methods of deprecations: straight line method, diminishing
balance method, Change of method as per revised AS-6. 10 Lectures
Unit–IV
Consignment and Joint Venture Accounts:
(i) Consignments: Features,
Accounting treatment in the books of the consignor and consignee.
(ii) Joint Ventures: Accounting procedures: Joint Bank Account, Records Maintained by
co-venturer of (a) all transactions (b) only his own transactions. (Memorandum joint
venture account). 10 Lectures
Unit–V
Accounting for Hire Purchase Transactions, Journal entries and ledger accounts in the
books of Hire Vendors and Hire purchaser for large value items including Default
and repossession. 10 Lectures
Unit–VI
Inland Branches: Dependent branches only and Ascertainment of Profit by Debtors method
and Stock and Debtors method. 10 Lectures
Unit–VII
Dissolution of Partnership Firms: Legal Position, Accounting for simple dissolution, Ap-
plications of rule in case of Garner Vs. Murray in case of insolvency of partner(s)
(excluding piecemeal distribution and sale of a firm to a company). 10 Lectures

(v)

Created with Print2PDF. To remove this line, buy a license at: http://www.software602.com/
 ROAD MAP
B.Com. Part I
Paper-II
TULSIAN'S FINANCIAL ACCOUNTING
Duration: 3 hrs. Max. Marks: 75
Lectures: 75

Course Contents: Relevant chapter

of the book
Unit–I
(i) Financial Accounting: Nature and scope, Limitations of Financial 1
Accounting.
(ii) Basic Concepts and Conventions. Accounting Standards: Meaning, 2
2
Procedure for issue of Accounting Standards in India, Significance,
Generally Accepted Accounting Principles (GAAP).
(iii) Accounting Process: From recording of transactions to preparation of 3, 4, 5, 6
final accounts.

Unit–II
(i) Final Accounts of a Sole-Trader. 7
(ii) Final Accounts of Not-For Profit Organisations: Meaning and features. 8
(iii) Preparation of Income and Expenditure Account and Balance Sheet:
From receipts and payments account with additional information and
vice-versa.
Preparation of Balance Sheets (opening and closing) from receipts and
payments account and income expenditure account and additional
information.
(iv) Accounts from incomplete records: statement of affairs method and final 9
account method.

Unit–III
Depreciation Accounting: Meaning of depreciation, causes, objects of providing 10
depreciation, factors affecting depreciation, accounting treatment including
provision for depreciation accounting. Methods of deprecations: straight line
method, diminishing balance method, Change of method as per revised AS-6.

Unit–IV
Consignment and Joint Venture Accounts: 11
(i) Consignments: Features,
Accounting treatment in the books of the consignor and consignee.
(ii) Joint Ventures: Accounting procedures: Joint Bank Account, Records 12
Maintained by co-venture of (a) all transactions (b) only his own
transactions. (Memorandum joint venture account).
Unit–V
Accounting for Hire Purchase Transactions, Journal entries and ledger accounts in 13
the books of Hire Vendors and Hire purchaser for large value items including
Default and repossession.
Unit–VI
Inland Branches: Dependent branches only and Ascertainment of Profit by Debtors 14
method and Stock and Debtors method.
Unit–VII
Dissolution of Partnership Firms: Legal Position, Accounting for simple 15, 16
dissolution, Applications of rule in case of Garner Vs. Murray in case of insolvency
of partner(s) (excluding piecemeal distribution and sale of a firm to a company).

(vii)

Created with Print2PDF. To remove this line, buy a license at: http://www.software602.com/
 CONTENTS
Preface iii

1. Introduction to Accounting 1.1-1.20

Introduction 1.1
Meaning of Accounting 1.1
Meaning of Accountancy 1.3
Meaning of Book-keeping 1.3
Relationship between Accountancy, Accounting and Book-keeping 1.3
Distinction Between Book-keeping and Accounting 1.3
Meaning of an Accounting Cycle 1.4
Users of an Accounting Information and Their Needs 1.5
Primary objectives of Accounting 1.6
Types of Accounting Information 1.7
Advantages of Accounting 1.8
Limitations of Accounting 1.9
Qualitative Characteristics of Accounting Information 1.10
Branches of Accounting 1.13
Basic Accounting Terms 1.13
Double Entry System of Book-Keeping 1.18
Accrual Basis of Accounting and Cash Basis of Accounting 1.19
Distinction between Accrual Basis of Accounting and
Cash Basis of Accounting 1.19
Theoretical Questions 1.19
2. Accounting Principles and Accounting Standards 2.1-2.12
Meaning of ‘Generally Accepted Accounting Principles’ (GAAP) 2.1
Accounting of Principles 2.1
Acounting Standards 2.7
Development of Accounting Standards 2.8
Accounting Standards Board of India 2.8
Theoretical Questions 2.10
3. Accounting Equation 3.1-3.5
Meaning of Accounting Equation 3.1
Procedure for Developing An Accounting Equation 3.1
Theoretical Questions 3.4
Practical Questions 3.5
4. Journalising, Posting and Balancing 4.1-4.33
Meaning of an Account 4.1
Traditional Classification of Accounts 4.1
Accounting Equation Based Classification of Accounts 4.1
Distinction Between Personal Accounts and Impersonal Accounts 4.2
Distinction Between Real and Nominal Accounts 4.2
Meaning and Rules of Debit and Credit 4.3
Double Entry System of Book-Keeping 4.4
(ix)

Created with Print2PDF. To remove this line, buy a license at: http://www.software602.com/
 Meaning and Format of a Journal 4.5
Meaning of Journalising 4.5
Ledger 4.11
Distinction Between Journal and Ledger 4.13
Compound Entry 4.14
Meaning, Recording and Posting of an Opening Entry 4.15
Balancing of Accounts 4.18
Theoretical Questions 4.29
Practical Questions 4.30
5. Subsidiary Books I—Cash Book 5.1-5.17
Need for Subdivision of the Journal 5.1
Meaning of Special Journals (or subsidiary books) 5.1
Meaning and Types of Cash Book 5.2
Trade Discount 5.3
Cash Discount 5.4
Petty Cash Book 5.8
Theoretical Questions 5.12
Practical Questions 5.15
6. Subsidiary Books II—Other Books 6.1-6.15
Purchases Book 6.1
Sales Book 6.3
Purchase Returns Book 6.4
Sales Returns Book 6.6
Distinction between Debit Note and Credit Note 6.8
Bills Receivable Book 6.8
Bills Payable Book 6.10
Journal Proper 6.10
Distinction between Opening Entry and Closing Entry 6.11
Theoretical Questions 6.13
Practical Questions 6.13
7. Final Accounts of a Sole-trader 7.1-7.113
Meaning of Financial Statements 7.1
Usefulness of Financial Statements 7.1
Trading Account 7.2
Profit and Loss Account 7.5
Balance Sheet [or Position Statement] 7.9
Distinction between Tangible Assets and Intangible Assets 7.11
Distinction between Fixed Assets and Current Assets 7.11
Distinction between Trading and Profit and Loss Account and
Balance Sheet 7.17
Distinction between a Trial Balance and a Balance Sheet 7.17
Methods of Presenting the Final Accounts 7.18
Treatment of Some Items Which May be Direct Items/Indirect
Items/Incomes/Expenses 7.20
Classification of Capital and Revenue 7.26
Distinction Between Capital Expenditure and Revenue Expenditure 7.26
Rationale of Making Adjustments at the Time of Preparing the
Final Accounts 7.29
(x)

Created with Print2PDF. To remove this line, buy a license at: http://www.software602.com/
 Adjustment of Closing Stock 7.29
Adjustment of Outstanding Expenses 7.30
Adjustment of Prepaid Expenses (or Unexpired Expenses) 7.31
Distinction between Deferred Revenue Expenses & Prepaid Expenses 7.32
Distinction between Outstanding Expense and Prepaid Expense 7.32
Adjustment of Accrued Income 7.33
Adjustment of Income Received in Advance (or Unaccrued Income) 7.33
Distinction Between Accrued Income and Unaccrued Income 7.34
Adjustment of Depreciation 7.35
Adjustment of Interest on Capital 7.41
Adjustment of Interest on Drawings 7.42
Adjustment of Abnormal Loss of Stock 7.42
Adjustment of Bad Debt 7.43
Adjustment of Provision for Doubtful Debts 7.44
Adjustment of Provision for Discount on Debtors 7.53
Adjustment of Commission on Profit 7.56
Adjustment of Goods Sent on Approval 7.57
Adjustment of Goods-in-Transit 7.58
Provident fund 7.58
Treatment of Items of Adjustment Appearing Outside the Trial Balance 7.63
Treatment of Items of Adjustments Appearing in the Trial Balance 7.63
Solved Problems 7.75
B.Com. Examination Problems 7.88
Theoretical Questions 7.100
Practical Questions 7.106
8. Accounting for Not for Profit Organisations 8.1-8.122
Meaning of Not for Profit Organisations 8.1
Distinction between a Profit Seeking Organisation and a
Not for Profit Organisation 8.1
Accounting for Not for Profit Organisation 8.1
Receipts and Payments Account 8.2
Income and Expenditure Account 8.4
Meaning and Accounting Treatment of Some Peculiar Items 8.5
Treatment of Consumable Items Consumed during the Year 8.15
Treatment of Profit/Loss from Trading Activities 8.17
Distinction between Receipts & Payments Account and
Income & Expenditure Account 8.18
Distinction Between Income and Expenditure Account and
Profit & Loss Account 8.19
Preparation of an Income & Expenditure Account 8.19
Balance Sheet of a Non-profit Seeking Entity 8.21
Preparation of a Receipts & Payments Account 8.42
Solved Problems 8.54
B.Com. Examination Problems 8.79
Theoretical Questions 8.119
Practical Questions 8.120
9. Accounts from Incomplete Records [or Single Entry System] 9.1-9.60
Meaning of Incomplete Records 9.1

(xi)

Created with Print2PDF. To remove this line, buy a license at: http://www.software602.com/
 Distinction between Double Entry System and Incomplete Records
(popularly known as Single Entry System) 9.2
Preparation of Accounts from Incomplete Records 9.2
Statement of Affairs Method 9.2
Distinction between Statement of Affairs and Balance Sheet 9.3
Final Accounts Method 9.5
Hints for Tracing Missing Information 9.12
Solved Problems 9.20
B Com Examination Problems 9.36
Theoretical Questions 9.51
Practical Questions 9.52
10. Depreciation, Reserves and Provisions 10.1-10.61
Meaning of Depreciation 10.1
Meaning of Depreciation Accounting 10.2
Causes of Depreciation 10.2
Need for Charging Depreciation 10.2
Factors Affecting the Amount of Depreciation 10.3
Depreciation on Additions to Fixed Assets 10.4
Methods of Recording Depreciation 10.4
Recording of Depreciation by Charging to Asset Account Method 10.4
Methods of Allocating Depreciation 10.5
‘Written Down Value Method’ of Depreciation (WDV) 10.19
Distinction between Straight Line Method and Written
Down Value Method 10.25
Recording of Depreciation by Creating Provision for
Depreciation Account 10.26
Change in the Method of Depreciation 10.30
Specific Requirements of AS-6 Issued by ICAI 10.40
Solved Problems 10.42
B Com Examination Problems 10.51
Theoretical Questions 10.57
Practical Questions 10.58
11. Accounting for Consignment 11.1-11.63
Meaning of Consignment 11.1
Features of Consignment 11.1
Distinction Between Consignment and Sale 11.1
Terms Used in Consignment 11.2
Distinction Between Ordinary Commission and
Del-credere Commission 11.4
Distinction Between Del-credere Commission and
Over-riding Commission 11.4
Valuation of Unsold Stock Lying with the Consignee 11.8
Treatment of Abnormal Loss 11.11
Treatment of Normal Loss 11.15
Distinction between Normal Loss and Abnormal Loss in Consignment 11.17
Accounting Treatment in the Books of Consignor 11.17
Accounting treatment in the Books of the Consignee 11.20
Solved Problems 11.34

(xii)

Created with Print2PDF. To remove this line, buy a license at: http://www.software602.com/
 B.Com. Examination Problems 11.46
Theoretical Questions 11.57
Practical Questions 11.58
12. Accounting for Joint Venture 12.1-12.62
Meaning of Joint Venture 12.1
Similarities between Joint Venture and Partnership 12.1
Distinction between Partnership and Joint Venture 12.1
Distinction between Joint Venture and Consignment 12.2
Methods of Recording Joint Venture Transactions 12.2
Method I—Recording in a Separate Set of Books 12.2
Joint Venture Account 12.4
Method II—Recording in the Books of One Co-Venturer Only 12.11
Method III—Recording in the Books of all Co-Ventures 12.15
Method IV—Memorandum Joint Venture Account Method 12.17
Solved Problems 12.23
B.Com. Examination Problems 12.40
Theoretical Questions 12.57
Practical Questions 12.58
13. Accounting for Hire Purchase 13.1-13.65
Meaning of Hire Purchase Agreement 13.1
Contents of Hire Purchase Agreement 13.1
Meaning of Instalment Purchase Agreement 13.1
Distinction between Hire Purchase Agreement and
Instalment Purchase Agreement 13.2
Calculation of Interest When both the Cash Price and the
Rate of Interest are Given 13.3
Calculation of Interest when Cash Price is Given But
Rate of Interest is Not Given 13.4
Calculation of Interest When Both the Cash Price and
the Rate of Interest are not Given 13.6
Calculation of Cash Price 13.7
Accounting for Hire Purchase Transactions 13.12
Full Cash Price Method 13.12
Journal Entries Under Full Cash Price Method 13.12
Disclosure in Balance Sheet Under Full Cash Price Method 13.13
Actual Cash Price Paid Method 13.16
Journal Entries under Actual Cash Price Paid Method 13.16
Disclosure in Balance Sheet Under Actual Cash Price Paid Method 13.17
Default and Repossession 13.20
Complete Repossession 13.20
Partial Repossession 13.22
Solved Problems 13.28
B.Com. Examination Problems 13.36
Theoretical Questions 13.55
Practical Questions 13.56
14. Accounting for Branches 14.1-14.92
Meaning of a Branch 14.1
Classification of Branches 14.1

(xiii)

Created with Print2PDF. To remove this line, buy a license at: http://www.software602.com/
 Accounting for Dependent Branches 14.1
Debtors Method 14.1
Accounting Treatment of Goods Returned and Cash Remitted by
Branch Customers Directly to Head Office 14.7
Accounting Treatment of Goods Sent to Another Branch and
Goods Received from Another Branch 14.8
Accounting Treatment of Normal Loss, Abnormal Loss, Insurance
Claim and Agreed Allowance/Trade Discount 14.10
Accounting Treatment of Branch Manager’s Commission 14.11
When Goods are Sent to Branch at Cost Plus Profit 14.14
Stock and Debtors Method 14.27
B.Com. Examination Problems 14.51
Theoretical Questions 14.83
Practical Questions 14.83
15. Accounting for Partnership—Dissolution of a Firm 15.1-15.42
Meaning of Dissolution 15.1
Meaning of Dissolution of Partnership 15.1
Meaning of Dissolution of a Firm 15.1
Distinction Between Dissolution of Partnership and Dissolution of Firm 15.1
Settlement of Accounts [Section 48] 15.2
Treatment of Firm’s Debts and Private Debts [Sec. 49] 15.2
Distinction Between Firm’s Debts and Private Debts 15.3
Realisation Account 15.3
Accounting Entries 15.4
Treatment of Goodwill 15.16
Preparation of Balance Sheet as on Date of Dissolution 15.16
Calculation of Remuneration Payable to Incharge of Realisation 15.30
Solved Problems 15.31
Theoretical Questions 15.36
Practical Questions 15.38
16. Accounting for Partnership—Insolvency of a Partner and Firm 16.1-16.40
Introduction 16.1
Decision in Garner vs Murray 16.1
Applicability of the Decision in Garner vs Murray in India 16.2
Insolvency of a Firm 16.11
B.Com. Examination Problems 16.19
Theoretical Questions 16.35
Practical Exercises 16.35
Insolvency of a Partner 16.35
Insolvency of All Partners 16.38
Appendix I AI.1-AI.23
Appendix II AII.1-AII.2

(xiv)

Created with Print2PDF. To remove this line, buy a license at: http://www.software602.com/
 INTRODUCTION TO
ACCOUNTING
1

INTRODUCTION
In all activities (whether business activities or non-business activities) and in all organisations
(whether business organisations like a manufacturing entity or trading entity or non-business
organisations like schools, colleges, hospitals, libraries, clubs, temples, political parties)
which require money and other economic resources, accounting is required to account for
these resources. In other words, wherever money is involved, accounting is required to
account for it. Accounting is often called the language of business. The basic function of any
language is to serve as a means of communication. Accounting also serves this function.

MEANING OF ACCOUNTING
Meaning
Accounting is the art of recording, classifying, and summarizing in a significant manner and
in terms of money, transactions and events which are, in part at least, of a financial
character, and interpreting the result thereof. [AICPA]
The dimension of accounting is much broader than that described above. A widely
accepted definition of accounting is given by the American Accounting Association in 1966
which treated accounting as “the process of identifying, measuring and communicating
economic information to permit informed judgements and decisions by the users of ac-
counts.’ [AAAA]
Thus, accounting covers the following activities:

Activities Covered under Accounting

Identifying Measuring Recording Classifying

Summarising Analysing Interpreting Communication

Let us discuss these activities one by one:

1. Identifying the Transactions and Events—Accounting identifies transactions and
events of a specific entity. A transaction is an exchange in which each participant
receives or sacrifices value (e.g., purchase of raw material). An event (whether internal

Created with Print2PDF. To remove this line, buy a license at: http://www.software602.com/
 1.2 Tulsian’s Financial Accounting

or external) is a happening of consequence to an entity (e.g., use of raw material for

production). An entity means an economic unit that performs economic activities
(e.g., TISCO, TELCO, Birla Industries Ltd., Reliance Industries Ltd.).
2. Measuring the Identified Transactions and Events—Accounting measures the
transactions and events in terms of a common measurement unit, that is the ruling
currency of a country.
3. Recording—It is concerned with the recording of identified and measured financial
transactions in an orderly manner, soon after their occurrence in the proper books of
accounts.
4. Classifying—It is concerned with the classification of the recorded transactions so as
to group the transactions of similar type at one place. This function is performed by
maintaining the ledger in which different accounts are opened to which related
transactions are brought to one place by posting. For example, all purchases of goods
made for cash or on credit on different dates are brought to purchasers account.
5. Summarising—It is concerned with the summarization of the classified transactions
in a manner useful to the users. This function involves the preparation of financial
statements such as Income Statement, Balance Sheet, Statement of Changes in Financial
Position, Statement of Cash Flow, Statement of Value Added.
6. Analysing—It is concerned with the establishment of relationship between the various
items or group of items taken from Income statement of Balance Sheet or both. Its
purpose is to identify the financial strengths and weaknesses of the enterprise. It
provides the basis for interpretation.
7. Interpreting—It is concerned with explaining the meaning and significance of the
relationship so established by the analysis. Nowadays, the first six functions are
performed by electronic data processing devices and the accountant has to concentrate
mainly on the interpretation aspects of accounting. The accountants should interpret
the statements in a manner useful to the users, so as to enable the users to make
reasoned decisions out of alternative courses of action. The accountant should explain
not only what has happened but also (a) why it happened, and (b) what is likely to
happen under specified conditions.
8. Communicating—It is concerned with the transmission of summarised, analysed and
interpreted information to the users to enable them to make reasoned decisions.
Communication is preceded by an accounting cycle through which the identified and
measured transactions and events pass. Accounting performs a basic function of a language,
that is, to serve as a means of communication. It is an information system which
communicates the accounting information to the users (whether internal or external) to
enable them to make reasoned decisions. As an information system, accounting may be
viewed as under:

INPUT  PROCESS  OUTPUT

  
Economic events Recording Communicating
measured in Classifying Information to
financial Summarising users
terms Analysing
Interpreting

Note: Economic event refers to the occurrence of economic consequence of an activity related to an
accounting entity.

Created with Print2PDF. To remove this line, buy a license at: http://www.software602.com/
 Introduction to Accounting 1.3

MEANING OF ACCOUNTANCY
Accountancy refers to a systematic knowledge of accounting. It explains ‘why to do’ and
‘how to do’ of various aspects of accounting. It tells us why and how to prepare the books of
accounts and how to summarize the accounting information and communicate it to the
interested parties.

MEANING OF BOOK-KEEPING

Book-keeping is a part of accounting and is concerned with record keeping or maintenance

of books of accounting which is often routine and clerical in nature. It only covers the
following four activities:
(1) Identifying the transactions and events (2) Measuring the identified transactions and
events in a common measuring unit (3) Recording the identified and measured transactions
and events in Proper Books of Accounts (4) Classifying the recorded transactions and events
in ledger.

RELATIONSHIP BETWEEN ACCOUNTANCY, ACCOUNTING AND

BOOK-KEEPING
Book-keeping is a part of Accounting. Accounting is a part of Accountancy, Diagrammatically
the relationship can be viewed as follows:

DISTINCTION BETWEEN BOOK-KEEPING AND ACCOUNTING

Book-keeping differs from accounting in the following respects:
Basis of Distinction Book-keeping
1. Scope Book-keeping involves—
(a) identifying the transactions,
(b) measuring the identified
transactions,
(c) recording the measured
transactions, and
(d) classifying the recorded
transactions.
Accounting
Accounting in addition to Book-
keeping involves—
summarizing the classified trans-
actions, analysing the summarized
results, interpreting the analysed
results and communicating the
interpreted information to the
interested parties.
(Contd)

Created with Print2PDF. To remove this line, buy a license at: http://www.software602.com/
 Tulsian’s Financial Accounting

20%
OFF

Publisher : SChand Publications ISBN : 9788121936088 Author : Dr. P.C. Tulsian

Type the URL : http://www.kopykitab.com/product/17710

Get this eBook