UNIT-I: Book-Keeping and

Accounting
Contents
UNIT-I: Book-Keeping And Accounting 1

List of Figures 2

1.1 Learning Objectives 3

1.2 Introduction 3

1.3 Basic Framework 4

1.3.1 Importance and Scope 4

1.4 Book Keeping 5

1.4.1 Basis and Importance of Book Keeping 5

1.4.2 How is Book-Keeping different from Accounting? 7

Review Questions 9

1.5 Accounting 9

1.5.1 Systems of Accounting 10

1.5.2 An Information System 11

1.5.3 Accounting as Measurement Discipline 14

1.5.4 Accounting Terminologies 15

1.5.4.1 Transactions 16

1.5.4.2 Capital and Drawings 17

1.5.4.3 Debtors and Creditors 17

1.5.4.4 Expenditure and Types of Expenditure 17

1.5.4.5 Cash Discount and Trade Discount 18

1.5.4.6 Solvent and Insolvent 18

1.5.4.7 Goodwill 19

1.5.4.8 Profit and Loss 20

1.5.4.9 Assets, Liabilities, Net Worth 21

1.5.5 Accounting Concepts, Conventions, and Principles 24

1.5.5 Accounting Standards 27

 1.5.5.1 IFRS (International Financial Reporting Standards) 28

1.5.5.2 Other Indian Accounting Standards 28

Review Questions 30

1.6 Accounting Entry Systems 30

1.6.1 Single Entry System 31

1.6.2 Double Entry System 31

1.6.2.1 Merits of Double-Entry System 31

1.7 Rules of Debit and Credit 32

1.7.1 Significance of Debit and Credit 33

Review Questions 34

1.8 Role of an Accountant 35

1.9 Accounting Equation 36

1.10 Summary 38

1.11 Glossary 40

1.12 Self-Assessment Questions 41

Suggested Readings 45

References Book 45

Textbook References 45

Website 45
1.1 Learning Objectives

In this chapter the following key objectives will be covered:

● Basic concepts and principles of accounting and book keeping.

● Importance and benefits of accounting and book keeping.
● The latest accounting standards.
● Scope of accounting.

1.2 Introduction

The theory of accounting dates back to the times when money came into existence.
‘Arthashastra' written by Chanakya in the Mauryan empire is the first written history of
Accounting. The study of accounts has grown to become an expansive study over the years.
The ever-growing economy and cut-throat competition have added to the importance of
Accounting.

Book-keeping helps to keep track of business transactions of an enterprise or any other

organization that would require to keep a track of the inflow and outflow of cash. This helps
in evaluating and documenting the exchange of money and the worth of money in case of
exchange activities related to money. The records help to assess the feasibility and
profitability of new projects and investments. Such information is essential for investors,
stakeholders, the government, etc.

The double-entry book-keeping system was developed by Luca De Bargo Pacioli, an Italian
merchant in the year 1494. The industrial revolution of the 18th, 19th centuries fuelled the need
for such accounting systems. The large scale manufacturing led to the separation of
management and ownership of the business.

The comprehensive development of business in the 20th century led to a requirement for a
more organized decision-making system. Thus, was born a new branch Management
Accounting.

Accounting started as a tool for individual business owners, has slowly developed into a full-
fledged study of its own. Social Responsibility Accounting has emerged in the 21st century
with aggressive growth in various sectors. Accounting is an integral part of modern business.
 Figure 1.1 Accountant

1.3 Basic Framework

In the earlier times, accounts of wealthy people were managed by agents. Such agents
accounted for the properties, cash for the owners. Records of credit and debit accounting can
be found dating as far as the 12th century.

A businessman who invests would like to keep a record of profit and loss he makes off
investment at regular intervals. The position and valuation of assets and liabilities will help
him assess if the business is doing good or not.

As defined by the American Institute of Certified Public Accountants (AICPA) accounting is,
"the art of recording, classifying and summarizing in a significant manner and terms of
money, transactions, and events which are, in part at least, of a financial character and
interpreting the results thereof".

Book-keeping translates to reading, recording business transactions in a systematic way for

further use in the future. The transactions are recorded date wise to keep track of the business
transactions accurately. It is an art of recording, summarising, classifying financial
transactions for a certain period often a year.

1.3.1 Importance and Scope

Accounting and Book-keeping are vital for a business to survive in this competitive world.
The tools help to gauge, analyze and understand the business under question better. Every
company, startup, no matter how big or small rely on accounting and book-keeping to keep a
tab on the expenses, purchases, and investments.
Accounting methods have grown manifolds to become more viable and suited to the 21st
century’s needs. The field of art has a great scope aiding the businesses to grow to their full
potential and flourish.

1.4 Book Keeping

It is the permanent recording of all business transactions with proper additional information. It reflects
the accounting and record-keeping of the transactions. The clerical process is repetitive and
mechanical and often assigned to junior employees. This work is taken care of by computers and
software nowadays with the advent of technology.

The system is developed to ensure a correct representation of income and expenditure, assets and
liabilities. It also accounts for the effects of the transactions on the business during the defined period.

Book-Keeping can be defined in different words as per different scholars:

Richard E. Strahelm: “The art of analyzing and recording business transactions, reporting
results of business operations through periodic statements and interpreting such results for
purposes of effective control of future operations.”

J. R. Batliboi : “Book-keeping is an art of recording business dealings in a set of books.”

Nocth Cott: “Book-keeping is an art of recording in the books of accounts the monetary
aspects of commercial or financial transactions.”

R.N. Carter : “Book-keeping is the science and art of correctly recording in the books of
accounts, all those business transactions that result in transfer or money or money's worth."

1.4.1 Basis and Importance of Book Keeping

Book-keeping is done on the following basis:

1. Book-Keeping is used to record day to day business activities.

2. The business activities included in the books are of financial type.

3. The book keeping is done for a specified period only.

4. The recording of transactions is done based on rules.

5. It is an art and science of recording financial transactions with proper rules.

Book-Keeping has many benefits for a business. The importance of Book-keeping is
mentioned as follows:

1. Record: One cannot remember all the financial transactions for a long period. Book-
Keeping helps to keep a record of all the financial transactions which take place in a
certain period.
2. Financial Assessment: Book-keeping provides a great basis and analytical data to the
business owner to make wise decisions that will prove beneficial for the business.
3. Control: The books provide complete control to the owner to make intelligent
decisions and take calculated risks and help the business to grow. Business owners
can control the decisions best suited for the business.
4. Evidence: The books provide enough evidence of performance. Well kept books are
also acceptable evidence in the court of law when any disputes erupt.
5. Tax Liabilities: Well maintained books help in calculating the tax liabilities.

Book-keeping finds utility with all the people related to the business. Some of the
beneficiaries of the book-keeping system are mentioned as follows:

1. Owner: The business owner extracts the highest amount of utility from the book-
keeping system. The owner can get all the information about profits, losses, liabilities,
assets in one place. It helps save time and gives control to the owner.

2. Management: The information from the book-keeping aids the management

decisions and helps in planning, providing control over overall business activities.

3. Investors: Well maintained books guide the investor to make decisions if the
investments should be made or not.

4. Customers: Business can be well assessed with the help of well-kept books. It helps
the customer to understand the standing of the business concerning its peers.

5. Government: Well kept books aid the tax calculation process. It helps the
Government to find out the different kinds of taxes applicable and calculate the exact
amount payable as taxes.

6. Lenders: The lenders can assess the standing of the business among its competitors
and make well-informed decisions about lending the money to the business.
1.4.2 How is Book-Keeping different from Accounting?

Book-keeping and accounting are often used synonymously but the two have differences.
Accounting is a larger aspect and is analytical. Accounting also includes the designing of
accounting systems which are further utilized by book-keepers to prepare audits, cost-studies,
analysis, interpretation of accounting information, financial statements. Such tools are used
by internal and external users to aid business decisions. It can be said that book-keeping is the
tip of the iceberg, where accounting is the iceberg.

Differences between Book-Keeping and Accounting:

Book-Keeping Accounting

Is the art and science of recording Summarizes the already recorded transactions.
financial transactions.

It is a routine job, often performed by Requires a higher level of knowledge and

clerks, now being done by computers. conceptual understanding.

Book-keeping results in Ledger and Accountancy results in Profit-Loss A/c and

Journals. balance sheet.

It is the accounting basis. Accounting begins where book-keeping ends.

Has to be completed as per the set The system and procedure may vary for
concepts and rules. accounting systems in different firms.
Book-keeping does not constitute Financial statements are a result of the data
financial statements. extracted from book-keeping and a part of
accounting.

Book=keeping does not ascertain the Accounting reports offer a complete picture of a
position of a business in the market. business in the market.

It is a daily record. It is often a record of transactions of an entire year.

Book-keeping does not require Book-keeping data is analyzed and interpreted to

analysis. It is a plain record of be compiled into reports.
transactions.

Figure 1.2 The Book-Keeping

Review Questions

Q. 1. Do you keep a log of your expenses?

Q. 2. Prepare a list of the articles you bought in the last week.

Figure 1.3 Traditional Book-Keeping in Register

1.5 Accounting

Book-keeping is the tip of the whole accounting system. It is the initial step. Under book-
keeping, the transactions are recorded to keep a track of all the transactions. Recording,
sorting, and reporting of financial transactions for an enterprise is known as accountancy.
Principles binding accountancy are norms and assumptions agreed upon by accountants all
across the world.

Some definitions given by notable accountants are:

1) “Accountancy refers to the entire body of the theory and process of accounting.” By
Kohler.

2) Prof. Robert N. Anthony has defined accounting as "Nearly every business enterprise has
an accounting system. It is a means of collecting, summarizing, analyzing and reporting in
monetary terms information about the business transactions."
1.5.1 Systems of Accounting

There are different systems of accounting. These may be followed individually or collectively.
The three different bases of accounting are:

1) Cash Basis: In this method, accounting entries are only made when cash is received or
paid. When a payment or a receipt is due, no payment is made under this system. In this
system of accounting only cash paid is reflected in the books. No revenue or sales are
considered until cash has been paid. There is no value of receipts about the future or past.
Expenditure under this system has a narrow range, where the entries considered only
involve cash payments.
The financial statements prepared and maintained under this system do not provide a true
picture of the operations as the method is not compatible with the principle of income
determination. The cash system is still followed by many businesses. It is a viable method
in cases where:

i) Individuals own a small business and it is difficult to set aside small amounts of
money in between financial periods.
ii) Where no or negligible credit transactions take place. Professionals like doctors,
lawyers, secretaries may opt for such accounting methods. Such financial
statements prepared for income determination may be referred to as receipts and
expenditure account.

2) Accrual or Mercantile Basis: The mercantile system of accounting also records

transactions based on amounts that are due for payment or receipt as well. The system is
an attempt at recording the finances and the effects of actions, situations, and transactions
of a company in real-time rather than in defined periods. The system understands well that
the buying, selling might not coincide with cash paid or received in the period. This type
of accounting very well relates the revenue earned and the cost incurred which makes the
reported net income a clear measure of enterprise's performance. The accounting system
acknowledges assets, liabilities, revenue-generating avenues, expenses in cash or credit.
Some essential features of the Mercantile accounting system are:

i) Earned revenue is accounted for even if it is not received yet.

ii) Cost and revenue are synced in the relevant period to account for the periodic
income.
iii) Costs not charged to income are carried to the next periodic cycle and are under
review. If a cost loses its utility, it is written off as a loss.
3) Mixed basis: This hybrid accounting system is a combination of cash basis and mercantile
basis of accounting. Both accounting systems are followed. Often revenues and assets are
recorded on a Cash basis and the expenses on a mercantile basis. The law in India does
not support the use of a Mixed basis of accounting.

Figure 1.4 Accounting requires the calculation of ratios and Financial data

1.5.2 An Information System

Accounting is the language of business. It is used to express and understand financials and
other information of a business, government, etc. For a loan application, a company is
required to produce all the financial details regarding the business activities, financial
position, etc. The shareholders seek financial information to make intelligent decisions and
evaluate the performance of the management of the company. Accounting deals with
collecting reports and interpreting the financial information regarding the operations of the
firm. Accounting can be interpreted as a result communicating medium for the organization.

Users of Information emerging from Accounting Process

A lot of people benefit from the information generated by Accounting. Creditors, investors,
shareholders, etc. are interested in accounting information. The use and users are discussed
below:

1) Owners: Accounting provides owners with important information about their businesses
to undertake useful decisions.

2) Shareholders: The people who own a stake in the business must know the financial
condition of the business. Accounting helps shareholders with all the financial
information.

3) Managers: To understand and manage a large business, financial information is highly

vital. In large businesses and corporations, there is a separation of ownership and
management. In such cases, the managers are highly concerned about the accounting
information as they are answerable to the owner of the business.

4) Prospective Investors: The people looking forward to investing in the business should
be well informed about the company financials. Accounting information helps the
investors to make good decisions about the money they wish to invest.

5) Creditors, Lending Institutions: The financial statements help a creditor or loan giving
institution to understand if the borrower will be able to repay the amount being lent. The
acceptability of loan applications depends highly on the financials produced by the
accounting of the company.

6) Government: The Government of the country is interested in the financials of the

company as it helps them to calculate and assess the tax liability of the business.

7) Employees: Employees are an integral part of the company. If the company is growing,
the employees will get equally rewarded and if not, the salaries of the employees may get
affected. Employees are interested in the financials of their own company to keep an eye
on the performance of the company.

8) Regulatory Agencies: Various agencies keep an eye on the financial information of the
companies. This helps them to understand how well a company is functioning and also to
keep a check if everything is being conducted legally.

9) Researchers: The research scholars may put financial information of a company to use
for researching and testing accounting theories and business operations and methods.

10) Customers: Customers may take an interest in the profitability, solvency, or even
liquidity of the company.
Characteristics of Information produced by Accounting

The characteristics of accounting information are:

1) Relevance: The information produced by Accounting must be relevant to the times to be

of help to the users of the information. The accounting information has a grave impact on
the decisions undertaken by creditors, investors, managers, etc. who utilize this data to
evaluate the past and future outcomes. The relevance is affected by the nature and
materiality of the information.

2) Reliability: The accounting information must be reliable so that it can be faithfully

presented and used. The information must be factual and free from bias and errors. The
key aspects are faithful representation, neutrality, completeness, substance over form.

3) Comparability: The accounting information of any firm must be comparable with that of
other firms. This means that the data must be presented, processed, collected similarly.

4) Understandability: The accounting information presented must be understandable by

those who wish to extract information from the data. Those who wish to study the
information must be able t to process it easily.

5) Timeliness: As soon as the information is circulated, it is bound to affect the people's

judgment. The information must be made available to those who require it without any
delay.

6) Cost-Benefit: The use and benefit of the accounting information must not come at a hefty
price. The accounting system must be rightly valued and not too time-consuming. The
utilization of the process must outdo the cost of creating it.

7) Verifiability: The truthfulness of the data is important. The accounting information must
be verifiable through worthy sources.

8) Neutrality: The accounting information must be free from bias. The information must
not favor any group, department, or sector. Neutrality is vital for the external users of the
information.

9) Completeness: All the information must be included which could be necessary for the
creditors, investors, etc. This saves time and hassle.
 Figure 1.5 Accountants

1.5.3 Accounting as Measurement Discipline

We can call accounting a measurement discipline as the system deals with the monetary
measurement of inputs and outputs. It forms the basis of efficiency measurement of
performance for an enterprise. Assessing the numerical values about specific attributes or
characteristics of the financial system.

Value of the system refers to the benefits which can be derived from ideas, abilities, and
objects. Valuation is a concept devised by economists. Utility and value are synonymous with
each other. Utility refers to the enjoyment or satisfaction of use derived from an article.

Four measurement basis are prevalent in the accounting world, they are:

1) Historical Cost: The acquisition price of an asset is the historical cost. By acquisition
price, we mean the price paid to acquire the commodity, article, etc. Recorded Liabilities
are at the number of proceedings in exchange for the asset.

2) Current Cost: Assets carry a certain value. The value at which a similar asset can be
bought presently is the current cost of the asset. Liabilities are carried at undiscounted
rates which might be required to settle the obligation in current times.

3) Realizable Cost: The value which can be obtained by selling an asset at a point in time.
Liabilities are recorded at their settlement values.

4) Present Value: Any asset has a value equivalent to the sum of present discounted net
cash inflow that is expected to be generated. Liabilities are recorded at the present
discounted value of future net cash outflow that would satisfy the liability.
 Figure 1.6 Data Processing

1.5.4 Accounting Terminologies

To understand accounting well, one must understand the meanings of certain terms used in
the accounting process. Accounting is an expansive system that caters to many purposes.

Cash
Transactions
Monetary
Transactions
Credit
Transactions Transactions

Non-Monetary Barter
Transactions Transactions

Fig 1.7 Different types of Transactions

1.5.4.1 Transactions

Whenever goods or services are exchanged between two different entities, it is called a
Transaction.

1) Monetary Transactions:

The exchange of goods or services which involves money directly or indirectly is known as
monetary transactions. Books of accounts record monetary transactions alone.

a) Cash Transactions: A transaction in which money is paid in return immediately is a

cash transaction.

E.g. i) Purchasing a gaming console for Rs. 1,000.

ii) Getting paid a salary of Rs. 5,000.

b) Credit Transactions: The transactions in which cash is not given out or received at the
same time. The money will be paid or received on a later due date.

E.g. i) Table sold on a credit of Rs. 5,000.

ii) Machinery sold at a credit of Rs. 10,000.

2) Non-Monetary Transactions:

The transactions which do not involve cash or money's worth in any way are non-monetary.
The barter system includes the exchange of one thing in exchange for the other, expected to
be of similar value.

i) Entry: Recording the transactions from the business, is a specified form in the
account books is known to be an entry.
ii) Narration: An explanation or comment added alongside the business transaction
is a narration. The narration is mentioned in a bracket below the entry. The
narration often begins with ‘Being’ or ‘For’.
iii) Goods: It refers to the articles, commodities, etc, a trader trades. These articles are
sold and bought to make a profit.
 e.g. a) Books are goods for a bookseller.

b) vegetables are goods for a vegetable seller.

1.5.4.2 Capital and Drawings

1. Capital: The total investment made into a business by the owner himself is the capital of
the business. Excess assets over liabilities are also defined as capital. It can also be defined
as:
Capital = Assets – Liabilities
It is the liability of the business as is payable by the business to the owner of the business
closes down.

2. Drawings: The amount of cash or goods are withdrawn by the owner from the business
for personal utilization is known as drawings.
e.g.: A chemist takes out some medicines from the inventory for his ailing mother.

1.5.4.3 Debtors and Creditors

1. Debtor: One who has to pay a business for getting machinery, services, goods on credit
is a debtor. The debtor owes money to the business.

2. Creditor: The person to whom a business owes the money is a creditor. The person has
given money to the business to fulfill requirements at a credit.

3. Bad Debts: Bad debts are revenue loss to the business. When a certain amount is
irrecoverable from a debtor it is classified as bad debt.

1.5.4.4 Expenditure and Types of Expenditure

Expenditure is an amount spent by an enterprise for any requirement of the business.

1. Capital Expenditure: When a business is acquiring a fixed asset, a certain amount of

money is employed for the same. The money incurred to buy or upgrade a fixed asset
is capital expenditure. such expenditures are beneficial in the long run and are non-
repetitive.

E.g.: Renovation, upgrading the machinery, purchasing new machines, etc.

 2. Revenue Expenditure: Such expenditures do not offer any long-term benefits but do
possess immediate, short term benefits. The benefits of such expenditure may not last
longer than a year. The profit earning capacity remains unaffected. These are normal
expenses of a business.

E.g.: Salary paid, wages, etc.

3. Deferred Expenditure: An expenditure that is revenue in nature but the benefit of

which is not exhausted within one year is called Deferred Revenue Expenditure. Such
expenditure is written off over several years. Such written off amount is shown on the
debit side of profit and loss a/c and the unwritten amount is shown on the asset side
of the Balance Sheet.

E.g.: Heavy expenditure on advertising, heavy legal expenses.

1.5.4.5 Cash Discount and Trade Discount

Discount is a concession offered by the seller to the customer. The two types of discount:

1. Trade Discount: It is the concession offered on the list price of the goods. The
discount is offered at the time of sale of goods. It does not appear separately in the
account books. The value of goods is recorded after deduction of the trade discount
amount. If something is listed at Rs. 1,000 is sold at a trade discount of 5%, the
recorded value will be Rs. 950 by the purchaser and the seller both.

2. Cash Discount: This kind of discount is deducted from the final amount. It could be
a concession offered for prompt payment. The cash discount is calculated on the final
price after the trade discount deduction. It is a loss to the seller and again to the buyer,
it appears in the books of both buyer and seller.

1.5.4.6 Solvent and Insolvent

1. Solvent: When a person has assets more than his liabilities' value or equal to the liabilities'
value the person is known as a solvent. A solvent person is financially sound and can pay
off any debts on him if any.
E.g.: A person has Rs. 60,000 worth of assets while his debts stand at Rs. 20,000, then
this person can safely pay off his debts without being bankrupt at any stage.
 2. Insolvent: A person whose liabilities overpower the assets he possesses is known as an
insolvent person. Such a person has liabilities worth more than the valuation of his assets.
E.g.: A person has Rs. 20,000 worth of assets while his debts stand at Rs. 40,000, then
this person cannot safely pay off his debts without being bankrupt. This person will be
declared insolvent if he is unable to source money to repay his debt.

Accounting Year:

The accounting year lasts for 12 months/1 year. For this period, accounts are maintained and
managed by the proprietor. In the earlier times, the proprietors used to follow the normal
calendar, but now the financial year starts on 1st April and ends on 31st March. Whenever a
financial year ends, the proprietor has to draw up the balance sheet, trading account,
Profit/Loss account to analyze the financial position of the company.

Trading concern and Not for Profit Concerns

i. Trading Concern: It refers to a business concern set up to make a profit by selling goods
or services. It may even be called a commercial or profit-making organization.

ii. Not for Profit Concern: A not for profit concern is one where the main objective is to
serve society for its greater good. There could be various reasons and motives for setting
up a not-for-profit concern.

Figure 1.8 Archaic Accounting Methods

1.5.4.7 Goodwill

The aggregate of the intangible attributes of an enterprise leads to better-earning power as

compared to a normal investment. Goodwill may arise from the ability and skill of the
employees, favorable location, ease of business, quality of products produced, great
management, etc.

● It can be understood as the reputation of a business when expressed monetarily.

● It is an intangible asset.

1.5.4.8 Profit and Loss

1. Profit: A profit is said to have been made when the selling price of an object is more than
its cost price. The capital of a business increases when the profit increases.
Profit = Selling Price – Cost price
E.g.: When a table is sold for Rs. 5,000 while it was bought for Rs. 3,000. It can be said
that a profit of Rs. 2,000 is made off the table.

2. Loss: When the selling price of an object happens to be lower than the cost price of the
object, a loss is incurred. Capital of business when the loss is incurred.
Loss = Cost Price - Selling Price
E.g.: When a chair is sold for Rs. 1,000 while it was bought for Rs. 3,000. It can be said
that a loss of Rs. 2,000 is incurred on the table.

3. Income: The revenue generated from business transactions. It is the total amount
receivable from services provided, earnings from the dividend, interest, etc.

4. Revenue: the income a business generates from business activities such as the sale of
goods, services.
 Figure 1.9 Transactions table

1.5.4.9 Assets, Liabilities, Net Worth

1. Assets: Physical attributes possessed which holds monetary value is known as an asset.
The business must own the asset to get it considered in the books and financials of the
business.
E.g.: Goodwill, land, machinery, etc.

2. Types of Assets:
a. Fixed Assets: The different assets which are held with a view of long term
benefits. These assets give long term benefits to the business and are often one-
time investments. These assets may be tangible or intangible.
E.g.: Machinery, land, Infrastructure, Goodwill, etc.
b. Current Assets: Al the assets held by a business in a single operating year are
known as the current assets. These assets can be converted to cash easily.
E.g: Stocks, cash in hand, debtors, etc.
c. Fictitious Assets: Imaginary assets that do not have any tangible representation.
These assets do not have a realizable value.
E.g: Advertisement payments deferred.
3. Liabilities: Any amount which needs to be paid by the business to others is a liability on
the business. It is often a debt undertaken by the business in the hour of need and needs
to be repaid, sometime in the future.
E.g.: outstanding expenses, loans, creditors, etc.

4. Types of Liabilities:
a. Fixed Liabilities: Fixed liabilities are one of the most trusted major sources of
funds in the business. These liabilities can be in the form of secured loans from
banks or cooperatives, capital, etc.
b. Current Liabilities: The liabilities which are payable in years are current
liabilities. Such liabilities can arise anytime in the regular operations of the
business. Such liabilities are often unsecured.
E.g.: payable bills, creditors, etc.

5. Net worth or Owners Equity or Capital:

The funds provided by the business owner to the business are 'Capital' or it can be said that
the excess of assets over liabilities for the business is 'Capital / Net Worth'. The net worth of
the business also includes reserves and capital. Capital can be provided in cash or kinds by
the proprietor.

Net Worth = Owner’s Equity = Capital

Or
Owner’s Equity = Total Equity (Assets) – Creditors Equity(liabilities)
E.g.: The capital of a business is Rs. 5,00,000 and creditors Rs. 3,00,000

Total Equity (Assets) = Liabilities + Capital

Rs. 8,00,000 = 3,00,000 + 5,00,000

If the total assets of the firm stand at Rs. 2,00,000 and the outside liabilities sum to
Rs. 50,000

Creditors Equity (liabilities) = Assets – Capital

50,000 = 2,00,000 – 1,50,000

If the total assets of a firm total to Rs. 6,00,000 and the outside liabilities are Rs.
3,00,000

Owner’s Equity (Capital) = Assets – Liabilities

3,00,000 = 6,00,000 – 3,00,000

Contingent Liabilities:

Contingent liabilities may arise in the future and are dependent on the happening of a certain
event. These liabilities are not perfect liabilities as they might occur or might not occur.
Contingent liabilities do not affect the financial position of the business and hence not shown
as a liability in the books. Such liabilities are mentioned as a footnote of the balance sheet.

Compensations that turn into lawsuits bodies are often classified as contingent liabilities.
 Figure 1.10 Accounting terms

1.5.5 Accounting Concepts, Conventions, and Principles

Accounting is the language of business operations. The language communicates to various

parties interested in getting acquainted with the condition of the business. These could include
investors, lending institutions, financial institutions, creditors, owners, etc.

Accounting is not just about the business but for anyone related to the business. Book-keeping
and accountancy are together the art and science of tracking, categorizing, and summarising
financial transactions in a specified manner.

Some important concepts related to Accounting are:

1. Business Entity: Accounting considers that the business under consideration is entirely a
different entity, distinct from its owner/owners, investors, etc. All the books are prepared
from the point of view of the business, not the owner. This makes the business a debtor
of the capital invested or contributed by the owner into the business.
Going by this concept, all the business transactions conducted with the enterprise are only
recorded. The personal transactions of the owner are not included in the company books.
The transactions which take place between the owner and the business are mentioned in
the books. The business owns its assets and has its liabilities.
E.g.: A business is opened in the garage of the owner. The owner has rented the space to
the business. The garage of the owner will be considered an investment in the business in
kind.

2. Money Measurement: As money is the medium of exchange, the transactions which can
be equated in terms of money are only entered in the book of accounts. The ruling currency
of the country is used as a measuring unit. The transactions which do not include money
are not recorded in the accounts book. E.g. strikes by workers, working conditions,
efficiency, etc. are not considered in the accounts book. The infrastructure is added in the
terms of the monetary value they hold.

3. Cost Concept: When an asset is acquired, it is recorded in the accounts book according
to the value it had at the time of acquiring. The asset may experience depreciation, its real-
time value may decrease. The value of the asset bought is systematically decreased by
charging depreciation on the value historically recorded.
4. Consistency Concept: Accounting policies and policies must not be changed frequently.
The policies adopted must be constant and consistent throughout the business, the life of
an asset. In any case, if the policies are to be upgraded or changed, prior notice must be
released. Constant improvement in techniques is not hindered by this. The changes must
be disclosed before the change takes place. This helps the accounting system and
regulators and the beneficiaries.

E.g.: If a fixed installment depreciation model has been adopted for a fixed asset, the
method must not be changed throughout the life of the asset.

5. Conservatism: While recording the accounts, this policy requires the accountant to be
prepared for all the losses and not anticipate any profits. This policy encourages secret
reserves and helps in preventing losses. The statements may give lower-income and
overstate the liabilities and understate the assets. The policy makes the accountant 'play
safe'.
E.g.: If a certain article in inventory has a cost price of 25 Rs. But the market price is Rs.
35. The accountant will record the value of Rs. 25 as it is the lower value.

6. Going Concerned: The most basic assumption is that the business is going on and will
continue to function in the future as well. The concept affects the accounting practice
concerning the valuation of assets and liabilities, depreciation of assets, accrued and
unearned revenues.
The assets are often valued at the historical cost, any increase or decrease in the cost is
ignored.

7. Realization: In the accounting process, transactions are only recorded only when the
income is realized, it can be stated as to when money is paid or received. Revenues are
only recorded in the accounts book when the sales are accomplished or the services are
provided. Sales records are recorded even when the cash is not received.

8. Accrual: The account books witness a record of income when either it is earned or paid.
The transactions accomplished in the accounting period need to be considered even if the
revenues are received or expenses are paid in cash or not.
9. Dual Aspect: Every transaction has two sides, just like two sides of the coin. For every
income, the payer is experiencing a loss but the receiver is gaining the amount. It can be
said that for every credit there is an equal corresponding debit. This is the basis of the
double-entry system of accounting. The accounting equation: Capital + Liabilities =
Assets emerges.

10. Disclosure: The accounting data must be transparent and release all the information
without withholding any. Full and fair information must be released honestly for all the
users and beneficiaries. The final position and performance of the business must be
completely disclosed. The results in terms of profits or losses and income and expenses
in the profit and loss account must be disclosed without any bias.

All the relevant information must be disclosed. The data released must be fair, unbiased,
complete, comparable, reliable, and understandable by all the concerned people. This
enables a better understanding of the financial statements of the businesses.

11. Materiality: This convention states that all the material data must be disclosed which
could be useful for the beneficiaries or help them form a decision. Any data or information
which is not significant enough can be left out from disclosure. This concept can be seen
as an exception to the full disclosure principle. ‘Materiality' is a subjective term that
depends on the size of the business, requirements of the beneficiary, etc. Something
material to the owner might not be material to the customer.

12. Matching Concept: the periodicity concept fixes the time for consideration. The
revenues under a certain accounting period are to be matched with the expenses incurred
during the period to earn the revenue. This concept is based on the accrual concept and
periodicity concept.

The expenses related to accounting are to be considered alone. Adjustments should be made
for outstanding and prepaid expenses for the period under consideration. Provisions for bad
debt, depreciation of fixed assets, etc. for the accounting period under consideration.

Thus, the expenses match the revenues earned during the accounting period to earn the
revenues before profit is gained or loss incurred. This helps in a better understanding of the
Profit/Loss accounts.
 Figure 1.11 Accounting requires analysis of financial transactions

1.5.5 Accounting Standards

Standards provide the basic framework for the accounting systems. This helps the financials
to become comparable. Standardizing the accounting process is important to ensure
comparability, compatibility, adequacy, and reliability of the accounting report. Accounting
standards enable uniformity in the accounting systems

One might wonder that why do we require a standardization of the accounting process when
we can complete accounting processes as per our own will? You can understand the
importance of standardization from the following points:

i) To promote a richer understanding of financial statements.

ii) Aid accountants in following uniform procedures and practices.

iii) Facilitate meaningful comparison of two or more financial statements.

iv) To enhance the reliability of financial statements.

v) To meet the legal requirements of the financial statements effectively.

There are International and Indian Standards of Accounting that are used to achieve
standardization of the accounting process. This standardization helps in a better understanding
of financial reports all around the world.
1.5.5.1 IFRS (International Financial Reporting Standards)

The international accounting standards, International Financial Reporting Standards (IFRS)

are issued by the International Standard Board (IASB). The International standards define
how particular transactions should be reported and filed. The accounting standards set by the
IFRS are understandable, acceptable, and applicable all around the world. The accounting
standards are highly relevant for the companies with shares or securities listed on the public
stock exchange. International Accounting Standards Committee (IASC) was set up in the year
1973.

1.5.5.2 Other Indian Accounting Standards

Institute of Chartered Accountants of India (ICAI) issues the Accounting standards in India.
The Accounting Standards Board (ASB) was set up on 21st April 1977. The ICAI recognized
the need for national uniform accounting standards which led to the set-up of ASB. The ASB
considers the International rules and standard practices while regulating the Accounting
standards in the country. The Accounting standards given by the international Accounting
society are valid and binding on all the for all the accounting processes all around the world.

With the advent of globalization, every country has to comply with the international
accounting standards so that financial statements made in the country are comparable with
financial statements from other countries. The convergence of the international and Indian
Accounting standards is known as Ind AS. All the big companies are required to follow the
Ind AS, while the small companies are required to follow AS regulations.

Some Accounting Standards (AS): The Council of the Institute of Chartered Accountants of
India has so far issued thirty-one accounting standards. Some of these Accounting Standards
are explained below

1) AS-1 Disclosure of Accounting Policies (1-4-1991 for Companies and 1-4-1993 for others)
As per the standard, accounting policies to be followed in the preparation and presentation of
financial statements should be a part of the financial statements and disclosed all at once.

2) AS-2 Valuation of Inventories (1-4-1999) As per the standard, inventories should be valued
at lower historical cost and net realizable cost.

3) AS-3 Cash Flow Statements (1-4-2001) As per the standard cash flow statement is prepared
and presented for an accounting period, profit and loss account is prepared for the same time
frame.
4) AS-6 Depreciation Accounting (1-4-1995) As per the standard, the depreciation amount of
an asset should be allocated on a systematic basis for each accounting period during the useful
life of an asset.

5) AS-8 Accounting for Research and Development (1-4-1991 for Companies and 1-4-1993
for others) As per the standard, the amount of research and development cost should be
charged as an expense of the period in which they incur.

6) AS-9 Revenue Recognition(1-4-1991 for Companies and 1-4-1993 for others) The standard
deals with the basis required for recognition of revenue items in the Profit and Loss Account
of an enterprise. It lays down conditions to recognize revenues that arise from the various
transactions of an enterprise.

7) AS-10 Accounting for Fixed Assets(1-4-1991 for Companies and 1-4-1993 for others)
As per the standard, the cost of fixed assets should comprise of the original cost and any
attributable cost of bringing the asset to its working conditions for its intended use. The fixed
assets should be eliminated from the financial statement on disposal or when no further benefit
is expected from their use.

8) As-12 Accounting for Government Grants(1-4-1994) As per the standard, government

grants should be recognized when there is an assurance that the enterprise will comply with
the conditions attached to them.

9) As-13 Accounting for Investments (1-4-1995) As per the standard, the enterprise must
reveal the current and long term investments distinction in its financial statements. Current
investments should be carried in the financial statements at a lower cost or fair value. However
long-term investments should always be carried in the financial statements at the cost price.

10) AS-22 Accounting for Taxes on Income (1-4-2001) As per the standard, tax expenses for
the period comprising current tax and deferred tax should be included in the determination of
the net profit or loss for the accounting period.
 Figure 1.12 Empty Ledger Table

Review Questions

Q. 1. Write differences between monetary and non-monetary transactions.

Q. 2. What do you mean by goodwill?

Q. 3. Write the full form of AS, IASB, IFRS, IASC.

Q. 4. Mention Important Accounting Concepts.

Q. 5. Explain the importance of Accounting systems.

1.6 Accounting Entry Systems

There are broadly two different types of entry systems in the accounting world. The two
accounting entry systems are developed with due research and with the growing need for
accounting practices.
 1.6.1 Single Entry System

The single-entry system is simple and easy to understand. It is the earliest form of record-
keeping developed in the accounting field. It is quick and easy to understand. The system is
economical to use but is unscientific. Often some transactions are not recorded in the system
or some are partially recorded. This leads to confusion and loss of credibility for the system.

1.6.2 Double Entry System

The double-entry system is credible and scientific. Most companies employ the double-
entry system for their accounting purposes. The double-entry system also recognizes that
every transaction has two faces and gives due credit to them by recording both of them. For
every transaction that takes place, a certain account is credited and the other debited to
account for both sides of the transaction. Thus, every transaction affects two accounts.

1.6.2.1 Merits of Double-Entry System

i. A complete record of all the business transactions is maintained. Personal and

impersonal accounts both are well kept and maintained. The assets and profits earned
and maintained all around the year are recorded, all the information can be retrieved
whenever required.
ii. The accounts can be checked for arithmetical accuracy easily as every credit has a
corresponding debit and vice-versa.
iii. Profit and loss accounts can be maintained to reflect profit earned or loss incurred
during a certain period.
iv. A suitable comparison can be drawn for sales, income, purchases, etc. for any certain
period with some other period equally long. It helps the owner and management to take
the required steps.
v. Frauds or mistakes are likely to happen if the accounts are lengthy. The double-entry
system removes the chance of fraud and errors.
vi. At any time after the creation of the accounts, the information can be obtained and
understood easily.
1.7 Rules of Debit and Credit

Let's say we add one more dimension to the above statement. The left side of an account can
be referred to as debit(D) and right-side credit(C). So, for every entry, there would be a D
and a C. In the debit and credit system, when an amount is increased on account, the entry is
on the debit side and when an amount is decreased on the account, the entry is on the credit
side of the account. It can be denoted as below:

When a cheque is deposited, the entry would be debit of (D) for the person who has issued
the cheque and credit (C) in the account of the person who has deposited that cheque.

Personal Account: ‘Debit the receiver and credit the giver’ In accounting, (debit and
credit) are strictly defined terms that mean the same thing, on opposite sides of an account.
It is a fundamental principle in double-entry bookkeeping. To keep a balance at zero, for
every debit entry there is an equal and offsetting credit entry.

Real Accounts: ‘Debit what comes in, and credit what goes out’ Simply put, debiting an
account means deducting or decreasing the balance of that account while crediting an
account increases or adds to the balance of that account. For example, when shoes are
bought, the shoe account is debited while the cash account is credited.

Nominal Accounts: ‘Debit all expenses and losses/ credit all incomes/ gains’ If a
company owes you $100, that is a legal claim on his assets (a liability) which is recorded in
an accounting record or journal. When the company pays you the $100, this is an entry to
debit cash and credit your account for $100. This is why debits have been traditionally
referred to as the "left side" of the accounting equation because they affect assets or
liabilities, while credits affect equities or revenue/expense.

Figure 1.13 Accountancy is a calculation intensive art and science

1.7.1 Significance of Debit and Credit

1. Debit in Personal Account: Debit is the term used for short-term borrowing. In
accounting, it refers to taking money from one account and placing it in the second
account. This category includes credit card transactions as well. The debit amount
goes directly into a negative number when written on the journal entries. Debits
reduce assets, increase liabilities, and/or subtract income (depending on the financial
statement).
2. Credit in Personal Account: A personal account being credited means that the
owner of the account has become the creditor of the business. If the account of the
creditor is credited, it means that fresh credit has been added.
3. Debit in Real Account: Debit in a real account means either the value of the debited
asset increased or the business bought more of the asset.
4. Credit in Real Account: The value asset whose account is being credited has
decreased or the business sold a part or whole of the asset, is a form of credit in a
real account.
5. Debit in Nominal Account: The phenomenon shows that an expense of the debt
amount or income has diminished by the same amount.
6. Credit in nominal Account: The situation arises when an or profit of the amount of
credit or some loss or expense decreased in value.

Note: Recording the Transactions

If the three fundamental rules described above are kept in mind, it would be possible to
record all the transactions correctly. Follow these simple steps to record all the
transactions:
– Identify the two accounts involved in the transaction.
– Find out the type of account for both the accounts
involved in the transaction.
– Apply the rules of debit and credit.

For example, payment of salary is a transaction. The transaction involves Salary Account
and the Cash Account. Salary Account is classified as a nominal account whereas the
Cash Account is a real account. Salary is an Expense. Rule of Nominal Accounts says
"Debit all expenses and losses". So, Salary Account will be debited. Whereas the rule of
real accounts says credit what goes out. Here cash is going out. So, Cash Account will be
credited.
Review Questions

Q. 1. What do we mean by Credit?

Q. 2. Explain the different types of accounts.

Q. 3. Write the differences between the Single-entry and Double-entry system of

accounting.

Q. 4. When was the Double-entry system invented and by whom?

Q. 5. What is the importance of the Accounting process?

Illustration 1: Analyse the given transactions and identify the nature of transactions involved
and write what account will be credited and which one debited?

S. TRANSACTION ACCOUNTS TYPE OF DEBIT/CREDIT

No. INVOLVED ACCOUNT

1. Sunita started a Cash Account Real Debit Incomings

business of
Capital Account Personal Credit Giver
bangles with Rs.
50,000

2. She purchased Purchases A/c Nominal Debit Expenses

goods for the
Cash Account Real Credit Outgoings
business for Rs.
25,000

3. A customer Cash Account Real Debit Incomings

bought bangles
Sales Nominal Credit Income
worth Rs. 10,000
 4. She bought some Purchases Real Debit Exp
more inventory
Cash Account Real Credit Outgoings
from Meeta for
Rs. 15,000

5. She sold some Charles Personal Debit Receiver

more bangles
Sales A/c Nominal Credit Income
worth Rs. 5,000

6. Sunita purchased Furniture A/c Real Debit Incomings

a sofa for Rs.
Cash Account Real Credit Outgoings
7,000

1.8 Role of an Accountant

An accountant is very important for every business in the modern-day business. The role of
an accountant are:

1. Maintenance of Accounts: This is the primary role of an accountant. Systematic

records of financial transactions are to be maintained to record profit or loss incurred
which further aids in the understanding of the financial position of the business.
2. Statutory Audit: A chartered accountant is hired as an auditor by every company
who makes sure that the financial documentation is as per the accounting standards
and check on the legal requirements and that the statements give a fair view of profit
and loss and financial position of the company.
3. Internal Audits: Some staff members are employed to conduct regular internal
audits along with the statutory auditing of the financials. The internal audit team
ensures that the transactions are recorded, classified, and summarized as per the
accounting standards and also that the management directives are followed.
4. Budgeting: It is the art of planning the cash flow before it occurs. When money is
received or spent, it is compared with the budgeting to find and analyze the
variation.
 5. Taxation: Taxes are to be paid by all businesses to the Government. An accountant
is entrusted with the responsibility of managing tax payments and appear before the
tax authorities and settle the tax liabilities on behalf of the business. The accountant
is also responsible for devising methods to reduce the tax burden and provide proper
tax planning measures.
6. Investigation: Sometimes investigation might be required as per the interest of the
interested beneficiaries. An accountant may be hired for the financial investigations.
7. Management Advisory: An accountant is the one who is responsible for reporting
to the management for different decision making, planning, controlling, planning
purposes. The accountant helps the management to understand the finances better.
8. Other Roles: Some other roles like those of arbitrator registrars to settle disputes,
cost accountants, liquidators, etc.

Figure 1.14 Different roles of an Accountant

1.9 Accounting Equation

All the financial transactions are classified and recorded as per the double-entry system. At
any point in time, an enterprise always possesses goods that can be liquidated. All such
goods and articles are known as assets. A few ec\xamples of assets are: Infrastructure, land,
machines owned, furniture, inventory, debtors, bills receivable, cash in hand, etc. The
proprietor ushers in money into the business. The business or enterprise utilizes the capital
out of this money to purchase assets and invest in the good of the business. The amount of
the assets of a business is given by:

Thus, Capital = Assets.

That is the amount of capital contributed by the proprietor of the business.

If the money sourced by the proprietor is less than the requirement of the business. The firm
can source or borrow money from outside parties. These money lending parties lend money
at certain interest rates. These parties also allow credit facilities at the time of buying goods.
The amount of money owed to these money lending companies are known as liabilities for
the business. Bills payable, loans, outstanding expenses, etc. all are liabilities for a business.
Loan provided by the outside money lenders increases the assets of the business, whereas
the claims of creditors on the assets of the business increase.

Hence, the sum of resources (assets) = obligations (capital + liabilities)

Therefore, Capital + Liabilities = Assets; or
Capital = Assets — Liabilities.
This equation is known as the Accounting equation. The equation is based
on the concept that for every debit, there is an equivalent credit. The
entire system of double-entry book-keeping is based on the Accounting
concept.

Figure 1.15 Digital Accounting Solutions

Example: If a business is set up with a capital of Rs. 60,000. The firm will possess the
capital as an asset. The business owes the owner the same amount. Thus, we have

Capital (60,000) = Assets 60,000 (cash)

Now, if the firm purchases machinery for Rs. 20, 000 our of the capital provided by the
owner. We will have the following situation at hand.

Capital (60,000) = Cash (40,000) + Machinery (20,000)

This is the final Accounting equation for the given situation.

1.10 Summary

Chapter Round-Up

Accounting: Art of summarizing, sorting, and recording transactions and exchanges

which are financial and in terms of money.

There are three main branches of accounting, they are i) financial accounting, ii)
cost accounting, and iii) management accounting.

Accounting functions include: maintaining financial records; protecting and

managing business properties and assets; ascertaining operational profit/loss;
assessing the financial position of the business; and Aiding rational decision-making
process.

Accounting is the language of business and is used to communicate financial as well

as other exchange related information to different interested parties like
researchers, owners, creditors, employees, investors, government, etc.
The information provided as Accounting information should be relevant,
comparable, understandable, timely, reliable, verifiable, neutral, and complete. This
ensures that the accounting process is complete and valid.

Accountancy could be based on a cash or accrual system. Under the cash system,
accounting entries are made when cash is received or paid whereas, under the
accrual system, transactions based on amounts having become due for payment or
receipt are also recorded.

Book keeping is different from accounting. Book keeping is only concerned with the
recording of financial transactions in a specific manner to display the financial effect
of the transactions in a certain period on the business. Accounting deals with the
summation and analysis of the recorded transactions. Book-keeping is a small part
of Accountancy.

Accounting principles are the stepping stones for the establishment of sound
accounting practices that lead to a proper path in reporting the financial status of a
business.

Accounting concepts are the basic assumptions on which financial statements of a

business entity are made. These assumptions form the basis of the analysis of the
accounting system.

Some important accounting concepts are business entity concept, dual aspect
concept, cost concept, money measurement concept, accrual concept, going concern
concept, accounting period concept, realization concept, and revenue match concept.

Accounting conventions include conservatism, disclosure, consistency, and

materiality.
Accounting standards (ASs) are then laid down Accounting policies and documents
issued by experts, accounting body or by a government agency, or any other
accounting or non-accounting regulatory body.

There are two classes of accounts which are: personal and impersonal accounts. The
Impersonal accounts can also be further classified into real and nominal accounts.

The given accounting Equation describes that the sum of assets as equal to the
liabilities of theenterprise.

1.11 Glossary

Glossary

Book Keeping : A permanent record of all the financial transactions in a defined

order.

Credit : Anything which is gained in a transaction, is credit.

Debit : Anything that is paid during the transaction is debit.

Accounting : The summarising of the financial transactions to prepare

financial reports.
 Accounting Principles : These are the guidelines set as standards for sound
accounting practices.

Accounting Concepts : Basic assumptions on which financial statements of an

enterprise are based.

Accounting Standards : Written accounting policies issued by experts.

Financial Statement : The record of financial transactions and the accounting

information compiled.

Arbitrator : Person who is chosen to settle disputes between two parties.

1.12 Self-Assesment Questions

Fill in the Blanks

1. Profit = Selling Price - __________________.

a. Cost Price
b. Marked Price
c. profit percent
d. concession

2. Accounts information must be reliable, unbiased, comparable,

_____________________________.
a. Relevant
b. understandable
c. distinct
d. unique

3. A non-recoverable debt is known as _______________ debt.

a. good
 b. bad
c. likeable
d. mixed

4. Goodwill is a ______________ asset.

a. Tangible
b. basic
c. Intangible
d. Comparable

5. Double entry system follows the ________________ aspect of transactions.

a. Comparable
b. Dual
c. Relevant
d. Basic

6. Brief explanation of an entry is known as _____________________.

a. Accounting
b. Narration
c. Comments
d. Terminology

7. Barter system involves the exchange of _____________________________ of

equal value.
a. Money
b. Goods
c. Goodwill
d. Narration

8. Actual cash receipts are recorded in the ______________________ basis of

accounting.
a. Cash Basis
b. Accrual Basis
c. Mercantile Basis
d. Mixed Basis
 9. Exchange of services or goods between two parties is known as
______________________.
a. Narration
b. Accounting
c. Transactions
d. Accrual

10. Under accounting, business is a _________________ entity.

a. distinct
b. owner’s
c. ambiguous
d. mixed

Answers:

1-a, 2-c, 3-b, 4-b, 5-b, 6-a, 7-c, 8-a, 9-c, 10-a

Long Answer Type Questions

1. Discuss the role of an Accountant.

1. What are the beneficiaries of Accounting Information?
2. What are accounting standards? Also, discuss what standards suit the Indian
businesses.
3. Explain the basics of credit and debit in accounting concerning different
accounts.
4. Discuss some accounting concepts.
5. Explain the merits of the double-entry system.

Practical Questions for Practice:

1) Form an accounting table for the following data.

a) Goods sold by Aman worth rs. 15,000.
b) Cash paid by Rajesh - Rs. 5,000.
c) Gold bought by Sunita for Rs. 10,000.
 d) Rice was bought by Kamla for Rs. 500.
e) Wheat was bought be Harris for Rs. 100.

2) Point out the accounts which will be debited or credited in the following
transactions.
a) Credit sale to Sam.
b) Depreciation of Furniture.
c) Appreciation of Stocks.
d) Appreciation of Gold.
e) Interest due but not paid.
f) Salary paid to a clerk ‘A’ by Owner ‘B’
g) Payment of rent to Landlord ‘L’ by tenant ‘T’.
h) Cash Paid to ‘Y’ and discount received from him.

3) Prepare the book for Aman for weekly transactions as mentioned.

a) Earned Salary Rs. 50,000.
b) Bought a TV worth Rs. 25,000.
c) Paid for groceries Rs. 1000.
d) Received Interest on his investment Rs. 5,000.
e) Paid for car maintenance Rs. 5,000.

4) Use accounting equation to show an effect on Aman’s transactions

a) Received salary of 50,000.
b) Purchased an investment of Rs. 10,000
c) Paid cash for groceries Rs. 3,000
d) Received rental income Rs. 2,100
e) Paid cash for telecom bills Rs. 5,000

5) Describe the expenses, sort them as credit and debit and sort them under different
accounts involved.

a) Salary earned by Mahesh worth Rs. 70,000

b) Money paid to maid Rs. 10,000
c) TV bought for Rs. 30,000
 d) Interest earned on previous investments Rs. 15,000
e) Money spent on groceries Rs. 5,000

Suggested Readings

References Book
● Narayanaswamy.(2014) Financial Accounting – A Managerial Perspective: PHI
Learning Pvt. Ltd.
● Bhattacharyya. Essentials of Financial Accounting: PHI Learning Pvt. Ltd.
● Banerjee, Bansal, Ghosh. (2002 edition) Principles and Practice of Accounting: Galgotia
Publishing Company, New Delhi-5.
● Shukla, Gupta, Grewal. (2008) Advanced Accounts Vol. I: S. Chand & Company Ltd.,
Ram Nagar, New Delhi-55.

● Tulsian (2017) Financial Accounting: Sultan Chand & Company, New Delhi.

Textbook References
● Bragg, M. (2011) Bookkeeping Essentials: How to Succeed as a Bookkeeper: Wiley
● Fitzpatrick, K. (2009) E-Z Bookkeeping: Baron’s Educational
● Gerber, M.E., et. al (2014) E-Myth Bookkeeper: Michael E. Gerber
● Carol Costa (2008) Teach Yourself Bookkeeping in 24 Hours: Alpha Publishers

Website
● Difference Between Bookkeeping and Accounting (with Comparison Chart) - Key
Differences
● We’ll keep your bookkeeping function on track; we have a knack for that - Finsmart
● Differences and Similarities Between Accounting and Bookkeeping - O2I
(outsource2india.com)
● Small Business Accounting and Bookkeeping Basics You Can’t Ignore
(cogneesol.com)