CA.

Naresh Aggarwal's
ACADEMY of ACCOUNTS
Accounting Costing Taxation Financial Management
West Pate!
Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
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 (1)
CHAPTER1
Basics of Accounting
When a person starts a business, whether large or smal, his main aimis to eam proft
He receives money from certain sources ke sale of goods, interest on bank deposits
etc. He has to spend maney on certain items like purchase of goods, salary,
adverisemert etc. These activites take place during the nomal course ot his business.
woud naturalhy be curious at the year end, to know the progress of his business.
He
The number ot business transactions are generaly too large. that t is not possible to
ecal is memory as to how the.money had been earned and spent. But f he had
noked down tese transacsions as and wthen they were occured, he can readily get
the required irtormation. Hence, the details of the business transactions have to be
recarded in a dlear and systematic manner to get answers easily and accurately for
thefciowing questions at any time he kes: .
What is the NetProftor Loss of the business ?
What are the value of Assets, Liabiies and Capital of the business concem?
How much money is used in ferent type of expenses and money eamed from
diferent type of incomes
) How much amount is to be receive ftrom customers to whom goods have been
sold on credit ?
() How mch amount is to be paid to suppiers o. account ot credit purchases?
These
and severe
accounting
other questions can be very eastly answered with the helpo
Book-keeping
The need for recording business transactions in a clear and systematic manner is the
basis which gives rise to Book-keeping.
Enninng ú a i inaiis i anrigi mi tio inm w neey a tunú i
business trarsacions. t is often routire and derical in nature. Only those transactions
which are related to the business and which can be expressed in tems of money are
recorded. The activitses of book-keeping incude recording in the joumal, posting to
the ledger and balancing of accounts. R.N. Carler says, Book-keeping is the science
and at o corecty recording in the books of account al those business transactions
that resut in the transter of money or money's wort.
Objectives of book-keeping
The objectves of book-keeping are as totows:
t o have permanet record of all the business transactions.
(2)
) t o keep records of income and expenses in such a way that the net prot or net
oss may be catoulated.
tothekeep records df assets andab es in sucha way thet the francial posion o
business may be ascartained.
() to know the names.of tne customers and ne amouri duetromthem.
v) to knowthe names of suppiers and the amout due to mem.
)to have important intormationSorlega and tax purposes.
Advantages of book-seeping
From the aboe objectives cf bock-keeging, the foiowing adartages can be noded
0 Pemanent andReliabeReco: Book-keeping provides pemanertrecord tor
al business transactions, repacing the memory which tails to remember
everyhing
Athmetcal Acuacyd theAcours:Wih he help of bock ieepingtral balarce
can be easily prepared. This is used to heck he athmeical accusracy of
accounts
Net Resut ofBusness Operations: t heips in ascertanigthe resut Prokt or
Loss)ofthepusiesscorecty
G)Ascertainment of EinancialPustion:istenoug tokcronte profit or oss
theproprietor shoutahave 2linowagacthisfacielpo inbusiness
which indides Assets Liabsend Cagalyees. Once fhe infomation is
known,this helpshimtoplanforhenexyearsbusiness.
certaiment ofthe Progressf BuisinessWnenaproprieiorprepares inancial
statements evey year, he ws be m a position to compare he statemerts. This
wil enable himto ascertain the growth of his business. Thus book keepingenables
a long range planning of business acivises besides satistyng the short tem
objective of calculation of anual proftsar bsses.
(v) Controlover Assets:inthe course of business, the proprietoracquiresvarious
and find out their vakues year after year.
(v)ldentihying Do's and Don'ts: Book keeping enables the proprietor to make an
inteligent and periodic analysis of various aspects of the business such as
purchases, sales, expenditures and incones. From such analysis, it wi be
possible to focus his attetson on what shous be done and what shoud not be
done to enhance his proft eaming capaciy.
(Fasing the Seing Price : In fixing the setfing price, the businessmen haveto
consider many aspects of accounsing ntomation such as costof producson,
cost of purchasesandotherexpenses.Accourtinginkomationis essentalin
detemining seling prices.
 (3)
(4)
Accounting Process
CA.Naresh Aggarwal's The process of accounting as per the above definition is
ACADEMY of ACCOUNTS given below:

Accounting Costing Taxation Financial Management Input Process 2

Output
West Patel Nagar, New Delhi. Ph:6800215448 Website:
www.academyofaccounts.org ldentitying
Recording
(ix)Taxation: Businessmen pay sales tax, income tax, etc. The tax authorities Business Classihying Information
them to submit their accounts. For this require
purpose, they have to maintain a record transactions Summarising

JL
of all their business transactions.
monetary value) Analysing Jsers
(x)ManagementDecision-making: Planning, reviewing, revising, controling and Interpreting
decision-making functions of the management are well helped by book-keeping Communicating
records and reports.
(xi) Legal Requirements: Claims against and for
be confimed and established by
the fim in relation to outsiders can In order to accomplish its final objective of communicating information to the users,
producing the records as evidence in the cour accounting embraces the following functions.
(0 Identitying: Idertitying the businesstransactions from thesource documents.
Accounting9 (i) ecording: Thenextfunction of accounting is to keep asystematic record of all
Book-keeping does not present a clear financial picture of the state of affairs of a business transactions,which are idetifed in an orderly
manner, soon after their
business. When one has to make a judgement
regarding the financial position of the occurrence
inthejournal or subsidiarybooks.
fim, the information contained in these books of accounts has to be
analysed and (i) ClassityingThisisconcemed
with the ciassificatign ottha recorded business
interpreted. This is the main pupose of accounting.
Accounting is the process of recording business transactions in systematic manner,
transactionissoastogroup the transactionsofsimlartypeatoneplace. ie., in
in term of money and
analysing the results thereof.
a
ledgeragcounts.In orderto verifythearithirneticalaccuracyofthe accounts,trial
records of all money related transaction ct an
Accounting is needed to maintain balance is prepared.
organisation in a very systematic way.
According to American Institute of Certified Public Accountants "Accounting is the art (v) Summanising:
to
TheClassiedinfomation available from thetrial balance are used
proft and loss account and balance sheet in a
of recording, classitying and
summarising in a significant manner and in tems of money, prepare
users of accounting infommation.
manner useful to the
transactions and events which are, in part at least, of a financial
character,
and
interpreting results thereof. (v) Analysing: t establishes the relationship between the items of the profit and loss
account and the balance sheet. The purpose of analysing is to identity the financial
Accounting is considered as a system which collects and
processes financial
infoion f 2 businece. Thcec inicaione.cre strength and weakness of the business. It provides the basis for interpretation.
rcpoicd te the eereto cnab!
them to make appropriate decisions. (vi) interpreung: ItiS concemea witn exptainng the meaning and sianuucance of ne
relationship so established by the analysis. Interpretation should be useful to the
users, so as to enable them to take correct decisions.
Objectives of Accounting
The main objectives of accounting
(vi) Communicating: The results obtained from the summarised, analysed and
are as follows
interpreted inforrmation are communicated to the interested parties.
() to maintain accounting records.
i) to calculate the result of operations.
(ii) to ascertain the financial position. Accounting Cycle
(iv) to communicate the information to users An accounting cycle is a complete
sequence ofaccounting process, that begins with
the recording business transactions
of and ends with the preparation of final accounts
The flow of activites in accounting
cycle is given below
 (5)
(6)
CA. NareshAggaruwal's Relationship between Accountancy, Accounting and Book-keeping
ACADEMY of ACCOUNTS Book-keeping provides the basis for accounting and
process. Accounting begins where book-keeping ends.
t is complementary to accounting
Accountancy includes
Accounting Costing Taxation Financial Management accounting and book-keeping. This relationship can be easily understood with the
West Patel Nagar, New Delhi. Ph:8800215448. help of the following diagram.
Website: www.academyofaccounts.org
Transactions Joumal Accountancy
Ledger Trial Balance
T(Next Year) Accounting
Balance Sheet Profit & Loss Account Book Keeping
Trading Account
When a businessman
starts his business activities, he records the
transactions in the Joumal. From the day-to-day
joumal the transactions move furtherto the ledger
where accounts are written up. Here, the combined Distinctlon between
to each acoount is arrived at in the fom
of balances.
effect of debit and credit
pertaining
In general the
Book-keeping and Accounting
To prove the accuracy of the work
done, these balances are transferred to a
following are the differences between book-keeping.and accounting.
statement No. Basis
called trial balance. Preparation of
trading and profit and loss account is the next step. 1.
Book-keeping Accounting
The balancing of
profit and loss account Scope Recording and maintenance tis hot bnly.tecording and
gives the net result (profit or
loss) of the
business transactions. To know the financial ofbooksof accounts.
sheet is
position of the business concem balance maintenanceot books of
prepared at the end.
These transactions
eccountsbutalso includes
which have completed the current analysis, interpreting and
come to the starting
accounting year, once again
next year. Thus, this
point-the journal- and they move with new transactions of the infomation.
corhmunicating the
cycic movement of the transactions through the books of accounts
(accounting cycle) is a continuous process. 2. Stage Primary stage.
3. Objective
Secondary stage.
To maintain systematic To ascertain the net resut
Accountancy, Accounting and Book-keeping records of business of the business
transactions. operation.
Awunia GY refers uo a sysiemaic k1wwieuye of accouning. lt explains 'wiiy to do"
and "how to do" of various aspects of 4.Naiuio Ofien routirne and cioiical
accounting. It tells us why and how to
prepare in nature.
Analytical and execuive
the books of accounts and how to summarize the in nature.
communicate it to the interested parties.
acoounting Infomation and 5. Responsibility Book-keeper is responsible An accountant is also
Accounting refers to the actual process of preparing and presenting the for recording business
accounts. In responsible for the work of
other words, it is the art of puting the academic transactions. a book-keeper.
knowledge accountancy into practice.
of
6. Supervision The book-keeper does not
Book-keeping is a part of accounting and is concemed with record keeping or
An accountant supervises
maintenance of books of accounts. It is often routine and clerical in nature. supervise and check thee and checks the work of the
work of an Accountant.
7.
book-keeper
Staff involved Work is done by the junior Senior staff perfoms the
staff of the
organisation. accounting work.
 (7) (8)
CA. Naresn Aggarwal's Extemel Users
(a) Creditors, banks, To detemine whether the principal and the interest the reof
ACADEMY of ACCOUNTS money lenders will be paid in when due.
Accounting Costing Taxation Financial Management
West Patel
Nagar, New Delhl. Ph:8800215448. Webslte: www.academyofaccounts.org (6) Present investors To know the position, progress and prosperity of the
business In order to ensure the safety of their investment.
Users of Accounting Information () Potential investors To decide whetherto invest in the business or not.
The basic objective of accounting is to provide infommation which (d) Govemment and To know the eamings in order to assess the tax liabilities
is useful for persons Tax authorities of the business.
and groups Inside and outslde the
organisation.
L Internal users: Intemal users are those individuals or groups who are within the
() Regulatory To evaluate the business operation under the regulatory
organisation like owners, management, employees and trade unions. agencles legislation.
. External users: Extemal users are those () Researchers To use in their research work.
individuals or groups who are outside
theorganisation creditors, investors, banks and other lending institutions, present
like
and potential investors, Government, tax Branches of Accounting
authorities, regulatory agencies and
researchers.
Increased scale of business operations has mad the management function more
complex. This has given raise to speclallsed branches in accounting. The main
Users of Accounting branches of
Informatlon accourting are Financial Accountng, Cost Accóunting and Management
Accountin9.
Internal Users External Users Branches of Accounting
Owners Management Employees and
Financial Cost
Trade unlons Management
Accounting Accounting Accounting
Creditors, Banks, Present Potentlal Govt. and Regulatory Researchers (1) Financlal Accountlng: t is concerned with
Money Lenders recording of business transactions
Investors Investors Tax Authornties Agencies in the books of accounts in such a way that
operating resut of a particular period
ald fiada position on a
particulai úaio cán be kuown.
The users and their need for information are as tollows: (2) Cost Accounting : It relates to collection, classification and ascertainment of
the cost of production or job undertaken the firm.
Intermal Users Need for Infomatlon by
(3) Management Accounting: It relates to the of
(a) Owners To know the profitability and financial soundness of the with the help of financlal
use accounting data collected
business. accounting and cost accounting for the purpose of policy
formulation, planning, control and decision making by the
(b) Management To take prompt decisions to manage the business management.
efficlently.
(c) Employees and To form judgement about the earning capacity of the Basic Accounting Terms
Trade unions business slnce thelr remuneration and bonus depend on it
The understanding of the subject becomes easy when one has the knowledge of
a few important terms of accounting. Some
of them are explained as follows:
(1) Transactions: Transactions are those acthvities of a business, which involve
 (9)
(10
business for
amount of goods bougit by a
(9) Purchases : Purchases refers to the for cash are called casii
CA. Naresh Aggarwal's resale or for use in he production. Goods purchased
is called as credit purchases.
Total purchases
purchases. If it is purchased on credit, it
ACADEMY of ACCOUNTS include both cash and credit purchases.
are returmed to the
Accounting Costing Taxation Financial Management Purchases Return or Returns Outward : When goods
(10)
the tems of purchase, it is called
as
suppliers due to defective quality or not as per
West Patel Nagar, New Delhl. Ph:2800215448. Website www.academyofaccounts.org purchases retum. To find net purchases, purchases
retum is deducted from the total
two two accounts. For purchases.
transfer of money or goods or services between persons or
amount of goods sold that are already bought
or
example, purchase of goods, sale of goods, borrowing from bank, lending of money. (11) Sales: Sales refers to the
manufactured by the business. When goods are
sold for cash, they are cash sales
salaries paid, rent paid, commission received and dividend received.
received at the time of sale, it is credit sales.
but if goods are sold and payment is not
(2) Proprietor: A person who owns a business is called its proprietor. He contributes
Total sales includes both cash and credit sales.
capital to the business with the intention of eaming profit. the customers
: When goods are retumed from
(3) Capltal: Itis the anount invested by the proprietor/s in the business. This amount (12) Sales Return or Returms Inward
of sale, it is called sales retum or
is increased by the amount of profits earned and the amount of additional capital due to detective quality or not as per the terms
returns inward. To find out net sales, sales return
is deducted from total sales.
introduced. It is decreased by the amount of losses incurred and the amounts
withdrawn. For example, If Mr.Anand starts business with Rs.5,00,000, his capital (13) Stock: Stock includes goods unsold
on a
paricular date. Stock may be opening
the beginning of
would be Rs.5,00,000. and closing stock. Thetem opening stock means goods unsoldin
unsold at the
the accounting periód. Whereas the term closing stock includes goods
(4) Assets: Assets are the properties of every description belonging to the business.
Cash in hand, plant and machinery, furmiture and fittings, bank balance, debtors, bills end of the accounting perid. For example, if 2,000 units purchased Rs.10 per unit
receivable, stock of goods, investments, Goodwill are examples for assets. Assets remain unsold, the closingstock is Rs.20,000. This wil be bpening stock of the
can be classified into tangible and intangible. subsequent year
Tangible Assets: These assets are those having physical existence. It can be
seen (14) Revenue:Revenuemeans theamount receivable or reallsed from sale of goods
and touched. For example, plant & machinery, casn, etc. and eamings from interest dividend, commission, etd
Intangible Assets: Intangible assets are those assets having no physical existence (15)Expenset is the amount spentin order to produce and sell the goods and
etc.
but their possession gives rise to some rights and benefits to the owner. It cannot be
services. For example, purchase of raw materials, payment of salaries, wages,
seen and touched. Goodwill, patents, trademarks are some of the examples. (16) Income: Income is the difference between revenue and expense.
(5) Llabilities: Liabilities the financial obligations of a business. These denote
refer to (17) Voucher: Itis a written document in support of a transaction. It is a proof that a
the amounts which a business owes to others, e.g., loans from banks or other persons, particular transaction had been taken place for the value stated in the voucher. It may
creditors for goods supplied, bills payable, outstanding expenses, bank overdraft etc. be in the fom of cash receipt, invoice, cash memo, bank pay-in-slip etc. Voucher is
(6) Drawinas: It is the amount of cash or value of goods withdrawn from
the husiness necessary to audit thesocounts.
by the proprietor for his personal use. It is deducted from the capital. (18) Invoice : Invoice ls a business document which is prepared when onesellgoods
who receives a bernefit without giving
money to another. The statement is prepared by the seller of goods. It contains the infomation
(7) Debtors:A person (individual or fim)
or money's worth immediately, but liable to pay in future or in
due course of time is a relating to name and address of the seller and the buyer, the date of sale and the clear
description of goods with quantity and price.
debtor. The debtors are shown as an asset in the balance sheet. For example, Mr. A
bought goods on credit from Mr. B for Rs.10,000. Now Mr. A is
a to Mr. B till he
debtor (19) Recelpt: Receipt is an acknowledgement for cash received. It is issued to the
pays the value of the goods. party paying cash. Receipts form the basis for entries in cash book.
(20) Account:Account is a summary of relevant businesstransactions at one place
(8) Creditors: A person who gives a benefit without receiving money money's
or
worth immediately but to claim in future, is a creditor. The creditors are shown as a named in the ing. An account is
relating to a person, asset, expense orrevenue
a brief history of financial transactions of a particular person or tem. An account has
liability in the balance sheet. In the above example Mr. B is a creditor to Mr. A til he
receive the value of the goods. ftwo sides called debit side and credit side
 (11) (12)
period of one year is considered as the accouting period.
CHAPTER -2 (4) Going Concern Assumption: As per this assumption, the business will exist
Frame Work of Accounting tor a long peiod and transactions are recorded from this point of view. There Is
neither the intention nor the necessity to wind up the business in the foreseeable
future.
Accounting is the language of business. It records business transactions taking9
place during the accounting period. Accounting communicates the result of the
business transactions in the form of final accounts. With Basie Concepts of Accounting
a view to make the
accounting results understood in the same sense by all interested parties, certain These concepts guide how business transact ns are reported. On the basis of the
accounting assumptions, concepts and principles have been developed over a above four assumptions the following concepts (principles) of accounting have been
course of period. developed.
Frame Work Accouting (1) Dual Aspect Concept: Dual aspect principle is the basis for Double Entry System
of
of book-keeping. All business transactions recorded in accounts have two aspects. It
based on the duality nature of the transactions. Every financial transaction always
has a double effect on the financial position of the enterprise. For example it you buy
Assumptions Concepts Moditying Principles
1. Accounting Entity 1. Dual Aspect Goods for Rs. 10,000 then it affects twice: first etfect is on the cash balance as it
1. Cost Benefit
2. Money Measurement 2. Revenue
Recognisation 2. Materiality
decreasés and second effect is that the stock in hand is
increased. Or it you take a
3. Accounting Period 3. Historical Cost 3. Consistency loan from Bank of As.50,000
a not only you get an asset in
tormof cash but also a
4, Going Concem 4. Matching 4. Prudence
liability that hayetopay
you the debt. Similarly allthe
transactions always have two
aspects. Therefore, in modem accounting.system all the transactions are recorded in
5. Full Discosure
two parts one is Debit and other Is.Credit.
6. Vertfiable objective evidence (2) Revenue Récognisation Concept The revenue recognition principle states that,
under the accrual basis of accounting, we should only record revenue when an entity
Basic Assumptlons has substantially
completed arevanue generation process; thus, we record revenue
(1) Accounting Entity or Business Entity Assumption : According to this when it has been eamed. For example, when an entity sells goods on credit to its
customer, it can recognize the revenue immediately upon completion of the sale, even
assumption, business is considered as a separate unit which is distinct from its owners, if It does not expect payment from the customer for several
suppliers, customers, managers and others. A business unit should have a completely days or weeks.
separate set of Books of Accounts. We should have to record every transaction Also, if an entity receives payment in advance froma customer, then the entity records
from the business point of view and not from the only this payment as a liability, not as revenue. Only after It has completed all work under
owners or any other persons point of
view. Even the proprietor is treated as a creditor/ the arrangement with the customer can it recognize the payment as revenue.
money lender to the extent of his
capital. (3) Historical Cost Concept: Under this concept, assets are recorded at the pric
(2) Money Measurement Assumption : In accounting, only those business
paid to acquire them and this cost is the basis for all subsequent accouning for the
transactions and events which are of financial nature are asset. For example, ifa piece of land is
recorded. For example, when purchased for Rs.5,00,000 and its market
Sales Manager is not on good terms with Production value is Rs.8,00,000 at the time of
Manager, the business is bound preparing final accounts the land value is recorded
to suffer. This fact will not be recorded, because it
cannot be measured In terms of only Rs.5,00,000. Thus, the balance sheet does not indicate the price at which the
for
money. asset could be sold for.

(3) Accounting Period Assumption: The users of financial statements need (4) Matching Concept: Matching the
revenues eamed during an accounting period
reports to know the operational resut and the financial position of the businessperiodical
concem.
with the cost associated with the same
period to ascertain the result of the business
Hence it becomes necessary to close the accounts at concem is called the
regular intervals. Usualy a
matching concept. It is the basis for finding accurate profit for a
 (13) (14)
is "anticipate no profit and provide for alt possible losses. For exarmpte, while
CA.Naresh Aggarwal's valuing stock in trade, market price or cost price whichever is less is considered.
ACADEMY of ACCOUNTS
Accounting » Costing Taxation Financial Management Accounting Standards
West Patel Nagar, New Delhi. Ph:8800215448.
Website: www.academyofaccoumts.org To promote world-wide uniformity in pubiished accounts, the Internationa!
Accounting Standards Committee (IASC) has been set up in June 1973 with nine
nations as founder members. The purpose of this committee is to fomulate
period which can be safely distributed to the owners. and
publish in public interest, standards to be observed in the presentation of audited
(5) Full Disclosure Concept: It involves financial statements and to promote their worid-wide
proper classification and explanations of acceptance and observance.
accounting information. Accounting statements should disclose IASC exist to reduce the differences between ditferent
significant infomation. On the basis on this, decisionsfullywill becompletely
all the and countries' accounting
taken by practices. This process of harmonisation will make it easier for the
users and
vañous interested parties and
wrong and incomplete infromation lead to
may preparers of financial statement to operate across intemationai boundaries. In our
Wrong decisions.
country. the Institute of Chartered Accountants of India has constituted
(6) Verifiable and Objective Evidence Standard Board (ASB) in 1977. The ASB has been Accourting
recorded business transactions in the Concept:
This principle
requires each
books of accounts should have an that issue accounting standards, empowered to formutate and
evidence to support it For adequate that should be followed by ali business concemsin
sothat genuineness of the
example, cash receipt must support the payments madde India.
transactions can be established. The
of transactons
should be free from any bias. All documentary evidence
accounting records should based on
documentary evidence which are capable of verification.

Moditying Principles
To make the
accounting information useful to various
assumptions and concepts discussed earlier have beeninterested parties, the basic
principles are as under:
(1) Cost Benefit Principle: This
principle shouid not be more thanmoditying
the benefit then that
modified. These

the benefit derived from it.

principle should be modified.
(2) Materiality Principle: The
infomation should be disclosed inmateriality
iwnlornation are eilver eft oul or
modifying
principle states that the cost of applying a
If the cost is more
than

principle requires all relatively relevant

the financial statements.
merged with other items. Unimportant
and immaterial
AOA
(3) Consistency Principle The aim of
consistency principle is to preserve the
comparabifity of financial statements. The rules,
used in accounting
should be continuously observed practices, concepts and principles
and applied
Comparnsons of financial resuts of the business year after year.
can be
significant and meaningful only when consistentamong different accounting
period
ascertaining them. For example, practices were followed In
methods, but whichever method depreciation of assets
is followed, It
can be provided under
different
should be followed
(4) Prudence
all (Conservatism) Principle: Prudence principle takesregularly.
prospective losses but leaves all into
prospective profits. The essence of conslderation
this princlple
 (15) (16)

CHAPTER-3 ( entific system: This is the only sclentific systen of recording business
msactions. It helps to attain the objectves of acoenting.
Origin, Source Documents and Vouchers Gi) mplete record of transactions: This system maimins a complete record of
adusiness transections.
Accounting process starts with idetitying the transactions to be recorded in the Gi) Actheckon the accuracy of accounts: By the use his systemthe accuracy
books of accounts. Accounting identifies
only those transactions and events which dithe accounting work can be established by the paparation of trial balance.
invove money. They should be of financial character.
Acoountant does so by (iv) Artainmentof profit or loss: The profit eamed or les oocured during a period
sorting out various cash memos, invoices, bills, receipts and vouchers.
abe ascertained by the preparation of profit andess account.
In the accounting process, the first
step is the recording of transactons in the books () owledge of the financial position: The financial psition of the concem can
of accounts. The origin of a transaction is derived from the
source document.
bEascertained at the end of each period throughe preparation of balance
set.
Double Entry System (vi) F details for control : This system permits accents to be kept in a very
Double entry system was introduced to the business world
named Lucas Pacioli in 1494. Though the
by an Italian merchant
system has orígineted in Italy but most of,
dailed
fom, and thereby provides sutficient intometions
aatrol.
for the
purpose of
the countries now have adopted this
system. (vil) amparative studly : The resuts of one year may compared with those of
There are numerous transactions in a business concem. Each pvious years the reasons for change may
transaction, when and banscertained.
closely analysed, reveals two aspects. The modern system of accounting is based (vil) lps in decisíon making: The mangement may able to obtain sutficlent
on this duality nature of the transactions.
Every financial transaction always has a idbrmation for ts work, especially for making
double effect on the financial position of the enterprise. For example if
you buy Goods
decisons. Weaknesses
can be

for Rs. 10,000 then it affects twice: first effect is on the cash balance dtected and remedial measures maybe applied.
as it decreases
and second effect is that the stock in hand is increased. Or if
you take a loan from a
(ix) Dtection of fraug : The systematic and sciene redording of business
Bank of Rs.5 D00 not only you get an asset in fom of cash but also a
liability that you
tansactions on the basis of this system minimisesle chances of fraud.
have to pay the debt. Similarly all the transactions
always
have two aspects. There-
fore, in modern accounting system all the transactions are recorded in two Accoming Equation s
parts one
is Debit and other is Credit
Accouing equation is based on dual aspect concept. Itanphasizes on the fact that
In short, the basic pinciple of this system is, for every debit, there must be a everyansaction has a two sided effect i.e., on the asets and claims on assets.
corresponding credit of equal amount and for every credit, there must be a Alwayshe total claims (those of outsiders and of the proprirs) will be equal to the total
corresponding deblt of equal amount. assetsthe business concem. The claims are also known
emquities.

Features of Double Entry System Assets Cepitel Liabilities

() Every business transaction affects two accounts or

Ci) Each transaction has two aspects, ie., debit and credit. Assets
Equities
Ci) It is based upon accounting assumptions concepts and principles.
(iv) Helps in preparing trial balance which is a test of arithmetical accuracy in Fixed Assets Current Assets Owner's Equity Outsider's Equity
accounting. or Captal or Liabilities
() Preparation of final accounts with the help of trial balanca
Acept

Advantages of Double Entry System Everytansaction has two aspects and each aspect han account. It is stated
that 'asaccount is a summary of relevant transactionsat one
The advantages of Double Entry system are as follows: to a place relating
particr head.
 (17)
(18)
CA. Naresh Aggarwal's accounts, because of buying goods from then or selling goods to them or

ACADEMY of ACCOUNTS borrowing from them lendinganto them. Thusthey become either Debtors or
or

Creditors. The proprietor being individual hiseapital account and his drawings
Accounting .
Costing Taxation Financial Management
account are also personal accounts.
West Patel Nagar, New Delhi. Ph:8800215448. (2) Impersonal Accounts: All those accountswhich are not personal accounts
Website: www.academyofaccounts.org are impersonal accounts. This is further divided
ino two types viz. Real and Nominal
Classficatlon of Accounts accounts.

Transactions can be divided into three

categories.
Ci) Real Accounts: Accounts relating to propertis and assets which are owned by
the business concern are real accounts. Ret
(1) Transactions relating to include tangible and
accounts
properties, goods or cash (Real Accounts) intangible accounts. For example,
Land, Builing. Goodwil, Purchases, etc.
(2) Transactions relating to expenses or losses and incomes or gains (Nominal (i) Nominal Accounts: These accounts do not hve any existence, fom or
Accounts) shape.
They relate to incomes and expenses andgains and losses of a business
(3) Transactions relating to individuals and fims
(Personal Accounts) concen. For example,
Salary Account, RerAccount, Interest Account, Fees
Therefore, accounts can also be classified into Account etc.
classification may be illustrated as follows Personal, Real and Nominal. The

Source Documents
Accounts Source documents
are the evidences of businss
information about the nature of the transaction, transactions which provide
thedate, thé amount and the parties
1 involved in it. Transactions are recordedinthe boks of accounts when
Personal take place and areduly supportedfby they actually
Impersonal objective principle of Accounting source doc nents, Accordingto the verifiable
eachtransactio cecofded in
should have adequate proof to support it. Thesespporting the books of accounts
and authentic proof of the correctness of the documents are the written
Natural Artificial Representative Real are requlrëd for audit andtax assessment They recored transactions.Thesedocuments
Nominal case of a
dispute. Bils receivable, bills so serve as the legal avidence in
correspondence etc., also serve as the payable, wage sheet, salaries pay slips,
source dauments. There
document for must be a source
Tangible the
each transaction recorded in the baks of accounts. The
Intangible Income Expense most common source documents. following are
() rersonal Accounts: The accounts
wnch relate to (1)
include the following. persons. Personal accounts Invoice/Bill and Cash
Memo: When a tradesells aoods on credit. he
a sale invoice and if he selis prepares
( Natural and Cash-Memo both are gouds
for casn, heprepares a cash
Persons:Accounts
Alc, Shyam's Alc etc.
which relate to individuals.
For example, Mohan's similer in pro-formand contains
full
memo. Invoice
the amount, the terms of details
payment, name andaddre_s of the seller and relating
to
(i) Artificial persons : Accounts which The original copy of the sale buyer etc.
relate to a group of invoice or cash m o is sent to the
institutions. For example, Reliance Ltd., HDFC persons or firms or
Bank, Life Insurance
its duplicate copy is
kept for making records isthe books of purchaser and
of India, Ramjus
Sports Club etc. Corporation Similarly, when a trader purchases goods accounts.
(ii) Representative Persons: Accounts which the supplier of goods and if he onwedit, receives an Invoice from
he
group of represent a particular person or Memo from the purchases gads for cash he receives a Cash-
persons. For example, Outstanding Salary supplier of goods.
A/c, Advance Fees A/c etc. A/c, Prepaid Insurance
The business concerm
may keep business relations with all the
above personal
 (19)
(20)
CA.Naresh Aggaruwal's
ACADEMY of ACCOUNTS RECEIPT
Accurate Watch Co.
Accounting Costing Taxation Financial Management 135, West Patel Nagar, New Delhi-110008.
West Patel Nagar, New Delhi. Ph:8800215448. Website:
www.academyofaccounts.org o 192 Date 18.05.2016
Received with thankS a sum of Rs.15,000 (Rupees fifteen thousand
only) from M/s ABC & Co. being the supply of watches as per the list
enclosed.
Invoice/BIL/CashMemo ChequeDDNo. 210345
Accurate Watch Co. Dated 10.05.2016
135, West Patel Nagar, New Delhi-110008. Bank Name HDFC Bank, East Patel
No: 152
Nagar
Date 18.05.2016 Revenue
Stamp
Name& address of the Customer XYZ Enterprises, Manager
181, East Patel Nagar, for Accurate Watch Co.
New Delhi-110008.
(3) Debit Note: Adebit note is
S.No. Description the goods
prepared by the buyer and it contains the date of of
RateRs. Ay. Amount retúmed, name of the supplier, details of the goods
retumed and reasons
1. Titan Regulia for retuming the goods. Each debitnote is serially numbered. A duplicate copy or
1,800
2. Titan Raga
5400 counter foil of the debit note is retained by the buyer. Onthe basis of debit note,
1,200 2.400 the suppliers accountis debited in the books.
7,800
Les: Discount 10%
I780 M/S AKBAR&
CO.
Total 7,020
Terms: Goods
2i8, Ran Nagar, Nagpur,
once sold are not taken back No. 2318
29 August. 201
E&OE DEBIT NOTE
Against: Ms Kabir and Sons. New Deihi
Authorised sianatory Goods retumed as
per delivery
1 naian nu.
for Accurale Watch Co.
(Detais of goods returmcd)

(2) Receipt: When a trader receives cash from a customer, he issues a (Rupees Ten thousand anly)
receipt 10,000
M. Karana Sagar
containing the date, the amount and the name of the customer. The original
copy is handed over to the customer and the duplicate copy is kept for record. Manager
In the same way, whenever we make
payment, we obtain a receipt from the
party to whom we make payment (4) Credit Note: A credit note is prepared by the seller and it contains the
date on
which goods are retumed, name of the
customer, details of the goods received
back, amount of such goods and reasons for retuning the
note is serialy numbered. A duplicate
gocods. Each credit
copy of the credit note is retained for the
record purpose. On the basis of credit note, the customer's
account is credited in
the books.
 (21) (22)

FORMAT OFA CHEQE

NS SMITH & CO.

12213. Waite ltouse
walchand Hirachand Mag
Mumdai400o0
19 Scptember. 2011
No ti

CREDIT NODTE
la Faveur of : Ms Amrà
Singh& Ses, New Dehi
Gods receivnd as per dcliven
Challan No
(Detais of goods receved)

Rapces Taehe theusand eh)

12,000 (7) Vouchers: The documents prepared for the
purpose of recording business
transactions in the books of accounts are known as vouchers. Voucher is
Mache Kumar on the basis of source documents. For prepared
of accounts, source documents
recording business transactions in the books
Manager re further analyzed and conclusion is drawn as to
which account is to be debited and which account is to be
credited. The docurment on
which this conclusion is written is known as voucher or accounting voucher.
(5) Pay-in-slip: Pay-in-slip is a
into bank account. Each
a
fom
available in banks and is used to
deposit money
pay-in-slip has a counterioil which is retumed to the Features of Voucher
depositor duy sealed arnd signed by the bank official. This source document relates
to bank transactions. It
gives detais regarding date, account number, amount
tisa document.
deposited (in cash or
cheque) and name of the
)tis prepared by analyzing the source documents
account (i) Itcontaigs decision regarding the accounts to be debited and
v) It helpsin recording.an accounting entryin thebooks of credited
(v) Itis prepared and signed by the accounts
accountant and is also countersigned by the
authorized signatory of the business
eSKAATUD
enterprise.
Preparation of Vouchers
Business transactions in the books of accounts
are available in the source
These documents are further
analysed and conclusion is to be drawn about documents.
account is to be debited and which
account is to be credited. After
which
of accounts to be debited
and credited, vouchers are deciding the head
are readily available in the
printed fom in the market
prepared. Usuaily, blank fomns
Accounting Vouchers are broadly of two types
LCashVoucher . Non Cash Voucher
(6) Cheque : A cheque is a document in writing drawn upon a
pay a specfied sum to the bearer or the specified banker to Types of Vouchers
person named in it and payable on
demand. Each cheque book has a counterfoil
in which the same
cheque are filled. The counterfoil remains with the account holder detais in the
for his future Cash Voucher
reference. The counterfoil forms the source document Non Cash Voucher
for entries to be made in
the books of accounts. Transter Voucher)
Debit Voucher Credit Voucher
 (23) (24)
CA. Naresh Aggarwal's
DEBI VOUCHE
ACADEMY of ACCOUNTS EFC&CO

Accounting Costing Taxation Financial Management Youche No. 0

07, Nai Sar1k, Delhi
Dove 164201
West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org Amount
() Cash Vouchers : Cash Vouchers are vouchers that are prepared at the time of Debit Computer AJc. 20,000
receipt or payment of cash. Cash Vouchers are of two types: (Beirg Computer purchased
0) Credit Vouchers: Credit Vouchers are vouchers that are prepared vidc tash Temo No. 603)
at the
time when cash is received. For example when goods sold for cash, sale of Total 20,000
investments, cash collected from customer etc. The content of a Credit
Vouchers are as follows:
Sd. S4
(1) Name and address of entity 6) Naation (a brief description) Marager AuTkan
(2) Voucher Number Supporting vouchernumber
(3) Date of Preparing Voucher
(4) Name of Alc to be Credited Signature ofthe preparer
(9) Signature of authorized signatory (1) Non Cash Vouchers (Transter Vouchers): Non Cash Vouchers are vouchers
6) Net amount of transaction
prepared forthe transitions that do not
involve cash. For example, credit
The content of a Non Cash
sales, credit
as follows:
purchase, sales retunetc. Vouchers are
CREDIT VOUCHER (1) Nameand address of entity (6) Netamount ottransaction
ABC&Co. Lud. (2) Voucher Number Namaton(a briet description)
08, Nai Sarak, Delhi (3) Dateof Preparing
Voucher Supportingvouchernumber
Voucher No. 909
Date25.3.201 (4) Naimeof,Alctobe Debited 9Signature ofthepreparer
5) Name of AJC to be Credited Signature of authorzed
signatory
Credit Sales Aic $0,000
(Being goods sold for cash
vide Bill No. 306)
TRANSPER VOUCHER

. PQR &Co. Lud

Totsl S0,000 &1, Nai Sarak, Delhi
Voucher No. 801 Dale 30.1.20
Amount (
Sd S
Manager Accountant
Dehit: Frnilure AfC $2000

(i) Debit Vouchers: Debit Vouchers are vouchers that are prepared whencash
is paid. Payment may be on account of expenses, purchases, drawing of Credit Ram 52000
the proprietor, payment to creditor etc. The content of a Debit Vouchers are (Being furmiure purchased vide memo Na. 909)
as follows:
(1) Name and address of entity (6) Narration (a brief description)
(2) Voucher Number (7) Supporting voucher number Totad

(3) Date of Preparing Voucher 8) Signature of the preparer

4) Name of A/c to be Credited (9) Signature of authorized signatory
Accountant
5) Net amount of transaction (10) Receipt (Optional) Manager
 (25)
(26)

Assets= Liabilities+Capital'. The

CHAPTER -4 accounting equation is a statement
of equality
between the debits and the credits. The rules of debit and
credit depend on the
Accounting Procedures nature of an account. For the of
purpose the accounting equation approach, ll
the accounts are classified into five
types and transactions are entered in the
After books of accounts by applying the
identifying the business transactions from the source document the next following rutes
function of accounting is to keep a systematic record of all business transactions. ) Assets :Debit for
All these
(+) and Credit for (-)
transactions are recorded in an ) Expenses /Loss
in the joumal or orderly manner, soon after their occurrence Debit for (+) and Credit for (-)
subsidiary books. ii) Liabilities :Credit for (+)
The books in which a
transaction is recorded for the first time from a and Debit for ()
source document (iv) Captial :Credit for (+) and
are called Books of
Original Entry or Prime Entry. Journal is one of the books of Debit for (-)
original entry in which transactions are originally recorded in a (v) Income / Revenues Credit for (+) and Debit for ()
day) order according to the principles of Double chronological (day-to-
Entry System.
Account
Journal Entries An account is a record of all business transactions
relating to a particular
liability or expense or income. In accounting, we keep a separateperson
or
Joumal entries are the first asset or
step in the record of
business transactions and events in the accounting cycle
and are used to record all each individual,
accounting system. As business events occur asset liability, expense or income. The
placewhere such a record is
maintained is temed as an 'Account'.
throughout accounting period, journal entries are recorded in the
the
show how the event journal book to All accounts are divided into two
changed in the finacial position of the business.
Jourmal is a date-wise record of all the
transactions with details of the accouts
side and the right hand side of ansides.Thelefthand side of an account is called Debit
account is calledCredit side.
debited and credited and the amount of
each transaction. In the Journal, each
transaction is dealt with separately. Joumal entries use Ledger
debits and credits to record
the changes of the finacial
position in the journal. There are two ditferent ways to A Ledgerisa book which contains all the
learn the effects of debits and credits on
which accounts
whether personal, realor
nominal,
book
accounts in the double entry
keeping. They are () Traditional Approach, and (i) Accounting system of are tirst entered injOumal or speclal purpose
subsidiary books.
Approach. Irrespective of the approach used, the effect on the Equation According to LC. Cropper, 'the book wthich containsa cdassified and
books of accounts of all thetransactions of a business is called the permanent record
remains the same. Ledger.
The ledger that is normally used in a majority of business concem is
(1) Traditional approach: Following the traditional a bound note
classified as real, personal, and nominal approach accounts are book. This can be preserved for a
long time. Its pages are consequently numbered.
accounts. Real accounts are accounts Each account in the ledger is
opened preferably on a
relating to physical assets. Personal accounts are accounts
or relating to
organisations with whom the business has transactions and will mainlypersons compleled, Uhe accouni will be coniünuedin lhe next orseparate page. If one page is
some olher page. But in
of accounts of consist concems, where it is not practical to keep the bigger
proprietor, debtors and creditors. Nominal accounts relate with ledger as a bound note
revenue, expenses, gains, and losses. Transactions are
ledger are prepared in place of a bound note book. In a loose-leaf book, Loose-leaf
entered in the books of ruled sheets of thick paper are introduced ledger,
appropriate
accounts by applying the and fixed up with the
following golden rules of accounting Whenever necessary additional pages may be help of a binder.
) Real account : Debit what comes in and credit what removed and the accounts may be
inserted, completed accounts can be
goes out arranged and rearranged in the desired order. This
(i) Personal account: Debit the receiver and credit the type of ledger is known as Loose-leaf Ledger.
giver
(i) Nominal account: Debit all
expenses& losses and credit all incomes &
gains Utility of Ledger
(2) American approach or Accounting Ledger is a principal or main book which contains all the accounts in which the
transactions are
equation approach: Under this approach
recorded based on the accounting equation, i.e., transactions recorded in the books of original entry are transferred.
Ledger is also
 (27)
(28)
called the 'Book of Final
Entry' or 'Book of Secondary Entry', because the
transactions are finally incorporated in the Ledger. The following are the
(6) Next Stage Entries are tramferred to From the Ledger, first
ofledger advantages the ledger. the Trial Balance is
(i) Complete infomation at a glance: All the transactions drawn and then final Alcs
are collected at one
pertaining to an account are prepared.
place in the ledger. By looking at the balance of that account,
one can understand the collective effect of all such transactions at a (7) Tax authorities Do not rely upe these Rely on the ledger for
glance. assessment purpose.
i) Arithmetical
Accuracy: With the help of ledger balances, Trial balance can be
prepared to know the arithmetical accuracy of accounts.
(ii) Resut of Business Operations: It facilitates the Subsidiary Books
preparation of final accounts for For a business having
ascertaining the operating resut and the financial position of the business concen. large number oftansactions it is practically impossible to
a

(iv) Accounting infomation The data supplied write all transactions in joumal, becaue of the following limitations.
one
by various ledger accounts are
Summarised, analysed and interpreted for obtaining various accounting infomation.
Periodical details of some important bsiness transactions cannot be known, from
the journal easily, e.g., monthly
salesmonthly purchases.
Posting (i) Such a system does not facilitate theinstallation of an intemal check system
The process of transferring the entries since the journal can be handled by alyone
recorded in the joumal or subsidiary books to person.
the respective accounts
opened in the ledger is called Posting. In otherwords, (i) Thejoumal becomes bulky and volurinous.
means grouping of all the
transactions relating to a particular account at one posting
is necessary to
post all the jourmal entries into various accounts in the place. It
Use of
posting helps us to know the net effect of various transactions ledger because Subsldiary
Books
on a particular account. during a given period Transactions canbe classified and
groupalconveniently according to their nature, as
sometransactions are usually of repetitivein nature. Generally, transactions are of
Distinction between Journal and
two types: Cash and Oredit Cash transetions can be grouped in one category
Ledger: whereas credit transactions can be group din another category. Thus, in practice,
Books of original entry
(Jounal) and Ledger themain joumal is sub-divided in such aay that a
category.orgroup.of transactions which arepetiiveseparate bookis used for each
can be distinguished as follows:
S.N. Basis
(1) Book
Journal
Jt is the book of prime
Ledger Each one of the subsidiary books is a andsufficientlylargeinnumber.
t is the main book of speial joumal and a book of
original primeor
entry. entry. Though the usual type of jourmal enties
account. are notpassed in these sub-divided
(2) joumals, the double entry principles of acaunting are
Stage Recording of entries in Recording of entries in strictly followed.
these books is the first the ledger is the
stage. second stage. Types of Subsidlary Books
(3) Process The process of recording The number of
The process of subsidiary books may
business. The following are the vayaccording to the requiienmenis of each
entries in these books is recording entries in the special puose subsidiary books.
called "Joumalising". ledger is called "Posting.
(4) Transactions
Trans tions
Transactions relating to Transactions relating
a person or property or
to a particular account
expense are spread over. are found together on Day Books Cash Book Joumal Proper Blls Books
a particular page.
(5) Net effect The final position of a The final position of a
particular account can Purchases Sales Purchases Bills
particular account can Book Book Bills
not be found. Retum RUM Receivable
be ascertained just at Payable
Book ok Book Book
a glance.
 (29)
(30)
Purpose of different type of
()
Susbsidiary Books Journal Proper
Purchases Book: It is also known as
Bought Day Book is used to record all Joumal proper is used for
credit purchases of goods which are meant making the original record of such transactions for which
for resale in the business. Cash no special
purchases of goods and any kind of joumal (subsidiary book) has been kept in the business. The usual
purchases of assets (cash or entries that are put through this
not entered in this
book. credit) are jourmal is explained below:
(i) Sales Book: tis used to record (1) Opening Entries: Opening entries are used at the beginning of every financial
all credit sales of year to open the books by
cash and any kind of sale of goods. Cash sales of goods, recording the assets, liabilities and capial appearing in
assets (cash or the balance sheet of the
(ti) Purchases Retum Book: /t is also
credit) are not entered in this book. previous year.
known as Returm Outword Book. It (2) Closing Entries:Closing entries are recorded at the end of the
the goods retumed
by the trader to the records accounting year for
money is received then it will go to Cashsuppliers closing accounts relating to expenses and revenues. These accounts
but money not received. If
are closed
Book.
Book in place of Purchase
Return by transferming the balances to the Trading Accout and
Profit & Loss Account
(iv) Sales Retum Book:t is aslo (3) Adjustment Entries: To arrive at a corect
known as Retrun Inward Book. It deals accounts
figure of profits and loss, certain
retumed by the customers to the trader with goods require some adjustments. Entries for making such adjustments are
but money not refunded. If called as adjusting entries. These are
refunded then it will go to Cash Book in money is needed at the time of preparing the final
place of Sales Retrun Book. accounts. Examples are
charging depreciation on assets and making provision
(v) Bils Receivable Book: It records
the for doubtful debts etc.
receipts of bills (Blls Receivable).
(vi)Bils Payable Book: It records the issue of bills (4) Transfer Entries:Transfer entries are passed in the joumal properfor
(vi) Cash Book: It is used for
(Bills Payable). transferring
an item
all
recording only cash transactions i.e. all receipts and enteredin one account to another account.
payments cash or by bank.
of Example: when the proprietor takes goods for his
(vii) Joumal Proper: It is the joumal which personal use.
(5) Rectification Entries: Rectitying entries are passed
records the entries which can not be for rectitying erors which
entered in any of the above listed have been
subsidiary books. committed inthe book of accounts
Example : Purchase of fürniture was
(6) Miscellaneous Entries or Casual Entries
debited to Púrchases Account.
Advantages of Subsidiary Books
The advantages of
These are entries of casual nature
which do not occur so frequertly. Such transactions
maintaining subsidiary books can be summarised as under
Division of Labour: The division of joumal, () Credit purchases and credit sale of assets whichinclude the following:
resuting in division of work, ensures cash book,
purchases book or sales book
cannot be recorded through
more clerks working
independently in recording original entries in the subsidiary i)
books. Endorsement, renewal and dishonour of bill of
recorded through bills book. exchange which cannot be
)Efficiency: The division of labour also helps the reduction in work load, (ii) Other adjustments like interest on
time and stationery. It also saving in capital and loan, outstanding expenses,
gives advantages of specialisation leading to efficiency. bad debts, reserves etc.
(i) Prevents Erors and Frauds The
manner that the work of one
accounting work can be divided in such a
person is automatically checked by another Cash Book
With the use of internal check, the person.
may be avoided.
possibility of occurrance of errors and frauds In every business there are
cash transactions as well as credit
(v) Easy Reference:t facilitates easy references to credit transactions will become cash transactions. All
any particular item. For instance transactions when payments are made to
total credit sales for a month can be creditors or cash received from debtors.
easily obtained from the Sales Book.
Since, cash transactions will be numerous, it is better to
(v)EasyPostings: Posting from the subsidiary books may be made at convenient
intervals depending upon the nature of the record only the cash transactions. keep a
separate book to
business.
Features of Cash Book
A cash book is a special joumal which is used to record all cash
receipts and
 (31) (32)
cash payments. The cash book is a book of discount recelved. In the double column cash book, cash column is balanced like
original entry or prime entry since
transactions are recorded for the first time from the source documents. The cash any other ledger account. But the discount column on each side is merely totalled.
book is a ledger in the sense that it is The total of the discount column on the debit side shows the total discount allowed
designed in the form of a cash account and
to customers and is debited to Discount Alowed AVc. The total
records cash receipts on the debit side and cash
payments on the credit side. of the discount
column on the credit side shows total discount received and is credited to Discount
Thus, the cash book is both a journal and a ledger. Cash Book will always show
debit balance, as cash payments can never exceed cash available. In short, cash Received Ac.
book is a special journal which is used for
recording all cash receipts and cash
payments. (3) Two Column Cash Book (with Bank) When bank transactions are more in number,
it is advisable to open a cash book by providing a separate column on ether side of
the cash book to record the bank transactions therein. In such case, it is not necessary
Advantages of Cash Book
in
(1) Saves time and labour: When cash transactions are recorded in the joumal a lot
to open a separate Bank Account in the Ledger because the two columns the
cash book serve the purpose of Cash Account and Bank Account respectvely. His
of time and labour will be involved. To avoid this all cash transactions are straight
a combination of Cash Account and Bank Account. There are two
away recorded in the cash book which is in the form of a ledger. amount columns
on debit side one for cash receipts and the other for bank deposits (.e.. payment
(2)To know cash and bank balance: It helps the proprietor to know the cash and made into Bank Account). Similarty there are two amount columns on the credit side,
bank balance at any point of time. one for payments in cash and the other for payments by cheques respectively.
(3) Mistakes and frauds can be prevented: Regular balancing of cash book reveals
the balance of cash in hand. In case the cash book is maintained by business (4) Three Column Cash Book: Large business concems receive and make
concem, it can avoid frauds. Discrepancies if any, can be identified and rectified payments in cash/and by oheques. Where cash discountisa regular feature, a
instantly. Three Column Cash Book is more advantageous, This cashbook has three amount
(4) Effective cash management: Cash book provides all information regarding total columns (cash,bankand discout) oneachside Allcash
receipts deposits into
receipts and payments of the business concem at a particular period. So that, bank and discount allowed
arerecorded oridebit side.andallcash payments,
withdrawals from bank and discount received are recorded on credit side. The
effective policy of cash management can be formulated.
format is giyven in the next page
Kinds of Cash Book (5) Simple Petty Cash Book: In every business, of whatever size, there are many
The various kinds of cash book from the point of view of uses may be as follow: etc.
small cash payments such as conveyance, carriage, postage, telegram, These
expenses are generally repetitive in nature. If ll these small payments are recorded
) Single column Cash Book
(i) Two column Cash Book (with Discount) in the cash book, it will be dificult for the cashier to maintain by
the records all
(i) Two column Cash Book (with Bank) himself. In order to make the task of the cashier easy, these small and recuing
recorded in separate cash book which looks like an account is
(iv) Three column Cash Book expenses are a
called "Simple Petty Cash Book and the person who maintains the perty cash is
(v) Simple Peliy cash Book
Columnar or Analytical Petty Cash Book called the 'Petty Cashier.
(vi)

book (simple cash book) has (6) Columnar or Analytical Petty Cash Book: As in the case of any other cash book,
(1) Single Column Cash Book : Single column cash petty cash book also has the debit side and the credit side. The debit side is smaller
one amount receipts are recorded on the debit side
column in each side. All cash
and has very infrequent entries because cash recelpt by the petty cashier is mainly .

and all cash payments on the credit side. In fact, this

book is nothing but a Cash
from the cashier at the beginning or close of a specified period. The credit side is
Account. Hence, there is no need to open cash account in the ledger. bigger and thus has many columns. For each important pety expenses there
is a
this petty
seperate column, and therefore columnar cash book is another name for
The most common two column cash cash book. These analytical columns helps to know the actual amount spent
on
(2) Two Column Cash Book (with Discount):
books are: Cash book with discount and cash
columns. On either side the single
of each and every type of petty expenses for the specified period. Each pety payment
record discount allowed and
column cash book, another column is added to
 (34)
(33)
Contra Entrles

and then recorded in the respective

is first entered in the total payments column,
analytical column, so that :
office use
the total amount spent on each expenses fora particular period
can be easily Cash withdrawn for
() Cash deposlted into Bank
ascertained by adding up the respective column.
Cash Ac Dr.
Dr.
(i) only the periodical total of each column is posted to the ledger. Bank Alc
To Bank A/c
from the total To Cash Ac
(ii) the total petty payment for any period can be easily ascertained
payments column.
to the requirements of
The analytical petty cash book may be designed according Imprest System of Petty Cash
Book
the business. on loan'. Under this system
the amount required
Imprest means 'money advanced cashier at
is estimated and given to the petty
to meet out various petty expenses are
a month. All the payments
Advantages of Analytical Petty Cash Book the beginning of the spectfied period, usually
when the petty
by vouchers. At the end of the given period or earlier,
The advahtages of analytical petty cash book is given below supported the
he closes the petty cash book for
The cashier has spent the petty cash amount,
Simple Method: It is a simple method of recording petty expenses. cashier. He verifles
and balances it. Then he submits the accounts to the
of period
maintenance of petty cash book does not require specialised knowledge After satisfying himself as to the
correctness
the petty cash book with the vouchers.
accounting. amount equal to the cash spent is given to
the
and genuiness the payments
of an
the time of bring up the
Ci) Economy of Time :lt requires lesser time in recording and also saves petty Thisamount together with the
cashier. amount will
unspent
the main cashier.
cashin hand to the amount withwnich he originally started ie., the imprest
Ci) Lesser chances of mistakes :The petty cash book is checked by the main
cashier
of amount. Thus the systm ofreimbursing the amount spent by the petty cashier at
chances
at the end of the specified period. This process minimises the system af petty cashe
fixedperiod, is known-as.the imprest
mistakes.
For example, On June 1,2002, Rs.1000 was giVen to
the petty cashier. He had

spent Rs.850 during the month He wil be paid Rs.850 on 30th June the cashier
of
(iv) Frauds can be minimised: Recording transactions on the basis vouchers by
of
and checking of cash book by the main cashier minimises the chances so that he may again háve Rs.1,000 for the nextmonth ite., July
fraud.
the
Trade Discount: Trade discount is an allowance or concession granted by
seller to the buyer, if the customer purchases goods above a certain quantity
Contra Entry or
When an entry affect both cash and bank accounts it is called a contra entry. a certain amount. This discount is always necessary in case where goods
the debit and
above
Contra is a Latin word which means opposite. In contra entries both are sold
toa customer who is a trader himself. For example all deals of sale and
credit aspects of a transaction are recorded in the cash book itself. Contra entry
purchase between whole sellers and retaitcrs must have a portion af trade discount,
irom bank If there is no trade discount then retailer will not be able to eam profit on further
is made when (j) Cash deposiied into bank and (i) Cash withdrawn as

for office use. As two cash book with bank columns is a combined cash and bank
the same book.
account, both the aspects of the transaction will be entered in
Such contra entries are denoted by writing the letter 'C in the 'LF. column,
on
resale. The amount of the purchase or sale, is always arrived at after deducting the
trade discount, ie., only the net amount is considered. For example, if the MRP of a
product is Rs.5,000 and trade discount granted by manufacturer to the whole

both sides of the cash book. They indicate that
necessary in the ledger.
no posting in respect thereof is seller is 20% then net price of the product to the wholesaler is Rs.4,000 and by this
amount entry will be recored. Trade discount is not recorded in the books. They are
used only for determining the net price.
Cash Discount: Sale of goods on credit is a common phenomenon in any business.
When goods are sold on credit the customers enjoy a facility of making payment on
some date in the future. In order to encourage them to make the payment immediately
or before the expiry of the credit period a deduction is offered. The deduction so
 (35)
(36)

CA.Naresh Aggarual's CHAPTER-5

ACADEMY
Accounting
of ACCOUNTS Bank Reconciliation Statement
Costing Taxation Financial Management
West Patel Nagar, New Delhi. Normaly entries in the cash book should tally (agree) with those in the pass book
Ph:8800215448. Website: www.academyofaccounts.org and the balances shown by both the books should be the same. But in
practice, the
balances generally differ. In case of disagreement in the balance of the cash book
made is known and the pass book, the need for
as cash discount. For
example, If Ram preparing Bank Reconciliation Statement arises.
Rs.5,000 on 30 days credit purchases goods worth
make payment 30
then, as per the terms of contract, he is authorised to
days after the date of purchase. If he is offered a Bank Reconcillation Statement
cash
of 2% on
payment within 10 days and if he does so, he is entitled to deductdiscount The balance of the bank column in cash book
from the invoice
price and
Rs.100 represents the customers cash balance
pay Rs.4,900. In this case Rs.100 is cash discount. But at bank. It should be the same as shown
by his bank pass book on any particular
if he does not choose to
make payment within 10 days then he will day. For every entry made in the cash book if there is a corresponding
not get any cash
discount In this case he will entry in the
pay Rs.5,000 within 30 days. pass book (maintained by the banker) or vice versa, the bank
balance will be the
same in both the books.
Distinction between cash discount and However, the cash book and the pass book are maintained
trade discount
Trade discount difers from cash by two different
discount in the parties and hence it-is not certain that entry in one
following respects. book will always have a
S.N. Basis Trade Discount Cash Discount
corresponding entry in the other.
(1) Purpose It help the trader to eam Bank reconciliation statement is a list in which the vaious items
some profit
t encourage prompt
dlifference betweenbank balanceas per cash book that cause a
payment within a specified date are indicated. andpass book on any given
time period.
(2) Time when Itis allowed on the ABank recondiliation statementis prepared by
allowed purchase of goods.
tis allowed when
payment is
made within specified period.
any of the two books. But in actual practice, starting with the balarice shown by
Bank recoiiciliation statement is
a

(3) Variation It is usually given at the It varies from customer to

same rate which is
applicable to all customers
and will vary with the
quantity purchased.
(4) Disclosure It is shown by way of
preparedy the
that the balancecustomerstartingwith the balanoe as percash book and wilensure
as per pass book is arrived
customer depending on at
the time and period of Need and Importance of Bank
Reconcillation Statement
payment.
Aftertracing the various items of difference, a bank
It is not shown in the
prepared. The following are its advantages in which lies reconciliation statement
its importance.
is

deduction in the invoice.
(5) Ledger A/c No separate Account is
opened in the Ledger.
invoice.
Separate Accounts are
opened in the Ledger for
discount received and
discount allowed.
(1) The errors that might have taken
bank
place in the cash book in connection with
transactions can be easily found.
(2) Regular preparation of bank
reconciliation statement prevents frauds.
(3) It indirectly imposes moral check on the
(4) By the preparation of bank reconciliation
accounting staff.
be detected and statement, uncredited cheque can
steps can be taken for their collection.
Pass Book or Bank
Statement
Pass Book (Bank
Statement)
books of a bank. It shows all
is merely a
copy of the customer's account in the
the deposits, withdrawals and the
the customers account. balance available in
Banker credits the account of the
customer for all the
 (37) (38)
It is balanced at the end t is balanced after each
(7) Balancing
CA.Naresh Aggarwal's of a specified period. transaction.

ACADEMY of ACCOUNTS Causes of disagreement between the balance shown by the cash book and the
Accounting Costing .
Taxation Financial Management
West Patel Nagar, New Delhi. Ph:8800215448. Website: balence shown by the pass book
www.academyofaccounts.org (1) Cheques pald /deposted into bank but not yet collected: The cheques paid
amounts received from the customer and on his behalt. into bank for collection but not credlted Iinto the account of the customer, because
Similarly the banker the cheque is
debits the account of the customer tfor all withdrawals and amounts
on behalf of the customers.
pald to others
(not collected and credited till thatdate (most common).
The main point to be remembered is that entries are made only after cash is )collected but the bank staff has forgotten to make entry.
recelved or paid, except in the case of interest and bank () collected but credited to wrong account.
bank charges are mere book
charges. Interest and (M) dishonoured.
adjustments and in these, there are neither receipt
of cash nor payment of cash. As soon as the cheques are sent to the bank, entries are made in the debit side
of the cash book (bank column). But, usually bank credit the customers account
Bank Overdraft only when they have recelved payment from the bank concerned, In other
words, when the cheques have been collected. Hence, there will be a time
Bank overdraft is an amount drawn over and above the actual
balance kept in the gap between the depositing of the cheques and the collection by the bank.
bank account. This facility is available
only to the current account holders. Interest
will be charged for the amount overdrawn i.e., overdraft. The Cash book wll (2) Cheques issued butnot yet presented for payment: Thecheques issued but
show a
credit balance l.e., unfavourable balance. The book will show a debit
pass balance.
not debited
cústomersaccount maybe becausetheghequets
00 not cashedtildate.
Difference between Cash Book and Pass Book ()notpresentedtil date
S.N. Basis Cash Book (Bank Column) Pass Book G)presenedbut dishonouredfor somereasonsorother.
(1) Maintained by Cashier
v) lostby the partyaccount
() debitedto wrong
towhomthe.chequewas ssued.
Banker
(2) Deposits of Cash Entered on the debit Entered on the credit In all of the above cases, the entry in the cash book is made
immediately on the
side of the cash book. column of the pass book. issue of cheque but naturally the entry will be made by bank only when the
(3) Withdrawals of Entered on the credit Entered on the debit cheque is presented for payment. Thus there wll be a gap of some days between
Cash side of the cash book. the entry for issue of cheque in the cash book and the
column of the pass book. entry for payment mede in
the pass book.
(4) Cheques deposited Entered on the Entered in the pass
for collectton debit side of the cash book only on the date (3) Amount credited by the banker In the peee book without the immedliate knowledge
book on the date of of the realisation of the customer The following are some of the examples for the above
depositing the cheques of the cheque. statement
into the bank () The bank might have collected rent,
dividend, bills of exchange, interest
(5) Cheques issued Entered on the credit side Entered on the debit etc., due for the customer as per standing instructions.
of the cash book on the column of the pass book ) Some debtors might have directly paid into bank.
date of issuing the only on the date on which
they i) Bank credits interest on the credit balance of the customer's account.
cheque to the creditors. are presented and paid. () The banker has wrongly credited this account instead of some other account
(6) Collections and Entered in the Cash In all the above cases, the
Entered in the Pass book entry will be first entered in the pass book. The
payments as per book after seeing the customer will know this only after he verifies the entries In the
first. pass book. So
standing instructions pass book. there may be a time gap of some days before the customer includes entries
made in the pass book.
 (40)
(39)

CA. Naresh Aggarval's CHAPTER-6

Rectification of Errors
ACADEMY of ACCOUNTS Trial Balance and

Accounting Costing Taxation Financial Management

West Patel Nagar, New Delhi. Ph:880021548. Website: www.academyofaccounts.org
accounts along with
the transactions in the various
After recording and classifing to prepare a statement
accounting process is
the immediate in the
(4) Amounts debited by the banker in the pass book without balancing thereof. The next step so for. This statement
of the examples for this. of the transactions recorded
knowledge of the customer: The following are some to check the arithmetical accuracy
interest on overdrat etc. is called Trial Balance'.
) The banker has recorded bank charges, and credit balances of all
which shows debit balances
The banker has paid insurance premium, subscription
for Trial balance is a statement credit as per
(i) debit should have a comesponding
instructions. accounts in the ledger. Since, every
periodicals,etc.on behalf of the customer as per the standing the total of the debit balances and credit
balances
instead of some other the rules of double entry system, corectness
The banker has wrongly debited this account difference, one has to check the
(ii) should tally (agree). In case, there isa
Trial balance can be
account. from the respective accounts.
of the balances brought forward
the customer as per standing
(iv) The banker has paid the bills payable of prepared in any date provided
accounts are balanced.

instructions.
bills receivable
(v) Dishonour of a cheque deposited and discounted Objectives ot TrialBalance
the entry will be first entered in the pass book of the
Theobjectives of preparing atrial balanceofare
In all the above cases,
customer. And the customer wil know only
after he verifies the entries in the
So there may be a time gap of
some days
9 To check the arithmetical accuracy
the ledger accounts.
pass book or statement of
account .

before the customer includes the entries

made in the pass book. i) To locate the errors.
Gi) To facilitate the preparation otfinal accounts.

Advantages of Trial Balance

The advantages of the trial balance
are

of the book-keeping work done

) It helps to ascertain the arithmetical accuracy
during the period.
reference of all the balances of the ledger
(i) It supplies in one place ready
accounts.
rectified
a trial balance, the same can be
(Gii) If any error is found out by preparing
before preparing final accounts.
which final accounts are prepared.
(iv) It is the basis on

Methods of preparing Trial Balance

methods.
A trial balance can be prepared in the following
total amount of the debit
( According to this method, the
The Total Method :accounts of the
and the total amount of the credit side
side of the ledger
ledger accounts are recorded.
 (41) (42)

(1) ETors of Principle: Transactons are recorded as per generaly acoepted

The Baence Method: in this method
only the balanoes of an account either accounting principles. H any of these principles is violated or ignored, erors
debit or credit as he case may be, are recorded resuiting from such vioiaion are known as erors d principle. For exampe
against their respective
accous This method is more midely used, as suppies ready figures tor Purchase of assets recorded in the purchases book. t is an error of principle,
prepering he final aooaunts because the purchases book is meant for recording redt purchases of goods
meant for resale and not foued assets. A tral balance w not dsclose erors o
Limations &Tral Balance principle.
Thaugh e ra baience heips to ensure he arithmetical accuracy d the books of
(2) Clerical Errors These errors arise because of mistakes commited in the
accourts as possibie oney hen the accountant has not commited any eror. As ordinary course of accouring work These can be turther classifed into three
typesas folows
ateeosmde ae nat disciosed by thetrial balence, t wouid not be regarded as
Erors of Omission: This eror arises whena tansacton is completely
or
a concksie procf af corectness of t e books af accounts maintained.
of omission
partialy omitted to be recorded in the books of acoouts. Emors
may be classified as below
ErorsinAceourting when a transaction is
(a) Eror of Complete Omission: This eror arises
The undameta principle di the doubie entry system is that every debit has a totally omited to be recorded in the books of accounts. For example,
comespondirg cedt of eqel amourt and vice-versa Therekore, the toal of al Goods purchased from Ram completely onited to be recorded. Tris
ebt baarces e r e t accuns mus be equal to he toal of al cedit balances
eror doesnot afect the trial balance
n d e e t accounts, ie., te t a d te o columns shouid taly (agree).
The talyng d e two t a s (debit balances and credit belances) of the trial Eror of Partial Omission: This eror arisess en only one aspect of
(b)
the tra ction either debito.credit is recorded.For erample, acredit
balance ensursayaitmesc acaracy but not accousing ecauray.
Fhowever,
teto totals do not taly, R impies that some errors have been commited wtile saleci goodsto Ravi ecordedi es bookbut amited to be postedin
ecordng he tansacsons in te boos daccounts.
his A/c. Thisserroraffectsthe tria nce
Errors of Commission Thiseror eo wrongrecording,wong
etc. Eros
Types of Errors
posting, wrong cas gcarying f
otcommissionamayi
Keeping in view te natrederos, al he emos commited in the acouning process (a) Eror of Recording: This eror arises when a transacion wrongy
is
Erors
can bemainty ciassfeditotwo types: Erors of Principal, Clerical recorded in the books of original entry. For example, Goods of Rs2500,
book for Rs.1,500.
purchased on credit from Suni, is recorded in the
Types of Erors This error does not affect the trial balance.
recorded in the
(b) Emor of Posting: This e o r arises when iniomation
Eror of
books of original entry are wrongly entered in the ledger.
Clerical Erors
Erors of Principle posting may be as folows
0Amount posted in wrong account
) Amount posted in wrong side.
Erors of Erors of Compensating
Errors
(i)Wrong amount posted
Omission Commission which depends on
This emor may or may not affect the trial balance

LParfial cmisio iEra recording the type of emor committed.

is
i Emor of posing This eror arises when a mistake
iCompletecemission (c) Emor of Casting (Totaling) account. For example,
Emor of casting committed while totaling the subsidiary book or
but it may be wrongly totaled
iw.Eor odcarying forward fcorrect tolal of an account is Rs.10,000
H t is wrongly totaled
as
as Rs.9,000. This is caled overcasting.
Rs.9,000, it is called undercasting
 (43)
CA.Naresh Aggarwal's
ACADEMY of ACCOUNTS
Accounting Costing Taxation Financial Management
West Patel Nagar, New Delhi. Ph:8800215448. Webste:
www.academyofaccounts.org
(d) Error of Carrying Forward: This error arises when a mistake is
Committed in camying forward a total of one page to the next page. For
example, Total of purchase book in page 122 of the ledger was Rs.4,500,
while carrying forward the balance to the next page it was recorded as
Rs.5,400.
(i) Compensating Errors: The errors arising from excess debits or under
debits of accounts being neutralised by the excess credits or under credits
the
to same extent of same or some other account is compensating error.
the erors in one direction are compensated by errors in another
Since
direction, arithmetical accuracy of the trial balance is not at all affected inspite
of such eors. For example, If the purchases book and sales book are both
overcast (excess totalling) by Rs.1,000, the errors mutually compensate
each other. This eror will not affect the agreement of trial balance.
(44)
Suspense Account
When debit and credit side of trial balance does not taly (agree) and it is difficult
to locate the mistakes before preparing the final accounts, the difference in the
trial balance is transferred to newly opened imaginary and temporary account
called 'Suspense Account'. Suspense account is prepared to avoid the delay in
the preparation of final accounts. If the total of debit balances of the trial balance
exceeds the total credit balances, the difference is transferred to the credit side of
the suspense account. On the other hand, if the total credit balances of the trial
balance exceeds the total debit balances the difference is transferred to the debit
side of the suspense account.
When the errors affecting the suspense account are located, they are rectified
with suspense account. Suspense account is continued in the books until the
errors are located and rectified. Such balance will be shown in the balance
sheet. Debit balance will be shown on the asset side and the credit balance will
be shown on the liability side.
When all the errors
affecting the trial balance are located and rectfied, the
suspense account automatically gets closed.

Errors disclosed and not disclosed by trial balance

If the impact of the errors on tral balance is considered, errors may be classified into
two categories )
balance.
Errors disclosed by trial balance, (i) Errors not disclosed by trial

ERRORS
AG
Disclosed by Trial Balance Not disclosed by Trial Balance
0 Erors of complete omission
Erors of parial omission (i) Erors of recording
)Errors of casting
Errors of camying forward Gi) Errors of principle
(v) Erors of posting in the wrong side () Erors of posting to wrong Alc
() Compensating Eors
() Erors of posting with wrong amount
(vi) Double posting in the same Alc

Rectification of Errors

Correction of errors in the books of accounts is not done by erasing, rewriting

or

the errors that has occured is

striking the figures which are incorrect. Correcting
suitable explanatory note is
called Rectification. Appropriate entry is passed or
neutralise the effect of errors.
written in the respective account or accounts to