ST.

JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)

BRIDGE COURSE ON FUNDAMENTALS OF ACCOUNTING

STUDY MATERIAL

THEORETICAL CONCEPTS

Meaning of Accounting: Accountancy is the language of a business and serves as a

means of communication about the financial matters of the business. Accounting is the
process of recording financial transactions pertaining to a business. One should be
familiar with the grammar of the language and understand it in the proper technical
sense to be able to prepare the books of accounts.

Definition: According to the American Institute of Certified Public Accountants,

“Accounting is the art of recording, classifying and summarising in a significant
manner and in terms of money, transactions and events, which are, in part at least, of
a financial character and interpreting the results thereof.”

 Art of recording…writing the transactions in the records in an orderly

manner; eg., Journals, Cash Book, etc.
 Art of classifying…items of similar nature are grouped in Ledgers; eg., Sales
Account, Travel Expenses Account, Furniture Account, etc.
 Art of summarising…presenting the classified data in a manner useful to
internal and external end-users of accounting statements; eg., Statement of
Profit and Loss Account, Balance Sheet and so on.
 Art of interpretation & communication…so that the end-users can make
meaningful judgments about the financial condition or the profitability of the
business.

Purpose of Accounting
• To maintain full and systematic records of business transactions
• To ascertain profit or loss of the business
• To depict financial position of the business
• To provide accounting information to the interested parties

Advantages of Accounting
 Helps management in planning, decision making and controlling.
 Provides complete and systematic records.
 Provides information regarding Profit or Loss of the business.
 Provides information regarding the financial position of the business.
 Enables comparative study.
 Helpful in assessment of tax liability and audit
 Properly maintained accounts and records provide evidence in legal matters.
 Accounting information can be used to determine the valuation of a business.
  Helpful in raising loans.
 Helpful in prevention and detection of errors and frauds.

Limitations of Accounting
• The items which are nonmonetary in nature cannot be recorded.
• Accounting data that are recorded on the basis of estimates may not be
inaccurate.
• Fixed Assets are recorded at the original cost which may not be realistic.
• Value of money does not remain stable so accounting value does not show
true financial results.
• Accounting can be manipulated and biased.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

These are the rules, regulations and guidelines issued by the Institute of Chartered
Accountants of India (ICAI) to prepare books of accounts. The GAAP is broadly
divided into Accounting Concepts (rules) and Accounting Conventions
(suggestions).

ACCOUNTING CONCEPTS
1. Business Entity Concept:
- business is treated as separate and distinct unit from its owners and is liable
to them
2. Money Measurement Concept:
- Only those transactions which can be measured in terms of money are
recorded
3. Going Concern Concept:
- Business entities have infinite duration
4. Cost Concept:
- All transactions are recorded at their monetary cost of acquisition
5. Accounting Period Concept:
- Books of accounts are usually maintained for a year (Financial/Calendar)
- It is at the end of this period that the financial position is ascertained
6. Matching Concept:
- Expenses which are relevant to the period should be matched/deducted from
the revenue of the period to determine the profit or loss of that period
7. Dual Aspect Concept:
- Every transaction has two aspects namely (i) the receiving aspect – Debit and
(ii) the giving aspect - Credit
- Accounting Equation (Assets = Liabilities + Capital) is based on this concept
8. Realisation Concept:
 - revenue is considered as being earned on the date on which it is realised
(earned) ie., the date on which the title or the ownership in the goods are
being transferred to customers and not on the date cash is received
9. Accrual Concept:
- All expenses which are due to be paid and all incomes which are due to be
received are accounted for in the current year
10. Objective Evidence Concept:
- There should be documentary evidence (invoices & vouchers) for the
recorded transactions

ACCOUNTING CONVENTIONS
1. Convention of Materiality:
- Only material (significant) items are recorded in the books of accounts
2. Convention of Conservatism or Prudence
- All anticipated losses should be recorded in the books of accounts, but all
anticipated or unrealized gains should be ignored.
3. Convention of Consistency:
- accounting practices should remain unchanged from one accounting year
to another
4. Convention of Full Disclosure:
- all significant information should be disclosed in the accounting statements

ACCOUNTING STANDARDS
Accounting standards are a common set of principles, standards and procedures that
define the basis of financial accounting policies and practices. Accounting Standards
(AS) in India are issued by ICAI (Institute of Chartered Accountants of India) since
1979, for preparation of uniform and consistent financial statements.

IFRS & Ind AS

The International Financial Reporting Standards (IFRS) are accounting standards that
are issued by the International Accounting Standards Board (IASB), an independent
body formed in 2001, with the objective of providing a common accounting
language to increase transparency in the presentation of financial information. It is
internationally recognised accounting standards.
IndAS stands for Indian Accounting Standards, which are basically standards that
have been harmonised with the IFRS to make reporting by Indian companies more
globally accessible. The Ministry of Corporate Affairs in 2015, had notified the
Companies (Indian Accounting Standards) Rules 2015, which stipulated the
adoption and applicability of IndAS in a phased manner Level I companies
beginning from the accounting period 2016-‟17 by the entities. Level II and Level III
enterprises are considered as SMEs and they continue with AS.
Voluntary Adoption

Companies can voluntarily adopt Ind AS for accounting periods beginning on or

after 1 April 2015 with comparatives for period ending 31 st March 2015 or
thereafter. However, once they have chosen this path, they cannot switch back.

Phases of Adoption
MCA has notified a phase-wise convergence to IndAS from current accounting
standards, which shall be adopted by specific classes of companies based on their
Networth and listing status.

Phase 1
Mandatory applicability of IndAS to all companies from 1st April 2016, provided
- It is a listed or unlisted company
- Its Networth is greater than or equal to Rs.500 Crore
- Networth shall be checked for the previous three financial years (2013-
‟14,2014-„15 and 2015-„16)
Phase II
Mandatory applicability of IndAS to all companies from 1st April 2017, provided
- It is a listed company or is in the process of being listed (as on 31.03.2016)
- Its Networth is greater than or equal to Rs.250 Crores but less than Rs.500
crores
Phase III
Mandatory applicability of IndAS to all banks, NBFCs and Insurance companies
from 1st April 2018, whose
- Networth is more than or equal to Rs. 500 crores with effect from 1st April
2018
Phase IV
All NBFCs whose Networth is more than or equal to Rs. 250 crores but less than
Rs.500 crores shall have IndAS mandatorily applicable to them with effect from 1st
April 2019.

ACCOUNTING TERMINOLOGIES
Accounting Transaction – is any business event that impacts the financial position
of an enterprise; these should be recorded in the books of accounts. All transactions
are events.
Business Event – refers to any occurrence in a business scenario such as placing an
order by a customer, death of a partner and so on which is not recorded in the books
of accounts.
Accounting Event – refers to the consequences of the accounting transactions eg.
Profits and Closing Stock.
Cash Transaction – refers to transactions which involves cash like purchase of goods
with cash
Credit Transaction – refers to transactions which do not involve cash like selling
goods on credit
Capital – Refers to the amount invested by the proprietor in a business enterprise.
Drawings – refers to any cash or value of goods withdrawn by the owner for
personal use.
Assets – Valuable resources controlled by a business enterprise which can be
measured in terms of money
Liabilities – refers to the amount which the firm owes to outsiders, an obligation to
be fulfilled
Current Assets– refers to assets which are expected to be converted into cash within
an operating cycle or within a year.
Non-current Asset – refers to assets which are expected to be present in the business
for more than a year or the operating cycle.
Tangible Asset – refers to the physical asset which includes stock, cash, furniture
etc.
Intangible Asset – refers to the asset which do not have physical form like patent
rights, copyrights etc.
Fictitious Assets – refers to assets which cannot be realised in cash, like preliminary
expenses to the extent not written off, huge advertisement expense not yet written
off, etc.
Debtor – refers to the party who owes money to the business; customer to whom
goods are sold on credit
Creditor – refers to the party to whom the business owes money; supplier from
whom raw-materials or goods are purchased on credit
Expense – refers to the cost incurred in production, administration and distribution
of goods and services.
Revenue – refers to the income from the operating activities, like sale of goods
Trade Discount – refers to the discount allowed by the seller to its customers on the
list/catalogue price of the goods at the point of sales.
Cash Discount – refers to the discount allowed to the customers for making prompt
payment at the point of settlement of dues.
Purchases – refers to buying goods for the purpose of resale/ use in the
manufacturing process.
Sales – refers to the value of sale of goods and services rendered.
Capital Transaction - refers to the transactions which are non-recurring and of long-
term in nature, for creation of source of income in nature like purchase of machinery,
sale of land etc.
Revenue Transaction – refers to the transactions which are recurring and short-term
in nature, for maintaining the source of income like payment of salary, purchase of
goods, repairs to machinery etc.

CLASSIFICATION AND RULES FOR ACCOUNTING UNDER

MODERN/AMERICAN/ACCOUNTING EQUATION BASED METHOD
(i) Capital Account:
Debit decrease in capital;
Credit increase in capital
(ii) Asset Account:
Debit increase in asset;
Credit decrease in asset
(iii) Liabilities Account:
Debit decrease in liability;
Credit increase in liability
(v) Expenses Account:
Debit increase in expenses and losses;
Credit decrease in expenses and losses
(iv) Revenue Account:
Debit decrease in incomes and gains;
Credit increase in incomes and gains

ACCOUNTING CYCLE

Journals/Subsidiary Books

Ledger Accounts

Trial Balance

Final Accounts

Journal: A Journal is a chronological record of business transactions.

Journal Entry: A journal entry is the recording of a business transaction in a
Journal. Journal entry follows the double entry concept of accounting,
recording the debit and credit aspect of a transaction.
Format:
Date Particulars LF Debit (Amt.) Credit (Amt.)

Narration: A brief description about the entry

Ledger Folio: The concerned account ledger page number where the entry
will be posted.

Ledger Books or Books of Accounts:

A ledger is the complete collection of all the accounts of an organization. It
records transactions of a similar nature
Format:
Dr Name of the Account Cr
Date Particulars Amount Date Particulars Amount

Trial Balance:
Trial Balance is a statement which accounts all the ledger balances regardless
of either Revenue or Capital A/c. It comprises 2 columns viz., debit and
credit. If the transactions are documented systematically by providing dual-
sided effect and later posted methodically, then the total of both the columns
would be the same. Hence, trial balance also determines the accuracy of the
accounts. These balances are also used in the preparation of Final Accounts.

Format:
Sl. No. Name of the Account LF Debit Credit

**********************
SOLVED PROMBLEMS

A. Identify the Event and Transaction

1. Appointment of Mr.Raghav as Finance manager – Event
2. Sale of goods for Rs. 10,000 – Transaction
3. Death of a senior key management personnel – Event
4. Large scale employee/labour union strike – Event
5. Credit purchase of goods from Mr.Prabhakar – Transaction

B. Identify the Credit and Cash transaction

1. Machinery purchased from Mahindra and Mahindra Rs.20,00,000 – Credit
2. Cash withdrawn from bank – cash
3. Counter sale of goods – cash
4. Commission received – cash
5. Sold furniture to Mahesh – credit

C. Identifying nature of accounts (elements) under modern approach.

1. Drawing a/c – Equity
2. Furniture a/c - Asset
3. Sales a/c – Income
4. Rent a/c - Expense
5. Outstanding Salary a/c – Liability

D. Identify the elements, accounts and give the rules (Debit and Credit)
1. Commenced business with cash
Equity – Capital a/c – Increase – Credit
Asset – Cash a/c – Increase – Debit
2. Paid rent for the shop by cheque
Expense – Rent a/c – Increase - Debit
Asset – Bank a/c – Decrease – Credit
3. Purchased goods from Mr.Anand
Expense - Purchases a/c – Increase – Debit
Liability – Mr.Anand a/c ( Creditor) – Increase – Credit
4. Sold goods for cash
Income – Sales a/c – Increase – Credit
Asset – Cash a/c – Increase – Debit
5. Proprietor took goods for his personal use
Equity – Drawing a/c – Decrease – Debit
Expense - Purchases a/c – Decrease – Credit

E. Show in accounting equation:

a. Commenced business with Cash Rs. 20,000; Goods Rs. 50,000 and Furniture Rs.
30,000.
b. Purchased goods from Gopal on credit Rs. 40,000.
c. Sold goods for cash Rs. 40,000 (Costing Rs. 30,000)
d. Withdrew for personal use goods costing Rs. 5,000.
 e. Purchased chairs for office use for cash Rs. 10,000
f. Paid for printing Rs. 500 and received commission Rs.1,200.

Accounting Equation: Asset = Liability

Asset = Equity (internal liability) + Liability (external liability)

Equity = Capital + Income/Profit – Expense/Loss

Transaction Asset = Equity + Liability

Commenced business with Cash Rs. 1,00,000 1,00,000 0
20,000; Goods Rs. 50,000 and
Furniture Rs. 30,000.
Total 1,00,000 1,00,000 0
Purchased goods from Gopal on + 40000 (Stock) + 40,000
credit Rs. 40,000. (Gopal)
Total 1,40,000 1,00,000 40,000
Sold goods for cash Rs. 40,000 (-) 30,000 +10,000 (Profit)
(Costing Rs. 30,000) (stock)+ 40,000
(cash)
Total 1,50,000 1,10,000 40,000
Withdrew for personal use goods (-) 5000 (Stock) (-) 5,000
costing Rs. 5,000 (Drawings)
Total 1,45,000 1,05,000 40,000
Purchased chairs for office use for + 10,000 (
cash Rs. 10,000 Furniture) –
10,000 (Cash)
Total 1,45,000 1,05,000 40,000
Paid for printing Rs. 500 and received (-) 500 + 1200 (-) 500 (Rent) +
Interest Rs.1,200 (cash) 1,200 (Interest)
Total 1,45,700 1,05,700 40,000

F. Give the journal entries for the following transactions and prepare necessary
ledger accounts and the trial balance.
a. Manoj started business with Cash Rs. 2,30,000; Goods costing Rs. 1,00,000; Building
Rs. 2,00,000
b. He purchased goods for cash Rs. 50,000
c. He sold goods costing Rs. 20,000 for Rs. 35,000
d. He purchased goods from Rahul Rs. 55,000
e. He sold goods to Varun (costing Rs. 52,000) for Rs. 60,000
f. He paid cash to Rahul in full settlement Rs. 53,000
g. Salary paid by him Rs. 20,000
h. Received cash from Varun in full settlement Rs. 59,000
i. Rent outstanding Rs. 3,000
j. Prepaid insurance Rs. 2,000

Books of Manoj Enterprises

Date Particulars LF Debit Rs. Credit Rs.

1/1/2020 Cash a/c Dr 2,30,000
Inventory a/c Dr 1,00,000
Building a/c Dr 2,00,000
To Capital a/c 5,30,000
(Being for commencement of business)
2/1/2020 Purchases a/c Dr 50,000
To Cash a/c 50,000
(Being for cash purchase made)
3/1/2020 Cash a/c Dr 35,000
To Sales a/c 35,000
(Being for cash sales made)
4/1/2020 Purchases a/c Dr 55,000
To Rahul a/c 55,000
(Being for credit purchase made)
5/1/2020 Varun a/c Dr 60,000
To Sales a/c 60,000
(Being for credit sales made)
6/1/2020 Rahul a/c Dr 55,000
To Cash a/c 53,000
To Discount received a/c 2,000
(Being for account settled with Rahul)
7/1/2020 Salary a/c Dr 20,000
To Cash a/c 20,000
(Being for salary paid)
8/1/2020 Cash a/c Dr 59,000
Discount allowed a/c Dr 1,000
To Varun a/c 60,000
(Being for varun account settled)
9/1/2020 Rent a/c Dr 3,000
To Rent outstanding a/c 3,000
(being for rent expense not yet paid)
10/1/2020 Prepaid Insurance a/c Dr 2,000
To Cash a/c 2,000
(For Insurance paid in advance)

Ledger Accounts

Dr 1. Cash a/c Cr

Date Particulars JF Amount Date Particulars JF Amount

1/1/2020 To Capital a/c 2,30,000 2/1/2020 By Purchases a/c 50,000
3/1/2020 To Sales a/c 35,000 6/1/2020 By Rahul a/c 53,000
8/1/2020 To Varun a/c 59,000 7/1/2020 By Salary a/c 20,000
10/1/2020 By Prepaid 2,000
Insurance a/c
15/1/2020 By Balance b/d 1,99,000
3,24,000 3,24,000
16/1/2020 To balance 1,99,000
b/d
Dr 2. Inventory a/c Cr

Date Particulars JF Amount Date Particulars JF Amount

1/1/2020 To Capital a/c 1,00,000 15/1/2020 By Balance c/d 1,00,000

1,00,000 1,00,000
16/1/2020 To Balance b/d 1,00,000

Dr 3. Building a/c Cr

Date Particulars JF Amount Date Particulars JF Amount

1/1/2020 To Capital a/c 2,00,000 15/1/2020 By Balance c/d 2,00,000

2,00,000 2,00,000
16/1/2020 To Balance b/d 2,00,000

Dr 4. Capital a/c Cr

Date Particulars JF Amount Date Particulars JF Amount

15/1/2020 To balance c/d 5,30,000 1/1/2020 By Cash /ac 2,30,000
By Stock a/c 1,00,000
By Building a/c 2,00,000
5,30,000 5,30,000
16/1/2020 By Balance c/d 5,30,000

Dr 5. Purchases a/c Cr

Date Particulars JF Amount Date Particulars JF Amount

2/1/2020 To Cash a/c 50,000 15/1/2020 By Balance c/d 105,000
4/1/2020 To Rahul a/c 55,000
105,000 105,000
16/1/2020 To Balance b/d 105,000

Dr 6. Sales a/c Cr

Date Particulars JF Amount Date Particulars JF Amount

15/1/2020 To balance c/d 95,000 3/1/2020 By Cash a/c 35,000
5/1/2020 By Varun a/c 60,000
95,000 95,000
To Balance b/d 95,000

Dr 7. Rahul a/c Cr

Date Particulars JF Amount Date Particulars JF Amount

6/1/2020 To Cash a/c 53,000 4/1/2020 By Purchases a/c 55,000
 To Discount 2,000
received a/c
55,000 55,000
Dr 8. Varun a/c Cr

Date Particulars JF Amount Date Particulars JF Amount

5/1/2020 To Sales a/c 60,000 8/1/2020 By Cash a/c 59,000
By Discount 1,000
allowed a/c
60,000 60,000

Dr 9. Discount received a/c Cr

Date Particulars JF Amount Date Particulars JF Amount

15/1/2020 To balance 2,000 6/1/2020 By Rahul a/c 2,000
c/d

2,000 2,000
16/1/2020 By Balance 2,000
b/d

Dr 10.Discount allowed a/c Cr

Date Particulars JF Amount Date Particulars JF Amount

8/1/2020 To Varun a/c 1,000 15/1/2020 By Balance c/d 1,000

1,000 1,000
16/1/2020 To Balance b/d 1,000

Dr 11. Rent a/c Cr

Date Particulars JF Amount Date Particulars JF Amount

9/1/2020 To Outstanding 3,000 15/1/2020 By Balance c/d 3,000
rent a/c

3,000 3,000
16/1/2020 To Balance b/d 3,000

Dr 12.Prepaid Insurance a/c Cr

Date Particulars JF Amount Date Particulars JF Amount

10/1/2020 To Cash a/c 2,000 15/1/2020 To Balance c/d 2,000

2,000
16/1/2020 To Balance b/d 2,000

Dr 13. Rent-outstanding a/c Cr

Date Particulars JF Amount Date Particulars JF Amount
15/1/2020 To Balance c/d 3,000 9/1/2020 By Rent a/c 3,000

3,000 3,000
16/1/2020 By Balance b/d 3,000

Dr 14.Salary a/c Cr

Date Particulars JF Amount Date Particulars JF Amount

7/1/2020 To Cash a/c 20,000 15/1/2020 By Balance c/d 20,000

20,000 20,000
16/1/2020 To Balance b/d 20,000

Trial balance as on 31/12/2019

S.No Name of the account LF Debit Rs. Credit Rs.

1 Cash a/c 1,99,000
2 Inventory a/c 1,00,000
3 Building a/c 2,00,000
4 Capital a/c 5,30,000
5 Purchases a/c 1,05,000
6 Sales a/c 95,000
7 Discount Received a/c 2,000
8 Discount Allowed a/c 1,000
9 Rent a/c 3,000
10 Prepaid Insurance a/c 2,000
11 Rent Outstanding a/c 3,000
12 Salary a/c 20,000
Total 6,30,000 6,30,000

G. Prepare the Trial Balance of Shri Rajan as on 31st December,2019:

Particulars Amount (Rs.)

Capital 920000
Creditors 188520
Bills payable 69300
Sales 1218500
Provision for doubtful debts 13200
Interest received 3400
Buildings 700000
Machinery 120000
Furniture 16400
Debtors 156000
Opening stock 150400
Cash in hand 9880
Cash at bank 145340
Bills receivables 58440
 Purchases 855220
Carriage inwards 12910
Carriage outwards 8000
General expenses 60850
Insurance 7830
Bad debts 6130
Audit fees 4000
Travelling expenses 3250
Discount allowed 6200
Sales returns 2850
Investments 89220

Books of Shri Rajan

Trial balance as on 31/12/2019

S.No. Name of the account LF Debit Rs. Credit Rs.

1 Capital a/c 9,20,000
2 Creditors a/c 1,88,520
3 Bills payable a/c 69,300
4 Sales a/c 12,18,500
5 Provision for Doubtful debts 13,200
6 Interest received 3,400
7 Building a/c 7,00,000
8 Machinery a/c 1,20,000
9 Furniture a/c 16,400
10 Debtors a/c 1,56,000
11 Cash in hand a/c 9,880
12 Cash at bank a/c 1,45,340
13 Bills receivable a/c 58,440
14 Purchases a/c 8,55,220
15 Carriage inwards a/c 12,910
16 Carriage outwards a/c 8,000
17 General expenses 60,850
18 Insurance 7,830
19 Bad debts 6,130
20 Audit Fees 4,000
21 Travelling expenses 3,250
22 Discount allowed 6,200
23 Sales return 2,850
24 Investments 89,220
25 Opening Stock 1,50,400

Total 24,12,920 24,12,920