CHAPTER 1 : BASIC ACCOUNTING TERM BY RAKESH RAJPUT

Entity : Entity means a thing that has a definite individual existence. Business Entity
ntity means a
specifically identifiable business enterprise like Big Bazaar, Reliance Jewellers, ITC Limited, etc.
An accounting system is always devised for a specific businbusiness entity (also called accounting
entity).
Business Transaction: An event involving some value between two or more entities. It can be a
purchase of goods, receipt of Money, payment to a creditor, incurring expenses, etc. It can be a
cash transaction or a credit transaction.
Voucher: The documentary evidence in support of a transaction is known as voucher. For
example, if we buy goods for cash, we get cash memo, if we buy on credit, we get an invoice;
when we make a payment we get a receipt and so on.
Goods: It refers to the products in which the business units are dealing, i.e. in terms of which it is
buying and selling or production and selling.
Account: an account is a ledger record in summarized for, of all transaction that have taken place
with thee particular person or things specified.
Dr. ………………… Account Cr.
Particular Amount Particular Amount

Left Side Right Side

Every Account has Two Sides

 Left Side is Debit
 Right Side is Credit
Capital: Amount invested by the owner in the firm is known as capital. It may be brought in the
form of cash or assets by the owner for the business entity capital is an obligation and a claim on
the assets of business. It is, therefore, shown as capital on the li
liabilities
abilities side of the balance sheet.
Drawings: Withdrawal of money and/or goods by the owner from the business for personal use is
known as drawings. A drawing reduces the investment of the owners.
Sales : Sales are total revenues from goods or services sold or provided to customers. Sales may
be cash sales or credit sales.
Revenues : These are the amounts of the business earned by selling its products or providing
services to customers, called sales revenue. Other items of revenue common to many businessesbusiness
are: commission, interest, dividends, royalities, rent received, etc. Revenue is also called income.
Assets: The valuable resources owned by business which acquire at a measurable money cost.
Definition of Assets
“Assets
ssets are future economic benefits, the rights, which are owned or controlled by an
organization or individual.” -- Finney and Miller
“Assets are property or legal right owned by an individual or a company to which money
value can be attached.” -- R. Brockington

JOIN RANK 1 COACHING OF ACCOUNTANCY

 Type of Assets (As Per Time)
Non-current
current Assets are those assets which are held by a business from a long long-
Non Current term point of view. They are not held with a purpose to resell but are held
Assets either as investment or to facilitate business operations. Which includes
Tangible Fixed Assets; Intangible assets etc.
Current Assets are those assets which are held by the business with the purpose
Current assets of converting them into cash within a short period, i.e., one year. e.g. Stock,
Debtor, cash etc.
Note: Prepaid expenses are also Current Assets although they cannot be converted into cash. They
are so classified because benefit from such expenses when paid has not fully exhausted, i.e., it will
be available in the next accounting year also.
These assets have physical existence. And remain with business for more
Tangible Assets than a year. E.g. Land and Building ,Plant and Machine, Furniture,
Office Equipments etc.
These assets do not have physical existence. E.g. Goodwill, ,Patents ,
Intangible Assets
Trademarks, Copyright, Computer software etc
These are not acquire for the purpose of resale but it offers
Fixed Assets
business operations and increase earning capacity of business
Those assets which are either in form of cash or in form of assets which
Liquid Assets
can get converted in cash in short period.
These are the
the/ assets which represent loss or expenses yet to be written
Fictitious Assets
off.
Liabilities: These are certain obligations or dues which firm has to pay. Liabilities can be
divided into
nto two categories i.e. Non Current Liabilities and Current Liabilities.
Non Current Liabilities Current Liabilities
These liabilities are for the purpose of long term These liabilities are for the purpose of short
finance and have maturity period more than a term finance and have maturity period less
year. than a year.
e.g. Bank Loan, Mortgage, Loan from other e.g. Creditors Bills Payable Outstanding
financial institutions Other long term liabilities Expenses Bank overdraft
Profit: The excess of revenues of a period over its related expenses during an accounting year
profit. Profit increases the investment of the owners.
Gain: A profit that arises from events or transactions which are incidental to business such as
sale of fixed assets, winning a court case, appreciation in the value of an asset.
Loss: The excess of expenses of a period over its related revenues its termed as loss. It decreases
incurred) without
in owner’s equity. It also refers to money or money’s worth lost (or cost incurred)
receiving any benefit in return, e.g., cash or goods lost by theft or a fire accident, etc. It also
includes loss on sale of fixed assets.
Purchases: Purchases are total amount of goods procured by a business on credit and on cash,
for use or sale.
 In a trading concern, purchases are made of merchandise for resale with or without
processing.
 In a manufacturing concern, raw materials are purchased, processed further into
finished goods and then sold.
 Purchases may be cash purchases or credit purchases.
Discount: Discount is the deduction in the price of the goods sold. It is offered in two ways.
A. Trade Discount’: “ Offering deduction of agreed percentage of list price at the time selling
goods is one way of giving discount” . Such discount is called ‘Trade Discount’
Discount’. It is
generally offered by manufactures to whole sellers and by whole sellers to retailers.

JOIN RANK 1 COACHING OF ACCOUNTANCY

 B. Cash Discount : After selling the goods on credit basis the debtors may be 11given11 certain
deduction in amount due in case if they pay the amount within the stipulated period or earlier.
This deduction is given at the time of payment on the amount payable. Hence,Hence, it is called as
Cash Discount.. Cash discount acts as an incentive that encourages prompt payment by the
debtors.
Stock (Inventory) : Stock is a measure of something on hand-goods,
hand goods, spares and other items
in a business. It is called Stock in hand.
hand
In a trading concern
 Stock in Trade: Those amount of goods which are purchased by business for
purpose of resale are called stock in trade.
In a manufacturing company
 Stock of Raw Material: material on hand for purpose of processing is called stoch
of raw material
 Stock of Work-In-- Progress: material on hand which have entered in the
production process but not yet work not yet finished are stock of WIP
 Stock of Finished Goods: those goods on hand which are ready for sale after
production process are called stock of finished goods .
In concern of time
 Opening Stock : Opening Stock is the stock stock-in-hand
hand in the beginning of the
accounting year. In other words, it is stock
stock-in-hand att the end of the previous
accounting year.
 Closing Stock :Closing Stock is the stock-in-hand hand at the end of the accounting
period. Stock may be of the following kinds:
Debtors: Debtors are persons and/or other entities who owe to an enterprise an amount for buying
goods and services on credit.
Creditors:: Creditors are persons and/or other entities that have to be paid by an enterprise an
amount for providing the enterprise goods and services on credit.
Expenses : Costs incurred by a business in the process of earning revenue are known as expenses.
e.g. depreciation, rent, wages, salaries, interest, cost of heater, light and water, telephone, etc.
Outstanding Expanses: Outstanding expenses are the expenses which have fallen due at the end
of the accounting period but which has not been paid.
Prepaid Expenses : Prepaid expenses are the expenses which paid during the year before its due.
Expenditure : Expenditure is the amount
amount paid or liabilities incurred in acquisition of assets,
goods, or services it may be categorized as follow:
Capital Expenditure: Capital expenditure includes costs incurred on the acquisition of a
fixed asset and any subsequent expenditure that increa
increases
ses the earning capacity of an existing
fixed asset. Capital Expenditure may include the following:
 Purchase costs (less any discount received), Delivery costs, Legal charges , Installation
costs, Up gradation costs , Replacement costs etc
Revenue Expenditure: Revenue expenditure incurred on fixed assets include costs that are
aimed at 'maintaining' rather than enhancing the earning capacity of the assets. These are
costs that are incurred on a regular basis and the benefit from these costs is obtained
obtai over a
relatively short period of time.
 Revenue costs therefore comprise of the Repair costs , Maintenance charges ,
Repainting costs , Renewal expenses etc
 As revenue costs do not form part of the fixed asset cost, they are expensed in the income
statement
ement in the period in which they are incurred.

JOIN RANK 1 COACHING OF ACCOUNTANCY

 Deferred
red Revenue Expenditure: Deferred Revenue Expenditure is an expenditure which is
revenue in nature and incurred during an accounting period, but its benefits are to be derived over
a number of following accounting periods.
Capital Receipts: An amount received in the form of capital from the owner and as loan from
outsiders is known as capital receipts. Besides, cash received by selling shares, debentures and
permanent assets is also capital receipt. It is of nonrecurring type of receipt.
Items
ms relating to capital receipts are Received from the owner as capital , Received, through
the sale of Securities Amount of loan received , Received from the sale of old assets, Other
receipts of non-recurring nature.
Revenue Receipts: Revenue receipt is an an amount which is received from the regular transaction
of a business. It is the amount received from the sale of goods and services. It is the main source
of income. It is a regular type of income. It is shown on the credit side of the trading and profit
and loss accounts.
Items relating to revenue receipts are Amount received from the sale of goods and services.
Amount received by way of discount, commission, rent, interest and dividend. Amount received
from the sale of waste paper and packing cases.
cases
Differences
erences Between Capital Receipts And Revenue Receipts
Basis Capital receipt Revenue Receipts
Capital receipt is the amount received Revenue receipt is the amount
Source from the sale of assets, shares and received from the sale of goods and
debentures. services.
Capital receipt is of nonrecurring Revenue receipt is of recurring nature.
Nature
nature.
Main items of capital receipt are Main items of revenue receipt
capital and loan, which affect financial are sale of merchandise,
handise, discount and
Impact
position of the business. commission, which affect operating
results of the business.
Capital receipt is shown on the Revenue receipt is shown on the credit
Treatment liabilities side of the balance sheet. side of the trading and profit and loss
accounts.
Differences Between Capital Expenditures And Revenue Expenditures
Basis Capital Expenditure Revenue Expenditure
Capital expenditure is of nonrecurring Revenue expenditure is of recurring
Nature
nature. nature.
Capital expenditure is incurred Revenue expenditure is
in acquiring permanent assets incurred in managing day-today
day
Purpose
or improving their existing capacity. activities of the organization and
maintaining its fixed assets.
Capital expenditure gives benefit over Revenue ue expenditure gives benefit not
Benefit
a number of years. for more than one year.
Capital expenditure helps in increasing Revenue expenditure helps in earning
Earning
earning capacity of the business. capacity of the business.
Capital expenditure is shown Revenue expenditure is shown
Treatment on asset side of the balance sheet. on the debit side of the trading and
profit and loss account.
Accrued Income: These are those incomes which have become earn during the accounting
period but which have not yet been received in same acc accounting
ounting period. E.g. commission earned
but not received. This is shown in the assets side of balance sheet.

JOIN RANK 1 COACHING OF ACCOUNTANCY

 Income Received In Advance: Income which is not yet earned but received in the financial
year. It has been shown in liabilities side of balance sheet of the company. e.g. advance salary ,
commission received in advance.
Reserve: Reserve is the term which refers to a sum or percentage of profit that a company retains
or keeps aside at the end of a financial year towards meeting future contingencies that may occur.
It is also used to strengthen the business.
There are two types of reserves in an organisation
1. Capital Reserve
2. Revenue Reserve
Capital Reserve :A A capital reserve is created from the capital profits and is not available for
distribution to shareholders in the form of dividends. Therefore, it cannot be created from the
profits earned from the core operations of a company.
Revenue Reserve : Revenue reserve is created from the profits earned from the core operations
of a company or organisation. A profit and loss appropriation account needs to be made for
creating Revenue reserve.
Provision : Provision refers to an amount that is kept aside from a company’s profit in order to
cover probable expenses arising in future or a possib
possiblele reduction in the value of an asset.
Bills Receivable:: A bills of exchange accepted by the debtor which will received in future
specified date. In other words Bill receivables are those bills whose amount will be received on
due date from debtor or the person whose name in it as drawee.
Bills Payable : A bills of exchange the amount for which will be payable in future specified date.
In other words payable are those bills whose amount will be paid on due date to creditor or the
person whose name in it as drawer.
Bad Debts : The amount irrecoverable from debtor is called bad debts. In others words If debtor
does not pay money due to business. It means receivable money will be converted into bad debts.
It will be loss of the business.
Insolvent: When an individual
ividual or organization can no longer meet its financial obligations with
its lender or lenders as debts become due.
Solvent: when an Individual or an entity is able to pay its debts out of its assets then it is called solvent.
Balance Sheet : A financial statement that summarizes a company's assets, liabilities and
shareholders' equity at a specific point in time. These three balance sheet segments give investors
an idea as to what the company owns and owes, as well as the amount invested by the
shareholders.
Contingent Assets:: A contingent asset is a possible asset that may arise because of a gain that is
contingent on future events that are not under an entity's control. For example, a claim that an
enterprise is pursuing through legal process, where the outcome is uncertain, is a contingent
asset.
 As per the concept of prudence as well as the present accounting standards, an enterprise should
not recognise a contingent asset. However, when the realisation of income is virtually certain,
then the related asset no longer remains as contingent asset.
 A contingent asset need not be disclosed in the financial statements. A contingent asset is usually
disclosed in the report of the approving authority if an inflow of economic benefits is probable.
Contingent Liability: A contingent liability is either a possible obligation arising from past
events and depending on future events not under an entity's control, or a present obligation not
recognized because either the entity cannot measure the obligati
obligation
on or settlement is not probable.
An enterprise should not recognise a contingent liability. A Contingent liability is required to be
disclosed unless possibility of outflow of a resource embodying economic benefits is remote.
These liabilities are assessedd continuall
continually to determine whether an outflow ow of resources
embodying economic benefits has become probable.

JOIN RANK 1 COACHING OF ACCOUNTANCY

Basis Liability Contingent Liability
Definition A liability is a present obligation A contingent liability is a future
which arises from past events obligation which may arise from past
events.
Measurement A liability can be measured with sufficient A contingent liability cannot be
reliability measured with sufficient reliability
Part of A liability is disclosed on the Liability side A contingent liability is not a part of
Balance of the Balance Sheet and hence, it is a part the Balance Sheet. It is disclosed by
Sheet of the Balance Sheet way of a foot note in the Balance
Sheet

Basis Contingent Liability Provisions

Definition A contingent liability is not a liability as it
A provision is a liability which can be
is not apparent that an outflow of resources
measured with some estimation. It is a
embodying economic benefit will be reliable estimate of a probable outflow
required to settle the obligation of resources to settle a present
Obligation
Recognition A contingent liability has no Recognition in A provision is recognised in books
the books of accounts of accounts
Disclosure A contingent liability is disclosed as For provision, the following are
required by AS-29 disclosed:
o Opening and closing ng balance
o Additions during the year
o Amount used during the year
o The unused amount is reversed during
the year

JOIN RANK 1 COACHING OF ACCOUNTANCY

CHAPTER 2 : INTRODUCTION OF ACCOUNTING BY RAKESH RAJPUT

Meaning of Accounting
Traditional Definition
"Accounting is an art of recording, classifying and summarising in a signified manner and in terms
of money, transactions and events which are, in part at least of financial character, and interpreting
the results thereof." [American Institute of Certified
Certified Public Accountants (AICPA) (1941)]
Modern Definition
"Accounting is the process of identifying, measuring and communicating economic information to
permit informed judgments’ and decisions by users of information." [American Accounting
Association (AAA) (1966)]

Objective of Accounting

Followings are main Objectives of Accounting

a) Maintaining record of transaction: The objective of accounting is to record financial
transactions of the business in books of accounts in a systematic manner
b) Ascertaining profit or losses: It ascertains that whether firm has earned profit or suffered
losses. For this purpose Trading & Profit and loss Accounts are prepared.
c) scertaining financial position: It also tells about the financial position of the busines
business for this
statement of Assets, Liabilities and Owners equity is calculated. This statement is called balance
sheet.
d) Assisting Management:: For the purpose of making decisions and effective control.
Management requires financial information of the business.
e) Communicating Accounting Information to users : Accounting provide information to the
users. Than users can use these information as they required.
f) Prevention of Fraud: Maintaining proper and systematic Accounts make a business able to
prevent fraud in the business.

Functions of Accounting
Followings are the functions of accounting
a) Identification: The first step in accounting is to determine what to record Because Accounting
records only those transactions and events which are of financial nature. The process involves
identifying transactions that are of financial nature.
b) Measurement: In Accounting we record only those financial transactions which can be
measured in terms of money. If a transactions or event cannot be measured in monetary terms,
it is not considered for recording in financial accounts.
c) Recording: Recording is made through journal or subsidiary books in chronological order so
that the information can be made available when required.
d) Classifying: Once the financial transactions are recorded
recorded in journal or subsidiary books, all the
financial transactions are classified by grouping the transactions of one nature at one place in a
separate account. This is known as preparation of Ledger.

JOIN RANK 1 COACHING OF ACCOUNTANCY

 e) Summarising : It is concerned with presentation of data and it begins with balance of ledger
accounts and the preparation of trial balance with the help of such balances. Trial balance is
required to prepare the financial statements i.e. Trading Account, Profit & Loss Account and
Balance Sheet.
f) Communication: The main purpose of accounting is to communicate the financial information
the users who analyze them as per their individual requirements. Providing financial
information to its users is a regular process.

The Advantages Of Accounting

Followings are the advantages of accounting:
a) Give financial information: It ascertains that whether firm has earn profit or suffered losses. It
also tells about the financial position of the business.
b) Assisting Management: For the purpose of making decisions and effective control.
Management requires financial information of the business.
a) Replace memory: A systemic record of transaction make able the user not to remember all the
transaction of the business.
b) Facilitates comparative
arative study: It enable a business to compare the performance of one year
with another.
c) Evidence in court: A systemic record of transaction often accepted by court as a good
evidence.
d) Facilitates Loan: banks provides loan to business on the basis of poten
potential
tial to grow. The
performance report given by accounts help to ascertain it.

Limitations of Accounting
Following are limitations of accounting
a. Accounting is not fully exact: Most transaction is recorded on the basis of evidences yet some
transactions are used to ascertain profit e.g. Depreciation, Bad debts, etc
b. Accounting does not include the realizable value: balance sheet of Business does not provide
any information related to realizable value of assets.
c. Ignore qualitative elements: Accounting Only record the financial transaction it does not
record the transaction which are qualitative in nature and does not have money value.
d. Ignore price level Changes: Accounting records are maintained at historical cost and does
not record the changes in price.
e. Estimated Position and not Real Position -Since Since the financial statements are prepared on a
going concern basis as against liquidation basis, they report only the estimated periodic results
and not the true results since thehe true results can be ascertained only on the liquidation of an
enterprise.
f. Danger of Window Dressing -When When the management decides to enter wrong figures to
artificially inflate or deflate the figure of Profits, Assets and Liabilities, the Income Statement
Statemen
fails to provide true and fair view of the Financial Performance and Balance Sheet fails to
provide true and fair view of the Financial Position of the enterprise.

Branches of Accounting

Accounting has three main forms or branches viz. Financial Accounting, Cost Accounting and
Management Accounting.
a) Financial Accounting: It is concerned with record
record-keeping
keeping directed towards the preparation of
trial balance, profit and loss account and balance sheet. It is historical in nature as it records
transactions
ions which had already been occurred.

JOIN RANK 1 COACHING OF ACCOUNTANCY

 b) Cost Accounting: Cost accounting is the process of accounting for costs. It is a systematic
procedure for determining unit cost of output produced or services rendered. The main
functions of cost accounting are to ascertain
as the cost of a product.
c) Management Accounting: Management accounting is primarily concerned with the supply of
information which is useful to the management in decision making, increasing efficiency of
business and maximizing profits.
d) Social Responsibility
ibility Accounting
Accounting:: Social responsibility accounting is concerned with
accounting for social costs incurred by the enterprise and social benefits created. Due to
increasing social Awareness about the by-Products
by Products of economic activity demand for social
responsibility
nsibility accounting has been increased.
e) Human Resource Accounting : Human Resource Accounting is the activity of knowing the
cost invested for employees towards their recruitment, training them, payment of salaries &
other benefits paid and in return knowing
know their contribution to organisation
rganisation towards it's
profitability.

Meaning of Accountancy
Accountancy refers to a systematic knowledge of accounting. It explains 'why to do' and 'how to
do' of various aspects of accounting. It tells us why and how to prepare the books of accounts and
how to summarise the accounting information and communicate it to the interested parties.

Book-keeping
Book-keeping
keeping is a part of accounting and is concerned with record keeping or maintenance of books
of accounting which is often routine and clerical in nature. It only covers the following four
activities:
 Identifying the transactions and events
 Measuring the identified transactions and events in a common measuring unit
 Recording the identified & measured transactions & events in Proper Books of Accounts
 Classifying the recorded transactions and events in the ledger

Differences between book keeping and Accounting

Following are the Differences between book keeping and Accounting :
Basis Book keeping Accounting
Nature It is concerned with identifying financial It is concerned with summarizing
transactions; measuring them in monetary the recorded transactions, interpreting
terms; recording and classifying them. them and communicating the results.
Objective It is to maintain systematic records of It aims at ascertaining business income
financial transactions and financial position by maintaining
records of business transactions.
Function It is to record business transactions. So its It is the recoding, classifying,
scope is limited. summarizing, interpreting business
transactions and communicating the
results. Thus its scope is quite wide.
Basis Vouchers and other supporting documents Book-keeping keeping works as the basis for
are necessary as evidence to record the accounting information.
business transactions.
nsactions.
Level of It is enough to have elementary For accounting, advanced and in depth
Knowledge Knowledge of accounting to do book knowledge and understanding is
keeping. required.
Relation Book-keeping
keeping is the first step to Accounting begins where book keeping
accounting. ends.
JOIN RANK 1 COACHING OF ACCOUNTANCY
SYSTEMS OF ACCOUNTING

Double Entry System Single Entry System

Under this system every transaction has two Transaction are not recorded on two Aspect
Aspects i.e. Debit & Credit, at the time of basis i.e. Debit & credit, this is also known as
transaction. Incomplete System of Accounting

Advantages of Double Entry System

Scientific System: it is only scientific system of Accounting.

b) Scientific System: it is only scientific system of Accounting.
Accounting
c) Accuracy of Accounts:: the Accuracy of Accounts can be established through trial Balance
d) Ascertainment of Profit & Loss : it ascertain the profit earned or loss suffered by the firm
e) Knowledge of Financial Position
Position:: at the end of the year it ascertain the financial position of
the business
Disadvantages of Double Entry System

a) Complicated method: to record the transaction an accountant must know about the principle of
accounting. This is why it is very complicated method of book keeping system.
b) Costly: required trained and skilled worker to maintain the accounts. Which incurred huge cost.
c) Not Suitable for Small Business: this is not suitable for small business for few
ew transaction
d) Sound knowledge of Book Keeping: to record the transaction sound knowledge about
principle and procedure of accounting.
e) Window Dressing: window dressing refers to the practice of manipulating accounts, so that
financial statement may disclos
disclosee a more favorable position then actual position. Hence correct
decision can’t be taken on the basis of such financial Statement
Meaning of Accounting Cycle

After identifying and measuring the financial transactions, the accounting cycle begins. An
accounting cycle is a complete sequence beginning with the recording of the transactions and ending
with the preparation of the final accounts. The sequential steps involved in an accounting cycle are
given below:

Step 1 → Journalising : Record the transactions in the Journal. Or Subseries books

Step 2 → Posting : Transfer the transactions (recorded in the Journal), in the respective accounts
opened in the Ledger.
Step 3 → Balancing: Ascertain the difference between the total of debit amount column and the
total of credit amount column of a ledger account.
Step 4 → Trial Balance: Prepare a list showing the balances of each and every account to
verify whether the sum of the debit balances is equal to
to the sum of the credit balances.
Step 5 → Income Statement:: Prepare Trading and Profit & Loss Account to ascertain the profit
or loss for the accounting period.
Step 6 → Position Statement: (i.e. Balance Sheet) Prepare the Balance Sheet to ascertain the
financial position as at the end of accounting period.

JOIN RANK 1 COACHING OF ACCOUNTANCY

Types of Accounting Information
The various types of accounting information are given below:
1. Accounting Information relating to financial transactions & events
 Financial Position — Information about financial position is primarily
provided in a balance sheet.
 Financial Performance — Information about financial performance is primarily provided in
a Statement of Profit and loss (also known as Income Statement).
 Cash Flows — Information about cash flows is provided in the financial statements by
means of a cash flow statement.
2. Accounting Information relating to cost of a product, opera
operation or function.
3. Accounting information relating to planning and controlling the activities of enterprise for
internal reporting. Such information may further be classified as follows:
(a) Information relating to Finance Area
(b) Information relating too Production Area
(c) Information relating to Marketing Area
(d) Information relating to Personnel Area
(e) Information relating to Other areas (such as Research & Development)
4. Accounting information relating to Social Effects of business decisions.
5. Accounting information relating to Environment and Ecology.
6. Accounting information relating to Human Resources.

User of Accounting Information

Accounting information helps users to make better financial decisions. Users of financial information
may be both internal and external to the organization.

a) Bank & Financial Institution: After inspection of Accounts banks provide loan.
b) Investors : After knowing about the performance of business an investor decide that whether
they have to invest in business or not .
c) Creditor: Before giving credit a creditor satisfy himself about the credit worthiness of
business.
d) Government: For compliances with law or tax payment.
e) Regulatory Agencies: various government departments and agencies such as company law
board, registrar of companies, tax authorities etc. Use accounting reports not only as a basis for
tax assessment but also in evaluating how well various businesses are operating under
regulatory legislation.

f) Owner: Wants to know about Profit &loss Accounts And financial position of business
g) Management: Use information for making different decisions like determination of price, cost
control etc.
h) Employee & Worker: Look for profit to ascertain that they will get bonus or not.

JOIN RANK 1 COACHING OF ACCOUNTANCY

CHAPTER 3 : ACCOUNTING Principle BY RAKESH RAJPUT

Accounting Principles

Principles of Accounting are the general law or rule adopted or proposed as a guide to action, a
settled ground or basis of conduct or practice. Accounting principles are man-made.
man made.

Unlike the principles of physics, chemistry, and the other natural sciences,
sciences, accounting principles
were not deducted from basic axioms, nor is their validity verifiable by observation and experiment.
Instead, they have evolved. This evolutionary process is going on constantly; accounting principles
are not “eternal truths”.
Features of Accounting Principles
Followings are the features of accounting principle:
a. Accounting principles are man man-made: Accounting principles are man-made made and do not stand
scrutiny as principles of science it is best possible suggestions based on practical experiences.
b. Accounting principles are flexible
flexible:: the accounting principles are not permanent principle as
principles of science. In certain cases whenever it is require changing the principles it can be
change.
c. Accounting Principles are generally accepted:
accepted Accounting principles are the basis and guide
for accounting. It is generally acceptable. The acceptability of accounting principle depends on
how it meets the criteria of relevance, objective, and feasibility.
 Relevance:: Accounting information are relev relevant
ant if they result in information i.e. useful to user
of accounting information
 Objective:: Accounting principles are objective if they are not influenced by the person.
 Feasible: Accounting principles are feasible if they can be applied without undue complexitycompl
and cost.

ACCOUNTING CONCEPT ACCOUNTING CONVENTION

Accounting concepts refers to the rules of
accounting which are to be followed, while
recording business transactions and preparing
final accounts.
Accounting conventions implies the customs or
practices that are widely accepted by the
accounting bodies and are adopted by the firm
to work as a guide in the preparation of final
accounts.

Accounting concepts /Assumptions

Accounting concepts: Accounting concepts are defined as basic assumptions on the basis of which
financial statements of a business entity are prepared. They are used as a foundation for formulating
various methods and procedures for recording and presenting the business transactions. The
important accounting concepts are given below:
bel
a) Going Concern Concept: This concept assumes that every business has a long and
indefinite life. Since financial statements are prepared on the basis of this concept, all fixed
assets are shown in the books at their cost ignoring their market value.
Relevance:
1. Distinction is made between capital expenditure and revenue expenditure.
JOIN RANK 1 COACHING OF ACCOUNTANCY
 2. Classification of assets and liabilities into current and non
non-current.
3. Depreciation is charged on fixed assets and fixed assets appear in the balance sheet at book
value, without having reference
eference to their market value.
b) Consistency: This principle requires that accounting practices, methods and techniques used
by a business unit should be consistent. A business unit can adopt any accounting practice,
but once a particular ar practice is chosen, it must be used for a number or years.
Relevance: It helps the management in decision decision-making
making as they can compare the financial
information of current year with that or previous years.
c) Accrual Assumption: As per Accrual assumption, all revenues and costs are recognized
when they are earned or incurred.
It is immaterial, whether the cash is received or paid at the time of transaction or on a later
date e.g., if a credit sale (Credit for two months) for Rs. 15,000 is made on 15th Feb. 2016,
then the revenue earned is to be recorded on 15th Feb. 2016, not on the date when cash is
realized, i.e., after two months. In case of Expenses, if at the end of the year, salary for two
months is due but not paid, then th thee expenses of salary will be recorded in the current year in
which the salary is due, not in the next year when it will be paid.
Relevance: Earning of revenue and consumption of a resource (expenses) can be accurately
matched to a particular accounting pe period.
Accounting Principles

1. Business Entity Concept: This concept considers a business unit as a separate entity. Business
and businessman are two separate entities and all the business transactions are recorded in the
books of accounts from business point of view.
2. Money Measurement Concept: According to this concept only those transactions are recorded
in the books of accounts which can be expressed in monetary terms.
The non-financial or non-monetary
monetary transactions do not find any place in the accounting
account records.
Money is the common denominator to denote the value of the various assets of diverse nature to
give a meaningful total of these assets.
3. Accounting Period Concept: According to this concept the long life of business is divided into
justifiable accounting periods so as to help businessman to know the results of his investment
during each such period. This period is known as accounting period and the length of this period
depends on the nature of business. Accounting period may be either a calenda
calendarr year (From
January 1 to December 31) or the fiscal year of the Govt. (April 1 to March 31)
4. Full Disclosure: This concept implies that financial statements should disclose all material
information which is required by the proprietor and other users to ass
assess
ess the final accounts of the
business unit.
5. Conservatism or Prudence: This principle is nothing but a formal expression of the maxim
“Anticipate no profits and provide for all possible losses.” In other words, it considers all
possible losses but ignores all possible profits.
6. Materiality: This principle emphasizes that only those transactions should be recorded which are
material or relevant for the determination of income from the business. All immaterial facts
should be ignored.
7. Cost Concept: According to this concept all fixed assets are recorded in the books at cost i.e. the
price paid to acquire them. Any subsequent increase or decrease in their value will not be shown
in the records except the depreciation of these assets.
In subsequent years,
ars, therefore fixed assets are shown at cost less depreciation provided on them
up to date. Continuous charging of depreciation on the asset will ultimately eliminate the asset
from the books.
8. Matching Concept: This concept states that it is necessary to charge all the expenses incurred to
earn revenue during the accounting period against that revenue in order to ascertain the net
income or trading results of the business. The matching concept which is so closely related to
JOIN RANK 1 COACHING OF ACCOUNTANCY
 accrual concept and accounting pperiod
eriod concept helps a businessman in realizing his objective i.e.
in ascertaining the trading results or profit or loss from the business. For ascertaining the net
income.
9. Dual Aspect Concept: This Concept also known as equivalence concept signifies that every e
business transaction has two fold effects or every transaction affects at least two accounts. This
concept is, in fact, the base on which Double Entry System of Book Book-Keeping
Keeping is based. According
to this principle, every debit has a corresponding credit.
credit
10. Revenue Recognition Concept or Realisation Concept: According to this concept income is
treated as being earned on the date on which it is realized i.e. the date on which goods or
services are transferred to the customers. Since this exchange of goods or services may be for
cash or on credit, it is not important whether cash has actually been received or not.
11. Objective Evidence Concept or Verifiable Objective Concept: This concept justifies the
significance of verifiable documents supporting various tran
transactions.
sactions. According to it, each
transaction should be supported by objective evidences like vouchers. Objective evidence, here,
means evidence free from bias of the accountant.

Distinction Between Accounting Concepts And Conventions

ACCOUNTING CONCEPTS
Accounting concept is a theoretical idea
forming a set of practices
Accounting concepts are not based on
accounting conventions
Accounting concepts are not internally
Inconsistent
Personal judgment has no role in the adoption For accounting conventions, Personal judgment
of accounting concepts
Accounting concepts are established by Law
There is uniform application of accounting
concepts in different organizations
ACCOUNTING CONVENTIONS
Accounting convention is a method or
procedure accepted by general agreement.
Accounting conventions are based on
accounting concepts.
Accounting conventions are internally
inconsistent.
may play a crucial role.
Accounting conventions are established by
common accounting practices.
It may not be so in a case of accounting
account
conventions.

Accounting Standard
An accounting standard is a principle that guides and standardizes accounting practices.
The Generally Accepted Accounting Principles (GAAP) is a group of accounting standards widely
accepted as appropriate to the field of accounting necessary so financial statements are meaningful
across a wide variety of businesses and industries.
“An accounting standard is a guideline for financial accounting, such as how a firm prepares and
presents its business income, expenses, assets and liabilities, and may be in accordance to standards
set by the International Accounting Standards Board (IASB).”

Nature of Accounting Standards

Accounting standards dominate the work of accountants. These standards are being changed, aadded
and deleted with passage of time. Accounting standards act as guidelines and handy rules for the
conduct of accounting work. Any accounting standard usually consists three parts.
(i) A description of the problem to be handled
(ii) Discussion of ways of solving the problems
(iii) In the light of discussion the prescribed solution.

JOIN RANK 1 COACHING OF ACCOUNTANCY

Merits of Accounting Standards
Accounting practices have created. Standards are there to help accountants to apply those accounting
practices regarded as the most suitable for the situations covered. The merits of standards can be
studied as under:
a. Standards Improve Reliability of Financial Statements: Reliability of financial statements
depends upon reliable accounting data. Various users of financial statements of business
organisation
ation use financial statements for making some important decisions. These important
decisions which they want to take should be based on fair and true financial statements
standards help the accounting professionals to create a general sense of confidence. Standards
also help to harmonies divergent accounting practices. Standards protect the users of financial
statements by providing them financial information in which they can have confidence.
b. Helpful for Accounting Professionals: Accounting professionals, like accountants and
auditors have to perform their work in changing environment of legal bindings. Accountants
have to maintain their accounts in the fear of threats of stern actions.
Whereas auditors are also to do audit work for detecting frauds and misleading
misleading information’s
presented in financial statements. Accounting standards help the accountants and auditors while
performing their duties.
c. Accounting Reforms: Accounting standards are also helpful in development of a logical
conceptual framework and structure for measurement of information, objectives of financial
reporting. Accounting standards have helped in sweeping reforms in accounting theory as well
as in accounting practices.
d. Determining Managerial and Corporate Accountability: Standards also facilitate acilitate in
determining corporate and managerial accountability. Standards are important factors in
assessment of managerial performance. Standards ensure consistency and comparability in
place of uniformity in financial reporting. Management always conceconcentrate
ntrate on choice of best
alternative for performing any activity, standards act as best choice available to them.

Limitations of Accounting Standards

There are some limitations of accounting standards:
(i) Difficulties in making choice between different treatments: Alternative solutions to certain
accounting problems may each have arguments to recommend them. Therefore, the choice
between different alternative accounting treatments may become difficult.
(ii) Restricted scope: Accounting standards cannot override the statute. The standards are
required to be framed within the ambit of prevailing statutes.
International Financial Reporting Standards

The term IFRS refers to the International financial reporting stand

standards
ds Issued by international
accounting standard
tandard board IASB. IFRS also cover a wide range of international accounting
standard IAS issued by International accounting standers committee IASC. The number of IFRS
issued so far is 9
Assumptions in IFRS
1. Going concern: it is assumed that life of a business
business is infinite I.e. The entity will continue to
exist for an infinite period in the future.
2. Accrual assumption: as per this assumption transaction are recorded on Accural basis I.e. As
and when they occur and the date of settlement is immaterial.
3. Measuring
ring units assumptions: the assets are not shown in Balance sheet at historical cost but
they are shown at current and fair market value, similarly Liabilities are to be shown at which it
would be required to settle.

JOIN RANK 1 COACHING OF ACCOUNTANCY

 4. Constant purchasing power assumptions: this assumption requires that the value of capital
be adjusted to inflation at the end of financial year.

Benefits of IFRS
IFRS is very beneficial for them who are carrying their business worldwide. IFRS is also beneficial
to investors, industries and accounting professional in following way:
way:-
1. Help to enterprises operating globally: all entities having business operations in different
countries will face problem of consolidation of financial statements if they prepare
prepare their
financial statements according to Accounting standers of different countries. IFRS unify the
Accounting practices worldwide as a result problem of consolidation is avoided.
2. Help to Investors: IFRS would be helpful to investors in comparison to ffinancial
inancial statements
prepared under different accounting standard adopted by different countries.
3. Help full to industries: obtaining fund from outside the country become easier if the financial
statements comply with globally accepted accounting standard.
4. Helpful
elpful to Accounting professional: accounting professionals are able to provide better service
in countries adopting IFRS

JOIN RANK 1 COACHING OF ACCOUNTANCY

CHAPTER 4 : BASIS OF ACCOUNTING BY RAKESH RAJPUT

Basis Of Accounting

There are two basis of accounting

1. Cash basis of accounting
2. Accrual basis accounting

Cash basis of accounting: This is a system in which accounting entries are recorded only when cash is
received or paid. No entry is made when a payment or receipt is merely due. In other words, it is a
system of accounting in which revenues and costs and assets and liabilities are reflected in the accounts
in the period in which actual payments or actual receipts are made in cash.
Accrual basis accounting: Under this basis of accounting both cash and accrual transaction are get
recorded. i.e. income is recorded when it is earned or accrued and expanses are recorded when it is
get arise or paid. This is also known as mercantile system of accounting.
Advantages of Cash basis of accounting
a. It is very simple as adjustment entries are not required
b. This approach is more objective as very few estimates and judgment are required.
c. This basis of accounting g is suitable for those enterprises where most of the transaction is on
cash basis.
Disadvantages of Cash basis of accounting
a. It never give a true & fair view of financial position & profit & losses.
b. It does not flow the matching principle of accounting
c. Thisis system does not distinguish between capital and revenue item.
Advantages of Accrual basis of Accounting
a. It is more scientific compare to cash basis
b. This basis disclose correct profit at a particular
c. It reflects true profit or loss during the accounting period
d. This basis shows complete picture of financial transaction.
Outstanding Expenses: They are those expenses which have been incurred during the accounting
period but have not yet been paid during the year.
Prepaid Expenses: They are those expenses which have been paid in advance.
Accrued income: It is an income which has been earned during the accounting period but has not
yet become due for payment and, therefore, has not been received.
Income Received in Advance: It is aan n income which has been received before it has been earned,
i.e., goods have been sold or services have been rendered.

Difference between Cash basis & Accrual Basis of Accounting

BASIS ACCRUAL BASIS CASH BASIS
Both cash & credit transactions Only cash transaction are recorded
Recording
are recorded
Profit & loss Give correct picture of profit Does not give correct picture of profit
Technical It required technical knowledge It does not required any kind
Knowledge for recording of transaction of technical knowledge

JOIN RANK 1 COACHING OF ACCOUNTANCY

 It is recognized by companies Act
Legal Position
2013.
It is more acceptable in business
Acceptability as it give correct income statement
and provide required information
Accrual basis of Accounting is
suitable for businesses as it required
Suitability information that Complex. It can
make available by accrual basis of
accounting.
It is not recognized by companies Act
2013
It is not acceptablee in business because as
it does not provide required information
This is more suitable for not-for- profit
organizations and professionals such as
CA, CS, And Lawyers etc. as they require
less information.

Numerical of Cash Basis & Accrual Basis

Q.1. During the financial year 2018-19,
19, Rakesh had cash sales of Rs.4,50,000 and credit sales Rs.3,00,000.
His expenses for the year were Rs.3,50,000 out of which Rs.1,50,000 is still to be paid Find out Rakesh's
income for 2018-19 following :
(a) The Cash Basis of Accounting.
(b) The Accrual Basis of Accounting. {Ans.: (a )Rs.2,50,000
50,000 (b) Rs. 4,00,000}
Q.2. Gunjan ,an Accountant, during the financial year 2020-21
2020 21 earned Rs. 12,00,000. Out of which he
received Rs.10,50,000. She incurred an expense of Rs.5,10,000, out of which Rs.1,20,000 are
outstanding. She also received
ceived Accounting fee relating to previous year Rs.1,35,000 and also paid
Rs.60,000 expenses of last year.
You are required to determine his income for the year if
(i) he follows Cash Basis of Accounting and
(ii)
ii) he follows Accrual Basis of Accountin
Accounting.
Ans.: (i) Rs. 7,35,000 (ii) Rs.6,90,000.

JOIN RANK 1 COACHING OF ACCOUNTANCY