Definition

Accounting is the art of

recording, classifying and
summarizing in a significant
manner and in terms of money,
transactions and events which
are, in part at least, of a
financial character and
interpreting the results thereof.
 Functions

 Recording : Journals
 Classifying : Ledger
 Summarising : Trial balance
Trading and Profit and Loss Account
Balance Sheet
 Interpreting
 Accounting Concepts

 Entity Concept
 Dual aspect concept
 Going concern concept
 Accounting period concept
 Cost concept
 Types of Accounts and Golden Rules of Journal entry

a. The account of each person or firm with whom it deals called Personal account

Concept: Example: Ramu got salary from Mani & Co.,

Debit the receiver Ramu a/c Dr

Credit the giver To Mani & Co., a/c

b. The account of each property in the business called Real account

Concept: Example: Machinery purchased

Debit what comes in Machine a/c Dr

Credit what goes out To Cash a/c

c. The account of each head of expense or income called Nominal Account

Concept: Example: Salary paid & rent received

Debit all expenses and losses Salary a/c Dr Cash a/c Dr

Credit all incomes and gains To Cash a/c To Rent a/c
 Primary Books (recording)

 Journal
 a. General journal
 b. Special journal
 Cash book
 Bank Book
 Bank book
Ex: Rent received by cheque Rs. 1000/-

Journal:
Bank a/c Dr 1000/-
To Rent a/c 1000/-

Bank book

Date Vr. Receipts L/f. Rs. Date Vr. Payments L/f. Rs.
No. No

To rent a/c 1000/-

 Cash book
Ex: Stationeries purchased for Rs. 100/-

Journal :
Stationery a/c Dr 100/-
To cash a/c. 100/-

Cash Book :

Date Vr. Receipts L/f. Rs. Date Vr. Payments Rs.

No. L/f.
No

By Stationery 100/-
 Bank Reconciliation Statement

This statement explains the difference

between the two balances (cash book & pass
book)– analyzed into various causes and the
extent to which each contributes to such
difference.
 Specimen for Bank Reconciliation Statement

Balance as per Cash Book - xxxxx

Add:
(Items which make the cash book balance smaller than the
One in the pass book)

customer made payment directly in bank xxxxx

cheque issued but not presented for payment xxxxx
direct credit given by bank but not taken into account xxxxx
-------- xxxxx
--------
xxxxx
Less:
(Items which make the cash book balance larger than the
One shown in the pass book)

cheque deposited but not yet collected xxxxx

payments directly made by bank etc., xxxxx
Bank charges directly debited by bank but
not taken into account xxxxx xxxxx
-------- --------
Balance as per Pass Book - xxxxx
--------
 Ledger (secondary book : classification)
Ledger is a book in which various accounts are opened. The process of
entering in the ledger the information from the journals is called posting. The net
balance of all accounts can be got only through ledger accounts.

Specimen:

Dr. Cr.
Date Vr.No. Particulars Folio Rs. Date Vr.No. Particulars Folio Rs.

Trial Balance

When all the accounts of a concern are thus balanced off then they are
put in a list called Trial balance, debit balances on one side and credit balances
on the other side. The total of debit side must be equal to the credit side total
based on the principle that in double entry system for every debit there must be a
credit. The matching of debit side with credit side ensure the arithmetic accuracy
of accounts books ie., journal and ledger.
 Examples
Preparation of Journal, ledger & trial balance:
 1.Sam Started business with a capital of Rs. 10,000/-
 2.He Purchased goods from Mahesh on credit Rs. 2000/-
 3.He sold goods to Suresh Rs. 2000/-
 4.He paid cash to Mahesh Rs. 1000/-
 5.He received cash from Suresh Rs. 3000/-
 6.He further purchased goods from Mahesh Rs. 2000/-
 7.He paid cash to Mahesh Rs. 1000/-
 8.He further sold goods to Suresh Rs. 2000/-
 9.He received cash from Suresh Rs. 1000/-
 JOURNAL J/f - 1

DATE VR. PARTICULARS L.F. AMOUNT (DR.) AMOUNT (CR.)

NO. Rs. Rs.
1. Cash a/c 1 10,000
Dr. 1 10,000
To Capital a/c
2. Purchase a/c 2 2000
Dr. 2 2000
To Mahesh a/c
3. Suresh a/c 3 2000
Dr. 3 2000
To Sales a/c
4. Mahesh a/c 1 1000
Dr. 2 1000
To Cash a/c
5. Cash a/c 1 3000
Dr. 3 3000
To Suresh a/c
6. Purchase a/c Dr. 2 2000
To Mahesh a/c 2 2000
7. Mahesh a/c 1 1000
Dr. 2 1000
To Cash a/c
 LEDGER L/f -1
CASH ACCOUNT
DR. CR.
DATE PARTICULAR J/F AMOUNT DATE PARTICULAR J/F AMOUNT
To Capital a/c 1 10,000 By Mahesh 1 1000
To Suresh a/c 1 3,000 By Mahesh 1 1000
To Suresh a/c 1 1,000 By balance c/d 12000
---------- ---------
14,000 14,000
---------- ----------
To balance b/d
12,000/-

Capital a/c
DR. CR .
DATE PARTICULAR J/F AMOUNT DATE PARTICULAR J/F AMOUNT
By cash a/c 1 10,000 By balance c/d 10,000
--------- ---------
10,000 10,000
---------- ----------
By balance b/d
10,000
LEDGER L/f -2

DR. CR.
Purchase a/c
DATE PARTICULAR J/F AMOUNT DATE PARTICULAR J/F AMOUNT
To Mahesh a/c 1 2,000 By balance c/d 4000
To Mahesh a/c 1 2,000 ---------
---------- 4,000
4,000 ----------
----------
To balance b/d 4,000/-

Mahesh a/c
DATE PARTICULAR J/F AMOUNT DATE PARTICULAR J/F AMOUNT

To cash a/c 1 1,000 By purchase a/c 1 2,000

To cash a/c 1 1,000 By purchase a/c 1 2,000
To balance c/d 2,000 ---------
----------
4,000
4,000
----------
---------- By balance b/d 2,000/-
 LEDGER L/f -
3
DR. Suresh a/c CR.

DATE PARTICULAR J/F AMOUNT DATE PARTICULAR J/F AMOUNT

To Sales a/c 1 2,000 By cash a/c 1 3,000

To Sales a/c 1 2,000 By cash a/c 1 1,000
---------- ---------
4,000 4,000
---------- ----------

Sales a/c
DATE PARTICULAR J/F AMOUNT DATE PARTICULAR J/F AMOUNT

To balance c/d 4,000 By Suresh a/c 1 2,000

By Suresh a/c 1 2,000
---------- ---------
4,000 4,000
---------- ----------
By balance b/d 4,000/-
 Trial balance
Particulars L/f. Dr Cr

Cash a/c 1 12,000 -

Capital a/c 1 - 10,000

Purchases a/c 2 4,000 -

Mahesh a/c 2 - 2,000

Suresh a/c 3 - -

Sales a/c 3 - 4,000

--------- ---------
16,000 16,000
--------- ---------
 Final Accounts (Summary)

(A)Trading and Profit and Loss Account

Trading and profit and loss account is the statement which shows the
result of the business activities. In the trial balances there are various accounts
relating to expenses and revenues. All these accounts either increase or
decrease profits. In order to know the overall picture of the effect of these
accounts they are grouped at one place. This income statement is normally
divided into two parts – first part is called trading account and the second part
is called profit and loss account.
Trading account

All the opening stock manufacturing and direct expenses are shown
under this account on debit side and the sales effect and the closing stock is to
be shown on credit side to arrive Gross profit or gross loss.

Profit & Loss account

All the revenue expenses like office expenses, rent paid, salary paid,
electricity expenses, sales promotion exp. etc., will be shown on the debit side
of the account. All the revenue incomes like interest, dividend, rent received
etc., will be shown on the credit side of the account. Net profit or loss is
arrived on balancing both side.
 (B) Balance Sheet

It is the statement showing financial position of the

business on the last date of the financial year.

The balances of real, personal accounts are grouped

as assets and liabilities and are arranged in a proper way
and the resultant statement is called as the Balance Sheet.
 Preparation of Trading and Profit and Loss a/c

Example:
Prepare final accounts from the following information of the book of Shri. Murugan & Co. as on 31/03/2006,
Stock on hand as on 31.03.06. Rs. 1800/-
Depreciate Fixtures & fittings by Rs. 25/-
Rs/ 350/- was due and unpaid in respect of Salaries
Rent & insurance had been paid in advance to the extent Rs. 40/-

Trial balance
Dr. Cr.
Capital - 7670
Cash in hand 30 -
Cash at bank 885 -
Purchases & Sales 8990 11060
Fixtures & fittings 225 -
Freehold premises 1500 -
Lighting & heating (office) 65 -
Bills receivable & payable 825 1875
Return inwards 30 -
Salaries 1075 -
Drs. & Crs. 5700 1890
Stock (01.04.05) 3000 -
Printing 225 -
Rent, taxes and insurance 190 -
Disc. Allowed 200 -
Disc. Received - 445
---------- ----------
22,940/- 22,940/-
---------- ----------
 Shri. Murugan & Co.,
Trading and Profit and Loss Account
(for the year ending 31.03.06.)
DR. CR.

Particulars Amount Particulars Amount

To opening stock a/c 3000 By Sales 11060
To Purchases 8990 By returns 30
To Gross Profit (b/f) 840 -------- 11030
By Closing stock 1800
--------- ---------
12,830
12,830
---------
--------
Lighting & heating 65 By Gross Profit 840
445
Salaries 1075 By discount received
350 805
(+) Outstanding salaries By Net Loss (b/f)
Printing ------ 1425
Rent & taxes 225
(-) Prepaid rent 190
40
To Discount allowed ------ 150
To Depreciation 200
25
---------
2090 ---------20
---------- 90
----------
 Shri. Murugan & Co.
Balance sheet
(as on 31.03.06.)

Liabilities Amount Assets Amount

Capital 7670 Cash in hand 30
(-) Loss 805 Cash at bank 885
------ 6865 Fixtures & fittings
Bills payable 1875 (-) Depreciation 225
Creditors 1890 25 200
Outstanding salaries 350 Freehold Premises ----- 1500
Debtors 5700
Prepaid rent 40
Closing stock 1800
---------- ----------
10,980/- 10,980/-
--------- ---------