Sandip Shahi Thakuri

1. MODULE -1
Introduction to accounting, journal,
ledger, trial balance

2. Definitions
1. Recording, classifying, summarising business
transactions and interpreting the results thereof.

3. 2. It is an information system whose purpose is to identify ,
collect, measure and communicate information about
economic units to those with an interest in the units
financial affairs. To permit judgment and decisions by
users of the information.

4.  Systematic record of business transactions.
 Protecting the property of the business.
 Communicating results to the interested parties.
 Compliance with legal requirements.

5. Evidence in court.
Settlement of taxation liability.
Comparative study.
Sale of business.
Assistance to various parties.

6.  Records only monetary transactions.
 Effect of price level changes not considered.
 Historical in nature.
 Personal bias of Accountant affects the
accounting statements.

7. Generally Accepted Accounting Principles
In order to make the accounting work uniform and
comparable, a set of Guidelines called as the “GAAP” have
been developed by professional bodies.
 ICWAI:- Institute of cost & work Accountants of
India.
 ICAI:- Institute of Charted Accountants of India.
 AICPA:- American Institute of Certified Public
Accountants.

8. Capital:-
It means the amount (in terms of money or
assets having money value) which the proprietor has
invested in the firm or can claim from the firm.
For the firm Capital is a liability towards the
owner. It is so because the owner is treated to be
separate from the business.

9. Liabilities:-
If an amount is due to be paid to any other person
or institution other than the owner it is called as a liability.
Liabilities can be classified into following:
i) Long-term liabilities: These are those liabilities which are
payable after a long term, (generally more than one year).
Example; Long-term loans, debentures etc.
ii) Current liabilities: These are those liabilities which are
payable in near future ,(generally within one year).
Example; creditors, bank overdrafts, bills payable, short-
term loans, etc.

10. Assets:-
Any physical thing or right owned that has a money
value is an asset. In other words, an asset is that
expenditure which results in acquiring of some property
or benefit of a lasting nature.
Assets can be classified as:
i) Fixed Assets: Fixed assets are those assets which are
purchased for the purpose of operating the business and
not for resale. E.g. land, building, machinery, furniture,
etc.
ii) Current Asset: Current assets are those assets of the
business which are kept for short term for converting into
cash. E.g. debtors, bills receivables, bank balance, etc.

11. Debtors:-
A person who owes money to the firm, generally on
account of credit sale of goods is called a debtor.
For e.g. When goods are sold to a person on credit
that person pays the price in future. He is called a debtor
because he owes the amount to the firm.

12. Receivables:-
The term receivables is used for the amount that
is receivable by the firm, other than the amount due from the
debtors.
Creditors:-
A person to whom the firm owes money is called
a creditor. For e.g. Mr. M is creditor of the firm when goods
are purchased on credit from him.

13. Payables:-
The term payables is used for the amount payable by
the firm, other than the amount due to creditors.
Drawings:-
It is the amount of money or the value of goods
which the proprietor takes for his domestic or personal use.
Revenue:-
It means the amount which, as a result of
operations, is added to the capital. “Revenue is an inflow of
assets which results in an increase in owner’s equity. E.g.
sale of goods, rent income.

14. Expense:-
It is the amount spent in order to produce and sell the
goods and services which produce the revenue. “Expenses is
the cost of the use of things or services for the purpose of
generating revenue”. E.g. payment of salary, wages, rent,
etc.
Income:-
It is the profit earned during a period of time. In
other words, the difference between revenue and expense is
called income.

15. Gross Profit:-
Gross profit is the difference between sales
revenue or the proceeds of goods sold and services rendered
over its direct cost.
Net Profit:-
Net Profit is the profit made after allowing for all
expenses. In case, expenses are more than revenue, it is Net
Loss.
Cost of goods sold:-
It is the direct cost of the goods or
services sold.

16. Expenditure:-
Expenditure is the amount spent or liability
incurred for the value received. Expenditure may be
classified into:
i) Revenue Expenditure: It is the amount that is incurred in
current activities to purchase goods and services which are
consumed during the period.
ii) Capital Expenditure: It is the amount that is incurred in
purchasing assets which will give benefit extending over a
number of accounting periods.

17. Discount:-
When customers are allowed any type of reduction
in the prices of goods by the businessman, that is called
discount.
Gain:-
It is a term used to describe profit of an irregular nature,
e.g. capital gains.

18. Cash Transaction:-
Transactions involving immediate
receipt or payment of cash.
Credit Transaction:-
Transactions in which the
receipt/payment of cash is postponed to a future date is
called as a credit transaction.

19. Net worth:-
It means assets minus outside liabilities.
Profits of a business increase net worth where as
losses reduce the net worth of a business.
Turn over:-
It means total trading income from cash sales and
credit sales.
Voucher:-
Any written document in support of a business
transaction is called a voucher. It is an objective evidence in
support of a transaction.

20. Basis of Accounting
a) Cash Basis
b) Accrual / Mercantile Basis

21. Cash Basis:-
Under this basis, actual cash receipts &
actual cash payments are recorded. Credit transactions
are not recorded until the cash is actually received or
paid.
Limitation: Does not show actual profits nor does it show
the financial position of a firm.

22. Mercantile or Accrual Basis:-
In the accrual basis of accounting, the income, whether
received or not, but has been earned or accrued during the
period forms part of the total income of that period.
Similarly, if the firm has taken benefit of a particular
service, but has not paid within that period, the expenses will
relate to the period in which the service has been utilised.

23. Accounting concepts
1. Entity
2. Money measurement
6. Accruals
4. Cost
3. Going-concern
5. Réalisation
7. Matching
8. Periodicity
9. Consistency
10. Conservatisme

24. • Accounting concepts
1. Entity
2. money measurement
6. Accruals
4. Cost
3. Going-concern
5. realization
7. Matching
8. Periodicity
9. Consistency
10. conservatism
The affairs of the
business are distinct from
the personal affairs of
its owner. The business is
an independent ENTITY.

25. • Accounting concepts
1. Entity
2. money measurement
6. Accruals
4. Cost
3. Going-concern
5. realization
7. Matching
8. Periodicity
9. Consistency
10. conservatism
Records are kept in
monetary terms, and only
matters capable of being
expressed in monetary
terms are reflected in the
books.

26. • Accounting concepts
1. Entity
2. money measurement
6. Accruals
4. Cost
3. Going-concern
5. realization
7. Matching
8. Periodicity
9. Consistency
10. conservatism
The business is assumed to
have a continuing and
indefinite life. The
business IS NOT on the
verge of extinction.

27. • Accounting concepts
1. Entity
2. money measurement
6. Accruals
4. Cost
3. Going-concern
5. realization
7. Matching
8. Periodicity
9. Consistency
10. conservatism
Accountants compute the
value of an asset by
reference to its
acquisition cost, AND NOT
by reference to its
expected future benefits.

28. • Accounting concepts
1. Entity
2. money measurement
6. Accruals
4. Cost
3. Going-concern
5. réalisation
7. Matching
8. Periodicity
9. Consistency
10. conservatism
Any change in the value of
an asset may only be
recognized at the moment
the firm REALIZES it, or
disposes of that asset.

29. • Accounting concepts
1. Entity
2. money measurement
6. Accruals
4. Cost
3. Going-concern
5. realization
7. Matching
8. Periodicity
9. Consistency
10. conservatism
The recognition of an
expense (or revenue) and
the related liability
(or asset) results from
an accounting EVENT, and
is not necessarily
signaled by a cash
transaction.
SFAC #1: Accrual
accounting attempts to
record the financial
effects on an enterprise
of transactions and other
events and circumstances
that have cash
consequences for the
enterprise in the periods
in which these
transactions, etc… occur
rather than only in the
periods when cash is
received or paid.

30. • Accounting concepts
1. Entity
2. money measurement
6. Accruals
4. Cost
3. Going-concern
5. realization
7. Matching
8. Periodicity
9. Consistency
10. conservatism
Expenses should be
recognized in the same
accounting period during
which the firm has
recognized the associated
revenues.
Revenues and expenses
resulting from the same
transactions (or events,
circumstances, etc…)
should be recognized
simultaneously.

31. • Accounting concepts
1. Entity
2. money measurement
6. Accruals
4. Cost
3. Going-concern
5. realization
7. Matching
8. Periodicity
9. Consistency
10. conservatism
Accounting reports must be
prepared for fixed, and
relatively short, periods
of time.

32. • Accounting concepts
1. Entity
2. money measurement
6. Accruals
4. Cost
3. Going-concern
5. realization
7. Matching
8. Periodicity
9. Consistency
10. conservatism
Like transactions should
be treated the same way in
consecutive periods.

33. • Accounting concepts
1. Entity
2. money measurement
6. Accruals
4. Cost
3. Going-concern
5. realization
7. Matching
8. Periodicity
9. Consistency
10. Conservatisme
(1) The accountant should
not anticipate profit, and
should provide for all
possible losses;
(2) Faced with several
methods of valuing an
asset, the accountant
should choose that which
leads to the lesser value.

34. Business Transactions:-
Any event which involves exchange
of money or money’s worth between the firm and any other
person is known as a Business Transaction.
In other words any event which affects the
business and involves money is a Business Transaction.

35. ILLUSTRATIONS:-
a) Capital introduced into the business by the proprietor [BT]
b) Sending of price list [NBT]
c) Purchase of goods for cash [BT]
d) Receiving of a price list [NBT]
e) Purchase of goods on credit [BT]
f) Placing of an order [NBT]
g) Sale of goods on credit [BT]
h) Receipt of an order [NBT]

36. Accounting Equation
The equation is based on the principle that accounting deals
with property & rights to property & the sum of the
properties owned is equal to the sum of the rights to the
properties. The properties owned by a business are called
assets & the rights to properties are known as liabilities or
equities of the business.
Assets = Liabilities + Capital

37. The Double-Entry System
The double-entry book-keeping system is based on the
principle that for every business transaction that takes place
two entries must be made in the accounts: a debit entry,
showing goods or value coming into the business, & a
corresponding credit entry, showing goods or value going
out of the business.

38. Rules of the Double Entry System
1) Personal Account:-
These accounts record a business dealings with
persons or firm.
The person receiving something is given debit
and the person giving something is given credit.

39. 2) Real Account:-
These are the accounts of assets. Assets entering
the business is given debit and assets leaving the business is
given credit.

40. 3) Nominal Account:-
These accounts deal with expenses, incomes,
profits and losses. Accounts of expenses and losses are
debited and accounts of incomes and gains are credited.

41. Debit Receiver
Personal Account
Credit Giver
Debit What comes in
Real Account
Credit What goes out
Debit Expenses & Losses
Nominal Account
Credit Incomes & Gains

42. Advantages of Double Entry System
a) Complete record of the financial transactions is maintained.
b) It gives accurate information of amount due to & due by the
business unit at any time.
c) It is helpful in preventing frauds & errors.
d) Arithmetical accuracy of the account books can be tested.
e) It is helpful in preparing profit & loss account and Balance
sheet of a firm.

43. Accounting Cycle
a) Recording:-
First, all transactions should be recorded in the
Journal or Books of original entry known as subsidiary
books.
b) Classifying:-
All entries in the Journal should be posted to
the appropriate ledger accounts to find out at a glance the
total effect of all such transactions in a particular account.

44. c) Summarising:-
Last stage is to prepare the trial balance
and final accounts with a view to ascertaining the profit or
loss made during a trading period and the financial position
of the business on a particular date.

45. Journal
Journal means a daily record of business transactions.
Journal is a book of original entry because transaction is first
written in the Journal from which it is posted to the ledger.

46. Date Particular LF Debit
Rs
[Dr]
Credit
Rs [Cr]
Year
Month
Date
Name of account to be
debited.
To, Name of account to
be credited.
[Narration]
The ruling of the journal is as follows:-
Journal

47. L.F:-
It stands for Ledger Folio which means page of the
ledger. This column is used to record the page numbers on
which the various accounts appear in the ledger.

48. Trade Discount:-
It is a deduction allowed by the
manufacturer to the wholesaler or retailer on the gross value
or list price of goods to enable the buyer to sell the goods
further (at list price) and yet make a profit for himself.
Trade discount is not recorded in any
account as it is deducted in the invoice itself from the gross
value of goods.

49. Cash Discount:-
It is allowed by the creditor to the debtor as
an incentive to the latter to make an early payment.
Cash discount is calculated on net value of
goods, after deducting trade discount.
Cash discount being a nominal account, it is
debited with the loss on discount allowed and credited with
the gain on discount received.

50. Example – 1
Sale of food & drink as meals in a restaurant
amounted to Rs. 1,500 cash.
In this case the sales account would be credited
with the value of the food & drink leaving the restaurant as
meals, and the cash account would be debited with Rs. 1,500
cash coming into the business from the sale.

51. Example – 2
A hotelier sent a cheque for Rs. 20,000 as
payment of her electricity bill.
In this case the bank account would be credited
with Rs. 20,000 going out of the business and electricity
account would be debited with Rs. 20,000 being the cost of
the electricity used in the business.

52. Debit
1.Increase in asset accounts
2.Increase in expense accounts
3.Decrease in liability accounts
4.Decrease in equity accounts
5.Decrease in revenue accounts
Credit
1.Decrease in asset accounts
2.Decrease in expense accounts
3.Increase in liability accounts
4.Increase in equity accounts
5.Increase in revenue accounts

53. LEDGER
A ledger account may be defined as a summary statement of
all the transactions relating to a person, asset, expense or
income which have taken place during a given period of
time and shows their net effect.

54. Date Particular F Amou
nt
Date Particular F Amoun
t
To, Name of
credit A/c
Rs By, Name of
debit A/c
Rs
Ledger Format

55. Each account in the ledger is divided into two
equal parts by a vertical line. The left hand side of the
account is known as debit side and the right hand side is
called credit side.
‘F’ stands for folio (page number) of the
journal or subsidiary book.

56. Ledger Posting of Journal
Every transaction is first recorded in the
journal in the form of a journal entry.
From the journal it is transferred to the
concerned accounts in the ledger. This process of
transferring the transaction from the journal to the ledger is
known as Posting.

57. Balancing of Accounts
Various accounts in the ledger are balanced with
a view to preparing the final accounts.
1) Take the totals of the two sides of the account concerned.
2) Ascertain the difference between the totals of two sides.

58. 3) Enter the difference in the amount column of the side
showing less total writing against the difference in the
particular column “To, balance c / d” [ c/d means carried
down] on the debit side of the account and “By, Balance
c/d” on the credit side of the account. In this way, the totals
of two sides will agree.

59. 4) The balance is brought forward at the beginning of the next
period. If “To, Balance C/d” is written on the debit side
before balancing, it is brought forward on the credit side and
“By, Balance b/d” [b/d means brought down] is written
against the balance in the particulars column and vice versa.

60. An account is said to have a debit balance if the
total of its debit side is more than the total of its credit side.
On the other hand, an account is considered to
have a credit balance if the total of its credit side is more
than the total of its debit side.

61. 1] Journalise the following transactions & post them to ledger.
2008 Jan 1. Started business with cash Rs. 1,00,000
2. Cash paid into bank Rs. 40,000
3. Purchased goods Rs. 6,000
7. Cash sales Rs. 10,000
9. Goods sold to Mr. Raj Rs. 15,000
12. Purchased goods from Mr. Nanda Rs. 20,000
19. Returned goods to Mr. Nanda Rs. 2,500
25. Received from Mr. Raj Rs. 15,000
27. Paid Mr. Nanda Rs. 17,500 by cheque.

62. Trial Balance
Trial Balance is a list of balances extracted
from the ledger accounts at the end of an accounting period.
Since the balances in ledger accounts are effects of double
entries, the total of debit balances should be equal to total of
credit balances.

63. Uses of Trial Balances
1) It is the basis of preparation of Final Accounts.
2) It helps in verifying the arithmetical accuracy of ledger
accounts.
The two sides of the trial balance will not tally if a mistakes
has taken place in the following.
a) Posting
b) Totaling
c) Balancing.

64. Nature of Balances:
In the normal circumstances,
i) All assets accounts & also dues from persons will show
debit balances.
ii) All liabilities accounts will show credit balances.
iii) All expenses account will show debit balances.
iv) All income accounts will show credit balances.

65. Sl No Particulars LF Debit
Balance
Rs
Credit
Balance
Rs

66. Errors Revealed by the Trial Balance:-
1) Incorrect balances of the cash book.
2) Incorrect totals in purchases, purchase returns, allowances
or sales day books.
3) Entries posted to the wrong side of an account.
4) Omission of a debit or a credit in posting from the journals
to the ledger.
5) Incorrect figures posted from a journal to the ledger
account.
6) Discounts transferred incorrectly.

67. Procedures for locating Errors in the Trial Balance
a) Check the cash balance in the cash book against the actual
cash in hand.
b) Check and reconcile the bank balance in the cash book
against the balance in the bank statement.
c) Prove the purchases and purchases returns figures against
the purchases control account.

68. Errors not revealed by the Trial Balance:-
1) Errors of omission:
This type of errors occurs when an
accounting document, e.g. an invoice or a credit note, is lost
or mislaid, the result being that there is no debit or credit
entry in either the book of first entry or the ledger account.

69. 2) Errors of original entry:
This type of error occurs when an
amount on an invoice, e.g. Rs. 600, is entered wrongly in the
book of first entry, e.g. Rs. 666, and then is posted wrongly
to the ledger account, as Rs. 666.
As there has been a debit entry and a
credit entry for the same amount, the totals of the trial
balance will still be in agreement.

70. 3) Errors of principle:
This type of error occurs when a
transaction has a debit entry and a credit entry but the item is
posted in principle to the wrong classification of account.
E.g. Motor expenses of Rs. 300 has been debited to motor
vehicles account.

71. 4) Errors of commission:
When a wrong amount is entered
either in the subsidiary books or in the ledger accounts or
when amount is posted on the wrong side, it is a case of
errors of commission.
For example, if fuel costs are incorrectly debited to the
postage account (both expense accounts). This will not
affect the totals.

72. 5) Compensating errors:
An example of this type of errors is
where the wages account has been over-added by Rs. 5,000
& by coincidence the sales account has been over added by
Rs. 5,000. So an error on debit side is compensated by an
error on the credit side.

73. 6) Errors of duplication:
An example of this type of error is
when the same invoice is entered into the purchases day
book twice and posted from there to the ledger account
twice.

74. The Suspense Account:-
When trial balance does not tally , the
difference is put into a newly opened account named
suspense account and the trial balance is thus made to tally.
In case , the debit side exceeds the credit
side the difference is put on the credit side of suspense
account . Likewise , if the credit side of the trial balance
exceeds the debit side , the difference is put on the debit side
of suspense account.