Diploma in Accounting

(DIA)
DIA-1
Basic Accounting
Block

1
Unit –I
Accounting – An Introduction
Accounting Concepts and Conventions
Unit-II
Accounting Equation
Journal and Ledger
Expert Committee

Dr. Pradeep Kumar Panda Dr. Prasanta Kumar Kuanr

Rtd. Principal, Asst. Professor,
Govt. CollegeSambalpur -Chairman Rourkela Govt. College - Member

Sri Aditya Kumar Jena Dr. Susanta Kumar Maharana

Associate Professor & HOD Former Principal,
Commerce, Panchayat College Regional College of Management,
Bargarh–Members Bhubaneswar & Academic Consultant
Odisha State Open University- Convener

Prof. Dilip Kumar Parichha

Rtd. Principal
NSCB College Sambalpur – Member

Course Writer
Mr. Aditya Kumar Jena
Associate Professor & HOD
Panchayat College, Bargarh

Material Production
Dr. Jayanta Kar Sharma
Registrar
Odisha State Open University, Sambalpur

January, 2017
Odisha State Open University

Printers: Sri Mandir Publication, Sahid Nagar, Bhubaneswar

 Diploma in Accounting
DIA-01- Basic Accounting

Unit -I
1.1. – Accounting – An Introduction

1.2. – Accounting Concepts and Conventions

Unit-II

2.1. – Accounting Equation

2.2. –Journal and Ledger

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Unit –I

1.1. – Accounting – An introduction

Learning points:-
At the end of Unit-I, you will be able to

 Understand the meaning and concept of accounting

 Know the difference between book-keeping and accounting
 Highlight the role of accountant
 Describe the objectives of accounting
 Forecast the development of accounting

Structure
1.1.1- Introduction – Need and development of accounting

1.1.2- Meaning, definition & function of accounting.

1.1.3- Nature – a science or an art

1.1.4- Book-Keeping Vs Accounting

1.1.5- Users of accounting information

1.1.6- Role of the accountant

1.1.7- Branches of accounting

1.1.8- Objective of accounting

1.1.9- Self assessment questions.

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1.1.1- Introduction

Under barter system, commodities are exchanged against commodities. Services

and labour charges were also exchanged against commodities. There was no need to
keep in memory or in records. When money comes to picture as a medium of exchange,
the value of all goods and services are measured in term of money. As a result it leads to
evaluation and growth of business units (Producing Units, Wholesaling Units,
Distributing Units & Retailing Units). All business units are managed, organized &
controlled by owner / owners (Natural persons). It is quite impossible to keep in memory
all events relating to business activities. For example, the owner of a producing unit can
never keep in memory the money value of all business events from the point of
procuring raw-materials to the point of distribution of finished products. As a result, it is
quite essential to maintain records of events in day to day business operational activities
in monetary & quantitative figures.

At the same time, as per provisions of Income Tax Act 1961, person |firm|
Company carrying on any nature of business must have to submit the report on profits
earned or losses sustained during each financial year called business year to the income
tax department for computation of tax liability. So it compels business units to keep
detail records of events in monetary figures to determine profits earned or losses
sustained at the end of each financial year and to submit profitability statement to
Income Tax Department for tax-assessment & settlement. Therefore, it gives birth to
book-keeping and accounting of business events.

Need of Accounting:-

Accounting is basically considered as business language which communicates

various information and data in the context of business activities to different
stakeholders in the business, viz. proprietor, creditors, investors, government and other
parties. Besides business units, other persons and non–trading units may use it in
practice. For example, a cricket club of ODISHA has to maintain records of cash
receipts from different sources and cash payment for different cricket games organised
during a particular financial year. Sources of procuring funds may be entrance fees, life
member fees, subscriptions, donations etc. Application of funds may be preparation of
play grounds, purchasing cricket tools, remuneration to staff members, fire insurance of
physical stock, life insurance of players & other necessary expenses. This record must
be made in chorological order (date wise).

From this record, the cricket club may be able to know

 Sources of funds raised and its application on different purchases.

 Cash balance position in hand and at bank at the end of the financial year.

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 It can know the total amount of receipts from various items and total amount of
payments on different items.

It means various sources of receipts and various areas of application. At the end
of financial year the cricket club can ascertain its financial status that is assets and
liabilities position. It will help for financial planning in future and suitable and
appropriate budget for subsequent year.

A person who desires to carry on a business must know

 his strength of own investment

 his borrowing power and ability
 his skill and ability to generate profits or sustain losses
 his financial position / status at present and also to maintain in figure.

Development of Accounting

Accounting is as old as money itself. In India, Chanakya in his Arthashastra has

given importance to concept of accounting and auditing. In the old ages, there was no
complexity in business activities. Business units were very small. It could be managed
by the proprietor himself. Time has changed. After Industrial Revolution, there is a rapid
change in business environment resulting in large scale production, cut throat
competition & widening market. At present, modern technique of management and
control is implemented. Technological improvement leads to great change in business
environment. So the whole concept of accounting has changed. It is now considered as a
tool for measuring the various economic problems faced by business units. It provides
appropriate information & data which are absolutely required for decision making and
planning for future operations.

1.1.2 – Meaning, Definition and Function of Accounting: -

Meaning: -The concept of accounting and the role of accountant have rapidly
changed during the last 30 years due to technological advance in business environment.
In earlier years, accounting was concerned with process of recording business
transactions and the role of accountant was confined to record keeping. But now it is
considered as a tool of management for policy formulation and decision making. So it is
an information system rather than a merely recording system.

Accounting is a discipline which guides the accountant for recording, classifying,

summarizing, analyzing and interpreting the financial information about the various
activities of a business unit for taking appropriate decisions that will bring fruitful
benefits / results in future.

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Definitions of accounting:-

“Financial 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.”

- American Institute of Certified Public Accountants –

Accounting is “the process of identifying, measuring and communicating economic

information to permit informed judgments and decisions by users of the information.”

- American Accounting Association –

Accounting may be defined “as the identifying, measuring, recording and

communicating of financial information.”

- H. Bierman & AR Dribin –

Functions of accounting:-

The above definitions depict the functions of accounting as follows:

Recording: - It is the basic function of accounting. It is concerned with recording of all

business transactions (internal and external) in a book called journal named as book of
original entry as and when they take place. This book may be sub-divided into various
Subsidiary Books such as Cash Book (for recording cash transaction), Sales Book (for
recording credit sales of goods), Purchase Book (for recording credit purchase of goods),
and other books as per requirements.

Classifying:- It is concerned with systematic grouping of transactions of same nature at

one place. The work of classification is done in the book called Ledger. Ledger is the
main or Principal Book in which all accounts are maintained systematically to determine
the closing balance of each account. For example Mr. X is a customer of the business.
All transactions relating to Mr. X in the journal or various subsidiary books will be
posted to Mr. X’s account.

All business transactions should be recorded & classified under the principles &
rules of accounting. So that it may be possible to determine the correct profits or losses
and to present correct financial position.

Summarizing:-It is the step to prepare trail balance (to know mathematical accuracy of
books of account), Profits or Loss Account (to know profits earned or losses sustained)
and Balance Sheet (a statement of assets & liabilities to know financial position of a
business unit on a particular date).

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Analyzing & Interpreting:-Analysis and interpretation are two sides of a coin. Both are
inter-related. Where there is analysis, there must be interpretation. Analysis is
meaningless without interpretation. Financial information such as Total purchases,
Credit purchases, Stock at the end of the year, creditors at the end of the year, Gross
profits, Net Profits, Fixed Assets, Current assets, owners capital etc. are analyzed &
interpreted on the basis of calculating ratio and percentages to evaluate past performance
of the business and to prepare second plans & policies for future. It enables the
proprietor to take sound judgment for growth & development and face competition.

Communication:-After analysis and interpretation, the accounting information is

communicated to the higher management in the proper form and manner. Income
Statement (P/L A/C) position Statement (Balance Sheet) along with other financial
information in the form of ratio, graphs, diagrams, Cash flow statement, fund flow
statement and etc. are submitted to proper authority for right judgment and sound
decision making.

1.1.3-Nature: - A Science or, an Art

Science is an organized and systematic knowledge based on universal basic

principle. Accounting is also a science as it is an organized knowledge based on
statutory principle which has been developed as a result of study & experiences. But it is
not considered as a perfect science like physics, chemistry & etc. as testing &
experiments cannot be possible to draw a perfect conclusion. Rather Accounting is a
social science as it deals with human behavior, social and economic factors. Perfect
conclusion can never be possible.

Art is termed as a technique through which one can achieve his/her desired
objective. Accounting is an art because it has basic functions of recording, classifying
and summarizing financial transactions. It develops & adopts appropriate techniques to
measure profitability and to present financial position by maintaining proper accounts.

1.1.4-Book-Keeping vs. Accounting:-

Both terms seem to be similar in nature. But they are different from each other.
Book-Keeping is a process of record keeping of business transaction. It is a work of
Book-keeper, (a clerk). He may not be a qualified person possessing requisite
professional qualification (Certificate of Chartered Accountant or Cost Accountant). He
may not be responsible for keeping all records of business. Book-Keeping is a routine
work and clerical in nature. It does not require specialized knowledge because it is
repetitive in nature.

Accounting is a systematic process of recording, classifying, summarizing,

analyzing & interpreting the financial data and communicating it to the higher

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management for information and for taking suitable decision. Accountant gives direction
and reviews the work of book-keeper. Accountant must be qualified person possessing a
certificate issued by Institute of Chartered Accountants of India / Institute of Cost and
Works Accountants of India. The work & function of accountant is confined to
preparation of income statement, position statement, valuation of unsold stock at the end
of financial year, solving critical adjusting, correcting errors & mistakes and all other
complex financial matters.

The difference between book-keeping and accounting can be presented through

an example.

Suppose, X & Co. purchases material costing Rs.50000 from a supplier named
Mr. S.K Rana on credit. The book-keeper records it in the book of original entry
(journal) as debiting of purchase A/c with Rs. 50000 and crediting Mr. S.K. Rana A/c
with Rs.50000.

At the end of financial year, accountant has to prepare income statement to

determine correct & true profits or losses and position statement showing present
financial position. Besides these two statements, he has to value the unsold finished
stock properly adopting valuation procedures and principles. Many adjustments and
accounting treatments will have to be made for finding true and correct profits or losses.

1.1.5-Users of accounting information :- (Accounting as an information system)

Accounting is the language of the business. The primary object of language is to

serve the society as a means of communication. The basic objective of accounting is to
communicate business information to internal users and external users. According to
Slavin and Reynolds, Professors of Accounting, “Conceptually, accounting is the
discipline that provides information on which external and internal users of the
information may take decisions that result in the allocation of economic resources in
society”.

(A)Internal Users:-
I) Owners / Proprietors: - A business is carried on for earning profits. The owners invest
money in business for operation. They desire to know application money / fund in
different activities. They want to know profitability and financial position of the
businesses. So they frequently need business information for safety & security of their
investment.

ii) Managers: - In case of sole proprietary business the owner and manager is one
person. In case of partnership business, partners are both owners & managers. But in
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case of Company form of business, owners and managers are different persons.
Management of Company is vested in the hand of group of persons called Directors who
look after the growth of company and the investors called shareholders. As management
and ownership are in two different hands, owners want to know vital business
information from time to time.

iii) Employees: - They are also interested in the financial position of a business because
their financial benefits (Salary, Allowance, Bonus etc.) depend on the amount of profit
earned.

(B)External Users:-
i) Creditor: - Creditors are the persons and financial institution who have provided
credit to the business unit. They are suppliers of goods and services, bankers and other
lenders of money. They are interested in the financial statement to study the financial
strength to meet their claims in time.

ii) Prospective investors:-A person desiring to invest money in a particular company

will like to know the profitability and financial position. A study of financial statement
may inspire him for investment.

iii) Government: - Central Govt. and State Govt. are interested in the accounting
information for imposing taxation. Govt. officials are directed to verify the accounting
records of a business and other registers for adoptability of labour and corporate laws.

iv Citizen: - A citizen may be interested in the accounting records of the organization

with which he comes in contact in his daily life (bank, temple, public utility concerns,
gas, water & electricity). A citizen is also interested in the accounts of government
companies, public sectors and public utility companies as a voter and a tax-payer.

1.1.6- Role of the accountant:-

Accountant is a person who does the work of accounting. The accounting system
and accountant provide valuable service to the society as a whole. Accountants are of
two types –
a) Accountants in public practice, b) Accountants in employment.

a) Accountants in Public Practice:-

These accountants are professional persons. They are members of professional
bodies- Institute of Chartered Accountants of India (ICAI), Institute of Cost and Works
Accountant of India (ICWAI). They provide services of conducting financial audit,
management audit & designing accounting system.

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 b) Accountants in employments:-
These accountants are employees of business units or non business units. Non-
business units include educational institutions, Government, hospitals and other bodies.
In business units, they are called financial accountant, cost accountant, management
accountant. Their work is confined to preparation of financial statement, budgeting,
operating decision, investment decision, evaluating performance of subordinates,
preparing financial reports etc.

Role of Accountant / Service of Accountant: -

 Maintenance of Books of Account -
An accountant has to maintain books of account systematically and to prepare
income statement presenting correct profits earned or losses sustained and to present
correct financial position through position statement.

 Assisting Management -
He provides financial reports and information to the management for taking
appropriate decisions. He helps the management in planning, controlling, coordinating,
motivating and communicating.

 Comparative Study–
It helps in comparative study & evaluation of performance through maintaining
proper books of account.

 Conducting Audit –
Auditing means the verification of books of account to know accuracy &
reliability of accounting statements & reports. It may be statutory audit and / or internal
audit. Statutory audit is conducted as per provisions of law framed by company law /
Central Govt. / State Govt. In other name, it is called external audit. Internal audit is held
by a separate internal audit department headed by professionally qualified persons.

 Taxation –
Accountant is also involved in taxation matters of business units. He helps in
computing tax liability & its settlement. He also makes proper tax planning.

 Financial Services –
Now-a-days, professional accountants provide management consultancy services
such as framing management information system, business planning, conducting various
studies, executive selection studies. They act as financial advisers having knowledge in
law, accounting & taxation matters.

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Accountant is responsible person, carrying the resources of business unit. Business
environment (National and Global) is changing rapidly on account of technological
improvement. So it is necessary for an accountant to cope with the situation, developing
effective communication skills, updating knowledge, improving skill and ability etc.

1.1.7-Branches of Accounting:-
Different people are interested in the accounting information. It leads to
classification of accounting into different categories.

 Financial Accounting:–
It is accounting of finance. It is basically based on recording of business
transactions on a particular year. At the end of financial year, it prepares financial
statements, profits or losses A/C (income statement and balance sheet (position
statement) for the use of external users like shareholders, debenture holders, creditors,
bank and financial institutions.

 Cost Accounting :–
It is accounting of cost determination of a product or service to be produced in
future. So it is the collection, classification, determination of cost and its accounting and
cost control of the different elements of cost.

 Management Accounting :–
It is accounting of the management for policy formulation, planning, controlling
& decision making. It uses various techniques and tools in this process like ratio,
comparative statement, percentage, cash flow statement, fund flow statement, budgeting
and so on. It generally uses data from financial accounting and cost accounting records.

 Tax Accounting :–
A business unit has to pay different types of taxes (direct & indirect) to Govt.
(State or Central) on behalf of itself or on behalf of others (share- holders/ employees).
Tax accounting is necessary for computation of different taxes like income-tax, sales
tax, excise duties, custom duties, Value Added Tax etc.

 Social Responsibility Accounting :–

Each & every business unit is responsible towards society where it stands and
carries on operation. To what extend and how much it contributes funds (money) for
social progress of human-being. So it is the technique of identifying, measuring welfare
activities and communicating to the Govt. and general public.

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1.1.8-Objective of Accounting:-
 Maintaining records:–
Accounting is basically keeping records of business transactions & events in
chronological order. It is impossible for the proprietor to keep in memory all business
events.
 Protecting business assets :–
Accounting provides safety and security of business properties and other
resources. It provides information for the following purposes.
i) Investment of proprietor
ii) Claims from credit customers
iii) Claims to credit suppliers & Banks
iv) Application of funds in fixed assets and current assets
v) Balance in form of cash and deposits in banks.

 Determining operational income :–

Business have primary objective to generate profits that enables for growth and survival.
At the end of each financial year, accounting presents either net profit earned or net
losses sustained, so that a business unit can plan for future periods.
 Presenting financial status :–
Govt., Public, creditors, taxation authorities & others are interested to know financial
position of a business unit from time to time. The objective can be effective through
Balance Sheet or position statement. Balance Sheet is a statement of assets & liabilities
of a business unit on a particular date. It measures financial soundness or wealth
condition of the business.

 Making genuine decisions:–

Accounting facilitates decision making in sphere of investment, sources of financial
payment of bonus, payment of dividend and many others matters. It provides various
tools like ratios, percentages, comparative statement, cash flow statement, fund flow
statement for appropriate and genuine decision making which will produce effective and
positive results in future. Right decision is the key factor for growth, survival and
prosperity of a business.

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1.1.9-Self Assessment Questions:-

1. “Accounting is language of business communication”, do you agree?

2. Define accounting, explain its objective.
3. Who are the members of accounting information system? Name them.
4. Narrate the role of accountant in the day-to-day business environment.
5. What are the functions of accounting?
6. Where book-keeping ends, accounting starts” explain.

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 1.2.Accounting Concepts & Conventions

Learning points:-

At the end of the Unit, you will be able to

 Know the difference between accounting concepts and conventions

 Judge the importance of various accounting concepts & conventions

Structure

1.2.1- Accounting Concepts – Meaning & Types

1.2.2- Accounting Conventions - Meaning & Types

1.2.3- Self Assessment Questions–

1.2.1- Introduction:-

As it has been presented in Unit-1, accounting is the language of business through which
a business unit has to communicate with the interested parties. It should be
communicated in such a way that anyone can understand easily. So the accounting
information system should be based on appropriate standards that are called accounting
principles.
Accounting principles means rules, procedures and guidelines to be followed
while maintaining books of account. It is of two types such as:
 Accounting concepts
 Accounting conventions

Accounting concepts & types: -

Concepts related to assumptions or conditions on which accounting is based on.
Important accounting concepts are as follows:
a) Separate entity concept
b) Going concern concept
c) Money measurement concept
d) Cost concept
e) Dual aspect concept
f) Accounting period concept
g) Matching concept
h) Realisation concept

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a) Separate entity concept:-It implies the separation of ownership from business unit.
It is applicable to all form of business units. In case of sole proprietorship and
partnership business, sole proprietor and partners are not considered as separate entities
still for accounting purpose, they are considered as separate entities. In case of company
form of organization, shareholders are the owners and company has its own name and
address through registration. So company form of organization is generally called an
artificial person as it is created by law. So company has separate legal entity.

b) Going concern concept:-This assumption states that a business unit will continue
over a long period of time. It does not mean that it will continue permanently forever.
For example, while charging depreciation on a fixed asset, an accountant considers
expected life of the asset without taking into consideration the present market value. It
may be dissolved or liquidated at any point of time due to unavoidable circumstances.

c) Money measurement concept:-It states that monetary transactions are only recorded.
Business events or transactions (cash / credit) are recorded in terms of money value. As
a result, it can facilitate each analysis and interpretation of financial information. For
example, a business unit has a few efficient & dynamic talented employees. They are no
doubt assets of the business. Their monetary measurement cannot be possible. They are
not presented in the books of account. Similarly a business has Rs.20,000/- cash in hand,
Rs. 1,00,000/- cash at bank, 2000 kg of materials, 2000 square feet land, double storied
building in 1500 square feet land etc.

Until and unless, land, material & building are expressed in terms of money
value, we can’t assess the total value of assets possessed.

d) Cost concept :-This assumption is related to going concern concept. Any assets
(fixed assets & current assets) acquired must be recorded at the purchasing price.
Suppose, a machine is purchased at cost of Rs. 200000/-. It is recorded at cost price.
Depreciation charged annually reduce the value of machine gradually. If machine
market value is either increased or decreased by Rs. 20000/- in the next year due to
inflation or deflation, it is not at all accounted but at present, inflation accounting is
adopted because inflationary tendencies is found in economic system.

e) Dual aspect concept: - All business transaction are recorded under this concept. It
shows two aspects of a business transaction. For example, Mr. X started a business with
a capital of Rs. 50000/-. One aspect is receipts of Rs. 50000 by business and other aspect
is to meet claim of proprietor as capitals Rs.50000. It is presented as follows:
Equities = Assets (Cash)
 50000 = Rs.50000
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Again it is presumed that furniture costing Rs. 20000 is purchased. Then equation stands
as
 Rs. 50000 (equities) = Rs.30000 (Cash) +Rs. 20000 (Furniture)
The concept of assets & equities & their classification is presented in the section-II of
unit-1.
This concept states that every debit has a corresponding credit. The double entry
system of book-keeping is completely based on this concept.

f) Accounting period concept: - Business unit has continuous existence that is long
period of life. The measurement of income & studying the financial position of a
business after a long period can never be possible. So entire life period is divided into
segments. Each segment or time interval is called accounting period, particularly a year.
At the end of each year accounting period, income statement and balance sheet are
prepared. Accounting period is usually financial year communicating on 1st April of a
calendar year and ending on 31st March of the next calendar year.

g) Matching concept:-This assumption is based on accounting period concept. Every

business unit has primary objective to generate profit. As a result, it is necessary to
match the revenue of the period with the expenses incurred during the period. Matching
means appropriate association of earned revenue with expenses. According to this
concept, adjustments are made for all outstanding expenses, prepaid expenses, accrued
income, unearned / advance income etc. while preparing final accounts at the end of
accounting period.

h) Realisation concept: - According to this concept the revenue is realized when a sale
is made. Sale means the transfer of ownership of a product from seller to buyer. The
buyer is legally liable to pay for if the ownership of the product passes to the buyer on
the date of transaction. But there are certain exceptions to it.
i) in case of hire purchase, the ownership is transferred to the buyer on payment of last
installment.
ii) in case of contract account, account is settled between contractor and contractee on
completion of work but profit is calculated annually on the basic of work certified.

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1.2.2- Accounting Conventions and Types

Introduction: Conventions mean customs and traditions to be followed while preparing

final accounts (Financial Statements). They are different types:

a) Conservatism b) Full disclosure

c) Consistency d) Materiality

a) Conservatism:

It is a bias in the financial statements instead of realistic assessment of the

financial position of the business. Error in human work is very common. An accountant
may reject information that may be correct subsequently and an accountant may accept
information that may be false later on.

According to this convention, income may be understated due to under valuation

of assets and may be overstated due to over valuation of assets. It is also based on
concealment of the true state of affairs of the business to the outsiders (Bankers,
Creditors, share-holders, financial institutions, etc.)

Inspite of certain criticisms, it is universally applied in the following cases:

i) Inventories are valued at cost price or market price, whichever is less ii) In contract
accounts, the profit is calculated even if the work is incomplete on the basis of work
certified.

iii) Deferred Revenue Expenditure is considered as an expense of the year in which it is

incurred although their benefits will come in subsequent years. Examples: research &
development expenses, market promotion expenses, advertisement expenses.

iv) In case of “Cash on delivery sales”, revenue in generated on when cash is received
by the seller not on delivery of goods to the buyer.

v) Profits on revaluation of assets is not distributed as dividend amongst the

shareholders unless the articles of association of a company permit.

b) Full Disclosures: -

Under this convention, the business unit should present true picture of the
financial progress to the users. It should be honestly prepared and sufficiently disclose
information for interest of the users. This convention has great importance in case of
joint stock companies because of separate entities of ownership and management. The
companies Act, 1956 not only requires that the income statement and Balance Sheet of a

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company should give a true & fair view of the state of affairs of the company but also
gives the prescribed forms in which these statements are to be prepared.

c) Consistency:-

This concept states that accounting practices should remain unchanged from one
period to another. For example, if the depreciation on fixed asset is charged adopting
fixed instalment method, it will follow year after year. Similarly if closing stock is
valued at cost price or market price whichever is less, it should be followed year after
year. It does not mean that it is a rigid convention. It may be flexible depending on
circumstances.

d) Materiality:-

According to this convention, the accountant should attach material details with
the financial statements to present before management / outsiders for information.

Materiality is a subjective term and an accountant should consider an item as

material. According to Kohler, “Materiality” means the characteristic attached to a
statement, whereby its disclosure would likely to influence the judgment of a reasonable
person.” It is concluded that accounting is a man-made art designed to help man in
achieving certain objectives. Accounting principles are rules developed by man to fulfil
the essential and useful needs and purposes of the business.

1.2.3- Self assessment questions:-

1. What are the basic accounting concepts which guide the formulation of generally
accepted accounting principles in relation to Balance Sheets?

2. “Accountant frequently refer to a procedure as being a conservative one” Discuss

what is meant by a conservative accounting procedure. State at least four areas of the
applications of the concept of conservation.

3. List out any four accounting concepts.

4. Explain briefly accounting conventions.

5. Explain the accounting conventions of “Conservatism” and “materiality” and their

significance in the preparation of financial statements.

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 Unit –II
2.1-Accounting equation

Learning points:-

In this Unit you will be able to:-

 Know the need of accounting equation

 Describe the different system of book-keeping and accounting

Structure

2.1.1 Systems of Book-Keeping

2.1.2 Systems of Accounting
2.1.3 Classification of Assets & Equities
2.1.4 Other terminologies
2.1.5 Accounting Equation – meaning and illustrative example
2.1.6 Self -Assessment Questions

2.1.1 Systems of Book-Keeping :-

Book-keeping is the art of recording business transactions in a set of books under

the principle of debit and credit. System of book-keeping is of two types.

 Single Entry System:-

Kohler has defined single entry system as “a system of book-keeping in which
only records of cash and personal accounts are maintained. It is always incomplete
double entry, varying with circumstances”.
This system is not appropriate and reliable. It is adopted by small business units.

 Double Entry System :-

It is a system of recording two fold aspects of a transaction. It has two fold
effects. Transaction means exchange of goods or services for money or money’s worth.
Money’s worth implies receivable in future. One aspect – receipt / receivable / expense /
losses other aspect – payment / payable / income / gains.

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2.1.2-System of Accounting: -

(A)Cash System of Accounting: -Under this system, cash transactions (receipts/

payments) are recorded. Credit transactions are not at all recorded. It is only recorded
when they are converted into cash receipts/payments. This system is adopted by Govt.
department, Non-trading concerns (Club, School, College, University & other charitable
units) and professional persons (lawyer, doctor, charted accountant, others). Receipts
and payments account is prepared at the end of financial year to know the cash balance
position.

(B)Mercantile / Accrual System of Accounting:-This system solves the problems of cash

basis of accounting. It considers & takes into account the credit transactions. A credit
transaction is recorded is the books of account otherwise profits earning
(positive/negative) and financial position will be adversely effected. For example, Salary
due but not paid, income earned but not received, credit sales, credit purchases & others
are recorded on the date of occurrence to ascertain correct profits or losses and true
financial position at the end of the financial period/ year.

2.1.3-Classification of Assets and Equities:-

(A) Assets: - These are resources possessed by the owner/ owners of a business to
generate income. In other words, we may call them physical things which allows
owner/owners to generate income. It is of two types such as fixed assets & current
assets.

(I) Fixed Assets: - It is permanent in nature. These assets are used in business for either
producing goods/ services or trading goods/services. It is of two types: Tangible fixed
assets and Intangible fixed assets.

Tangible Fixed Assets:-It is visible in character. Examples are Land, Building,

Machinery, Equipment, Furniture, Fixture, Fittings etc.

Intangible Fixed Assets:-It is invisible in nature. One can realize it. It has market value.
Examples are Goodwill, trademarks, copy rights, patent rights etc.

(II) Current Assets: - It is apposite of fixed assets. It is non-permanent in nature. A

business unit deals in it to earn profits. It is of two types such as liquid assets & floating
assets.

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Liquid Assets:-These assets are almost in liquid form. One can meet the requirements
immediately. Examples are cash in hand, cash at Bank, Govt. Securities, marketable
securities.

Floating Assets: - These assets take time to convert into cash. These assets are nearer to
cash. Examples are: stock in hand, amounts due from customers, amounts due against
bills receivable.

Besides these above assets other assets are – Fictitious assets & Wasting assets.

Fictitious Assets:-These assets are invisible in nature. They have no market value.
Examples are research & development expenditure, advertising expenses, market
promotion expenses, underwriting commission, discount on issue of share, discount on
issue of debenture, profits / loss A/c debit balance.

Wasting Assets:-These assets are free gift of nature. The natural resources are called
wasting assets such as oil fields, iron-ore fields, and other mineral fields. These assets
value is declined due to continuous extraction of mineral form the soil.
(B) Equities:- It is the total claim on assets of the business. That is rights on properties.
It is of two types such as owner’s equity & creditor’s equity.

Owner’s Equity:-It is the investment of owner / owners in the business. In other words,
it is called as Net Worth / Net Assets / Capital.
Creditor’s Equity:-It is the claim of outsiders / creditors. Creditors may by short-term
creditors or long term creditors. So it is called liabilities.

Short term creditors: - Suppliers, Bank overdraft, short term loan from bank.
Long term creditors: - Debentures, bonds, public deposits, Loan from Banks.

2.1.4 Other Terminologies:-

Business Transactions:-It means exchange of goods or services for money or money’s

worth between two parties. Receipts must be backed by payments. Examples are
purchase of goods, sales of goods, cash receipts, cash payment, rendering of any service
between two parties.

Debtor: - A debtor is a person who owes money. A sale of goods to a person on credit
gives rise to debtor. In other words a debtor is a credit customer.

Debt: - The amount due from debtor is called debt.

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Book-Debt: - The amount due from a debtor as per the books of account is called book-
debt.

Creditor: - A person to whom money is payable is called creditor.

Capital: - It is owner’s investment. In other words, it is called net worth / net assets.

Goods:-It includes all products and articles in which the business deals in. for example
furniture is the goods for furniture dealers & rice is the goods for rice – dealer.

Income: - It is the revenue generated by transferring goods or services. It is an inflow of

assets that lead to increase in the owner’s capital.

Expenditure: - It is the spending money deriving benefits over a long period of time. It
produces benefits not only at present but also in future. Example – purchase of fixed
assets.

Expenses: - It is also spending money to demand benefits immediately. The benefits so

derived is expired during the current financial year. Examples rent paid, salary paid,
wages paid, carriage on purchases, carriage on sales etc.

Loss:-It is also spending money without getting any benefits. Lack of any benefits is
treated as a loss. Examples- damage of stock in godown, non-recoverable amounts from
credit costumers.

Gain:-It is the benefits derived in form of cash or kind without any physical or mental
efforts and without any payment.

Drawing:-It represents the amounts in form of cash or kind taken by the owner of a
business for personal purpose and domestic use.

Voucher: - It is a documentary evidence of a business transaction.

Turnover: - It is the total amounts of cash sales and credit sales after return.

Net worth: - The excess assets excluding fictitious assets over all liabilities (short term
& long term) is called net worth / Net Assets.

Insolvent: - A business unit is declared as insolvent only when it is incapable to meet the
obligation / claims / liabilities.

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2.1.5- Accounting Equation:-

It is a statement of equating assets with equities. American accountants have derived the
rules of debit and credit through accounting equation which is given below.
Assets= Equities

The properties owned by a business are called “assets”. The rights over the
properties are called “equities”. Equities are of two types such as creditor’s equity &
owner’s equity. Creditor’s equity is termed as liabilities & owner’s equity is termed as
capital.
So,
Assets = Liabilities + Capital
or Assets-Liabilities = Capital
or Assets- (Liabilities +Capital)=0

Rules of accounting equation:-

Regarding Assets:-
Increases in assets are debits and
decreases in assets are credits

Regarding Liabilities:-
Increases in liabilities are credits and
decreases in liabilities are debits

Regarding Capital:-
Increases in capital are credits and
decreases in capital are debits

Regarding Income:-
Increases in income are credits and
decreases in income are debits

Regarding Expenses:-
Increases in expenses are debits and
decreases in expenses are credits

Accounting equation is presented through illustrations

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Illustrations-1

1. Mr. X started a business with capital of Rs. 50000/-

2. He deposited Rs 20000 in a bank by opening a current A/C
3. Purchased goods on credit Rs. 10000
4. Purchased goods on cash Rs.5000
5. Sale of goods for credit Rs. 6000 (20% profits on cost)
6. Sale of goods on credit Rs. 3000(10% profits on selling price)
7. Salary paid by cheque Rs. 4000
8. Rent paid in cash Rs.3000
9. Furniture purchased & paid by cheque Rs.10000
10. Supplier paid in cash Rs. 6000
Statement of Accounting Equation

No. Transactions Assets = Liabilities + Capital

1. Started Business with cash Rs.50000 Cash – 50000 - 50000
50000 Nil 50000

2. Deposited in a bank Rs.20000 Cash-30000

Bank-20000 50000
50000 Nil 50000
3. Purchases goods on credit Rs. 10000 Cash- 30000
Bank- 20000 Supplier = 10000 50000
Purchases –10000 (Credits)
60000 10000 50000
4. Purchases on cash Rs. 5000 Cash- 25000
Bank- 20000 Supplier = 10000 50000
Purchases –15000 (Creditors)
60000 10000 50000
5. Sale of goods for cash Rs. 6000 (20% Cash- 31000
profits on cost) Bank - 20000 Supplier = 10000 51000
Purchases –10000 (Credits)
61000 10000 51000
6. Sales of goods on credit Rs. 3000 Cash- 31000
(10% profits on sales) Bank- 20000 Supplier = 10000
Purchases- 7300 (Credits) 51300
Customers – 3000
(Debtors)
61300 10000 51300
7. Salary paid by cheque Rs. 4000 Cash- 31000
Bank- 16000
Purchases- 7300 Supplier = 10000 47300
Customers- 3000
57300 10000 47300

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8. Rent paid in cash Rs. 3000 Cash- 28000
Bank- 16000
Purchases- 7300 Supplier = 10000 44300
Customers- 3000
54300 10000 44300
9. Furniture purchased by cheque Cash- 28000 44300
Rs.10000 Bank- 6000
Purchases - 7300 Supplier = 10000 44300
Customers- 3000
Furniture - 10000
54300 10000 44300
10. Supplier paid in cash Rs. 6000 Cash- 22000
Bank - 6000
Purchases - 7300 Supplier = 4000 44300
Customers - 3000
Furniture - 10000
48300 4000 44300

The above statement is showing the financial position of a business on a particular date.
That statement is called Balance sheet.

Illustrations-2 in Rupees
1. Mr. Ramchand started a business with cash = 20000/-
2. Paid Advance Rent = 4000/-
3. Furniture Purchased = 3000/-
4. Purchased goods on credit = 4000/-
5. Paid the credit Supplier = 3000/-
6. Loan Taken from bank = 1000/-
7. Interest paid on Loan = 500/-
8. Cash withdrawn for private use = 2000/-
9. Goods sold on cash (Cost price=2000) = 2500/-
10. Rent adjusted against advance rent = 2000/-
Statement of Accounting Equation

No. Transactions Assets = Liabilities + Capital

1. Started Business with cash 20000 Cash - 20000 Nil 20000
20000 Nil 20000

2. Paid Rent in advance Rs.4000 Cash- 16000

Advance 4000 Nil 20000
Rent Nil 20000
20000
3. Furniture Purchased Rs. 3000 Cash- 13000
Adv. Rent- 4000
Furniture - 3000 Nil 20000
20000 Nil 20000

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4. Purchased goods on credit Rs. 4000 Cash- 13000
Adv. Rent - 4000 Supplier - 4000
Furniture - 3000 (Credits)
Purchases - 4000 20000
24000 4000 20000
5. Paid to supplier Rs. 3000 Cash- 10000
Adv. Rent - 4000
Furniture - 3000 Supplier = 1000
Purchases - 4000 20000
21000 1000 20000
6. Loan taken from bank Rs. 10000 Cash- 10000
Bank- 10000
Adv. Rent - 4000 Supplier - 1000
Furniture - 3000 (Credits)
Purchases - 4000 Bank loan - 10000 20000
31000 11000 20000
7. Interest paid on Loan Rs. 500 Cash- 9500
Bank- 10000
Adv. Rent - 4000 Supplier - 1000
Furniture - 3000 Bank loan -10000
Purchases - 4000 19500
30500 11000 19500
8. Cash withdrawn for private use Cash- 7500
Rs.2000 Bank- 10000
Adv. Rent - 4000 Supplier - 1000
Furniture - 3000 Bank loan -10000
Purchases - 4000 17500
28500 11000 17500
9. Goods sold on cash Rs. 2500 Cash- 10000
Bank- 10000
Adv. Rent - 4000 Supplier - 1000
Furniture - 3000 Bank loan –10000
Purchases - 2000 18000
29000 11000 18000
10. Adjustment of advance rent Rs. 2000 Cash- 10000
Bank- 10000
Adv. Rent - 2000 Supplier = 1000
Furniture - 3000 Bank loan- 10000
Purchases - 2000 16000
27000 11000 16000

2.1.6- Self assessment questions:-

1. What is accounting question? Illustrate through an example.

2. Differentiate between system of accounting & system of book-keeping.

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3. Write short notes on:-
a) Assets b) Equity c) Revenue d) Expenses
e) Debtor f) Creditor g) Goodwill h) Fictitious assets
i) Debt j) Net worth
4. Prepare accounting equation statement from the following transactions in rupees
a) Ramesh commended business with cash =30000
b) Purchased goods from Rakesh & Co on cash = 5000
c) Purchased goods on credit from Shyam & Co = 6000
d) Deposited into Bank =10000
e) Paid Shyam &Co. in full settlement of claim =5800
f) Sold goods on cash (cost price=3500) =4000
g) Sold goods on credit Hari & Co.
(Profits 20% on sales) =2000
h) Cash collected from Hari & Co. in full settlement =1900
i) Salary unpaid =3000
j) Paid office expenses =2000
k) Paid salary =3000
l) Office rent unpaid =1000
m) Prepaid office expenses =1000
n) Accrued Interest (er) =500
o) Unpaid office expenses =1000
p) Furniture purchased =4000
q) Salary unpaid =2000
r) Cash used at home =2000

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 Unit –II
2.2. Journal & Ledger

Learning points:-

At the end of the unit, a learner is able to know:-

 Concept of Journal
 Rules of debit and credit
 Various key terms
 Concepts of Ledger
 Various key terms in Ledger

Structure

2.2.1. Journal : Meaning

2.2.2. Account & its classification
2.2.3. Rules of debit & credit
2.2.4. Various key terms in Journal
2.2.5. Suitable illustration of Journal
2.2.6. Ledger: Meaning
2.2.7. Various key terms in ledger
2.2.8. Suitable illustration of ledger
2.2.9. Self Assessment Questions

2.2.1 Journal:-
The journal is a primary book in which all business transactions are recorded in
chronological order. It is called a book of original entry. It is the gateway where all
business transactions take shelter.

The process of recoding business transactions in a journal is called journalizing. The

specimen of a journal is given below
Date Particulars L.F Debit (Rs.) Credit(Rs.)
1 2 3 4 5

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 1. Date:- The date on which a transaction took place
2. Particulars :- It contains two parts of a transaction under principle of debit &
credit
3. L.F:- Ledger Folio- Page No. of ledger in which accounts are maintained.
4. Debit:- The amount to be debited is entered
5. Credit:- the amount to be credited is entered

2.2.2. Accounts & its Classification:-

The transactions in the journal are recorded on the basic of rules of debit and
credit. For this purpose, business transactions are classified into three types:-
i) Transactions relating to persons
ii) Transactions relating to properties & assets
iii) Transactions relating to incomes and expenses

On basis of above classification, account is of three types:-

i) Personal Accounts
ii) Real Accounts
iii) Nominal Accounts
i) Personal Accounts:-Personal accounts include the accounts of persons to whom the
business has dealings. It is of three types:

 Natural Personal Accounts :

Natural person is a human being creation of God. For example – Ram’s Account,
Gopi’s Account.

 Artificial Personal Accounts :

Artificial persons are created by law. The business has to deal with them. Examples-
Bank, Company, Insurance Company and any registered institution. Their accounts are
recognized as artificial personal accounts.

 Representative Personal Account :

These accounts represent a particular person or group of persons. Examples are capital
account, Drawing Account, outstanding salary Account, outstanding rent accounts.

ii) Real Accounts: - It is related to all assets. All assets accounts come under real
accounts. It may be tangible real account (Cash A/c, Stock A/c, Furniture A/c, Building
A/c) and intangible real accounts (goodwill A/c, trademarks A/c, Copy right A/c, Patent
right A/c)

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iii) Nominal Accounts:-
Nominal Accounts include all expenses, losses, incomes & gains. Examples are rent
A/c, salary A/c, interest paid A/c, interest received A/c, wages A/c etc.

2.2.3. Rules of Debit & Credit:-

 Personal Account :-
Debit – The Receiver
Credit – The Giver

 Real Account :-
Debit – What comes in
Credit – What goes out

 Nominal Account :-
Debit – All expenses and Losses
Credit – All incomes & Gains

2.2.4. Various terms in Journal :-

 Debit: An entry in the left hand side of an account. Debit =>Dr
 Credit: An entry in the right hand side of an account. Credit => Cr
 Account:

It includes all transactions accumulated together under a particular head to

determine the balance at the end of financial year. It has two sides such as left hand side
(Debit side) and Right hand side (Credit Side)

 Entry:
It means the presentation of a transaction in a suitable form under the principle of
debit and credit.
 Narration:
It means brief information about the transaction. It is presented after posting the
entry.
 Simple Journal Entry:
It contains only two accounts. One account stands debit and another account
stands credit at same amounts. For example –
Salary Paid Rs. 10000
The entry is:
Salary A/c Dr 10000
To Cash A/c 10000
(Being salary paid)

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  Compound Journal Entry:
It happens only when
i) One particular A/c is debited & several other A/cs are credited .
ii) Several A/cs are debited & one particular A/c is credited.
iii) Several A/cs are debited and credited.

Example:-1)
Cash paid to Ram Rs.1980 and discount
Received Rs. 20
The entry is
Ram A/c Dr 2000
To Cash A/c 1980
To Discount received A/c 20
(Being cash paid to Ram & Discount received)

Example: - 2)
Cash received from Gupta & Sons Rs. 5900
And discount allowed 100
The Entry is
Cash A/c Dr 5900
Discount Allowed A/c Dr 100
To Gupta & Sons A/c 6000
(Being cash received from Gupta & Sons & Discount allowed)
Example: - 3) Mr. X purchased a business from Mr. Y and possessed the following
assets & liabilities.
Stock – 10000, Furniture-8000, Debtors-12000, Cash in hand – 2000, creditors-5000,
Bank overdraft –Rs.5000
The Entry is
Stock A/c Dr. 10000
Furniture A/c Dr. 8000
Debtors A/c Dr. 12000
Cash A/c Dr 2000
To creditors 5000
To Bank overdraft 5000
To Mr. Y A/c 22000
(Being different assets & liabilities are taken over from Mr. Y)

 Opening Journal Entry:

The journal entry passed at the beginning of the financial year taking into account the
previous year assets & liabilities of a running business is called opening journal entry.

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The entry is
Cash A/c Dr 5000
Bank A/c Dr 20000
Stock A/c Dr 40000
Debtors A/c Dr 15000
Land/Building A/c Dr 100000
Furniture A/c Dr 30000
Equipment A/c Dr 10000
To creditors A/c 10000
To Bank Loan A/c 30000
To O/S Expenses A/c 5000
To Capital A/c 175000
(Being opening entry passed taking into account assets & equities)

2.2.5:-Illustrative Examples
Illustration-1: Give journal entries for the following transactions.
1. April 1, 2015 – Mr. Prakash started business with cash Rs.25000
2. April 4, 2015 –He paid into bank Rs.5000
3. April 6, 2015 – He purchased goods for cash Rs.10000
4. April 8, 2015 – He purchased goods on credit from Mr. Y Rs.6000
5. April 10, 2015 – He sold goods for cash Rs.8000
6. April 13, 2015 – He sold goods on credit to Mr. X Rs.5000
7. April 15, 2015 – Mr. X Returned goods Rs.500
8. April 17, 2015 – Goods returned to Mr. Y Rs.800
9. April 20, 2015 – Furniture purchased for cash Rs.4000
10. April 23, 2015 – Rent Paid Rs.2000
11. April 25, 2015 – Paid Telephone charges Rs.500
12. April 26, 2015 – Goods distributed by way of free samples Rs.1000
13. April 27, 2015 – He withdrew goods for personal use Rs.1000
14. April 30, 2015 – He withdrew cash for personal use Rs.2000
15. May 5, 2015 – He withdrew cash from bank for office use Rs.2000
16. May 8, 2015 – He withdrew cash from bank for personal use Rs.1000
17. May 10, 2015 – Cash received from Mr. X Rs.4400
Allowed him discount Rs.100
18. May 15, 2015 – Cash paid to Mr. Y Rs.5000
Discount received Rs.200
19. May 18, 2015 – Salary paid Rs.2000
Stationery Paid Rs.1000
Wages Paid Rs.500
20. May 20, 2015 – Purchased goods worth Rs.5000

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 (For less 20% trade discount & 5% Cash discount)
Journal
Solution:-
Sl Date Particular L.F. Debit Rs. Credit Rs.
No
1 1.4.15 Cash A/c ……………………Dr 25000
To Capital A/c 25000
(Being business started with cash)
2 4.4.15 Bank A/c ……………….…Dr 5000
To Cash A/c 5000
(Being cash deposited in the bank)
3 6.4.15 Purchases A/c ……….……Dr 10000
To Cash A/c 10000
(Being goods purchased for cash)
4 8.4.15 Purchases A/c ……………Dr 6000
To Mr. Y A/c 6000
(Being goods purchased on credit
from Mr. Y)
5 10.4.15 Cash A/c ……………...……Dr 8000
To Sales 8000
(Being goods for cash)
6 13.4.15 Mr. X A/c …………………Dr 5000
To Sales 5000
(Being goods sold to Mr.X on
credit)
7 15.4.15 Sales Return A/c …………..Dr 500
To Mr. X A/c 500
(Being goods returned by Mr.X)
8 17.4.15 Mr. Y A/c ………………Dr 800
To purchases return A/c 800
(Being goods returned by Mr.Y)
9 20.4.15 Furniture A/c ………………Dr 4000
To Cash A/c 4000
(Being furniture purchased for
cash)
10 23.4.15 Rent A/c ………………….…Dr 2000
To Cash A/c 2000
(Being Rent paid)
11 25.4.15 Telephone charges A/c ……Dr 500
To Cash A/c 500
(Being Telephone charges paid)
12 26.4.15 Advertising A/c ………………Dr 1000
To purchases A/c 1000
(Being goods distributed as free
sample)
13 27.4.15 Drawing A/c………………Dr 1000

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 To purchases A/c 1000
(Being goods withdrawn for
personal uses)
14 30.4.15 Drawing A/c ……………..…Dr 2000
To Cash A/c 2000
(Being cash withdrawn for
personal uses)
15 05.5.15 Cash A/c ……………………Dr 2000
To Bank A/c 2000
(Being Cash withdrawn from bank
for office use)
16 8.5.15 Drawing A/c ………………Dr 1000
To Bank A/c 1000
(Being Cash withdrawn from bank
for personal use)
17 10.5.15 Cash A/c …………………….Dr 4400
Discount allowed A/c …… …Dr 100
To Mr. X 4500
(being Cash received & discount
allowed)
18 15.5.15 Mr. Y A/c ……………………..Dr 5200
To Cash A/c 5000
To discount received A/c 200
(Being Cash paid to Mr. Y)
19 18.5.15 Salary A/c Dr 2000
Stationery A/c Dr 1000
Wages A/c Dr 500
To cash A/c 3500
(Being different expenses paid)
20 20.5.15 Purchases A/c ………………Dr 4000
To Cash A/c 3800
To Discount received A/c 200
(Being goods purchased for cash &
availed cash discount @ 5%)

2.2.6 Ledger:-

Ledger is a principal book in which all accounts (Personal A/c, Real A/c &
Nominal A/c) are maintained. In other words, it is a set of accounts. Ledger book may
be a bound book or Loose-Leaf Book. In actual practice, Loose-Leaf-Book is used
because it facilitates addition of Loose-leaf cards.

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The format or specimen of a ledger is as follows.

Name of particular A/c

Dr Cr
Date Particulars Rs. Date Particulars Rs

2.2.7- Various Key Words:-

 Posting:-
It means transferring the debit and credit items from the journal to their
respective accounts in the Ledger.
 Rules of Posting:-
i) Separate accounts should be opened in the ledger for posting transactions
relating to different accounts recorded in the journal.
ii) The concerned A/c which has been debited in the journal should also be
debited in the ledger.
iii) The concerned A/c which has been credited in the journal should also be
credited in the ledger.
 Use of words “To” and “By”:-
These two words are used while making ledger position “To” is written on left hand
side (debit side) and “By” is written on right hand side (credit side) of each account.
These words have no specific meaning.
Now –a-days, while maintaining accounts & making posting, these two words are not
used.
 Balancing of an account:-
It means to find out the difference between debit total and credit total of an account. The
excess of debit total over credit total is called debit balance and such balance is recorded
as “By balance c/d”. Similarly the excess of credit total over debit total is called credit
balance and such balance is recorded as “To Balance c/d”.

C/d – Carried Down.

C/d- It may be recorded as C/f
C/f – Carried forward

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2.2.8. Illustration of Ledger:-Preparation of Leger A/c from 2.5 journal entries

Dr. Cash A/c

Cr
Date Particulars Rs. Date Particulars Rs
1.4.15 To Capital A/c 25000 4.4.15 By Bank A/c 5000
10.4.15 To Sales A/c 8000 6.4.15 By Purchases A/c 10000
5.5.15 To Bank A/c 2000 20.4.15 By Furniture A/c 4000
10.5.15 To Mr. X 4400 23.4.15 By Rent A/c 2000
25.4.15 By Telephone Charge A/c 500
30.4.15 By Drawing A/c 2000
15.5.15 By Mr. Y 5000
18.5.15 By Salary 2000
18.5.15 By Stationary 1000
18.5.15 By wages 500
20.5.15 By Purchases 3800
20.5.15 By Balanced c/d 3600
39400 39400
21.5.15 To Balance b/d 3600

Dr. Capital A/c Cr

Date Particulars Rs. Date Particulars Rs
20.5.15 To Balance 25000 1.4.15 By Cash A/c 25000
C/d 25000 25000
21.5.15 By Balance b/d 25000

Dr. Bank A/c Cr

Date Particulars Rs. Date Particulars Rs
4.4.15 To Cash A/c 5000 5.5.15 By Cash A/c 2000
8.5.15 By drawing A/c 1000
20.5.15 By Balance c/d 2000
5000 5000
21.5.15 To Balance 2000
b/d

Dr. Purchases A/c Cr

Date Particulars Rs. Date Particulars Rs
6.4.15 To Cash A/c 10000 26.4.15 By Advertising A/c 1000
8.4.15 To Mr. Y A/c 6000 27.4.15 By Drawing A/c 1000
20.5.15 To Cash A/c 3800
20.5.15 To Discount Receive 200 20.5.15 By Balance c/d 18000
A/c
20000 20000
21.5.15 18000
To Balance
b/d

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Dr. Mr. Y A/c Cr
Date Particulars Rs. Date Particulars Rs
17.4.15 To purchase 8.4.15 By purchases A/c 6000
return A/c 800
15.5.15 To Cash A/c 5000
15.5.15 To Discount Receive 200
A/c
6000 6000

Dr. Sales A/c Cr

Date Particulars Rs. Date Particulars Rs
20.5.15 To Balance 13000 10.4.15 By Cash A/c 8000
c/d 13.4.15 By Mr. X A/c 5000
13000 13000
21.5.15 By Balance b/d 13000

Dr. Mr. X A/c Cr

Date Particulars Rs. Date Particulars Rs
13.4.15 To Sales A/c 5000 15.4.15 By Sales Return A/c 500
10.5.15 By Cash A/c 4400
10.5.15 By discount allowed 100
5000 A/C 5000

Dr. Sales Return A/c Cr

Date Particulars Rs. Date Particulars Rs
15.4.15 To Mr. X A/c 500 20.5.15 By Balance c/d 500
500 500
21.5.15 To Balance 500
b/d

Dr. Purchases Return A/c Cr

Date Particulars Rs. Date Particulars Rs
20.5.15 To Balance 800 17.4.15 By Mr. Y A/c 800
c/d 800 800
21.5.15 By Balance b/d 800

Dr. Furniture A/c Cr

Date Particulars Rs. Date Particulars Rs
20.4.15 To Cash A/c 4000 20.5.15 By Balance C/d 4000
4000 4000
21.5.15 To Balance 4000
b/d
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Dr. Rent A/c Cr
Date Particulars Rs. Date Particulars Rs
23.4.15 To Cash A/c 2000 20.5.15 By Balance c/d 2000
2000 2000
21.05.15 To Balance 2000
b/d

Dr. Telephone Charge A/c Cr

Date Particulars Rs. Date Particulars Rs
25.4.15 To Cash A/c 500 20.5.15 By Balance c/d 500
500 500
21.5.15 To Balance 500
b/d

Dr. Advertising A/c Cr

Date Particulars Rs. Date Particulars Rs
26.4.15 To Purchases 1000 20.5.15 By Balance c/d 1000
A/c 1000 1000
21.5.15 1000
To Balance
b/d
Dr. Drawing A/c Cr
Date Particulars Rs. Date Particulars Rs
27.4.15 To Purchases 1000 20.5.15 By Balance c/d 4000
30.4.15 A/c 2000
8.5.15 To Cash A/c 1000
To Bank A/c 4000 4000
21.5.15 4000
To Balance
b/d

Dr. Discount Allowed A/c Cr

Date Particulars Rs. Date Particulars Rs
10.5.15 To Mr.X A/c 100 20.5.15 By Balance c/d 100
100 100
21.5.15 To Balance 100
b/d

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Dr. Discount Received A/c Cr
Date Particulars Rs. Date Particulars Rs
20.5.15 To Balance c/d 400 15.5.15 By Mr. Y 200
20.5.15 By Purchases 200
400 400
21.5.15 By Balance b/d 400

Dr. Salary A/c Cr

Date Particulars Rs. Date Particulars Rs
18.5.15 To Cash A/c 2000 20.5.15 By Balance c/d 2000
2000 2000
21.5.15 To Balance b/d 2000

Dr. Stationary A/c Cr

Date Particulars Rs. Date Particulars Rs
18.5.15 To Cash A/c 1000 20.5.15 By Balance c/d 1000
1000 1000
21.5.15 To Balance b/d 1000

Dr. Wages A/c Cr

Date Particulars Rs. Date Particulars Rs
18.5.15 To Cash A/c 500 20.5.15 By Balance c/d 500
500 500
21.5.15 To Balance b/d 500

C/d – Carried down

b/d – Brought down
c/d = c/f (Carried forward)
b/d=b/f (brought forward)
(In place of c/d, c/f may be used
In place of b/d, b/f may be used)

2.2.9. Self-Assessment Questions:-

1. Different between Journal and Ledger.

2. You are required to pass Journal entries and prepare necessary Ledger A/cs of
the following transactions.

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 i) Mr.X started a business with capital Rs. 50000
ii) He deposited in a bank by opening a current A/c Rs. 20000
iii)Purchased goods on credit from Mr.Y Rs. 10000
iv)Purchased goods on cash Rs. 5000
v) Goods sold for cash Rs. 6000
vi) Goods sold on credit to Mr. Ram Rs. 3000
vii)Salary paid by cheque Rs. 4000
viii)Rent paid Rs. 3000
ix)Furniture purchased & paid by cheque Rs. 10000
x)Cash paid to Mr. Y Rs. 6000

3. Transaction are as follows:

i)Mr.Ramchad started a business with cash Rs. 20000

ii)Paid rent in advance Rs. 4000
iii)Furniture purchased Rs. 3000
iv)Purchased goods on credit from Mr.X Rs. 4000
v)Paid to Mr. X on full settlement Rs. 3800
vi)Loan Taken from Bank Rs. 10000
vii)Interest paid on loan Rs. 500
viii)Cash withdrawn for private use Rs. 2000
ix)Goods sold on cash Rs. 2500
x)Rent adjusted against advance rent Rs. 2000

Give Journal entries and prepare ledger A/cs

4. Give Journal entries and prepare Ledger A/c

a)Ramesh commenced business with cash Rs. 30000

b)Purchased goods on cash from Rakesh & Co. Rs. 5000
c) Purchased goods on credits from Shyam & Co. Rs. 6000
d)Cash deposited into bank Rs. 10000
e)Paid Shyam & Co. in full settlement of claim Rs. 5800
f)Goods sold on cash Rs. 4000
g)Sold goods on credit to Hari & Co. Rs. 2000
h)Cash collected from Hari& Co in full settlement Rs. 1900
i) Salary unpaid Rs. 3000
j)Office expenses paid Rs. 2000
k)Salary paid Rs. 3000
l)Office rent unpaid Rs. 1000
m)Prepaid Office expenses Rs. 1000
n)Accrued Interest Rs. 500

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 o)Unpaid office Expenses Rs. 1000
p) Furniture purchased Rs. 4000
q) Salary unpaid Rs. 2000
r)Cash used at home Rs. 2000

5. Pass the opening entry on 1st January 2015 on the basic of following information
taken from the business of Mr. Krishna Lal.

Cash in hand Rs. 5000

Sundry Debtors Rs. 18000
Stock of goods Rs. 25000
Plant & Machinery Rs. 100000
Land & Buildings Rs. 50000
Sundry Creditors Rs. 8000
Bank overdraft Rs. 10000

6. Give the classification of accounting transactions. Also state the rules of “debit
and credit” in this connection.

7. Explain the different rules for journalizing the transactions with appropriate
illustrations.

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