ACCOUNTING

Definition
Accounting may be defined as the process of recording, classifying, summarizing, analyzing
and interpreting the financial transactions and communicating the results thereof to the persons
interested in such information.
An analysis of the definition brings out the following functions of accounting.
Recording
This is the basic function of accounting. It is essentially concerned with ensuring that all
business transactions of financial character are recorded in an orderly manner. Recording is
done in the book journal.
Classifying
It is concerned with the systematic analysis of the recorded Data, with a view to group
transactions or entries of one nature at one place. The work of classification is done in the book
termed as ledger.
Summarizing
This involves presenting the classified data in a manner, which is understandable and useful
to the internal as well as external end users of accounting statements. This process leads to the
preparation of following statements:
i) Trial balance, ii) Income statement & iii) Balance sheet.
Deals with financial transactions
Accounting records only those transactions and events in terms of money which are of a
financial character. Transactions which are not of a financial character are not recorded in the
books of account.
Analysis and Interprets
This is the final function of accounting. The recorded financial data are analyzed and
interpreted in a manner that the end users can make a meaningful judgment about the
financial condition and profitability of the business operations.
Communications
The accounting information after being meaningfully analysed and interpreted has to be
communicated in a proper form and manner to the proper person. This is done through
preparation and distribution of accounting reports.
OBJECTIVES
The following are the main objectives of Accounting
To keep systematic records
Accounting is done to keep a systematic record of financial transactions.
To protect business properties
Accounting provides protection to business properties from unjustified and unwarranted use.
To ascertain the operational profit or loss
Accounting helps in ascertaining the net profit earned or loss suffered on account of carrying the
business. This is done by keeping a proper record of revenues and expenses of a particular period. The
profit and loss account is prepared at the end of a period and if the amount of revenue for the period is
more than the expenses incurred in earning that revenue, there is said to be a profit. In case the
expenditure exceeds the revenue, there is said to be a loss.
Profit and loss account will help the management investors, creditors, etc. in knowing whether
running the business is remunerative or not.
To ascertain the financial position of business
The profit and loss account gives the amount of profit or loss made by the business during a
particular period. However it is not enough. The businessman must know about his financial position
i.e, where he stands: what he owes and what he owns? This objective is served by the Balance sheet
or position statement. The Balance sheet is a statement of assets and liabilties of the business on a
particular date.
To facilitate rational decision making
Accounting these days has taken upon itself the task of collection, analysis and
reporting of information at the required points of time to the required levels of the authority in order to
facilitate rational decision making. The American Accounting Association has defined accounting as
the process of identifying, measuring and communicating economic information to permit informed
judgements and decisions by users of the information.
Financial accounting
The art of recording, classifying and summarizing in a significant manner and in terms of
money, transactions and events which are atleast in part of a financial character and interpreting the
results.
Management accounting
The presenting of accounting information in such a way as to assist management in the
creation of the policy and in the day to day operation of undertaking.

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SYSTEMS OF BOOK KEEPING

Book keeping is the art of recording pecuniary or business transactions in a regular and
systematic manner. Book-keeping is the art of applying the principles of the science of Accountancy
in the keeping of books of account. From properly kept books a person can at any time ascertain
i. what property he possesses
ii. what amounts are owing to him and by whom
iii. what amounts he owes and to whom
iv. what profit he has made or what loss he has unstained for any given period and the
manner in which the profit or loss has arisen and
v. the amount of his capital or deficiency.
Single Entry System
An incomplete double entry can be termed as a single entry system. It is 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 has been developed by some business houses,
who keep only essential records. Since all records are not kept, the system is not reliable and can
be used only by small business firms.
Double Entry System
This system is believed to have originated with the Venetian merchants of fifteenth century
and it is the only system of recording the two – fold aspect of the transaction. The system recognizes
that every transaction have a two – fold effect. If someone receives something then either some
other person must have given it, or the first mentioned person must have lost something, or
some service etc. must have been rendered by him.
Every transaction involving money or money’s worth has a two fold aspect, the receiving of a
value on the one hand and the giving of the same value on the other. This two fold nature in all
transactions must be recorded in the books and this gives rise to the term “Double entry Book-
keeping”.
In order that the two fold aspect of every transaction may be recorded, a ledger account (A/c.)
is assumed to be capable of receiving and giving. Thus a ledger account has two sides, one side for
recording values received and the other for recording values given. The left hand side is for values
received and is called the debit (Dr.)side. The right hand side is for values given and is called the credit
(Cr.) side.
To debit (Dr.) an account is to enter an amount on the debit side – this is termed a debit entry.
To credit (Cr.) an account is to enter an amount on the credit side – this is termed a credit
entry.
Every transaction affects two ledger accounts. If one account is to be debited with an amount,
another account must be credited with the same amount. If one account receives, another account
must give.
Every debit entry must have a corresponding credit entry.

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 Every credit entry must have a corresponding debit entry.
Every debit entry is preceded by the word “To” and every credit entry is preceded by the word
“By”.
Accounting Equation
The system of double entry system of book keeping is very well explained by the
Accounting Equation given below.
Assets = Equities
The properties owned by business are called ‘Assets’. The rights to the properties are
called ‘Equities.
Equities can be sub divided into two principal types, the right of creditors and the rights
of the owners. The equity of the creditors represents debts of the business and are called liabilities.
The equity of the owners is called capital or proprietorship or owner’s equity. Thus,
Assets = Liabilities + Capital.
Assets – Liabilities = Capital.

Example:
Transaction 1. A starts business with a capital of Rs. 1000.
There are two aspects of transaction. The business has received cash of Rs. 10,000. It is it,s
asset but on the otherhand it has to pay a sum of Rs. 10,000 to A, the proprietor.
Thus:
Capital & Liabilities Rupees Assets Rupees
Capital 10,000 Cash 10,000

Transaction 2. A purchases sofa for cash worth of Rs. 2000. The position of his business will
be as follows:
Capital & Liabilities Rupees Assets Rupees
Capital 10,000 Cash 8,000
Sofa 2,000
10,000 10,000

Transaction 3. A purchases cotton bales from B for Rs. 5,000 on credit. He sells for cash cotton
bales costing Rs. 3,000 for Rs. 4,000 and Rs. 1,000 for Rs. 1,500 on credit to P.
As a result of these transactions the business makes a profit of Rs. 1,500 (i.e. Rs 5500 –
4,000) and this will increase A’ s capital from Rs. 10,000 to 11,500. The business will have a
profitability of Rs. 5,000 to B and two more assets in the form of a debtor P for Rs. 1,500 and stock of
cotton bales of Rs. 1,000.

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 Capital & Liabilities Rupees Assets Rupees
Creditor(B) 5,000 Cash(Rs.8,000+4,000) 12,000
Capital 11,500 Stock of cotton bales 1,000
Debtor(P) 1,500
Sofa 2,000
16,500 16,500

Transaction 4. A withdraws cash of Rs, 1,000 & cotton bales of Rs. 200 for his personal use. The
amount and the goods withdrawn will decrease relevant assets and A’s capital.
Capital & Liabilities Rupees Assets Rupees
The Creditor (B) 5,000 Cash 11,000 above
type of (Rs.12,000-Rs.1,000)
Capital 10,300 Stock of cotton bales 800
statement (Rs11,500-Rs.1,200)
showing the Debtor (P) 1,500
financial Sofa 2,000
15,300 15,300
position of a
business on a certain date is termed as Balance Sheet.
The double entry system may be summarized as:
“For every debit there must be equivalent Credit and vice versa”.
Original Records
It records all daily transactions of a business into the order in which they occur and is also
called as Journal. Journal is defined as a book containing a chronological record of transactions. It is
the book in which transactions are recorded under the double entry system. Thus journal is the
books of original records. The process of recording transaction in a journal is termed as Journalizing.
Proforma of Journal
Date Particulars L.F Debit Rs Credit Rs
(1) (2) (3) (4) (5)
Date: The date on which the transaction was entered is recorded here.
Particulars: The two aspects of transaction namely debit and credit are recorded here.
L.F: It is Ledger Folio. The transactions entered in the journal are later on posted to the ledger.
Debit: The amount to be debited is entered.
Credit: The amount to be credited is shown.
Closing of accounts (Closing entries)
Closing Entries are entries passed at the end of the accounting year to close different
accounts. These entries are passed to close the accounts relating to incomes, expenses, gains and
losses. In other words, these entries are passed to close the different accounts pertaining to Trading
and Profit and Loss account. The accounts relating to assets and liabilities are not closed but they are
carried forward to next year.

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 The principle of passing a closing entry is very simple. In case an account shows a debit
balance, it has to be credited in order to close it. For e.g. if the purchases account is to be
closed, the purchases account will have to be credited so that it may be closed because it has a debit
balance. The closing entries are passed in the journal proper.
Rules for Debit and Credit
The transactions in the journal are recorded on the basis of the rules of debit and credit. For
this purpose, business transactions have been classified into three categories:

(i) Transactions relating to persons – Personal Accounts

(ii) Transactions relating to properties and assets – Real Accounts
(iii) Transactions relating to incomes and expenses – Nominal Accounts.

ACCOUNTS
Personal Real Nominal
1. Natural 1. Tangible 1. Expenses and Losses
2. Artificial 2. Intangible 2. Incomes and Gains
3. Representative

Personal Accounts
It includes the accounts of persons with whom the business deals. There are three categories
in this.
Natural Personal Accounts
The term ‘Natural Persons’ means persons who are creation of GOD. For e.g. Roja’s
account, Kumar’s account.
Artificial Personal Accounts
These accounts include account of Corporate bodies or Institutions which are recognized as
persons in business dealings. E.g. The account of a club, the account of government, the account of an
insurance company etc.
Eg. Account of LIC.
Representative Personal Accounts
These are accounts which represent a certain person or group of
persons. E.g. For salaries due to the employees (not paid), an outstanding
salaries account will be opened. This outstanding salaries account represents
the accounts of the persons to whom the salaries have to be paid. The rule is
DEBIT – THE RECEIVER ; CREDIT – THE GIVER

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Example: Ravi is giving cash to Rama.
Then the account of Ravi will have to be credited and Rama’s account will have to be debited.
Real accounts
Tangible real accounts
Those accounts which relate to such things which can be touched, felt, measured etc.
Example: Cash account, Building account, Furniture account, Stock account etc.
Intangible real accounts
These accounts represent such things which cannot be touched, though they can be measured
in terms of money. Example: Patient’s account. The rule is
DEBIT – WHAT COMES IN ? CREDIT – WHAT GOES OUT ?
Example: When furniture is purchased for cash, furniture account should be debited while the cash
account should be credited.

Nominal accounts
These accounts are opened in the books to simply explain the nature of transactions. They do
not really exist. For e.g. in a business, salary is paid to the manager, rent is paid to the landlord, while
salary, rent as such do not exist. The accounts of these items are opened simply to explain how the
cash has been spent. In the absence of such information, it may be difficult for the person concerned to
explain how the cash was utilised.
Nominal accounts include accounts of all expenses, losses, incomes and gains. The examples
of such accounts are rent, insurance, dividends, loss by fire etc.
The rule is
DEBIT - ALL EXPENSES AND LOSSES; CREDIT – ALL GAINS AND INCOMES

FINANCIAL ANALYSIS OF ACCOUNTS

Some of the financial statements useful to know the financial structure and position of any
livestock enterprise are
 Balance Sheet
 Profit and Loss statement
 Cash flow statement

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 Balance Sheet
A balance sheet is a summary statement of all the assets and liabilities of a business at a
given point of time. To be precise, it is presenting the net value of assets and liabilities in a concised
form at a given time and is usually prepared towards the end of the financial year. Balance sheet is also
known as Net Worth statement. In a typical Balance sheet, the assets are listed on the left hand side
and liabilities are listed on the right hand side. Apart from this, at the bottom of right hand side of
balance sheet Net worth or Equity is mentioned. Generally the left hand side values are equal or
balances the right hand side values and hence this statement is called as Balance sheet.
An Asset may be defined as a property which a farmer/firm owns.
A Liability is the amount of money to be paid by the farmer to the outsiders. On the basis of liquidity
assets/liabilities are classified into
Current assets: The assets which are used up in one production cycle and which can be easily
converted into cash.
Eg.: Cash on hand, accounts receivable, market securities, inventories etc.,
Medium term assets : The assets which are used up in production process for more than one year
and upto 5 years.
Eg. : Animals, equipments etc.,
Fixed assets: The assets which are used up in production process over a long period and which
cannot be easily converted into cash.
Eg.: Land, buildings, machinery etc.,
Current Liabilities: They refer to short time commitments of the business farmer which has to be
repaid within the current year.
Eg.: Accounts payable, taxes payable, interest payable.
Working/Medium term loans: They refer to commitments of the business farmer which could be
deferred at present but the due falls in the next season and their time period ranges from 1 – 5 years.
Eg. : Medium term loans, production loans etc.,
Deferred Liabilities : They refer to long term loans and other such commitments (5-15 years).
Eg.: Long term loans for land .
Net Worth/Equity: It is the difference between the total assets and total liabilities in the business.
The most liquid current asset is cash in hand and the least liquid current asset is inventory. The
most liquid current liability is money at call and the least liquid asset is long term loans.
Profit and Loss statement (Income Statement)
Profit and Loss statement is an important financial statement employed to assess the
performance of farm business. It shows the operational efficiency of the farm business in terms of
receipts, expenses, profits and losses. Generally it is prepared by the entire farm for one agricultural
year. However, it may also be prepared over a period of time. So, we can know the trend in receipts

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and expenses which indicates the success or failure of a farm business. Thus it contains basically three
important items, namely., Receipts, Expenses and Net income.
Receipts: They include returns from all the enterprises in the farm. It also includes the appreciation in
the value of assets, gifts, many other types of receipts etc.,. However the returns from the sale of
capital assets such as land, buildings, machinery etc., are not counted as receipts.
Expenses: All the expenses and the variable inputs are taken as operational expenses which includes
the interests on working capital. The fixed expenses include, depreciation, interests on fixed capital,
rental value of owned land, land revenue etc.,. The amount spent on the purchase of any capital asset
does not come under expenses.
Net Income : It is calculated in three different ways.
a. Net Cash Income: This is worked out by reducing total cash expenses from the total cash
receipts.
b. Net Operating Income: It is calculated by reducing the total operational expenses from the
gross income.
c. Net Farm Income :It is worked out by deducting total fixed expenses from the net operating
income.
Of the three types of net incomes, net farm income is the best measure and is most frequently
used for assessing the performance of farm business.
1. Operating ratio : Total operating expenses
Gross income

2. Fixed ratio : Total fixed expenses

Gross income

3. Gross Ratio / Input – Output ratio : Total Expenses

Gross income

INVESTMENT ANALYSIS (CAPITAL BUDGETING / PROJECT APPRAISAL)

Generally in agricultural projects, the investments are made during different time periods and
the associated benefits were also spread overtime. These investments and returns are not comparable
as such with out adjusting for their time value. Thus the time value of money has to be necessarily
taken into reckoning in the investment analysis of agricultural projects.
The project appraisal techniques are broadly classified under two heads namely.,
 Undiscounted Measures
 Discounted Measures
Undiscounted Measures
They are the naïve (simple) methods of ranking agricultural projects. The three important
undiscounted measures are
a. Pay back period

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 b. Proceeds per rupee of outlay
c. Average annual proceeds of rupee outlay
a. Pay Back Period
Pay back period is a simple technique of ranking projects based on the actual period of time in
which one can get back total investment.

I
P =
E
where, P is the pay back period
I is the total investment made in the project and
E is the net cash revenues / net revenues per annum.

b. Proceeds per rupee of outlay

Total Proceeds
Proceeds per rupee of outlay =
Total investment
c. Average annual proceeds of rupee outlay
This method is another method of choosing between the projects and measured by the
following formula
Total proceeds / life span of project
Average annual proceeds of rupee =
Total investment
The projects are estimated by the magnitude of the estimate.

The major draw back of the undiscounted measures is that for the same data of the project, we
will get different rankings. Thus undiscounted measures are inconsistent and incompatible in ranking.
Discounted Measures
Here the cash flows which are accrued in the project are discounted with an appropriate
discount rate. Generally the existing interest rate is taken as discount rate for this purpose. The
discount rate cash flows are the best estimates to measure the worth of the projects. The three
important discount rate measures are
a. Net Present Worth (NPW)
b. Benefit Cost Ratio (BCR)
c. Internal rate of Returns (IRR)

a. Net Present Worth

The Net Present Worth which is also called as Net Present Value (NPV) is nothing but the
present value/worth of the cash flow stream in the project. The cash flow in the project is the
difference between cash inflow and cash outflow. The investments made in the projects are generally

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 called costs or cash outflows. The receipts that accrued during different time periods are called as
cash inflows or gross returns. The cash flows discounted with an appropriate discount rate will give
the net present worth of the project.
n n
NPW = ∑ Bt / (1+r) - ∑ Ct / (1+r)t
t

t =1 t =1
t
B is cash flows in t year, Ct is cash outflows in tth year, t is 1 to 10 years that is life span of the
th

project.
The choice criterion using NPW is that the project with positive NPW is accepted for
implementation and the project with negative NPW is rejected. If the NPW is zero, the entrepreneur is
left in indifference. If he is to choose among different projects, the project with highest NPW has to be
chosen.
b. Benefit Cost Ratio (BCR)
BCR is worked out by dividing the present value of cash inflows by the present value of cash
outflows. If the BCR is more than one, that project is accepted and if BCR is less than one the project is
rejected. Among the different projects, the project with highest BCR is to be selected.

n Bt/(1+r)t
BCR = ∑
t =1 Ct/(1+r)t
c. Internal Rate of Returns (IRR):
It is the rate of return per rupee invested in an agricultural project over its life span. For
example if the IRR is 30 per cent in a livestock project, it means that this project gets an average
annual return of Rs. 30/ per Rs. 100/ invested in the project over its life span. It is the rate of return at
which the present value of total cash flows in a project is equal to zero. In other words, it is the discount
rate at which the NPW of the project is zero i.e.,
IRR = NPW = 0 or
n Pt
IRR = ∑
t=1 (1+r)t

Lower Difference Present worth of cash flow at lower discount rate

IRR = discount + in
rate discount rate Total of present worth of cash flow of both discount rates
(Ignore the signs)

Present worth =Future value/(1+r)t

For a project to be viable it should have a BCR of one or greater than one at the opportunity
cost of capital and a NPW of zero or greater than zero at the opportunity cost of capital and the
discount rate for IRR should be greater than the opportunity cost of capital.

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