Ch – 2

Concepts of Financial and Cost Accounting

Introduction of Accounting Cycle
The accounting cycle is a collective process of identifying, analyzing, and recording
the accounting events of a company. It is a standard process that begins when a transaction
occurs and ends with its inclusion in the financial statements and the closing of the books.
Accounting Cycle
Double Entry Book Keeping System
Double-entry bookkeeping, also known as double-entry accounting, is a method of bookkeeping that relies on a two-
sided accounting entry to maintain financial information. Every entry to an account requires a corresponding and opposite
entry to a different account. The double-entry system has two equal and corresponding sides known as debit and credit. A
transaction in double-entry bookkeeping always affects at least two accounts, always includes at least one debit and one
credit, and always has total debits and total credits that are equal. The purpose of double-entry bookkeeping is to allow the
detection of financial errors and fraud.
Types of Accounts and Rules
Journal Entry
A journal entry is used to record a business transaction in the accounting records of a business. A journal entry is
usually recorded in the general ledger
Example -1
Pass the journal entries:
ABC traders started a business with a capital of Rs. 1,00,000 on April 10, 2021.
April 19, 2021 - Purchased furniture worth Rs. 75,000.
April 24, 2021 - Purchased goods on credit from XYZ traders worth Rs. 1,00,000.
April 30, 2021 - Rent paid Rs. 50,000.
May 2, 2021 - Goods sold for Rs.20,000 at 10% discount.
May 15, 2021 - Cash deposited Rs. 50,000 into the bank.
Answer Example -1
SUBSIDIARY BOOKS
Journal is a book of prime entry in which all transactions are to be recorded first. But, in
practice, the number of transactions happens to be so large that it becomes difficult to record
them in one book. Hence, the journal is sub-divided into a number of special journals, called
subsidiary books. Subsidiary Books are those books of original entry in which transactions of
similar nature are recorded at one place and in chronological order. In a big concern, recording
of all transactions in one Journal and posting them into various ledger accounts will be very
difficult and involve a lot of clerical work.

This is avoided by sub-dividing the journal into various subsidiary journals or books. The
subdivisions of journal into various subsidiary journals for recording transactions of similar
nature are called as ‘Subsidiary Books.
Purchases Book
All credit purchases of goods are recorded in the purchases journal whereas cash purchases are
recorded in the cash book. Other purchases such as purchases of office equipment, furniture,
building, are recoded in the journal proper if purchased on credit or in the cash book if
purchased for cash. The source documents for recording entries in the book are invoices or bills
received by the firm from the supplies of the goods. Entries are made with the net amount of the
invoice. Trade discount and other details of the invoice need not be recorded in this book.
Purchases Return Book
In this book, purchases return of goods are recorded. Sometimes goods purchased are returned
to the supplier for various reasons such as the goods are not of the required quality, or are
defective, etc. For every return, a debit note (in duplicate) is prepared and the original one is sent
to the supplier for making necessary entries in his book. The supplier may also prepare a note,
which is called the credit note. The source document for recording entries in the purchases
return journal is generally a debit note.
Sales Book
All credit sales of merchandise are recorded in the sales journal. Cash sales are recorded in the
cash book. The format of the sales journal is similar to that of the purchases journal explained
earlier. The source document for recording entries in the sales journal are sales invoice or bill
issued by the firm to the customers.
Sales Return Book
This journal is used to record return of goods by customers to them on credit. On receipt of
goods from the customer, a credit note is prepared, like the debit note referred to earlier. The
difference between the credit not and the debit note is that the former is prepared by the seller
and the latter is prepared by the buyer.
Example-1
Cash Book
Cash book is a book in which all transactions relating to cash receipts and cash payments are recorded. It starts with
the cash or bank balances at the beginning of the period. Generally, it is made on monthly basis. This is a very popular
book and is maintained by all organizations, big or small, profit or not-for profit. It serves the purpose of both journal
as well as the ledger (cash) account. It is also called the book of original entry. When a cashbook is maintained,
transactions of cash are not recorded in the journal, and no separate account for cash or bank is required in the ledger.
Cash Book (Cont…….
 Rules for Cash Book
(1) (1) Cash book is a Cash Account. It is a Real Account and the rule "Debit what comes in and credit what
goes out" applies to it.
(2) (2) The cash book starts with the opening cash balance shown as the first item on the receipt side.
(3) When cash is received in business according to rule of debit what comes in, the entry is made on the
debit side (receipt side) of the cash book and in particulars column, the name of the other account is written.
(3) (4) When cash is paid in business on any account, cash goes out. According to the rule 'credit what goes
out', the entry is made on the credit side (payments side) of the cash book. The name of the other account is
written in the particulars column.
(4) (5) Balance of Cash book is found at the end of the day and it is written on the payments side as a closing
balance
Example-1 Cash Book
Three Column Cash Book
Three Column Example -1
 Ledger
(1) All the accounts identified on the basis of transactions recorded in different journals/books such as Cash
Book, Purchase Book, Sales Book etc. will be opened and maintained in a separate book called Ledger. So
a ledger is a book of account; in which all types of accounts relating to assets, liabilities, capital, expenses
and revenues are maintained. It is a complete set of accounts of a business enterprise.

(2) Thus, from the various journals/Books of a business enterprise, all transactions recorded throughout the
accounting year are placed in relevant accounts in the ledger through the process of posting of transactions
in the ledger. Thus, posting is the process of transfer of entries from Journal/Special Journal Books to ledger.
 Features of Ledger
1) Ledger is an account book that contains various accounts to which various business transactions of a
business enterprise are posted.
2) It is a book of final entry because the transactions that are first entered in the journal or special purpose
Books are finally posted in the ledger. It is also called the Principal Book of Accounts.
3) In the ledger all types of accounts relating to assets, liabilities, capital, revenue and expenses are
maintained. It is a permanent record of business transactions classified into relevant accounts.
4) It is the ‘reference book of accounting system and is used to classify and summaries transactions to facilitate
the preparation of financial statements
Format of Ledger
 Trial Balance
Trial Balance consists of a debit column with all debit balances of accounts and credit column with all credit
balances of accounts. The totals of these columns if tally it is presumed that ledger has been maintained
correctly. However, Trial Balance proves only the arithmetical accuracy of posting in the ledger.

Trial Balance may be defined as a statement which contains balances of all ledger accounts on a particular date
 Objective of Trial Balance
 To Check Arithmetical Accuracy
 To Help in Preparing Financial Statements :
 Helps in Locating Errors
 Helps in Comparison
 Helps in Making Adjustments
 Preparation Of Trial Balance
Trial Balance is not an account. It is only a list or schedule of balances of ledger accounts including cash and
bank balances. It is prepared on a particular date. The accounts having a debit balance are entered in the debit
amount column and credit balance accounts are entered in the credit amount column. The totals of the two sides
of the accounts may also be used to prepare trial balance. The sum of each column should be equal. The
standard format of a trial balance is given below :
Financial Statements Of Companies As Per
Companies Act 2013 Format
 Stock Register (Stores Ledger)
Stores Ledger is maintained by the costing department to make record of all receipts, issues of materials with
quantities, values (Sometimes unit rates also).Ledger resembles with bin cards except that receipts, issues and
balances are shown along with their money value. The ledger contains an account for every item of stores in
which receipts, issues and balances are recorded both in quantity and value.
Format of Stock Register
First in First Out (FIFO)
FIFO stands for First In, First Out. It is a method for organizing and managing data that is
based on the principle that the item that is stored first is the item that is retrieved first. In other
words, the oldest item in the system is the first one to be processed.

FIFO stands for “First In, First Out” and is an inventory accounting method used to track the
cost of goods sold. This method assumes that the first items purchased (or produced) are the
first items sold and that the cost of those items is the cost of goods sold. This method is used to
ensure that the costs associated with inventory are accurately reflected in a company’s financial
statements.
Example -1
Example -2
Last in First Out

Last in, first out (LIFO) is a method used to account for business inventory that records the most recently
produced items in a series as the ones that are sold first. That is, the cost of the most recent products
purchased or produced is the first to be expensed as cost of goods sold (COGS), while the cost of older
products, which is often lower, will be reported as inventory.
Example -1
Example -2
 Weighted Average Method

A weighted average is a calculation that takes into account the varying degrees of importance of the

numbers in a data set. In calculating a weighted average, each number in the data set is multiplied by a

predetermined weight before the final calculation is made. A weighted average can be more accurate than a

simple average in which all numbers in a data set are assigned an identical weight.
Example -1
Example -2