accounts iii sem

7/31/2019 Accounts III Sem

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BUSINESS ACCOUNTING


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BOOK KEEPING

It is that branch of knowledge which tells us how to keep a

record of financial transaction

Book keeping is the science and art of recording correctly in

books of accounts all those business transactions that result in

the transfer of money or moneys worth

Book keeping is the art of applying the principles of

accounting in keeping of books of accounts

The process of analyzing ,classifying and recording transaction

in accordance with pre-conceived plan.


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OBJECTS OF BOOK KEEPING

To tell about cash in hand

To have permanent record of every transaction

To explain about stock in trade

To show balance of debtors and creditors

To reveal the financial position of business

To disclose the profit and loss of the concern during the year

To facilitate comparison of two different periods


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ADVANTAGES OF BOOK KEEPING

It is a proof in the court

It show financial position of business

It makes comparison of two business house

It is complete record of the transactions

It give information on any point of time

It helps to use resources properly

It discloses profit or loss


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ACCOUNTING

Accounting is often called the language of business.

The basic function of any language is to serve as the means of

communication.

Accounting is the art of recording, classifying, andsummarizing in a significant manner and in terms of money,

transactions and events which are, in part at least, of financial

character, and interpreting the results thereof.

Accounting is a means of collecting ,summarising ,analysing

and reporting in monetary terms, information about the

business.


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So accounting is a

Identifying and measuring business transactions in terms of

money

Recording in terms of money ,business transactions of

financial nature, soon after their occurrence

Classifying the entries found in journal into ledger

Summarizing or presenting at the end of accounting period the

information found in ledger accounts

Analyzing and interpreting the financial statements Communicating the results of interpretations of financial

statements to the end users for making sound decisions


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Features of accounting

Identifying

Measuring

Recording

Classifying

Summarizing

Analysis and Interpretation

Communicating


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Difference Between Book Keeping &

AccountingBasis Book keeping Accounting

nature The nature of job is clerical The nature of accounting job requires

initiative and judgment besides training

Knowledge Simple knowledge is required Special knowledge is required

scope It has limited scope It has a wide scope

stage It is primary stage of accounting It is advance stage and it begins where

book keeping ends

Inter-dependnece It has to depend on accountingfor making the accounting

records more useful

It has to depend on book keeping forgetting the required information from

accounting records and for making them

useful for planning, control and decision

making

Financial position Financial position cant be knownas book keeping is limited to Financial position can be knownthrough preparation of balance sheet.


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Need of Accounting

Profit to business is like a food to human body

To earn a profit businessman enters into

number of transactions

Keep a record of all transactions

It is helpful in planning , controlling and

directing activities related to business Helpful for the investors


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Objectives of accounting

Maintain proper records of business transactions

Ascertaining the profit or loss of business

Knowing the sources of revenue and items of expenses

Ascertaining of financial position of the business

Ascertaining to amounts due to business and amount due from

business

Ensuring effective control over the performance of business

Protection of the properties of business

Prevention of errors and frauds

Satisfying legal requirements

Making financial information available to various groups of persons


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Persons interested in accounting

information

Owners

investorsemployees

Public

consumers

Management Government

Researchers

Creditors


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Branches of accounting

FinancialAccounting

CostAccounting

ManagementAccounting

Branches ofAccounting


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Accounting cycle

BusinessTransaction

Journal

LedgerTrial

Balance

FinalAccounts


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Accounting standards

An Accounting Standard is selected set ofaccounting policies or broad guidelines issued bya an accounting body,regarding the principles and

methods to be chosen out of severalalternatives,that are followed for the preparationof financial statements.

The adoption and use of accounnting standards

show uniformity,comparability and qualitativeimprovement in the preparation and presentationof financial statements.


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Objects /Advantages

Removal of confusing variation

Uniform presentation of accounts

Avoidance of manipulation Globalised business

Disclosure beyond law

Facilitates comparison


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Accounting Standards Board of

INDIA(ASB)

Established in April 27,1977

It is member of International Accounting

Standards Committee(IASC)

It formulate accounting standards

It is member of International Accounting

Standards Committee(IASC)

It review the accounting standards


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Procedure for Issuing Accounting

Standards

Submission of draft

Finalize draft

Drafting

Hold dialogue with government, industry

Determine the areas and priority


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Journalising

posting

balance

Trialbalance

Incomestatement

Position

statement

Accounting cycle is a sequence of steps

followed to prepare accounts


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Accounting Terminology

EQUITY: It refers to the total claims against the enterprise.

It is of two types: capital and liability

CAPITAL: Capital is the amount which the investor,proprietor, owner has invested in the firm or company and can

claim from the firm or company. It is written on the liability

side in the balance sheet.

Proprietor/Owner: proprietor is the person who makes the

investment and bears all the risks connected with the business.


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ASSETS: Assets are anything which will enable the firm or

company to get cash or benefit in future.

An asset may be defined as anything of use to future

operations of the enterprise and belonging to the enterprise.

Types of assets:

Fixed assets: These assets are purchased for purpose of

operating the business and not for sale. The assets of durable nature which are used in business and

are acquired and intended to be retained permanently for the

purpose of carrying on the business.

These are also called capital assets, capital expenditure,long lived assets or Block

Examples:land,buliding,machinery,furniture,plant etc


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Current assets: These assets of business are kept for short

term converting into cash or resale.

These are temporarily held assets which are meant for resale or

which frequently undergo change. These are also called Floating assets, Circulation assets.

Examples: cash in hand ,cash in bank, stock, bill

receivable, debtors, stores


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LIABILITIES: Liability is the amount which the firm/company

owe to the outsider(pay to outsider)

Types of Liabilities:

Fixed Liabilities:these are liabilities which are to be redeemed

after a long period of time.

The amount to be paid more than one year or after one year

These are also called long term liabilities.

Examples:long term loans


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Current liability/liabilities:Thisis the amount to be paid

within one year.

Those liabilities which are to be redeemed in near future

usually within one year. These are also called short term liabilities

Examples:creditors,bank loan(short term)bills payable etc


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Debtor:A person who owe(have to pay) money to the

firm/company on account of credit sales of goods .

Debtor is the person from whom amounts are due for goods

sold or services rendered .

Also called sundry debtor, trade debtor, accounts

receivable

Bills receivable: when the firm/company acquire documentary

proof from debtor then it becomes bill receivable or accounts

receivable


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Creditor: A person /firm/company to whom the firm/company

owe (to pay) money.

It is amount owed by the enterprise on account of goods

purchased or services rendered . Also called sundry creditor, trade creditor, accounts

payable

Bills payable: when the firm/company has to givedocumentary proof to the creditor this becomes bills payable

or accounts payable


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Examples-Assets & Liabilities

Assets:Land,Building,plant,machinery,furniture,fixtures,fitting

s,stock(raw material, work in progress,finishing

goods),debtors, bills receivable, Other

investments,Governement securities, cash in hand ,cash in

bank, Tradmarks,goodwill,patent,leasedhold land.

Liabilities: Capital,Reserves ,surplus,outstanding

expenses,loans,creditors,bills payable,bankers,


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Transaction/Business transaction: Any exchange (dealing)

of goods or services ,for cash or credit by

business/person/firm/company with any other

business/person/firm/company

Goods: Includes also merchandise commodities which are

purchased and sold in the usual course of business

Drawings: Money or value of goods belonging to the business

used by the proprietor/owner for his personal/domestic use.


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Entry: The record of transaction or event in the books of

accounts is known as entry.

Events: these are occasions which cause changes in the value

due to time element.

Example: Interest,depriciation

Depriciation: It is the permanent decrease in the value of an

asset due to use/lapse of time.

It is the permanent and continuous decrease in the quality,

quantitiy or value of an asset


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Revenue/Income: It is monetary value of the goods or

services sold to the customers during the period.

Expense/Cost: It is the amount spent in order to produce and

sell goods and services which proceeds revenue.

Loss/Net loss:it refers to the result of the revenue for a period

when expense exceeds the revenue

It also describes those efforts which fail to earn revenue

Example:Fire,theft,accident etc


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Profit/Net Profit:The excess of revenue over expense/cost during aparticular period.

Gain:profit of irregular nature

Discount:Discount is the reduction in the price of goods by thebusinessman to the customers

Tangible/tangible assets:things which have physical shape and canbe touched,seen ,purchased,sold Like buliding,land, machinery

Intangible/intangible assets:things which have no physical shape andcan not be touched like goodwill,patent etc

Bad debts:The amount which is not paid by debtor is called baddebts.


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Accounting Equation

CAPITAL=ASSETS -LIABILITIES


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Accounting Principles

Accounting principles are general law or rule adoptedas guide to action a basis of practice.

Also called accounting concepts

Materiality It refers to the importance of an item or event

Material details should be given

Do not include insignificant details

Details with full accuracy up to paisa should be given todebtor

In case of management figures can be rounded


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Accounting period

Though the business is a continues process

but still it has to present results at a specific

period

Financial year Ist April to 31st March

Final accounts are prepared for the accounting

period

Financial position of business is shown


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Realisation

This principle says profit should be considered

only when it realized

Profit occurs only when goods or services are

passed to the buyer

No profit should be taken credit of

In case of long term installments system of

purchase and sale are exceptions


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Conservatism

According to this concept the revenue

requires better evidence/proof then

recognition of expense

Revenues are to be recognized only when they

are certain and expenses are recognized as

soon as they are reasonably possible


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Disclosure

According to this concept the information

related to all business transactions should be

given in the accounts

Any party or person interested in the accounts

can ask any relevant information


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Types of Accounts

Accounts

PersonalAccounts

RealAccounts

Nominal

Accounts


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Personal Accounts

Natural Persons

personal Account

Artificial/Impersonal

Persons personalAccounts

P l t A di


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Personal accounts: Accounts recordingtransactions relating to individual or firms orcompany or bank or institution or club are known

as personal accounts Natural persons personal accounts:These

account recording transactions relating toindividual human being are natural personspersonal accounts like Rajs account, Anandsaccounts, sahils account, shivams account

Artificial/Impersonal persons personalaccount:The account recording transactionrelating to bank,company,firm,club,institute areartificial persons personal account like bfgiaccount,HDFC bank Mittal & sons company ,thelions club account etc.


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Real accounts: The accounts recording

transactions relating to tangible things like

building, land ,machinery, cash,plant are called

tangible real accounts

The accounts recording transactions relating to

intangible things like intangible things like

patent,goodwill,trademarks etc are known asintangible real accounts.


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Realaccounts

Tangible real

accounts

Intangiblereal accounts

N i l Th di


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Nominal accounts:The accounts recording

trasactions relating to the

loss,gain,expense,income like

salary,wages,commission,interest,bad debts are

known as nominal accounts


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Journal

The basic book of accounting is called Journal It is the book of prime entry and called Day Book or Diary

The process of recording transactions into journal is calledjournalising

The transaction written in journal is known as journal entry

In journal the transactions are recorded in chronological ordermeans in order of date

It has two columns for transactions debit and credit

Each Transactions are analyze into debit and credit

Transactions are recorded first in this book

Each entry has narration written in brackets with it to describe itsnature.

Debit =Credit


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The journal or daily record as originally used

was a book of prime entry in which

transactions were copied an order of date froma waste book .The entries as they were copied

were classified into debits and credits, so as to

facilitate their being correctly posted

afterwards in the ledger.

A journal is a book, employed to classify or

sort out transactions in a form convenient for

their subsequent entry in the ledger


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Types of Journal

General Journal: This journal keeps the

chronological records of transaction.

Special Journal: It is divided into Cash Book,

Sales day book, Bills payable book, bills

receivable book, return inward book, return

outward book. These books are called

subsidiary books.


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Advantages of Journal

Transactions are recorded chronological order

thus reducing the chance of omitting any

transaction

Transactions are written with narration to

understand true nature of transaction

Debit and credit amounts are written side by

side it reduces chances of wrong entry


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Rules for debit & credit

PersonalAccounts

Debit the

receiver

Credit thegiver


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Realaccounts

Debit what

comes in

Credit whatgoes out


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NominalAccounts

Debit expenses

and losses

Credit incomesand gains


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Format of JournalDate

(1)

Particulars

(2)

L/F

(3)

Debit Dr

Amount (4)

Credit Cr

Amount (5)

Dr


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Assets


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Liabilities


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Double entry book keeping


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Voucher

The document prepared for the purpose of recording business transactions in the

books of accounts is called Voucher

A voucher may be defined as documentary evidence/proof in support of an entry

appearing in the books

Vouchers are printed by all enterprise /Companies in their name

A separate voucher is prepared for each transaction and specifies debit and creditcolumns

Vouchers are preparared by accountant and signed by authorized person of the

company

Each voucher is serially numbered


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Vouchers

Cash Vouchers

DebitVoucher(For

payment)

Creditvouchers(For

receipts)

Non-CashVouchers/transfer

vouchers


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Cash vouchers These vouchers are documentary proof of cash receipts and payments

Debit Vouchers: These vouchers are prepared when cash payments are made.Transactions of

cash payments are recorded like;

Payments of goods purchased

Payment of expenses

Cash purchase of assets

Payments of creditors Information contained in Debit voucher:

Name and address of the organisation

Date of preparing

Voucher number

Source document number

Name of the accounts to be debited

Net amount payment

Brief description of transaction

Signature of the person who prepared the voucher

Signature of authorized person

Document in support of voucher to be attached


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Credit voucher

These vouchers are documentary proof of cash received.These vouchers are prepared to

record the transaction of cash received like:

For cash sale of fixed assets For cash received for various incomes

For cash received from credit customers

For cash received on account of sale of investment

For taking loan

For withdraw cash from bank

Information contained in Credit voucher:


Date of preparing

Voucher number

Name of the accounts to be credited

Net amount received Brief description of transaction





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Non Cash voucher/transfer voucher

These vouchers are the documentary proof of all non cash transactions of the business

These vouchers are prepared for transactions like:

Credit sale of fixed assets For return of goods by customers

For return of goods to suppliers

Credit sale of investment

Charging depreciation

For writing off bad debts

Information contained in Non cash voucher:


Date of preparing

Voucher number

Name of the accounts to be credited or debited

Net amount of transaction

Brief description of transaction




Difference between source document


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Difference between source document

and vouchersSource document Voucher

It is the basis for preparing voucher It is the basis for recording in the books of

original entries (Journal)

It contains full details of transaction It contains accounts to be credited and

debited

It is signed by person who makes it It is signed by accountant and

countersigned by manager

It is the evidence of transaction It is evidence of recording

It has different numbers as the sources

are different

It is numbered serially and filed

accordingly which helps the audit to

voucher easily


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Sub-division of Journal

Subsidiary books: In order to make quick efficient and accurate recording

of business transaction, the need for sub-division of journal arises.

The journal is sub-divided into many subsidiary books ,also called Day

books as they facilitate the preparation of ledger book.

It is also called Sub-Journal or Subsidiary book.

The system under which transactions of similar nature are entered in the

relevant subsidiary book and on the basis of which ledger is written is

called practical system of book keeping.

This system reduces the labor and time of recording transactions.


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Advantages of Subsidiary books

Specialisation Convenience

Saving of Time

Increase in efficiency Internal check

Easy reference

Flexibility

Fixation of responsibility Convenience in auditing


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Source document

Source document contains full detail of

transaction

It is evidence for transaction


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SUB-Division of Journal

CashJournal/cash

bookGoods Journal Bill Journal Journal Proper


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Cash Book

Cash book consists cash and bank accounts taken out of ledger and maintainedseparately

It is a substitute of ledger for cash and bank accounts

It is also a book of original entry because cash and bank transactions are not

recorded in any other subsidiary book

It is a primary book in which cash and bank transactions are recorded date wisewith a brief narration

Cash book is a journal in the sense that all cash transactions are primarily recorded

are recorded in cash book with narration

Cash book is also a ledger as it serves the purpose of cash account and bank

account

It is known asjournalised ledger


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Features of cash book

Only cash and bank transactions are recorded in the cash book

It performs the role of both journal and ledger

Receipts are recorded in debit side and payments are recorded in credit book

Transactions are recorded in chronological order(date-wise)

Format of cash book is like ledger

Cash book is balanced daily

Cash column must have debit balance and bank column may have credit and debit

balance depending upon bank balance


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Similarities of cash book with journal

All cash transactions are recorded first in cash

book like journal

Transactions are recorded at the time of origin

Transactions are recorded date-wise

Transactions from cash book are posted in the

cash account in ledger

Cash book contains ledger folio

Narration is given for each entry like journal


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Similarities of cash book with Ledger

Like ledger cash book has debit and credit

column

Words to and By are used

Cash book is the final entry for ledger account

Cash and bank columns are balanced like

ledger

Difference between cash a/c and cash


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Difference between cash a/c and cash

book

Cash account Cash book

It is account in ledger It is separate book of accounts in

accounting system

In cash account posting are done from

ledger or from cash book

Cash book records transactions directly

In cash account posting is not followed by

narration

In cash book entries are followed by

narration

It only record one aspect of transaction

involving cash and bank

It records both aspects of transaction in

cash and bank column to completedouble entry posting


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Advantages of cash book

It prevents duplication of work

Cash and bank transactions are recorded

It is easily find out cash and bank transaction

in cash book

Frauds are minimised


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Cash book/cashJournal

Single columncash book/simple

cash book

Double columncash book

Cash & DiscountColumn

Bank & DiscountColumn

Cash & BankColumn

Triple columncash book

Single BankAccount

Double BankAccount

Cash book as theonly book oforiginal entry

Multi column cashbook

Petty cash book

Simple

Analytical

Single column cash book/Simple cash


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Single column cash book/Simple cash

book It is simple cash book which keeps record with narration only for cash transactions

It has one column on each side for amount.

It is same as ledger cash account and no need of having cash account in ledger if

cash book is there

The opening cash balance if any is written on debit side

The difference of balance is written on credit side as By balance c/d

The totals are written on both debit and credit side as To balance b/d


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Pro -forma/format of single cash book

Date Particulars V. No L.F Amount

(Rs)

Date Particulars V. No L.F Amount

(Rs)

CrDr


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Double Column Cash book

Cash book having additional column for

discount is called double entry cash book.

Discount allowed to debtors is a loss so

written on the debit side.

Discount received from creditors is gain so

written on the credit side.

Cash received and discount allowed are

written on debit side

Cash payment and discount received are

written on credit side


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Discount

Discount is a deduction or concession fromnominal or actual amount.

Discount

Trade

discount

Cash

Discount

Bankers

Discount


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Trade discount It is reduction grated by supplier from the list price of goods or services

It is allowed by producer to wholesaler or wholesaler to retailer

Its object is to promote sale and to leave fair margin of profit to retailer

It is allowed only at the time of sale whether cash or credit

It is shown by way of deduction in the invoice(bill) itself

Trade discount account is not opened in the ledger

The rate of discount may vary with quantity of purchased

Goods purchased or sold may be returned. It is deducted from any goods returned

Trade discount is concession or reduction granted by the producers to the

wholesalers or by the wholesalers to the retailers on the bulk purchase in

accordance with customers of each trade.

It is allowed by way of reduction in the list price or catalogue price.

Trade discount is usually deducted in purchase book, sales book or returns book.


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Cash Discount

It is reduction by supplier from the amount due

It is allowed by creditor to debtor

Its object is to encourage debtors to make prompt payment

It is allowed only when there is cash/bank receipt or payment before due

date

It is not shown in invoice

Cash discount account is opened in the ledger

The rate of discount vary with the time period within which payment is

made

Cash return is not possible. Cash discount is an allowances made on the prompt payment

It is allowed when payment is made by customers before time.


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Advantages of cash discount

To the seller

He gets cash within time

The possibility of bad debt is avoided

Reduces clerical work

To the buyer

It increasing the income of buyer He can sells goods to customers on cheaper

rate

Good reputation and name of buyer


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Bankers Discount

The amount of interest deducted in advance

by banker is called bankers discount

It is the sort of interest for the amount

advanced against the bill for the period of useof money

Difference between cash discount and Trade discount


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Trade discount Cash Discount

It is reduction grated by supplier from the list

price of goods or services

It is reduction by supplier from the amount

due

It is allowed by producer to wholesaler or

wholesaler to retailer

It is allowed by creditor to debtor

Its object is to promote sale and to leave fair

margin of profit to retailer

Its object is to encourage debtors to make

prompt payment

It is allowed only at the time of sale whethercash or credit

It is allowed only when there is cash/bankreceipt or payment before due date

It is shown by way of deduction in the

invoice(bill) itself

It is not shown in invoice

Trade discount account is not opened in the

ledger

Cash discount account is opened in the ledger

The rate of discount may vary with quantity of

purchased

The rate of discount vary with the time period

within which payment is made

Goods purchased or sold may be returned. It is

deducted from any goods returned

Cash return is not possible.

k l d d f


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Bank loan and overdraft

Bank loan is debited to bank column of cash

book.

Overdraft: when the customer overdraw

money from his account up to agreed limit.

Interest is charged on daily balance

overdrawn.

Bank overdraft will appear as credit side of

bank column of cash book

Bank loan and overdraft represents liabilities

but loan is lon term liabilit and overdraft is

Pro-forma/format of double column


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Pro forma/format of double column

cash book

Date Particulars V. No L.F Discount

(Rs)

Amount

(Rs)

Date Particulars V. No L.F Discount

(Rs)

Amount

(Rs)

CrDr

T i l l h b k


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Triple column cash book

Triple cash book has a additional column for

bank transactions.

The amount deposited and withdrawn are

shown in bank column.

The advantage of this book is that bank

account is not required to maintain in the

ledger

Pro-forma/format of triple column


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Pro forma/format of triple column

cash book

Date Particulars L.F Discount

(Rs)

Cash

(Rs)

Bank

(Rs)


(Rs)

Cash

(Rs)

Bank

(Rs)

CrDr

C /C i


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Contra entry/Contra transactions

Contra is a Latin word means the other side.

When both the debit and credit aspects of a transaction are recorded

simultaneously in the same book but in different columns, each entry on

debit side and on credit side is called contra entry.

Contra entry transactions are:

When cash is deposited into bank. The amount is debited in bank column

with description To cash and amount is credited in cash column with

description By bank

When cash is withdrawn from bank. The amount is debited in cash column

with description To bank and amount is credited in bank column with

description by cash

The word account is not used with cash and bank in contra entry

Letter C is written in Ledger Folio for Contra entry because no such cash

account and bank account is prepared in the Ledger.

Treatments relating to Cheque


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Treatments relating to Cheque

Transactions Cheques received and deposited immediately

Bank a/c Dr

To customers a/c

Cheque received from customers

Cash a/c Dr

To customers a/c

When cheque /(open)is deposited into bank subsequently ( Contra entry)

Bank a/c Dr

To cash a/c

When cheque is dishonored

Customers a/c Dr

To cash a/c

When cheque/open cheque is endorsed to creditors (Contra entry)

Creditors a/c Dr

To cash a/c

Cash book as the only book of original


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y g

entry

In Indian system of accounting cash book ismaintained as journal

The cash book records all transactions of cash

and credit(Non-cash transactions).

An additional column adjustment "is

provided on each side of cash book.

Non- cash transactions is recorded in

adjustment column on both sides

Pro-forma/format of cash book as the


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/

only book of original entry

Date Particulars Cash

(Rs)

Adjustment

(Rs)

Date Particulars Cash

(Rs)

Adjustment

(Rs)

CrDr

B k h b k


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Bank cash book

Single column bank cash has a bank column inplace of cash column

Double column cash book has a discount

column on both sides

All the payment made and cash received

either in cash or in cheque form are written in

the bank cash book

Pro-forma/format of bank cash book


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/

(simple/single column)

Date Particulars L.F Bank

(Rs)

Date Particulars L.F Bank

(Rs)

CrDr

Pro-forma/format of bank cash book


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/

(Double column)


(Rs)

Bank

(Rs)


(Rs)

Bank

(Rs)

CrDr

P tt h B k


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Petty cash Book

Every business make smaller payments like postage, coolie hire, telegramsetc.

Business units/companies maintain separate cash book to record small

payments such a cash book is called Petty cash book.

It is the book which is used to for the purpose of recording the payment of

petty cash expenses.

Transactions of petty sums are recorded in petty cash book.

The person who maintain petty cash book in a Company is called Petty

Cashier.

Features of Petty Cash book


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Features of Petty Cash book

The amount received from the head cashier is recorded on the left side column Payment of petty expenses are recorded on the right side column

It never has credit balance because cash payment never exceeds the cash receipts

Recording is done on the basis of vauchers.

Columns of expenses are totalled and totals are posted in the debit side of

expense account in the ledger. It serves the purpose of both Journal and ledger

Petty expenses of given period like week,fornight,month are recorded in the petty

cash book

Advantages of petty cash book


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Advantages of petty cash book

Simplicity

Saving of time

Saving of energy

Lesser chances of error

Lesser chances of frauds

Easy posting Easy to prepare

Systems of petty cash book


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Systems of petty cash book

Systems ofpetty cash book

Ordinarysystem Imprest /Floatsystem

Ordinary system :

In this system advance is given to petty cashier as per needs.


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The amount and period is not fix.

It is flexible system and changes as per need

The amount given in advance is not same beginning for all the time

Imprest/Float system:

Under this system the amount estimated to meet the expected possible petty expenses

for certain period is fixed.

The amount is given to the petty cashier in the beginning to make a fixed balance in

hands in the beginning.

The petty cashier submit the statement of expenses incurred to the head cashier and

reimburse by head cashier

The amount reimbursed with unspent balance will restore the original sum in the hands

of the cashier with which he started.

Ex: Suppose petty cashier is given Rs.500 for a month. He paid Rs.375 for pettyexpense and have the balance of Rs.125 at the end of the month. The petty cashier will

be reimbursed Rs.375 in the beginning of next month and again he will have Rs.500

for next month

Features of Imprest system of Petty


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cash book

Estimation by head cashier

Advances by head cashier

Submission of petty cash book by petty

cashier

Reimbursement of amount spent

Availability of same amount of petty cash

Types of Petty cash book


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Types of Petty cash book

Petty cash book

Simple /Non-

analytical petty cashbook

Columnar/Analyticalpetty cash book

Simple/Non analytical petty cash book


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Simple/Non analytical petty cash book

Amountreceived

Date Particulars V.No L.F Amountpaid

Rs. Rs. P

Purchase book


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Purchase book

All the credit purchase are recorded in thisbook.

It is also known as purchase journal, bought

day book, invoice book, purchase day book,purchases register

Cash purchase and purchase of assets on cash

or credit is not recorded in this book

Format of purchase book


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Format of purchase book

Date Particulars Invoice No: L.F Details(Rs)

Amount(Rs)

Invoice


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Invoice

Transactions of credit purchase or credit sale arerecorded in purchase book from invoices calledbills

An invoice is a document giving the detail of

goods bought or sold as to their quantity, quality,brand, price etc.

Invoice is a source of prime entry both for sellerand buyer.

It is known as purchase invoice or inward invoicefor buyer and sales invoice or outward invoice forseller

Sales book


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Sales book

All the credit sale are recorded in this book.

It is also known as sales journal, sales day

book, Sold day book, sales register

Cash sale and sale of assets on cash or credit is

not recorded in this book

Format of Sales book


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Format of Sales book

Date Particulars OutwardInvoice No:

L.F Details(Rs)

Amount(Rs)

Capital Expenditure


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Capital Expenditure

These are those expenditure which are madefor acquiring fixed assets of the business, for

making fixed assets serviceable, for increasing

business assets ,for increasing earningcapacity

Examples of capital expenditure


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Examples of capital expenditure

Acquisition of machinery, plant

Acquisition of furniture

Acquisition of vehicles

Revenue Expenditure


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Revenue Expenditure

It is the expenditure which is incurred on themaintenance of business

It is consumed within same accounting period

means one year

Like salaries ,wages, rent ,taxes

Capital expenditure Revenue expenditure

Th i d i i iti f fi d Th i d i i iti f


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These are incurred in acquisition of fixed

assets

These are incurred in acquisition of raw

material

These expenditure increases the value ofassets They do not increase value of assets

These are related to installation of fixed

assets

These are related to day to day running

expenditure

They increase the earning capacity of

business

They incurred to maintain earning capacity of

business

They are non-recurring in nature They are recurring in nature

Legal expenses incurred due to making some

defaults regarding goods then they are not

capital expenditure

When default is made in sending goods then

legal expenses are revenue expenditure

Income tax appeal expenses are capital

expenses

Income tax appeal are not revenue

expenditure

Deferred revenue Expenditure


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Deferred revenue Expenditure

It is also know as Capitalised Expenditure

It is the expenditure the benefit of which is not completely exhausted in the year in

which they spent

It is shown in the profit & loss account of every year year and the balance is carried

forward to subsequent year and it is shown in the asset side in the balance sheet

Examples: Research expenditure

Advertisement expenditure

Final Statements


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Final Statements

The two statements means trading and profit & loss account and balancesheet are prepared to give the final results of the business that is why these

both are called final accounts

Final accounts are the summary statements which are prepared to show

periodic performance of the business organisation and its financial position

at the end of year The composition of the final accounts varies according the nature of the

business

Manufacturing Organisation


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Manufacturing Organisation

Final accounts

Manufacturingaccount

Tradingaccount

Profit & lossaccount Balance sheet

Trading Organisation


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Trading Organisation

Final accounts

Tradingaccount

Profit &loss account

Balancesheet

Basis of accounting used


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Basis of accounting used

There are two basis of accounting Cash basis: Under this the inflow and outflow of cash are the basis of

recognising incomes and expenses.

Incomes are earned only when it is in cash form and expenses incurred

when it is actually paid in cash .Business organisation don not follow cash

basis of accounting.

Accrual basis:Under this the incomes are considered in which they are

earned whether cash has actually received or not.

Expenses are charged to the period in which they no matter whether cash is

paid or not

.Business organisation follow accural basis of accounting.

Trading account


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Trading account

Trading account is the first part of financial statements which shows theresults of buying and selling of goods and services during the accounting

period.

The trading account shows the results of buying and selling of goods. In

preparing this account the general establishment charges are ignored and

only the transactions in goods are included Trading account is a nominal account

Gross profit: The amount of net sales is more then cost of goods sold it is

called gross profit.

Gross loss: The amount of cost of goods sold is more then the net sales it is

called gross loss.


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Gross profit is the profit added by the owner inthe cost of goods sold to sell the goods to the

customer. It gives idea about covering the

indirect expenses. Example: If an article is purchased for 500 and

100 Rs is incurred on freight then its cost is

600 to the seller .Bt if seller sell it for Rs.800then 200 is gross profit. Added to fix selling

price

Need of trading account


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Need of trading account

To ascertain gross profit/loss

To know the direct expenses

To make comparison of stock

To fix up selling price

To know the limit of indirect expenses

Format of trading account


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Format of trading account

Particulars AmountRs

Particulars AmountRs

To Opening stock By net sales

To net purchase By closing stock

To direct expenses

To gross profit By gross loss

CrDr

Debit side of trading account


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Debit side of trading account

Opening stock: It is the goods which remain unsold at the end of previousyear.

In the first year of business there will be no opening stock

It is an expense

Note: Opening stock of stationary, postal stamps are not shown in trading

account

Purchases: Purchases means the commodity in which the trader deals.

Purchase include both cash and credit purchase.

Total purchase is recorded on the debit side

Note: Goods received on consignment, goods received on hire, goodspurchased under contract for future, purchase of fixed assets, goods

purchased for domestic use, goods purchased from third party should not

recorded in trading account

Direct expenses: These expense refer to the expenses incurred in purchasing

and manufacturing of goods. Direct expenses are:


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Wages: wages incurred in the purchase or manufacturing of goods are direct

wages also called productive wages, factory wages, manufacturing wages. Ifnothing is mention whether direct or indirect wages it is considered direct

wages and shown on the debit side of trading account.

Note: wages spent on construction of fixed assets are not included in trading

account

Freight:The expenses incurred for bringing the goods to the godown of the

buyer from the pace of the seller are called Freight. Also called fright inward,

fright on purchase, freight In

These are paid for transportation

These expenses are part of cost of goods purchased so shown on the debit side

of trading account.

Note: Freight spent on purchases of fixed assets are not included in the trading

account

Carriage and cartage: These are the expenses paid on carriage of goods from

railway station to godown .

These are also called cartage carriage carriage on purchase carriage inward


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These are also called cartage, carriage, carriage on purchase, carriage inward

These are shown on debit side of trading account

Clearing charges/port charges/dock dues: These expenses are paid to the port

authorities, dock authorities, railway authorities for using facilities installed at

airport, railway station, dock yard for the purpose of taking delivery of goods.

Post charges and dock dues are paid in case of imported goods and railway

charges are paid within country

Import duty/custom duty: In case of imported goods import duty/custom

duty are to be paid.


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y p

Octroi: When goods are bought into the municipal limits, states, cities

octroi have to be paid to the concerned authorities.

Motive power: Coal,gas, water,fuel,electricity which are used for running

the machines.

Manufacturing expenses: All expenses incurred for manufacturing the

goods like factory rent, factory insurance, depreciation on machines and

plant,factory lighting

Consumable stores: Nuts, bolts, grease, oil, cotton, waste cloth arecollectively included under the name stores consumed

Packing charges: These are of three types:

Ordinary/primary packing: these packing are necessry for handling the

products without which the product cannot be sold like bottle in case of ink


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products without which the product cannot be sold like, bottle in case of ink,

water etc.

These packing charges are the part of finished goods .These are shown on the

debit side of trading account

Distribution packing: these packing are required to transport goods from one

place to another like containers, boxes. These are indirect expenses and shown

on the debit side of profit and loss account.

Fancy packing: These packing is used for attracting the customers. These areindirect expenses and shown in the debit side of profit & loss account

Royalty: Royalty refers to payment made for acquiring the right to use

patent, copyrights, mine .


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If the royalty is paid on the basis of production it is shown on the debit side

of trading account but if royalty is paid on the basis of sales the it is shown

on the debit side of profit & loss account

Commission on purchase: It is direct expense and shown on the debit side

of trading account.

Excise duty: It is a tax on production paid by the manufacturer to the

government on the goods manufactured. It is direct expense and shown on

the debit side of trading account.

Insurance premium: Insurance premium on goods purchased, factory

building are recorded on debit side of trading account

Note: Expenses on fixed assets are not recorded in the trading account

Credit side of trading account


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g

Sales: Sales include both cash and credit sales of those goods which arepurchased for resale purpose .Net sale is shown on the credit side of trading

account.

Note: Sale of asset, sale of hire goods, goods sold but not dispatched, sale

on the behalf of other should not recorded in trading account

Closing stock: It represents value of the goods which remain unsold at the

end of trading period.

When it is shown in the trail balance then it is not shown in trading account

otherwise it is shown on credit side of trading account.

Closing stock is valued at cost price or market price which ever is lower.

Formulas for trading account


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g

Cost of goods sold=Opening stock+ Netpurchase+ Direct Expenses-Closing Stock

Gross profit = Net sales Cost of goods sold

Net Purchase = Credit purchase + Cashpurchase Purchase return

Net Sales = Credit sales + cash sales- sales

return

Profit & Loss account


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The profit & loss account can be defined as the report that summarizes therevenues and expenses of an accounting period to reflect changes in various

critical areas of firms operations

A profit and loss account is an account into which all gains and losses are

collected.

Net profit: if gains is more than losses then it is net profit Net loss: If gains is less than losses then it is net loss

Profit and loss account shows the profit or loss during the course of the

business

Gross profit or gross loss of trading account is passed into profit and loss

account

It is nominal account

It records indirect expenses

Need for profit & loss account


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p

Knowledge of net profit or net loss

Comparison of profits

Control over expenses

Future planning

Income tax

Helpful for the preparation of balance sheet

Important Terms


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p

Indirect expenses: These are those expenses which help in the maintenanceand running of business

Apprentice ship premium: Some business organisation impart training to

workers in various trades and charge fee from the concern

organisation.This fee is called apprentice ship premium

Bad debts: Bad debt denotes the amount lost from debtors to whom goodswere sold on credit.

Depreciation: It is the decrease in the value of assets due to getting old,

wear and tear, usage etc.

Format of Profit and loss account


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Particulars Amount(Rs)

Particulars Amount(Rs)

To gross loss b/d By gross profit b/d

Office and administrative expenses

Selling and distribution expenses

Financial expenses

Maintenance expenses

Abnormal losses

Net profit By net loss

DrCr

Debit side of Profit and loss account


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Office & Administrative/Management Expenses

Office salaries, staff salaries, indirect salaries Insurance, office insurance

Rent, rates, taxes

Printing & stationary

Entertainment expenses

Audit fee

Staff bonus

Legal charges

Postage

Telephone, telex, fax, pager, mobile, e-mail charges Sundry general expenses/general expenses

Trade expenses

Office heating, cooling, lighting expenses

Selling & distribution Expenses

Advertisement

Salaries & commission of sales department


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Salaries & commission of sales department

Show room rent, show room lighting, show room insurance, depricition on show

room building, Travelling expenses, Free samples

Commission on sales, sales promotion charges, forwarding charges(indirect)

Delivery van expenses

Cost of printing catalogue

Bad debts, Provision for doubtful debt

Export duty, Insurance on goods sold

Carriage outward

Packing charges(Indirect)

Brokerage, Stable charges, Godown rent/warehouse rent

Financial expenses

Interest on loan

B k h


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Bank charges

Interest on capital

Discount allowed

Commission paid for raising loan


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accounts iii sem

Documents