1) The accounting process involves in recording:

A) Quantifiable economic event

B) Non quantifiable economic event
C) All of them
D) None of them
2) In accounting an Economic event is referred to as:
A) Cash
B) Bank statement
C) Transaction
D) Exchange of money
3) Identify the correct sequence of accounting process
A) CommunicatingRecordingIdentifying B)
RecordingCommunicatingIdentifying
C) IdentifyingcommunicatingrecordingD)
Identifyingrecordingcommunicating
4) Bookkeeping mainly concerns with which part of accounting process?
A) Analysing
B) Preparing financial
statements
C) Recording financial information
D) Auditing the books of
accounts
5) Financial accounting provides financial information to all of the
following external users except:
A) Government agencies
B) investors
C) Creditors
D)
Managers
6) For which step of accounting process the accountants of business
entity prepare financial statements?
A) Identification of economic event
B) Communication of financial
information
C) Recording financial information
D) Making decisions about business
7) Keeping the log of financial information in books of original entries is
called
A) Recording B) summarizing
C) Grouping D) Processing
8) Auditing is what?
A) Reporting the financial information
B) Examination of financial
statements
C) Preparation financial statements
D) maintaining the ledger
records
9) Which of the following is the external user of financial statements?
A) Manager of the business
B) CEO of the business
C) Creditor of the business
D) Controller of the business
10) Which of the following is the internal user of financial statements?
A) Creditor of the business
B) Government agency
C) Shareholder of the business
D) Manager of the business
11)
The Basic accounting equation is
A) Asset=Expense +Income
B) Assets=Cash+Capital
C) Assets=Capital+Liabilities
D) Assets=Expenses+Capital
12) Find out the value of assets if: Liabilities=$5000 and Capital=$1000
A) $4000
B) $6000
C) $7000
D) $3000
13) Calculate the amount of cash if: Total assets=$10,000 Total
liabilities=$10,000 Total Capital=$5000
A) $6000
B) $10,000
C) $5000
D) $1000
14) Capital increases if ______ increases
A) Expenses
B) Drawings
C) Interest on capital
D) Revenue
15) Capital of a business decreases if there is an increase in
A) Drawings
B) Income
C) Gains
D) Fresh capital

16) If the total liabilities of a business decrease by $5000 what will be

the effect on total asset? (assuming the amount of capital remain
same)
A) Remain constant B) Decrease by $5000
C) Increase by $5000
D)
Increase by $10,000
17) If the business's owner withdraws cash for his/her personal use what
will be the effect on capital?
A) Increase in capital B) Remain the same
C) Decrease in capital
D) No
effect on capital
18) Net income equal to Revenues minus
A) Gains
B) Depreciation
C) Expenses
D) Capital
expenditures
19) Collection of account receivable will
A) Increase assets and decrease assets
B) Increase assets and
decrease liabilities
C) Increase assets and increase capital
D) Increase assets and increase
cash
20) Payment of expenses will ______ the assets
A) Increase
B) Reduce
C) apportion
D)
Overstate
21)
The process of recording is done
A) Two times a year
B) once a year
C) Frequently during the accounting period
D) At the end of a accounting period
22)
General journal is a book of _______ entries
A) First
B) Original C) Secondary
D) Generic
23) The process of recording transactions in different journals is called
A) Posting
B) Entry making
C) Adjusting
D)
Journalizing
24) Every business transaction affects at least ________ accounts
A) One
B) Two
C) Three
D) Infinite
25) Discount allowed is a kind of deduction from
A) Account payable B) Account receivable
C) Cash account D)
Discount account
26) The other name of journal is
A) Ledger
B) T account
C) Day book
D) Cash book
27) A journal entry in which two or more account is debited or credited
is referred as
A) Journal entry
B) Multi entry
C) Additional entry D) Compound
entry
28) The term 2/10-n/30 implies that ______ % discount will be given if the
payment is made within _____ days or full amount is receivable within 30
days
A) 2,10
B) 10,2
C) 10,30
D) 3,15
29) Goods returned by customer should be debited to which of the
following accounts?
A) Sales income account
B) Sales account C) Return inward account D)
Expenses account
30) Discount allowed is
A) Expense of business B) Income of business C) Loss of business D)
Abnormal loss of business

31)
Trial balance is prepared to check accuracy of
A) Ledger accounts balances
B) Balance sheet balances
C) Income statement balances
D) Cash flow statement
balances
32) If a transaction is completely omitted from the books of accounts,
will it affect the agreement of a trial balance?
A) Yes
B) No
C) Transactions can't be omitted
33) ________ is the common base for preparing a trial balance
A) Ledger accounts B) General Journal C) Specialized journals D) Balance
sheet
34) Which of the following is true about a trial balance?
A) It lists down the balances of accounts B) It lists down the balances of a
balance sheet
C) It is a kind of financial statement
D) It is not a part of accounting
cycle
35) Debit balance = Credit balance in a trial balance indicates that
A) No error in recording transactions
B) No error in posting entries to
ledger accounts
C) Account balances are correct
D) Mathematically
Capital+Liabilities=Assets
36) Trial balance is commonly prepared
A) Frequently during the year
B) At the end of an accounting period
C) At the end of a month
D) At the end of a year
37) Which of the following will affect the agreement of a trial balance?
A) Complete omission of a transaction
B) Partial omission of a transaction
C) Error of principle
D) Compensating errors
38) If debit balances = credit balances, trial balance only shows or check
the ____________ and it does not indicate that no errors were made during
recording and posting
A) Arithmetic accuracy
B) Errors of commission
C) Omissions of economic events
D) Understatements of
balances
39) Which of the following account with normal balance is shown at the
debit side of a trial balance?
A) Rent income account
B) Creditors account
C) Unearned income account
D) Cash account
40) Which of the following account with normal balance is shown at the
credit side of a trial balance?
A) Cash account
B) Bank account C) Equipment account
D) Accrued
expenses account
41)
Which of the following is not regarded as the fundamental concept
that is identified by IAS-1
A) The going concern concept
B) The septate entity concept
C) The prudence concept
D) Correction concept
42) Using "lower of cost and net realisable value" for the purpose of
inventory valuation is the implementation of which of the following
concepts?
A) The going concern concept
B) The septate entity concept
C) The prudence concept
D) Matching concept
43) The concept of separate entity is applicable to which of following
types of businesses?

A) Sole proprietorship
B) Corporation
C) Partnership
D) All of them
44) Does Prudence concept allow a business to build substantially higher
reserves or provisions than that is actually required?
A) Yes
B) No
C) To some extent D) It depends on the
type of business
45) The revenue recognition principal dictates that all types of incomes
should be recorded or recognized when
A) Cash is received
B) At the end of accounting period
C) When they are earned
D) When interest is paid
46) The matching concept matches which of the following?
A) Asset with liabilities B) Capital with income C) Revenues with expenses D)
Expenses with capital
47) The allocation of owner's private expenses to his/her business
violates which of the following?
A) Accrual concept B) Matching concept C) Separate business entity concept
D) Consistency concept
48) The going concern concept assumes that
A) The entity continue running for foreseeable future
B) The entity continue running until the end of accounting period
C) The entity will close its operating in 10 years
D) The entity can't be liquidated
49) American companies prepare their their financial statement in
dollars whereas Japanese companies produce financial statements in
yens. Ths is an example of:
A) Stable monetary unit Concept
B) Unit of measurement Concept
C) Money value concept
D) Current swap concept
50) Which of the following is time span into which the total life of a
business is divided for the purpose of preparing financial statements?
A) Fiscal year B) Calendar year C) Accounting period
D) Accrual
period
51)
Financial statements are prepared mainly for
A) Internal users of financial information B) External users of financial
informaiton
C) Creditors of the business
D) Managers of the busienss
52) Net profit is computed in which of the following?
A) Balance sheet B) Income statement C) Cash flow statement D) Statement
of changes in equity
53) Which of the following should be the most appropiate order of
current asset in a balance sheet?
A) cash, debtor, bank, stock
B) Bank, cash, stock, debtor
C) Stock, bank, cash, debtor
D) Cash, bank, debtor, stock
54) In income statement, gross profit is always equal to
A) Sales-expenses
B) Incomes-expenses
C) Sales-cost of goods sold
D) Sales-selling costs
55) Office equipment is a ________ asset for a computer manufacturer and
the same office equipment is a _________ asset for a company that deals
in these equipments
A) Current, Fixed
B) Fixed, intangible
C) Tangible, intangible
D) Fixed, current
56) Identify the external user of financial information or financial
statements

A) Management of the business

B) CFO of the business
C) Employees of the business
D) Investors of the business
57) A statement or report that records the fluctuation in business's
capital is referred as
A) Balance sheet B) Income statement C) Cash flow statementD) Statement
of changes in equity
58) Financial statements mainly help in
A) Assumption of economic events
B) Anticipation of economic
events
C) Recording of economic events
D) Communication of economic
events
59) Purchases+opening stock-closing stock=?
A) Amount of sales
B) Gross profit
C) Cost of goods sold
D) Net income
60) Which of the following financial statements shows the financial
position of a business at a specific date?
A) Balance sheet B) Income statement C) Cash flow statement D) Statement
of changes in equity
61)
What is depreciation?
A) Cost of a fixed asset B) Cost of a fixed assets repair C) The residual value
of a fixed asset
D) Portion of a fixed assets cost consumed during the
current accounting period
62) What is the accumulated deprecation?
A) Sum of all depreciation expenses of a fixed asset
B) Depreciation expenses
C) Cost of depletion of assets D) Future value of
fixed asset
63) Which of the following is the normal balance of an accumulated
depreciation account?
A) Debit balance
B) Credit balance C) Nil balance
64) How trial balance shows the accumulated depreciation?
A) as a debit item
B) as a credit item
C) It doesnt show
65) Which of the following is a double entry for depreciation expenses?
A) Accumulated depreciation debit and depreciation expenses Credit
B) Depreciation expenses Debit and accumulated depreciation Credit
C) Cash Debit and depreciation expenses Credit
D) Depreciation expenses Debit and cash Credit
66) An alternative term used for accumulated depreciation expenses?
A) Provision for depreciation
B) Cumulative depreciation
C) Targeted depreciation
D) Depletion
67) Which of the following is/are a kind of depreciation expenses?
A) Amortization
B) Depletion
C) Both of them
68) Current assets and current liabilities are the elements:
(A) current ratio
(B)Liquid ratio
(C) Absolute liquid ratio
(D) Gross profit ratio
69)
Current liabilities are payable in:
(A) More than 5 years
(B) Between 2 to 5 years
(C) Less than a year
(D) More than 2 years
70)
Inventory is a part of .
(A) Current assets
(B) Fixed assets
(C) Non-current assets
(D) Liquid assets

71)

The term receivables implies:

(A) Trade debtors only
(C) trade debtors, B/R and Prepaid expenses

(B) trade debtors and B/R

(D) None of these

Meaning of Accounting
According to the American Institute of Certified Public
Accountants, 1941, Accounting is the art of recording, classifying
and summarising 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.
Characteristics of Accounting

1. Financial Nature Transactions

2. 2. Art as well as Science
3. 3. Measurement in terms of Money
4. 4. Recording
5. 5. Classification
6. 6. Summarisation
7. 7. Analysis and Interpretation of Results
8. 8. Communication
Role of Accounting
Provides assistance to management
Helps in comparative study
Substitute of memory
Information to end users
Branches of Accounting
1. Financial Accounting- It is mainly concerned with
identifying the transactions of financial nature and their
recording in the books, classifying, summarising and
communicating the business results. The main focus of this
branch of accounting is to determine the profit or loss of a
business by preparing Trading and Profit and Loss Account.
This also helps in assessing the financial position at the end
of an accounting period by preparing the Balance Sheet
2. Cost Accounting
- This branch of accounting helps in presenting the financial
data and results in such an easy manner so that the vital
and useful information can be easily and clearly available to
the management. Management uses this information for
drafting their future plans and their decision making.

4. Tax Accounting- This branch of accounting is a technique of accounting that

is used for the tax purposes. Tax accounting helps in handling the tax issues
of a business such as computation of tax liabilities, filing tax returns, etc.
5. Social Responsibility Accounting- This is one of the important branches of
accounting that studies the effects of business decisions on the society. It is
basically concerned with analysing and interpreting the contribution of
business to the society. A business can contribute to the society by generating
employment, carrying out business without adversely affecting the
environment, by making customer friendly products, etc.
Accounting Process or Phases of Accounting
1. Identifying financial transactions
2. Recording financial transactions
3. Classifying financial transactions
4. Summarising
5. Analysis and Interpretation of Results
6. Communication
Objectives of Accounting
1. Recording Business Transactions Systematically
2. Determining Profit or Loss
3. Assessment of Financial Position
4. Assistance to Management
5. Assessment of Progress of Business
6. Detection and Prevention of Errors and Frauds
7. Communicating Accounting Information
Benefits of Accounting

1. Financial Results of Business

2. Organised and Systematic Records
3. Assistance to Management
4. Provides Comparative Study
5. Determining the Tax Liability
6. Acts as Evidence
7. Helps in Selling the Business
8. Helps in Obtaining Loans
Limitation of Accounting
1. Based on Personal Judgement
2. Ignores Qualitative Aspects of Transaction
3. Ignores Changes in Price Level
4. Based on Accounting Concepts and Conventions
5. Window Dressing
6. Forecasting not Possible
Book-Keeping
, Book Keeping is the art of recording in the books of accounts the monetary
aspect of commercial and financial transactions.
J.R. Batliboi states Book Keeping as an art of recording dealings in a set of
books.
From the above explanation, it can be derived that Book-Keeping is a function of:
i.

Identifying the transactions and events of financial character

ii.

Measuring them in terms of money

iii. Recording them in the books of accounts and

iii.

Classifying the transactions so recorded into Ledger Accounts

Difference between Book-Keeping and Accounting

Point
of
Book-Keeping
Distinction
Key Area

It is a function of identifying the

events of financial character,
measuring them in terms of money,
recording them in the books and
lastly classifying them.

Accounting
Apart from functions of bookkeeping it is concerned with
summarizing, interpreting and
communicating the financial
information to the various
parties interested in business.

Purpose

Main purpose is to record the Main purpose is to find out the

financial transactions and events in net results and financial status
the books of accounts.
of
the
business
and
communicating the results to
its various users.
Stage
It is the first stage that forms the It is the second stage and it
basis for accounting.
begins where book-keeping
ends.
Nature of Job It is a routine job.
It is analytical and dynamic in
nature.
Performed by It is performed by lower level staff. It is performed by the higher
level staff.
Knowledge

Connection

It does not demand any specialised It demands a specialised

knowledge of accounts.
knowledge of accounting rules
and principles.
It provides a basis for starting the It starts where book-keeping
process of accounting.
ends.

Difference between Accounting and Accountancy

Point
of
Accounting
Distinction

Accountancy

Key Area

It is a function of identifying the events

of financial character, measuring them
in terms of money, recording them in the
books and lastly classifying them.

Purpose

Main purpose is to find out the net Main purpose of accountancy includes
results and financial status of the decision making function.
business and communicating the results
to its various users.
Accountancy depends on the information
Accounting depends on the information
provided
by
book-keeping
and
provided by book-keeping.
accounting.
Accounting is narrow in scope. It starts It is wider in scope because it explains the
where book-keeping ends.
principles and techniques that are required
to be followed in accounting and includes
both accounting and book-keeping.
Accounting is prepared on the basis of Accountancy is the knowledge of
rules and regulations explained by accounting which explains principles and
Accountancy.
techniques that needs to be followed in
accounting.

Dependence

Scope

Basis

Accountancy is basically appropriate

knowledge of accounting which defines
how the accounting principles and
techniques are to be followed.

Users of Accounting Information

There are various parties or users who are interested in the business of an
enterprise and require accounting information. These users can be bifurcated in two
categories as- Internal Users and External Users.
1. Internal Users
These are the users who are internal to an organisation. Such users have a
direct access to the financial statements of a business. The following users are
included in the category of internal users.

i. Owners- These are the persons who make investment in the business. These
are interested in knowing the profit earned or loss incurred during an
accounting period. They are interested in assessing the profitability and
viability of the capital invested by them in the business. The financial
statements prepared by the business concerns enable them to have
sufficient information to assess the financial status and financial health of
the business.
ii. Management- The management is an integral part of an organisation. They
are indulged in drafting plans, decision-making process, evaluating the past
performances, etc. The financial statements enable the management not
only in drafting policy measures and planning but also in efficient
implementation of the plans. With the help of information revealed by the
financial statements, management can not only enhance the efficiency of
the business but also exercise various cost controlling measures to remove
inefficiencies.
iii. Employees and Workers- They are interested in the timely payment of
wages and salaries, bonus and appropriate increment in their wages and
salaries. With the help of the financial statements they can know the
amount of profit earned by the company and can demand reasonable hike
in their wages and salaries. The financial statements also help them to
assess their individual career scope and their growth prospects.
2. External Users
External users are those who are outsiders to an organisation and are
interested in the financial affairs of the business. These users do not have a
direct access to the financial statements of the business. The following parties
come under the head of external users.
i. Banks and Financial Institutions- Banks provide finance to various
businesses in the form of loans and advances. Thus, they need information
regarding liquidity, credit worthiness, solvency and profitability to advance
loans. The accounting information revealed through the financial
statements of business enable them to have access over such information.
ii. Investors and Potential Investors- These are the parties who have invested
or are planning to invest in the business of an enterprise. They are
interested in knowing the safety of their investment in the business and
regularity of returns on their investments. Hence, in order to assess the

viability and prospects of their investments, they need information about

the profitability and solvency position of the business.
iii. Creditors- These are the parties to whom a business owes money on
account of credit purchases of goods and services. Hence, creditors require
accounting information to enquire about the credit worthiness and liquidity
position of the business.
iv. Tax Authorities- They need accounting information to know whether the
amount of sales, production, profits, revenues, etc. are correctly calculated
and shown unambiguously in the books. This is very important so that
appropriate and correct tax rates (of taxes such as sales tax, excise duty,
etc.) are levied on the business.
v. Government- Government requires information to determine various
macro-economic variables such as national income, GDP, industrial
growth, etc. The accounting information assists the government in the
formulation of various policy measures and to address various economic
problems such as unemployment, poverty, etc.
vi. Consumers- Every business attempts to build-up reputation in the eyes of
consumers, which can be created only by supplying better quality products
and post-sale services at reasonable and affordable prices. Businesses that
have transparent financial records, assists the customers in knowing the
correct cost of production and accordingly assess the degree of
reasonability of the price charged by the business for its products. Thus,
unambiguous and transparent financial statements help in building
business reputation.
vii. Researchers- Various research institutes such as NGOs and other
independent research institutions like CRISIL, stock exchanges, etc.
undertake various research projects. The accounting information facilitates
their research work.
viii. Public- Public is keenly interested in knowing the proportion of profit
that the business spends on various public welfare schemes; for example,
making charities, funding schools, etc. This information is revealed by the
financial statements of a business.
ACCOUNTING TERMINOLOGY

 Capital: Capital is the amount invested by the proprietor in the business.

Capital has credit balance. Increase in capital is credited and decrease in
capital is debited.
Capital Expenditure: Expenditures which are incurred on the purchase of
fixed asset and which are non recurring in nature are termed as Capital
Expenditure.

Drawings: Goods or cash that is withdrawn by the proprietor from business

for his/her personal use is termed as Drawings.
Assets: Assets include all properties or legal rights owned by a firm for its
operations, such as cash in hand, plant and machinery, bank, land, building,
etc. All assets have debit balance. Increase in assets is debited and decrease in
assets is credited.
Fixed Assets: Fixed Assets are held for long term and increase the profit
earning capacity of the business, over various accounting periods.
Current Assets: Assets that can be easily converted into cash or cash
equivalents are termed as current assets

Liability: Liability is an obligation of the business such as Creditors, Bills

Payable etc. to whom the payment is to be made.
Current Liability: Those liabilities that are incurred with an intention to be
paid or are payable within a year
Non-Current Liabilities: These are the long-term liabilities of a business that
are to be repaid by the business after a period of one year. For example, longterm loans, loan from bank, mortgage, etc
Creditors: Persons or organisations to whom the firm is liable to pay money are
called Creditors.
Patents: Patents are intangible assets which do not have any physical
existence i.e. such assets cannot be seen or touched. Patents are the exclusive
rights assigned to the inventor for a limited time period. These are generally
fixed assets. The reduction in the value of these assets is considered as
amortisation.
Prepaid Expenses: Expenses which are paid in advance by the business for
the current accounting period are known as Prepaid Expenses.
Proprietor: Proprietor is a person who makes investment in the business

 Purchases: Purchases means the goods which are purchased for resale or for
producing the finished goods from it. It includes both cash as well as credit
purchases
Revenue: Revenue refers to the amount received from day to day activities
of the business, like sale proceeds of goods and rendering services to the
customers.
Revenue Expenditure: Expenses related to the day to day activities and
which are recurring in nature are termed as Revenue Expenditure.
Sales: Sale of goods either in cash or credit is termed as Sales.

ACCOUNTING CONCEPTS & ACCOUNTING CONVENTIONS

The Accounting Concepts and Accounting Conventions have been
developed over the years from experience, reason, usage and
necessity and are generally accepted for accounting of transactions
and preparation of Financial Statements.
Accounting Concepts are the necessary assumptions, conditions or
postulates upon which the accounting is based. They are developed to
facilitate communication of the accounting and financial information to
all the readers of the Financial Statements, so that all readers interpret
the statements in the same meaning and context.
ACCOUNTING CONCEPTS & ACCOUNTING CONVENTIONS
The Accounting Concepts and Accounting Conventions have been
developed over the years from experience, reason, usage and
necessity and are generally accepted for accounting of transactions
and preparation of Financial Statements.
Accounting Concepts are the necessary assumptions, conditions or
postulates upon which the accounting is based. They are developed to
facilitate communication of the accounting and financial information to
all the readers of the Financial Statements, so that all readers interpret
the statements in the same meaning and context.
Entity Concept
For accounting purposes, an organisation is treated as a separate entity
from the owners or stakeholders. This concept helps in keeping private
affairs of the owners and stakeholders separate from the business affairs.
According to this concept, proprietor and business both are separate entity.
They are separate from each other.
.
Dual Aspect or Accounting Equivalence Concept
According to this concept every transaction has two aspect one should
debited and another should be credited. The total of debit is always equal to
total of credit.
Going Concern Concept
It is assumed that the organisation will continue for a long time, unless and
until it has entered into a state of liquidation. It is as per this concept, that
the accountant does not take into consideration the market value of the

assets while valuing them, irrespective of whether the market value is higher
or lower than the book value. Similarly, depreciation on fixed assets is
provided on the basis of expected lives of the assets rather than on their
market values. Also, the financial statements are prepared at defined period
end to measure the performance of the entity during that period and not
only on the closure or liquidation of the entity.
Money Measurement Concept
In accounting, every transaction is recorded in terms of money. Events or
transactions that cannot be expressed in terms of money are not recorded in
the books of accounts. Receipt of income, payment of expenses, purchase
and sale of assets, etc., are monetary transactions that are recorded in the
books of accounts. For example, the event of a machinery breakdown is not
recorded as it does not have a monetary value. However, the expenditure
incurred for the repair of the machinery can be measured in monetary value
and hence is recorded.
Cost Concept
As per this concept, an asset is ordinarily recorded at the price paid to
acquire it, i.e. at its cost and this cost is the basis for all subsequent
accounting for the asset. The cost concept does not mean that the asset will
always be shown at cost.
Accounting Period Concept
The life of the business is endless. Every business wants to know its profit
and loss. For this purpose the whole life of the business divides into intervals,
these intervals known as accounting periods. These periods may be of
quarterly, half yearly or yearly. An accounting period is the interval of time at
the end of which the financial statements are prepared to ascertain the
financial performance of the organization.
Accrual Concept
Under the cash system of accounting, the revenues and expenses are
recorded only if they are actually received or paid in cash, irrespective of the
accounting period to which they belong. But under the accrual concept,
occurrence of claims and obligations in respect of incomes or expenditures,
assets or liabilities based on happening of any event, passage of time,
rendering of services, fulfillment (partially or fully) of contracts, diminution in
values, etc., are recorded even though actual receipts or payments of money
may not have taken place. In respect of an accounting period, the
outstanding expenses and the prepaid expenses and similarly the income
receivable and the income received in advance are shown separately in the
books of accounts under the accrual method.
Periodic Matching of Cost and Revenue Concept
To ascertain the surplus or deficit made by the entity during an accounting
period, it is necessary that the costs incurred are matched with the revenue

earned by the entity during that accounting period. The matching concept is
a corollary drawn from the accrual concept. To ascertain the correct surplus
or deficit, it is necessary to make adjustments for all outstanding expenses,
prepaid expenses, income receivable and income received in advance to
correctly depict and match the income and expenditure relating to that
accounting period.
Realisation Concept
According to this concept, revenue should be accounted for only when it is
actually realised or it has become certain that the revenue will be realised.
This signifies that revenue should be recognised only when the services are
rendered or the sale is effected. However, in order to recognise revenue,
actual receipt of cash is not necessary.
ACCOUNTING CONVENTIONS
Convention of Disclosure
The term disclosure implies that there must be a sufficient revelation of
information which is of material interest to owners, creditors, lenders,
investors, citizen and other stakeholders. The accounts and the financial
statements of an entity should disclose full and fair information to the
beneficiaries in order to enable them to form a correct opinion on the
performance of such entity, which in turn would allow them to take correct
decisions.
Convention of Materiality
An item should be regarded as material, if there is a sufficient reason to
believe that knowledge of it would influence the decision of informed
creditors, lenders, investors, citizen
and other stakeholders. The accounts and the financial statements should
impart importance to all material information so that true and fair view of the
state of affairs of the entity is given to its beneficiaries.
Convention of Consistency
The convention of consistency facilitates comparison of financial
performance of an entity from one accounting period to another. This means
that the accounting principles followed by an entity should be consistently
applied by it over the years. For example, an organisation should not change
its method of depreciation every year, i.e., from Straight Line Method to
Written Down Value Method or viceversa. Similarly, the method adopted for
valuation of stocks, viz., First In First Out (FIFO) or Weighted Average should
be consistently followed. In case a change is made, it should be disclosed.
Convention of Conservatism
As per this convention, the anticipated profits should be ignored but all
anticipated losses should be provided for in the books of accounts of an
entity. This means that all prospective losses are taken into consideration,

however, no doubtful income is taken into consideration in recording of

transactions by an entity. For example, while provision for doubtful debts and
discount is made on debtors or Accounts Receivable, no provision is made for
likely discount receivable from creditors or Accounts Payable. Similarly,
provision is made for diminution in value of investments; however, no
provision is made for any appreciation in value of investments.
Basis of Accounting:
(1) Cash basis
Under this entries in the books of accounts are made when cash id received or paid and not when the
receipt or payment becomes due. For example, if salary Rs. 7,000 of January 2010 paid in February
2010 it would be recorded in the books of accounts only in February, 2010.
(2) Accrual basis
Under this however, revenues and costs are recognized in the period in which
they occur rather when they are paid. It means it record the effect of transaction
is taken into book in the when they are earned rather than in the period in which
cash is actually received or paid by the enterprise. It is more appropriate basis
for calculation of profits as expenses are matched against revenue earned in the
relation thereto. For example, raw materials consumed are matched against the
cost of goods sold for the accounting period.
Accounting Standards (AS): A mode of conduct imposed on an accountant by custom, law and a
professional body. By Kohler Nature of accounting standards:
(1) Accounting standards are guidelines which provide the framework credible financial statement
can be produced.
(2) According to change in business environment accounting standards are being changed or revised
from time to time
(3) To bring uniformity in accounting practices and to ensure consistency and comparability is the
main objective of accounting standards.
(4) Where the alternative accounting practice is available, an enterprise is free to adopt. So
accounting standards are flexible.
(5) Accounting standards are amendatory in nature.
Utility of accounting standards:
(1) They provide the norms on the basis of which financial statements should be prepared.
(2) It creates the confidence among the users of accounting information because they are reliable.
(3) It helps accountants to follow the uniform accounting practices and helps auditors in auditing.
(4) It ensures the uniformity in preparation and presentation of financial statements by following the
uniform practices.
International Financial Reporting Standards (IFRS): To maintain uniformity and use of same or
single accounting standards, International Financial Reporting Standards (IFRS) are developed by
International Accounting Standards board (IASB). Objectives of IASB:
(1) To develop the single set of high quality global accounting standards so users of information can
make good decisions and the information can be comparable globally.
(2) To promote the use of these high quality standards.

(3) To fulfill the special needs of small and medium size entity by following above objectives.
Meaning of IFRS: IFRS is a principle based accounting standards. IFRS are a single set of high
quality accounting Standards developed by IASB, recommended to be used by the enterprises
globally to produce financial statements.
Benefits of IFRS:
(1) Global comparison of financial statements of any companies is possible
(2) Financial statements prepared by using IFRS shall be better understood with financial statements
prepared by the country specific accounting standards. So the investors can make better decision
about their investments.
(3) Industry can raise or invest their funds by better understanding if financial statements are there
with IFRS.
(4) Accountants and auditors are in a position to render their services in countries adopting IFRS.
(5) By implementation of IFRS accountants and auditors can save the time and money.
(6) Firm using IFRS can have better planning and execution. It will help the management to execute
their plans globally.

Accounting Equation : Total Assets = Total Liabilities Or Total Assets = Internal Liabilities +
External Liabilities Or Total Assets = Capital + Liabilities Classification of Transactions Following
are the nine basic transactions:
1. Increase in assets with corresponding increase in capital.
2. Increase in assets with corresponding increase in liabilities.
3. Decrease in assets with corresponding decrease in capital.
4. Decrease in assets with corresponding decrease in liabilities.
5. Increase and decrease in assets.
6. Increase and decrease in liabilities
7. Increase and decrease in capital
8. Increase in liabilities and decrease in capital
9. Increase in capital and decrease in liabilities.

RULES OF DEBIT AND CREDIT (I) Traditional or English Approach: This approach is
based on the main principle of double entry system i.e. every debit has a credit and every credit has a
debit. According to this system we should record both the aspects of a transaction whereas one aspect
of a transaction will be debited and other aspect of a transaction will be credited. (1) Personal
Account: Debit the receiver and credit the giver. (2) Real Account: Debit what comes in and credit
what goes out. (3) Nominal Account: Debit all expenses and losses credit all incomes and gains. (2)
Modern or American Approach: This approach is based on the accounting equation or balance sheet.
In this approach accounts are debited or credited according to the nature of an account. In a
summarised way the five rules of modern approach is as follows:
1. Increase in asset will be debited and decrease will be credited.
2. Increase in the liabilities will be credited and decrease will be debited.
3. Increase in the capital will be credited and decrease will be debited.
4. Increase in the revenue or income will be credited and decrease will be debited.
5. Increase in expenses and losses will be debited and decrease will be credited
FINAL ACCOUNTS

Preparation of final account is the last stage of the accounting cycle. The basic
objective of every concern maintaining the book of accounts is to find out the profit
or loss in their business at the end of the year. Every businessman wishes to
ascertain the financial position of his business firm as a whole during the particular
period. In order to achieve the objectives for the firm, it is essential to prepare final
accounts which include Manufacturing and Trading, Profit and Loss Account and
Balance Sheet. The determination of profit or loss is done by preparing a Trading,
Profit and Loss Account. The purpose of preparing the Balance Sheet is to know the
financial soundness of a concern as a whole during the particular period.
Trading, Profit and Loss Account
Trading Account and Profit and Loss Account are the two important parts of income
statements. Trading Account is the first stage in the final account which is prepared
to know the trading results of gross profit or loss during a particular period. In other
words, it is a summary of the purchases, and sale of a business or production cost of
goods sold and the value of sales. The difference between the elements establishes
the gross profit or loss which is then carried forward to the profit or loss account for
calculation of net profit or net loss. Accordingly, if the sales revenue is higher than
the cost of goods sold the difference is known as 'Gross Profit,' Similarly, if the sales
revenue is less than the cost of goods sold the difference is known as 'Gross Loss.'
The determination of Gross Profit or Gross Loss is done by preparation of Trading
Account. But it does not reveal the Net Profit or Net Loss of a concern during the
particular period. This is the second part of the income statement and is called as
Profit and Loss Account. The purpose of preparing the profit and loss account to
calculate the Net Profit or Net Loss of a concern. Net profit refers to the surplus
which remains after deducting related trading expenses from the Gross Profit. The
trading expenses refer to inclusive of office and administrative expenses, selling
and distribution expenses. In other words, all operating expenses such as office and
administrative expenses, selling and distribution expenses and nonoperating
expenses are shown on the debit side and all operating and non operating gains and
incomes are shown on the credit side of the Profit and Loss Account. The difference
of two sides is either Net Profit or Net Loss. Accordingly, when total of all operating
and non-operating expenses is more than the Gross Profit and other non-operating
incomes, the difference is the Net Profit and in the reverse case it is known as Net
Loss. This Net Profit or Net Loss is transferred to the Capital Account of Balance
Sheet.
BALANCE SHEET
According to AICPC (The American Institute of Certified Public Accountants) defines
Balance Sheet as a tabular Statement of Summary of Balances (Debit and Credits)
carried forward after an actual and constructive closing of books of accounts and
kept according to principles of accounting. The purpose of preparing balance sheet
is to know the true and fair view of the status of the business as a going concern
during a particular period. The balance sheet is on~ of the important statement

which is used to owners or investors to measure the financial soundness of the

concern as a whole. A statement is prepared to show the list of liabilities and capital
of credit balances of the business on the left hand side and list of assets and other
debit balances are recorded on the right hand side is known as "Balance Sheet."