cONTENTS

PART A
1.1-1.22

1. Introduction to Accounting 2.1-2.16

Basic Accounting Terms 3.1-3.22
2 Standards
and
Accounting
3. Base of Accounting, Standards
(IFRS)
heory Financial Reporting 4.1-4.20
nternational

5.1-5.18
4. Accounting Equation and Credit
of Debit 6.1-6.18
5. ACCOunting
P r o c e d u r e s - R u l e s

Documents
and
Preparation of Vouchers
T r a n s a c t i o n s - S o u r c e
7.1-7.78
6. Origin of
8.1-8.40
7. Journal
9.1-9.50
8. Ledger Book
Books
-Cash 10.1-10.550
9. Special Purpose Books
I-Other
Books 11.1-11.56
10. Special Purpose
Bank Reconciliation S t a t e m e n t 12.1-12.24
11.
13.1-13.40
12. Trial Balance

14.1-14.8
13. Depreciation
Reserves 15.1-15.42
Provisions and
14.
Bills of Exchange
Accounting for
16.1-16.42
15
Rectification of Errors 17.1-17.60
16.
Proprietorship
of Sole Sheet)
17. Financial Statements Account and Balance
Account, Profit and Loss
(Final Accounts: Trading 18.1-18.78

of Financial Statements
18. Adjustments in Preparation

PART B
19.1-19.64
Not-for-Profit Organisations
19. Financial Statements of 20.1-20.30

Incomplete Records-Single Entry

System
20. Accounts from
21.1-21.20

21. Computers in Accounting

P.1-P.56

Project Work
BP.1-BP.34

Examination Papers
CHAPTER
Introduction to Accounting
(Meaning and Objectives of Accounting
and Accounting Information)
Learning Objectives
The study of this Chapter would enable
you to understand:
Meaning and Definition of Accounting
Attributes (Characteristics) of Accounting
Accounting Process
Book Keeping, Accounting and Accountancy
Difference between Book Keeping and Accounting
Objectives of Accounting
OFunctions of Accounting
Advantages of Accounting
Limitations of Accounting
Accounting Information and its Types
Users of Accounting information

Systems of Accounting
Bases of Accounting:Cash Basis, Accrual Basis and Hybrid Basis

MEANING AND DEFINITION OF ACcoUNTING

Accounting is a systematic process of identifying, measuring, recording, classifying,
summarising, interpreting and communicating financial information to the users.
Accounting gives information about:
) the resources available;
(i) how the available resources have been employed; and
(ii) the results achieved by their use.
It shows the profit earned or loss incurred during the accounting period, book value
and nature of assets, liabilities and owners' equity, i.e., capital.
Since accounting is a medium of communication, it is called the language of business.
"Accounting is the art ofrecording,classifyingand summarising ina significant manner
and in terms of money, transactions and events which are, in part at least, of a financial
character, and interpreting the results thereof."
-American Institute of Certified Public Accountants
"Accounting is the science of recording and classifying business transactions and
events, primarily of a financial character, and the art of making significant summaries,
analysis and interpretations of those transactions and events and communicating the
results to persons who must make decisions or form judgment."
-Smith and Ashburne
 Keeping (WBCHSE
1.2 Double Entry Book
communicating.
economie
and
"Accounting is the process of identifying. Pasuring
users of t n e tnjormation
derisions by
Omafion to permit informed iudgments andAmerican Accounting Associatio

A C C O U N T I N G

OF
( C H A R A C T E R I S T I C S )

of accounting:
ATTRIBUTES attributes
following
light the is the proces
of accounting bring to
Identification

The definitions
78actions
and
Events:
recorded.
Accounting records
1. determining
of Identifying which
Financial
transactions r e to
be nature
Tr ts which are ofafinancial ey bring
transactions
as they hatchange
are of
events
and
actions tha t r a n s a c t i o n s

identifying
ed goods by a
only those transactions. involves
sale of finished
in the resources of a firm. The process

of raw
material
or
and receipts a s
evi vidence
purchase
help of bills
financial nature. For exam with the
identified

actions are
a re
firm. These transactions m e a s u r e s
the transactions
of the transactions. Accounting
currency
(money) of
T r a n s a c t i o n s :

the
unit, i.e., 2,50,000
the I d e n t i f i e d m e a s u r e m e n t
steel for
2. Measuring c o m m o n

10 of tonnes

i.e., ?5,25,000
in terms of
a say
events
purchase of
goods, t e r m s ofmoney,
and For example, in measured
t h e country. 2,75,000
is in the books
cement for
transactions

and 1,000 bags of financial

of financial
a n art
of recording transactions

is business
Accounting
of recording
sub-divided into
3. Recording: 1s
further

Recording is the process

Journal.
This book
of a c c o u n t . i.e., cashtransactions)
entry, (tor r e c o r d i n g
character in the book oforiginal
J o u r n a l or
Cash Book
of goods), Sales
such a s Cash credit purchases
books recording t r a n s a c t i o n s are
subsidiary
Purchases
Book (for financial
Journal or etc. The
Purchases credit sales),
recording
Sales Book (for accoounts.
Journal or under appropriate
Classification
recorded in an orderly m a n n e r , financial
transactions.

Accounting is
an art ofclassifying place by opening
accounts in the
4. Classifying: at one
subsidiary books
transactions are
similar
the of collecting the Journal' or the
is recorded in
process

Book. The
transactions
Ledger. This book contains
Ledger known as
the main book of
account
t r a n s a c t i o n s of
similar nature are
classifiedor posted to financial
all with
individual account
heads under which financial
transactions
in the Ledger,
collected. For example, in Rahul's Account Rahul or due from Rahul
that what amount is ultimately due to
Rahul are posted so

can be known.
financial transactions. This
Accounting is an art of summarising
5. Summarising: understandable and useful
data in m a n n e r which is
classified a
involves presenting the leads to
statements. This process
external of accounting
to internal as well as
users

statements:
the preparation of following
and Profit and Loss Account (Statement
of Protit and
) Trial Balance, (i) Trading
Sheet. Trading and Profit and Loss
Loss, in case of companies), and (ii) Balance
Account and Balance Sheet are collectively known as Final Accounts or Financla
Statements.
Introduction to Accounting 1.3

6. Analysis and Interpretation: Financial data is analysed and interpreted so

that the users of financial data can make a meaningful assessment of the nnanea

performance (profit) and financial position of the business. This helps in planning the
future in a better way.
7. Communicating: Finally, accounting involves communicating the financial data,
financial statements to its users. The accounting information should be provided
in time to the users so that decisions are taken at the appropriate time.

ACCOUNTING PROCESS
Based on the attributes of accounting, the steps of accounting process are as follows:
ldentifying Financial Transactions and Events. (i) Recording, (ii) Classifying, (iv)
Summarising, () Analysing and Interpreting and (vi) Communicating
The accounting process may be explained with the help of a diagram:

Accounting Process

Communicating FinancialTransactions
and Events
to Users

Analysisand Journal
Interpretation 1. Cash Book
2. Purchases Book
3.Sales B0ok
4. Purchases Retum Book
Summarising 5.Sales Return Book
1. Trial Balance Recording
2 Trading and ProfitandLoss Account 6,Bills Payable Book
7. Bills Receivable Book
(Statement of Profitand Loss 8. Journal Proper
3. Balance Sheet
Classiying(Posting into Ledger
BRANCHES OF ACCOUNTING
With the changing times, following specialised branches of accounting have emerged
to meet the changed requirements:
Branches of Accounting

Financial Acoounting Cost Accouting Management Accounting

Financial Accounting
Financial Accounting is that branch of acounting which records financial transactions
and events, summarises and interprets them before communicating the results to
the users. It determines profit earned or loss incurred during an accounting period
(usually a year) and the financial position on the date when the accounting period ends.
 Keeping (WBCHSE)-Y
1.4 Double Entry Book
tor the
period
The LO8s Account
end-product of financial accounting is the Profit and Sheet
Balance as on
ended (which shows the profit earned loss
or
ineuGnancial position).
the financial
position).
y the accounting period (which shows
O of
financial statementa
preparation
tatements,
In short, financial accounting is confined to the u s e r s of accounting
i.e., the Pro and Balance Sheet, for the
Loss Account and the
otit
information.
Cost Accounting cost of products, operations
ascertaining
concerned with w i t h recording c0sts
s oranch of accounting is which deals
accounting
prOcesses or activities. It is
that branch of controlling
cOsts.

reducing and
wED the objective of
ascertaining,

Management Accounting developed

branch
of accounting. It
most recently
Management Accounting
is the to funds, costs, profits. eto
information relating
accounting that Managemen
concerned with generating decision-making.
We may say
management in
as it enables the
the m a n a g e m e n t .
u s e r group, i.e.,
of a single
addresses the needs
Accounting
ACCOUNTANCY
ACCOUNTING AND
BOOK KEEPING,
considered as same is not correr
Accounting, often
The terms Book Keeping' and is a wider concept and includes
from each other. Accounting
The two terms are different
Book Keeping.

Meaning of Book Keeping

financial transactions
Book Keeping is a part of accounting
being a process of recording
involves:
account. Thus, Book Keeping
and events in the books of
transactions and events,
1 Identifying financial
2. Measuring them in terms of money,
3. Recording the identified financial transactions and events in the books of account,
and
XClassifying recorded transactions and events, i.e., posting them into Ledger accounts.
Definitions of Book Keeping
Book Keeping is an art of recording in the books of account the monetary aspect of
commercial and financial transactions." -Northcott
Book Keeping is an art ofrecording business dealings in a set of books."-J.R. Batliboi
"Book Keeping is the science and art of recording correctly in the books of account all those
business transactions that result in the transfer of money or money's worth."-R.N. Carter
"Book Keeping is the art of recording business transactions in a systematic manner.
er"

-A.N. Rosen Kampf

Introduction to Accounting 1.5

Accounting
a wider eoneopt than Book Keeping. It starts where Bnk Keeping ends.
Acvounting is
In other words, Book Keeping is a part of accounting.
Difference between Book Keeping and Accounting
Basis Book Keeping Accounting
1. Scope Book Keeping is concemed with identifying financlal Accounting is concerned with summarising the
transactions and events; measuring them in money recorded transactions and events, interpreting trhem
tems, recording them in the books of account and and communicating the resuts.
classitying them.
2. Stage It is a primary stage. It is the basis for accounting. It is a secondary stage. It begins where Book
Keeping ends.

3. Objective The objective of Book Keeping is to maintain The objective of Accounting is to ascertain net
systematic records of financial transactions. results of operations and financial position and to
communicate information to the interested parties.
4. Nature of Job This job is routine in nature. This job is analytical and dynamic in nature.

t being a routine work is performed by junior staff. It being a specialised function is performed by
5. Performance
senior staff.
Book Keeping is mechanical in nature and, thus, Accounting requires special skills and ability to
6 Special
Skills does not require special skils. analyse and interpret.

Accountancy
how to deal with
Accountancy is a systematic knowledge of accounting. It explains
various aspects of accounting. It educates us how to maintain the books of account
it to the users.
and how to summarise the accounting information and communicate
and
Inthe words of accountancy refers to the entire body of the theory
Kohler,
practice of accounting.
Accounting and Accountancy
whereas accounting is the action or process. Accounting
Accountancy is knowledge
by accountancy.
the basis of the rules and principles framed
process is carried out on
of and accounting is
Thus, it may be said that accountancy is knowledge accounting
the application of accountancy.
OBJECTIVES OF ACCOUNTING

The objectives of accounting are:

Events: The objective of accounting is

1. Record of Financial Transactions and
events of the organisation in the books of
account
to record financial transactions and
of accountancy.
in a systematic manner following the principles
of accounting is to determine the
2. Determine Profit or Loss: Another objective
loss incurred, for the accounting period.
financial performance, i.e., profit earned or
 Keeping (WBCHSE)
1.6 Double EntryBook
Income Statement, i.e., Trading and Profit and LoRs Account or Statement
ws the
of Profit
profit

and Loss (by companies) prepared at the end of the ne

earned or loss incurred during the accounting yea accounting

is to ermine
determine
of position of the
Another
objective Financial

3. Determine Financial Position: Sheet. Statemer

the Incomestatement,
Balance Income

financial position. It is known from the

from Bnn ta ns isis the
as

financial
s t a t e m e n t s

in the
of comp
case mpanies).
u s e r s of
business is a s relevant for the of Profit and Loss,
1sSist the
assist the
is to
and Loss Account (Statement accounting

i.e., Profit objective of often requires

requires
Another m a n a g e m e n t

The
to it.
Management:
ASsisting
the information
budgeting
a n dtorecasting
financial control,
management by providing exercising
Another
objective of
decision-making,
nancal
information for Information
to
Users:
them a s per
Accounting
who a n a l y s e
users
Communicating information
to
. accounting

accounting
is to provide have recorda
is to
their individual requirements. accounting
of
Another
objective
of a s s e t s
owned by the
Assets: record
Business maintains

6. Protecting Accounting exercise control.

business.
them and
of a s s e t s
owned by the m a n a g e m e n t to
protect
enables the
business which

FUNCTIONS OF ACCOUNTING

accounting are: function of

The primary
The functions of Records:
Accounting
f i n a n c i a l transactions
Maintaining
Systematic records of
I. accounting the
maintain systematic be m a i n t a i n e d
following
to
accounting is records should
It means that the accounting the function of Book Keeping
and events.
concepts. In other words,
principles and
s t a t e m e n t s can
financial
accounting rules, because reliable
It is so recording
function of accounting. involves
is the primary Book Keeping
The process of
is proper. the recorded
be drawn if Book Keeping the books of account and classifying
transactions and events in ie.,
financial financial statements,
be drawn to prepare
The Trial Balance
can
transactions. of companies) and
of Profit and Loss, in the case

Profit and Loss Account (Statement

Balance Sheet.
statements m e a n s final accounts
Statements: Financial
2. Preparation of Financial Income Statement (Profit and
accounting period. It includes
prepared at the end of the and Position
Account or Statement of Profit and Loss, in the case of companies)
Loss the
It is important function of accounting because
Statement (Balance Sheet).
an
earned or loss incurred
financial statements show the financial performance, i.e., profit
end
the accounting and the financial position, i.e., Balance Sheet as at the
during year
users because
of the accounting year. Both the statements are important for all the
users make decisions on the basis of these statements.
Introduction to Accounting 1.7

3. Meeting Legal Requirements: Accounting records are accepted as evidence by

the court of law if they are maintained systematically following the accounting rules,
principles and concepts. Besides, the law such as the Companies Act, Income Tax Act,
Goods and Services Tax (GST) Act, etc., require submissions of returns in the form
and period as is prescribed in the law. The returns can be submitted if the accounting
records are maintained systematically and timely. A systematic accounting record
maintained following the accounting principles and concepts is accepted by the authorities
to be correct. Thus, it is a function of accounting to meet the legal requirements.

4. Communicating the Financial Information: It is yet another function of

accounting to communicate the financial information to the users, which may be
internal users or external users, such as management, banks, employees, government
authorities, etc.
5. Assistance to Management: Management often requires financial information
which is given by the accounting records which in turn helps the management in
decision-making. For example, financial statements do not show since when the
amount is due from debtors. It is the function of accounting to make such information
available to the management. Similarly, accounting record should be maintained in
such a manner that the assets owned are known. It will assist the managementin
protecting the assets and also exercising control.

ADVANTAGES OF ACCOUNTING
1. Financial Information about Business: Financial performance during the
accounting period, i.e., profit earned or loss incurred and also the financial position at
the end of the accounting period is known through accounting.
2. Assistance to Management: The management makes business plans, takes
decisions and exercises control over the affairs on the basis of accounting information.

3. Replaces Memory: A systematic and timely recording of transactions obviates the

necessity to remember transactions. The accounting record provides the necessary

information.
4. Facilitates Comparative Study: A systematic record enables a businessman to

compare one year's results with those of other years and locate significant factors
leading to change, if any.
5. Facilitates Settlement of Tax Liabilities: A systematic accounting record
immensely helps in settlement of income tax and Goods and Services Tax (GST)
liabilities, since it is a good evidence of the correctness of transactions.

6. Facilitates Loans: Loan is granted by the banks and financial institutions on the
basis of growth potential which is supported by the performance. Accounting makes
available the information with respect to performance.
 (WBCHSE)XI
Keeping
1.8 DoubleEntryBook
acceptea Dy the
is often
. Evidence in Court: Systematic record of transactions
Courts of law as good evidence. his
b u s i n e s s , the

to sell
desires purcha 1se
s e price.

8. Facilitates Sale of Business: If someone

ofthe
proper

ascertainment
number of
accounts maintained by him will enable
the a
large
taking
in which
w hich goods
gooda
Accounting
helps price aatt
the price
.Helps in Decision-making: proprietor,

withdrawn by
decisions like the amount to be
should be sold, etc. LIMITATIONS O F A C C o U N T I N G

recorded on
are
t r a n s a c t i o n s

most of the some

estimates are
Although yet
is n o t Fully
Exact:
or
receipt ofcash,
providing
depreciation on
Accounting purchase
4 evidence
such a s
sale or
Examples
of this
are

the probable
market
t h e basis of or
loss. bad debts,
ascertaining
profit possible
for
also made
useful life
of a n asset,
of
estimated
Sheet does
the basis etc. The
Balance

stock of goods,
Value:
price of the
Realisable
of all the assets
the the sale
does not
Indicate
realise by u s e and are
Accounting the firm may m e a n t for
2. which
they
are
amount of cash to be sold; written off
not show the not
meant have been
assets are that m a y
depreciation
because m a n y
This is cost less is confined to
written
down value, i.e., Since
accounting
shown at Elements:
industrial
relations
Qualitative
the staff,
Accounting
Ignores elements like quality of
qualitative
matters only,
monetary statements
relations are ignored. Accounting
and public Level Changes:
Price in value.
Ignores the
Effect of measurement
unit, changes
Accounting
4. Money, a s
a c o n s i d e r e d while
historical cost. are
prepared at changes
are Unless price level true financial
remain stable. i n f o r m a t i o n will
not show
It does not
accounting
financial statements,
preparing
means
results. term window dressing
Dressing: The
to Window financial
and present the
Lead
5. Accounting may vital facts
accounts so a s
to conceal is. In this
manipulation of than what it actually
show better position
statements in such
a way as to true and
Loss Account) fails to provide a
statement (i.e., Profit
and
situation, income true and
to provide a
and the Balance Sheet fails
ir view of the result of
operations
of the enterprise.
fair view of the financial position
ACCOUNTING INFORMATION

is to provide qualitative informatio,

"Accounting is a service activity. Its function in
in nature, about economic entities that is intended to be useful
primarily financial
-Accounting Principles Board
making economie decisions."
 Introduction to Accounting
1.9

Ae an information system, accounting collects financial data, records it in the hooks

of account, classities and summarises it to produce financial information that is
ommunicated to its users. Accounting begins with the identification of transactions of
financial nature and ends with the preparation of financial statements (i.e., Income
Statement and Balance Sheet). Each step in the process of accounting generates
information. Generation of information is not an end in itself, it is a way to facilitate
the communication of information to users of accounting information.

Types of Accounting Information

Acoounting information refers to the financial statements generated through the process
of Book Keeping, use of which helps the users to arrive at decisions. The financial
statements so generated are the lncome Statement, i.e., Profit and LOss Account and
the Position Statement, i.e., Balance Sheet. The information made available by these
statements can be categorised into the following:
1. Information Relating to Profit or Surplus;
2. Information Relating to Financial Position; and
3. Information about Cash Flow.
Let us now discuss these in detail.
1. Information Relating to Profit or Surplus: The Income Statement makes
available the accounting information about the profit earned or loss incurred as a
result of business operations or otherwise during an accounting period.
A firm prepares Trading Account, a part of the Profit and Loss Account, which provides
information about Gross Profit or Gross Loss and Profit and Loss Account provides
information about the Net Profit or Net Loss.
in
A company prepares Statement of Profit and Loss in the form prescribed
Schedule II of the Companies Act, 2013.
Account instead of
A Not-For-Profit Organisation prepares Income and Expenditure
and not
Profit and Loss Account because it carries on welfare or charitable activities
termed as Surplus' while excess
business. The excess of income over expenditure is
of expenditure over income is termed as Deficit'.
The Position Statement, i.e.,
2. Information Relating to Financial Position:
about the financial position of
the Balance Sheet makes available the information
information about the assets owned by
the entity. The Position Statement provides
bank balances held by it. These are
the entity, amounts receivable and the cash and
amounts owed by the entity
towards loans, creditors
represented in the liabilities by the
is represented by capital, i.e.,
and amounts payable.The difference between the two
difference between
amount due to owners. In the case
of Not-For-Profit Organisation,
Fund'.
assets and liabilities is termed 'Capital
as
1.10 Double Entry Book Keeping (WBCHSE)X

Statement is
a statement hat shows
tha flow,
3.Information about Cash Flow: Cash Flow It is of immense use as
many
both inflow and outflow, of cash during a spec
uidend and expansion of
business,
decisions such as payment of linbilities, paymen
etc., are based on availability of cash.
I N F O R M A T I O N

A C C O U N T I N G

USERS OF Internal Users and

categorised
into In
may
be
Information

Users of Accounting
External Users.
and thus a r e exposed to
Internal Users the
business

contribute capitalin i n knowing

the profit earned
or
Owners interested
(i) Owners:
are The finanei
Naturally, they their capital.
risk. safety of
maximum
business
besides the
and
financial position ofthe th.
loss incurred by the about profit
or l o s s
information
statements give the
of accounting
informatio
ion
use
business. makes
extensIve

of selling price. Cost

Management:
The m a n a g e m e n t as
determination

(ii) decisions such

informed
projects, etc.
to arrive at investment
into n e w
reduction, entitled to bonus at
controls and and workers are
Employees Therefora
Employees
and Workers: earned by a n enterprise.
(iii)
which is linked to the profit s t a t e m e n t s . Besides, tha
financial
the year-end, i n t e r e s t e d in
and workers
are deposited its dues
enterprise has
the employees reflect whether the
s t a t e m e n t s also Insurance, etc., or not
financial
Fund and Employees' State
Provident
towards Employees'
authorities.
with the appropriate

External Users institutions are an

Institutions: Banks and financial
Financial
(i) Banks and Naturally, they
to businesses.
business as they provide loans
essential part of any business to know whether
it is making progress as
watch the performance
of the and payment
and recovery of the loan advanced
projectedto e n s u r e the safety information.
of interest. They assess it by analysing the accounting
Investors: Investment
involves risk and also the
Investors and Potential
(ii)
control over the business affairs.
Therefore, they rely
investors do not have direct
information available to them and
seek a n s w e r s to questions
on the accounting
is their
of the enterprise and how safe
such as-what is the earning capacity
investment?
services on
(ili) Creditors: Creditors those parties who supply goods and/or
are
remain
credit. It is a common business practice that a large number of suppliers
themselves
invested in credit sales. Before granting credit, creditors satisfy
them
about the credit-worthiness of the business. The financial statements help
immensely in making such an assessment.
 Introduction to Accounting 1.11

(iv) Government and its Authorities: The government makes use of financial
statements to compile national income accounts and other information. The
ntormation available to it enables it to take policy decisions.
Government levies varied taxes such as GST and income tax. These government
authorities assess correct tax dues after an analysis of the financial statements.
(o) Researchers: Researchers use accounting information in their research work.
(vi) Consumers: Consumers require accounting information for establishing good
accounting control so that cost of production may be reduced with the resultant
reduction in the prices of products they buy. Sometimes, prices of some products
are fixed by the government, so it needs accounting information to fix fair prices
so that consumers and producers are not exploited.
(vii) Public: They want to see the business running since it makes substantial
contribution to the economy in many ways, e.g., employment of people, patronage
to suppliers, etc. Thus, financial accounting provides useful financial information
to various user groups for decision-making.
QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION
Qualitative characteristics are attributes that make the accounting information useful
to users. The qualitative characteristics are:
1. Reliability: Accounting infornmation must be reliable. Reliability of information
means it is verifiable, free from bias and material error.

2. Relevance: Accounting information must be relevant to the user. Information is

relevant if it meets the needs of the users in decision-making.
3. Understandability: Understandability means that the information provided
through the financial statements must be presented in a manner that the users are
able to understand it.
4. Comparability: Comparability means that the users should be able to compare
the accounting information of an enterprise of the period either with that of other
periods, known as intra-firm comparison or with the accounting information of
other enterprises, known as inter-firm comparison.

SYSTEMS OF ACCOUNTING
The systems of recording transactions in the books of account are two namely:
1. Double Entry System, and 2. Single Entry System.
1. Double Entry System
Double Entry System of accounting is a system of accounting under which both, debit
and credit, aspects of accounting are recorded. A transaction has two aspects-Debit and
Credit-and at the time of recording a transaction, one aspect is recorded on the debit side
and other aspect is recorded on the credit side. For example, at the time ofcash purchases,
1.12 Book Keeping (WBCHSs
Double Entry

goods are received and in return cash is paid. In the transaco Entry ects are
Syste
Double Entry System, bot
volved, i.e., receiving goods and paying cash and under the isdebited and and the
the seco
secn debited

these aspects are recorded. One part, i.e., the receipt of goods, are affected
accounts are affecte
p a r t , i.e., p a y m e n t of cash, is credited. In o t h e r words, i f B u i l d
twin
oga,c c
isou
dneb
t si tae d and the

is debited and
the
Building,

than two.accounts are

account,
n the purchase of building for cash). one

ds If moreequal to the sum of the

amount.

other acount, Cash, is credited for the same

attected by a transaction, the sum of the debit entries mu total amouount credited
equal to the
debited is
Credit entries. Thus, on any day, total amount which nd records
recognises and record
"The.system

Thus, we can define Double Entry System

as:

Entry System has proved

to be a 8cientit scientific
both aspects of a transaction. TheDouble
and complete system of accounting
Features of the Double Entry System transaction.

lt maintains a complete
record of each viz., the aspect of receiving (valua
alue
transaction,
of every
It recognises two-fold aspect
4 (value out). is c r e d i t e d following the
and the aspect of giving
in) debited and the other aspect
is
8. In this system, one aspect
other is credited, the total ot
credit.
rules of debit and
transaction is
debited and the
4. Since one aspect of
a establishing arithmetical
of all credits. It helps in
to total
all debits is always equal
Balance.
accuracy preparing the Trial
by

Stages of Double Entry System

book keeping has following three stages:
A complete system of double entry
Journal.
1. the transactions in the
Recording
them to the appropriate ledger
2. Classifying transactions in the Journal by posting
accounts and then preparing the Trial
Balance.

3. Closing the books and preparing the final acounts.

All these stages shall be discussed one by one in succeeding chapters.

Advantages of the Double Entry System

The advantages of Double Entry System are:
() Scientific System: Double Entry System is a scientific system of recording
business transactions as compared to other systems of Book
Keeping. It helps
attain the objectives of accounting.
(ii) Complete Record of Transactions: Under the
system, both sides of a
transaction are recorded. It is a complete record as it
results in showing correct
income or loss, assets and liabilities.
(iii) Arithmetical Accuracy of Accounts is Ensured: By the use
of this system,
arithmetical accuracy of the accounting work can be
Trial Balance. established through the
Introduction to Accounting 1.13

(iv) Determining Profit or Lo88: Profit enrned or loss incurred during a period
can be determined by
preparing Profit and Loss Account.
() Knowledge of Financial Position: Financial position of the firm or the
institution can be aseertained at the end of each period by preparing the Balance
Sheet.
(vi) Full Details for Purposes of Control: The system permits accounts to be
maintained in as much detail as necessary and, therefore, provides significant
information for purposes of control, etc.
(vii) Comparative Study is Possible: Results of one year may be compared with
those of previous years and reasons for the change may be ascertained.

(vii) Helps Management in Decision-making: Management may be able to obtain

good information for its work, especially in making decisions.
(ix) Detection of Frauds and Misappropriations: Frauds and misapp
are minimised since complete information about all assets and liabílities is
available.
It is because of these advantages that the Double Entry System is used extensively
in all countries.

2. Accounts from Incomplete Records or Single Entry System

Account from Incomplete Records or Single Entry ystem of recording transactions in

the books of account may be defined as an incomplete Double Entry System. In this
system, all transactions are not recorded on double entry basis. In some transactions,
both aspects of the transactions are recorded, while in others, either one aspect is
recorded or not recorded at all. Instead of maintaining all the accounts, only Personal
Accounts and Cash Book are maintained under this system. The accounts maintained
under this system are incomplete and unsystematic and, therefore, not reliable.
Since both the aspects of all transactions are not recorded following double entry
principle, it is not possible to prepare a Trial Balance. As a result, the Profit and
Account and the Balance Sheet cannot be prepared.

BASES OF ACCOUNTING

The most significant function of accounting is to determine profit earned or loss

incurred by a business during an accounting period.
Profit earned or loss incurred by the business can be determined either by 1: Cash
Basis of Accounting, 2. Accrual Basis of Accounting, or 3. Hybrid Basis of Accounting.
I. Cush Basis of Accounting: Cash basis of accounting is a system in which
transactions are recorded when cash is received or paid, i.e., entry is not recorded
when a payment or receipt is merely due. It means, revenue is recognised on receipt
of cash. Likewise, expenses are recorded as incurred when they have been paid. The
 Keeping (WBCHSE)
Book
Entry
1.14 Double
Loss
oss of a
Profit or
represents

1s followed
differencebetween the total incomes and total expen80s
Basis of
Accounting

when Cash and

accrued
incomes
business for the accounting period. Thus, in
advance

Not-for-Profit
of Not-for Profit
rad in
received

income in case
case

outstanding and prepaid expenses and

Payments
Account
prepared
schools,
is xample of
a n exa

are not considered. Receipts and clubs

and
institutions,

Organisations, such as charitable

accountingon cash basis.

Accounting are es, prepaid
prepaid
Basis of
expenses,

of Cash
outstanding

Advantages for made.

Advantages:
as
adjustments
advance
is not
accounting in
() It is a simple basis of
l t 18 a income
received
and
judgements a re
income and estimates

accrued few
expenses, as very
objective
is more

(2) This
approach
enterprises
where most
the
of tha
those
required. suitable for
accounting
is
of
(ii) This basis
cash basis.
transactions
are on
Basis of
Accounting are
of Cash financial position
Disadvantages
or loss and the
Disadvantages:
of the profit and
and fair view expenses
accrued
a true and prepaid
It does not give outstanding
) because it ignores
enterprise
of an income
received in advance.

income and accounting.

Principle of
follow the Matching items and, as a
capital and
revenue
does not
(i) It between
does not distinguish
(ii) This system the two years.
consistency in profits of
result,there is no

llustration 1. and credit sales

2018-19, Ashok
had cash sales of R3,90,000
financial year is still to
During the
for were
year
2,70,000 out
the ofwhich T 80,000
1,60,000. His expenses the Cash Basis of Accounting.
of Ashok's income for 2018-19 following
be paid. Find out

Solution: 3,90,000
Revenues (inflow of cash, i.e., cash sales)
1,90,000
80,000)
Less: Expenses (outflow of cash) (R 2,70,000- 2,00,000
Net Income as per Cash Basis of Accounting
will not be considered under Cash Basis of Accounting
Note: Credit sales and outstanding expenses
under
2. Accrual Basis of Accounting: Under Accrual Basis of Accounting, unlike
accruea.
Cash Basis of Accounting, income is recorded as income when it is earned or
For example, credit sale is recognised as sale irrespective of the fact whether amou
as
has been received or not. Similarly, if an expense has been incurred but payment Das
not been made, it will be recorded as an expense. For example, rent for the month
had
March, 2019 has not been paid. It will still be recorded as an expense because
become due.
 1.15
Introduction to Accounting
and
Acerual Basis of Accounting is based on the concept of renlisation and expiration
Revenue Recognition Principle and Matching
follows twobasic accounting principles, i.e.,
outstanding and prepaid
Principle. Thus, under the Accrual Basis of Accounting, advance are
income and income received in
expenses are adjusted. Similarly, accrued
or loss for the accounting period.
T'hus, under
recognised for ascertaining eorrect profit
is the result of matching
the Accrual Basis of Accounting, net income for the period
revenue realised in the period and cost incurred,
whether paid or not. The difference
between total income and total expense incurred is the profit or loss for the period.
to follow accrual
It may be noted that the Companies Act, 2013 requires companies
basis of accounting inmaintaining the books of account.
Advantages: Advantages of Accrual Basis of Accounting
are:

as compared to Cash
Basis of
) It is more scientific and comprehensive approach
Accounting and hence is preferred by accountants.
financial transactions of the
) This basis of accounting shows a complete picture of
it takes into account the effect of all transactions relating to a period
business as
expenses, accrued
as well as adjustments like outstanding expenses, prepaid
income and income received in advance.
and also exhibits
(ii) This basis discloses correct profit or loss for a particular period
true financial position of the business on a particular day.
has wide
(iv) It retlects true profit or loss during the accounting period and, therefore,
acceptability. This system is followed by most of the industrial and commercial
firms.
Disadvantages: Disadvantages of Accrual Basis of Accounting
are:

() This system is not as simple as Cash Basis of Accounting.

(i) The accounting process is too elaborate.

because many adjustments are
(ii) A quick appraisal of the profit/loss is not possible
of the business.
required to ascertain the true financial performance
llustration 2.
to Accrual Basis of
Taking the figures in lustration 1, find out the net income according
Accounting.
Solution:
Total Sales = Cash Sales + Credit Sales (T 3,90,000 +7 1,60,000) 5,50,000
Less: Total Expenses for the Year 2.70,000
Net Income as per Accrual Basis of Accounting 2,80,000

Note:7 80,000 expenses still to be paid belong to this year and hence are to be charged to the
revenue of this year. Similarly, credit sales of 7 1,60,000 are taken in the year in which sales

transaction is done.
 Book Keeping (WBCHSE -X\
Double Entry
1.16
Basis of Accounting
Accounting and Cash
Dbetween Accrual Basis of Cash Basis of Accounting
e
Basis Accrual Basis of Accounting transactions a r e recorded.

Orily cash
are recorded.
1 Natureof Both cash and credit transactions
outstanding expenses are not adjustar
Transactions in Prepaid and income and inco
come received in
are accounted accrued
2. Prepaid Prepaid and outstanding
expenses Similarly,
advance are
not adjusted
Outstanding the Profit and Loss Account.
advance are
in
income received
Expenses, ACCrued income and
the Balance
Sheet.
Accrued also accounted and shown in
Income/ncome
Received in not ascertained because
e
or loss is
Advance records
Correct profit transactions.
because it
loss is ascertained records only cash
3. Profit or Loss Correct profit or technical knowledge as is
transactions. much of
both cash and
credit
technical It does not require Basis of Accounting.
requires Accrual
Basis of Accounting required for
The Accrual like prepaid,
4. Technical adjustments
knowledge a s many r e v e n u e are required to be
Knowledge and
outstanding, capital not recognised by the
Accounting is
made. the Cash Basis of
is recognised by Companies Act, 2013.
Accrual Basis
of Acounting
5. Legal Position not acceptable in businesa
Companies Act, 2013.
Cash Basis Accounting is
of
is more acceptable in not reveal the
required information.
Accrual Basis of
Accounting as it does
and expense
6 Acceptability correct income
businessas it reveals
liabilities.
is less reliable as it records
besides assets and
more reliable
as it Cash Basis of Accounting
and as a result does not reveai
Accounting is transactions
Accrual Basis of and thus only cash
7. Reliability transactions
or loss and
also assets and liabilities.
cash and credit profit
records both besides assets
and correct
loss
reveals correct profit or

liabilities. is suitable for Not-For-Profit

is suitable for
businesses Cash Basis of Accounting
Professionals such as chartered
8. Suitability
Accrual Basis of Accounting is complex. It can be made Organisations and
since they require
information that
as it requires accountants, lawyers, etc.,
of Accounting.
available by Accrual Basis comparatively less information.

Under mixed basis

of accounting both
Accounting:
Mixed Basis of are recorded
o n cash basis
3. Hybrid o r followed. Incomes
accrual basis a r e
income is ascertained
cash basis and basis. The net
a c c o u n t e d on accrual
whereas e x p e n s e s
are
basis. This is the most
accrual basis with income o n cash
to the period, whether
on
by matching expenses because all expenses relating
conservative basis of accounting received only in cash is
taken
considered, whereas income
not, are
actually paid or
is seldom used since it
consideration. n actual practice, this basis of accounting does
not in u s e since the law
to
fails to m e a s u r e the income accurately. This system is
not recognise it.

Illustration 3.
information about his income and expenses
Mr. Vijay Gupta supplies you the following
for the financial year 2018-19:

Expenses paid 4,00,0000 Income received 6,00,000D

Expenses paid in advance 1,00,000 Income received in advance 75,000
Expenses not yet paid 50,000 Income not yet received 60,000
Introduction to Accounting 1.17

Find out the net income or profit of Mr. Vijay Gupta if he adopts (i) Cash basis,
) Accrual basis, or (ii) Hybrid basis of accounting.

Solution:
) Cash Basis
Revenue:
Income received 6,00,000
Expenses:
Expenses paid 4,00,000
Profit 2,00,000
(i) Accrual Basis
Revenue:
Income received 6,00,000
Add: Income not yet received 60,000
6,60,000
Less: Income received in advance 75,000
(A) 5,85,000
Expenses.:
Expenses paid 4,00,000
Add: Expenses not yet paid 50,000
4,50,000
Less: Expenses paid in advance 1,00,000
(B) 3,50,000

Profit (A) - (B) =7 5,85,000 T 3,50,000 2,35,000.

(iii) Hybrid Basis

Revenue:
Income received 6,00,000
Expenses:
Expenses paid 4,00,000
Add: Expenses incurred but not yet paid 50,000
4,50,000
Less: Expenses paid in advance 1,00,000
3,50,000
Profit Revenue - Expenses = 7 6,00,000-7 3,50,000 = 7 2,50,000.
 Keeping
(WBCHSE)V
Book
1.18 Double Entry

QUESTIONS

Multiple Choice Questions (1 Mark Questions)

Select the Correct Alternative:
()Book Keeping and Accounting interchangeably.
used
sameand
means
are

not used
i n t e r c h a n g e a b l y .

not
Odoes
same and
mean
are

(b).
(c) m e a n s both (a) and
(d) None of the above. i n c l u d e Book
Keeping
does not
(b)
(ii) Accounting None of t h e s e .
includes Book
Keeping. (d)
(a) include Book
Keeping. account?
books of
not
in the
(c)mayor may will not be
recorded
Payment
of salary
of the following (b)
(117) Which stationary
Paid for
goods (d)
(a) Sales of
of staff
(c) Quality concerned
with
is mainly operations.
business
Book Keeping to recorded data.
(iv) data relating summarising
financial and
(a) recording classifying
recording,
systems
(6) designing for external
users.

internal and
data for
(c) interpreting
All of the above.
information?

(d) process
of
as a
of accounting
Which is the last step
(u) transaction
the
(a) Recording statement
financial
(6) Preparation of
()Communication of information
information
interpretation of
(d) Analysis and
accounting is to
function of financial
(v) The basic transactions.
business
(a) record all
financial data.
(6) interpret effectively.
in performing functions
)assist the management
(d) None of the above.
Transactions are into Ledger Account from
posted
(vii) (6) Journal book.
(a) Vouchers.
(d) None of these.
(c) Both of these.
(viit) Cost of Goods Manufactured is determined by
(a) Financial Accounting. (6) Cost Accounting
c) Management Accounting. (d) Human Resource Accounting
ix) Which of the following is not a business transaction?
(a) Purchase of goods for resale amounted to T 50,0000
(b) Paid salaries and wages amounted to 10,000
(c) Paid rent for office premises 5,000
(d) Purchased a LCD for personal use
 Introduction to Accounting
1.19
()Which of the following transactions will not be recorded in the books of account?
(a) Purchased a LCD for personal use, paying the amount from personal bank account
(6) Purchased machinery for manufacture
()Purchased machinery for resale
Paid salaries and wages
(ri) Accounting does not show the realisable value of business. It is alan
(a) limitation of Accounting. (b) advantage of Accounting.
( Both (a) and (6). (cd) None of these.
(xii) Qualitative characteristic of Accounting includes
(a) Reliability and Relevance.
(6) Understandability and Comparability.
Both (a) and ().
( None of the above.
(x) Which of the following is not an internal user of financial statements?
(a) Board of Directors (6) Managers
c)Employees a)Lenders
(xziv) Under the Cash Basis of Accounting, expenses are recorded
(a) on payment. 6) on being incurred.
Both(a)and (6). (d) None of these.
(ao) Under the Acerual Basis of Accounting, expenses are recorded
(6) on being incurred.
(a)onpayment.
() Both (a) and (6). (d) None of these.

incomes recorded
(xui) Under the Hybrid Basis of Accounting, are

(a) on receipt. (6) on being earned.

(c) Both (a) and (6). () None of these.

(xvii) Accrual Basis of Accounting

and financial position.
(a) does not give a true and fair view of profit
and financial position.
(6) gives a true and fair view of profit
fair view of profit and financial position.
(c) may or may not give a true and
(d) None of the above.
(rvii) Accrual Basis of Accounting recognises
(a) Outstanding and Prepaid Expenses.
Advance.
and Incomes Received in
(6) Accrued Incomes
(e) Both (a) and (6).
(d) None of the above.
(xix) Under Accrual Basis of Accounting
transactions are recorded.
(a) both Cash and Credit
are recorded.
(b) only cash transactions
recorded.
(c)only credit transactions
are

None of the above. (a);

d)
(c); (iv) (a); (o) (©; (vi) (a); (vii) (6); (vii) (6); (ix) (d); (x)
Ans.: (i) (b): (ii) (a); (ii)
(a); (xii) (©; (xii) (d); (riv) (a); (ru)
(6)}; (xvi) (a); (rvii) (6); (xvii) (c; (xix) (a)]
(xi)
1.20 Keeping (WBCHSE)V
Double Entry Book

Short Answer Type

Questions (1 Mark Question
Q.1. Define Accounting.
Or
Give the events, iring them
meAsuri
meaning of 'Accounting financial
t r a n a n c t i o n s
and
sing, analysing
a u m m a r i s i n g

Ans.
Accounting is a process of identifyvingprimary books, elassilying,

then in users.
In money terms, recording the results
to the

communicating
erpretng them and
2 . List any two funetions of Accounting Recording
them in the
books
Ans. Two functions of accounting are events;
and (i)
t r a n s n c t i o n s
and
)ldentifying financ
of account.
involved in
the process of accounting'
3.What are thesteps of a c c o u n t i n g
are:

involved in the process

events;
Ans. The steps transactions
and
)Identifying
financial
account,
the books of
() Recording in
recorded entries;
Classifving the
() Balance;
Preparation of Trial
(iv) Accounts;
of Final Statements;
and
Preparation
() of Financial
Interpretation
and
(v7) Analysis
Communicating to the users
(vii)
account the
monetary aspect of
Q.4. Define Book Keeping. the books of
is an art of recording in
Ans. Book Keeping transactions.
financial
commercial and

Q.5. What is the function of Book Keeping? financial

transactions and events, measuring

Keeping is to identify account and classifying the

Ans. The function of Book them in the
books of
in terms, recording
them money
recorded transactions. transactions in a set
a record of monetary
which keeps
Q.6. Name the branch of commerce,
of books.
Ans. Book Keeping.
Q.7. Name any two objectives of Accounting.
are:
Ans. The objectives of Accounting
two

Ascertaining profit or loss; and (i) Ascertaining financial position.

(i)
Q.8. What are the advantages of Accounting?
(Any Two)
Ans. Two advantages of Accounting are:
and
(i) Financial performance and position is known;
decisions and exercise control.
(ii) Assist management in making business plans, take
Q9. What are the limitations of Accounting? (Any Two)
Ans. The limita ions of Accounting are
(i) Non-financial informations are not recorded; and
(i) It ignores price level changes.
.10. Name any one external user of Accounting information.
Ans. Creditors
Introduction to Accounting 1.21
Q. 11. What are the two accounting syatems to record financinl tranaactions in the books of
account?

Ans. The two accounting systems are:

Double Entry System; and
() Acounts from Incomplete Records or Single Entry System.
Q.12. Which system of accounting is most widely used?
Ans. Double Entry System is most widely used.
Q. 13. Name the external user of accounting information from whom the firm purchases goods
on credit.
Ans. Suppier of goods.
Q.14. Is the basic objective of Book Keeping to maintain systematic records or to ascertain net
results of operations of financial transactions?
Ans. The basic objective of Book Keeping is to maintain systematic records of financial
transactions.
Q.15. Name the external users directly concerned with accounting information.
Ans. ) Creditors, ii) Bankers or Financial Institutions, and
(ii) Government and its Authorities.
Q.16. What are the different bases of accounting?
Ans. Different bases of accounting are Cash Basis of Accounting, Accrual Basis of Accounting
and Hybrid Basis of Accounting.
Q. 17. Briefly explain Cash Basis of Accounting.
recorded
system of accounting in which transactions
are
Ans. Cash Basis of Accounting is a

when cash is paid or received.

Q. 18. Briefly explain Accrual Basis of Accounting.

in which transactions are recorded
Ans. Acrual Basis of Accounting is a system of accounting
settlement is made in cash or not.
when transactions are entered into whether its
Q.19. Briefly explain Hybrid Basis of Accounting.
recorded
system of Accounting in which income is
on
Ans. Hybrid Basis of Accounting is a

are recorded on Accrual Basis.

Cash Basis whereas expenses
Do with the Statement?
Q.20. Book Keeping is not a part of accounting. you agree
because without Book Keeping accounting function
Ans. No, I do not agree with the statement
is not complete.
records?
Q.21. Is the basic objective of Book Keeping to maintain systematic
Ans. Yes.
and preparing financial
financial transactions and events correctly
Q.22. Recording the
statements are the only objectives
of accounting. Do you agree?
financial
transactions and events correctly and preparing
Ans. No, besides recording financial the users.
financial statements and communicating to
statements, its functions are to analyse
which shows profit earned loss incurred.
or
Q.23. Name the financial statement
Ans. Profit and Loss Account.
1.22 Double Entry Book Keeping (WBCHSE)X

2 4 . Name the financial statement which shows financial po6ition or

Ans. Balance Sheet.
ny'
4. kesignation by a Marketing Manager in not recorded in the books ot account of
be measured
in terms
money,
Ans. ltis not recorded in the booksof account hecause it cannot

PRACTICAL PROBLEMS

4 Marks Questions 90,000 and

credit sales of
Mohan had
cash sales of still to be paid
the financial year 2018-19, ? 30,000 is
1.
During were
70,000 out of which Accounting.
His e x p e n s e s for the y e a r Cash Basis of
b0,000. 2018-19 following the Income 50,000
for
Find out Mohan's income
to the Accrual Basis
net income according
the
given in 1 above,
find out [Income 80,000]
2 Taking the figure for the
income and e x p e n s e s
of Accounting. information
about his
the following
3. Naren supplies you
financial year 2018-19:
1,80,000
20,000
Expenses paid included in above)
advance (not 10,000
Expenses paid in
paid 2,40,000
Expenses not yet
Income received 15,000
advance (included
in Income Received)
Income received in 12,000
Income not yet received
(i) Cash Basis and (ii) Accrual Basis
o r profit of
Naren if he adopts
Find out the net
income
[Profit-() T 40,000; (ii) F 47,000.]
of Accounting. for the
information about his income and expenses

Mohan supplies you the following

4.
financial year 2018-19:

1,20,000
Income received
80,000
Expenses paid Income received in advance 15,000
advance 20,000
Expenses paid in but not received 12,000
Income earned
Outstanding expenses 10,000
Accrual Basis;
the net income of Mohan if
he adopts (i) Cash Basis; (i)
Compute 47,000; (ii) T 50,000.]
ii) Hybrid Basis of Accounting. Net Income-()7 40,000; (ii)F
financial year 2018-19 earned
4,00,000. Out of which
5. Vijay, consultant,
a during the are
of7 1,70,000, out of which { 40,000
he received 7 3,50,000. He incurred expenses
and also
He aleo received consultancy fee relating to previous year 7 45,000
outstanding.
paid 20,000 expense8 of last year.
You are required to determine his income for the year if
iy he follows Cash Basis of Accounting:
(i) he follows Accrual Basis of Accounting; and
(ii) he follows Hybrid Basis of Accounting.
ncome-() 7 2,45,000; (ii) T 2,30,000; (iii) 7 2,25,000.