Accounting
Accounting is the analysis and
interpretation of book-keeping records. It includes not only maintains of
accounting records but also the preparation of financial and economic
information. Which involves the measurement of transaction and other events pertaining
to a business. “Accounting system is a measure of collecting summarizing,
analyzing and reporting in monetary terms the information of the business”
According to the American
institute of certified public accounts,”It is The arts of recordings, classifying
and summarizing in a significant manner and in terms of money transaction and
events which in parts, at least of a financial charter and interpreting the
result thereof”.
From the above discussion it is
clear that accounting is an of analysis and interpretation of financial records
Accounting concepts which
are followed at the time of recording transaction:
The basis aims of book-keeping and accountancy are to record the business
transactions and events in a summarised form. Transactions are recorded in
chronological order in proper books of accounts book-keeping. Accountancy is a
science based on fundamental truth and rules or conducts or procedures which
are universally accepted. These rules of conducts to record business transactions
are called accounting concepts and conventions.
The term ‘concept’ is used to denote
accounting postulates, i.e., basic assumptions
or conditions upon the edifice of which the accounting super-structure is based.
The following are the common accounting concepts adopted by many business concerns.
i)
Business Entity Concept
ii)
Money Measurement Concept
iii)
Going Concern Concept
iv)
Dual Aspect Concept
v)
Periodicity Concept
vi)
Historical Cost Concept
vii)
Matching Concept
viii) Realisation
Concept
ix)
Accrual Concept
i) Business Entity
Concept: Business entity concept implies that the business unit is
separate and distinct from the persons who provide the required capital to it.
This concept can be expressed through an accounting equation, viz., Assets =
Liabilities + Capital. The equation clearly shows that the business itself owns
the assets and in turn owes to various claimants.
ii) Money Measurement
Concept: According to this concept, only those events and transactions are
recorded in accounts which can be expressed in terms of money. Facts, events
and transactions which cannot be expressed in monetary terms are not recorded
in accounting. Hence, the accounting does not give a complete picture of all
the transactions of a business unit.
iii) Going Concern
Concept: Under this concept, the transactions are recorded assuming that
the business will exist for a longer period of time. Keeping this in view, the
suppliers and other companies enter into business transactions with the
business unit. This assumption supports the concept of valuing the assets at
historical cost or replacement cost.
iv) Dual Aspect
Concept: According to this basic concept of accounting, every transaction
has a two-fold aspect, Viz., 1.giving certain benefits and 2. Receiving certain
benefits. The basic principle of double entry system is that every debit has a
corresponding and equal amount of credit. This is the underlying assumption of
this concept. The accounting equation viz., Assets = Capital + Liabilities or
Capital = Assets – Liabilities, will further clarify this concept, i.e., at any
point of time the total assets of the business unit are equal to its total
liabilities.
V) Periodicity
Concept: Under this concept, the life of the business is segmented into
different periods and accordingly the result of each period is ascertained.
Though the business is assumed to be continuing in future, the measurement of
income and studying the financial position of the business for a shorter and
definite period will help in taking corrective steps at the appropriate time.
Each segmented period is called “accounting period” and the same is normally a
year.
vi) Historical Cost
Concept: According to this concept, the transactions are recorded in the
books of account with the respective amounts involved. For example, if an asset
is purchases, it is entered in the accounting record at the price paid to
acquire the same and that cost is considered to be the base for all future
accounting.
vii) Matching Concept: The
essence of the matching concept lies in the view that all costs which are
associated to a particular period should be compared with the revenues
associated to the same period to obtain the net income of the business.
viii) Realisation
Concept: This concept assumes or recognizes revenue when a sale is made.
Sale is considered to be complete when the ownership and property are
transferred from the seller to the buyer and the consideration is paid in full.
ix) Accrual Concept: According
to this concept the revenue is recognized on its realization and not on its
actual receipt. Similarly the costs are recognized when they are incurred and
not when payment is made. This assumption makes it necessary to give certain
adjustments in the preparation of income statement regarding revenues and
costs.
Answer of
Q.N.1(b).
Journal
The word ‘Journal’ has been
derived from the French word ‘JOUR’ means daily records. Journal is a book of
original entry in which transactions are recorded as and when they occur in
chronological order (in order of date) from source documents. Recording in
journal is made showing the accounts to be debited and credited in a systematic
manner.
In
the words of E. L. Kolher, “A Journal is a chronological record of accounting
transactions showing the names of the accounts that are to be debited or
credited, the amounts of debits and credit, and any useful supplementary
information about the transactions. It is analogous to a diary.”
Thus, the journal provides a
date-wise record of all the transactions with details of the accounts and
amounts debited and credited for each transaction with a short explanation,
which is known as narration.
Ledger
Journal
records all business transactions separately and date-wise. The transactions
relating to a particular person, asset, expense or income are recorded at
different places in the journal as they occur on different dates. Hence, it
fails to bring the similar transactions together at one place. Thus, to have a
consolidated view of the similar transactions different accounts are prepared
in the Ledger.
A
Ledger account may be defined as a summary statement of all the transactions
relating to a person, asset, expense or income, which have taken place during a
given period of time and show their net effect. So every entry recorded in the
journal must be posted into the Ledger. A ledger account is a statement shaped liked an English
alphabet 'T' that systematically contains all financial transactions relating
to either a particular person or thing for a certain period of time. It
is the principal book of accounts.
Necessity
or Utility of Journal
1. Direct
recording of transactions in the ledger may result in committing errors and
omissions and it would be difficult to correct them later on. Hence, Journal is
necessary.
2. A complete
record (i.e. Debit and credit aspects of each transaction) is available at one
place.
3. As the
transactions are recorded date wise, it facilitates quick and easy reference to
any transaction, whenever necessary.
4. Narration to
Journal entry explains the purpose of the entry and helps in understanding the
transaction recorded.
5. Entries in
the ledger can be made at leisure by the clerk concerned according to his
convenience.
6. Cross
checking between Journal and Ledger is facilitated to check the accuracy.
7. As the
entries in the Journal are made from basic documents like invoices. Vouchers,
receipts etc. The court considers the entries in the Journal as proof of
transactions.
Answer of Q.N.2.
Joural Entries
In the books of Deven Verma
Date
|
Particulars
|
Amount
|
Amount
|
|
a.
|
Purchases A/c
Sales A/c
To Suspense A/c
(For Goods purchased wrongly entered in sales book, now rectified)
|
Dr.
Dr.
|
400
400
|
800
|
b.
|
Ramdas’s A/c
To Suspense A/c
(For Ramdas account wrongly credited by Rs. 340 instead of being
debited by Rs. 430)
|
Dr.
|
770
|
770
|
c.
|
Sales A/c
Suspense A/c
To Furniture A/c
(For the sale of furniture for Rs. 540 credited to sales book as Rs.
450)
|
Dr.
Dr.
|
450
90
|
540
|
d.
|
Drawings A/c
To Purchases A/c
(for goods Taken by proprietor not entered in the books, now
rectified)
|
Dr.
|
100
|
100
|
e.
|
Krishan’s A/c
To Sales A/c
(For less amount of sales recorded in the sales book)
|
Dr.
|
27
|
27
|
f.
|
Sales Return A/c
To Suspense A/c
(For the balance of sales return book not recorded in accounts)
|
Dr.
|
210
|
210
|
Suspense Account
Particulars
|
Amount
|
Particulars
|
Amount
|
To Difference in Trial Balance
To Furniture
To Balance C/d
|
1270
90
420
|
By Purchases
By Sales
By Ramdas’s
By Sales Return
|
400
400
770
210
|
1780
|
1780
|
Answer of Q.N.4.
Total Debtors account
Particulars
|
Amount
|
Particulars
|
Amount
|
To Balance B/d
To Credit Sales
|
5300
4700
|
By Cash (received from debtors)
By Balance C/d
|
4000
6000
|
10000
|
10000
|
Total Creditors account
Particulars
|
Amount
|
Particulars
|
Amount
|
To Cash (Paid to creditors)
To Balance C/d
|
2700
1900
|
By Balance B/d
By Credit purchase
|
1500
3100
|
4600
|
4600
|
Statement of Affairs (Opening)
Liabilities
|
Amount
|
Assets
|
Amount
|
Creditors
Overdraft
Opening Capital (Balancing Figure)
|
1500
600
7500
|
Building
Debtors
Stock
|
2500
5300
1800
|
9600
|
9600
|
Trading account and Profit & loss account
For the year ended on 31 – 12 - 2010
Particulars
|
Amount
|
Particulars
|
Amount
|
To Opening stock
To Purchase
To Gross Profit
|
1800
3100
2400
|
By Sales
By Closing Stock
|
4700
2600
|
7300
|
7300
|
||
To Salaries
To General Expenses
To Depreciation
To Interest on Loan
To Net Profit
|
300
900
125
45
1030
|
By Gross Profit
|
2400
|
2400
|
2400
|
Balance Sheet
As on 31 – 12 - 2010
Liabilities
|
Amount
|
Assets
|
Amount
|
Capital
7500
Add: Net profit 1030
Add: Additional Capital 300
Less: Drawings 400
Creditors
Loan From C
1500
Add: Interest on Loan 45
|
8430
1900
1545
|
Debtors
Building 2500
Less: Depreciation 125
Stock
Bank Balance
|
6000
2375
2600
900
|
11875
|
11875
|
Answer of Q.N.5(a)
Income and Expenditure
Account
It is the summary of income
and expenditure for the accounting year. It is just like a profit and loss
account prepared on accrual basis in case of the business organizations. It
includes only revenue items and the balance at the end represents surplus or deficit.
The Income and Expenditure Account serves the same purpose as the profit and
loss account of a business organization does. All the revenue items relating to
the current period are shown in this account, the expenses and losses on the
expenditure side and incomes and gains on the income side of the account. Income
and Expenditure Account is a Nominal Account which is prepared at the end of
the accounting period by a Not-For-Profit Organisation to ascertain the
surplus, i.e., excess of income over expenditure, or the deficit, i.e. Excess of expenditure over income. which is transferred to the
capital fund shown in the balance sheet.
Features of Income and Expenditure Account.
i)
It is a nominal account which
reveals either surplus, i.e., excess of expenditure over income.
ii)
It is prepared for an accounting
period based on the accrual concept following the matching principle.
iii)
Only revenue items are considered,
while capital items are excluded.
iv)
Both cash and non-cash items, such
as depreciation, are recorded.
Difference between Receipts and Payments Account and Income and
Expenditure Account
Basic
|
Receipt and Payment Account
|
Income and Expenditure Account
|
1. Nature
|
It is a Real Account
|
It is nominal Account.
|
2. Recording
|
It records receipt and payments of
both capital and revenue nature.
|
It records incomes and expense
of revenue nature only.
|
3. Opening Balance
|
Balance at the beginning
represents cash and bank balance at the beginning of the year.
|
There is no balance at
beginning.
|
4. Closing Balance
|
Balance at the end represents
cash and bank balance at the end of the year.
|
Balance at the end represents
either surplus or deficit.
|
5. Period of items
|
It records the items received or
paid during the current year, whether relating to past, present or future
periods.
|
It includes expenses or incomes
relating to current year only.
|
6. Non cash items
|
It ignores non-cash items like
depreciation, credit purchase, credit sales etc.
|
It records non-cash items also.
|
7. Balance of account
|
It usually shows a debit
balance.
|
It may show a debit or a credit
balance.
|
8. Carrying forward
|
Closing balance is carried
forward to the next period.
|
Closing balance is added to the
capital fund.
|
Answer of Q.N.5(b).
Depreciation may
be defined as permanent decrease in the value of assets due to Use and /or the lapse of the time. According
to Carter,”Depreciation may be defined as the permanent and gradual decrease in
the Value of an assets from any cause.’’
Methods of Depreciation
classified under the following groups:-
(1)Uniform charge methods:
(a) Fixed
installment method.
(b) Depletion
method
(c) Machine hour
rate method
(2)Declining charged method:
(a)Diminishing
balance method
(b)Sum of years
Digit method.
(c)Double
Declining method
(3)Others method:
(a)Group
Depreciation method
(b)Annuity
method
(c)Inventory
system of Depreciation
(d)Insurance
policy method
Out of the
methods mentioned above, most commonly used methods are straight line method
and Written down value method which are explained below:
Straight-line
Method
Straight-line depreciation is the simplest and
most-often-used technique, in which the company estimates the disposal value of
the asset at the end of the period during which it will be used to generate
revenues (useful life) and will expense a portion of original cost in equal
increments over that period. The disposal value is an estimate of the value of
the asset at the time it will be sold or disposed of; it may be zero or even
negative. Disposal value is also known as scrap value or residual value.
Depreciation
under this method is calculated by applying the following formula:
Depreciation = (cost
of asset – scrap value)/ life of asset
Reducing
Balance Method
Depreciation may be given as a fixed percentage annually and
may be applied on cost in the first year, but in subsequent years applied on
the reduced balance or net book value of the previous year. This method is
called the diminishing balance method.
There are two
methods of charging depreciation. Under 1st method fixed assets are
shown at book value. In second method a separate account, provision for
depreciation, is opened. In this method,
Provision for Depreciation Account is opened and depreciation charged in this
account instead of Asset Account.
Following Journal entries are passed at the
end of each accounting period:
(i) Depreciation Account Dr
To
Provision for Depreciation Account
(for depreciation during the year)
(ii) Profit and Loss Account Dr
To
Depreciation Account
(for transferring depreciation to profit and
loss account)
In this treatment the balance of Asset
Account remains same throughout its useful life. Provision for Depreciation is
show liabilities side of Balance Sheet.