Basic Concept on Accounting

What is the meaning of Accounting ?

“Accounting is the art of recording, classifying and summarizing 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 result thereof”

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The widely accepted definition of accounting, given by the American Accounting Association in 1966 which treated accounting as :

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“The process of identifying, measuring and

communicating economic information to permit

informed judgment and decisions by the users of

accounts.”

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In 1970, the Accounting Principles Board (APB) of American Institute of Certified Public Accountants (AICPA) enumerated the functions of accounting as follows: “The function of accounting is to provide quantitative information, primarily of financial nature, about economic entities, that is needed to be useful in making economic decisions.”

Thus, accounting may be defined as the process of recording, classifying, summarizing, analysing and

interpreting the financial transactions and communicating the result thereof to the persons

interested in such information.

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Accounting is an art….The term “Art” means diverse range of human activities and study of these activities but most often misused or misunderstood to refer to painting, film, photography, sculpture, and other visual media. Art is using the skills or techniques of any field. We can say that art is the study of implementation of techniques and methods.

Accounting is an art because it presents the financial findings by following and implementing a universally accepted method (GAAP).

Art is the study of implying scientific method to practical use. And Accounting is an art as the established rules and principles of accounting is applied in bookkeeping process of and economic entity.

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Accounting is the science of recording and presenting the financial data of an economic entity by observing, detecting, investigating, and identifying the economic events via established collecting, testing, analyzing and presenting methods. Similarly or for scientist; to reach an acceptable conclusive result on a particular matter or topic requires identifying recording, measuring, researching it.

Science is obtaining knowledge about by a systematic pattern including observation, study, practice, experiments and investigation. Like Science; Accounting requires to gain knowledge about the economic status of an entity by systematic study.

Accounting is a Science….

.

So, Accounting is a science that includes comprises of rules, principles, concepts, conventions and standards like science

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Views and thoughts about whether accounting is an art or science differ from accountant to accountant.

Processes and methods used in accounting can be underlined as scientific, and the decisions and estimation making can be classified as an art.

The rules and principles is the science part of the “accounting” and choosing the way to use them is considered as the art

Conclusion :

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Bookkeeping

Accounting

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Book-keeping is a part of accounting and is concerned with records keeping &

maintenance of books of accounting which is often routine & clerical in nature and can be accomplished through the use of mechanical

and electronic equipments.

Book-keeping

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Accounting starts where book keeping ends. It refers to the actual process of preparing and presenting the accounts. In others words, it is the art of putting the academic knowledge of accountancy into practices .It covers the following activates :

Summarising the classified transaction and events in the form of income Statement and Position Statement etc.

Analysing the summarised results. Interpreting the analysed results. Communicating the interpreting information to the

interest of users.

Accounting:

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Accountancy refers to a systematic knowledge of accounting concerned with the principle & techniques which are applied in

accounting, It tells how to prepare the books of accounts, how to summarise the accounting

information and how to communicate it to the interested parties.

Accountancy

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Accounting as a source of information

Information generated through financial statement such

as profit loss account, balance sheet, cash flow statements, etc.

facilitate by different users of groups whether inside or outside

the business enterprises. and enables them to take

appropriate decisions.

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Advantages of Accounting Help in Payment of Income taxMany types of taxes-income-tax, vat and sales-tax are imposed upon the businessmen now a days. To make payments of this taxes it is necessary that accounts are maintained according to the principles of accounting.

Proof in the court of lawIf the accounts of the business are kept properly according to the principles of accounting .They can be presented in the court of law. For giving necessary documentary evidence for example the business man has to present his account in the court if he want himself to be declared insolvent.

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Help on RememberingA businessman cannot remember all the transaction, how-so-ever sharp his memory may be. Therefore this transaction should be recorded in black or white , so there is may not be any misappropriation.

Facilitates raising loans.Accounting facilitates raising loans from banks and various financial institution by providing them historical and projected financial statements

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Helps in the realisation of debit.Accounting proves useful in realizing debts from other persons. The business man can produce his account book in the court of law as a proof of debt.

Facilitates a comparative study.By keeping a systematic records accounting helps the owner of the business to compare one year’s cost, expenses, sales and profit, etc. those value of others years by commutating various accounting ratio such as comparison provides the useful information on the basis of which important decision can be taken more judiciously.

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Helps in sale of business:If the business man wants to sale its running business he can realize its reasonable price only if he had maintained proper accounts, otherwise it will not be possible to asses the correct value of the business.

Assists the management:Accounting assist the management in planning and controlling business activities and in taking decisions. For example, projected cash flow statements facilitates the management to know future receipts and payments to take decisions regarding anticipated surplus or shortage of funds. By Nisha Pawar

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Limitation of Accounting• Financial Accounting is not absolutely exactFinancial accounting is not completely free from personal bias or judgment. Though transaction are recorded on actual basis, but there are any instances where estimates have to be made for calculating profits. Such estimates requires judgmental factor For example provision for doubtful debt, depreciation of asset etc.

• Financial Accounting does not show what the business is worth

The assets are recorded in the balance sheet at cost less than depreciation because they meant for use not for sale. Hence the balance sheet should not to be taken to disclose the realised value of assets on sale.

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• Financial Accounting does not present the whole picture.

Financial Accounting information does not include the qualitative aspects of business such as good labour relation, quality of the goods, management efficiency, etc. Accounting is considered only with those activities which can be expressed in monetary term.

• Window Dressing in Balance SheetWhen accounts apply window dressing in balance sheet, the balance sheet can’t exhibit the true and fair view of the state of affairs of the business

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Worthless assets are also shown in Financial Statements.

Certain Worthless assets are shown in balance sheet just to distort the factual position e.g. preliminary expenses, discount on issue of shares and debenture, underwriting commission etc.

No effects of inflationary trends.As money is not a stable unit of measurement of inflation makes most of figures out of date.

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Thus, Generally Accepted Accounting Principles (GAAP) refers to the rules or guidelines adopted for recording and reporting of business transactions, in

order to bring uniformity in the preparation and presentation of

financial statements.

The Generally Accepted Accounting Principles have evolved over a long period of time on the basis of past experiences, usages or customs, statements by individuals and professional bodies an regulations by government agencies and have general acceptability among most accounting professionals.

The term ‘principle’ has been defined by AICPA as `A` general law or rule adopted or professed as a guide to action, a settled ground or basis

of conduct or practice

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Accounting Principle are based on certain concepts and conventions.

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The term convention relates to customs or traditions as a guide to the preparation of

accounting statements.

Accounting convention

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Accounting concept is a basic assumptions concerning the economic environment in which

accounting exists.

Accounting concept

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MONEY MESURMENT CONCEPT. The concept of money measurement stats that only those transactions and happenings in an organizations which can be expressed in terms of money such as sale of goods or payment of expenses or receipt of income, etc., are to be recorded in the books of accounts.

Events which can not be expressed in money terms do not find place in the books of account through they may be very important for the business. Non monetary events like death, dispute, sentiments, efficiency etc., are not recorded in the books, even though these may have great effect. Thus , accounting information is perceived as essentially monetary and quantified.

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GOING CONCERN CONCEPTThe concept of going concern assumes that a business firm would continue to carry out its operations indefinitely i.e., for a fairly long period of time and would not be liquidated in the foreseeable future. This concept provides the basis for showing the assets in the balance sheet.

However , if it is certain that business will continue for a limited period, then the accounting records will be kept on the basis of expected life of business and there will be no need for such detailed accounting information as to revenue and capital expenditure. By Nisha Pawar

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Accrual Concept• Accrual concept is basic assumption in accounting process. Accrual means when a payment or due are arise especially an amount of money that is yet to be paid or received(accrued) i.e., not received or paid actually, at the end of the accounting period.

• Accrual means that revenues are recognized when they become receivable. Suppose the expenses are recognized when they become payable although cash is paid or not paid.

• Therefore, the accrual concept makes a distinction between the accrual receipt of cash and the right to receive cash as regards revenue and actual payment of cash and obligation to pay cash as regards expenses.• The accrual concept under accounting assumes that revenue is realized at the time of sale of goods or services irrespective of the fact when the actual cash is received.

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Realization Concept:

Determines whether a revenue or expense has occurred so that it can be measured, recorded and reported in

the financial reports. In general, revenue is recognized along with the associated expenses when an exchange has taken place, the earnings process is complete, the amount of income is determinable, and collection of

amounts due is reasonably assured.

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Matching Concept: Determines that the expenses associated with revenue are identified and measured. Matching concept states

that expenses incurred in an accounting period should be matched with revenue during the year. It further state

that all the revenue earned during the accounting year whether received or not should be taken into account

while ascertaining profit and loss for the period. Thus, it becomes necessary to provide outstanding and prepaid

expenses for the period costs.

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Business Entity Concept:

Delineates the boundaries of the organization for which amounts are kept and reports are made.

Business entity concepts states that the business it to be treated as a separate entity by itself

independent of the owner’s entity . In books of business each transaction is recorded from the

point of view of the firm not the point of view of owner.

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Therefore, Assets are initially recorded by measuring the amount paid for them. As time passes, asset

measurements are not changed even if the current value of these assets is changing.

Cost Concept:Cost concept means that the amount where any asset is bought is to be written in the financial statement.

The marked price is not to be written here but exact the amount in which the asset is bought should be written.

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Revenues and gains are recognized slower and expenses and losses are recognized quicker. The concept of conservation provides guideline for recording transaction in the books of account and its based on policy of playing safe. There are two principles which stems out directly from conservation:(A)The accountant should not anticipated income and should

provides all possible losses.(B)Faced with the choices between two methods of valuing an asset

the accountant should choose a method which lead to lesser value.

Conservation (Prudence)

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Some example are: Making provision for bad debt in respect of doubtful debts, amortising intangible asset like, goodwill, patents , trade mark, etc., as early as possible , valuing the stock in hand at lower of cost or market value.

Consistency Concept: The concept of consistency means that accounting methods once adopted must be applied consistently in future. Also same methods and techniques must be used for similar situations.

It implies that a business must refrain from changing its accounting policy unless on reasonable grounds. If for any valid reasons the accounting policy is changed, a business must disclose the nature of change, the reasons for the change and its effects on the items of financial statements.

Consistency concept is important because of the need for comparability that is, it enables investors and other users of financial statements to easily and correctly compare the financial statements of a company. 35By Nisha Pawar

Materiality Concept:Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements (IASB Framework).

Materiality therefore relates to the significance of transactions, balances and errors contained in the financial statements. Materiality defines the threshold or cutoff point after which financial information

becomes relevant to the decision making needs of the users. Information contained in the financial statements must therefore be complete in all material respects in order for them to present a true

and fair view of the affairs of the entity.

Materiality is relative to the size and particular circumstances of individual companies. 36By Nisha Pawar

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Disclosure :As financial information is used by group of people so it becomes all more important that the financial statements make a full, fair, and adequate disclosure of all information which is relevant for taking

financial decisions.

Remember that disclosure of material facts does not mean leaking out the business secrecy but all information of proprietor’s and

investor’s interest. Accordingly, certain unimportant items are left and some of them are merged with other items. The intention is not

to over-burden accounting with information but present facts without any malafide intension.

ACCOUNTING PERIOD CONCEPTAccounting period refers to the span of time at the end of which the financial statements of an enterprise are prepared, to know whether it has earned profits or incurred losses during that prepared and what exactly is the position of its assets and its liabilities at the end of that period.

The assumption of accounting period facilities the business in assessing its worth after a year. It focuses that the expenditure whose benefit will accrue over a long period should be apportioned suitably over each year.

An Example of such expenditure is depreciation on machinery. It requires a process of estimation. At the end of each accounting period an income statement and a Balance Sheet are prepared. The income statement discloses the profit or loss made during the accounting period while the Balance Sheet depicts the Financial Position on the last day of the accounting period.

The financial statements are therefore prepared at regular intervals, normally after a period of one year, so that timely information is made available to the users. This intervals of time is called accounting period.

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Sub-Fields of Accounting Cost Accounting

Financial Accounting

Management Accounting

Tax Accounting

Social Responsibility Accounting

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Financial Accounting is the original form of accounting. It deals with the systematic maintenance of books of accounts with a view to ascertain the profitability and the financial status of business.

The main purpose of this branch of accounting is to ascertain the financial position of business at the end of certain period. That is, to find out whether the firm is earned profits or incurred losses. It relates to the past period, and is monetary in nature. It is primarily concerned with the provision of financial information to all the stakeholders.

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Cost accounting Cost accounting is a

process financial accounting of accounting of costs .In a view of limitation of financial accounting in respect of information relating to the cost of individual products, cost accounting was developed .Cost Accounting is the formal mechanism by means of which cost of products or services are as certain controlled.

Its main purpose is to ascertain the cost of production of goods and cost of running different departments to enable the management to fix the selling price.

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Tax accounting The tax accounting is the branch which is used for tax purpose is

known as tax accounting. Income tax sales tax ,service tax ,value added tax (vat) excise duty as

well as customs duty are computed on the basic of tax

accounting Mechanised accounting may be of much help

in this regard.

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Management Accounting provides necessary information to management for discarding functions. Management accounting covers wide areas such as Budgetary control, Inventory Control, Internal auditing, Working capital management, Statistical methods etc.

The main purpose of this branch is to provide all relevant information that may be required by management to take decisions in respect of various aspects of running business enterprises. Such information include Cash flows, Purchase requirements , Manpower needs ,environmental data about effects on air, land ,water etc.

Management Accounting

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Social responsibility

Social responsibility of accounting is a process of identifying, measuring and communicating the social effects of business decisions to permit informed judgements and decisions by the users of accounting data and information.

Business has great social responsibility and its contribution to society may consists of providing employment ,

supplying good quality products and services , paying fair wages to employees

and taxes to the government . Management is held Responsible for what it contributes to the social well-being and progress. Accounting for

environment and ecology is part of social responsibility accounting.

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Personal account

Note that in accounting, persons refer not only to individuals but also to companies, partnerships or any form of organization with whom there may be transactions.

As the name says, personal accounts are accounts of persons. They, therefore, bear the names of persons. Such persons can be credit customers or credit suppliers. Therefore, personal accounts are kept in either:• Sales ledger, or• Purchases ledger

Personal Accounts, in practices may be of following types:• Natural Personal Account• Artificial or Legal Persons Accounts• Representative or Groups Personal Accounts By Nisha Pawar

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• Natural Personal Account

Such as the accounts of proprietor, supplier or receiver of goods or money, etc., in the name of natural persons such as Albert Account, James Account etc.

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• Artificial or Legal Persons Accounts

Such as the accounts of legal entities in the nature of limited companies accounts, (example : Hindustan Lever Limited , ITC Limited.),

Such as the accounts of legal entities in the nature of Partnership Firms Accounts (example: Radhey Ram Nath Bros.)

Such as the accounts of legal entities in the nature of Government agencies (Example: Sports Authority of India)Such as the accounts of legal entities in the nature of Institutional accounts (example: Delhi Collage of Arts and Commerce);

Such as the accounts of legal entities in the nature of Clubs Accounts (example: Lions club)

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• Representative or Groups Personal Accounts

The group or representative personal accounts are the accounts of different persons of the same nature but more than one in numbers.

In the account books, the accounts are opened in the names of individual persons. But since they are of same nature , they are grouped into one accounts

Example : Sundry Debtors Account and Sundry Creditors Account.

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Impersonal accounts

As seen in the previous slide, impersonal accounts are of two types:1.Real accounts2.Nominal accounts

Accounts which are not personal such as machinery account, cash account, rent account etc.

All impersonal accounts are kept in the General ledger.

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.• Real accountsReal account stands for the resources or properties of a business enterprises, which can be intangible and tangible.

Tangible accounts refer to properties having physical existence , like cash, building, stock of goods, furniture etc.

Intangible refer to those which can not be physically felt or touched but are capable of monetary measurement such as Goodwill patent rights, trademarks, copyrights, etc.

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• Nominal accounts

• Nominal accounts relates to expenses, revenues, capital and drawing. Examples of accounts are:

Loan account Sales account Commission received account, Salaries account, Rent account, Capital account, Drawings account Purchases Return Account Sales Return AccountBy Nisha Pawar

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Relationship between types of ledger and types of accounts

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BASIC ACCOUNTING TERMS ENTITY:Entity means a thing that has a definite individual existence. When an accounting system is devised for a business entity, it is called an accounting entity. For example Big Bazar, Bhargav Paints Pvt. Ltd. etc.

TRANSACTION:

A event involving some monetary value between two or more entities, and is capable of changing the financial position of the enterprise. We can also say that transaction is a activity of a financial nature having documentary evidence, capable of being presented in numerical, monetary term causing effect on assets, liabilities, capital, revenue and expenses. it can be in both forms cash or credit.

Transaction can be purchase of goods, collection of money, payment to creditors for goods and services, etc.

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AssetsAssets are economic resources of an enterprise that can be useful expressed in monetary terms.they are those resources that the business owns. These are the items of value used for the operations of the business enterprise and also includes the Assets = Capital + Liabilities due to it from others. some of the examples of assets are money owing by debtors, stock of goods, cash, furniture, machines, building, etc.

Assets = Capital + Liabilities

Assets can be broadly classified into two types :

Fixed Assets Current Assets

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CURRENT ASSTES:Current assets are those which are held on the short term basis with the intention of converting them into cash during the normal business operations of the company. Examples of current assets are -unsold stock, debtors, bills receivables bank balance, cash in hand, etc.

FIXED ASSETSFixed assets are those assets which are purchased for the purpose of operating the business and not for resale i.e., held by the business enterprise for long term purpose. Examples of fixed assets are building, machinery, furniture, etc.

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Liquid AssetsLiquid Assets liquid assets are those which yield cash in a very short period of time current assets excluding inventory and prepaid expenses are included in liquid assets

Liquid Assets = Current assets - Prepaid expenses - Inventory

Intangible AssetsIntangible assets are those which can't be seen and touched but we can feel them for example goodwill, trademark, etc.

Tangible AssetsTangible assets are those which can be seen and touched . For example furniture car building etc.

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Liabilities :Liabilities are obligation or debt that an enterprise has to pay at some time in the future. They represent the creditors’ claim on the firms’ assets, or we can say that they are claims of those who are not owners. They can be expressed as :

Liabilities = Assets - Capital

Liabilities can be classified into following:

Long term Liability are those that are usually payable after the period of one year. They are also known as Fixed Liabilities. For example, long-term loan, debenture, public deposit, etc.

Short term Liability are those which are payable with in a year from the date of balance sheet and paid out of current asset. For example, bank overdraft, bills payable, outstanding expenses.

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Amount (in terms of money and asset having monetary value) invested by the owner in the firm is known as capital. For the firm, it is liability towards the owner, since owner is treated to be separate from the business. Capital is also known as owner’s equity and is always equal to assets less liabilities. This can be expressed as:

Capital = Assets – Liabilities

Capital :

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Goods :Goods refers to product and services in which the business unit is dealing i.e., in terms of which it is buying and selling or producing or producing and selling . They are the physical item of trade. Here it should be noted that items which are purchased of stationery dealer, purchase of stationery will be goods for him but for others stationery is just an item of expense.

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Sales are total revenue from goods or services sold or provided to customers when the goods are sold to cash, they are cash sales but if good are sold and payment is not received at the time of the sale, it is termed as credit sale. Some customers might return the goods, that returned portion is sale return which is deducted from the total sales but sales of fixed assets is not termed as sales.

Sales:

PurchasesPurchases are total, amount of goods procured by a business on credit and on cash, for use or sale. In manufacturing, raw material are purchased, processed further into finished goods and are then sold. In trading concern, purchases are made of merchandise for resale with or without processing.

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RevenuesRevenues are the amount of the business earned by selling the goods or services to the customers, they are the inflow of asset which results in an increase owner capital sales of goods and services, earning from interest, dividends, rent, commission etc., are some example of revenue.

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ExpensesCosts incurred by the business in the process of earning revenue are known as expenses. They are the amount spend in order to produce the revenue. It decreases the capital. Expenses may include : Cost of sales, depreciation, general business expenses such as salary, advertisement, commission, rent, etc.

Expenses may classified into

Outstanding Expenses. It refers to those Expenses which have become due during the accounting period but which yet not paid. They are liability of the firm.

Prepaid expenses:It refers to those expenses which are not due yet but are paid well in advance. They are treated as an advances.

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Expenditure:Expenditure may be define as money spend or liability incurred for some benefit, service or receiving property. Some of the example of expenditures are – Payment of rent, Salaries, Purchase of Goods, Purchase of Machinery, Purchase of Furniture, etc. Expenditure may be classified into :

Capital Expenditure :Those Expenditure which are incurred for acquiring fixed assets like Building, machinery ,furniture etc, are referred to as a capital expenditure , and are shown in the balance sheet as assets

Revenue Expenditure:Those expenditure which are incurred in the current year and benefit of which is also taken in the same in the same accounting year . These expenditure do not result in income of the firm. All revenue expenditure is termed as expensesBy Nisha Pawar

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ProfitThe excess of revenues of a period over its related expenses during any accounting year is profit.

Gross Profit It is difference between ales revenue or the proceeds of goods or services sold over. its direct cost

Gross Profit

Net Profit. It is the profit made after allowing for all expenses. Gain

Profit that arise from events or transactions which is incidental to business is termed as gain. Example go gain are: sale of fixed asset, winning o court case, appreciation in value of fixed assets, etc.

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The excess of expenses of a period over its related revenues is termed as loss. It decreases the owner’s equity.

Loss

It is also referred to such activities of business which do not yield any benefit.For example : Loss due to accident, theft etc. It also include loss on sale of fixed assets

Loss = Expenses-Revenue

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Income

Income can be classified into followings :

Income is the profit earned during a period of time or we can say that the difference between revenue and expense is called income.

Income =Revenue – Expenses

Accrued IncomeIt refers to that part of income which has been earned by the business during the accounting year but yet not to become due, and therefore not yet received. It is treated as an asset for the firm.

Income received in advance :It refers to that part of income which has been received by business well in advance or before being actually earned. It is liability for the firm.

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Trade Discount

Discount :Discount is the deduction in the price of the goods sold. Discount can be classified into two types :1. Trade Discount 2. Cash Discount

Cash Discount

Offering any deduction at agreed percentage of sale price at the time of selling the goods, is termed as Trade Discount. It is generally offered by manufacture to whole seller or whole seller to retailer.It is always deducted from the sale price and no entry is made in the books of accounts.

When the buyer is allowed some discount to induce them to make prompt payment, it is called cash discount. It is recorded in books of accounts. By Nisha Pawar

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Any type of withdrawal i.e. in monetary terms of goods, by the owner from the business for personal use, is known as drawings. It is to be noted that drawings reduce the owner’s equity in the business

Drawings:

Debtors:Those persons who owes money to the firm generally on account of credit sale of goods is called a Debtor. The total amount standing to the favour of such person and/or entity on the closing date , is shown in the balance sheet as Sundry Debtors on the asset side.

Creditor:A person to whom the firm owes money is called a creditor. They are the persons and/or rather entities who have to be paid by an enterprise on amount for providing the goods on credit.The total amount standing to the favour of such person and/or entity on the closing date is shown as Sundry Creditors on the liability side of balance sheet.

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Dual Aspects Principle

This principle is based on the famous Newton’s Law of Motions i.e. to every action there is always an equal and contrary reaction.

Thus every debit balance must have a corresponding credit and vice-versa and upon this dual aspect whole superstructure of Double Entry System of Accounting has been raised.

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Golden Rules Of Accounting

• Rules of Accounting: Debit all expenses and losses Credit all income and gains

There are 3 golden rules or types of accounts. These are:-

• Rules of Accounting: Debit the Receiver Credit the Giver.

• Rules of Accounting: Debit what comes in Credit what goes out

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Journal a book of primary record and often called a book of original entry.

This is also called a day book, perhaps because of its name having been derived from a French word jour

meaning “day.”

Journal book

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STEPS IN JOURNALISINGIn the process of journalizing the accounts by each and every transaction are debited and credited separately. Its involves the following steps:

Step 1 : Ascertaining the names of accounts after examining the business transaction.

Step 2: Choosing the approach to follow i.e. Traditional O‘ Modern.

Step 3: Analyse the nature of accounts involved in the transaction based upon the selected approach.

Step 4 :Examine the name of accounts to be debited or credited.

Step 5: Fill in the related information in all the five columns of the journal.

Step 6: Write the narration of the transaction. 73By Nisha Pawar

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LedgerThe ledger is a book of final entry in which the accounts are recorded in a classified and summarised form. It is, therefore, the PRINCIPLE BOOK which supplies detailed information about the trancations connected with a individual account at a glance.

A ledger Account may be defined as a summary statement of all the transactions relating to person, asset, expense or income which have taken place during a given period of time and shows their net effect.

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FORMAT OF LEDGER ACCOUNTS:

A Ledger account has two sides – Debit (left part of the accounts) and Credit (right part of the account) as shown below:

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POSTING: The process of transferring the debit and credit items from journal to classified accounts in the ledger is known as ‘Posting’.

Rules regarding Posting:

Separate account is opened in ledger book for each account and entries from ledger posted to respective account accordingly.

Use the words ‘To” (identifies the accounts to be written on the debit side) and ‘By’ (identifies the accounts to be written on the credit side)

The concerned account debited in the journal should also be debited in the ledger but reference should be of the respective credit account

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BALANCINGAt the end of the each month or year or any specific day it is necessary to determine the balance in an account. To do that, add the totals of both sides (Debit and credit sides) and find out the difference in both the side. The difference in both the sides is ‘Balance’. If the Debit is greater than the credit side, it is a Debit balance or vice-versa.

The Debit balance is written on the Credit side as, “By Balance c/d” (carried down) or the Credit balance is written on the Debit side as, “To Balance c/d. By doing this, two sides will be equal.

While preparing the Ledger accounts for next period, this balance would be transferred from last period Ledger accounts as ‘To Balance b/d’ (brought down) if there was debit balance or ‘By Balance b/d’ if there was credit balance in the last period Ledger.

It should be noted that Nominal accounts are not balanced, instead the balance at end need to be transferred to the Profit and Loss Account.

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Trail BalanceA Trail Balance is a statement of debit and credit totals or balances, extracted from the ledger with the view to test the arithmetical accuracy of the books .

Trail Balance is neither a part of double entry system, nor it appear in the actual account. It is merely a working paper. Always remember a trail

balances just a statement, not as account.

It is always prepared on a particular date and not a particular period.

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Total Method: Under this method, every ledger account is totalled and that total amount (both credit and debit side) is transferred to trial balance. The difference of totals of each ledger account is the balance of that particular account. This method is not commonly used as it cannot help in the preparation of financial statements.

METHODS:

Balance Method: Under this method, every ledger account is balanced and those balances only are carried forward to the trial balance. Financial statements are commonly prepared on the basis of this method.

Total and Balance Method: As name shows it is combination of above two methods. Under this method, statement of trial balance shows to balance contains the balance in both ways as explained in the above two methods.

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RULES:Following are the rules to prepare trial balance from Ledger balances:

2) The following balances must be placed in the credit side of the trial balance:

Liabilities Accounts Income Accounts Profits Capital Account

1) The following balances must be placed in the debit side of the trial balance:

Asset Accounts Expenses Accounts Losses Drawings Cash and Bank Balances

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Profit & loss

Account

According to Prof. Carter, “A Profit & Loss account is an account into which all gains and losses are collected in order to ascertain the excess of gains over losses or vica versa.”

Profit & Loss account

Trading Account “The Trading Account shows the result of buying and selling of goods. In preparing this account, the general establishment charges are ignored and only the transactions in goods are included.”

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New format of Profit & Loss account as per Revised schedule 6 Revised:

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Balance Sheet

In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances

of a sole proprietorship, a business partnership, a corporation or other business organization, such as an LLC or an LLP. Assets, liabilities and ownership equity are listed

as of a specific date, such as the end of its financial year. business' calendar year.

A balance sheet is often described as a "snapshot of a company's financial condition". It is also known as position statement.

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TRADITIONAL FORMAT OF BALANCE SHEET :

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New Format of balance sheet as per schedule 6 (Revised)

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Accounting cycle is a step -by-step process of recording , Classifying and summarization of economic transactions of business .Its generates useful financial information n the form of financial statement including income statements, Balance sheet, cash flow statements and statement of change in equity.

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1. Collect & verify source data 2. Analysing the transactions3. Recording transaction via Journal Entries4. Posting Journal Entries to Ledger Account5. Preparing the trail balance6. Preparing worksheet7. Preparing Financial statements8. Preparing adjusted entries at the end of the

period.9. Preparing post- closing trail balance

Main steps in an accounting cycle:

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