KINSHUK INSTITUTE

Chapter –1 Basic Concepts (Accounting Process)

 Transactions: Accounting starts with Transactions. Transaction means Receipts, Payments, Sale, and
Purchase etc.
It is any give & takes which has financial effects. Which affects the concern? (Business Entity
concept)
 Entry: Transaction is recorded by way of an entry in the Cash book/Journal/Purchase Register/Sale
Register (books of entry) etc. as per Double Entry Principle i.e. Debiting some accounts & Crediting
others with the equal amounts.
 Posting Ledgers: Above entries are posted in the ledger books in respective accounts.
Different accounts are prepared for each & every different nature of items. Each account will
provide the complete details about the transaction of a particular nature for that accounting
period. Accounts will have two sides known as Debit & Credit sides.
 Balancing: At the end of accounting year all accounts are totaled & balanced, some accounts
may have Nil balance, other may have Debit balance (i.e. Debit total is more) & some other may
have credit balance (i.e. credit total is more.)
 Trial Balance: The accounts having balances are listed in a statement known as Trial Balance giving
Debit & Credit balances separately.
Total of debit & credit side must tally because accounting is done by double entry system.
If it doesn’t tally that means there are errors which will have to be located & rectified.
 Final a/c: With the help of this Trial Balance and other Adjustment/additional information the Final
Statement of Accounts i.e. (a) Trading profit & loss Account and (b) Balance Sheet is prepared.
 This adjustment/additional information are the transactions which have not been recorded in the
books of account so far, therefore double effect (i.e. debit & credit) has to be given for them.
 Closing entries: All the accounts (accounts of Income & Expenses) transferred to trading profit &
loss account gets closed & their net result i.e. the profit or loss is transferred to Capital Account.
Whereas the accounts (accounts of Assets & Liabilities) shown in the Balance Sheet are carried
forward to next year’s books of accounts as opening balances.

Classification of Accounts:
 Traditionally all accounts are broadly classified into two heads: (a) Personal Account and (b)
Impersonal Account.
 The Impersonal Account may further be sub-divided into (i) Real Account, and (ii) Nominal
Account.
 So, accounts can be classified into Personal, Real and Nominal.

Personal Account:
 It deals with the accounts relating to persons and takes the following forms-
1. Natural Person: e.g. the name of an individual, the suppliers and buyers, say, Ram, Shyam etc.
2. Artificial Person or legal or Notional Person: e.g. Bank, Firm, Association, Company etc.
3. Representative Personal Account: e.g. Outstanding liabilities for Rent, Salary etc, i.e. Rent
Payable a/c etc.
Capital a/c is also a personal a/c. It is the account of owner. Similarly Drawings a/c is also a personal a/c of
owner.

Real Account:
 It stands for properties and assets which are broadly classified as tangible and intangible
 e.g. Plant, Cash, Land, Building etc. are tangible real a/c
 Whereas goodwill, patent, trade mark etc. are intangible assets.

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Nominal/Fictitious Account:
 It relates to items which exist in name only.
 This account incorporates items relating to ‘Expenses and Losses', and ‘Income and Gains'.
 e.g. Rent, Salary, Dividend, Bad Debts etc.
 Thus it represents the accounts of Goods/ Services/benefits consumed or rendered to others.
Adjustment Accounts: Certain accounts donot have meaning on standalone basis but they are
adjustment to some other accounts like Provision for bad debt a/c, Depreciation provision a/c. etc.

Deciding Entry by using classification of Accounts: Golden Rule (rules for Ascertaining ‘DEBIT’
&‘CREDIT')
Personal Account: ** Debit the receiver/the person who takes the benefit/ the person from whom
something is receivable.
** Credit the giver/the person who sacrifices the benefit/ the person to whom we
are liable to give /pay.
Real Account: ** Debit what comes into the business.
** Credit what goes out of the business.
Nominal Account: ** Debit All Expenses / losses
** Credit All Incomes / gains

CASH BOOK:
 All cash transactions i.e. receipts & payments will be recorded in the cash book.
 Cash book will be prepared in the form of an account having debit and credit side.
 Receipt will be recorded on the debit side and payments on the credit side.
 The cash book itself serves the purpose of cash A/c & hence we don’t have to prepare
separate cash A/c in Ledger.

Posting:
 The receipt side items will be posted on credit side in respective accounts in ledger.
 Payment side items will be posted on debit side in respective account in ledger.
 Only one posting is made because cash book itself is also a cash account & hence when we
write an entry on receipt side it means cash a/c is debited &
 When we write an entry on payment side it means cash a/c is credited.
 Balance of Cash a/c is cash balance & will be taken in Trail balance.

CASH-CUM-BANK BOOK:
 We can make cash book with two columns, one for cash transactions & other for Bank
transactions.
 All deposits into & withdrawal from the bank will be recorded in bank column, & this itself is a
bank a/c also.
 No need to prepare now Cash & Bank a/c in ledger.

Posting:
 Posting from Bank column & cash column is made in the same way as explained in case of
cash book.
 Balance of Cash and Bank columns will come in Trial balance as cash and bank balances.

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a. Double column cash book can be of the following three types i) Cash & Bank column ii) Cash &
discount column iii) Bank & discount column.
b. The discount columns are opened when the transactions involving discount allowed & discount
received are frequent.
c. Discount allowed will be entered on debit side and discount received on credit side. Posting to
other accounts will be the cash/bank amount plus discount.
d. Unlike Cash & Bank column, discount column is not treated as an account & hence total of
discount column is posted in Discount account in ledger.

TRIPPLE COLOUMN CASH BOOK:

 It will have three columns on both sides for cash, bank & discount.
 Entry in this book & posting to ledger accounts will be same as mentioned above.

Cash column i.e. Cash account will always have debit balance but Bank column i.e. bank account
can have either debit or credit balance.

PETTY CASH BOOK:

 This is to be prepared to record the petty (small) expenses, which are incurred frequently.
 On the payment side the amount is classified into various columns depending upon the
account to which it has to be debited.
 The columns can be for conveyance expenses, postage, repairs & maintenance, printing &
stationery, salary, wages and so on.
 It is also known as analytical cash book.
 In petty cash book receipt will be from main cash book.

Posting:
 The total of these columns is debited to respective expense accounts in the ledger after a
specific period may be monthly, weekly etc.
 The Balance of petty cash book (i.e. receipts (-) payments) shows the balance of cash in hand
which will be shown in Trial balance.

IMPREST SYSTEM:
 An amount is fixed which is given to petty cashier who meets expenses out of it & periodically
or when the amount is spent, he takes reimbursement from main Cashier exactly equal to
amount spent hence his cash balance again becomes equal to fixed imprest amount.
 This is the upper limit of cash which petty cashier can have.
 It is a version of Petty cash book only.
Ex. Imprest amount is fixed at Rs. 1000. Petty cashier has spent Rs. 785 in that period, thus he has
balance of Rs. 215. Now he will get reimbursement from main cashier Rs. 785, thus his balance will
again become Rs. 1000/-

SALES BOOK:
 The Sales Day-Book is a register specially kept to record credit sales of goods dealt in by the firm,
 Cash sales are entered in the Cash Book and not in the Sales Day Book.
 Credit sales of things other than the goods dealt in by the firm are not entered in the Sales day
Book; they are journalized.
 For accounting, Goods means only those items in which the particulars concern is doing business
i.e. purchasing & selling it.
 It is a subsidiary book/subsidiary journal & posting is made from it to the sales account and accounts
of the customers.

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Posting:
 The total of sales register is credited to sales a/c periodically says monthly.
 And individual amounts are debited to respective parties (debtors) a/c.
Sales Account is a final record and postings are made to it from Cash Book (Cash sales) and Sales
Day Book (credit sales).
Sales Account is maintained in the ledger in the manner, the other accounts are maintained.
Sales Account is a nominal account and its balance is used for ascertaining gross profit or gross loss.

PURCHASE BOOK:
 All credit purchases of goods are recorded in purchase book.
 Cash purchases are entered in the Cash Book and not in the Purchases Day Book.
 Credit purchases of things other than the goods dealt in by the firm are not entered in the
Purchases day Book; they are journalized.
 It is a subsidiary book/subsidiary journal & posting is made from it to the purchases account
and accounts of the suppliers.

Posting:
 The total of purchase register is debited to purchase a/c periodically say monthly &
 Individual amounts are credited to respective parties (suppliers) a/c.
Cash sales & Cash Purchases will be recorded in Cash Book. And credit sales & credit purchase
of Assets will be recorded in Journal. Comments for sales account made above equally apply to
purchase account.

BILLS RECEIVABLE & BILLS PAYABLE BOOKS:

 All Bills Receivables received are recorded in Bills Receivables book &
 Bills Payables issued will be recorded in Bills Payable book.

Posting:
 The total of Bills Receivable register is debited to Bills Receivable a/c. And
 Individual amounts are credited to respective parties’ a/c.
 Similarly the total of Bills Payable register is credited to Bills Payable a/c. And
 Individual amounts are debited to respective parties a/c.
Entry for Discounting, Payment, Receipt, Dishonor etc will not be recorded in this registers but
will be recorded in Cash book/Journal etc.

Bills Receivable Endorsed book:

 If there are regular/frequent cases of endorsing the Bills Receivable then instead of recording
the same in Journal, we can prepare a Bills Receivable endorsed Book.
 All Bills Receivable endorsed will be entered in it.
 The parties account to whom bill is endorsed will be debited from here &
 Total of this book will be monthly credited to Bills Receivable a/c.

Accrual basis of accounting (Mercantile system of Accounting)& cash basis of accounting:

 A transaction is recognized when either a liability is created (i.e. when goods/services/benefits
or properties are received) and/or an asset is created (i.e. when goods/services/benefits or
properties are given).
 Whether payment is made or received is immaterial in accrual basis accounting.
 Accrual basis of accounting is also known as mercantile basis of accounting.

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 On the other hand, cash basis of accountings system of accounting by which a transaction is
recognized only if cash is received or paid, no entry is being made when a payment or receipt
is merely due.
 Accrual basis accounting is the only generally accepted accounting method for business
entities which are supposed to operate for long period.
 Cash basis accounting is suitable for short duration ventures.
 All the chapters which you will study are on accrual basis only exception may be joint venture.

Trade discount & Cash discount:

 Trade discount is a discount on the selling price for bulk purchase or for purchasing above a
minimum quantity or is offered generally to regular customers. .
 It is also called quantity discount.
 This is a technique of sales promotion.
 It is generally determined at the stage of sale itself & is deducted from the sale/ purchase
value & hence doesn’t appear separately in the Books of a/cs& Final a/cs.
 Cash discount is the discount offered by the supplier in consideration of early or timely
payment.
 It may vary with the period of payment.
 It is accounted as a separate item & appears in the Profit & loss a/c.
 Cash discount is usually given at the time of payment/receipt as against trade discount is
given at the stage of sale/purchase.

Discount:
 The term discount refers to any reduction or rebate allowed and is used to express one of the
following situations:
(i) An allowance given for the settlement of a debt before it is due i.e., cash discount.
(ii) An allowance given to the wholesalers or bulk buyers on the list price or retail price,
known as trade discount. A trade discount is not shown in the books of account
separately and it is shown by way of deduction from purchases/sales value.
(iii) The excess of par or face value of shares or debentures over the amount paid by
subscriber i.e. discount on issue of a security.
(iv) The amount charged by a bank on discounting of a bill of exchange.

Debit Note:
 A debit note is a statement sent by one party to the other stating/informing him that his
account has been debited with a specified amount and the reason for debit.
 A debit note is sent to the supplier when the goods purchased from him are returned
(purchase return) or for discount to be received from him or for any expenses incurred for him.

Entry: In the books of sender of Debit note In the books of receiver of Debit note
Party (to whom it is sent) a/c Dr. Sales return/Discount allowed etc. a/c Dr.
To Purchase return/Discount received etc. To Party (who sent it) a/c

Credit Note:
 A Credit note is a statement/letter sent by one party to the other stating/informing him that his
account has been credited with a specified amount and the reason for credit.
 A credit note is sent to the customer when we receive good returned by them or for discount
to be allowed to him or for any expenses incurred for us by him.

Entry: In the books of sender of Credit note In the books of receiver of Credit note
Sales return/Discount allowed etc. a/c Dr. Party (who sent it) a/c Dr.
To Party (to whom it is sent) a/c To Purchase return/Discount received etc.

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P.1: State whether the following accounts are Real, Personal or Nominal:
(a) Capital account
(b) Drawings account
(c) Bad debt account
(d) Debtors account
(e) Stock account
(f) Cash account
(g) Goods account
(h) Purchase account
(i) Sales account
(j) Interest account
(k) Salary outstanding account
(l) Discount account
(m) Loss by fire account
(n) Printing and stationery account
(o) Bank of India account
(p) Mr. Ramrao account
(q) ABC partnership firm account
(r) Building account
(s) Investment account

P.2: The following were the transaction of Pannalal Bros., a furniture dealer:
Mar 2016 Rs.
1 Started business with :Cash 12000
:Bank 8000
:Furniture (for office) 5000 25,000
3 Bought furniture from R. Bros. 2,000
5 Bought furniture for the office 1,000
6 Sold furniture to J. Jaju 2,000
8 Bought furniture 1,800
10 Returned furniture to R. Bros. 50
12 J. Jaju returned furniture 200
14 Paid taxi fare 10
15 Sold to A., furniture for Rs. 500 less trade discount @10%
17 Received commission from J. Das 15
18 Paid to R Bros. by cheque 1,000
19 Sent to Bank 200
20 Received a cheque of Rs. 425 from A. in full settlement of his account
22 Received a cheque of Rs. 500 from J. Jaju and deposited the same
into Bank
23 Lent to Naren 150
24 J. Jaju’s cheque dishonoured
26 Received interest 10
31 Withdrawn from bank for office use 2,000
31 Paid for taxes 150

Journalize the above transactions in the books of the firm.

Illustration: 5: Opening balance Cash Rs.200 & Bank Rs.400. Cheque received from Anand Rs.480 &
Discount allowed Rs.20. Rupesh settled his dues Rs.200 @5% discount by cash. We settled Truptis dues

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Rs.300 at 5% discount by cheque. Paid cash to Rajani Rs.195 & discount received 2.5%. Write Tripple
column cash book.
Solution: Cash Book (Triple column)
Dr. Cr.
Date Particulars LF Dis. Cash Bank Date Particulars LF Dis. Cash Bank

Total Total

Posting
Anand A/c Trupti A/c

Rupesh A/c Rajani A/c

Discount allowed A/c Discount received A/c

Illustration:6: Opening balance of petty Cash Rs.100 Received from main Cashier Rs.900. Petty cashier
spent during the period: Rs.50 for Connivance, Rs.80 for Stationary, Rs.60 paid for postage stamps, Rs150
for repairs of furniture. Rs.40 for carting. Rs.200 paid to workers, Rs.100 for office cleaning.
Solution: Petty Cash Book (Analytical cash book)
Date Particulars Receipt Payment Convey Stationary Postage Repairs Cartage Wages Travelling Office
ance exp.
To Op. bal.
To Main Cash
By Conveyance
By Stationary
By Postage
By Repairs
By Cartage
By Wages
By Office exp.
By Closing bal.
Total

Posting of total amount will be made to respective expense account in ledger.

Illustration:7: Credit sales of goods made to Pravin Rs.2,000, Pranay Rs.1,500 & Prashant Rs.1,000
Solution: Sales Book

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Date Particulars Party/Customer/Debtor LF Amount Rs.

Total

Posting
Sales A/c Pranay A/c

Pravin A/c Prashant A/c

Illustration:8: Credit purchase of goods made from Prateek Rs.1,800, Puneet Rs.1,200 &Praneeta
Rs.1,000.
Solution: Purchase Book
Date Particulars Party/Supplier/Creditor LF Amount Rs.

Total

Posting
Prateek A/c Praneeta A/c

Puneet A/c Purchase A/c

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