ACCOUNTANCY (HIGHER SECONDARY FIRST YEAR) - Basic Concepts

ACCOUNTANCY

HIGHER SECONDARY – FIRST YEAR

Untouchability is a Sin Untouchability is a Crime Untouchability is Inhuman.

TAMILNADU TEXTBOOK CORPORATION College Road, Chennai - 600 006.

First Edition - 2004

PREFACE CHAIRPERSON Dr. (Mrs) R. AMUTHA

The book on Accountancy has been written strictly in accordance Reader in Commerce Justice Basheer Ahmed Sayeed College for Women Chennai - 600 018.

with the new syllabus framed by the Government of Tamil Nadu.

As curriculum renewal is a continuous process, Accountancy curriculum has undergone various types of changes from time to time in REVIEWERS

accordance with the changing needs of the society. The present effort Dr. K. GOVINDARAJAN Dr. M. SHANMUGAM

of reframing and updating the curriculum in Accountancy at the Higher Reader in Commerce Reader in Commerce

Secondary level is an exercise based on the feed back from the users. Annamalai University SIVET College Annamalai Nagar - 608002. Gowrivakkam,Chennai-601302.

Mrs. R. AKTHAR BEGUM S.G. Lecturer in Commerce Quaide-Millet Govt. College for Women Anna Salai, Chennai - 600002.

This prescribed text book serves as a foundation for the basic principles of Accountancy. By introducing the subject at the higher secondary level, great care has been taken to emphasize on minute details to enable the students to grasp the concepts with ease. The vocabulary and terminology used in the text book is in accordance with the comprehension and maturity level of the students. AUTHORS

This text would serve as a foot stool while they pursue their higher Thiru G. RADHAKRISHNAN Thiru S. S. KUMARAN S.G. Lecturer in Commerce Co-ordinator, Planning Unit SIVET College (Budget & Accounts)

studies. Since the text carries practical methods of maintaining accounts the students could use this for their career.

Gowrivakkam, Chennai - 601302. Education for All Project

Along with examples relating to the immediate environment of the College Road, Chennai-600006.

students innovative learning methods like charts, diagrams and tables Thiru N. MOORTHY Mrs. N. RAMA

have been presented to simplify conceptualized learning. P.G. Asst. (Special Grade) P.G. Assistant Govt. Higher Secondary School Lady Andal Venkatasubba Rao Nayakanpettai - 631601 Matriculation Hr. Sec. School Kancheepuram District. Chetpet, Chennai - 600031. Price : Rs.

As mentioned earlier, this text serves as a foundation course which is coupled with sample questions and examples. These questions and examples serve for a better understanding of the subject. Questions for examinations need not be restricted to the exercises alone.

This book has been prepared by the Directorate of School Education on behalf of the Govt. of Tamilnadu.

Chairperson This book has been printed on 60 G.S.M. paper Printed by Offset at :

iii

7. SYLLABUS

Subsidiary Books II – Cash Book [ 21 Periods ]

Features – Advantages – Kinds of cash books. 1. Introduction to Accounting [ 14 Periods ]

8. Subsidiary Books III Need and Importance – Book-keeping – Accounting –

– Petty Cash Book [ 7 Periods ] Accountancy, Accounting and Book-keeping – Users of accounting information – Branches of accounting – Basic accounting terms.

Meaning – Imprest system – Analytical petty cash book – Format – Balancing of petty cash book – Posting of petty cash book entries – Advantages. 2. Conceptual Frame work of Accounting [ 7 Periods ]

9. Bank Reconciliation Statement [ 21 Periods ] Basic assumptions – Basic concepts – Modifying principles – Accounting Standards.

Pass book – Difference between cash book and pass book – Bank reconciliation statement – Causes of disagreement between 3. Basic Accounting Procedures I

balance shown by cash book and the balance shown by pass – Double Entry System of Book-Keeping [ 7 Periods ]

book – Procedure for preparing bank reconciliation statement –

Double entry system – Account – Golden rules of accounting.

Format.

4. Basic Accounting Procedures II

10. Trial Balance and Rectification of Errors [ 21 Periods ]

– Journal [ 21 Periods ]

Definition – Objectives – Advantages – Methods – Format –

Source documents – Accounting equation – Rules for debiting and crediting – Books of original entry – Journal – Illustrations.

Sundry debtors and creditors – Limitations – Errors in accounting – Steps to locate the errors – Suspense account – Rectification of errors. 5. Basic Accounting Procedures III

– Ledger [ 21 Periods ]

11. Capital and Revenue Transactions [ 7 Periods ]

Meaning – Utility – Format – Posting – Balancing an account – Distinction between journal and ledger.

Capital transactions – Revenue transactions – Deferred revenue transactions – Revenue expenditure, Capital expenditure and Deferred revenue expenditure – Distinction – Capital profit and 6. Subsidiary Books I

revenue profit – Capital loss and revenue loss. – Special Purpose Books [ 21 Periods ]

12. Final Accounts [ 22 Periods ] Need – Purchase book – Sales book – Returns books – Bills of exchange – Bills book – Journal proper.

Parts of Final Accounts – Trading account – Profit and loss account – Balance sheet – Preparation of Final Accounts.

CONTENTS

Chapter Page No.

1. Introduction to Accounting 1

2. Conceptual Frame Work of Accounting 21

3. Basic Accounting Procedures I

Double Entry System of Book-Keeping 28

4. Basic Accounting Procedures II – Journal 38

5. Basic Accounting Procedures III – Ledger 82

6. Subsidiary Books I – Special Purpose Books 109

7. Subsidiary Books II – Cash Book 140

8. Subsidiary Books III – Petty Cash Book 176

9. Bank Reconciliation Statement 194

10. Trial Balance and Rectification of Errors 222

11. Capital and Revenue Transactions 256

12. Final Accounts 270

Books for further reference:

1. T.S.Grewal – Double Entry Book Keeping.

2. R.L. Gupta – Principles and Practice of Accountancy

3. T.S.Grewal – Introduction to Accountancy

4. Patil & Korlahalli – Principles and Practices of Accountancy

5. S.Kr.Paul – Accountancy Vol. I.

6. M.P.Vithal, S.K.Sharma & S.S.Sehrawart – Accountancy Textbook

for Class XI NCERT.

7. Institute of Company Secretaries of India – Principle of

Accountancy.

8. Vinayagam, P.L.Mani, K.L.Nagarajan – Principles of Accountancy.

9. P.C.Tulsian, S.D.Tulsian – ISC Accountancy for Class XI.

10. M.Jambunthan, S.Arokiasamy, V.M.Gopala Krishna, P.Natrajan –

Book-keeping and Principles of Commerce.

11. Narayan Vaish – Book-keeping and Accounts.

12. Tamil Nadu Textbook Corporation – Accountancy Higher

Secondary First Year.

13. L.S.Porwal, R.G.Saxena, B.Banerjee, Man Mohan, N.K.Agarwal

– Accounting A Textbook for Class XI Part I, NCERT.

14. Jain & Narang – Financial Accounting.

15. R.L.Gupta, Radha Swamy – Financial Accounting.

16. R.K.Gupta, V.K.Gupta – Financial Accounting.

17. Basu Das – Practice in Accountancy.

18. S.Kr.Paul – Practical Accounts Vol.I.

19. Ghose Dostidar Das – Graded Accounting Problems.

20. M.C.Shukla – Advanced Accountancy.

CHAPTER - 1

INTRODUCTION TO ACCOUNTING

Learning Objectives

After studying this Chapter, you will be able to:

Ø understand the Need, Meaning, Definition, Objectives

and Advantages of Book-Keeping.

Ø know the Need, Definition, Objectives and Process of

Accounting.

Ø distinguish between Book-Keeping and Accounting.

Ø identify the Users of Accounting Information and their

Need.

Ø know the Basic Accounting Terms.

“Accounting is as old as money itself”. Since in early ages commercial activities were based on barter system, record keeping was not a necessity. The Industrial Revolution of 19th century along with rapid rise in population, paved way for the development of commercial activities, mass production and credit terms. Thus recording of business transaction has become an important feature. In recent years with the change of technologies and marketing along with stiff competition, accounting system has undergone remarkable changes.

1 vi

1.2. 1.1 Need and Importance of Accounting

Book-keeping

When a person starts a business, whether large or small, his

Book-keeping is that branch of knowledge which tells us how main aim is to earn profit. He receives money from certain sources

to keep a record of business transactions. It is often routine and like sale of goods, interest on bank deposits etc. He has to spend

clerical in nature. It is important to note that only those transactions money on certain items like purchase of goods, salary, rent, etc.

related to business which can be expressed in terms of money are These activities take place during the normal course of his business.

recorded. The activities of book-keeping include recording in the He would naturally be anxious at the year end, to know the progress

journal, posting to the ledger and balancing of accounts. of his business. Business transactions are numerous, that it is not possible to recall his memory as to how the money had been earned

1.2.1 Definition and spent. At the same time, if he had noted down his incomes and expenditures, he can readily get the required information. Hence, the details of the business transactions have to be recorded in a clear and systematic manner to get answers easily and accurately for the

R.N. Carter says, “Book-keeping is the science and art of correctly recording in the books of account all those business transactions that result in the transfer of money or money’s worth”.

following questions at any time he likes.

1.2.2 Objectives i. What has happened to his investment?

ii. What is the result of the business transactions?

The objectives of book-keeping are

iii. What are the earnings and expenses?

i. to have permanent record of all the business transactions.

iv. How much amount is receivable from customers to whom

goods have been sold on credit?

ii. to keep records of income and expenses in such a way that

the net profit or net loss may be calculated.

v. How much amount is payable to suppliers on account of

credit purchases?

iii. to keep records of assets and liabilities in such a way that the financial position of the business may be ascertained.

vi. What are the nature and value of assets possessed by the

business concern?

iv. to keep control on expenses with a view to minimise the

same in order to maximise profit.

vii. What are the nature and value of liabilities of the business

v. to know the names of the customers and the amount due concern?

from them.

These and several other questions are answered with the help of accounting. The need for recording business transactions in a clear

vi. to know the names of suppliers and the amount due to

them.

and systematic manner is the basis which gives rise to Book-keeping.

vii. to have important information for legal and tax purposes.

viii. 1.2.3 Advantages

Control over Borrowings: Many businessmen borrow

From the above objectives of book-keeping, the following advantages can be noted

from banks and other sources. These loans are repayable. Just as he must have a control over assets, he should have control over liabilities. i. Permanent and Reliable Record: Book-keeping provides permanent record for all business transactions, replacing the memory which fails to remember everything.

ix. Identifying Do’s and Don’ts : Book keeping enables the proprietor to make an intelligent and periodic analysis of various aspects of the business such as purchases, sales, expenditures and ii. Arithmetical Accuracy of the Accounts:With the help of book keeping trial balance can be easily prepared. This is used to check the arithmetical accuracy of accounts.

incomes. From such analysis, it will be possible to focus his attention on what should be done and what should not be done to enhance his profit earning capacity.

iii. Net Result of Business Operations: The result (Profit or Loss) of business can be correctly calculated.

x. Fixing the Selling Price : In fixing the selling price, the businessmen have to consider many aspects of accounting information such as cost of production, cost of purchases and other expenses. iv. Ascertainment of Financial Position: It is not enough to

Accounting information is essential in determining selling prices. know the profit or loss; the proprietor should have a full picture of his financial position in business. Once the full picture (say for a year) is known, this helps him to plan for the next year’s business.

xi. Taxation: Businessmen pay sales tax, income tax, etc. The tax authorities require them to submit their accounts. For this purpose, they have to maintain a record of all their business transactions. v. Ascertainment of the Progress of Business: When a proprietor prepares financial statements evey year, he will be in a position to compare the statements. This will enable him to ascertain the growth of his business. Thus book keeping enables a long range

xii. Management Decision-making: Planning, reviewing, revising, controlling and decision-making functions of the management are well aided by book-keeping records and reports. planning of business activities besides satisfying the short term objective of calculation of annual profits or losses.

xiii. Legal Requirements: Claims against and for the firm in relation to outsiders can be confirmed and established by producing vi. Calculation of Dues : For certain transactions payments

the records as evidence in the court. may be made later. Therefore, the businessman has to know how much he has to pay others.

1.3 Accounting

vii. Control over Assets: In the course of business, the proprietor acquires various assets like building, machines, furnitures, etc. He has to keep a check over them and find out their values year after year.

Book-keeping does not present a clear financial picture of the state of affairs of a business. When one has to make a judgement regarding the financial position of the firm, the information contained in these books of accounts has to be analysed and interpreted. It is

In with the purpose of giving such information that accounting came into

order to accomplish its main objective of communicating being.

information to the users, accounting embraces the following functions.

Accounting is considered as a system which collects and processes financial information of a business. These informations are

i. Identifying: Identifying the business transactions from the source documents. reported to the users to enable them to make appropriate decisions.

ii. Recording: The next function of accounting is to keep a

1.3.1 Definition

systematic record of all business transactions, which are identified in an orderly manner, soon after their occurrence in the journal or American Accounting Association defines accounting as “the

subsidiary books. process of identifying, measuring and communicating economic

iii. Classifying: This is concerned with the classification of the information to permit informed judgements and decision by users of

recorded business transactions so as to group the transactions of the information”.

similar type at one place. i.e., in ledger accounts. In order to verify

1.3.2 Objectives

The main objectives of accounting are

the arithmetical accuracy of the accounts, trial balance is prepared. iv. Summarising : The classified information available from the trial balance are used to prepare profit and loss account and balance i. to maintain accounting records.

sheet in a manner useful to the users of accounting information. ii. to calculate the result of operations.

v. Analysing: It establishes the relationship between the items iii. to ascertain the financial position.

of the profit and loss account and the balance sheet. The purpose of iv. to communicate the information to users.

analysing is to identify the financial strength and weakness of the business. It provides the basis for interpretation. 1.3.3 Process

vi. Interpreting: It is concerned with explaining the meaning The process of accounting as per the above definition is given

and significance of the relationship so established by the analysis. below:

Interpretation should be useful to the users, so as to enable them to

Input Process Output

take correct decisions.

Identifying Recording Business Classifying Information

vii. Communicating: The results obtained from the summarised, analysed and interpreted information are communicated to the interested parties.

transactions Summarising to

1.3.4 Meaning of Accounting Cycle (monetary value) Analysing Users

Interpreting Communicating

An accounting cycle is a complete sequence of accounting process, that begins with the recording of business transactions and ends with the preparation of final accounts.

When a businessman starts his business activities, he records the day-to-day transactions in the Journal. From the journal the transactions move further to the ledger where accounts are written up. Here, the combined effect of debit and credit pertaining to each account is arrived at in the form of balances.

To prove the accuracy of the work done, these balances are transferred to a statement called trial balance. Preparation of trading and profit and loss account is the next step. The balancing of profit and loss account gives the net result of the business transactions. To know the financial position of the business concern balance sheet is prepared at the end.

These transactions which have completed the current accounting year, once again come to the starting point – the journal – and they move with new transactions of the next year. Thus, this cyclic movement of the transactions through the books of accounts (accounting cycle) is a continuous process.

Profit & Loss Account á

Balance Sheet

Trading

(Opening)

Account

1.4 Accounting Cycle

Accountancy, Accounting and Book-keeping

Accountancy refers to a systematic knowledge of accounting. Balance

It explains “why to do” and “how to do” of various aspects of Sheet ä

(Closing) â

Transactions

accounting. It tells us why and how to prepare the books of accounts and how to summarize the accounting information and communicate it to the interested parties.

â æ

Journal

Accounting refers to the actual process of preparing and presenting the accounts. In other words, it is the art of putting the academic knowledge of accountancy into practice.

Book-keeping is a part of accounting and is concerned with å

Ledger

record keeping or maintenance of books of accounts. It is often Trial

routine and clerical in nature. Balance

1.4.1 Relationship between Accountancy, Accounting and

Book-keeping

Book-keeping provides the basis for accounting and it is complementary to accounting process. Accounting begins where book-keeping ends. Accountancy includes accounting and book-keeping. The terms Accounting and Accountancy are used synonymously. This relationship can be easily understood with the help of the following diagram.

C OUNTAN

B C

OUNTIN k-keep

9 G o

I. Internal users: Internal users are those individuals or groups who are within the organisation like owners, management, employees and trade unions.

II. External users: External users are those individuals or groups who are outside the organisation like creditors, investors, banks and other lending institutions, present and potential investors,

1. Scope Recording and maintenance

Government, tax authorities, regulatory agencies and researchers. of books of accounts.

The users and their need for information are as follows:

Users Need for Information Internal

2. Stage Primary stage.

i. Owners To know the profitability and financial

soundness of the business. 3. Objective To maintain systematic records of business transactions.

ii. Management To take prompt decisions to manage the

business efficiently. iii. Employees and Trade unions To form judgement about the earning 4. Nature Often routine and clerical in

capacity of the business since their nature.

remuneration and bonus depend on it.

5. Responsi- A book-keeper is respon-

External -bility -sible for recording business

transactions.

i. Creditors, banks and other To determine whether the principal and lending institutions the interest thereof will be paid in when 6. Supervision The book-keeper does not

due. supervise and check the

ii. Present investors To know the position, progress and work of an Accountant.

prosperity of the business in order to

7. Staff Work is done by the junior

involved staff of the organisation. 1.4.2 Distinction between Book-keeping and Accounting

In general the following are the differences between book-keeping and accounting.

Sl. Basis of No. Distinction

Book-keeping Accounting

It is not only recording and maintenance of books of accounts but also includes analysis, interpreting and communicating the information.

Secondary stage.

To ascertain the net result of the business operation.

Analytical and executive in nature.

An accountant is also responsible for the work of a book-keeper.

An accountant supervises and checks the work of the book-keeper.

Senior staff performs the accounting work.

ensure the safety of their investment. iii. Potential investors To decide whether to invest in the

business or not. iv. Government and Tax To know the earnings in order to assess 1.5 Users of Accounting Information

authorities the tax liabilities of the business. v. Regulatory agencies To evaluate the business operation The basic objective of accounting is to provide information which

under the regulatory legislation. is useful for persons and groups inside and outside the organisation.

vi. Researchers To use in their research work.