Accounting concepts, standards and equation introduction

Introduction
Define Accounting & discuss its functions.
Meaning of Accounting – Accounting is an art of
recording, classifying, summarizing & reporting
of transactions with the aim of showing the
financial health of an entity which has its income
& expenses.
Accounting has two distinct functions.
Historical functions &
Managerial functions.
Historical function is related to recording,
classifying, summarizing & interpreting past
transactions of an enterprise. The reporting of
the result is done through B/S, P&L A/c etc.

• The managerial functions provides information
for managers at all levels for planning,
coordinating, controlling day today activities,
appraising the performance by comparing actual
with pre determined standards. These functions
helps to achieve maximum efficiency. Like cash
flow statement, Ratio analysis etc.

• Explain Accrual basis of Accounting. Define double entry
system of Accounting & its features.
• Accrual basis of accounting – It is the basis
which recognizes revenue & expenses as they
are earned or incurred without regard to the
accounting period to which it belongs.
• Double entry system of Accounting is a system
of recording business transactions which
recognizes that each transaction has a dual
aspect i.e., Debit & Credit is affected.
• Features :
• This method records both aspects of each
transaction.
• Both Debit & Credit entries are made for every
transaction in two different accounts.
• All transactions are recorded fully.

• Under this system Trial balance can be prepared
to check arithmetic accuracy of the transactions.
• Profit & Loss A/c can be prepared by showing in
detail the incomes & expenses.
• Balance sheet can also be prepared in detail.

• What are the advantages & limitations of Double
entry system?
• Advantages :
• A complete record of all the transaction relating to
a business unit are maintained.
• The financial position of the firm can be
ascertained.
• The arithmetical accuracy of the books of A/c can
be ensured.
• Locating & Rectifying errors are easier.
• The system can be applied to any form of
organization.
• Profit earned or losses made can be ascertained.

• Amounts due to supplier or due from customers
can be easily ascertained.
• It helps taking managerial decisions.
• Greater control over accounts can be exercised.
• Business transactions does not get mixed up
with private transactions of the owner.
• Limitations :
• The system adopts only money as the basic unit
of measurement.
• Many important events can not be recorded
simply because they can not be expressed in
monetary terms.

• Transactions are all historical records & not
future probabilities.
• If a transaction is omitted by mistake then it may
remain undiscovered.
• If a transaction is wrongly recorded then it is
difficult to detect the error.
• A compensating error may also remain
undetected.
• The system requires personal judgment of the
accountant.

• What are the characteristics of Modern
accounting? State the advantages & its
limitations.
• With the growth of corporate activity in the 20th
century, the field of accounting has increased
greatly in importance and has seen many
improvements in theory and techniques. The
chief causes of changes in accounting methods
have been more complex tax laws and
regulations and the need to keep uniform
accounts for possible governmental or public
scrutiny. Contemporary accounting firms also
have taken on managerial functions and are no
longer concerned simply with ascertaining and
reporting financial condition but also with
advising a client how to act on this information;
they also consult on information-technology
systems and other services.

• Main characteristics of Modern accounting are :
• Use of Double entry system of Accounting.
• Use of computer based programmes for faster
& accurate accounting.
• Use of electronic media to transfer accounting
data.
• Advantages :
• Accurate accounting.
• Faster processing & completion of accounting.
• Human errors are removed.
• Accountants are relieved of lengthy process of
making entry in the books of A/cs.

• Limitations :
• If any error takes place then it becomes very
difficult to identify it.
• Accounting becomes more dependent on use of
computers.

• What do you mean by Accounting cycle? Explain
the various parts of the Accounting cycle.
• Accounting cycle – It refers to the sequence of
accounting procedures used to record, classify &
summarize the business transactions. It begins
with identification of business transactions,
preparation of business document, recording of
transactions through journal, posting of
transactions into ledger, preparation of Trial
balance, passing of adjustment entries,
preparation of Final account, passing of closing
entries and lastly passing of reverse entries.
• Various parts of Accounting cycle are :
• Identification of business transactions.
• Preparation of business document.
• Recording of transactions through journal.

• Posting of transactions into ledger.
• Preparation of Trial balance.
• Passing of adjustment entries.
• Preparation of Final account.
• Passing of closing entries and lastly
• Passing of reverse entries.

• What do you mean by GAAP?
• GAAP stands for generally accepted accounting
principles. These are the conventions, rules &
procedures necessary to define accepted
accounting practice at a particular time. These
principles provide a foundation for measuring &
disclosing the results of business transactions &
events.
• Generally accepted accounting principles are
conventional – that is, they become generally
accepted by agreement rather than by formal
derivation from a set basic concepts. The
principles are developed on the basis of
experience, reason, custom, usage & to a
significant extent out of practical necessity.

Introduction – Accounting concept,
standard & equation.
• Explain business entity, cost & realization
concepts.
• Business entity – A firm possesses an existence
which is distinct from its owner or owners. An
entity can be a sole proprietor, partnership firm,
company or a non profit making organization.
• Cost concept - A business transaction is
recorded in terms of the amount actually
passing through the transaction. For example A
purchases a machine from B for Rs.20000. the
real worth of the machine may be more or less
than Rs.20000.

But the transaction must be recorded at cost of
Rs.20000. The balance sheet therefore normally
shows the asset at cost price.
• Realization concept – In a normal business an
order is executed after signing of contract. Then
goods are delivered which creates an obligation
for the buyer to pay. Under realization concept
the profit is normally regarded as being earned at
the time when goods or services are passed on
to the buyer.

• Discuss Money measurement, going concern,
dual aspect & accrual concept.
• Money measurement – Money is medium of
exchange. Accounting is only concerned with
those events which can be measured in terms of
money.
• Going concern – Accounting is based on the
assumption that the business unit will continue to
operate for an indefinitely long period of time.
• Dual aspect concept – This concept shows two
aspects of accounting, one representing the
Asset & the other representing the claims against
assets which recognizes that each transaction
has a dual aspect i.e., Debit & Credit.

• Accrual concept - It is the basis which recognizes
revenue & expenses as they are earned or
incurred without regard to the date of receipt or
payment.

• Define Accounting equation with example.
• The accounting equation is the basis for double
entry system of accounting. It implies that every
time a transaction takes place, there is always a
two sided effect.
• Accounting equation can be expressed as :
• Asset - Liability = Capital
• For example owner introduces capital results in –
Increase in Asset & Capital.
• Purchase of P & M on credit results in – Increase
in Asset & Liability.
• Sale of P & M in Cash results in - Decrease in
Asset & increase in another Asset i.e., Cash.

• Explain Traditional classification of A/cs & rules
for Debit & Credit.
• Traditional classification is the old system of
classifying A/cs.
• Personal A/c – Transactions relating to persons.
• Natural persons – Rams A/c, Madhus A/c etc.
• Artificial persons – Ltd. Company, club,
institutions etc.
• Representatives – Salaries due to employees
i.e., Outstanding salary A/c.
• Real A/c – Transactions relating to Properties &
Assets.
• Tangible Asset – B/L, Furniture, Stock etc.

• Intangible Asset – Goodwill, Patent & copyright.
• Nominal A/c – Transactions relating to Expenses,
Losses, Incomes & Gains.
• Rules for Debit & Credit :
• Personal A/c –Debit the Receiver & Credit the
Giver.
• Real A/c – Debit what comes in & Credit what
goes out.
• Nominal A/c – Debit all expenses & losses &
Credit all incomes & gains.
• Note – when some prefix or suffix is added to a
nominal A/c it becomes a personal A/c.
• O/s Rent A/c, Rent Prepaid A/c, O/s Interest A/c,
Prepaid Salary A/c, O/s Comm. A/c etc.

• What are accounting standards? What is the
need for such standards?
• Accounting standards are accounting rules &
procedures relating to measurement, valuation &
disclosure issued by the Institute of the chartered
accountants of India.
• Need for accounting standard are :
• Accounting standards promote better
understanding of accounting statements.
• Accounting information is more useful if it is
published on a comparable basis.
• Accounting standards provide a generally
accepted language for financial statements.

• Accounting standard may be regarded as a
means to establish that the collective wisdom &
experience prevail over an individual.
• Examples :
• AS 2 – Valuation of Inventories – 1.4.99
• AS 6 – Depreciation Accounting – 1.4.95
• AS 7 – Accounting for cons. contracts – 1.4.91
• AS 19 – Leases – 1.4.01
• AS 20 – Earning per share – 1.4.01
• AS 21 – Consolidated Financial stmt –1.4.01 etc.

• What are the recognized accounting doctrines?
• Recognized accounting doctrines are :
• Consistency – This implies that the basis followed
in several accounting periods should be
consistent. If a change becomes necessary, the
change & its effect should be mentioned clearly.
• Disclosure – This requires that all significant
information should be disclosed. Accounting
statements should be honest representation of
true facts of the business. It should follow
generally accepted accounting principles.
• Conservatism – “Anticipate no profit & provide for
all possible losses” is the teaching of
conservatism.

Conservatism always leads to understatement of
income in the profit & loss A/c, over statement of
liabilities & understatement of Assets in the B/S.
So it does not show the true position of A/c, hence
not permitted.
• Materiality – This doctrine emphasises that
matters which are significant require accounting in
greater details than the matters which are less
significant.

Journal Entries
• Define Journal & explain its nature. Explain the
various parts of a journal.
• The journal records all transactions of a business
in the order in which they occur. A journal can
therefore be defined as a book containing
chronological record of transactions. It is the
book in which the transactions are recorded first
under the double entry system.
• It contains from the left to right side Date,
Particulars, L.F., Debit & Credit. Amounts.
• A journal is a tool for analyzing & describing the
impact of various transactions upon a business
unit. A journal is an analysis of the effects of a
transaction on the accounts, usually
accompanied by an explanation as to its nature.

• The various parts of a Journal are :
• Journal is divided by vertical lines into five
columns in which to enter transactions. Date,
Particulars, Ledger Folio, Amount (Debit) &
Amount (Credit).

• What is a Journal? What do you mean by simple
& compound journal entries?
• Simple journal entry – A journal entry containing
one Debit & one Credit entry is called a simple
journal entry. Example,
• Dr Cr
• Date Particulars L.F. Amt(Rs.) Amt(Rs.)
• Cash A/c Dr. 50000
• To Sales A/c 50000
• (Being goods sold for cash)
• Compound journal entry – A journal entry which
contains more than one Debit entry or more than
one Credit entry or both is called a compound
journal entry.

• Dr Cr
• Date Particulars L.F. Amt(Rs.) Amt(Rs.)
• B/L A/c Dr. 150000
• Furniture A/c Dr., 100000
• Cash A/c Dr. 50000
• To Capital A/c 300000
• (Being the different assets brought in as Capital)

• What is a Voucher? Explain it with example.
• A voucher is a document which provides the
authorization to pay & specifies the accounts to
be Debited & Credited. It is prepared for each
expenditure.
• It contains written evidence that :
• All expenditure have been incurred on the basis
of proper authorization, for example against
purchase order.
• The goods & services have been received in full.
• Payment has been made only for the goods &
services received.

• A clerk prepares voucher by filling up data from
invoice such as Invoice No., Date Amount,
Creditors name & Address. Then voucher with
Invoice is sent to the employee who have placed
the order for verifying Price, Quantity & terms
with Purchase order. After verifying the employee
sends it to the A/cs department who mentions
the A/c No. to be Debited or Credited & sends it
to Manager for his final approval. After this the
voucher is paid & entered in the books of original
entry.

Ledger
• Distinguish between Journal & Ledger.
• The transaction is first recorded in the books as
Journal.
• Ledger is where Journals are posted.
• Journal records transactions in a chronological
order.
• Ledger records transactions in an analytical
order.
• Journal is more reliable as compared to Ledger
since it is the book original entry.
• The process of recording transactions is called
Journalizing.
• The process of recording transactions in the
Ledger is called Posting.

• Journal is called as a book of prime
entry.
• Ledge is called as book of final entry.
• Journal entry shows which accounts
should be debited and which should be
credited.
• Transactions are classified according to
their nature and posted in their
respective accounts in ledger.

• What are the subdivisions of Ledger? Explain.
• Sales Ledger – It contains accounts with
Customers i.e., Debtors.
• Purchase Ledger – It relates to recording the
accounts of Suppliers or Creditors.
• General Ledger – It contains all the Real
accounts such as Building, Plant & Machinery,
Furniture & Fixture etc.
• Nominal Ledger – It contains all the expenses
such as Wages, Salaries, Rent, Insurance, Rates
& Taxes & incomes like commission received,
Discount received etc.

• Private Ledger – Accounts of Capital & Drawings
which are of confidential nature may be
maintained in a separate Private ledger.
• Cash book – It contains Cash & Bank related
transactions.

• Ledger is a book of final entry. Explain.
• Ledger is the main book of accounts. It is the
most important book of accounting system.
It contains an account for each asset, liability,
revenue and expenses account to which the
transactions recorded in the book of original
entry are posted. Ledger is the
ultimate destination of all transactions.
• It is also called book of “final entry”. In ledger the
information is classified by nature and relevance.
The ledger includes all the basic accounts
needed for the preparation of the financial
statements.

• Ledger is the principal book of Accounts. Do you
agree? Give reasons.
• The individual accounts are normally maintained
in a book referred to as Ledger. It is the most
important book of accounts as it includes all the
summaries of transactions and hence it is called
the Principal book of Accounts.
• Ledger is called Principal book of accounts
because :
• It summaries all the transactions.
• It provides a permanent record of the financial
transactions of a Firm.
• It is the principal or primary book of accounts.
• The transactions are classified under appropriate
heads called accounts.

• The information contained in the ledger account
can be used to draw the conclusion regarding
status of any account.
• The accounts contain the summaries of all the
related transactions.
• It is the basic of preparing the final account.
• It helps us in achieving the objectives of
accounting.

Cash Book – Meaning & Types
• What are the different types of Cash books?
What are contra entries?
A Cash book can be of following types.
1. Simple cash book or single column cash book.
2. Two columnar cash book or Double column
cash book.
3. Three Columnar cash book or Triple column
cash book.
4. Petty Cash Book.
Single column cash book – It consists of Cash
column i.e., column for cash received & cash paid in
the book.
Double column cash book – This cash book has two

columns i.e., Cash & Bank column.
Triple column cash book - It contains three columns
on each side of cash book i.e.,
i) Cash column for cash received and cash paid.
ii) Discount column for discount received and
allowed.
iii) Bank column for money deposited and money
withdrawn from bank.
Petty Cash Book – It records Petty/small Expenses
& Receipts.
Contra entry – A double column cash book contains
columns for both cash and bank transactions. This is

an account where both cash and bank accounts are
involved. This transaction is recorded on both sides
of the cash book.
For example : Cash of Rs.10,000 is withdrawn from
bank.
Entry on the debit side of the cash book will be
Cash A/c Dr. 10,000
To Bank A/c 10,000
Entry on the credit side of the cash book will be
Bank A/c Cr 10,000
By Cash A/c 10,000
So, Cash book is Debited with cash column on the
Debit side and bank column is credit on the credit
side of the cash book. This is a contra entry.

• Explain single & double column cash books.
Single column cash book – It consists of Cash
column i.e., column for cash received & cash paid in
the book. All cash receipts are recorded on the left-
hand (Debit) side & all cash payments are recorded
on the right-hand (Credit) side.
A specimen of single column cash book consists of
Date, Particulars, Voucher No., Ledger Folio &
Amount on both Debit & Credit side of the Cash
book.
Double column cash book – This cash book has two
columns i.e., Cash & Bank column. It is the cash
book where cash & transactions involving receipts

& payments by cheques are recorded is called
Double column cash book. A Double column cash
book is one where both cash & bank transaction are
shown in columnar fashion.
A specimen of double column cash book consists of
Date, Particulars, Voucher No., Ledger Folio, Cash
Amount & Bank Amount on both Debit & Credit side
of the Cash book.

• What is the purpose of the discount column
maintained in the cash book? Explain Triple
column cash book.
• The most exhaustive cash book is the Triple-
column cash book, which has three amount
columns on either side, viz., Cash, Bank &
Discount. The discount column is provided for
recording discount. It is suited to large business
houses which make & receive payments in cash &
by cheques & which receive / allow cash discount.
Discount column maintained separately helps
management to know the value of Discount
received & foregone by the organization.
• Triple column cash book contains Cash, Bank &
Discount column.

A specimen of triple column cash book consists of
Date, Particulars, Voucher No., Ledger Folio, Cash
Amount, Bank Amount & Discount Amount on both
Debit & Credit side of the Cash book.

• Cash book is a Journalized Ledger. Explain.
• The cash book is a subdivision of the book of
original entry. It records transactions involving
receipt or payment of cash.
• All cash transactions are first entered in the cash
book & then posted from cash book into the
ledger. Cash book is maintained in the form of a
ledger with narration like done in journal. Thus
cash book is called a journalized ledger.

• What is a Petty cash book? Explain the imprest
system of Petty cash.
• Chief cashier generally deals with cash receipts &
payments of high value. He delegates the
responsibility for small day-to-day transactions to
some senior staff of accounts department. The
person records these transactions in a petty cash
book. Petty cash expenditures are like bus fares,
tea & snacks purchases, purchase of news paper
etc.
• A petty cash fund is established by transferring a
small amount of cash from head cashier to the
petty cashier. The petty cashier records all the
petty transactions in a separate book called Petty

• cash book. All receipts of cash are entered on the
debit side & payments are entered in the credit
side of the petty cash book.
• Imprest system of petty cash – It is a system of
controlling petty cash. Under this system, a fixed
sum or float is allocated as sufficient to meet petty
cash expenditure for an agreed period of time. At
the end of the agreed period, the petty cashier
submits his account of expenditure. The sum
expended by the petty cashier is reimbursed, thus
making up the balance to the original sums.

Cash Book
• Distinguish between Debit Note & Credit Note.
• Credit note is a document evidencing that a credit
entry has been passed to a Debtors Account.
• Debit note is a commercial document evidencing
that a debit entry has been passed to a Debtors
Account.
• Credit note is passed to record return of material
due to defect in quality, quantity, damage to parts
of the material etc.
• Debit note is prepared by the supplier if he forget
to include some of the charges while preparing
Invoice. It can be Freight, Insurance charges etc.
• Credit note is a document issued to account for
goods returned by the customer.
• Debit Note is a document which is raised on
customer to debit certain expenses which were
not charged at the time of raising Invoice.

• Distinguish between Cash & Trade Discount.
Cash Discount - A reduction granted by a supplier
from the Invoice price in consideration of
immediate / prompt payment or payment within a
stipulated period.
Cash discount is allowed to encourage a Debtor to
payoff his debt within a specified period. The
Invoice sent by the supplier or to the customer
usually contains details of cash discount. For
example :
(i) Payment made within 7 days, 10% Discount.
(ii) Payment made with in 14 days, 7.5% Discount.
(iii) Payment made within 30 days, 5% Discount.
(iv) If payment is made after 30 days, over due
interest @ 14% will be chargeable.

Cash discounts are allowed :
(i) To improve cash flow of the organization.
(ii) To reduce the possibility of Bad Debt.
Trade Discount – A reduction granted by a
supplier from the list price of goods or services on
business considerations other than for prompt
payment.
Trade discount represents an allowance which is
made by the manufacturer to the wholesalers or
by the wholesalers to the retailers & it is calculated
as a percentage of List price of the goods.
Trade discounts are not separately recorded in the
books of A/c. When entering invoices in the
Purchase day book or Sales day book, only the
net total of the invoices are shown.

Bank Reconciliation statement.
• What do you mean by Bank reconciliation
statement?
• A bank gives to every account holder, from time
to time, a copy of his account as it appears in the
books of the bank. It takes the form of a book
which is called Bank pass book.
• The bank pass book should agree with the bank
column in the cash book. In actual practice,
however, they rarely agree.
• In order to reconcile & explain the causes of
difference between the bank balance as per cash
book & the same as per pass book as on a
particular date, a statement is prepared which is
called a Bank reconciliation statement.

• What is the need for Bank reconciliation
statement?
• Need for Bank reconciliation statement are the
following -
• It reflects the actual bank balance position.
• It helps to detect any mistake in the cash book &
in the pass book.
• It prevents frauds in recording the banking
transactions.
• It explains any delay in the collection of
cheques.
• It identifies valid transactions recorded by one
party but not by the other.

• Mention some of the items that frequently cause
the difference.
• Cheque paid into bank but not credited or
collected by the Bank.
• Cheques or cash paid into bank & credited in the
pass book but omitted to be recorded in the
cash book.
• Cheques issued but not presented for payment.
• Discounted bills dishonoured & debited in the
pass book but not recorded in the cash book.
• Direct deposit by customer into bank but not
recorded in the cash book.
• Incomes collected & credited by bank under
standing order not recorded in the cash book.

• Payments & remittances by bank under standing
order debited in the pass book but not in cash
book.
• Bank charges or collection charges debited in
the pass book but not entered in the cash book.
• Interest on deposit allowed by the bank is
credited in the pass book but not recorded in the
cash book.

Bank Reconciliation Statement
• What is a Bank reconciliation statement? Why is
it prepared?
• Bank reconciliation statement is prepared to
ascertain discrepancy in the records as per Bank
pass book & Cash book of the establishment.
• All the errors and mistakes made either in the
cash book or the books of the bank are revealed.
• It also indicates the delays in the clearance of the
outstation cheques.
• Another important purpose of preparing this
statement is that it discourages the staff from
committing any misappropriation of fund.

• What are the usual items that occur in a Bank
reconciliation statement?
• Usual items that occur in a BRS are the
following :
1. Cheques issued but not presented for payment
– The firm issues cheque from time to time for
making various payments. As soon as a cheque
is issued, the firm debits the party account and
credits the bank account. However bank records
such transaction only when it is presented for
payment. The bank therefore debits cash
account of the firm only when the cheque is
presented for payment. For example a firm
issues a cheque in favor of X on 25th
August
2009 for a sum of Rs.5000. The cheque is
presented by X on 5th
September 2009.

In case the Bank submits the statement of
account to X on 31st
August 2009, there will be
a difference of Rs.5000 between balance in the
bank’s pass book and X’s cash book.
2. Cheque sent for collection but not yet collected
– A firm receives from time to time cheques
from its customers which is sent to its banker
for collection and crediting the proceeds to its
account. A firm debits the bank account as soon
as it sends the cheque to the bank for
collection. However bank gives affect only when
the cheques are actually collected. So on a
particular day it may be possible that some of
the cheques debited by the firm have not yet
been collected by the Bank and not accounted.

Hence there will be a difference in the balance as
shown in the Firm’s cash book & in the Bank’s
pass book.
3. Bank charges – bank charges its customers for
various services it renders to them. The bank
may charge the customer for collecting outstation
cheques, preparing Draft or remitting money at
his instruction. Such charges are debited by
bank immediately on performing the task. But
customer is able to know and rectify its account
only at month end when it receives its statement.
Hence for most part of the month, balance of
firm’s cash book & the bank’s pass book does
not tally.

4. Direct collection on behalf of customers – A
bank may receive certain remittances through
ECS or Cheque/Draft directly from the
customers Banker or customer and credit is
passed on to the firm Immediately. However
Firm comes to know only when it receives
statement of account from the bank. So on a
particular date the Bank pass book and cash
book maintained by the firm will not agree.
5. Errors –There may be errors in the account
maintained by the customer as well as by the
bank. A wrong credit or debit may be given by
customer or the bank. The balances therefore
will not tally.

• When is Bank reconciliation necessary?
• Bank reconciliation is necessary for ensuring
Bank balance as per Cash book & balance as per
Pass book / Bank statement of the organization
matches.
• A bank reconciliation is usually done after
receiving monthly statement of account from the
Bank.
• It is necessary when the finance manager assess
the financial position of the company.
• It is necessary to detect & rectify errors
committed by bank in giving credit for money
collected or debit for payments made by the
organization.
• It must be completed before Quarterly/Half
yearly/Annual audit of account of an organization.

Trial Balance
• What is a Trial Balance? Explain the errors which
are disclosed by the T.B.
• Trial Balance – It is a statement containing the
various Ledger balances (Debit & Credit
balances) on a particular date.
• Errors disclosed by TB are :
• Omission to post an amount in the Ledger - Cash
receipt of Rs.1000 from Ram has been recorded
in the cash book but not posted on the credit side
of Ram A/c. So, credit side of T.B. will fall short
by Rs.1000.
• Debit or credit entries are not posted at all or
posted twice.

• Debits are wrongly posted as credits & vice versa
– Cash receipt of Interest Rs.500 is correctly
debited in the cash book but has been wrongly
recorded on the debit side of interest A/c. So,
credit side of T.B. will fall short by Rs.1000.
• Wrong totaling of Subsidiary books.
• Difference in amount between the entries.
• Error in the computation of an account balance.
• Omission of Account balance.
• Balance of an Account is wrongly recorded in the
Trial Balance.
• Errors in totaling of Trial Balance.

• Explain errors which are not disclosed by T.B.
• Errors of Omission – A transaction is omitted
altogether.
• Errors of Principle – Wages for installation of
machinery, instead of adding it with cost of
Machinery, debited to Wages A/c.
• Compensating Errors
• Recording wrong amount in the books of original
entry.
• Recording a Transaction more than once in the
books of A/c.
• Error in recording a transaction in wrong account
head – Instead of debiting Ram, Raman A/c is
debited.

• Suspense Account – When it is not possible to
locate the errors in spite of trying different means
to locate it, the difference in the Trial Balance is
transferred temporarily to an account known as
Suspense Account. Afterwards, when the errors
have been located, they can be rectified through
the Suspense Account.

• Explain the steps for locating errors through T.B.
What are errors of Commission.
• 1. Check whether Debit & Credit columns have
been added correctly by adding these columns
from top to bottom & from bottom to top.
• 2. If the errors remain undetected, divide the
difference by 9. If it is divisible then there is either
Transposition or Slide error. Transposition error
occurs when digit of an amount is placed wrongly.
For example if Cash A/c has a balance of Rs.5760
but wrongly posted in T.B. as 5670, the resulting
error is 90 which is divisible by 9. Slide error
happens when decimal point is placed incorrectly,
like Rs.6250 is copied as 62.50. The resulting
error is Rs.6187.50 which is divisible by 9.
• 3. Divide the difference by 2 & scan the columns

• for an identical amount. If Debit balance of Rs.250
has been entered in the Credit column of the T.B. it
will cause a difference of Rs.500 in the T.B. total.
• 4. Check in the Ledger if any account shows a
balance equal to the difference in the T.B.
• 5. Re-check the opening balances of all the accounts
from the previous balance sheet.
• 6. Cross check the amount in the T.B. with the
balances in the Ledger.
• 7. Re-compute the balances of each Ledger Account.
• 8. If the errors remain undetected, check the postings
from Journal & other books of original entry.
• 9. If the errors still remain undetected, repeat the
above steps with the help of other members of the
staff.

Trial Balance is a conclusive proof of accuracy of
accounts. Do you agree? If not, explain how & why?
The main objective of preparing a Trial balance is
checking of the arithmetical accuracy of the
accounting entries. Trial balance represents a
summary of all Ledger balances and, therefore, if
the two sides of the Trial balance tally, it is an
indication of the fact that the books of Account are
arithmetically accurate.
However, there may be certain errors in the books
of Account in spite of an agreed Trial Balance.
Different classes of errors are discussed below.

1. Errors of Omission – Such an error arises when
any Transaction is either wholly or partially
omitted to be recorded in the books. In the
former case Trial balance will not be affected but
for the later case the Trial balance will disagree.
2. Errors of commission – This error arise when
transactions are incorrectly recorded, either
wholly or partially. In the former case Trial
balance will have no affect but for the later case
Trial balance will not tally.
3. Clerical errors – It is a form of error of
commission. This may consist of an incorrect
posting, posting to the wrong account etc.,
Incorrect posting will make the Trial balance to
disagree but posting to the wrong account will not
affect the agreement of the Trial balance.

4. Errors of Principle – An error of principle arises due
to recording of the transaction in a fundamentally
incorrect manner. It may be caused by treating a
revenue item as an Asset or Liability, or vice versa.
These errors will not make the T.B. to disagree.
5. Compensating Errors – This is an error which is
counterbalanced by another error or errors of the
same amount either in the same account or different
accounts. Such an error will not cause the Trial
balance to disagree.
From the above it is clear that T.B. will agree in spite
of presence of many errors. Hence an agreed T.B.
can not be regarded as a conclusive evidence of the
correctness of the books of accounts, rather it may be
regarded as a prima facie proof that the postings are
in order.

Correct the following Trial Balance.
Debit
Amount
(Rs.') Credit
Amount
(Rs')
Return Outward 16000 Debtors 15,000
Opening Stock 34200
Carriage
Outward 5,000
Salaries 12000 Capital 55,200
Creditors 28000 Machinery 18,000
Bank 45000 Return Inward 3,000
Carriage Inward 6000
Discount
Received 4,000
Rent Received 3000 Trade Expenses 6,000
Discount Allowed 2000 Sales 140,000
Purchases 100000 Building 20,000
Bills Payable 20000

Debit
Amount
(Rs.') Credit
Amount
(Rs')
Building 20000 Capital 55,200
Machinery 18000 Sales 140,000
Purchases 100000 Creditors 28,000
Opening Stock 34200 Bills Payable 20,000
Debtors 15000 Return Outward 16,000
Bank 45000 Discount Received 4,000
Salaries 12000 Rent Received 3,000
Carriage Outward 5000
Carriage Inward 6000
Return Inward 3000
Discount Allowed 2000
Trade Expenses 6000
266,200 266,200

Preparation of Trading & Profit & Loss A/c
• What is a Profit & Loss A/c – Profit & Loss A/c
discloses Net Profit or Loss made by a
businessman or Trader by purchase & selling of
goods.
• Why P&L A/c is prepared – It provides Net Profit
or Loss earned during a particular period.
• It helps in comparing Profit or Loss of other
periods.
• By comparing current year expenses with those
of other years – It helps in controlling expenses.
• Allocation of profit & setting aside a part of it can
be done.

• Adjustment entries required at the time of preparing Final
A/c.
• Closing Stock – Closing Stock A/c Dr.
• To Trading A/c.
• O/s Expenses – Expenses due but not been paid.
• Expenses A/c Dr.
• To O/s. Exps A/c.
• Prepaid Exps.- Exps paid in advance & relate to other
A/cing period. Prepaid Exps A/c Dr.
• To Expenses A/c.
• O/s Income – Income fallen due but not received.
• O/s Income A/c Dr.
• To Income A/c.

• Income recvd in Advance – Income of Subsequent A/cing
period is recvd.
• Income A/c Dr.
• To Income Recvd in advance A/c.
• Depreciation - Normal Wear & Tear
• Depreciation A/c Dr.
• To Fixed Asset A/c.
• Bad Debt - Debtors which is not receivable.
• Bad Debt A/c Dr.
• To Debtors A/c.
• Prov. For Bad Debt – P & L A/c Dr.
• To Prov. For Bad debt A/c.
• Interest on Capital A/c- Interest on Cap A/c Dr.
• To Capital A/c.
• Interest on Drawing – Capital A/c Dr.
• To Interest on Drawing A/c.

• Distinguish between TB & Balance Sheet –
• Trial Balance - Debit & Credit balances of Ledger
A/cs are recorded.
• It helps in checking Arithmetical accuracy of
Accounting entries. It forms the basis of
preparing Final A/c.
• Balance Sheet – It is a statement & not Account.
• It records Assets on the right side & Liabilities on
the left side of the statement.
• It helps management to know financial position
of the firm.

• Distinguish between P&L A/c & B/S
• P&L A/c – It discloses Net Profit or Loss made
during a particular period.
• It records all income & expenses other than
those related to Trading A/c.
• It is an A/c & not a statement.
• It measures Profit or Loss made from the
business.
• Balance Sheet – It is a statement & not Account.
• It records Assets on the right side & Liabilities on
the left side of the statement.
• It helps management to know financial position
of the firm.

• Advantages of preparing Accounts in Vertical
form.
• Here Trading Profit & Loss Account is presented
in the form of a statement in a vertical form.
• It is easier to read & understand specially by
those who are not from commercial background.
• It records Income from operations i.e., credit
side of P&L A/c first then expenses relating to
operation of business are deducted i.e., debit
side of Trading & P&L A/c.
• Presently Income & expenditure from operations
from businesses are presented by many
organization in the vertical format. Since it is
easier for common person to understand and it
has their acceptability.

Preparation of Balance sheet.
• Discuss the treatment of Prepaid expenses &
Outstanding expenses at the time of preparation
of Final account.
• Outstanding Expenses - Expenses due but
not been paid.
• Expenses A/c Dr.
• To O/s. Expenses A/c.
• Prepaid Expenses - Expenses paid in
advance & relate to other Accounting
period.
• Prepaid Expenses A/c Dr.
• To Expenses A/c.

• Discuss the treatment of Depreciation & Closing
Stock at the time of preparation of Final account.
• Closing Stock - Closing Stock A/c Dr.
• To Trading A/c.
• Depreciation - Normal Wear & Tear
• Depreciation A/c Dr.
• To Fixed Asset A/c.

• What are Capital reserves? How are they
created?
• Capital reserves are those which are not generally
distributed as Profits. They arise mainly out of the
following :
• 1. Capital receipts, e.g. issue of shares or
debentures at a premium.
• 2. Non-trading incomes during the period prior to
incorporation.
• Capital reserves may or may not involve any
receipts of cash.

• Differentiate between Reserve & Reserve fund.
• Funds are referred to as assets for specific
purposes, which are not generally available for
normal business activities.
• Reserves are not usually represented by
earmarking assets. If they are, they are
expressed as Reserve fund.
• For example, if an organization sets aside profits
for Building construction, the reserve so created
is known as Building Funds.
• A reserve fund is usually created either to
replace a fixed asset at the end of its useful life
or to repay a liability in the future, e.g.
redemption of Debentures.

• What are Secret reserve?
• A secrete reserve is a reserve that is created but
not stated in a balance sheet. There are various
ways of creating secrete reserves. The banks,
insurance companies and other financial
institutions wants to win public confidence for
there successful working. These concerns can
create secret reserves. It is a technique to show
poor financial position and in case of need such
reserves are available to meet crisis.
• A secret reserve is created by the following
methods:
• 1. By under valuation of assets much below their
cost or market value.
• 2. By not writing up the value of an asset, the
price of which has permanently gone up.

• 3. By creating excessive reserve for bad & doubtful
debts.
• 4. By providing, excessive depreciation on fixed
assets.
• 5. By writing down goodwill to a nominal value.
• 6. By omitting some of the assets altogether from B/S.
• 7. By overvaluing the liabilities.
• 8. By the inclusion of fictitious liabilities.
• 9. By showing contingent liabilities as actual liabilities.
• Object of creating secret reserve
• Secret reserves strengthen the financial position of a
concern, losses can be made good without disclosing
their occurrence to the shareholders & others. This
helps the concern to remain financially strong in spite
of a period of adversity.

Final Account Adjustments
• How is Goods in Transit & Goods lost by Fire are
treated in Final A/c?
• INSURANCE IN TRANSIT:
while bringing goods from outside, they
may be destroyed or stolen in transit .such
loss may be insured against. The amount
of premium paid to the insurance company
is debit to the insurance in Transit a/c and
is transferred to the debit side of the
trading a/c being an expense connected
with the purchased of goods.
Trading A/c Dr.
To Insurance in Transit A/c

• If a portion of good is lost by Fire then the value of
such loss is first to be ascertained. Then pass
Accidental Loss A/c Dr.
To Trading A/c
• If the above loss is covered under Insurance then
pass
Insurance claim A/c Dr.
Profit & Loss A/c Dr. (Claim not admitted)
To Accidental Loss A/c.
• When the claim is settled then pass
Bank A/c Dr.
To Insurance claim A/c.

• What are the uses & limitations of Balance sheet?
• Uses of Balance sheet :
• The lender can ascertain the financial position of
the business.
• It helps to ascertain capital employed in the
business.
• It serves as the basis for the acquisition of the
business.
• Trends of W.C. of the business can be determined
& corrective measures taken if required.
• It helps to ascertain owners interest in the
business.
• Different ratios calculated & can be used for better
management of the enterprise.

• Limitations of Balance sheet :
• Fixed assets shown in the balance sheet are at
historical cost less depreciation which is not the
true value of the assets.
• Balance sheet can not reflect the value of certain
factors such as skill & loyalty of employees.
• Conventional balance sheet may mislead a reader
in inflationary situation.
• The value of Current assets depend upon some
estimates, so it can not reflect the true liquidity
position of the business.

• Define Assets & their classification.
• Assets are resources, tangible & intangible, from
which probable future economic benefits are
obtained & the rights to which have been
acquired by the entity as a result of past
transactions.
• The assets are the valuable resources owned by
a business. Assets are classified into following
four groups :
• Fixed Assets.
• Current Assets.
• Fictitious Assets. (Preliminary expenses,
Accumulated losses)
• Intangible Assets. (Goodwill, Patents, Copyright
etc.)

• Define Liabilities & their classification.
• Liabilities are obligations which arise from
transactions or other events that have already
been occurred. Liabilities are the claims of the
outsiders against the business or the amount that
the business owes to its providers other than its
owners.
• Liabilities can be classified into the following three
groups :
• Fixed Liabilities. (Long term liabilities)
• Current Liabilities.
• Contingent Liabilities. (Not recorded in the
Balance sheet but are disclosed as note to
accounts in the audit report)

Accounting of Non Trading organizations-I.
• Explain the meaning of Subscription, Donation &
Life Membership Fees.
• Subscription – These are amounts received or
receivable from the members of a Non Profit
making organization for being entitled to the
service rendered by it. This is a major source of
Income of a Non Trading concern. For example a
Club receives membership fees, Society
receives monthly subscription from its members
etc., The Receipt & Payment A/c records actual
subscription received while the Income &
Expenditure A/c records only the subscriptions
which relate to the Accounting period, whether
received or not.

• Donation – Are amounts given by members or
outsiders for the general functioning of a Non
Profit organization or for a particular purpose, not
in anticipation of any return, but simply as a token
of appreciation of the organization’s services to
the society.
• (i) Specific Donation is received for a specific
purpose. For example donation given for
construction of Building or for giving prizes to a
the best sportsman. It is taken on the Liability
side of the Balance sheet & used only for the
purpose for which it is meant.
• (ii) General Donation is received not for a specific
purpose. If the donation is small &

• Recurring in nature then it can be taken to the
Income & Expenditure A/c. If the donation
amount is substantial & non recurring in nature
then it is taken in the Liability side of the B/s.
• Life Membership Fee – is received for making life
time member. Members will have to pay fees only
once in their life time & enjoy benefit of the
institution for the whole life. The amount received
can be dealt in the A/c by any of the following
methods.
• (i) The amount is treated as Capital receipt &
shown in the Liability side of the B/s.
• (ii) It may be credited to a separate A/c i.e., Life
membership Fee A/c. Normal annual subscription

may be transferred to Income &
Expenditure A/c & balance may be carried
forward till it is exhausted. In the case of
death of a member balance may be
transferred to Capital Fund A/c.
• (iii) The amount received is credited to Life
membership fee A/c. Annual contribution
according to average life of a member may
be transferred from this A/c to the Income
& Expenditure A/c.

• Differentiate between Receipt & Payment A/c &
Income & Expenditure A/c.
• 1. R&P A/c shows inflow & outflow of cash
similar to Cash book of non trading concern. I&E
A/c is a revenue A/c of a non trading concern
resembling the P&L A/c of a Trading concern.
• 2. R&P A/c includes both capital & revenue items
but I&E A/c represents only revenue items.
• 3. R&P A/c deals with income & expenses in
cash during the current period. But I&E includes
prepaid & outstanding incomes & expenses.
• 4. R&P A/c includes expenses & incomes of
previous, current & future periods. But an I&E A/c
include only expenses & income for the current
accounting period.

• 5. Depreciation of assets, Bad debt, Provisions etc.
are not included in R&P A/c but included in I&E A/c.
• 6. In R&P A/c income is shown on debit side &
expense is shown on the credit side as in a cash
book. But in I&E A/c the expense is shown on the
debit side & income is on credit side as in a P&L
A/c.
• 7. A R&P A/c starts with opening & closing balance
whereas I&E A/c does not start with opening
balance but usually ends with a closing balance
(deficit or surplus)
• 8. The closing balance of R&P A/c is to be carried
forward in the same A/c but closing balance of I&E
A/c is transferred to capital fund of the concern.
• 9. R&P A/c is not followed by B/S but I&E A/c is
usually followed by a B/S.

Accounting of Non Trading organizations-II.
• Distinguish between accounting for a trading A/c
& accounting for a non trading A/c.
• 1. Main objective of a Trading concern is to earn
profit for the owners, but the objective of a Non
Trading concern is to render social service.
• 2. Trading A/c includes Trading P&L A/c followed
by B/S whereas in non trading A/c I&E A/c is
prepared followed by B/S.
• 3. Excess of revenue income over expenditure in
a trading concern is called Profit & in non trading
concern it is termed as excess of income over
expenditure.

• 4. In case of trading concern profit accrues
to the owner whereas in non trading
concern surplus enhances the capital fund
of the concern to be utilized by the concern
only.
• 5. Profit of a trading concern arises out of
excess of sales revenue over cost of sales
but in a non trading concern it is the
difference of income from subscription,
donation etc., over expenses.

• Meaning of Receipt & Payment A/c.
• It is a summary of cash transactions under proper
heads during the accounting period. It is a
summary of cash book. Cash book contains
record of cash receipt & payments in the
chronological order of date while the R&P A/c is a
summary of receipts & payments under different
heads. For example a club receives subscription
from its members on different dates, they will be
recorded on these dates separately in the cash
book but R&P A/c will contain total subscription
received during the accounting year. It records all
cash receipts & payments, irrespective of the fact

• whether they are of capital or revenue in nature
or whether they relate to the current year or not.
R&P A/c generally starts with opening balance &
ends with balance at the end of the accounting
year.
• Meaning of Income & Expenditure A/c.
• An I&E A/c records all revenue income &
expenses relating to the period for which account
is being prepared. It is similar in form to the P&L
A/c of a trading concern. It shows all revenue
expenses on the debit side & revenue incomes
on the credit side. In case of both income &
expenses, adjustments are to be made for
amount due & prepaid.

• Items like Depreciation on fixed assets,
bad debt etc are to be brought in the A/c.
Final balance represents surplus income
over expenditure or a surplus expenditure
over income for the period. This is added
or deducted form an A/c called Capital fund
or Accumulated fund or General fund.

Capital & Revenue Expenditure
• What is capital & revenue expenditure.
Distinguish between them.
• Capital expenditure is an expenditure the benefits
of which is consumed in several accounting
periods. It is, therefore, of non-recurring nature.
Examples are :
• Expenses incurred for acquiring fixed assets, for
making additions to existing fixed assets, benefits
of enduring nature, like goodwill, patent & copy
right.
• Revenue expenditure is an expenditure incurred
in an accounting period & benefits of which is also
consumed in the same period. It is of recurring in
nature.

• Examples are :
• It includes expenses incurred for acquiring assets
for resale or for conversion into finished products,
repairs & maintenance, various trade charges like
rent, rates & taxes, salaries, wages, carriage etc.
• Distinction between capital & revenue expenditure
are :
• Benefits of capital expenditure is spread over
several accounting periods but of revenue
expenditure is consumed in one accounting
period.
• CE is of non recurring nature & RE is of recurring
nature.
• CE increases the earning capacity of the business

but not Revenue Expenditure.
• All items of CE appear in the Asset side of the
balance sheet & that of RE appear in the debit
side of the P&L A/c.

• What are capital & revenue receipts? Distinguish
between them.
• Capital receipts comprises contribution by
proprietors or partners towards the capital of their
business or in case of a company subscription
towards share capital or debenture, any loan etc.
Thus CR generally create a liability either to
outsiders or to the proprietors.
• Revenue receipts, do not create any liability &
comprise sale proceeds of stock, interest on
investment, commission earned, discount
received etc. Thus Revenue receipt is of
recurring in nature.

• Distinction between CR & RR are :
• CR is of non recurring nature & RR is of recurring
nature.
• CR creates liability but RR does not create nay
liability to the organization.
• CRs are shown in the Liability side of the balance
sheet but RRs are shown on the credit side of the
P&L A/c.

• Define capitalised expenditure & deferred
revenue expenditure.
• Capitalised expenditure – It is an expenditure
which is of revenue in nature but incurred for
acquiring any asset or for adding value to it.
• Examples are :
• Repair charges, purchase of material & wages
as part of construction or erection, carriage &
legal expenses.
• Deferred revenue expenditure – This is an
expenditure of a revenue in nature the benefits
of which extends beyond the accounting period.
The unwritten portion which is carried forward to
the subsequent years is referred to as deferred

revenue expenditure & is shown on the asset side
of the balance sheet.
• Examples are :
• Discount allowed on issue of debentures,
expenditure on an advertisement campaign or on
a scientific experiment.

Rectification of Errors
• Explain the different stages of rectification of
errors.
• Errors in accounts may be discovered & might call
for rectification in any of the following stages :
• Before preparation of Trial Balance-First stage
• Before preparation of Final Account-Second stage
• After the preparation of the Final Accounts-Third
stage.
• First stage rectification – The errors may come to
light during the course of the accounting period &
before the books are closed. If it is a double sided
error, a suitable entry will have to be passed in
order to reverse the effect & bring about the

• Furniture purchased for Rs.1000 is wrongly
debited to purchase account. So rectifying entry
to be passed is Debit Furniture A/c & credit
Purchase A/c with Rs.1000.
• If the error is one sided then rectification will be
made directly in the ledger by debiting or
crediting the account affected by the error.
• If an item of Rs.700 on the credit side of the cash
book in respect pf salaries paid is posted to the
debit of salaries account as Rs.70, the error is
one sided & will be rectified by debiting salaries
account to error due to wrong posting from cash
book with Rs.630.

• Second stage rectification – here the error
remained undetected at the time of preparation of
Trial balance & Trial balance is made to agree by
transferring the difference to Suspense A/c.
• Any double sided error is rectified in the same
way as in the first stage. One sided error will
however be rectified by passing a journal entry
through Suspense A/c. Thus in the above case
the rectifying entry to be passed will be Debit
salary A/c & credit Suspense A/c with Rs.630.
• Third stage rectification – If in spite of repeated
efforts, the errors can not be detected, Final A/c
may be prepared showing the suspense A/c in it.
Debit balance being shown on the Asset side &
Credit balance shown on the Liability side.

• An error in the previous accounting period
affected a revenue or an expense account &
effect would creep into the P&L A/c &
subsequently into Capital A/c. Thus for
rectification of such an error, the P&L A/c or the
Capital A/c is to be Debited or Credited as the
case may be.
• The two errors cited above will be rectified as
follows :
• Furniture A/c Dr. Rs.1000
• To Capital A/c Rs.1000
• Capital A/c Dr. Rs.630
• To Suspense A/c Rs.630

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