Training Programme for CBEC officials

Basic Concepts of Accounts

-CA.Chinmaya Hegde

Summary

Basic Concepts of Accounts

Understanding Journal Entries
Ledger Posting and its importance
Understanding Trial Balance

Basic Concepts of Accounts : Transaction

and events

Transaction
Performance of an act
Activity
Buying, Selling
Event
A consequence of transaction
Cash balance, profit for a year

Reflected in
accounting

Identify event/transaction
Particulars

Event/transactio
n

Rent Paid

Cash balance

Machinery
purchased

Machinery value
at the end of the
year

Definition

the art of recording, classifying, and summarizing in a significant manner

and in terms of money, transactions and events which are, in part at
least of financial character, and interpreting the results thereof.

The American Institute of Certified Public Accountants (AICPA)

ACCOUNTING PROCESS

Final accounts
Transaction

Statement of
profit and loss
Balance sheet

Journal entry

Trial Balance

Posting

Ledger

ACCOUNTING PROCESS

Final accounts
Transaction

Statement of
profit and loss
Balance sheet

Journal entry

Trial Balance

Posting

Ledger

BASIC CONCEPTS IN ACCOUNTING

Business Entity Concept
Business is treated as distinct from the persons who own it
Money Measurement Concept
Transactions which can be measured in monetary terms
Cost Concept
Transactions at the amount actually involved
Periodicity concept
Books of accounts are closed at regular intervals

Basic accounting assumptions

Going Concern Concept
Business is not likely to be closed in the near future
Consistency
Accounting policies are followed consistently from year to year basis
Accrual
Income and expenses are recognised as and when they become due

Secondary considerations
Prudence
Provision is made for all known liabilities and losses even though the
amount cannot be determined with certainty
Profits are not anticipated but recognized only when realized
Substance Over Form
Governed by their substance and not merely by the legal form
Materiality
Items the knowledge of which might influence the decision of the user

Concept of Capital and Revenue

Revenu
e

Capital

Short term

Long term

Related to
revenue of
current year

Related to
revenue of
subsequent
year

Reflected in
Profit and
Loss A/c

Reflected in
Balance sheet

Method of accounting

Method of
accountin
g

Mercantile
When
accrued

Cash
When
there is
cash flow

Questions
Provision for doubtful debts in based on the concept of
Conservatism/Prudence
___ concept that separate owner from the asset.
Dual
Money owed to outsiders is a ____
Liability
Depreciation of fixed asset is based on concept of___
Matching/Accrual
Accounting doest not record non-financial transactions because of ___
Money measurement concept

Classification of accounts

Method
1

Method
2

Assets

Real
Land,Building,cas
h

Liabilities

Nominal
Salary,sales

Income

Personal
Capita,
drawings,debtors

Expenses

ACCOUNTING PROCESS

Final accounts
Transaction

Statement of
profit and loss
Balance sheet

Journal entry

Trial Balance

Posting

Ledger

Double entry system

Introduced in 1494 by Lucio Paciolio
Each transaction that is recorded in the books of account has two
aspects.
Two aspects are called as debit and credit
Accounting equation
Assets =

Liabilities

Capital

Identify 2 aspects
Salary paid

Salary &cash

Materials purchased
on credit

Materials/Purchases
and Creditor

Goods sold for cash

Goods/Sales and
Debtor

Paid towards auto

charges

Auto charges and

cash

Fixed assets
purchased on credit

Fixed assets and

creditor

Sales returns by
customers

Debtor and Sales

return

Golden rules of accounting

Real accounts
Debit what comes in, credit what goes out
Personal
Debit the receiver, Credit the giver
Nominal
Debit all expenses and losses
Credit all income and gains

Particulars

Debit

Credit

Expenses/
Asset

Income/
Liability

Whether to be debited or credited

Transaction

Account

Debit/credit

Salary paid in cash

Cash

Credited

Goods sold to
customer on credit

Customer

Debited

Fixed assets
purchased for cash

Fixed assets

Debited

Advance received
from customer

Advance

Credited

Paid to supplier

Cash

Credited

Cash deposited in
bank

Bank

Debited

Bank charges by bank

Bank

Credited

Journal entry and Journal book

All transactions are first recorded in the Journal as and when they
occur.
The record chronological recorded
The form of the Journal is given below:

SUBSIDIARY BOOKS
Keeping a separate register for each such class of transactions
Cash Book
Purchases Book
Sales Book
Bills receivable book
Journal (proper)

Pass journal entries for following

Started or commenced business with Rs. 20,000
Cash A/c Dr
To Capital A/c

20,000
20,000.

Goods purchases from Mohan Rs. 18,000 on credit

Purchases A/c Dr 18,000
To Mohan A/c
18,000
Goods sold to Mohan for cash
Cash A/c Dr
7,000
To Sales A/c
7,000

Related to service tax

When services are provided for 100,000 with service tax of Rs.10,000
Debtors Dr
110,000
To Revenue
100,0000
To Service tax Output
10,000
When services are received:Expenses Dr
80,000
Service tax Input Dr
8,000
To Creditor
88,000
At the time of Adjustment
Service tax Output Dr 10,000
To Service Tax Input
To Service tax Payable

8,000
2,000

At the time of Payment

Service tax Payable Dr
2,000
To Cash/bank
2,000

ACCOUNTING PROCESS

Final accounts
Transaction

Statement of
profit and loss
Balance sheet

Journal entry

Trial Balance

Posting

Ledger

LEDGER POSTING
It is a process of summary of transaction of one account in one place.

Examples
When services are provided for 100,000 with service tax of Rs.10,000
Debtors Dr
110,000
To Revenue
100,0000
To Service tax Output
10,000

Debtors A/C

Dr
Date Pariculars

To Revenue
To Service tax
Output

Dat Paricular
JF Amount e
s
JF
1,00,00

10,000

Cr

Dr

Amount

Date Pariculars

Revenue A/c

Cr

Amou
Paricular
JF nt
Date s
JF Amount
By

Debtors
1,00,000

Service tax output A/c

Dr
Date Pariculars

Cr
Amoun Dat Paricular
Amoun
JF t
e
s
JF t
By

Debtors 10,000

ACCOUNTING PROCESS

Final accounts
Transaction

Statement of
profit and loss
Balance sheet

Journal entry

Trial Balance

Posting

Ledger

Balancing of account
The process of closing the account and finding its closing balance

Debtors A/C

Dr

Cr

Date

Pariculars

To
To
To
To

JF

Revenue

Service tax Output

Revenue

Service tax Output

Dat
Amount e
1,00,00
0
10,000
60,000
6,000
1,76,00
0

Pariculars JF Amount
1,50,00
by cash

0
bal c/d

26,000

1,76,00

ACCOUNTING PROCESS

Final accounts
Transaction

Statement of
profit and loss
Balance sheet

Journal entry

Trial Balance

Posting

Ledger

Trial balance
It is list of balances of all accounts from various ledgers
It is a Statement prepared to ensure the arithmetical accuracy of all the
accounts before the preparation of the financial statements

Methods of making trial balance

Total
method
Total and
Balance
balance
method
method

Illustration

Examples
The difference in trial balance is due to?

wrong placing of salaries

wrong placing of Due from

customers

wrong placing of Sales returns

Examples
Find out the reasons for the difference in the following trial balance of
your client and draw the corrected trial balance

From trial balance to ?

Particulars

Transferred to

Expenses

Profit and loss A/c

Income

Profit and loss A/c

Liabilities

Balance Sheet

Assets

Balance Sheet

Trial balance

Groupings/Sub
grouping

Notes/Schedule
s

Final accounts

Importance of Trial balance for officials

Information on advance from customers
Break of various incomes, taxes are available
Branch wise details can be obtained
Various list of expenses available in detail.
Wont be club under administration expenses atc
Provision made for write offs etc
Helps in understanding chart of accounts

1
All economic activities can be classified as
(A) Transactions
(B) Events
(C) Both a and b
(D) None of the above
Answer: C

2
Mr A purchased a fixed asset worth Rs 10,00,000 on March 31, 2013. This
can be said to be
(A)
(B)
(C)
(D)

An Event
A Happening
A Business
A Transaction

Answer: D

3
At the end of the financial year, after sale of goods worth Rs 2,00,000 and
incurring expenses worth Rs 1,00,000, Mr Arjun realised he had a profit
of Rs 1,00,000. The profit earned is
(A)
(B)
(C)
(D)

A Transaction
An Event
Both a and b
None of the above

Answer: B

4
Prepaid expenses and outstanding expenses should be recorded in the
financial statements as per _______ concept
(A)
(B)
(C)
(D)

Going concern
Disclosure
Matching and Accrual
Money Measurement

Answer: C

5
Opening stock is overstated by Rs 8,000. This results in ________ of profit
for current year
(A) Overstatement
(B) Understatement
(C) No effect
(D) All of the above

Answer: B

6
A trial balance contains the balance of
(A) Only personal and real accounts
(B) Only real and nominal accounts
(C) Only nominal and personal accounts
(D) All accounts
Answer: D

7
When a sole proprietor brings in capital, Cash A/c is debited and Capital
A/c is credited. This is due to ______ concept
(A) Entity
(B) Disclosure
(C) Going Concern
(D) Matching

Answer: A

8
The purchase cost of machinery was Rs 1,00,000 installation charges
amounted to Rs 10,000. At the time of finalisation of accounts, market
value of the machinery was Rs 3,00,000. The company records the
value of machinery at Rs 3,00,000. Which concept is violated by the
company?
(A) Going concern
(B) Disclosure
(C) Cost
(D) Matching
Answer: C

9
Mr Arjun starts business with Rs. 40,000 and then buys goods from Mr
Jayesh on credit for Rs. 13,000. The accounting equation based on
Assets = Capital + Liabilities will be
(A) 53,000 = 40,000 + 13,000
(B) 40,000 = 27,000 + 13,000
(C) 40,000 = 40,000 + 0
(D) None of the above
Answer: A

10
Mr A, a dealer in air conditioners, sold 2 air conditioners to Mr Z during the
year for Rs 50,000 in cash. In the books, of Mr A, ______ Account will
be debited and ______ Account will be credited
(A) Cash; Air Conditioner
(B) Cash; Purchases
(C) Cash; Sales
(D) Debtors; Sales
Answer: C

11
Human Resources do not appear in the financial statement although they
are assets of the enterprise due to _________ concept
(A)
(B)
(C)
(D)

Money Measurement
Disclosure
Materiality
Entity

Answer: A

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