Category Archives: Accounting

Recording of Transactions

Points to Remember

  • A transaction is an event or happening that changes an organisation’s financial position and/or its earnings.
  • A source document or voucher is a document which provides evidence of a company’s transaction.
  • The accounting equation is: Assets= Liabilities + Capital.
  • Journal is a day book or daily record wherein the transaction are recorded in chronological order.
  • The process of recording transactions in the journal is called journalising.
  • Ledger is a book of final entry and it contains all the accounts of a business or all the accounts of a particular type.
  • The process of transferring journal entry to individual accounts is called posting.

Accounting Equations

Accounting Equations

Accounting Equations

Accounting Equation is the double entry system of accounting that is based on accounting equations where the relationship between assets, liabilities and capital can be expressed in the form of equations. The Accounting equation signifies that the assets of a business are always equal to the total of its liabilities and capital (owner’s equity).

The equation reads as follows:

Assets = Liabilities + Capital

The above equation can be presented in the following forms.

Assets – Liabilities = Capital

Assets – Capital = Liabilities

As the accounting equation depicts the fundamental relationship among the components of the balance sheet, it is also called the Balance Sheet Equation.

Accounting Standards

Accounting Standards 2018

Accounting Standards

The Institute of Chartered Accountants of India (ICAI) had established an Accounting Standards Board (ASB) in 1977 with the aim of developing accounting standards and issuing guidelines for implementation thereof.

The Following brief gives the various standards issued by the ICAI as on March 2006.

AS1 – Disclosure of Accounting Policies (January 1979)

This standards deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements. Such policies should form part of the financial statements and be disclosed in one place.

AS2 – Valuation of Inventories (June 1981)

This standard deals with the principles of valuing inventories for financial statements. For this purpose inventories include tangible property held for sale in the ordinary course of business, or in the process of production for such sale, or for consumption in the production of goods or services for sale, including maintenance supplies and consumable other than machinery spares.

AS3 – Cash Flow Statements (June 1981, revised in March 1992)

This standard deals with the financial statement that summarizes, for a given period, the sources and applications of funds of an enterprise. It supersedes Accounting Standards(AS) 3, ‘Changes in Financial Position’, issued in June, 1981. The Cash flows are to e classified into three categories viz., operating activities, investing activities and financing activities.

AS4 – Contingencies and Events Occurring after the Balance Sheet Date (November 1982, revised in April 1995)

This standard deals with the treatment of contingencies and events occurring after the balance sheet date. It, however, does not cover contingency situations relating to the liabilities of life insurance and general insurance enterprises arising from policies issued, obligations under the retirement benefit plan and commitments arising from long-term lease contracts.

AS5 – Net Profit or Loss for the Period, Prior Period items and Changes in Accounting Policies (November 1992, revised in February 1997)

This standard deals with the treatment in the financial statements of prior period and extraordinary items and changes in accounting policies. It does not deal with the tax implications of prior period items, extraordinary items and changes in accounting policies and estimates for which appropriate adjustments will have to be made depending on the circumstances. it also does not deal with adjustments arising out of revaluation of assets.

AS6 – Depreciation Accounting (November 1982)

This standard applies to all depreciable assets. It does not apply to assets in the category of forests, plantations and similar natural resources; wasting assets including expenditure on the exploration for natural non-regenerative resources; expenditure on research and development; goodwill and live stock. This also does not apply to land unless it has a limited useful life for the enterprise.

AS7 – Accounting for Construction Contracts (December 1983, revised in April 2003)

This standard deals with accounting for construction contracts in the financial statements of contractors. This contracts may fall into the category of fixed price contracts or cost plus contracts. The Accounting for such contracts may either on the percentage of completion method or completed contract method.

AS8 – Accounting for Research and Development (January 1985)

This standard deals with the treatment of costs of research and development in financial statements. It, however, does not deal with the accounting implications of the following specialised activites; (i) research and development activities conducted for others under an contract; (ii) exploration for oil, gas and mineral deposits; and (iii) research and development activities of enterprises at the construction stage.

AS9 – Revenue Recognition (November 1985)

This standard deals with the basis for recognition of revenue in the statement of profit and loss of an enterprise. It is concerned with the recognition of revenue arising in the course of the ordinary activities of the enterprise from the sale of goods, the rendering of rendering of services and the use by others of enterprise resources yielding interest, royalties and dividends.

AS10 – Accounting for Fixed Assets (November 1985)

This standard deals with fixed assets grouped into various categories such as land, buildings, plant and machinery, vehicles, furniture and fittings, goodwill, patents, trademarks and designs. It does not deal with the specialised aspects of accounting for fixed assets that arise under a comprehensive system reflecting the effects of changing prices but applies to financial statements prepared on historical cost basis. This also does not deal with accounting for following assets. (i) forests, plantations and similar regenerative natural resources; (ii) wasting assets including mineral rights, expenditure on the exploration for and extraction of minerals, oil, natural gas and similar non-regenerative resources; (iii) expenditure on real estate development; and (iv) livestock.

AS11 – The Effects of Changes in Foreign Exchange Rates (August 1991, revised in 2003)

This standard deals with issues relating to accounting for effect of changes in foreign exchange rates. This applies to accounting in foreign cur-rencies and translating the financial statements of foreign branches for inclusion in the financial statements of the enterprise.

AS12 – Accounting for Government Grants (August 1991)

This standard deals with accounting for government grants. Government grants are sometimes called subsidies. cash incentives. duty drawbacks and so on. This standard does not deal with: (i) the special problems arising in accounting for gov-ernment grants in financial statements reflecting. the effects of changing prices or  in supplementary information of a similar nature; (ii) government assistance other than in the form of government grants; and (iii) government participation in the ownership of the enterprise.

AS13 – Accounting for for Investments (September 1993)

This standard deals with accounting for investments in the financial statements of the enterprise and related disclosure requirements. The issues relating to recogni-tion of interest, dividends and rentals earned on investments, operating or finance lease and investment of retirement benefits plans and life insurance enterprise are not within the purview of this standard.

AS14 – Accounting for Amalgamations (October 1994)

This standard deals with the accounting treatment of any resultant goodwill or reserves in amalgamation of companies. This does not apply to the cases of acquisitions where one company purchases the shares in whole or in part of other company in consideration of cash or by issue of shares of other securities (In such a case the entity of acquired company continues).

AS15 – Accounting for Retirement Benefits in the Financial Statements of Employers (January 1995)

This standard deals with accounting for retirement benefits in the financial state-ments of employers. For this purpose, the retirement benefits considered may be in the form of provident fund, superannuation/ pension, gratuity, leave encashment benefits on retirement, post retirement health and welfare scheme and any other retirement benefits.

AS16 – Borrowing Costs (May 2000)

This standard deals with the issues involved relating to capitalisation of interest on borrowing for purchase of fixed assets. It deals with issues related to identifying the assets which qualify for capitalisaciong of interest, the period for which the interest is to be capitalised and the amount of interest that can be capitalised.

AS17 – Segment Reporting (October 2000)

This standard applies to companies which have an annual turnover of Rs.50 crore or more. it requires that the accounting information should be reported on segment basis. The segments may be based on products, services, geographical areas and so on.

AS18 – Related Party Disclosure (October 2000)

This standard requires certain disclosures which must be made for transactions between the enterprise and related party as an enterprise which has a common control with reporting enterprise, associate or joint venture of reporting enterprise, individual having direct/ indirect interest in the voting power of reporting enterprise and any other key personnel. Basically it includes any enterprise or person over which any person having direct/ indirect interest in voting power or key management personnel of the reporting enterprise, is able to exercise significance influence.

AS19 – Leases (January 20001)

This standard deals with the accounting treatment of transactions related to lease agreements. For this purpose, the standard divides the agreements into operating and financing leases.

AS20 – Earnings Per Share (January 2001)

This standard deals with the presentation and computation of Earning Per Share (EPS). The E{S needs to be calculated on consolidated basis as well as for the parent (holding) company while presenting the financial statements of the parent company. Basic as well as diluted EPS must be computed and presented.

AS21 – Consolidated Financial Statements (1-4-2001)

This standard deals with the preparation of consolidated financial statement to provide information about the activities of a group (parent company and companies under its control. referred to as subsidiary companies).

AS22 – Accounting for Taxes on Income (1-4-2001)

This standard deals with the determination of the amount of tax expenses for related revenues. The tax expense will comprise current tax and deferred tax for the purpose of determing the net profit (loss) for the period.

AS23 – Accounting for Investments in associated in Consolidated Financial Statements (July 2001)

This standard deals with the principles and procedures to be followed for recognis-ing, in consolidated financial statements, the effect of the investments in associ-ates, on the financial position and operating results of a group

AS24 – Discontinuing Operations (February 2002)

This standard lays down the principles for reporting information about discontinued operations with an objective to enhance the ability of users of financial statements to make a projection of an enterprise’s cash flows. earning generating capacity and financial position by segregating information about discontinued operations from information about continuing operations.

AS25 – Interim Financial Reporting (February 2002)

This standard deals with the minimum content of interim financial reports and pre-scribes the principles for recognition and measurement in complete or condensed financial statements for an interim period. It does not say anything about the frequency of such reporting.

AS26 – Intangible Assets (February 2002)

This standard prescribes the accounting treatment for intangible assets which are not covered by any other specific accounting standard.

AS27 – Financial Reporting of interests in Joint Ventures (February 2002)

This standard sets principles and procedures for accounting for interests in joint ventures and reporting of joint ventures’ assets, income and expenses in the financial statements of ventures and investors.

AS28 – Impairment of Assets (2004)

This standard sets principles and procedures that an enterprise needs to apply to ensure that its assets are not carried in the balance sheet at an amount higher that their recoverable value.

AS29 – Provisions. Contingent Liabilities and Contingent Assets

The Objective of this standard is to ensure that appropriate recognition criteria and measurement bases are applied to provision and contingent liabilities. and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount. The objective is also to lay down appropriate accounting for contingent assets.

Financial Statements

Financial Statements

Financial Statements

A Financial Statement is a periodic report prepared from the accounting records of a company. Financial statements include the profit and loss statement (or income statement), balance sheet and cash flow statement. Financial statements are usually compiled on a quarterly basis or annual basis.

For reporting convenience, the profit and loss account is divided into:

  • Trading account
  • Profit and Loss account

Financial Statements

The Profit and Loss statement can be further classified into:

  • Gross Profit: Gross Profit is arrived at, after considering the core activi-ties of the company. It is expressed as:

Gross Profit = Net Sales – Cost of Sales

  • Net Profit: Net Profit is arrived at, after considering the other administra-tive costs incurred for the period. It is expressed as:

Net Profit = (Gross Profit + Other Income) – (Selling and Administrative Expenses + Depreciation + Interest + Taxes + Other Expenses)


Accounting Cycle

Accounting Cycle

The term ‘Accounting Cycle’ refers to the sequence of accounting procedures followed in recording, classifying and summarising business transactions. In starts with identification of business transactions and ends with the adjustment entries for prepaid and outstanding expenses.

The sequence of accounting procedures is as follows.

  1. Identification of transactions.
  2. Preparation or receipt of business documents.
  3. Recording of transactions in books of original entry.
  4. Posting of transactions to ledgers.
  5. Preparation of trial balance.
  6. Preparation of final accounts.
  7. Passing of closing and adjustment entries.

accounting cycle


A transaction is an event or happening that changes an organisation’s financial position and/ or its earnings. For example, when you deposit cash in the bank, your cash balance increases and your stock reduces.

Transactions can be classified as follows:

  • Receipts – Cash or Bank
  • Payments – Cash or Bank
  • Purchases
  • Sales

Recording Transaction

The essential function of accounting is to record transaction to ascertain the financial status of a company as on a particular date.

  • Purchase of goods, either as raw material for further processing or as finished goods for resale.
  • Payment of expenses incurred towards business.
  • Sale of goods or services.
  • Receipts, in cash or by cheque.
  • Other payments, in cash or by cheque.

Types of Accounts

The three types of accounts maintained for transactions with parties are:

  • Real Accounts
  • Personal Acounts
  • Nominal Accounts

Real Accounts are maintained for assets owned or possessed by the business.

Examples include:

  • Buildings
  • Furniture
  • Cash

Personal Accounts are the accounts of persons with whom the business is required to deal with.

Examples include:

  • Suppliers
  • Customers
  • Lenders

Nominal Accounts are accounts where income and expenses are recorded.

Examples include:

  • Sales
  • Rent expenses
  • Salary expenses

Accounts can e broadly classified under the following five groups:

  • Assets
  • Liabilities
  • Capital
  • Revenue
  • Expenses

Assets, liabilities and capital are taken to the balance sheet. Revenue and expenditure accounts are shown in the profit and loss statement.

QuickBooks Training    Branches of Accounting    Basic Terms in Accounting    Basic Accounting Concepts    Meaning of Accounting

Basic Terms in Accounting

Basic Terms in Accounting

Basic Terms in Accounting


Entity has a definite individual existence. Business entity is an identifiable business enterprise such as Super Bazaar, Jewellers and so on. An accounting system is always devised for a specific business entity (also called accounting entity).


Transaction is an event involving some value between two or more entities. It can be a purchase of goods, receipt of money, payment to a creditor, incurring expenses and so on. It can be either a cash transaction or a credit transaction.


Assets are economic resources of an enterprise that can be expressed in monetary terms. They are items of value used by the business in its operations. For example, Super Bazar owns a fleet of trucks which it uses to deliver goods. The truck provide economic benefit to the enterprise. So the are shown on the asset side of the balance sheet of Super Bazaar.

Assets can be broadly classified into

  • Fixed Assets
  • Current Assets

Fixed Assets are assets held on a long term basis such as land, buildings, machinery, plant, furniture and fixtures. These assets are used for the normal operations of the business of goods, receipt of money, payment to a creditor, incurring expenses and so on. It can either be a cash transaction or a credit trans-action.

Current Assets are assets held on a short term basis such as debtors, bills receivables, stock, temporary marketable securities, cash and bank balances.


Profit is the excess of revenues of a period over its related expenses during an accounting year. Profit increases the investment of the owners.


Gain is a profit that arises from events or transactions which are incidental to business such as sale of fixed assets, winning a court case, appreciation in the value of an asset.


The excess of expenses of a period over its related revenues is termed as Loss. It decreases the owner’s equity. It also refers to money or money’s worth lost (or cost incurred) without receiving any benefit in return. For example, cash or goods lost due to theft, fire and so on. It also includes loss on sale of fixed assets.


Discount is the deduction in the price of goods n sale. It is offered in two ways. Offering a deduction of an agreed percentage on the list price at the time of the sale is one way of giving discount. Such a discount is called ‘Trade Discount’. It is generally offered by manufactures to wholesalers and by wholesalers to retailers. After selling the goods on credit basis, debtors may be given a certain deduction in the amount due if they pay the amount within the stipulated period or earlier. This deduction is given at the time of payment on the amount payable. Hence, it is called ‘Cash Discount’. Cash discount is an incentive that encourages debtors to make prompt payments.


The documentary evidence in support of a transaction is known as Voucher. For example, when you buy goods for cash, you get a cash memo. When you buy goods on credit, you get an invoice, When you make a payment, you get a receipt, and so on.


Goods refer to the products which a business unit produces and sells, or buys and sells. The items that are purchased for use in the business are not called good. For example, for a furniture dealer the purchase of chairs and tables is termed as goods, while for others it is furniture and is treated as an asset. Similarly, for a sta-tionery merchant, stationery is goods. But for others, stationery is an item of expense (not purchases).


Withdrawal of money and/ or goods by the owner from the business for personal use is known as drawings. Drawings reduce the investment of the investment of the owners.


Purchases Is the total amount of goods procured by a business on credit and cash, for use or sale, in a trading concern, merchandise is purchased for resale, with or without processing In a manufacturing concern, raw materials are purchased, processed further into finished goods and then sold. Purchases may either be cash or credit purchases.


Stock (inventory) is a measure of something on hand – goods, spares and other items in a business. It is called ‘Stock in hand.’ In a trading concern, the amount of goods that lie unsold at the end of an accounting period is called closing stock (ending inventory). In a manufacturing company, closing stock comprise raw materials, semi-finished goods and finished goods on hand on the closing date. Similarly, opening stock (beginning inventory) is the amount of stock at the beginning of the accounting period.


Creditors are persons and/ or other entities who have to be paid by an enterprise for providing goods and services on credit. The total amount in favour of such persons and/ or entities on the closing date is shown in the balance sheet as Sundry creditors on the liabilities side.

Basic Accounting Concepts

Basic Accounting Concepts

Assumptions are traditions and customs which are developed over a period of time and well-accepted by the profession. They provide a foundation for recording transactions and preparing financial statements. They are also referred to as ‘Accounting Concepts’ and form the basis of systematic accounting practices. The following are some important basic accounting concepts.

Basic accounting concepts

Money Measurement Concept

In accounting, all transactions are measured using a common unit of measurement, money. The Money Measurement Concept records only those transactions or events which can be measured or expressed in terms of money.

Entity Concept

The Business Entity Concept views the business as an entity, separate from its owners, i.e., business is assumed to have a distinct entity (existence) other than the existence of its proprietors.

Going – Concern Concept

The Going-Concern Concept records transactions on the assumption that a business will remain in operation long enough for all its current plans to be carried out.

Cost Concept

The Cost Concept is an accounting concept which is used only for fixed assets. The fixed asset are valued at their cost price, i.e., price paid at the time of acquisition.

Dual-Aspect Concept

Dual-Aspect involves debit and credit. For instance, when a business purchases goods for cash, it receives goods of some value and gives cash of equal value. Thus, every business transaction involves a dual or double aspect of equal value.

Periodicity Concept

The Periodicity Concept generates financial statements for relatively shorter periods such as a year or quarter, so that performance can be measured and compared.

Objective Evidence Concept

The Objective Evidence Concept means that all accounting entries should be evidenced and supported by business documents such as invoices, vouchers and so on.

Matching Concept

As per the Matching Concept, in an accounting period, the revenue that is reported must be set off against the expenses incurred to generate that revenue. This gives a true picture of the profit earned during that  period.

Realisation Concept

The Realisation Concept deals with how revenue is recognised by a business. Revenue is recognised when goods and services are delivered in quantities/amounts that are reasonable certain to be realised.

Legal Aspect Concept

The Legal Aspect Concept requires accounting records and statements to conform to legal requirements, i.e., accounting records should be maintained and statements should be prepared in the manner provided by law.

Accrual Concept

Accrual is a method of accounting that recognises revenue when earned rather than when due or collected, and expenses when incurred rather than when paid. Thus, transactions are recorded on the basis of income earned or expense incurred, irrespective of actual receipt or payment.

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Branches of Accounting

Branches of Accounting

Branches of Accounting

Economic development and technological advancement have resulted in an increase in the scale of operations of business, leading to the advent of the company from of organisation. As management functions become complex, the importance of accounting increases. Special branches of accounting developed which are briefly explained as follows.

branches of Accounting

Financial Accounting: The purpose of financial accounting is to keep a record of all financial transactions so that:

  • The Profit earned or loss sustained by the business during an accounting period can be worked out.
  • The financial position of the business at the end of the accounting period can be ascertained.
  • The financial information required by the management and other interested parties can be provided.

Cost Accounting: The purpose of cost accounting is to analyse the expenditure to ascertain the cost of various products manufactured by the company and fix the price of the final product. It also helps in controlling the costs and providing necessary costing information to management to enable decision-making.

Management Accounting: The purpose of management accounting is to assist the management in taking rational policy decisions. It also helps to evaluate the impact of past management decisions and actions.