BUSINESS ACCOUNTING.pdf - BUSINESS ACCOUNTING BCom BCOM 15 PROGRAMME ADVISORY COMMITTEE Chairman Dr Pooja Munjal Registrar Mahatma Gandhi university

BUSINESS ACCOUNTING.pdf - BUSINESS ACCOUNTING BCom BCOM 15...

This preview shows page 1 out of 198 pages.

You've reached the end of your free preview.

Want to read all 198 pages?

Unformatted text preview: BUSINESS ACCOUNTING BCom BCOM 15 PROGRAMME ADVISORY COMMITTEE Chairman Dr. Pooja Munjal Registrar, Mahatma Gandhi university Meghalaya. Vice Chairman Ms. Jasvinder Kaur Director, DDE, Mahatma Gandhi university Meghalaya. MEMBERS Prof.(Brig.) Ramesh Chandra Area Chair Person-HRM & OB Dean, Delhi Business School. Dr. Rakesh Kumar Gupta HOD Dept. of Mgmt. Affliated College of GGSIP University Dr. Amit Kumar jain Department of Microbiology & Botany Janta Vedic College, Baraut (Baghpat) Dr. Sanjay Kumar Research Associate NGO-Work Psychology & Human Resource Forum Ms. Seema Hasan Director, National Institute of Mass Communication PROGRAMME PREPARATION COMMITTEE (Authors) SN Maheshwari, Director General, Delhi Institute of Advanced Studies, Delhi Sharad K Maheshwari, Finance Manager Baker Hughes, EHO Ltd. Muscat, Oman Suneel K Maheshwari, Professor & Interim Division Head - Division of Accountancy & Legal Environment Marshall University, USA Copyright © Authors, 2011 All rights reserved. No part of this publication which is material protected by this copyright notice may be reproduced or transmitted or utilized or stored in any form or by any means now known or hereinafter invented, electronic, digital or mechanical, including photocopying, scanning, recording or by any information storage or retrieval system, without prior written permission from the Publisher. Information contained in this book has been published by VIKAS® Publishing House Pvt. Ltd. and has been obtained by its Authors from sources believed to be reliable and are correct to the best of their knowledge. However, the Publisher and its Authors shall in no event be liable for any errors, omissions or damages arising out of use of this information and specifically disclaim any implied warranties or merchantability or fitness for any particular use. Vikas® is the registered trademark of Vikas® Publishing House Pvt. Ltd. VIKAS® PUBLISHING HOUSE PVT. LTD. E-28, Sector-8, Noida - 201301 (UP) Phone: 0120-4078900 • Fax: 0120-4078999 Regd. Office: 576, Masjid Road, Jangpura, New Delhi 110 014 Website: • Email: [email protected] Produced and Printed for MAHATMA GANDHI UNIVERSITY Meghalaya Dear Students, I recall Mahatma Gandhi famous saying– “The real difficulty is that people have no idea of what education truly is? We assess the value of education in the same manner as we assess the value of land or of shares in the stock-exchange market. We want to provide only such education as would enable the student to earn more. We hardly give any thought to the improvement of the character of the educated. The girls, we say, do not have to earn; so why should they be educated? As long as such ideas persist there is no hope of our ever knowing the true value of education.” With the passage of time the technology is also advancing and so are teaching methods/mediums. “Mahatma Gandhi University” provides you with latest mode of learning that is online/E-Learning as well as offline/regular learning. I always believed in the ideology that to build a bright future we should nurture the youth in right direction by the means of not just knowledge but overall development. With a motto of “Education For All” we are providing a special 100% scholarship to girl students. Students become successful leaders of future when they get right exposure and direction in studies & life. Here at MGU we provide them with best & renowned faculty, comprehensive study material, dynamic web-portal & various online/offline Student Support Services so that, their studies become easier & convenient. Mahatma Gandhi University will strive to cater all your academic needs to help you to excel in every sphere of your life. Thanks & Good Luck! Rajan Chopra Chancellor SYLLABI-BOOK MAPPING TABLE Business Accounting Syllabi Mapping in Book Unit 1 Introduction Accounting - a financial information system, accounting principles, conventions and concepts, systems, accounting equations, double entry system, journal-ledger, bank reconciliation-trial balance. Unit 1: Introduction to Accounting (Pages: 3-21); Unit 2: Journal (Pages: 23-34); Unit 3: Ledger Posting and Trial Balance (Pages: 35-48); Unit 4: Bank Reconciliation (Pages: 49-58) Unit 2 Business Income and Final Accounts Accounting concept of income, income measurement, manufacturing, trading, profit and loss accounts, balance sheet, sole trader. Unit 5: Accounting Concept of Income (Pages: 59-70); Unit 6: Preparation of Final Accounts of Sole Trader (Pages: 71-108) Unit 3 Accounting for Depreciation: Meaning, objects, methods of depreciation. Unit 7: Methods of Depreciation (Pages: 109-130) Unit 4 Bill Transactions in Business Bill of exchange, promissory note, definition, accommodation bills, meaning objects etc, recording of bill transactions. Unit 8: Bill Transactions in Business (Pages: 131-151) Unit 5 Consignments and Joint Ventures Meaning, differences, commission etc. Unit 9: Consignment Accounts (Pages: 153-171); Unit 10: Joint Venture Accounts (Pages: 173-187) CONTENTS INTRODUCTION UNIT 1 INTRODUCTION TO ACCOUNTING 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 1.13 23-34 Introduction Unit Objectives Journal Rules of Debit and Credit Compound Journal Entry Opening Entry Summary Key Terms Answer to ‘Check Your Progress’ Questions and Exercises Practical Problems Further Reading UNIT 3 LEDGER POSTING AND TRIAL BALANCE 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 3.13 3-21 Introduction Unit Objectives Accounting—A Financial Information System Accounting Principles Accounting Concepts Accounting Conventions Systems of Bookkeeping Accounting Systems Summary Key Terms Answers to ‘Check Your Progress’ Questions and Exercises Practical Problems Further Reading UNIT 2 JOURNAL 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 1 Introduction Unit Objectives Ledger Posting Relationship between Journal and Ledger Rules Regarding Posting Trial Balance Voucher System Summary Key Terms Answers to ‘Check Your Progress’ Questions and Exercises Practical Problems Further Reading 35-48 UNIT 4 BANK RECONCILIATION 4.0 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 Introduction Unit Objectives Need for Bank Reconciliation Statement Meaning and Objective of Bank Reconciliation Statement Importance of Bank Reconciliation Statement Technique of Preparing Bank Reconciliation Statement Summary Key Terms Answers to ‘Check Your Progress’ Questions and Exercises Practical Problems Further Reading UNIT 5 ACCOUNTING CONCEPT OF INCOME 5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 59-70 Introduction Unit Objectives Concept of Income Realization Principle and Income Measurement Summary Key Terms Answers to ‘Check Your Progress’ Questions and Exercises Practical Problems Further Reading UNIT 6 PREPARATION OF FINAL ACCOUNTS OF SOLE TRADER 6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 6.12 49-58 71-108 Introduction Unit Objectives Trading and Profit and Loss Accounts Manufacturing Account Balance Sheet Adjustment Entries Worksheet Summary Key Terms Answers to ‘Check Your Progress’ Questions and Exercises Practical Problems Further Reading UNIT 7 METHODS OF DEPRECIATION 7.0 Introduction 7.1 Unit Objectives 7.2 Depreciation Accounting 7.2.1 7.2.2 7.2.3 7.2.4 7.2.5 7.2.6 7.2.7 7.2.8 Equities Assets Concept of Depreciation Causes of Depreciation Basic Features of Depreciation Depreciation, Depletion, Amortization and Dilapidations Meaning of Depreciation Accounting Objectives of Providing Depreciation 109-130 7.2.9 7.2.10 7.2.11 7.2.12 7.2.13 7.2.14 7.2.15 7.3 7.4 7.5 7.6 7.7 7.8 Fixation of Depreciation Amount Methods of Recording Depreciation Methods for Providing Depreciation Depreciation of Different Assets Depreciation on Replacement Cost Depreciation Policy Accounting Standard 6 (Revised)—Depreciation Accounting Summary Key Terms Answers to ‘Check Your Progress’ Questions and Exercises Practical Problems Further Reading UNIT 8 BILL TRANSACTIONS IN BUSINESS 8.0 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 8.11 8.12 Introduction Unit Objectives Promissory Note—Definition Bill of Exchange Accounting Entries Regarding Bills of Exchange and Promissory Notes Accommodation Bills Bills Receivables and Payable Books Summary Key Terms Answers to ‘Check Your Progress’ Questions and Exercises Practical Problems Further Reading UNIT 9 CONSIGNMENT ACCOUNTS 9.0 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.10 9.11 153-171 Introduction Unit Objectives Consignment Accounts—Meaning Accounting Records Valuation of Unsold Stock Books of the Consignee Summary Key Terms Answers to ‘Check Your Progress’ Questions and Exercises Practical Problems Further Reading UNIT 10 JOINT VENTURE ACCOUNTS 10.0 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 131-151 Introduction Unit Objectives Meaning of Joint Venture Joint Venture and Partnership Summary Key Terms Answers to ‘Check Your Progress’ Questions and Exercises Practical Problems Further Reading 173-187 Introduction INTRODUCTION The exact position and record of the profit and loss for each venture is very important for any business. Business accounting provides the tools to do exactly this and provide clarity on the exact financial state of a company at a particular point of time. This process is not limited to trace the flow of cash and keep records, but it also allows companies to track flawed endeavors, make the most of profitable ones as well as track wasteful dealings. NOTES This book provides clarity on the various books of accounts like journals and ledgers and the processes involved in posting transactions in the books of accounts. It covers the management of finances and accounting with illustrations and examples for undergraduate as well as postgraduate students. A study of the topics within enables one to know the process followed by a businessman to record transactions in the proper books of accounts in a systematic manner. This book comprises activities to enable students to get introduced to the process of Ledger posting and Trial Balance, Bank Reconciliation Statement, concept of income from an economist’s and an accountant's point of view, depreciation and its various methods, the concept of consignment and Joint Venture accounts. It is a good literature for every small business and small business owner or anyone wanting to learn more about accounting. The book is written strictly in SIM (Self Instructional Material) format for Distance Learning. Each unit starts with an Introduction and Unit Objectives. Then, the detailed content is presented, along with figures and tables, in an understandable and organized manner. Each unit will also have Check Your Progress questions to test the readers’ understanding of the topics covered. A Summary along with a list of Key Terms and a set of Questions and Exercises is also provided at the end of each unit for effective recapitulation. Each unit also has a list of books for Further Reading. Self-Instructional Material 1 UNIT 1 INTRODUCTION TO ACCOUNTING Introduction to Accounting NOTES Structure 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 1.13 1.0 Introduction Unit Objectives Accounting—A Financial Information System Accounting Principles Accounting Concepts Accounting Conventions Systems of Bookkeeping Accounting Systems Summary Key Terms Answers to ‘Check Your Progress’ Questions and Exercises Practical Problems Further Reading INTRODUCTION Accounting is the language of business through which a business house normally communicates with the outside world. In order to make this language intelligible it should be based on certain uniform and scientifically laid down standards. These standards are termed as accounting principles. The present unit deals with such principles. They are known by different names such as concepts, postulates, prepositions, basic assumptions, underlying principles, fundamental rules, etc. Different authors have given them loose and overlapping meanings. For the purpose of this unit, we are putting them as accounting principles. 1.1 UNIT OBJECTIVES After going through this unit, you will be able to: • Explain the meaning of accounting principles • Differentiate between accounting concepts and conventions • Appreciate the importance of different accounting concepts and conventions • Name the accounting standards issued by the Institute of Chartered Accountants of India • Describe the different systems of accounting Self-Instructional Material 3 Introduction to Accounting NOTES 1.2 ACCOUNTING—A FINANCIAL INFORMATION SYSTEM Need for accounting Accounting has rightly been termed as the language of business. The basic function of a language is to serve as a means of communication. Accounting also serves this function. It communicates the result of business operations to various parties who have some stake in the business viz., the proprietor, creditors, investors, the government and other agencies. Though accounting is generally associated with business, it is not only business which makes use of accounting. Persons like housewives, the government and other individuals also make use of accounting. For example, a housewife has to keep a record of the money received and spent by her during a particular period. She can record her receipts of money on one page of her ‘household diary’, while payments for different items such as milk, food, clothing, house, education, etc., on some other page or on the pages of her diary in a chronological order. Such a record will help her in knowing about: • The sources from where she received cash and the purposes for which it was utilized • Her receipts more or less than her payments • The balance of cash-in-hand or the deficit, if any, at the end of a period In case the housewife records her transactions regularly, she can collect valuable information about the nature of her receipts and payments. For example, she can find out the total amount spent by her during a period (say a year) on different items, say milk, food, education, entertainment, etc. Similarly she can find the sources of her receipts such as salary of her husband, rent from property, cash gifts from her near relations, etc. Thus, at the end of a period (say a year) she can judge her financial position, i.e., what she owns and what she owes. This will help her in planning her future income and expenses (or in making out a budget) to a great extent. The need for accounting is all the more greater for a person who is running a business. He knows: (i) What he owns, (ii) what he owes, (iii) whether he has earned a profit or suffered a loss on account of running a business, (iv) what his financial positions are, i.e., whether he will be in a position to meet all his commitments in the near future or he is in the process of becoming a bankrupt. Development of accounting Accounting is as old as money itself. In India, Chanakya in his Arthashastra emphasized the existence and need of proper accounting and auditing. However, the modern system of accounting owes its origin to Pacoili, who lived in Italy in the 18th century. In those early days the business organizations and transactions were not so complex as they were small and easily manageable by the proprietor himself. Things have changed very fast during the last fifty years. The advent of industrial revolution has resulted in large-scale production, cut-throat competition and in widening of the market. This has also reduced the effectiveness of personal supervision, resulting in the decentralization of authority and responsibility. Today there is a greater need for coordination and control. The old technique of management by intuition is no longer considered dependable in the situation in which the modern firm operates. Accounting 4 Self-Instructional Material today, therefore, cannot be the same as it used to be about half a century back. It has also grown in importance and has changed in its structure with the evolution of complex and giant industrial organizations. In the early stages accounting developed as a result of the need of the business firms to keep track of their relationship with outsiders, through listing of their assets and liabilities. In recent years changes in technology have brought a remarkable change in the field of accounting. The whole concept of accounting has changed. Introduction to Accounting NOTES It has come to be recognized as a tool for mastering the various economic problems which a business organization may have to face. It systematically writes the economic history of the organization. It provides information that can be drawn upon by those responsible for decisions affecting the organization’s future. This history is written mostly in quantitative terms. It consists partly of files of data, partly of reports summarizing various portions of these data, and partly of the plans established by management to guide its operations.1 Definition and functions of accounting From the above discussion it is clear that over a period of time the concept of accounting and the role of the accountant has undergone a revolutionary change. The change has been particularly noticeable during the last fifty years. Earlier accounting was considered simply as a process of recording business transactions and the role of an accountant as that of a record-keeper. However, accounting is now considered to be a tool of management providing vital information concerning the organization’s future. Accounting today is more of an information system than a mere recording system. It will be useful here to give, in a chronological order, the definitions given by some of the well-established accounting bodies which show how the concept of accounting has undergone a change over a period of time. In 1941, the American Institute of Certified Public Accountants (AICPA) defined accounting as follows: ‘Accounting is the art of recording, classifying and summarizing, in significant manner and in terms of money, transactions and events which are, in part, at least of a financial character and interpreting the results thereof.’ In 1966, the American Accounting Association (AAA) defined accounting as follows: ‘Accounting is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.’ In 1970, the Accounting Principles Board (APB) of the AICPA enumerated the functions of accounting as follows: ‘The function of accounting is to provide quantitative information, primarily of financial nature, about economic entities, that is needed to be useful in making economic decisions.’ 1 Mryon J. Gordon Shillinglaw, Accounting: A Management Approach, p. 3, 4th edition. Self-Instructional Material 5 Introduction to Accounting NOTES Thus, accounting may be defined as the process of recording, classifying, summarizing, analysing and interpreting the financial transactions and communicating the results thereof to the persons interested in such information. An analysis of the definition brings out the following functions of accounting: 1. Recording: This is the basic function of accounting. It is essentially concerned with not only ensuring that all business transactions of financial character are in fact recorded but also that they are recorded in an orderly manner. Recording is done in the book termed as ‘Journal’. This book may be further sub-divided into various subsidiary books such as cash journal (for recording cash transactions), purchases journal (for recording credit purchase of goods), sales journal (for recording credit sales of goods), etc. The number of subsidiary books to be maintained will be according to the nature and size of the business. 2. Classifying: Classification is concerned with the systematic analysis of the recorded data with a view to group transactions or entries of one nature at one place. The work of classification is done in the book termed as ‘ledger’. This book contains individual account heads, on different pages, under which a...
View Full Document

  • Fall '19

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes