FINANCIAL ACCOUNTING & COST

ACCOUNTING VOLUME -I
NEED FOR ACCOUNTING
1.
2.
3.
4.

Maintain accounting records

Calculate the results of operation
Ascertain the financial position
Communicate the information to the users

Process of Accounting
1. Recording: - Business transactions of the financial characters are
recorded in a book called Journal.
2. Classifying: - The book containing classified information is called
Ledged. This book contains diff pages E.g. Purchase, sales, rent etc.
3. Summarizing: - concerned with the preparation and presentation of
classified data through the financial statement 1. Trail balance 2.
Trading, Profit and Loss A/c 3.Balance sheet.
4. Analyzing: - concerned with the establishment of relationship
between the items of the profit and loss account and the balance
sheet.
5. Interpreting:- concerned with the explaining the meaning and
significance of the relationship so established by the analysis.
6. Communicating:- transmission of summarized analyzed and
interpreted information to the users to enable them to make sound
decision.
Book Keeping
Book keeping is the art of recording classifying and summarizing business
transaction in money or money worth. Forms of book keeping are
1. Double entry system
2. Single entry system
Accounting
The process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by the users of
accounts.
BASIS OF DOUBLE ENTRY SYSTEM
Each transaction in the results of two parties coming together
1. This cannot be seller without a buyer
2. Borrower without a lender

FINANCIAL ACCOUNTING & COST

ACCOUNTING VOLUME -I
Founder of the Double entry is Italian Merchant named LUCO
PACIOLI wrote the first book named DE COMPUTIS ET OF
SCRIPTURIS in the year 1494.

Forms of Book keeping:1. Double Entry system: - its a record two fold aspects of every
business transaction.
2. Single Entry system: - in this method the principles of double entry
system have not been observed in all cases. It is an incomplete form of
double entry system. Under single entry only personal accounts of
debtors, creditors and cash book are maintained.

DIFFERENCES BETWEEN DOUBLE ENTRY AND SINGLE

ENTRY SYSTEM
Double Entry System

Single Entry System

It is only the scientific system of

keeping books of accounts

It is not a system at all. It is

incomplete and unscientific

Maintains complete record of both

personal and impersonal accounts

Only personal and cash accounts are

maintained

Trail balance can be prepared to test

the arithmetical accuracy of the book
if accounts

A trail balance cannot be prepared

since debits and credits do not agree

Profit and loss account and balance

sheet can be easily prepared

With the incomplete record cannot be

easily prepared

Comparison with previous year is

possible

Very difficult

Taxation authorities accept it for

assessment purpose

Do not accept

ADVANTAGES OF DOUBLE ENTRY SYSTEM

a. It keeps complete record of both personal and impersonal accounts
b. It helps us to check arithmetic accuracy of the books by preparing trial
balance
c. Help to find out the profit earned or loss incurred during a given period
by preparing profit and loss account

FINANCIAL ACCOUNTING & COST

ACCOUNTING VOLUME -I
d. Can find out financial position of the business by preparing balance
sheet.
e. Any financial information can be had anytime.
f. Comparison of expenditure, income, sales, purchase etc can be made
for previous year and current year
g. It is easy for taxation authorities to make correct assessment.
LIMITATIONS OF DOUBLE ENTRY SYSTEM
a. If the transaction is completely omitted to be recorded or with wrong
amounts or with wrong accounts it may remain undiscovered.
b. Requires the maintenance number of books of accounts and number of
people to look at them the system is too expensive sophisticated.
c. Financial accounts consider only chose assets which can be expressed
monetary terms. Human Resources, the very important assets of a
business are not shown in the balance sheet,
CLASSIFICATION OF ACCOUNTS
a. Deals with persons
b. Possesses Assets
c. Pay expenses
In order to keep a complete record of all business transaction a business
keeps
a. Account in the name of persons known as Personal Account
b. Account in the name of Asset known as Real Account
c. Accounts under the head of expense and income known as nominal
account.
Personal Accounts following forms:1. Natural persons name of a individual
2. Artificial persons- Account of firms, Limited Company
3. Representative personal Account- Account representing outstanding
expenses, prepaid expenses, accrued income etc
ACCOUNTING RULES
PERSONAL ACCOUNT

DEBIT THE RECEIVER

CREDIT THE GIVER

FINANCIAL ACCOUNTING & COST

ACCOUNTING VOLUME -I
REAL ACCOUNT

DEBIT WHAT COMES IN

CREDIT WHAT GOES OUT

NOMINAL ACCOUNT

DEBIT ALL EXPENSES AND LOSS

CREDIT ALL INCOME AND GAINS

UNIT 2

JOURNALS

The process of accounting is recording the business transactions in

the books of accounts is called Journals. This book is also called
Original Entry, Also known as primary book.
When more than two accounts are involved in a transaction and the
transaction is recorded by means of a single journal entry instead of
passing several journal entry such entry is known as Compound
Journal Entry.

UNIT 3

LEDGERS

After recording the transaction in the journal, recorded entries are

classified and grouped into by preparation of accounts and the book
which contains all set of account (viz. personal, real and nominal
accounts) is known as Ledger.
Popular method is to have three ledgers namely.
1.

General ledger- containing all accounts expect those of sundry

2. Debtors Ledger-

debtors and Sundry creditors

containing personal accounts of sundry

debtors

3. Creditors Ledgercreditors

containing personal accounts of sundry

FINANCIAL ACCOUNTING & COST

ACCOUNTING VOLUME -I
Balance of account
The technique of finding the net balance of an account after considering the
totals of both debits and credits appearing in the accounts known as
Balancing. It can be at the end of the month or year or any particular day.
1. If credit side is bigger than debit side than it is credit balance
2. If debit side is bigger than credit side than it is debit balance
The difference is entered in the lighter side of the account on the
last day of the month.
1. The credit balance is written on the debit side as By balance
C/d (carried down)
2. The debit balance is written on credit side as By Balance C/d
3. The Credit balance is written on the Credit side on the first day
of next month as
(To Balance B/d)
4. The Debit balance id written on the debit side on the first day
of the month as
(To Balance B/d)