Accounting study guide

MR. AAQIB HUSSAIN RATHER
DELINA BARAMULLA
MASTER OF COMMERCE (M.COM) ; (NET)
MOBILE: 9906710947
EMAIL: ratheraaqib@gmail.com

UNIT- I
Accounting- Meaning, Objectives, Characteristics & Functions;
Distinction between Accounting, Book-keeping & Accountancy;
Accounting as an Information System; users of Accounting
Information; Accounting as the Language of Business; Generally
Accepted Accounting Principles (GAAP); Types of Accountants;
Double Entry System- Concept; Debit & Credit- Concept;
Types of Accounts; Asset- Meaning & Types; Liabilities- Meaning
& Types; Terms Like - Capital, Capital Expenditure, Revenue
Expenditure, Drawings, Insolvent, Bad Debts & Working Capital

ACCOUNTING………………………….
Accounting is the preparation of financial records for a
business company, a governmental or other organization.
According to American Institute of Certified Public
Accountants (AICPA)…“Accounting is 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 a financial character and interpreting the results
thereof”………………………………..
MR. AAQIB RATHER (M.COM, NET),
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OBJECTIVES OF ACCOUNTING………………
 To supply meaningful information about the financial
activities of a business to those who have a need or a
right to have such information…….
 To make available the relevant financial information
to all who have a legitimate interest in the business
enterprise……
 To enable decision-makers to interpret financial
information and employ its results in planning for the
future……
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CHARACTERISTICS OF ACCOUNTING…..
 Accounting attains the objective of ascertaining the
financial results……
 Accounting records only that component of business
transaction that can be represented in terms of
money……..
 Accounting is concerned only with transactions and
events that are of financial nature……
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FUNCTIONS OF ACCOUNTING…….
Main Functions:-
 Recording….. Known as the primary function of
Accounting…..
 Communicating….
 Meeting Legal Requirements…..
 Interpreting…..
Others:-
 Calculation of Profit or Loss…..
 Determination of financial health of the concern…..
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DISTINCTION BETWEEN ACCOUNTING, BOOK-KEEPING & ACCOUNTANCY…….
 ACCOUNTING: Accounting is a wider term and
includes the analysis and interpretation of the
recorded data…………
 BOOK-KEEPING: Book-Keeping is concerned with
the techniques of recording the financial data,
classifying the recorded items of information, and
summarizing them in the form of financial
statements. It is essentially clerical in nature…….
 ACCOUNTANCY: Accountancy is the application of
accounting concepts, methods and techniques to the
practice of accounting……..
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ACCOUNTING AS AN INFORMATION SYSTEM……..
Accounting acts as an information system as it contains
three activities……
 INPUT: Recording data of business activities and
transactions……….
 PROCESSING OF INPUT: Recorded data are stored
and processed……
 OUTPUT: Stored and processed data is
communicated to users and decision-makers in the
form of statements, reports etc……..
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USERS OF ACCOUNTING INFORMATION…….
‘accounting information is based on Doctrine of Truth
and Correctness’……
 MANAGEMENT: For Planning, Control ,
Performance Measurement and Decision-Making…….
 USERS WITH DIRECT FINANCIAL INTEREST:
Such as; Existing and Potential Investors and
Creditors……
 USERS WITH INDIRECT FINANCIAL INTEREST:
Such as; Taxation Authorities, Governmental and
Regulatory Authorities……
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ACCOUNTING AS THE LANGUAGE OF BUSINESS………
It has been rightly said by many professionals that
Accounting is the Language of Business…… as it acts
as a means of communicating information about a
business………….
.
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GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)…..
Financial Accounting follows a set of ground rules of
accounting principles in presenting financial
information which are generally known as Generally
Accepted Accounting Principles……………………………..
Accounting Principles are those concepts,
rules and conventions that are followed in accounting…..
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ACCOUNTING CONCEPTS………
Accounting Concepts are the necessary
assumptions upon which accounting is based………………
 ENTITY CONCEPT
 GOING CONCERN CONCEPT
 MONEY MEASUREMENT CONCEPT
 COST CONCEPT
 DUAL ASPECT CONCEPT
 ACCOUNTING PERIOD CONCEPT
 MATCHING CONCEPT
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ACCOUNTING CONVENTIONS….
Accounting Conventions signify customs or
traditions that guide in the preparation of accounting
standards…………………………
 CONVENTION OF CONSISTENCY
 CONVENTION OF CONSERVATISM
 CONVENTION OF MATERIALITY
 CONVENTION OF FULL DISCLOSURE
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ACCOUNTING EQUATION……..
Assets=Equities
Where;
Assets are the resources owned by a business…………….
Equities are the claims of various parties against these
assets. Equities are of two types viz; Capital and Liabilities …
Alternatively,
Assets=Capital + Liabilities
Where;
Capital represents the claims of the owners of the
business on its assets………
Liabilities are the claims of outsiders on the assets of
the business…………….
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ILLUSTRATION 1.1…………………
From the following information,
compute the assets of Mr. Adil…………
Liabilities= $ 4400
Capital= $ 5100
Solution:
Computation of Assets of Mr. Adil……………..
Assets=Capital + Liabilities
Where; Capital= $ 5100 & Liabilities= $ 4400
Therefore, Assets= 5100+4400= $ 9500
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ILLUSTRATION 1.2…………………..
Information;
Liabilities= $ 3600
Capital= $ 9000
From the above information, you are
required to compute Equities of Mr. Faizan………….
Solution:
Equities= Capital + Liabilities
Where; Capital= $ 9000 & Liabilities= $ 3600
Therefore, Equities= 9000 + 3600 = $ 12600
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TYPES OF ACCOUNTANTS……….
PUBLIC ACCOUNTANTS: Practise in companies and
individually offer their professional services to the
public…. E.g; Chartered Accountants………………………..
 PRIVATE ACCOUNTANTS: Working for private
enterprises…. Private enterprises include;
Manufacturers, wholesalers……………………………………….
 GOVERNMENTAL ACCOUNTANTS: Accountants
employed by Union, State and Local Governments……
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CONCEPT OF DOUBLE ENTRY SYSTEM…….
Double Entry System is based on the
assumption that there are two aspects to every business
transaction. There is the expense on the one hand, and
an increase in assets or decrease in liabilities on the
other.
Equal Debits and Credits
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CONCEPT OF DEBIT AND CREDIT……
 DEBIT: The left hand side of any account is called the
Debit side and is abbreviated as ‘Dr’…. The act of
recording a debit in an account is called Debiting…….
 CREDIT: The right hand side of any account is called
the Credit side and is abbreviated as ‘Cr’…. The act of
recording a credit in an account is called Crediting…..
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ACCOUNTING TREATMENT OF DEBIT & CREDIT…..
 For any Asset……………….
Debit means increase…..
Credit means decrease…..
 For Capital or any Liability Account……..
Debit means decrease…….
Credit means increase……..
 For any Expense Account……………………….
Debit means increase…….
Credit means decrease…….
 For any Revenue Account…………………………
Debit means decrease……..
Credit means increase…….
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T- ACCOUNT…………………………..
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TYPES OF ACCOUNTS………………
There are three types of Accounts:
 PERSONAL ACCOUNTS: Include; Debtors A/c,
Creditors A/c, Bank A/c, Interest Prepaid A/c, Salary
Outstanding A/c, Interest Paid in Advance A/c etc…….
 REAL ACCOUNTS: Real accounts are of things
(tangible or intangible) and include; Furniture A/c,
Cash A/c, Goodwill A/c, Machinery A/c etc……………….
 NOMINAL ACCOUNTS: Nominal accounts are
accounts which are related to expenses and incomes
and include; Wages A/c, Discount a/c, Rent A/c etc……
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RULES OF DEBIT AND CREDIT…..
PERSONAL ACCOUNT REAL ACCOUNT NOMINAL ACCOUNT
DEBIT THE RECEIVER DEBIT WHAT COMES IN DEBIT THE EXPENSE & LOSS
CREDIT THE GIVER CREDIT WHAT GOES OUT CREDIT THE GAIN & INCOME
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MEANING OF ASSETS………………
Asset means property of all kinds owned by
a business…………………………………
In other words, we can say that, Assets are
the resources owned by a business…………………..
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TYPES OF ASSETS…………………….
There are three types of assets:
 FIXED ASSETS: Fixed assets are the assets, not for
resale…. E.g; land, building, plant, machinery etc……
 CURRENT ASSETS: Current assets are those assets
which are acquired with the intention of converting
into cash during the normal business operations of the
company…. E.g; cash, inventories, bills receivables,
debtors etc……………………
 FICTITIOUS ASSETS: Fictitious assets are those
assets which have no real value…. E.g; Preliminary
Expenses etc…………
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ILLUSTRATION 1.3………………
From the following information, Compute Fixed Assets,
Current Assets and Fictitious Assets of Mr. Zuhaib……
Land= $ 50000
Cash= $ 36000
Machinery= $ 33500
Preliminary Expenses= $30000
Inventories= $ 45500
Bills Receivable= $ 14500
Furniture= $ 96000
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SOLUTION:
 Computation of Fixed Assets:
Fixed Assets=Land + Machinery + Furniture
=50000 + 33500 + 96000
= $ 179500
 Computation of Current Assets:
Current Assets= Cash + Inventories + Bills Receivable
= 36000 + 45500 + 14500
= $ 96000
 Computation of Fictitious Assets:
Fictitious Assets= Preliminary Expenses
= $ 30000
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MEANING OF LIABILITIES………..
Liabilities are the claims of outsiders on
the asset of a firm………………………
The term Liabilities are used to denote
liabilities which a business owes and has to return……..
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TYPES OF LIABILITIES……………….
There are two types of Liabilities:
 FIXED LIABILITIES: Fixed liabilities are those
liabilities that will not be due for a comparatively long
time, usually more than one year………………….
 CURRENT LIABILITIES: Current liabilities are those
liabilities which will be due within a short time,
usually one year or less………….. E.g; Trade Creditors,
Bills Payable etc…………………………….
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IMPORTANT TERMS…………………
 CAPITAL: Capital is a residual claim against the assets of
the business after the liabilities are deducted. ‘Any amount
invested in business is called Capital’. Also known as owners
equity or net worth…………………………
 CAPITAL EXPENDITURE: Refers to the expenditure
incurred for the purpose of obtaining a long-term
advantage……………………..
 REVENUE EXPENDITURE: Refers to the expenditure
whose benefit expires within a year…………
 DRAWINGS: Drawings means withdrawal of goods or
cash from the business by the owner for personal use…
(contd)
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IMPORTANT TERMS (CONTD)
 INSOLVENT: Insolvent is a person who is not in a
position to pay his debts…………………….
 BAD DEBT: Bad debt is the amount not received from
a debtor on account of his inability to pay his debt……..
 WORKING CAPITAL: Working capital means funds
available for day-to-day work of the enterprise.
Working Capital is calculated by the excess of current
assets over current liabilities…………………
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Calculate the working capital of Mr. Reyan, if he has
current assets of $ 55000 and has current liabilities
of $ 33000…………………….
Solution:
Calculation of Working Capital of Mr. Reyan:
Working Capital= Current Assets – Current
Liabilities
Where; Current Assets= $ 55000
Current Liabilities= $ 33000
Therefore, working capital= 55000 - 33000= $ 22000
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The following is the Balance-sheet of Rather Medicos……
Liabilities Amount ($) Assets Amount ($)
Capital 30000 Land 15000
Creditors 45000 Cash 63000
Bills Payable 40000 Inventories 37000
Total 115000 Total 115000
required to calculate the working capital of Rather
Medicos…….
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SOLUTION:
Computation of Working Capital of Rather Medicos:
Working Capital= Current Assets – Current Liabilities
Where;
Current assets= Cash + Inventories
= 63000 + 37000 = $ 100000
Current Liabilities= Creditors + Bills Payable
= 45000 + 45000= $ 90000
Therefore, Working Capital= 100000 – 90000
= $ 10000
• Capital not recorded as it is not a current liability….
• Land not recorded as it is a fixed asset……..
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MR. AAQIB HUSSAIN RATHER
DELINA BARAMULLA
MASTER OF COMMERCE (M.COM, NET)
MOBILE: 9906710947

UNIT- II
Accounting Standards- Meaning; Accounting Standards issued by
Institute of Chartered Accountants of India (ICAI);Accounting
Process- Meaning and Steps; Journal- Meaning and types;
Ledger- Meaning; Ledger Posting- Meaning; Trial Balance-
Meaning; Types of errors in trial balance; Suspense Account

MEANING OF ACCOUNTING STANDARDS……………….
Accounting standards are required to
make the financial information more useful…………….
Accounting Standards serve as a
guidance which is followed while preparing financial
Statements………………………..
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ACCOUNTING STANDARDS ISSUED BY INDIAN INSTITUTE OF CHARTERED ACCOUNTANTS (ICAI)…..
 AS- 1: DISCLOSURE OF ACCOUNTING POLICIES
 AS- 2: VALUATION OF INVENTORIES
 AS- 3: CASH FLOW STATEMENT
 AS- 4: CONTIGENCIES & EVENTS OCCURING
AFTER THE BALANCE-SHEET DATE
 AS- 5: NET PROFIT OR LOSS FOR THE PERIOD,
PRIOR PERIOD ITEMS AND CHANGES IN
ACCOUNTING POLICIES
 AS- 6: DEPRECIATION ACCOUNTING
 AS-7 (REVISED): CONSTRUCTION CONTRACTS
(Contd)MR. AAQIB RATHER (M.COM, NET),
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(Contd)
 AS- 8: WITHDRAWN & INCLUDED IN AS- 26
 AS- 9: REVENUE RECOGNITION
 AS- 10: ACCOUNTING FOR FIXED ASSETS
 AS- 11(REVISED 2003): THE EFFECT OF CHANGES
IN FOREIGN EXCHANGE RATES
 AS- 12: ACCOUNTING FOR GOVERNMENT GRANTS
 AS- 13: ACCOUNTING FOR INVESTMENTS
 AS- 14: ACCOUNTING FOR AMALGAMATIONS
 AS-15 (REVISED 2005): EMPLOYEE BENEFITS
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(Contd)
 AS- 16: BORROWING COSTS
 AS- 17: SEGMENT REPORTING
 AS- 18: RELATED PARTY DISCLOSURES
 AS- 19: LEASES
 AS- 20: EARNING PER SHARES
 AS- 21: CONSOLIDATED FINANCIAL STATEMENTS
 AS- 22: ACCOUNTING FOR TAXES ON INCOME
 AS- 23: ACCOUNTING FOR INVESTMENT IN
ASSOCIATES IN FINANCIAL STATEMENTS
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(Contd)
 AS- 24: DISCONTINUING OPERATIONS
 AS- 25: INTERIM FINANCIAL REPORTING
 AS- 26: INTANGIBLE ASSETS
 AS- 27: FINANCIAL REPORTING OF INTEREST IN
JOINT VENTURES
 AS- 28: IMPAIRMENT OF ASSETS
 AS- 29: PROVISIONS, CONTIGENT LIABILITIES &
CONTIGENT ASSETS
 AS- 30: FINANCIAL INSTRUMENTS RECOGNITION
& MEASUREMENT
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(Contd)
 AS- 31: FINANCIAL INSTRUMENTS-PRESENTATION
 AS- 32: FINANCIAL INSTRUMENTS-DISCLOSURES
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MEANING OF ACCOUNTING PROCESS….
Accounting Process involves an entire
sequence of accounting procedures which are repeated
in the same order for every different accounting
period……………………………………………………………...
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ACCOUNTING PROCESS………….
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STEPS IN ACCOUNTING PROCESS…..
 DOCUMENTING THE TRANSACTIONS
 CLASSIFYING THE TRANSACTIONS
 RECORDING THE TRANSACTIONS
 POSTING THE TRANSACTIONS
 SUMMARIZING THE TRANSACTIONS
 INTERPRETING THE TRANSACTIONS
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MEANING OF JOURNAL………….
Journal is a preliminary book to keep a
chronological record of transactions in which each
transaction is noted down in its entirely………………..
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TYPES OF JOURNAL…………………
There are two types of Journal:
 General Journal
 Special Journal…… Special Journal is divided into
seven categories……
 Purchase Book
 Sales Book
 Purchase Return Book
 Sales Return Book
 Bills Receivable Book
 Bills Payable Book
 Cash Book MR. AAQIB RATHER (M.COM, NET),
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MEANING OF LEDGER & LEDGER POSTING………..
 LEDGER: Ledger is a set of accounts. Ledger is the
book which contains the various accounts…………….
 LEDGER POSTING: Ledger Posting is the process of
transferring the debits from the journal to the proper
ledger account…………………….
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CONCEPT OF TRIAL BALANCE…..
In the double entry system, the debits must be
equal to credits. The sum of all debits must be equal to
the sum of all credits. This proof of the equality of the
totals of the debit and credit balances is called a
trial Balance………………..
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MORE ON TRIAL BALANCE………
A Trial Balance is prepared as a two- column
schedule listing the names and balances of all the
accounts in the order that they appear in the
ledger……………….
Debit Balances are listed in the left
column and the Credit Balances in the right column.
The total of the two columns should tally…………..
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TYPES OF ERRORS IN TRIAL BALANCE……..
There are two types of Errors in Trial Balance:
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DEFINITIONS……………………………
 Errors of Omission: if a transaction has not been
entered in the books of accounts either wholly or
partially, it is known as ERROR OF OMISSION….
 Errors of Commission: Refers to a transaction being
incorrectly recorded in the journal or inaccurately
posted in the ledger……..
 Errors of Principle: Arise when some fundamental
principles of sound accountancy are not strictly
adhered to in recording a transaction…….
 Compensating Errors: Arise when two or more
errors exactly nullify the effect of one another…………..
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From the following information, you are required to
prepare the trial balance of Faizan Bros for the year
ending 31st March 2013………………………….
Sales= $ 350000
Cash= $ 300000
Capital= $ 400000
Purchases = $ 450000
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SOLUTION………………………………
Note: In trial Balance, debit balance and credit balance
should tally…..
Preparation of Trial Balance of Faizan Bros for the
year ending 31st March 2013………
Particulars Dr ($) Cr ($)
Sales --- 350000
Cash 300000 -----
Capital --- 400000
Purchases 450000 -----
Total ($) 750000 750000
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CONCEPT OF SUSPENSE ACCOUNT……..
If the error in the trial balance is not
located, then to avoid delaying the preparation of the
final accounts, the difference is to put to a suspense
account…………………
The suspense account is debited if the
debit side is short and credited for a short credit side
Balance……………………
Suspense Account is an account
which is opened to avoid delay in the preparation of final
accounts.
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ILLUSTRATION 2.2………………….
The books of Rather Medicos Inc. did not agree. The
accountant put the difference in a suspense account.
Rectify the following errors and prepare the suspense
account………………………….
1. A purchase of $ 4000 from Umair has been entered
in the sales book. However, Umair’s account has
been correctly credited….
2. A sale of $ 4300 to Abid has been credited in his
account as $ 3400…..
3. A sale of $ 2960 to Kifayat has been entered in the
sales book as $ 2690…..
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SOLUTION……………………………..
Journal of Rather Medicos………….
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UNIT- III
Financial Statements- Meaning and Components; Accounting
Treatment of Trading Account, Profit & Loss Account and
Balance - Sheet; Aaqib’s 3-Equation Model of COGS; Difference
Between Trial Balance & Balance- Sheet ; Types of Business
Transactions……………………………………………………………………………..

MEANING OF FINANCIAL STATEMENTS………………
Financial Statements refer to Profit & Loss
Account, Balance-Sheet and Statement of Changes in
Financial Position……………
Alternatively;
Financial Statements generally refer to the
Profit & Loss Account and Balance-Sheet. However, it
may include the Statement of Changes in Financial
Position, the Statement of Retained Earnings and
others………………………….
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COMPONENTS OF FINANCIAL STATEMENTS…………..
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COMPONENTS OF FINANCIAL STATEMENTS…..(Contd)
There are three components of Financial Statements:
 TRADING ACCOUNT: Trading Account is the part of
Profit & Loss Account…. It is designed to show the
gross profit or loss for a specified period…….
 PROFIT & LOSS ACCOUNT: Profit & Loss Account is
designed to arrive at the final i.e; net profit or loss
corresponding to a certain period…………
 BALANCE-SHEET: Balance-Sheet is a statement
which is prepared to show the financial position of
business…………………
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ACCOUNTING TREATMENT OF TRADING ACCOUNT……
Particulars Amount
($)
Particulars Amount
($)
To Opening stock XXX By Sales (less Returns) XXX
To Purchases (less Returns) XXX By Closing Stock XXX
To Direct Expenses XXX By Gross Loss (B.f*) XXX
To Gross Profit (b.f *) XXX
Total XXX Total XXX
Note: B.F*……. Balancing Figure or Calculating figure……………….
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ILLUSTRATION 3.1……………………
The following is the information of Rather Fruit
Corporation, Delina………………………………………
Stock as on 1st Jan 2011….. Rs. 5 Lacs
Stock as on 31st Dec 2011….. Rs. 7 Lacs
Purchases….. Rs. 3 Lacs
Sales….. Rs. 6.50 Lacs
Purchase Returns….. Rs. 1 Lacs
Sales Returns…. Rs. 0.50 Lacs
Direct Expenses…. Rs. 0.70 Lacs
From the following information, you are
required to Prepare Trading Account of Rather Fruit
Corporation for the year ending 31st December 2011…
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SOLUTION……………………………
Particulars Amount
Rs. In Lacs
Particulars Amount
Rs. In Lacs
To Opening stock 5 By Sales 6.50
To purchases 7 Less: Returns 0.50 6
Less: Returns 1 6 By Closing stock 7
To Direct Expenses 0.70
To Gross Profit (b.f*) 1.30
Total 13 Total 13
Therefore, Gross Profit of Rather Fruit Corporation is Rs. 1.30 Lacs
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ACCOUNTING TREATMENT OF PROFIT & LOSS ACCOUNT………..
Particulars Amount ($) Particulars Amount ($)
To Salaries XXX By Gross Profit XXX
To Rent, Rates & Repairs XXX By Interest Received XXX
To Bank Charges XXX By Discount Received XXX
To Audit Fees XXX By Commission Received XXX
To Carriage Outward XXX By Net Loss (b.f*) XXX
To Lighting & Stationry XXX
To Insurance XXX
To Postage XXX
To Discount Allowed XXX
To Provisin for baddebt XXX
To Dep & Advertising XXX
To Net Profit (b.f*) XXX
Total XXX Total XXX
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prepare Profit & Loss Account of JK Trolleys Pvt. Ltd…..
Gross Profit…… Rs. 1.30 Lacs
Interest, Discount & Commission Received are Rs. .30,
Rs. 0.20 and Rs. 0.2o respectively………………………………….
Salaries…. Rs. 0.10; Rent, Rates and Repairs…. Rs. 0.15;
Bank Charges…. Rs. 0.05; Audit fees…. Rs. 0.15;
Carriage outward…. Rs. 0.07; Lighting & Stationary… Rs.
0.08; Discount allowed…. Rs. 0.21; Provision for Bad
Debts….. Rs. 0.12……..
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SOLUTION…………………………………
Particulars Amount
(Rs. In Lacs)
Particulars Amount
(Rs. In Lacs)
To Salaries 0.10 By Gross Profit 1.30
To Rent, Rates & Repairs 0.15 By Interest Received 0.30
To Bank Charges 0.05 By Discount Received 0.20
To Audit Fees 0.15 By Commission Recivd 0.20
To Carriage Outward 0.07
To Lighting & Stationary 0.08
To Discount Allowed 0.21
To Provision for Baddebt 0.12
To Net Profit (b.f*) 1.07
Total 2.00 Total 2.00
Therefore, Net Profit of JK Trolleys Pvt Ltd is Rs. 1.07 lacs
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ACCOUNTING TREATMENT OF BALANCE-SHEET……….
Liabilities Amount
($)
Assets Amount
($)
Owner’s Equity XXX Machinery XXX
Loan XXX Building XXX
Bank Overdraft XXX Land XXX
Creditors XXX Furniture XXX
Bills Payable XXX Stock XXX
Outstanding Expenses XXX Cash and Bank XXX
Debtors XXX
Total XXX Total XXX
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The following is the information of Jamkash Vehicleads
Pvt Ltd…………………………………………………………………….
Cash….. Rs. 55000 ; Land & Building….. Rs. 90000
Stock…. Rs. 10000 ; Debtors…. Rs. 50000
Capital…. Rs. 100000 ; Net Profit…. Rs. 15000
Drawings…. Rs.10000 ; Loan…. Rs. 20000
Outstanding Expenses…. Rs. 5000 ; Creditors….Rs. 35000
Bank Overdraft… Rs. 10000 ; Bills Payable… Rs. 30000
required to prepare Balance-Sheet of Jamkash
Vehicleads Pvt Ltd for the year ending 31st Mar 2013…
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SOLUTION……………………………….
Liabilities Amount
(Rs)
Assets Amount
(Rs)
Owner’s Equity: Land & Building 90000
Capital 100000 Stock 10000
Add: Profit 15000 Cash 55000
Less: Drawings 10000 105000 Debtors 50000
Loan 20000
Bank Overdraft 10000
Creditors 35000
Bills Payable 30000
Outstanding Expenses 5000
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AAQIB’S 3- EQUATION MODEL OF COGS……………….
Gross Profit= Sales – COGS
Or
Sales= Gross Profit + COGS
COGS= Opening Stock+Purchases+Direct Expenses-
Closing Stock
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The following is the Trading Account of Rather
Stationary Pvt Ltd. For the year ending 31st March 2013…
From the above information, you are required to
compute Cost of Goods Sold (COGS) for the year ending
31st March 2013…..(Using Aaqib’s 3-equation Model)…
Particulars Amount
(Rs)
Particulars Amount
(Rs)
To Opening Stock 5000 By Sales 10000
To Purchases 3000 By Closing Stock 6000
To Direct Expenses 6000
To Gross Profit 2000
MOBILE: 9906710947

SOLUTION………………………………
Computation of COGS through Aaqib’s 3- Equation Model:
Equation-1: Gross Profit=Sales-COGS
2000= 10000-COGS
2000-10000=-COGS
-8000=-COGS {Cancel Negative (-) Signs}
Therefore, COGS= Rs. 8000
Equation-2: Sales=Gross Profit-COGS
10000=2000-COGS
10000-2000= COGS
Equation-3: COGS=Opening Stock+Purchases+Direct Expenses-Closing Stock
= 5000+3000+6000-6000
= 8000
MOBILE: 9906710947

DIFFERENCE BETWEEN TRIAL BALANCE & BALANCE-SHEET…….
Trial Balance is the total of all debit balances
and credit balances of accounts. If both, total of debit
and credit are equal, it means there exists no error………..
Balance-Sheet is a financial statement which
shows the position of assets and liabilities of the
company at the end of the year………………………………………
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TYPES OF BUSINESS TRANSACTIONS………………..
(Contd)
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TYPES OF BUSINESS TRANSACTIONS….. (CONTD)
There are two types of transactions:
1. CAPITAL TRANSACTIONS: Capital Transactions are
those transactions which affect the business more
permanently in that their effect subsists into the future
accounting periods………………… This includes……………..
 Capital Expenditure: Capital expenditure comprises
such expenditure, the benefit of which is not fully
consumed in the present accounting period but spreads
over several years….. E.g; Cost of Freehold Land and
Building, cost of Goodwill, Cost of Lease Acquired, Cost of
Plant, Machinery, Tools and Furniture etc…………
(Contd)
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TYPES OF BUSINESS TRANSACTIONS…….(CONTD)
 Capital Receipts: Capital Receipts refer to money
received by an enterprise for the purpose of establishing,
expanding or modernizing the business…
2. REVENUE TRANSACTIONS: Revenue Transactions are
those transactions which are generally limited to the
current accounting periods…. This includes………
 Revenue Expenditure: Revenue expenditure refers to the
expenditure in one accounting period and the full benefit
of which is also consumed in the same period.... E.g;
Expenses incurred in the normal course of business
(Administration expenses), Expenses incurred to maintain
business (Repairs to Assets), cost of Raw Materials
Purchased etc…………..
(Contd)
MOBILE: 9906710947

TYPES OF BUSINESS TRANSACTIONS…….(CONTD)
 Revenue Receipts: Revenue Receipts refer to any
income or gain that arises from the use of the assets of
a business… E.g; Sale Proceeds, Interest on Bank
Deposits or Government Securities etc……..
DEFERRED REVENUE EXPENDITURE……………………………………………………..
Deferred Revenue Expenditure relates to a heavy
expenditure of a revenue nature that is incurred with a view to securing
benefits over a number of years……………………………
Examples: Preliminary Expenses; Brokerage paid on the issue of new shares
and debentures; Heavy Advertisement Projects and Compaigns; Research &
Development Expenses etc……………………
MOBILE: 9906710947

UNIT- IV
Depreciation- Meaning, Characteristics and Causes; Depreciation
Accounting- Meaning & Objectives;Determinants of Depreciation
Charge; Methods of calculating Depreciation Amounts;
Accounting Treatment of Depreciation under Straight-Line,
Diminishing - Balance & Machine Hour Method ; Difference
between Straight –Line Method & Diminishing-Balance Method;
Difference between Depreciation, Depletion & Amortization;
Concept of Replacement Cost; Concept of Accelerated Rate of
Depreciation……………………………………………………………………………….

MEANING OF DEPRECIATION…..
Depreciation means a reduction in the
value of a fixed asset owing to factors as wear and tear or
obsolescence………………………………………………..
Depreciation is the process of allocating
the cost of a fixed asset over the period during which
service is received from it……………………………..
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CHARACTERISTICS OF DEPRECIATION……………
Depreciation is an expense for the use of an asset in
the normal course of a business…….
 Depreciation is not to be understood simply as the
process of valuation of an asset. Rather, it is the
process of allocation of the cost of the asset over the
period of its expected life…….
 The basis of depreciation is the cost price and not
the replacement price of the asset….
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CAUSES OF DEPRECIATION……..
 Wear and tear of the asset on account of constant use
as is the case of plant and machinery, furniture and
fixtures used in a factory……
 Exhaustion of the asset through working….
 Obsolescence due to technological changes and new
inventions……
 Accident of the asset, causing a decrease in its value…
 Efflux of time,causing of a fall in the value of an asset..
 Growing inadequacy of the asset in meeting the firm’s
requirements…….
MOBILE: 9906710947

MEANING OF DEPRECIATION ACCOUNTING………
The American Institute of Certified Public
Accountants (AICPA) in its Accounting Research
Bulletin states that…. “ Depreciation Accounting is a
system of accounting, which aims to distribute the cost
or other basic value of tangible capital assets less
salvage (if any), over the estimated useful life of the
unit in a systematic and rational manner…. It is a
process of allocation, not a valuation”……………
MOBILE: 9906710947

OBJECTIVES OF DEPRECIATION ACCOUNTING………
 To arrive at the current amount of net profit or loss for
a period, after deducting depreciation, being the
expense for the use of fixed assets during the period…
 To show assets at their current value, after deducting
the charged depreciation from the original cost………..
 To provide for the replacement of an asset. The charge
of depreciation saves profit from being distributed,
which money could be utilized for the purchase of a
new asset at the end of its life………….
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DETERMINANTS OF DEPRECIATION CHARGE………….
 The actual cost of the asset, including all incidental
costs…..
 The residual or scrap value representing the estimated
amount likely to be recovered from it at the time of its
sale or disposal….
 The estimated useful life of an asset in terms of years
over which the cost is to be spread……
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METHODS OF CALCULATING DEPRECIATION AMOUNTS……
(Contd)
MOBILE: 9906710947

METHODS OF CALCULATING DEPRECIATION AMOUNTS…… (CONTD)
1. STRAIGHT-LINE METHOD: Also known as Fixed
Percentage on Original Cost Method……In this Method,
an appropriate percentage of original cost is written off
the asset every year……
2. DIMINISHING-BALANCE METHOD: In this method,
the rate of depreciation is fixed, but it applies to the value
at which the asset stands in the books in the beginning of
the year……
3. SUM OF YEARS DIGIT METHOD: In this method, the
amount of depreciation charged goes on decreasing in
the coming years. However, depreciation is charged by
means of differing periodic rates…….
(Contd)
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4. ANNUITY METHOD: Annuity Method is based on the
assumption that the capital sunk in the asset, if invested
elsewhere, would have earned interest. Therefore, the
amount of total depreciation is calculated at the rate on the
cost of the asset plus interest thereon…..
5. SINKING FUND METHOD: Sinking Fund Method
combines the benefits of depreciating the asset as well as
accumulating funds for its replacement…..
6. REVALUATION METHOD: Revaluation Method involves
a periodic valuation of assets, the fall in their value being
treated as depreciation. It is mainly used for
depreciation of loose tools, patents etc…….
(Contd)
MOBILE: 9906710947

7. DEPLETION METHOD: Depletion Method is
employed for mineral resources, natural resources and
timber stands. Such resources deplete due to
extrapolation……
8. INSURANCE POLICY METHOD: Under this
method, an insurance policy is taken for the asset
concerned and the amount of policy is such that it will
be sufficient to replace the asset after its life. The
amount equal to amount of depreciation is paid by way
of premium each year…
9. MACHINE HOUR METHOD: In this method,
depreciation is charged according to hours used….
MOBILE: 9906710947

ACCOUNTING TREATMENT OF DEPRECIATION UNDER STRAIGHT LINE,
DIMINISHING BALANCE & MACHINE HOUR METHOD
STRAIGHT LINE METHOD
DIMINISHING BALANCE METHOD
MACHINE HOUR METHOD
MOBILE: 9906710947

A Machine is purchased for $ 170000 with
installation charges of $ 40000 and estimated scrap
value of $ 10000. The Machine has an estimated life of 10
years. Compute the Annual Depreciation of
Machine by using Straight Line Method…………..
SOLUTION:
Therefore, Annual Depreciation is $ 20000
MOBILE: 9906710947

Compute annual Depreciation by using Machine
Hour Method, if the cost of asset is $ 450000, its scrap
value is $ 55000. The estimated number of hours is 300
hours………………….
SOLUTION:
Therefore, Annual Depreciation is $ 1317 (Approx)
MOBILE: 9906710947

DIFFERENCE BETWEEN
STRAIGHT-LINE METHOD & DIMINISHING-BALANCE METHOD………
S.NO STRAIGHT-LINE METHOD S.NO DIMINISHING-BALANCE METHOD
1. The amount of depreciation
remains same throughout the
life of the asset……
1. The amount of depreciation
changes every year……
2. The overall charge for use of the
asset goes on increasing due to
fixed amount of depreciation
including increasing cost of
repairs year after year…..
2. The overall charge for use of the
asset almost remains the same
every year……
MOBILE: 9906710947

DIFFERENCE BETWEEN DEPRECIATION, DEPLETION & AMORTIZATION……
 DEPRECIATION: Depreciation is the process of
allocation of cost of a fixed asset over the periods in
which asset is used……..
 DEPLETION: The word ‘Depletion’ is used when we
allocate the cost of some wasting assets or natural
resources such as mines, oil wells, timber trees etc…
 AMORTIZATION: The term ‘Amortization’ refers to
the process of writing down the intangible assets such
as goodwill, patents etc. over their useful life…..
MOBILE: 9906710947

CONCEPT OF REPLACEMENT COST……..
Replacement Cost is the cost at which an asset
can be replaced on a given date……
In the periods of rising prices or inflation, the
funds required for replacement of an asset is much more than the
original cost. So, it is advocated to charge depreciation on replacement
cost instead of original cost………
CONCEPT OF ACCELERATED RATE OF DEPRECIATION……………..
Accelerated Rate of Depreciation is the rate of depreciation
which comprises a normal depreciation rate as well as an additional
rate of depreciation sustained by the asset depreciated………
MOBILE: 9906710947
IMPORTANT CONCEPTS……………….

UNIT- V
Single Entry System - Meaning, Sailent Features & Limitations;
Methods of Single Entry; Statement of Affairs & Conversion
Method of Ascertaining Profit; Accounting Treatment of Profit
or Loss; Difference between Balance - Sheet & Statement of
Affairs; Double Entry System vs Single Entry System; Receipts &
Payments Account- Meaning & Features; Income & Expenditure
Account – Meaning & Features; Difference between Receipts &
Payments account and Income & Expenditure account……………….

MEANING OF SINGLE ENTRY SYSTEM……………
Single Entry System is a system of book
keeping in which as a rule only records of cash and of
personal accounts are maintained; it is always
incomplete double entry, varying with circumstances……
MOBILE: 9906710947

SAILENT FEATURES OF SINGLE ENTRY SYSTEM………….
 Usually under Single Entry system, only personal
accounts are maintained…..
 Under Single Entry System, a cash book is
maintained….
Single Entry System is suitable for small firms, sole
proprietary firms or partnership firms….
 Single Entry System is dependent on original
vouchers. The necessary information is collected by
using original voucher…….
MOBILE: 9906710947

LIMITATIONS OF SINGLE ENTRY SYSTEM………….
 As the Single Entry system ignores dual aspect of
every transaction, a trial balance cannot be prepared
owing to lack of double entries. Thus, the arithmetical
accuracy of records cannot be verified and ensured…..
 The possibility of fraud and misappropriation is
high..........
 Any information derived from a Single Entry System
cannot be free from doubt…..
 Single Entry System fails to inspire the confidence of
outsiders in the business. This might pose problems at
the time of sale of business……
MOBILE: 9906710947

METHODS OF SINGLE ENTRY…..
(Contd)
MOBILE: 9906710947

METHODS OF SINGLE ENTRY (CONTD)
There are three methods of Single Entry:
1. PURE SINGLE ENTRY: This method maintains only
the personal accounts leaving unrecorded all real
and nominal accounts. It ignores the dual aspect of
each transaction…….
2. SIMPLE SINGLE ENTRY: This method maintains
the cash book in addition to the personal accounts….
3. COMMONLY PRACTISED SINGLE ENTRY: In this
method, the cash book, personal accounts and some
subsidiary books are kept…….
MOBILE: 9906710947

METHODS OF ASCERTAINING PROFIT……….
(Contd)
MOBILE: 9906710947

STATEMENT OF AFFAIRS METHOD…..(CONTD)
Under Statement of Affairs Method, the profit or
loss of the business can be arrived at by comparing the
opening capital with the closing capital. For this,
statements known as ‘Statement of Affairs’ should be
prepared… “ A Statement of affairs is a sort of balance-
sheet prepared under the single entry system, showing
the assets and liabilities as on a particular date”…………
 Required Adjustments for Determination of the
Profit……….
1. Adjustment for Drawings;
2. Adjustment for Capital Introduced……..
MOBILE: 9906710947

CONVERSION METHOD……(CONTD)
As the profit ascertained from the statement
of affairs method cannot be highly accurate, it is advisable
to convert the accounts to the double entry system. This
would enable the profit and loss account and balance-sheet
to be prepared as usual, and lead to reliable results…………
 Procedure to be followed…………………………………….
1. Preparation of opening Statement of Affairs;
2. Analysis of Business Transactions;
3. Analysis of cash Transactions;
4. Identification of Omissions;
5. Preparation of Total Debtors & Total Creditors……..
MOBILE: 9906710947

ACCOUNTING TREATMENT OF PROFIT OR LOSS………….
Statement of Profit & Loss (for the year……)
Particulars Amount ($)
A. Capital at the end of the year XXX
B. Add: Drawings made during the year XXX
C. Less: Capital introduced during the year XXX
D. Less: Capital in the beginning of the year XXX
E. Profit Earned / Loss Suffered during the year (A+B-C-D) XXX
MOBILE: 9906710947

From the following information, you are required
to ascertain the profit or loss of Mr. Waseem for the
year ending 31st March 2013……
Information:
Capital as on 01.04.2012= $ 500000; Capital as on 31.03.2013= $ 700000;
Waseem has made drawings and introduced capital of
$ 100000 and $ 200000 respectively during 2012-13……………….
MOBILE: 9906710947

SOLUTION……………………………Computation of Profit earned or Loss Suffered of Mr. Waseem for the year ending
31st March 2013
Statement of Profit & Loss (for the year ending 31st March 2013)
Particulars Amount ($)
A. Capital at the end of the year 700000
B. Add: Drawings made during the year 100000
C. Less: Capital introduced during the year 200000
D. Less: Capital in the beginning of the year 500000
E. Profit Earned / Loss Suffered during the year (A+B-C-D) 100000
Therefore, Mr. Waseem has earned profit of $ 100000 during the year 2012-13
MOBILE: 9906710947

DIFFERENCE BETWEEN BALANCE-SHEET & STATEMENT OF AFFAIRS……….
S.NO BALANCE-SHEET S.NO STATEMENT OF AFFAIRS
1. The main aim of Balance-Sheet
is to show the financial position
of the business on a particular
date…..
1. The main aim of Statement of
Affairs is to ascertain the profit
made by the business during a
particular period…..
2. Balance-Sheet is prepared from
trial balance and ledger
accounts…
2. Statement of Affairs is prepared
from ledger accounts and
several other accounts…
3. Balance-Sheet is supposed to
show the true financial position
of the business….
3. Statement of Affairs is not
supposed to show the true
position of the business…
4. Balance-Sheet can easily
disclose the omission of assets
and liabilities….
4. Statement of Affairs cannot
easily disclose the omission of
assets and liabilities….
MOBILE: 9906710947

DIFFERENCE BETWEEN DOUBLE ENTRY SYSTEM AND SINGLE ENTRY SYSTEM………..
DOUBLE ENTRY SYSTEM…………………………………………
Double Entry System is based on the assumptions and
principles of accounting. Both the aspects (Debit and Credit) of
a transaction are recorded and all types of accounts (Personal,
Real and Nominal) are maintained…………..
SINGLE ENTRY SYSTEM……………………………………………
In Single Entry System, both the aspects of
transactions are not recorded. Usually, cash and personal
accounts are maintained……..
MOBILE: 9906710947

RECEIPTS AND PAYMENTS ACCOUNT……………………..
Receipts and Payments account is the summary of
cash transactions both receipts and payments of the
accounting period. Details of these may be found in the cash
book…….
FEATURES OF RECEIPTS AND PAYMENTS ACCOUNT……………….
 It is a real account……
 It begins with an opening balance on the debit side, representing
the cash in hand or at bank……
 Under Receipts and Payments Account, receipts are recorded on
the debit side and payments are recorded on the credit side…..
 Receipts and Payments account ends with the closing balance.
Debit would be cash and credit would be bank overdraft……
MOBILE: 9906710947

INCOME AND EXPENDITURE ACCOUNT………………….
Income and Expenditure Account is a revenue
account of non-profit organizations, prepared on the lines of
a profit and loss account of a trading concern. The balance
of the account would denote a surplus or income over
expenditure and vice-versa……………………
FEATURES OF INCOME & EXPENDITURE ACCOUNT………………..
 It is a nominal account…..
 It doesnot begin with any opening balance…
 Only items of a revenue nature are dealt within it, those of a
capital nature are excluded…..
 The debit side shows the expenditure and the credit side records
the incomes…..
MOBILE: 9906710947

DIFFERENCE BETWEEN RECEIPTS AND PAYMENTS ACCOUNT & INCOME AND EXPENDITURE ACCOUNT……..
S.NO RECEIPTS & PAYMENTS ACCOUNT S.NO INCOME & EXPENDITURE ACCOUNT
1. Receipts & Payments Account is
a short form of cash book……
1. Income & Expenditure Account is
the substitute of profit and loss
account…
2. Receipts & Payments Account
begins with the opening balance
of cash in hand or at bank……
2. Income & Expenditure Account
does not begins with any
opening balance, but includes all
incomes received or receivable
for the current year….
3. Receipts & Payments Account is
a real account….
is a nominal account…..
4. Receipts & Payments Account
shows the closing cash or bank
balance….
shows an excess of income over
expenditure and vice-versa…..
MOBILE: 9906710947

UNIT- VI
Inventory- Concept; Methods of Inventory Valuation;
Inventory Control- Concept, Procedure and Techniques;
Inventory Systems; Determination of EOQ……………………

CONCEPT OF INVENTORY……….
The American Institute of Certified Public
Accountants (AICPA) defines Inventory as………………….
“Inventory designates the aggregate items of tangible
personal property which are held for sale in the ordinary
course of business”………………………………………………………..
Items like jigs, tools component parts
etc. are included in inventory………………………………………
MOBILE: 9906710947

METHODS OF INVENTORY VALUATION………
(Contd)
MOBILE: 9906710947

METHODS OF INVENTORY VALUATION…(Contd)
1. First–In-First-Out (FIFO) Method: This method
assumes that the materials which are purchased first
are the first to be issued for production…………………..
ADVANTAGES:
 Normal procedure is followed……..
 Based on present price conditions……….
 Provides benefit of full recovery cost………..
DISADVANTAGES:
 Increase the possibility of clerical errors…..
 Not suitable in time of fluctuating prices……..
(Contd)
MOBILE: 9906710947

2. Last- In- First- Out (LIFO) Method: This method
operates on the assumption that the latest purchases
are the first to be issued for production…………………..
ADVANTAGES:
 Considers current market conditions……………
 Reduces the burden of Income Tax………………
DISADVANTAGES:
 Involves complicated calculations in calculating
prices………….
 Out- of- Date price……………..
(Contd)
MOBILE: 9906710947

3. Highest- In- First- Out (HIFO) Method: This
method works on the principle that the most highly
priced purchases would be the first to be utilized,
regardless of the date of purchase………………………….
4. Specific Price Method: This method is relevant for
job order production, which involves materials being
purchased for individual jobs…………………………………..
5. Base Stock Method: This method assumes that a
certain minimum stock of the material should be not
issued for production except in conditions of
emergency…………………………………
(Contd)
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6. Simple Average Method: This method involves the
average of the varying prices, without regard to the
quantities……………….
7. Weighted Average Method: This method involves
the multiplication of the purchased lots of materials
with the respective prices paid for them, thereafter the
average to be calculated on the total quantity of
materials in hand…………………
MOBILE: 9906710947

CONCEPT OF INVENTORY CONTROL………….
Also known as Material Control……………………………
Inventory Control may be defined as the
systematic control over the procurement, storage and
usage of material so as to maintain even flow of
materials and avoiding at the same time excessive
investment in inventories…………………………………………
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INVENTORY CONTROL PROCEDURE……
The following are the steps involved in the procedure of
Inventory Control:
 Purchase of material;
 Receipt and Inspection of material;
 Storage of material;
 Issuing of material and
 Maintenance of Inventory Records………….
MOBILE: 9906710947

TECHNIQUES OF INVENTORY CONTROL……..
1. Inventory Levels: Also known as Level Setting. This
technique seeks to avoid the twin danger of over-
stocking and under-stocking. This includes;
 Maximum Level;
 Minimum Level;
 Re-Order Level and
 Danger Level
2. Just- In- Time: Just- In- Time means inventories are
received just-in-time to go into production…………..
Just-in-time reduces stock of inventories……………….
(Contd)
MOBILE: 9906710947

TECHNIQUES OF INVENTORY CONTROL…(CONTD)
3. Economic Order Quantity (EOQ): Also known as
Economic Lot Size . EOQ is that quantity or size of the
order which gives maximum economy in purchasing
any material. This includes;
 Ordering or Set-up Costs and
 Carrying or Holding Costs
Since, there is a trade-off between ordering
costs and carrying costs; it is known as Trade- Off
Model of Inventory Control………………………………
(Contd)
MOBILE: 9906710947

TECHNIQUES OF INVENTORY CONTROL…(CONTD)
4. ABC: This is a selective technique of inventory
control, which accords varying degrees of priority to
different categories of items…………………………………..
A- Items: Less in number but higher value ( Require
greater supervision and care)………………………………….
B or C- Items: Require vigilance……………………………
5. Two- Bin System: In this system, two bins are
maintained. As soon as the materials of the first bin
are exhausted, a new order is placed for the quantity of
the first bin…………………………………………………………………
MOBILE: 9906710947

INVENTORY SYSTEMS…………….
There are two systems of Inventories viz; Periodical
Inventory System and Perpetual Inventory System…
 PERIODICAL INVENTORY SYSTEM: In Periodical
Inventory System, inventory is counted only at the end
of the specific period…………
 PERPETUAL INVENTORY SYSTEM: Also known as
Continuous Inventory System. In Perpetual Inventory
System, there is a continuous check on the inventory….
MOBILE: 9906710947

DETERMINATION OF EOQ………
compute Economic Order Quantity (EOQ)………………….
Annual Demand………. 10,000 units
Ordering Cost………….. Rs. 100 per order
Carrying Cost…………… Rs. 6 per unit
 SOLUTION: Computation of EOQ:
MOBILE: 9906710947

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