Rules and principles of double entry System Under traditional approach, there are four types of accounts called Personal Accounts. Real Accounts. Nominal Accounts. Valuation Accounts. Personal accounts - Accounts relating to persons are called personal accounts. These persons may be customers, suppliers, money lenders, owners and banks. Real Accounts - Accounts related to tangible and intangible properties and possession are known as real accounts are classified as Tangible Real Accounts and Intangible Real Accounts. Nominal Accounts - Accounts concerning the expenses, losses, incomes and gains of a business enterprise are called as nominal Accounts. These accounts helps in preparation of Income statement. Valuation Accounts - The process of attaching monetary value to some assets and liabilities is called as valuation. The accounts where such valuation is effected are called as valuation Accounts. Rules of debit and card under traditional approach Personal Account : Debit the receiver...

Double entry system Accounting historian have established that double entry book keeping was practised in Florence in the later 13th century. Although several Systems were developed by mathematicians and businessman to summarized and communicate business transaction, only the one which Luca Friar Pacioli complied has survived and has become the basis of modern Accounting. Luca Friar Pocioli is rightly recognized as the father of modern accounting. He authored the first printed book on double entry book keeping. It was titled as  "Summa de arithmetical geometrics proportionate proportionality". He described a method of arranging accounts in such a way that the double aspect  (present in every Account transaction) would be expressed by a debit amount and an equal and offsetting credit amount. Double entry system is the system under which each transaction is regarded to have two fold aspects and both the aspects are recorded to obtain Complete record of dealings. Double entry sy...

Classification of Accounting principles Accounting principles are also referred to as standards, assumption, postulates, concepts, convention, axioms, generally accepted accounting principles (GAAP) etc. The above term are interchangeably used though they have different connotations. We will discuss here only assumption, concepts and conventions because these terms have reasonable bearing on the accounting system. (A) Accounting assumptions  Certain fundamental Accounting assumptions underline the preparation and presentation of financial statement. Institute of Chartered Accountants of India and International Accounting Standards Committee vide AS-1 respectively have stated the following as Fundamental accounting assumption : (1) Going concern : Accounting records presume that the business will exist for a very long time unless the evidence available is contrary to this. Under this assumption, "the enterprise is normally viewed as a going concern, that is, as continuing in operat...

Liabilities It refers to an amount owing by a person, ( a debtor) to another (a creditors) payable in money, goods or services. In general liabilities are financial obligations to outside parties arising from events that have already happened. Eric L. Kohler -  "an amount owing by one person (a creditors), payable in money or in goods and services" Types of liabilities These are the following types of liabilities:- (a) Current liabilities : It refers to those liabilities which fall due for payment in a relatively short period (normally within one year). These are also known as s term liabilities. For example, creditors, bills payable, short term loans, outstanding Expenses etc. (b) Fixed liabilities  : It refers to long term liabilities which are payable after a long period of one year. These are also known as long term liabilities. For example, long term loans, public deposits, debentures etc. (c) Contingent liabilities : It refers to amount which may  or may not become ...

Assets An assets is any owned physical object (tangible) or right (intangible) , having a money value. In other words, assets are economic resources which are owned by a business and from which future Economic benefits are expected to flow to the enterprise. W.B. Meigs and R.F. Meigs  - "Assets are  Economic resources which are owned by a business and expected to benefit further operations" Cash Debtors, Investors, Stock of goods, plant and machineries, Land and building, computers, Vehicles, Goodwill etc are the examples of assets. Assets may have the value for the business for several reasons; for instance  : Cash  have a value because other things can be aquired with it. Debtors and investors are assets because business is entitled to get claim from debtors in future and investment may be realised in cash by selling them in the market. Building, plants and machinery, Goodwill etc, are also assets because these assets offer some potential benefits or rights or serv...

Branches of Accounting Accountancy is still in the process of evaluation. Accountancy has grown with the rapid growth of business. To meets the changing requirements of the business world, accountant have also discovered various specialized Branches of accounting. The important Branches of Accounting are stated below:- (1) Financial Accounting : It is concerned with the recording of transactions in financial books  in order to find out the trading results in term of profits or loss and financial position of the business, for a given period of time. The accounting which leads to the preparation of final accounts is called financial accounting. It is used by the proprietor, creditors, investors, employees, management, government, etc. Financial Accounting is historical in Nature. (2)  Cost accounting : It is concerned with Classification, recording, allocation and summarisation of current and budgeted costs. The object of cost Accounting is to find out the cost of goods produced...

Difference between book keeping and Accounting After studying the meaning of book keeping and Accounting the following point of difference emerge:- (1) Stage : Book keeping is the basis of Accounting. Accountings is the culmination of bookkeeping. It starts where book keeping ends. (2)  Scope :  Book keeping confined itself to recording posting, balancing and preparation of trial balance. Accounting is extends to preparation of final accounts after incorporating year end adjustment. (3)  Skill  :  Bookkeeping is done by junior staff because the nature of work is clerical. Accounting is done by senior staff, because nature of job requires imagination, skill and analytical ability. (4)  Operations :  Bookkeeping records transaction in significant and orderly manner.  Accounting classifies, summarises and provides information. (5)  Activities  : Bookkeeping covers journalising, posting and extracting of balance.  Accounting covers prep...

Advantages of Accounting Welse and Anthony has rightly said that : "A good system of accounting is a store house of valuable information". Accounting being the store house of information has a number of advantages. These are as follows: (1) Recording : Human memory has a limited capacity to store every business transaction in mind. Therefore, the need of accounting is felt to record every transaction in different books of Account. Accounting helps in keeping a systematic and permanent record of business, Which may be referred from time to time. (2) Helpful in Tax assessment : In most of the cases, the business is required to pay income tax, value added tax, excise duty etc.., to the government. The fixation of tax liability is done on the basis of accounts of books, provided these are prepared according to the requirements of taxation laws. (3) Prevents frauds : The maintenance of proper books of accounts prevent irregularities, misappropriation, frauds, errors etc,. A dishon...

Accounting Accounting may be defined as the Identifying, measuring, recording and communicating of financial information. Objectives of Accounting These are the following objectives of accounting:- (a) To keep systematic record: Accounting is done to keep a systematic record of financial transactions. In the absence of Accounting, there would have been terrific burden on human memory, which in most cases would have been impossible to bear. (b) To protect and control business properties: Accounting provide protection to business properties from unjustified and unwarranted use. Unjustified and unwarranted use is avoided by supply of the following transaction: The amount of the proprietors funds invested in the business. How much the business has to pay the others. How much the business has to recover from others. How much the business has in the form of (a) fixed assets, (b) cash in hand, (c) cash at bank, (d) stock of raw material, work in progress and finished goods? (c) To ascertain t...

Book keeping Book keeping is that branch of knowledge which tells us how to keep a record of financial transaction. Book keeping denotes as an art and science of recording business transactions in a systematic and chronological order. Definitions R.N. Carter - "Book-keeping is the science and art of recording correctly in the books accounts all those business transactions that results in the transfer of money or money's worth". Characteristics or Features of Book-keeping Book keeping is the fundamental accounting activity for recording businesses transactions in the prescribed books. Every transaction is properly analysed before recording. The transaction recorded relate to transfer of money or money's worth (also referred as pecuniary transaction). Thus, events which are non-pecuniary, like giving a gift to a friend on his appointment as  a new director of a company will not be recorded irrespective of their importance to the company. Book keeping is a systematic met...

Journal  The word 'journal' has been derived the French word 'jour' which means day. Therefore, journal means a daily record. It is called a book of original entry because every business transaction is first recorded in this book. In case of small businesses, journal is the only book of original entry. But in case if big business, where the number if transactions are large, it is practically impossible to record transaction through journal. To overcome this shortcoming, subsidiary books (special journals) are prepared for specific transaction of similar nature. Entries in the journal are recorded in chronological order i.e. as and when the business transaction occur. It will be wrong to record transaction of 21st June and of 8th June later. Definitions Eric. L. Kohler - "The journal is a book of original entry in which are recorded transaction not provided for in specialized journals". Features of Journal There are the below, features of Journal :- It is a boo...

Difference between Journal and Ledger The distinction between Journal and Ledger may be stated as under the following basis: (1) Stage of entry : Journal is a book of primary entry. Ledger is a book of final entry. (2) Timing of recording : As soon as the   transaction originates, it is recorded in journal. The transaction are posted in the ledger after the same have been recorded in the journal. (3) Occurrence Vs. Classification : Transactions are recorded in order of occurrence i.e. strictly in order of date. Transaction are classified according to the  nature and are grouped in the concerned accounts. (4) Narration : Narration is written for each transaction in journal. In ledger narration is not required. (5) Folio : Ledger Folio is written in the journal. Folio of journal or sub-journal is written in the ledger. (6) Quick information: In journal relevant information cannot be ascertained readily e.g. cash in hand cannot be found out easily. In ledger, since transactions o...

Introduction Ledger is a principal or primary book of accounts. It is the most important book in accounting system. It contains all the accounts (assets, liabilities, capital, revenue and expenses) to which the transaction recorded in the books of original entry are transferred (posted). Ledger is the ultimate destination of all transactions. It is also called book of  "final entry". In ledger, the information is classified by nature and relevance. It may be maintained as bound book or loose leaf sheet or  (in case of computerized accounting) in floppy diskettes. Definitions William pickles - "A ledger is the most important book accounts and is the (final) destination of the entries made in the subsidiary books" Features of Ledger These are the following important features of ledger:- It is the principal or primary book of accounts. The transaction are classified under appropriate heads, called accounts. The transaction contain the condensed and summarised record of...

Cash book In any business, perhaps, the largest number of transactions of one nature must related to cash and bank. It is so because every transaction must, ultimately, result in a cash transaction. Now, if every cash transaction is to be recorded in journal, it will involve an enormous amount of labour in debiting or crediting cash or bank account in the ledger for each transaction. Therefore it is convenient to have a separate book, to record such transaction. Maintaining of cash book removes the necessity of having cash and bank account in the ledger. This book enable us to know the balance of cash in hand and at bank at any point of time. It is also a book of original entry because cash and bank transaction are not recorded in any other Subsidiary book. Cash book may be described as other primary book meant for recording all cash  (including cash) transaction date wise, usually, accompanied by brief narration. It serves the purpose of ledger also. The need for a separate cash b...

Bank Over Draft Bank is an institution which accepts our savings as deposit and gives loans when we needs funds. Bank grants different types of loans to it's clients when they need e.g. cash credit, over-draft and clean loans (advances). Over-draft is a facility which a bank grants to it's current account holder implying that account holder can deposit his saving with bank when he has surplus funds but when he is in need of funds more than his deposit, he can do so upto a certain limit, which is to be sanctioned by bank authorities, taking into account the financial resources of the borrower. Interest on overdraft is charged by bank on the actual amount over drawn by the account holder. 

Bills of Exchange When a trader sells goods on credit, he becomes the creditor, and the buyer becomes his debtor. The creditor (i.e. the seller)  has to get from the debtors (i.e. the purchaser) the amount of goods sold on credit on a later date. Very often, the creditor likes to have a written promise from his debtor to pay the amount of goods on a certain date. For this purpose, the creditors the creditor orders his debtor to pay  the amount of goods either to him or to his order or to the bearer of the Instrument. This written order for payment issued by the creditor to his debtor is called a Bill of Exchange. A bill of exchange is legally defined as  "An Instrument in writing, containing an unconditional order, sign by the maker, directing a certain person, to pay on demand or at a fix or determinable future date, a certain sum of money only, to or the order of a certain purpose, or to the bearer of the Instrument." Features of bill of exchange These are the following...

Promissory note Section 4 of the Indian Negotiable Instrument Act of 1881 defines  "A promissory note is an instrument in writing, containing an unconditional undertaking, sign by the maker, to pay a certain sum of money to or to the order of a certain person or to the bearer of the Instruments" Features of a promissory note The main Characteristics of a promissory note are:- It must be in writing. It must contain an Express undertaking or promise to pay. The promise to pay must be unconditional i,e. no condition should be attached to the promise. The maker must be certain i.e. the name of the person who promises to pay must be clearly stated in the promissory note. It must be sign by the maker. The promise must be to pay only the money, and not any other things. The amount payable must be certain i.e fixed. The payee must be certain i.e. the name of the person to whom the payment is to be made must be mentioned in the promissory note. It must bear the required revenue stamps...

Accommodation Bills Bills of exchange are use to settle trade debts arising out of sale or purchase of goods and services. These bills are called  'Trade Bills' . This bills are drawn for Consideration, as the last words in the body of  a bills of exchange are  "for value received". These words represent that the drawer make an order upon the drawee to make the payment for the goods or services he has supplied to the latter. On the other hand "Accommodation bills" are written by a person over other without any business transaction of buying and selling of goods and services and the other person accept that without any consideration. Such bills are drawn, when one party or both the parties are in need of funds to meet their business liabilities. In other words when they are in financial difficulties temporarily. These bills are drawn and accepted for providing necessary finance to the parties concerned and not backed by actual business transaction. So, an acc...

Trial Balance The statements prepared with the help of ledger balances, at the end of financial year (or at any other date) to find out whether debit total agrees with credit total, is called trial balance. Errors of Trial Balance Normally four types of errors are not revealed by trial balance, so two sides of trial will although agree, even then our accounts may not be free from errors. Such errors are (1) Errors of omission : If a transaction is not recorded in the book of original entry then both debit and credit effects of the transaction are omitted and trial balance shall not be affected, e.g. goods sold to John worth rs 1,000. The entry is not recorded bin the books at all, it means neither John's account is debited nor sales Account is credited. As both sides have been affected by equal amount, so the trial balance shall agree. (2) Errors of Commission : These errors are the result of carelessness of accounting staff and in some of the cases such errors do not affect the to...

Introduction The main objective of Accounting is to ascertain the profit and loss and financial position of the business. The profit and loss  and the financial position of the business can be ascertain by preparing the final accounts. The final Account is prepared on the basis of the various balance accounts in the ledger. The ledger accounts are spread over many pages of ledger or over different ledgers like the debtors ledger,  the creditors ledger and the general ledger. So the various pages of ledger or the different ledgers have to be gone through by the the accountant to ascertain the balance of various ledger accounts. Such a step is inconvenient an takes more time to prepare the final accounts. To overcome this problem a list of balances of various ledger account, called the trial balance is prepared by the accountants as on the closing date  of the accounting year. When there is a trial balance prepared as on the last date of accounting period, the balances of a...