[introduction]

This on-line book is designed to help you learn the subject on your own. I have deliberately avoided the text book language. Instead you will find the concepts explained in your common English.

Have you noticed that the first part of your syllabus is very lengthy. If you study without considering the marks assigned to each chapter, you will end up spending 70% of your effort for your first 50 marks, and be left with less time for the remaining 50 marks. In fact the second part contains relatively easier chapters. Try to secure maximum from the second part (starting from depreciation). In the first part, see that you get full 15 marks from "final accounts". Then you have subsidiary books and bank reconciliation statement for additional easy 10 marks. Then this theory. If you undestand the concepts clear, then don't worry about the satandard definitions. If you know it, fine. If you don't then not much of a problem.

Again I tell you this book is just a written from of what I used to teach my students in the class room. Never meant to be in the format of a printed book.

[end of introduction]

In short, just understand that there are two books in an office, the first is journal and the second is ledger.

Each transaction is recorded in these two books.

Recording of business transaction generally means recording in the first book.

All deatails and related papers are to be chcked carefully before making an entry in the journal book. Once an entry is made in the journal, recording the entry in the Ledger is relatively simple. It is just making the entry based on the journal.

Please do not get frightened with this lengthy explanation. If you do not understand in the first reading, just ignore it now. All these details will be very clear to you once you start working out the sums.

Chapter 1

Accounting - meaning objectives and basic accounting terms

How many of you commerce students really have an idea of what you are going to study in commerce. You are aware that, as a general rule, what you have selected this year as your field of study will decide the way you are going to live and earn your money for the rest of your life. You must have already seen the prescribed text book and have noticed in every chapter some numbers are neatly printed in columns. So, it is very likely that you have come to the conlusion that accounting is some sort of business presentation, something like a spread sheet you are familiar with.

But, accounting is not just a presentation of facts and figures. It is not just a spread sheet, where you can organise data according to your convenience. In accounting you have limited option. You must present data according to certain rules of accounting.

Accounting is a technique of organising financial data in a business. Systematic recording of such details is very important because there is a large number of details to be kept. Our daily life is a kind of miniature business. But usually we do not bother to keep a systematic book of records. It is because what we are doing is mostly very limited and easy to remember. But in a business there are hundreds of business deals, such as buying, selling, collecting money, depositing in bank, paying salary, rent, etc. taking place every day. Unless the records are kept properly, it will be impossible to run a business. Accounting is systematic recording of financial dealings in books of accounts. If you analyse this definition you can see accounting involves record keeping of financial dealings only. For example when you pay salary it is a financial dealing and you can record it in accounts. But when you promise to increase salary next month, it is not a financial dealing, even though it is going to influence a future financial transaction. You can still maintain record of it either in the form of a labour contract or general notice to employees. Maintaining this record is a secretarial job, not an accounting job. Thus the basic job of an accountant is to decide whether a business transaction is financial or non financial. If the transaction is financial, he must first determine the deal is done in proper order and with due authority. Next step is to record the transaction.

Recording of transactions means to make entries in the appropriate books. There are two set of books maintained for accounting purpose. The first set is known as the books of original entry.

They are mainly:

Journal and its subsidiary books such as:

Purchases book
Purchases returns book
Sales book
Sales returns book
Cash book
Petty cash book
Bills receivable book
Bills payable book

The second set of books are known as Ledgers where accounts are maintained.

Recordig a transaction means making an entry in the suitable journal, ie. either in the main journal or a subsidiary journal. All verification of approvals authorisation etc. are done before an entry is made in journal.

The second step is making entry in the ledger book based on the journal entry. With the entry in ledeger recording is complete.

While journal entry is made on the basis of original documents of related to a transaction, ledger entry is made on the basis of journal. There is no need of verfication of documents before ledger entry.

The purpose of enrty in the Ledger is to group or accumulate all transactions realted to a particular item in one place. An account is a page in the Ledger in which all details of a particular item is recorded. For example if you are keeping just two books, ie.journal and ledger, your journal would contain entries as they take place. Purchase of materials, payment of salaries etc. come in a mixed list as they happen in the business. It is very hard to find out how much materials are purchased or the value of furniture purchased etc. by refering to the journal. But these are the information you need to control the business. Ledger is the book you must refer for such specific information. Every entry related to furniture will appear in the your furniture account. All cash recipts and payments will appear in your cash account.

Once entries are made systematically in the books, it is easy to analyse them. Analysis is important as it helps better management. It helps to idetify right and wrong decisions in the past.

1.2 Objectives
1.2.1 to maintain records of business
1.2.2 calculation of profit or loss
1.2.3 depiction of financial position
1.2.4 to make the information available to various groups and users

1.3 Basic Terms
1.3.1 capital
1.3.2 liability
1.3.3 assets
1.3.4 revenue
1.3.5 expense
1.3.6 purchase
1.3.7 sales
1.3.8 stock
1.3.9 debtors
1.3.10 creditios

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