EasyPC TrainingAccounting BasicsAccounting Basics Page 2Business amp Administration

ContentsAccounting Basics 3The Accounting Equation 3Assets 3Liabilities 3Ownerrsquos Equity 3The Balance Sheet 5Double Entry Bookkeeping 6Ledger Accounts 6

Trial Balance 7Profit and Loss account 8Sales 8Cost of Sales 9Expenses 9Reporting Period amp Conversion Period10Conversion partway through year10Other conversion issues10Glossary 12Accounting Basics Page 3

Business amp AdministrationAccounting BasicsThis booklet is designed to give the reader an overview of general bookkeepingpractices and accounting terminology in preparation for EasyPC Trainingrsquos MYOBaccounting or manual bookkeeping coursesAs you read through please note that words or phrases underlined appear in aglossary at the back of the bookletThe Accounting EquationAll accounting entries in the books of account for an organisation have a relationshipbased on the lsquoaccounting equationrsquoAssets = Liabilities + Ownerrsquos equityAssetsAssets are tangible and intangible items of value which the business owns Examplesof assets areCashCarsBuildingsMachineryFurnitureDebtors (money owed from customers)

Stock InventoryLiabilitiesLiabilities are those items which are owed by the business to bodies outside of thebusiness Examples of liabilities areLoans to banksCreditors (money owed to suppliers)Bank overdraftsOwnerrsquos EquityThe simplest way to understand the accounting equation is to understand what makesup lsquoownerrsquos equityrsquoAccounting Basics Page 4Business amp AdministrationBy rearranging the accounting equation you can see that Ownerrsquos Equity is made upof Assets and LiabilitiesOwnerrsquos Equity = Total Assets less Total LiabilitiesOwnerrsquos Equity can also be expressed asOwnerrsquos Equity = Capital invested by owner + Profits (Losses) to date(also known as lsquoRetained Earnings rsquo)Rearranging the equation again therefore

Total Assets - Total Liabilities = Capital + Retained EarningsAccounting Basics Page 5Business amp AdministrationThe Balance SheetThe balance sheet shows a snapshot of the businessrsquos net worth at a given point intime Below is a basic balance sheet Have a look at how it displays the elements ofthe accounting equationBalance SheetAssets $Current AssetsStock XDebtors XBank XCash XFixed AssetsBuildings XVehicles XTotal Assets XXLiabilitiesCurrent LiabilitiesOverdraft XCreditors X

Long-term LiabilitiesBank Loan XTotal Liabilities XXTotal Assets less Total Liabilities ZZOwnerrsquos Capital YRetained Earnings YOwnerrsquos Equity ZZThe accounting equation establishes the basis of Double Entry BookkeepingAccounting Basics Page 6Business amp AdministrationDouble Entry BookkeepingAll accounting transactions are made up of 2 entries in the accounts a debit and acreditFor example if you purchased a book your value of books would increase but yourvalue of cash would decrease by the same value at the same time This is doubleentry bookkeepingLedger AccountsA ledger account is an item in either the Profit amp Loss account (which wersquoll discussshortly) or the balance sheet A Ledger account is either a

AssetLiabilityEquityIncomeExpenseThe example of purchasing a book mentioned above can be shown in the form ofledger ldquoTrdquo accounts as followsPurchases ndash BooksDr CrCash $20CashDr CrBooks $20If all transactions are entered into the books in this way then the sum of all of thedebits would equal the sum of all of the creditsldquoDrrdquo is short for Debit ldquoCrrdquo is short for CreditAccounting Basics Page 7Business amp AdministrationTrial BalanceA trial balance is a list of all of the ledger accounts of a business and the balance ofeach Debits are shown as positive numbers and credits as negative numbers The

trial balance should therefore always equal zeroFollowing on from the previous example if we were to sell a CD for $25 cash then theledger accounts and trial balance would look like thisPurchases - BooksDr CrCash $20Sales - CDsDr CrCash $25CashDr CrSales - CDs $25 Books $20Trial Balance$Purchases - Books 20Sales - CDs (25)Cash ($25 - $20) 5Total 0Accounting Basics Page 8Business amp AdministrationProfit and Loss account

Whereas the balance sheet shows a snapshot at a point in time of the net worth of thebusiness the profit and loss account shows the current financial yearrsquos net operatingprofits broken down into various sales cost of sales and expenses ledger accountsProfit and Loss accountSales $Books XCDrsquos XMagazines XTotal Sales XXCost of SalesPurchases of Books XPurchases of CDs XPurchases of Magazines XTotal Cost of Sales XXGross Profit (Sales ndash Cost of Sales) YYExpensesAdvertising XMarketing XSalaries amp Wages XElectricity XTotal Expenses XXNet Profit (Gross profit ndash Expenses) ZZ

SalesSales accounts show all sales made in the period regardless of whether or not moneyhas been received yet and are shown as a credit in the Profit and Loss accountsWhere money has not yet been received the debit is not to cash (as per the CDexample above) but to a Debtors account (money owed from customer account)Accounting Basics Page 9Business amp AdministrationCost of SalesCost of Sales are expenses that can be directly attributed to sales items such aspurchases of stocksExpensesThese are all other expenses (other than purchases of assets) which cannot beattributed directly to sales items such as rent electricity or advertisingAccounting Basics Page 10Business amp AdministrationReporting Period amp Conversion PeriodThe reporting period is usually a 12 month period ending 30 June each year At the

end of each financial year the profit and loss account balance is transferred to theRetained Earnings account in the Balance Sheet (under Equity) A new profit and lossaccount is started for the new financial yearThe Balance sheet is continuous the Profit and Loss account is just for thecurrent financial yearThe conversion period is the month in which you transfer over to a new accountingsystem If you are transferring to a new accounting system at the beginning of afinancial year the final balance in the profit and loss account would be transferred tothe new system (retained earnings account) along with all of the current balance sheetaccount balancesConversion partway through yearIf you are transferring your accounts partway through a year all of the individual Profitand Loss account balances must be individually transferred to the new system asopening balances so that all of the current yearrsquos financial data is stored The

individual balances on the balance sheet are transferred as normalOther conversion issuesOnly the balances of accounts will usually be transferred to the new system Generallya business would not re-input all of their individual transactions such as invoicesreceipts payments etc This means that there are likely to be cut-over issuesFor example you may have written a cheque to a supplier but as at the cut-over datethe supplier has not cashed the cheque Even though the bank would have beencredited and the supplierrsquos account would be correct this cheque would beoutstanding and the new accounting system eg MYOB would not have a record ofthe outstanding cheque to enable a reconciliation of the bank account This issue iscovered in the course ldquoGetting started with MYOB accounting softwarerdquoAccounting Basics Page 11Business amp AdministrationOther similar cut-over issues would include

Monies received but not yet cleared through the bankSupplier invoices not yet paidCustomer receipts not yet receivedWe hope you have found this brief introduction useful If you would like more information on EasyPCTrainingrsquos range of courses or consultancy services please contact us atPO Box 154 Northgate QLD 4013 web wwweasypctrainingcomaue-mail infoeasypctrainingcomauAccounting Basics Page 12Business amp AdministrationGlossaryAccounting Equation All accounting entries made in the books of account of abusiness have a relationship based on the accountingequation Assets = Liabilities + Ownerrsquos EquityAsset Tangible or intangible items of value owned by abusiness eg cash stock buildings amp vehiclesBalance Sheet Shows a snapshot at a given point in time of the networth of the business It details the assets liabilities and

ownerrsquos equityCapital Amount invested in the business (usually at start up butmay include additional funds raised)Conversion Period The period (month) in which the accounts are beingconverted or transferred over from one system toanotherCost of Sales Expenses in the financial year which can be directlyattributed to sales of those goods or servicesCredit Revenue in the Profit and Loss or Liability in theBalance sheetCreditor Amount owed to a supplier from the businessCurrent Asset Short-term asset (items or amounts to be used orreceived within 12 months) eg stock or cashCurrent Liability Short-term liability (items or amounts to be paid within12 months) eg supplier or bank overdraftDebit Expenses in the Profit and Loss or Asset in the Balance

sheetDebtor Amount owed to the business from a customerDouble EntryBookkeepingSystem of bookkeeping where all transaction have 2entries a debit and a credit which net to zeroExpense Amount relating to expenditure for the financial year(excluding purchases of assets or cost of sales)regardless of whether cash has been paid or notFixed Asset Long-term asset (items or amounts to be used orAccounting Basics Page 13Business amp Administrationreceived after 12 months) eg building or vehicleGross Profit Sales less Cost of SalesIncome Amount of sales made in the current financial yearregardless of whether cash has been received or not

Ledger Account An account containing transaction data relating to aspecific type of item whether in the Profit and Loss orBalance sheet The full list of ledger accounts for abusiness is called the businessrsquos Chart of AccountsLiability Amounts owed to entities outside of the business egbank loan supplier payments amp overdraftsLong-term Liability Long-term liability (items or amounts to be paid after 12months) eg bank loanNet Profit Gross Profit less Expenses Amount to be carried overto retained earnings at the end of each financial yearOwnerrsquos Equity Net worth of the business to the ownerReporting Period The 12 month period which the business runs reportsto in a normal year (period may be shorter in start andend years) Normally 1July to 30 June

Retained Earnings Total profits andor losses from start of business to dateTrial Balance A list of all the businessrsquos account balances whichshould net to zero ie should lsquobalancersquo

2

DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment60

5BASIC ACCOUNTING PRINCIPLES50 INTRODUCTIONWe have studied economic activities which have been convertedinto business activities In business activity a lot of ldquogive amptakerdquo exist which is known as transaction Transaction involvestransfer of money or moneyrsquos worth Thus exchange of moneygoods amp services between the parties is known to have resultedin a transaction It is necessary to record all these transactionsvery systematically amp scientifically so that the financialrelationship of a business with other persons may be properlyunderstood profit amp loss and financial position of the businessmay be worked out at a particular date The procedure to record

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

ContentsAccounting Basics 3The Accounting Equation 3Assets 3Liabilities 3Ownerrsquos Equity 3The Balance Sheet 5Double Entry Bookkeeping 6Ledger Accounts 6

Trial Balance 7Profit and Loss account 8Sales 8Cost of Sales 9Expenses 9Reporting Period amp Conversion Period10Conversion partway through year10Other conversion issues10Glossary 12Accounting Basics Page 3

Business amp AdministrationAccounting BasicsThis booklet is designed to give the reader an overview of general bookkeepingpractices and accounting terminology in preparation for EasyPC Trainingrsquos MYOBaccounting or manual bookkeeping coursesAs you read through please note that words or phrases underlined appear in aglossary at the back of the bookletThe Accounting EquationAll accounting entries in the books of account for an organisation have a relationshipbased on the lsquoaccounting equationrsquoAssets = Liabilities + Ownerrsquos equityAssetsAssets are tangible and intangible items of value which the business owns Examplesof assets areCashCarsBuildingsMachineryFurnitureDebtors (money owed from customers)

Stock InventoryLiabilitiesLiabilities are those items which are owed by the business to bodies outside of thebusiness Examples of liabilities areLoans to banksCreditors (money owed to suppliers)Bank overdraftsOwnerrsquos EquityThe simplest way to understand the accounting equation is to understand what makesup lsquoownerrsquos equityrsquoAccounting Basics Page 4Business amp AdministrationBy rearranging the accounting equation you can see that Ownerrsquos Equity is made upof Assets and LiabilitiesOwnerrsquos Equity = Total Assets less Total LiabilitiesOwnerrsquos Equity can also be expressed asOwnerrsquos Equity = Capital invested by owner + Profits (Losses) to date(also known as lsquoRetained Earnings rsquo)Rearranging the equation again therefore

Total Assets - Total Liabilities = Capital + Retained EarningsAccounting Basics Page 5Business amp AdministrationThe Balance SheetThe balance sheet shows a snapshot of the businessrsquos net worth at a given point intime Below is a basic balance sheet Have a look at how it displays the elements ofthe accounting equationBalance SheetAssets $Current AssetsStock XDebtors XBank XCash XFixed AssetsBuildings XVehicles XTotal Assets XXLiabilitiesCurrent LiabilitiesOverdraft XCreditors X

Long-term LiabilitiesBank Loan XTotal Liabilities XXTotal Assets less Total Liabilities ZZOwnerrsquos Capital YRetained Earnings YOwnerrsquos Equity ZZThe accounting equation establishes the basis of Double Entry BookkeepingAccounting Basics Page 6Business amp AdministrationDouble Entry BookkeepingAll accounting transactions are made up of 2 entries in the accounts a debit and acreditFor example if you purchased a book your value of books would increase but yourvalue of cash would decrease by the same value at the same time This is doubleentry bookkeepingLedger AccountsA ledger account is an item in either the Profit amp Loss account (which wersquoll discussshortly) or the balance sheet A Ledger account is either a

AssetLiabilityEquityIncomeExpenseThe example of purchasing a book mentioned above can be shown in the form ofledger ldquoTrdquo accounts as followsPurchases ndash BooksDr CrCash $20CashDr CrBooks $20If all transactions are entered into the books in this way then the sum of all of thedebits would equal the sum of all of the creditsldquoDrrdquo is short for Debit ldquoCrrdquo is short for CreditAccounting Basics Page 7Business amp AdministrationTrial BalanceA trial balance is a list of all of the ledger accounts of a business and the balance ofeach Debits are shown as positive numbers and credits as negative numbers The

trial balance should therefore always equal zeroFollowing on from the previous example if we were to sell a CD for $25 cash then theledger accounts and trial balance would look like thisPurchases - BooksDr CrCash $20Sales - CDsDr CrCash $25CashDr CrSales - CDs $25 Books $20Trial Balance$Purchases - Books 20Sales - CDs (25)Cash ($25 - $20) 5Total 0Accounting Basics Page 8Business amp AdministrationProfit and Loss account

Whereas the balance sheet shows a snapshot at a point in time of the net worth of thebusiness the profit and loss account shows the current financial yearrsquos net operatingprofits broken down into various sales cost of sales and expenses ledger accountsProfit and Loss accountSales $Books XCDrsquos XMagazines XTotal Sales XXCost of SalesPurchases of Books XPurchases of CDs XPurchases of Magazines XTotal Cost of Sales XXGross Profit (Sales ndash Cost of Sales) YYExpensesAdvertising XMarketing XSalaries amp Wages XElectricity XTotal Expenses XXNet Profit (Gross profit ndash Expenses) ZZ

SalesSales accounts show all sales made in the period regardless of whether or not moneyhas been received yet and are shown as a credit in the Profit and Loss accountsWhere money has not yet been received the debit is not to cash (as per the CDexample above) but to a Debtors account (money owed from customer account)Accounting Basics Page 9Business amp AdministrationCost of SalesCost of Sales are expenses that can be directly attributed to sales items such aspurchases of stocksExpensesThese are all other expenses (other than purchases of assets) which cannot beattributed directly to sales items such as rent electricity or advertisingAccounting Basics Page 10Business amp AdministrationReporting Period amp Conversion PeriodThe reporting period is usually a 12 month period ending 30 June each year At the

end of each financial year the profit and loss account balance is transferred to theRetained Earnings account in the Balance Sheet (under Equity) A new profit and lossaccount is started for the new financial yearThe Balance sheet is continuous the Profit and Loss account is just for thecurrent financial yearThe conversion period is the month in which you transfer over to a new accountingsystem If you are transferring to a new accounting system at the beginning of afinancial year the final balance in the profit and loss account would be transferred tothe new system (retained earnings account) along with all of the current balance sheetaccount balancesConversion partway through yearIf you are transferring your accounts partway through a year all of the individual Profitand Loss account balances must be individually transferred to the new system asopening balances so that all of the current yearrsquos financial data is stored The

individual balances on the balance sheet are transferred as normalOther conversion issuesOnly the balances of accounts will usually be transferred to the new system Generallya business would not re-input all of their individual transactions such as invoicesreceipts payments etc This means that there are likely to be cut-over issuesFor example you may have written a cheque to a supplier but as at the cut-over datethe supplier has not cashed the cheque Even though the bank would have beencredited and the supplierrsquos account would be correct this cheque would beoutstanding and the new accounting system eg MYOB would not have a record ofthe outstanding cheque to enable a reconciliation of the bank account This issue iscovered in the course ldquoGetting started with MYOB accounting softwarerdquoAccounting Basics Page 11Business amp AdministrationOther similar cut-over issues would include

Monies received but not yet cleared through the bankSupplier invoices not yet paidCustomer receipts not yet receivedWe hope you have found this brief introduction useful If you would like more information on EasyPCTrainingrsquos range of courses or consultancy services please contact us atPO Box 154 Northgate QLD 4013 web wwweasypctrainingcomaue-mail infoeasypctrainingcomauAccounting Basics Page 12Business amp AdministrationGlossaryAccounting Equation All accounting entries made in the books of account of abusiness have a relationship based on the accountingequation Assets = Liabilities + Ownerrsquos EquityAsset Tangible or intangible items of value owned by abusiness eg cash stock buildings amp vehiclesBalance Sheet Shows a snapshot at a given point in time of the networth of the business It details the assets liabilities and

ownerrsquos equityCapital Amount invested in the business (usually at start up butmay include additional funds raised)Conversion Period The period (month) in which the accounts are beingconverted or transferred over from one system toanotherCost of Sales Expenses in the financial year which can be directlyattributed to sales of those goods or servicesCredit Revenue in the Profit and Loss or Liability in theBalance sheetCreditor Amount owed to a supplier from the businessCurrent Asset Short-term asset (items or amounts to be used orreceived within 12 months) eg stock or cashCurrent Liability Short-term liability (items or amounts to be paid within12 months) eg supplier or bank overdraftDebit Expenses in the Profit and Loss or Asset in the Balance

sheetDebtor Amount owed to the business from a customerDouble EntryBookkeepingSystem of bookkeeping where all transaction have 2entries a debit and a credit which net to zeroExpense Amount relating to expenditure for the financial year(excluding purchases of assets or cost of sales)regardless of whether cash has been paid or notFixed Asset Long-term asset (items or amounts to be used orAccounting Basics Page 13Business amp Administrationreceived after 12 months) eg building or vehicleGross Profit Sales less Cost of SalesIncome Amount of sales made in the current financial yearregardless of whether cash has been received or not

Ledger Account An account containing transaction data relating to aspecific type of item whether in the Profit and Loss orBalance sheet The full list of ledger accounts for abusiness is called the businessrsquos Chart of AccountsLiability Amounts owed to entities outside of the business egbank loan supplier payments amp overdraftsLong-term Liability Long-term liability (items or amounts to be paid after 12months) eg bank loanNet Profit Gross Profit less Expenses Amount to be carried overto retained earnings at the end of each financial yearOwnerrsquos Equity Net worth of the business to the ownerReporting Period The 12 month period which the business runs reportsto in a normal year (period may be shorter in start andend years) Normally 1July to 30 June

Retained Earnings Total profits andor losses from start of business to dateTrial Balance A list of all the businessrsquos account balances whichshould net to zero ie should lsquobalancersquo

2

DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment60

5BASIC ACCOUNTING PRINCIPLES50 INTRODUCTIONWe have studied economic activities which have been convertedinto business activities In business activity a lot of ldquogive amptakerdquo exist which is known as transaction Transaction involvestransfer of money or moneyrsquos worth Thus exchange of moneygoods amp services between the parties is known to have resultedin a transaction It is necessary to record all these transactionsvery systematically amp scientifically so that the financialrelationship of a business with other persons may be properlyunderstood profit amp loss and financial position of the businessmay be worked out at a particular date The procedure to record

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

Trial Balance 7Profit and Loss account 8Sales 8Cost of Sales 9Expenses 9Reporting Period amp Conversion Period10Conversion partway through year10Other conversion issues10Glossary 12Accounting Basics Page 3

Business amp AdministrationAccounting BasicsThis booklet is designed to give the reader an overview of general bookkeepingpractices and accounting terminology in preparation for EasyPC Trainingrsquos MYOBaccounting or manual bookkeeping coursesAs you read through please note that words or phrases underlined appear in aglossary at the back of the bookletThe Accounting EquationAll accounting entries in the books of account for an organisation have a relationshipbased on the lsquoaccounting equationrsquoAssets = Liabilities + Ownerrsquos equityAssetsAssets are tangible and intangible items of value which the business owns Examplesof assets areCashCarsBuildingsMachineryFurnitureDebtors (money owed from customers)

Stock InventoryLiabilitiesLiabilities are those items which are owed by the business to bodies outside of thebusiness Examples of liabilities areLoans to banksCreditors (money owed to suppliers)Bank overdraftsOwnerrsquos EquityThe simplest way to understand the accounting equation is to understand what makesup lsquoownerrsquos equityrsquoAccounting Basics Page 4Business amp AdministrationBy rearranging the accounting equation you can see that Ownerrsquos Equity is made upof Assets and LiabilitiesOwnerrsquos Equity = Total Assets less Total LiabilitiesOwnerrsquos Equity can also be expressed asOwnerrsquos Equity = Capital invested by owner + Profits (Losses) to date(also known as lsquoRetained Earnings rsquo)Rearranging the equation again therefore

Total Assets - Total Liabilities = Capital + Retained EarningsAccounting Basics Page 5Business amp AdministrationThe Balance SheetThe balance sheet shows a snapshot of the businessrsquos net worth at a given point intime Below is a basic balance sheet Have a look at how it displays the elements ofthe accounting equationBalance SheetAssets $Current AssetsStock XDebtors XBank XCash XFixed AssetsBuildings XVehicles XTotal Assets XXLiabilitiesCurrent LiabilitiesOverdraft XCreditors X

Long-term LiabilitiesBank Loan XTotal Liabilities XXTotal Assets less Total Liabilities ZZOwnerrsquos Capital YRetained Earnings YOwnerrsquos Equity ZZThe accounting equation establishes the basis of Double Entry BookkeepingAccounting Basics Page 6Business amp AdministrationDouble Entry BookkeepingAll accounting transactions are made up of 2 entries in the accounts a debit and acreditFor example if you purchased a book your value of books would increase but yourvalue of cash would decrease by the same value at the same time This is doubleentry bookkeepingLedger AccountsA ledger account is an item in either the Profit amp Loss account (which wersquoll discussshortly) or the balance sheet A Ledger account is either a

AssetLiabilityEquityIncomeExpenseThe example of purchasing a book mentioned above can be shown in the form ofledger ldquoTrdquo accounts as followsPurchases ndash BooksDr CrCash $20CashDr CrBooks $20If all transactions are entered into the books in this way then the sum of all of thedebits would equal the sum of all of the creditsldquoDrrdquo is short for Debit ldquoCrrdquo is short for CreditAccounting Basics Page 7Business amp AdministrationTrial BalanceA trial balance is a list of all of the ledger accounts of a business and the balance ofeach Debits are shown as positive numbers and credits as negative numbers The

trial balance should therefore always equal zeroFollowing on from the previous example if we were to sell a CD for $25 cash then theledger accounts and trial balance would look like thisPurchases - BooksDr CrCash $20Sales - CDsDr CrCash $25CashDr CrSales - CDs $25 Books $20Trial Balance$Purchases - Books 20Sales - CDs (25)Cash ($25 - $20) 5Total 0Accounting Basics Page 8Business amp AdministrationProfit and Loss account

Whereas the balance sheet shows a snapshot at a point in time of the net worth of thebusiness the profit and loss account shows the current financial yearrsquos net operatingprofits broken down into various sales cost of sales and expenses ledger accountsProfit and Loss accountSales $Books XCDrsquos XMagazines XTotal Sales XXCost of SalesPurchases of Books XPurchases of CDs XPurchases of Magazines XTotal Cost of Sales XXGross Profit (Sales ndash Cost of Sales) YYExpensesAdvertising XMarketing XSalaries amp Wages XElectricity XTotal Expenses XXNet Profit (Gross profit ndash Expenses) ZZ

SalesSales accounts show all sales made in the period regardless of whether or not moneyhas been received yet and are shown as a credit in the Profit and Loss accountsWhere money has not yet been received the debit is not to cash (as per the CDexample above) but to a Debtors account (money owed from customer account)Accounting Basics Page 9Business amp AdministrationCost of SalesCost of Sales are expenses that can be directly attributed to sales items such aspurchases of stocksExpensesThese are all other expenses (other than purchases of assets) which cannot beattributed directly to sales items such as rent electricity or advertisingAccounting Basics Page 10Business amp AdministrationReporting Period amp Conversion PeriodThe reporting period is usually a 12 month period ending 30 June each year At the

end of each financial year the profit and loss account balance is transferred to theRetained Earnings account in the Balance Sheet (under Equity) A new profit and lossaccount is started for the new financial yearThe Balance sheet is continuous the Profit and Loss account is just for thecurrent financial yearThe conversion period is the month in which you transfer over to a new accountingsystem If you are transferring to a new accounting system at the beginning of afinancial year the final balance in the profit and loss account would be transferred tothe new system (retained earnings account) along with all of the current balance sheetaccount balancesConversion partway through yearIf you are transferring your accounts partway through a year all of the individual Profitand Loss account balances must be individually transferred to the new system asopening balances so that all of the current yearrsquos financial data is stored The

individual balances on the balance sheet are transferred as normalOther conversion issuesOnly the balances of accounts will usually be transferred to the new system Generallya business would not re-input all of their individual transactions such as invoicesreceipts payments etc This means that there are likely to be cut-over issuesFor example you may have written a cheque to a supplier but as at the cut-over datethe supplier has not cashed the cheque Even though the bank would have beencredited and the supplierrsquos account would be correct this cheque would beoutstanding and the new accounting system eg MYOB would not have a record ofthe outstanding cheque to enable a reconciliation of the bank account This issue iscovered in the course ldquoGetting started with MYOB accounting softwarerdquoAccounting Basics Page 11Business amp AdministrationOther similar cut-over issues would include

Monies received but not yet cleared through the bankSupplier invoices not yet paidCustomer receipts not yet receivedWe hope you have found this brief introduction useful If you would like more information on EasyPCTrainingrsquos range of courses or consultancy services please contact us atPO Box 154 Northgate QLD 4013 web wwweasypctrainingcomaue-mail infoeasypctrainingcomauAccounting Basics Page 12Business amp AdministrationGlossaryAccounting Equation All accounting entries made in the books of account of abusiness have a relationship based on the accountingequation Assets = Liabilities + Ownerrsquos EquityAsset Tangible or intangible items of value owned by abusiness eg cash stock buildings amp vehiclesBalance Sheet Shows a snapshot at a given point in time of the networth of the business It details the assets liabilities and

ownerrsquos equityCapital Amount invested in the business (usually at start up butmay include additional funds raised)Conversion Period The period (month) in which the accounts are beingconverted or transferred over from one system toanotherCost of Sales Expenses in the financial year which can be directlyattributed to sales of those goods or servicesCredit Revenue in the Profit and Loss or Liability in theBalance sheetCreditor Amount owed to a supplier from the businessCurrent Asset Short-term asset (items or amounts to be used orreceived within 12 months) eg stock or cashCurrent Liability Short-term liability (items or amounts to be paid within12 months) eg supplier or bank overdraftDebit Expenses in the Profit and Loss or Asset in the Balance

sheetDebtor Amount owed to the business from a customerDouble EntryBookkeepingSystem of bookkeeping where all transaction have 2entries a debit and a credit which net to zeroExpense Amount relating to expenditure for the financial year(excluding purchases of assets or cost of sales)regardless of whether cash has been paid or notFixed Asset Long-term asset (items or amounts to be used orAccounting Basics Page 13Business amp Administrationreceived after 12 months) eg building or vehicleGross Profit Sales less Cost of SalesIncome Amount of sales made in the current financial yearregardless of whether cash has been received or not

Ledger Account An account containing transaction data relating to aspecific type of item whether in the Profit and Loss orBalance sheet The full list of ledger accounts for abusiness is called the businessrsquos Chart of AccountsLiability Amounts owed to entities outside of the business egbank loan supplier payments amp overdraftsLong-term Liability Long-term liability (items or amounts to be paid after 12months) eg bank loanNet Profit Gross Profit less Expenses Amount to be carried overto retained earnings at the end of each financial yearOwnerrsquos Equity Net worth of the business to the ownerReporting Period The 12 month period which the business runs reportsto in a normal year (period may be shorter in start andend years) Normally 1July to 30 June

Retained Earnings Total profits andor losses from start of business to dateTrial Balance A list of all the businessrsquos account balances whichshould net to zero ie should lsquobalancersquo

2

DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment60

5BASIC ACCOUNTING PRINCIPLES50 INTRODUCTIONWe have studied economic activities which have been convertedinto business activities In business activity a lot of ldquogive amptakerdquo exist which is known as transaction Transaction involvestransfer of money or moneyrsquos worth Thus exchange of moneygoods amp services between the parties is known to have resultedin a transaction It is necessary to record all these transactionsvery systematically amp scientifically so that the financialrelationship of a business with other persons may be properlyunderstood profit amp loss and financial position of the businessmay be worked out at a particular date The procedure to record

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

Business amp AdministrationAccounting BasicsThis booklet is designed to give the reader an overview of general bookkeepingpractices and accounting terminology in preparation for EasyPC Trainingrsquos MYOBaccounting or manual bookkeeping coursesAs you read through please note that words or phrases underlined appear in aglossary at the back of the bookletThe Accounting EquationAll accounting entries in the books of account for an organisation have a relationshipbased on the lsquoaccounting equationrsquoAssets = Liabilities + Ownerrsquos equityAssetsAssets are tangible and intangible items of value which the business owns Examplesof assets areCashCarsBuildingsMachineryFurnitureDebtors (money owed from customers)

Stock InventoryLiabilitiesLiabilities are those items which are owed by the business to bodies outside of thebusiness Examples of liabilities areLoans to banksCreditors (money owed to suppliers)Bank overdraftsOwnerrsquos EquityThe simplest way to understand the accounting equation is to understand what makesup lsquoownerrsquos equityrsquoAccounting Basics Page 4Business amp AdministrationBy rearranging the accounting equation you can see that Ownerrsquos Equity is made upof Assets and LiabilitiesOwnerrsquos Equity = Total Assets less Total LiabilitiesOwnerrsquos Equity can also be expressed asOwnerrsquos Equity = Capital invested by owner + Profits (Losses) to date(also known as lsquoRetained Earnings rsquo)Rearranging the equation again therefore

Total Assets - Total Liabilities = Capital + Retained EarningsAccounting Basics Page 5Business amp AdministrationThe Balance SheetThe balance sheet shows a snapshot of the businessrsquos net worth at a given point intime Below is a basic balance sheet Have a look at how it displays the elements ofthe accounting equationBalance SheetAssets $Current AssetsStock XDebtors XBank XCash XFixed AssetsBuildings XVehicles XTotal Assets XXLiabilitiesCurrent LiabilitiesOverdraft XCreditors X

Long-term LiabilitiesBank Loan XTotal Liabilities XXTotal Assets less Total Liabilities ZZOwnerrsquos Capital YRetained Earnings YOwnerrsquos Equity ZZThe accounting equation establishes the basis of Double Entry BookkeepingAccounting Basics Page 6Business amp AdministrationDouble Entry BookkeepingAll accounting transactions are made up of 2 entries in the accounts a debit and acreditFor example if you purchased a book your value of books would increase but yourvalue of cash would decrease by the same value at the same time This is doubleentry bookkeepingLedger AccountsA ledger account is an item in either the Profit amp Loss account (which wersquoll discussshortly) or the balance sheet A Ledger account is either a

AssetLiabilityEquityIncomeExpenseThe example of purchasing a book mentioned above can be shown in the form ofledger ldquoTrdquo accounts as followsPurchases ndash BooksDr CrCash $20CashDr CrBooks $20If all transactions are entered into the books in this way then the sum of all of thedebits would equal the sum of all of the creditsldquoDrrdquo is short for Debit ldquoCrrdquo is short for CreditAccounting Basics Page 7Business amp AdministrationTrial BalanceA trial balance is a list of all of the ledger accounts of a business and the balance ofeach Debits are shown as positive numbers and credits as negative numbers The

trial balance should therefore always equal zeroFollowing on from the previous example if we were to sell a CD for $25 cash then theledger accounts and trial balance would look like thisPurchases - BooksDr CrCash $20Sales - CDsDr CrCash $25CashDr CrSales - CDs $25 Books $20Trial Balance$Purchases - Books 20Sales - CDs (25)Cash ($25 - $20) 5Total 0Accounting Basics Page 8Business amp AdministrationProfit and Loss account

Whereas the balance sheet shows a snapshot at a point in time of the net worth of thebusiness the profit and loss account shows the current financial yearrsquos net operatingprofits broken down into various sales cost of sales and expenses ledger accountsProfit and Loss accountSales $Books XCDrsquos XMagazines XTotal Sales XXCost of SalesPurchases of Books XPurchases of CDs XPurchases of Magazines XTotal Cost of Sales XXGross Profit (Sales ndash Cost of Sales) YYExpensesAdvertising XMarketing XSalaries amp Wages XElectricity XTotal Expenses XXNet Profit (Gross profit ndash Expenses) ZZ

SalesSales accounts show all sales made in the period regardless of whether or not moneyhas been received yet and are shown as a credit in the Profit and Loss accountsWhere money has not yet been received the debit is not to cash (as per the CDexample above) but to a Debtors account (money owed from customer account)Accounting Basics Page 9Business amp AdministrationCost of SalesCost of Sales are expenses that can be directly attributed to sales items such aspurchases of stocksExpensesThese are all other expenses (other than purchases of assets) which cannot beattributed directly to sales items such as rent electricity or advertisingAccounting Basics Page 10Business amp AdministrationReporting Period amp Conversion PeriodThe reporting period is usually a 12 month period ending 30 June each year At the

end of each financial year the profit and loss account balance is transferred to theRetained Earnings account in the Balance Sheet (under Equity) A new profit and lossaccount is started for the new financial yearThe Balance sheet is continuous the Profit and Loss account is just for thecurrent financial yearThe conversion period is the month in which you transfer over to a new accountingsystem If you are transferring to a new accounting system at the beginning of afinancial year the final balance in the profit and loss account would be transferred tothe new system (retained earnings account) along with all of the current balance sheetaccount balancesConversion partway through yearIf you are transferring your accounts partway through a year all of the individual Profitand Loss account balances must be individually transferred to the new system asopening balances so that all of the current yearrsquos financial data is stored The

individual balances on the balance sheet are transferred as normalOther conversion issuesOnly the balances of accounts will usually be transferred to the new system Generallya business would not re-input all of their individual transactions such as invoicesreceipts payments etc This means that there are likely to be cut-over issuesFor example you may have written a cheque to a supplier but as at the cut-over datethe supplier has not cashed the cheque Even though the bank would have beencredited and the supplierrsquos account would be correct this cheque would beoutstanding and the new accounting system eg MYOB would not have a record ofthe outstanding cheque to enable a reconciliation of the bank account This issue iscovered in the course ldquoGetting started with MYOB accounting softwarerdquoAccounting Basics Page 11Business amp AdministrationOther similar cut-over issues would include

Monies received but not yet cleared through the bankSupplier invoices not yet paidCustomer receipts not yet receivedWe hope you have found this brief introduction useful If you would like more information on EasyPCTrainingrsquos range of courses or consultancy services please contact us atPO Box 154 Northgate QLD 4013 web wwweasypctrainingcomaue-mail infoeasypctrainingcomauAccounting Basics Page 12Business amp AdministrationGlossaryAccounting Equation All accounting entries made in the books of account of abusiness have a relationship based on the accountingequation Assets = Liabilities + Ownerrsquos EquityAsset Tangible or intangible items of value owned by abusiness eg cash stock buildings amp vehiclesBalance Sheet Shows a snapshot at a given point in time of the networth of the business It details the assets liabilities and

ownerrsquos equityCapital Amount invested in the business (usually at start up butmay include additional funds raised)Conversion Period The period (month) in which the accounts are beingconverted or transferred over from one system toanotherCost of Sales Expenses in the financial year which can be directlyattributed to sales of those goods or servicesCredit Revenue in the Profit and Loss or Liability in theBalance sheetCreditor Amount owed to a supplier from the businessCurrent Asset Short-term asset (items or amounts to be used orreceived within 12 months) eg stock or cashCurrent Liability Short-term liability (items or amounts to be paid within12 months) eg supplier or bank overdraftDebit Expenses in the Profit and Loss or Asset in the Balance

sheetDebtor Amount owed to the business from a customerDouble EntryBookkeepingSystem of bookkeeping where all transaction have 2entries a debit and a credit which net to zeroExpense Amount relating to expenditure for the financial year(excluding purchases of assets or cost of sales)regardless of whether cash has been paid or notFixed Asset Long-term asset (items or amounts to be used orAccounting Basics Page 13Business amp Administrationreceived after 12 months) eg building or vehicleGross Profit Sales less Cost of SalesIncome Amount of sales made in the current financial yearregardless of whether cash has been received or not

Ledger Account An account containing transaction data relating to aspecific type of item whether in the Profit and Loss orBalance sheet The full list of ledger accounts for abusiness is called the businessrsquos Chart of AccountsLiability Amounts owed to entities outside of the business egbank loan supplier payments amp overdraftsLong-term Liability Long-term liability (items or amounts to be paid after 12months) eg bank loanNet Profit Gross Profit less Expenses Amount to be carried overto retained earnings at the end of each financial yearOwnerrsquos Equity Net worth of the business to the ownerReporting Period The 12 month period which the business runs reportsto in a normal year (period may be shorter in start andend years) Normally 1July to 30 June

Retained Earnings Total profits andor losses from start of business to dateTrial Balance A list of all the businessrsquos account balances whichshould net to zero ie should lsquobalancersquo

2

DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment60

5BASIC ACCOUNTING PRINCIPLES50 INTRODUCTIONWe have studied economic activities which have been convertedinto business activities In business activity a lot of ldquogive amptakerdquo exist which is known as transaction Transaction involvestransfer of money or moneyrsquos worth Thus exchange of moneygoods amp services between the parties is known to have resultedin a transaction It is necessary to record all these transactionsvery systematically amp scientifically so that the financialrelationship of a business with other persons may be properlyunderstood profit amp loss and financial position of the businessmay be worked out at a particular date The procedure to record

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

Stock InventoryLiabilitiesLiabilities are those items which are owed by the business to bodies outside of thebusiness Examples of liabilities areLoans to banksCreditors (money owed to suppliers)Bank overdraftsOwnerrsquos EquityThe simplest way to understand the accounting equation is to understand what makesup lsquoownerrsquos equityrsquoAccounting Basics Page 4Business amp AdministrationBy rearranging the accounting equation you can see that Ownerrsquos Equity is made upof Assets and LiabilitiesOwnerrsquos Equity = Total Assets less Total LiabilitiesOwnerrsquos Equity can also be expressed asOwnerrsquos Equity = Capital invested by owner + Profits (Losses) to date(also known as lsquoRetained Earnings rsquo)Rearranging the equation again therefore

Total Assets - Total Liabilities = Capital + Retained EarningsAccounting Basics Page 5Business amp AdministrationThe Balance SheetThe balance sheet shows a snapshot of the businessrsquos net worth at a given point intime Below is a basic balance sheet Have a look at how it displays the elements ofthe accounting equationBalance SheetAssets $Current AssetsStock XDebtors XBank XCash XFixed AssetsBuildings XVehicles XTotal Assets XXLiabilitiesCurrent LiabilitiesOverdraft XCreditors X

Long-term LiabilitiesBank Loan XTotal Liabilities XXTotal Assets less Total Liabilities ZZOwnerrsquos Capital YRetained Earnings YOwnerrsquos Equity ZZThe accounting equation establishes the basis of Double Entry BookkeepingAccounting Basics Page 6Business amp AdministrationDouble Entry BookkeepingAll accounting transactions are made up of 2 entries in the accounts a debit and acreditFor example if you purchased a book your value of books would increase but yourvalue of cash would decrease by the same value at the same time This is doubleentry bookkeepingLedger AccountsA ledger account is an item in either the Profit amp Loss account (which wersquoll discussshortly) or the balance sheet A Ledger account is either a

AssetLiabilityEquityIncomeExpenseThe example of purchasing a book mentioned above can be shown in the form ofledger ldquoTrdquo accounts as followsPurchases ndash BooksDr CrCash $20CashDr CrBooks $20If all transactions are entered into the books in this way then the sum of all of thedebits would equal the sum of all of the creditsldquoDrrdquo is short for Debit ldquoCrrdquo is short for CreditAccounting Basics Page 7Business amp AdministrationTrial BalanceA trial balance is a list of all of the ledger accounts of a business and the balance ofeach Debits are shown as positive numbers and credits as negative numbers The

trial balance should therefore always equal zeroFollowing on from the previous example if we were to sell a CD for $25 cash then theledger accounts and trial balance would look like thisPurchases - BooksDr CrCash $20Sales - CDsDr CrCash $25CashDr CrSales - CDs $25 Books $20Trial Balance$Purchases - Books 20Sales - CDs (25)Cash ($25 - $20) 5Total 0Accounting Basics Page 8Business amp AdministrationProfit and Loss account

Whereas the balance sheet shows a snapshot at a point in time of the net worth of thebusiness the profit and loss account shows the current financial yearrsquos net operatingprofits broken down into various sales cost of sales and expenses ledger accountsProfit and Loss accountSales $Books XCDrsquos XMagazines XTotal Sales XXCost of SalesPurchases of Books XPurchases of CDs XPurchases of Magazines XTotal Cost of Sales XXGross Profit (Sales ndash Cost of Sales) YYExpensesAdvertising XMarketing XSalaries amp Wages XElectricity XTotal Expenses XXNet Profit (Gross profit ndash Expenses) ZZ

SalesSales accounts show all sales made in the period regardless of whether or not moneyhas been received yet and are shown as a credit in the Profit and Loss accountsWhere money has not yet been received the debit is not to cash (as per the CDexample above) but to a Debtors account (money owed from customer account)Accounting Basics Page 9Business amp AdministrationCost of SalesCost of Sales are expenses that can be directly attributed to sales items such aspurchases of stocksExpensesThese are all other expenses (other than purchases of assets) which cannot beattributed directly to sales items such as rent electricity or advertisingAccounting Basics Page 10Business amp AdministrationReporting Period amp Conversion PeriodThe reporting period is usually a 12 month period ending 30 June each year At the

end of each financial year the profit and loss account balance is transferred to theRetained Earnings account in the Balance Sheet (under Equity) A new profit and lossaccount is started for the new financial yearThe Balance sheet is continuous the Profit and Loss account is just for thecurrent financial yearThe conversion period is the month in which you transfer over to a new accountingsystem If you are transferring to a new accounting system at the beginning of afinancial year the final balance in the profit and loss account would be transferred tothe new system (retained earnings account) along with all of the current balance sheetaccount balancesConversion partway through yearIf you are transferring your accounts partway through a year all of the individual Profitand Loss account balances must be individually transferred to the new system asopening balances so that all of the current yearrsquos financial data is stored The

individual balances on the balance sheet are transferred as normalOther conversion issuesOnly the balances of accounts will usually be transferred to the new system Generallya business would not re-input all of their individual transactions such as invoicesreceipts payments etc This means that there are likely to be cut-over issuesFor example you may have written a cheque to a supplier but as at the cut-over datethe supplier has not cashed the cheque Even though the bank would have beencredited and the supplierrsquos account would be correct this cheque would beoutstanding and the new accounting system eg MYOB would not have a record ofthe outstanding cheque to enable a reconciliation of the bank account This issue iscovered in the course ldquoGetting started with MYOB accounting softwarerdquoAccounting Basics Page 11Business amp AdministrationOther similar cut-over issues would include

Monies received but not yet cleared through the bankSupplier invoices not yet paidCustomer receipts not yet receivedWe hope you have found this brief introduction useful If you would like more information on EasyPCTrainingrsquos range of courses or consultancy services please contact us atPO Box 154 Northgate QLD 4013 web wwweasypctrainingcomaue-mail infoeasypctrainingcomauAccounting Basics Page 12Business amp AdministrationGlossaryAccounting Equation All accounting entries made in the books of account of abusiness have a relationship based on the accountingequation Assets = Liabilities + Ownerrsquos EquityAsset Tangible or intangible items of value owned by abusiness eg cash stock buildings amp vehiclesBalance Sheet Shows a snapshot at a given point in time of the networth of the business It details the assets liabilities and

ownerrsquos equityCapital Amount invested in the business (usually at start up butmay include additional funds raised)Conversion Period The period (month) in which the accounts are beingconverted or transferred over from one system toanotherCost of Sales Expenses in the financial year which can be directlyattributed to sales of those goods or servicesCredit Revenue in the Profit and Loss or Liability in theBalance sheetCreditor Amount owed to a supplier from the businessCurrent Asset Short-term asset (items or amounts to be used orreceived within 12 months) eg stock or cashCurrent Liability Short-term liability (items or amounts to be paid within12 months) eg supplier or bank overdraftDebit Expenses in the Profit and Loss or Asset in the Balance

sheetDebtor Amount owed to the business from a customerDouble EntryBookkeepingSystem of bookkeeping where all transaction have 2entries a debit and a credit which net to zeroExpense Amount relating to expenditure for the financial year(excluding purchases of assets or cost of sales)regardless of whether cash has been paid or notFixed Asset Long-term asset (items or amounts to be used orAccounting Basics Page 13Business amp Administrationreceived after 12 months) eg building or vehicleGross Profit Sales less Cost of SalesIncome Amount of sales made in the current financial yearregardless of whether cash has been received or not

Ledger Account An account containing transaction data relating to aspecific type of item whether in the Profit and Loss orBalance sheet The full list of ledger accounts for abusiness is called the businessrsquos Chart of AccountsLiability Amounts owed to entities outside of the business egbank loan supplier payments amp overdraftsLong-term Liability Long-term liability (items or amounts to be paid after 12months) eg bank loanNet Profit Gross Profit less Expenses Amount to be carried overto retained earnings at the end of each financial yearOwnerrsquos Equity Net worth of the business to the ownerReporting Period The 12 month period which the business runs reportsto in a normal year (period may be shorter in start andend years) Normally 1July to 30 June

Retained Earnings Total profits andor losses from start of business to dateTrial Balance A list of all the businessrsquos account balances whichshould net to zero ie should lsquobalancersquo

2

DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment60

5BASIC ACCOUNTING PRINCIPLES50 INTRODUCTIONWe have studied economic activities which have been convertedinto business activities In business activity a lot of ldquogive amptakerdquo exist which is known as transaction Transaction involvestransfer of money or moneyrsquos worth Thus exchange of moneygoods amp services between the parties is known to have resultedin a transaction It is necessary to record all these transactionsvery systematically amp scientifically so that the financialrelationship of a business with other persons may be properlyunderstood profit amp loss and financial position of the businessmay be worked out at a particular date The procedure to record

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

Total Assets - Total Liabilities = Capital + Retained EarningsAccounting Basics Page 5Business amp AdministrationThe Balance SheetThe balance sheet shows a snapshot of the businessrsquos net worth at a given point intime Below is a basic balance sheet Have a look at how it displays the elements ofthe accounting equationBalance SheetAssets $Current AssetsStock XDebtors XBank XCash XFixed AssetsBuildings XVehicles XTotal Assets XXLiabilitiesCurrent LiabilitiesOverdraft XCreditors X

Long-term LiabilitiesBank Loan XTotal Liabilities XXTotal Assets less Total Liabilities ZZOwnerrsquos Capital YRetained Earnings YOwnerrsquos Equity ZZThe accounting equation establishes the basis of Double Entry BookkeepingAccounting Basics Page 6Business amp AdministrationDouble Entry BookkeepingAll accounting transactions are made up of 2 entries in the accounts a debit and acreditFor example if you purchased a book your value of books would increase but yourvalue of cash would decrease by the same value at the same time This is doubleentry bookkeepingLedger AccountsA ledger account is an item in either the Profit amp Loss account (which wersquoll discussshortly) or the balance sheet A Ledger account is either a

AssetLiabilityEquityIncomeExpenseThe example of purchasing a book mentioned above can be shown in the form ofledger ldquoTrdquo accounts as followsPurchases ndash BooksDr CrCash $20CashDr CrBooks $20If all transactions are entered into the books in this way then the sum of all of thedebits would equal the sum of all of the creditsldquoDrrdquo is short for Debit ldquoCrrdquo is short for CreditAccounting Basics Page 7Business amp AdministrationTrial BalanceA trial balance is a list of all of the ledger accounts of a business and the balance ofeach Debits are shown as positive numbers and credits as negative numbers The

trial balance should therefore always equal zeroFollowing on from the previous example if we were to sell a CD for $25 cash then theledger accounts and trial balance would look like thisPurchases - BooksDr CrCash $20Sales - CDsDr CrCash $25CashDr CrSales - CDs $25 Books $20Trial Balance$Purchases - Books 20Sales - CDs (25)Cash ($25 - $20) 5Total 0Accounting Basics Page 8Business amp AdministrationProfit and Loss account

Whereas the balance sheet shows a snapshot at a point in time of the net worth of thebusiness the profit and loss account shows the current financial yearrsquos net operatingprofits broken down into various sales cost of sales and expenses ledger accountsProfit and Loss accountSales $Books XCDrsquos XMagazines XTotal Sales XXCost of SalesPurchases of Books XPurchases of CDs XPurchases of Magazines XTotal Cost of Sales XXGross Profit (Sales ndash Cost of Sales) YYExpensesAdvertising XMarketing XSalaries amp Wages XElectricity XTotal Expenses XXNet Profit (Gross profit ndash Expenses) ZZ

SalesSales accounts show all sales made in the period regardless of whether or not moneyhas been received yet and are shown as a credit in the Profit and Loss accountsWhere money has not yet been received the debit is not to cash (as per the CDexample above) but to a Debtors account (money owed from customer account)Accounting Basics Page 9Business amp AdministrationCost of SalesCost of Sales are expenses that can be directly attributed to sales items such aspurchases of stocksExpensesThese are all other expenses (other than purchases of assets) which cannot beattributed directly to sales items such as rent electricity or advertisingAccounting Basics Page 10Business amp AdministrationReporting Period amp Conversion PeriodThe reporting period is usually a 12 month period ending 30 June each year At the

end of each financial year the profit and loss account balance is transferred to theRetained Earnings account in the Balance Sheet (under Equity) A new profit and lossaccount is started for the new financial yearThe Balance sheet is continuous the Profit and Loss account is just for thecurrent financial yearThe conversion period is the month in which you transfer over to a new accountingsystem If you are transferring to a new accounting system at the beginning of afinancial year the final balance in the profit and loss account would be transferred tothe new system (retained earnings account) along with all of the current balance sheetaccount balancesConversion partway through yearIf you are transferring your accounts partway through a year all of the individual Profitand Loss account balances must be individually transferred to the new system asopening balances so that all of the current yearrsquos financial data is stored The

individual balances on the balance sheet are transferred as normalOther conversion issuesOnly the balances of accounts will usually be transferred to the new system Generallya business would not re-input all of their individual transactions such as invoicesreceipts payments etc This means that there are likely to be cut-over issuesFor example you may have written a cheque to a supplier but as at the cut-over datethe supplier has not cashed the cheque Even though the bank would have beencredited and the supplierrsquos account would be correct this cheque would beoutstanding and the new accounting system eg MYOB would not have a record ofthe outstanding cheque to enable a reconciliation of the bank account This issue iscovered in the course ldquoGetting started with MYOB accounting softwarerdquoAccounting Basics Page 11Business amp AdministrationOther similar cut-over issues would include

Monies received but not yet cleared through the bankSupplier invoices not yet paidCustomer receipts not yet receivedWe hope you have found this brief introduction useful If you would like more information on EasyPCTrainingrsquos range of courses or consultancy services please contact us atPO Box 154 Northgate QLD 4013 web wwweasypctrainingcomaue-mail infoeasypctrainingcomauAccounting Basics Page 12Business amp AdministrationGlossaryAccounting Equation All accounting entries made in the books of account of abusiness have a relationship based on the accountingequation Assets = Liabilities + Ownerrsquos EquityAsset Tangible or intangible items of value owned by abusiness eg cash stock buildings amp vehiclesBalance Sheet Shows a snapshot at a given point in time of the networth of the business It details the assets liabilities and

ownerrsquos equityCapital Amount invested in the business (usually at start up butmay include additional funds raised)Conversion Period The period (month) in which the accounts are beingconverted or transferred over from one system toanotherCost of Sales Expenses in the financial year which can be directlyattributed to sales of those goods or servicesCredit Revenue in the Profit and Loss or Liability in theBalance sheetCreditor Amount owed to a supplier from the businessCurrent Asset Short-term asset (items or amounts to be used orreceived within 12 months) eg stock or cashCurrent Liability Short-term liability (items or amounts to be paid within12 months) eg supplier or bank overdraftDebit Expenses in the Profit and Loss or Asset in the Balance

sheetDebtor Amount owed to the business from a customerDouble EntryBookkeepingSystem of bookkeeping where all transaction have 2entries a debit and a credit which net to zeroExpense Amount relating to expenditure for the financial year(excluding purchases of assets or cost of sales)regardless of whether cash has been paid or notFixed Asset Long-term asset (items or amounts to be used orAccounting Basics Page 13Business amp Administrationreceived after 12 months) eg building or vehicleGross Profit Sales less Cost of SalesIncome Amount of sales made in the current financial yearregardless of whether cash has been received or not

Ledger Account An account containing transaction data relating to aspecific type of item whether in the Profit and Loss orBalance sheet The full list of ledger accounts for abusiness is called the businessrsquos Chart of AccountsLiability Amounts owed to entities outside of the business egbank loan supplier payments amp overdraftsLong-term Liability Long-term liability (items or amounts to be paid after 12months) eg bank loanNet Profit Gross Profit less Expenses Amount to be carried overto retained earnings at the end of each financial yearOwnerrsquos Equity Net worth of the business to the ownerReporting Period The 12 month period which the business runs reportsto in a normal year (period may be shorter in start andend years) Normally 1July to 30 June

Retained Earnings Total profits andor losses from start of business to dateTrial Balance A list of all the businessrsquos account balances whichshould net to zero ie should lsquobalancersquo

2

DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment60

5BASIC ACCOUNTING PRINCIPLES50 INTRODUCTIONWe have studied economic activities which have been convertedinto business activities In business activity a lot of ldquogive amptakerdquo exist which is known as transaction Transaction involvestransfer of money or moneyrsquos worth Thus exchange of moneygoods amp services between the parties is known to have resultedin a transaction It is necessary to record all these transactionsvery systematically amp scientifically so that the financialrelationship of a business with other persons may be properlyunderstood profit amp loss and financial position of the businessmay be worked out at a particular date The procedure to record

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

Long-term LiabilitiesBank Loan XTotal Liabilities XXTotal Assets less Total Liabilities ZZOwnerrsquos Capital YRetained Earnings YOwnerrsquos Equity ZZThe accounting equation establishes the basis of Double Entry BookkeepingAccounting Basics Page 6Business amp AdministrationDouble Entry BookkeepingAll accounting transactions are made up of 2 entries in the accounts a debit and acreditFor example if you purchased a book your value of books would increase but yourvalue of cash would decrease by the same value at the same time This is doubleentry bookkeepingLedger AccountsA ledger account is an item in either the Profit amp Loss account (which wersquoll discussshortly) or the balance sheet A Ledger account is either a

AssetLiabilityEquityIncomeExpenseThe example of purchasing a book mentioned above can be shown in the form ofledger ldquoTrdquo accounts as followsPurchases ndash BooksDr CrCash $20CashDr CrBooks $20If all transactions are entered into the books in this way then the sum of all of thedebits would equal the sum of all of the creditsldquoDrrdquo is short for Debit ldquoCrrdquo is short for CreditAccounting Basics Page 7Business amp AdministrationTrial BalanceA trial balance is a list of all of the ledger accounts of a business and the balance ofeach Debits are shown as positive numbers and credits as negative numbers The

trial balance should therefore always equal zeroFollowing on from the previous example if we were to sell a CD for $25 cash then theledger accounts and trial balance would look like thisPurchases - BooksDr CrCash $20Sales - CDsDr CrCash $25CashDr CrSales - CDs $25 Books $20Trial Balance$Purchases - Books 20Sales - CDs (25)Cash ($25 - $20) 5Total 0Accounting Basics Page 8Business amp AdministrationProfit and Loss account

Whereas the balance sheet shows a snapshot at a point in time of the net worth of thebusiness the profit and loss account shows the current financial yearrsquos net operatingprofits broken down into various sales cost of sales and expenses ledger accountsProfit and Loss accountSales $Books XCDrsquos XMagazines XTotal Sales XXCost of SalesPurchases of Books XPurchases of CDs XPurchases of Magazines XTotal Cost of Sales XXGross Profit (Sales ndash Cost of Sales) YYExpensesAdvertising XMarketing XSalaries amp Wages XElectricity XTotal Expenses XXNet Profit (Gross profit ndash Expenses) ZZ

SalesSales accounts show all sales made in the period regardless of whether or not moneyhas been received yet and are shown as a credit in the Profit and Loss accountsWhere money has not yet been received the debit is not to cash (as per the CDexample above) but to a Debtors account (money owed from customer account)Accounting Basics Page 9Business amp AdministrationCost of SalesCost of Sales are expenses that can be directly attributed to sales items such aspurchases of stocksExpensesThese are all other expenses (other than purchases of assets) which cannot beattributed directly to sales items such as rent electricity or advertisingAccounting Basics Page 10Business amp AdministrationReporting Period amp Conversion PeriodThe reporting period is usually a 12 month period ending 30 June each year At the

end of each financial year the profit and loss account balance is transferred to theRetained Earnings account in the Balance Sheet (under Equity) A new profit and lossaccount is started for the new financial yearThe Balance sheet is continuous the Profit and Loss account is just for thecurrent financial yearThe conversion period is the month in which you transfer over to a new accountingsystem If you are transferring to a new accounting system at the beginning of afinancial year the final balance in the profit and loss account would be transferred tothe new system (retained earnings account) along with all of the current balance sheetaccount balancesConversion partway through yearIf you are transferring your accounts partway through a year all of the individual Profitand Loss account balances must be individually transferred to the new system asopening balances so that all of the current yearrsquos financial data is stored The

individual balances on the balance sheet are transferred as normalOther conversion issuesOnly the balances of accounts will usually be transferred to the new system Generallya business would not re-input all of their individual transactions such as invoicesreceipts payments etc This means that there are likely to be cut-over issuesFor example you may have written a cheque to a supplier but as at the cut-over datethe supplier has not cashed the cheque Even though the bank would have beencredited and the supplierrsquos account would be correct this cheque would beoutstanding and the new accounting system eg MYOB would not have a record ofthe outstanding cheque to enable a reconciliation of the bank account This issue iscovered in the course ldquoGetting started with MYOB accounting softwarerdquoAccounting Basics Page 11Business amp AdministrationOther similar cut-over issues would include

Monies received but not yet cleared through the bankSupplier invoices not yet paidCustomer receipts not yet receivedWe hope you have found this brief introduction useful If you would like more information on EasyPCTrainingrsquos range of courses or consultancy services please contact us atPO Box 154 Northgate QLD 4013 web wwweasypctrainingcomaue-mail infoeasypctrainingcomauAccounting Basics Page 12Business amp AdministrationGlossaryAccounting Equation All accounting entries made in the books of account of abusiness have a relationship based on the accountingequation Assets = Liabilities + Ownerrsquos EquityAsset Tangible or intangible items of value owned by abusiness eg cash stock buildings amp vehiclesBalance Sheet Shows a snapshot at a given point in time of the networth of the business It details the assets liabilities and

ownerrsquos equityCapital Amount invested in the business (usually at start up butmay include additional funds raised)Conversion Period The period (month) in which the accounts are beingconverted or transferred over from one system toanotherCost of Sales Expenses in the financial year which can be directlyattributed to sales of those goods or servicesCredit Revenue in the Profit and Loss or Liability in theBalance sheetCreditor Amount owed to a supplier from the businessCurrent Asset Short-term asset (items or amounts to be used orreceived within 12 months) eg stock or cashCurrent Liability Short-term liability (items or amounts to be paid within12 months) eg supplier or bank overdraftDebit Expenses in the Profit and Loss or Asset in the Balance

sheetDebtor Amount owed to the business from a customerDouble EntryBookkeepingSystem of bookkeeping where all transaction have 2entries a debit and a credit which net to zeroExpense Amount relating to expenditure for the financial year(excluding purchases of assets or cost of sales)regardless of whether cash has been paid or notFixed Asset Long-term asset (items or amounts to be used orAccounting Basics Page 13Business amp Administrationreceived after 12 months) eg building or vehicleGross Profit Sales less Cost of SalesIncome Amount of sales made in the current financial yearregardless of whether cash has been received or not

Ledger Account An account containing transaction data relating to aspecific type of item whether in the Profit and Loss orBalance sheet The full list of ledger accounts for abusiness is called the businessrsquos Chart of AccountsLiability Amounts owed to entities outside of the business egbank loan supplier payments amp overdraftsLong-term Liability Long-term liability (items or amounts to be paid after 12months) eg bank loanNet Profit Gross Profit less Expenses Amount to be carried overto retained earnings at the end of each financial yearOwnerrsquos Equity Net worth of the business to the ownerReporting Period The 12 month period which the business runs reportsto in a normal year (period may be shorter in start andend years) Normally 1July to 30 June

Retained Earnings Total profits andor losses from start of business to dateTrial Balance A list of all the businessrsquos account balances whichshould net to zero ie should lsquobalancersquo

2

DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment60

5BASIC ACCOUNTING PRINCIPLES50 INTRODUCTIONWe have studied economic activities which have been convertedinto business activities In business activity a lot of ldquogive amptakerdquo exist which is known as transaction Transaction involvestransfer of money or moneyrsquos worth Thus exchange of moneygoods amp services between the parties is known to have resultedin a transaction It is necessary to record all these transactionsvery systematically amp scientifically so that the financialrelationship of a business with other persons may be properlyunderstood profit amp loss and financial position of the businessmay be worked out at a particular date The procedure to record

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

AssetLiabilityEquityIncomeExpenseThe example of purchasing a book mentioned above can be shown in the form ofledger ldquoTrdquo accounts as followsPurchases ndash BooksDr CrCash $20CashDr CrBooks $20If all transactions are entered into the books in this way then the sum of all of thedebits would equal the sum of all of the creditsldquoDrrdquo is short for Debit ldquoCrrdquo is short for CreditAccounting Basics Page 7Business amp AdministrationTrial BalanceA trial balance is a list of all of the ledger accounts of a business and the balance ofeach Debits are shown as positive numbers and credits as negative numbers The

trial balance should therefore always equal zeroFollowing on from the previous example if we were to sell a CD for $25 cash then theledger accounts and trial balance would look like thisPurchases - BooksDr CrCash $20Sales - CDsDr CrCash $25CashDr CrSales - CDs $25 Books $20Trial Balance$Purchases - Books 20Sales - CDs (25)Cash ($25 - $20) 5Total 0Accounting Basics Page 8Business amp AdministrationProfit and Loss account

Whereas the balance sheet shows a snapshot at a point in time of the net worth of thebusiness the profit and loss account shows the current financial yearrsquos net operatingprofits broken down into various sales cost of sales and expenses ledger accountsProfit and Loss accountSales $Books XCDrsquos XMagazines XTotal Sales XXCost of SalesPurchases of Books XPurchases of CDs XPurchases of Magazines XTotal Cost of Sales XXGross Profit (Sales ndash Cost of Sales) YYExpensesAdvertising XMarketing XSalaries amp Wages XElectricity XTotal Expenses XXNet Profit (Gross profit ndash Expenses) ZZ

SalesSales accounts show all sales made in the period regardless of whether or not moneyhas been received yet and are shown as a credit in the Profit and Loss accountsWhere money has not yet been received the debit is not to cash (as per the CDexample above) but to a Debtors account (money owed from customer account)Accounting Basics Page 9Business amp AdministrationCost of SalesCost of Sales are expenses that can be directly attributed to sales items such aspurchases of stocksExpensesThese are all other expenses (other than purchases of assets) which cannot beattributed directly to sales items such as rent electricity or advertisingAccounting Basics Page 10Business amp AdministrationReporting Period amp Conversion PeriodThe reporting period is usually a 12 month period ending 30 June each year At the

end of each financial year the profit and loss account balance is transferred to theRetained Earnings account in the Balance Sheet (under Equity) A new profit and lossaccount is started for the new financial yearThe Balance sheet is continuous the Profit and Loss account is just for thecurrent financial yearThe conversion period is the month in which you transfer over to a new accountingsystem If you are transferring to a new accounting system at the beginning of afinancial year the final balance in the profit and loss account would be transferred tothe new system (retained earnings account) along with all of the current balance sheetaccount balancesConversion partway through yearIf you are transferring your accounts partway through a year all of the individual Profitand Loss account balances must be individually transferred to the new system asopening balances so that all of the current yearrsquos financial data is stored The

individual balances on the balance sheet are transferred as normalOther conversion issuesOnly the balances of accounts will usually be transferred to the new system Generallya business would not re-input all of their individual transactions such as invoicesreceipts payments etc This means that there are likely to be cut-over issuesFor example you may have written a cheque to a supplier but as at the cut-over datethe supplier has not cashed the cheque Even though the bank would have beencredited and the supplierrsquos account would be correct this cheque would beoutstanding and the new accounting system eg MYOB would not have a record ofthe outstanding cheque to enable a reconciliation of the bank account This issue iscovered in the course ldquoGetting started with MYOB accounting softwarerdquoAccounting Basics Page 11Business amp AdministrationOther similar cut-over issues would include

Monies received but not yet cleared through the bankSupplier invoices not yet paidCustomer receipts not yet receivedWe hope you have found this brief introduction useful If you would like more information on EasyPCTrainingrsquos range of courses or consultancy services please contact us atPO Box 154 Northgate QLD 4013 web wwweasypctrainingcomaue-mail infoeasypctrainingcomauAccounting Basics Page 12Business amp AdministrationGlossaryAccounting Equation All accounting entries made in the books of account of abusiness have a relationship based on the accountingequation Assets = Liabilities + Ownerrsquos EquityAsset Tangible or intangible items of value owned by abusiness eg cash stock buildings amp vehiclesBalance Sheet Shows a snapshot at a given point in time of the networth of the business It details the assets liabilities and

ownerrsquos equityCapital Amount invested in the business (usually at start up butmay include additional funds raised)Conversion Period The period (month) in which the accounts are beingconverted or transferred over from one system toanotherCost of Sales Expenses in the financial year which can be directlyattributed to sales of those goods or servicesCredit Revenue in the Profit and Loss or Liability in theBalance sheetCreditor Amount owed to a supplier from the businessCurrent Asset Short-term asset (items or amounts to be used orreceived within 12 months) eg stock or cashCurrent Liability Short-term liability (items or amounts to be paid within12 months) eg supplier or bank overdraftDebit Expenses in the Profit and Loss or Asset in the Balance

sheetDebtor Amount owed to the business from a customerDouble EntryBookkeepingSystem of bookkeeping where all transaction have 2entries a debit and a credit which net to zeroExpense Amount relating to expenditure for the financial year(excluding purchases of assets or cost of sales)regardless of whether cash has been paid or notFixed Asset Long-term asset (items or amounts to be used orAccounting Basics Page 13Business amp Administrationreceived after 12 months) eg building or vehicleGross Profit Sales less Cost of SalesIncome Amount of sales made in the current financial yearregardless of whether cash has been received or not

Ledger Account An account containing transaction data relating to aspecific type of item whether in the Profit and Loss orBalance sheet The full list of ledger accounts for abusiness is called the businessrsquos Chart of AccountsLiability Amounts owed to entities outside of the business egbank loan supplier payments amp overdraftsLong-term Liability Long-term liability (items or amounts to be paid after 12months) eg bank loanNet Profit Gross Profit less Expenses Amount to be carried overto retained earnings at the end of each financial yearOwnerrsquos Equity Net worth of the business to the ownerReporting Period The 12 month period which the business runs reportsto in a normal year (period may be shorter in start andend years) Normally 1July to 30 June

Retained Earnings Total profits andor losses from start of business to dateTrial Balance A list of all the businessrsquos account balances whichshould net to zero ie should lsquobalancersquo

2

DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment60

5BASIC ACCOUNTING PRINCIPLES50 INTRODUCTIONWe have studied economic activities which have been convertedinto business activities In business activity a lot of ldquogive amptakerdquo exist which is known as transaction Transaction involvestransfer of money or moneyrsquos worth Thus exchange of moneygoods amp services between the parties is known to have resultedin a transaction It is necessary to record all these transactionsvery systematically amp scientifically so that the financialrelationship of a business with other persons may be properlyunderstood profit amp loss and financial position of the businessmay be worked out at a particular date The procedure to record

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

trial balance should therefore always equal zeroFollowing on from the previous example if we were to sell a CD for $25 cash then theledger accounts and trial balance would look like thisPurchases - BooksDr CrCash $20Sales - CDsDr CrCash $25CashDr CrSales - CDs $25 Books $20Trial Balance$Purchases - Books 20Sales - CDs (25)Cash ($25 - $20) 5Total 0Accounting Basics Page 8Business amp AdministrationProfit and Loss account

Whereas the balance sheet shows a snapshot at a point in time of the net worth of thebusiness the profit and loss account shows the current financial yearrsquos net operatingprofits broken down into various sales cost of sales and expenses ledger accountsProfit and Loss accountSales $Books XCDrsquos XMagazines XTotal Sales XXCost of SalesPurchases of Books XPurchases of CDs XPurchases of Magazines XTotal Cost of Sales XXGross Profit (Sales ndash Cost of Sales) YYExpensesAdvertising XMarketing XSalaries amp Wages XElectricity XTotal Expenses XXNet Profit (Gross profit ndash Expenses) ZZ

SalesSales accounts show all sales made in the period regardless of whether or not moneyhas been received yet and are shown as a credit in the Profit and Loss accountsWhere money has not yet been received the debit is not to cash (as per the CDexample above) but to a Debtors account (money owed from customer account)Accounting Basics Page 9Business amp AdministrationCost of SalesCost of Sales are expenses that can be directly attributed to sales items such aspurchases of stocksExpensesThese are all other expenses (other than purchases of assets) which cannot beattributed directly to sales items such as rent electricity or advertisingAccounting Basics Page 10Business amp AdministrationReporting Period amp Conversion PeriodThe reporting period is usually a 12 month period ending 30 June each year At the

end of each financial year the profit and loss account balance is transferred to theRetained Earnings account in the Balance Sheet (under Equity) A new profit and lossaccount is started for the new financial yearThe Balance sheet is continuous the Profit and Loss account is just for thecurrent financial yearThe conversion period is the month in which you transfer over to a new accountingsystem If you are transferring to a new accounting system at the beginning of afinancial year the final balance in the profit and loss account would be transferred tothe new system (retained earnings account) along with all of the current balance sheetaccount balancesConversion partway through yearIf you are transferring your accounts partway through a year all of the individual Profitand Loss account balances must be individually transferred to the new system asopening balances so that all of the current yearrsquos financial data is stored The

individual balances on the balance sheet are transferred as normalOther conversion issuesOnly the balances of accounts will usually be transferred to the new system Generallya business would not re-input all of their individual transactions such as invoicesreceipts payments etc This means that there are likely to be cut-over issuesFor example you may have written a cheque to a supplier but as at the cut-over datethe supplier has not cashed the cheque Even though the bank would have beencredited and the supplierrsquos account would be correct this cheque would beoutstanding and the new accounting system eg MYOB would not have a record ofthe outstanding cheque to enable a reconciliation of the bank account This issue iscovered in the course ldquoGetting started with MYOB accounting softwarerdquoAccounting Basics Page 11Business amp AdministrationOther similar cut-over issues would include

Monies received but not yet cleared through the bankSupplier invoices not yet paidCustomer receipts not yet receivedWe hope you have found this brief introduction useful If you would like more information on EasyPCTrainingrsquos range of courses or consultancy services please contact us atPO Box 154 Northgate QLD 4013 web wwweasypctrainingcomaue-mail infoeasypctrainingcomauAccounting Basics Page 12Business amp AdministrationGlossaryAccounting Equation All accounting entries made in the books of account of abusiness have a relationship based on the accountingequation Assets = Liabilities + Ownerrsquos EquityAsset Tangible or intangible items of value owned by abusiness eg cash stock buildings amp vehiclesBalance Sheet Shows a snapshot at a given point in time of the networth of the business It details the assets liabilities and

ownerrsquos equityCapital Amount invested in the business (usually at start up butmay include additional funds raised)Conversion Period The period (month) in which the accounts are beingconverted or transferred over from one system toanotherCost of Sales Expenses in the financial year which can be directlyattributed to sales of those goods or servicesCredit Revenue in the Profit and Loss or Liability in theBalance sheetCreditor Amount owed to a supplier from the businessCurrent Asset Short-term asset (items or amounts to be used orreceived within 12 months) eg stock or cashCurrent Liability Short-term liability (items or amounts to be paid within12 months) eg supplier or bank overdraftDebit Expenses in the Profit and Loss or Asset in the Balance

sheetDebtor Amount owed to the business from a customerDouble EntryBookkeepingSystem of bookkeeping where all transaction have 2entries a debit and a credit which net to zeroExpense Amount relating to expenditure for the financial year(excluding purchases of assets or cost of sales)regardless of whether cash has been paid or notFixed Asset Long-term asset (items or amounts to be used orAccounting Basics Page 13Business amp Administrationreceived after 12 months) eg building or vehicleGross Profit Sales less Cost of SalesIncome Amount of sales made in the current financial yearregardless of whether cash has been received or not

Ledger Account An account containing transaction data relating to aspecific type of item whether in the Profit and Loss orBalance sheet The full list of ledger accounts for abusiness is called the businessrsquos Chart of AccountsLiability Amounts owed to entities outside of the business egbank loan supplier payments amp overdraftsLong-term Liability Long-term liability (items or amounts to be paid after 12months) eg bank loanNet Profit Gross Profit less Expenses Amount to be carried overto retained earnings at the end of each financial yearOwnerrsquos Equity Net worth of the business to the ownerReporting Period The 12 month period which the business runs reportsto in a normal year (period may be shorter in start andend years) Normally 1July to 30 June

Retained Earnings Total profits andor losses from start of business to dateTrial Balance A list of all the businessrsquos account balances whichshould net to zero ie should lsquobalancersquo

2

DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment60

5BASIC ACCOUNTING PRINCIPLES50 INTRODUCTIONWe have studied economic activities which have been convertedinto business activities In business activity a lot of ldquogive amptakerdquo exist which is known as transaction Transaction involvestransfer of money or moneyrsquos worth Thus exchange of moneygoods amp services between the parties is known to have resultedin a transaction It is necessary to record all these transactionsvery systematically amp scientifically so that the financialrelationship of a business with other persons may be properlyunderstood profit amp loss and financial position of the businessmay be worked out at a particular date The procedure to record

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

Whereas the balance sheet shows a snapshot at a point in time of the net worth of thebusiness the profit and loss account shows the current financial yearrsquos net operatingprofits broken down into various sales cost of sales and expenses ledger accountsProfit and Loss accountSales $Books XCDrsquos XMagazines XTotal Sales XXCost of SalesPurchases of Books XPurchases of CDs XPurchases of Magazines XTotal Cost of Sales XXGross Profit (Sales ndash Cost of Sales) YYExpensesAdvertising XMarketing XSalaries amp Wages XElectricity XTotal Expenses XXNet Profit (Gross profit ndash Expenses) ZZ

SalesSales accounts show all sales made in the period regardless of whether or not moneyhas been received yet and are shown as a credit in the Profit and Loss accountsWhere money has not yet been received the debit is not to cash (as per the CDexample above) but to a Debtors account (money owed from customer account)Accounting Basics Page 9Business amp AdministrationCost of SalesCost of Sales are expenses that can be directly attributed to sales items such aspurchases of stocksExpensesThese are all other expenses (other than purchases of assets) which cannot beattributed directly to sales items such as rent electricity or advertisingAccounting Basics Page 10Business amp AdministrationReporting Period amp Conversion PeriodThe reporting period is usually a 12 month period ending 30 June each year At the

end of each financial year the profit and loss account balance is transferred to theRetained Earnings account in the Balance Sheet (under Equity) A new profit and lossaccount is started for the new financial yearThe Balance sheet is continuous the Profit and Loss account is just for thecurrent financial yearThe conversion period is the month in which you transfer over to a new accountingsystem If you are transferring to a new accounting system at the beginning of afinancial year the final balance in the profit and loss account would be transferred tothe new system (retained earnings account) along with all of the current balance sheetaccount balancesConversion partway through yearIf you are transferring your accounts partway through a year all of the individual Profitand Loss account balances must be individually transferred to the new system asopening balances so that all of the current yearrsquos financial data is stored The

individual balances on the balance sheet are transferred as normalOther conversion issuesOnly the balances of accounts will usually be transferred to the new system Generallya business would not re-input all of their individual transactions such as invoicesreceipts payments etc This means that there are likely to be cut-over issuesFor example you may have written a cheque to a supplier but as at the cut-over datethe supplier has not cashed the cheque Even though the bank would have beencredited and the supplierrsquos account would be correct this cheque would beoutstanding and the new accounting system eg MYOB would not have a record ofthe outstanding cheque to enable a reconciliation of the bank account This issue iscovered in the course ldquoGetting started with MYOB accounting softwarerdquoAccounting Basics Page 11Business amp AdministrationOther similar cut-over issues would include

Monies received but not yet cleared through the bankSupplier invoices not yet paidCustomer receipts not yet receivedWe hope you have found this brief introduction useful If you would like more information on EasyPCTrainingrsquos range of courses or consultancy services please contact us atPO Box 154 Northgate QLD 4013 web wwweasypctrainingcomaue-mail infoeasypctrainingcomauAccounting Basics Page 12Business amp AdministrationGlossaryAccounting Equation All accounting entries made in the books of account of abusiness have a relationship based on the accountingequation Assets = Liabilities + Ownerrsquos EquityAsset Tangible or intangible items of value owned by abusiness eg cash stock buildings amp vehiclesBalance Sheet Shows a snapshot at a given point in time of the networth of the business It details the assets liabilities and

ownerrsquos equityCapital Amount invested in the business (usually at start up butmay include additional funds raised)Conversion Period The period (month) in which the accounts are beingconverted or transferred over from one system toanotherCost of Sales Expenses in the financial year which can be directlyattributed to sales of those goods or servicesCredit Revenue in the Profit and Loss or Liability in theBalance sheetCreditor Amount owed to a supplier from the businessCurrent Asset Short-term asset (items or amounts to be used orreceived within 12 months) eg stock or cashCurrent Liability Short-term liability (items or amounts to be paid within12 months) eg supplier or bank overdraftDebit Expenses in the Profit and Loss or Asset in the Balance

sheetDebtor Amount owed to the business from a customerDouble EntryBookkeepingSystem of bookkeeping where all transaction have 2entries a debit and a credit which net to zeroExpense Amount relating to expenditure for the financial year(excluding purchases of assets or cost of sales)regardless of whether cash has been paid or notFixed Asset Long-term asset (items or amounts to be used orAccounting Basics Page 13Business amp Administrationreceived after 12 months) eg building or vehicleGross Profit Sales less Cost of SalesIncome Amount of sales made in the current financial yearregardless of whether cash has been received or not

Ledger Account An account containing transaction data relating to aspecific type of item whether in the Profit and Loss orBalance sheet The full list of ledger accounts for abusiness is called the businessrsquos Chart of AccountsLiability Amounts owed to entities outside of the business egbank loan supplier payments amp overdraftsLong-term Liability Long-term liability (items or amounts to be paid after 12months) eg bank loanNet Profit Gross Profit less Expenses Amount to be carried overto retained earnings at the end of each financial yearOwnerrsquos Equity Net worth of the business to the ownerReporting Period The 12 month period which the business runs reportsto in a normal year (period may be shorter in start andend years) Normally 1July to 30 June

Retained Earnings Total profits andor losses from start of business to dateTrial Balance A list of all the businessrsquos account balances whichshould net to zero ie should lsquobalancersquo

2

DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment60

5BASIC ACCOUNTING PRINCIPLES50 INTRODUCTIONWe have studied economic activities which have been convertedinto business activities In business activity a lot of ldquogive amptakerdquo exist which is known as transaction Transaction involvestransfer of money or moneyrsquos worth Thus exchange of moneygoods amp services between the parties is known to have resultedin a transaction It is necessary to record all these transactionsvery systematically amp scientifically so that the financialrelationship of a business with other persons may be properlyunderstood profit amp loss and financial position of the businessmay be worked out at a particular date The procedure to record

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

SalesSales accounts show all sales made in the period regardless of whether or not moneyhas been received yet and are shown as a credit in the Profit and Loss accountsWhere money has not yet been received the debit is not to cash (as per the CDexample above) but to a Debtors account (money owed from customer account)Accounting Basics Page 9Business amp AdministrationCost of SalesCost of Sales are expenses that can be directly attributed to sales items such aspurchases of stocksExpensesThese are all other expenses (other than purchases of assets) which cannot beattributed directly to sales items such as rent electricity or advertisingAccounting Basics Page 10Business amp AdministrationReporting Period amp Conversion PeriodThe reporting period is usually a 12 month period ending 30 June each year At the

end of each financial year the profit and loss account balance is transferred to theRetained Earnings account in the Balance Sheet (under Equity) A new profit and lossaccount is started for the new financial yearThe Balance sheet is continuous the Profit and Loss account is just for thecurrent financial yearThe conversion period is the month in which you transfer over to a new accountingsystem If you are transferring to a new accounting system at the beginning of afinancial year the final balance in the profit and loss account would be transferred tothe new system (retained earnings account) along with all of the current balance sheetaccount balancesConversion partway through yearIf you are transferring your accounts partway through a year all of the individual Profitand Loss account balances must be individually transferred to the new system asopening balances so that all of the current yearrsquos financial data is stored The

individual balances on the balance sheet are transferred as normalOther conversion issuesOnly the balances of accounts will usually be transferred to the new system Generallya business would not re-input all of their individual transactions such as invoicesreceipts payments etc This means that there are likely to be cut-over issuesFor example you may have written a cheque to a supplier but as at the cut-over datethe supplier has not cashed the cheque Even though the bank would have beencredited and the supplierrsquos account would be correct this cheque would beoutstanding and the new accounting system eg MYOB would not have a record ofthe outstanding cheque to enable a reconciliation of the bank account This issue iscovered in the course ldquoGetting started with MYOB accounting softwarerdquoAccounting Basics Page 11Business amp AdministrationOther similar cut-over issues would include

Monies received but not yet cleared through the bankSupplier invoices not yet paidCustomer receipts not yet receivedWe hope you have found this brief introduction useful If you would like more information on EasyPCTrainingrsquos range of courses or consultancy services please contact us atPO Box 154 Northgate QLD 4013 web wwweasypctrainingcomaue-mail infoeasypctrainingcomauAccounting Basics Page 12Business amp AdministrationGlossaryAccounting Equation All accounting entries made in the books of account of abusiness have a relationship based on the accountingequation Assets = Liabilities + Ownerrsquos EquityAsset Tangible or intangible items of value owned by abusiness eg cash stock buildings amp vehiclesBalance Sheet Shows a snapshot at a given point in time of the networth of the business It details the assets liabilities and

ownerrsquos equityCapital Amount invested in the business (usually at start up butmay include additional funds raised)Conversion Period The period (month) in which the accounts are beingconverted or transferred over from one system toanotherCost of Sales Expenses in the financial year which can be directlyattributed to sales of those goods or servicesCredit Revenue in the Profit and Loss or Liability in theBalance sheetCreditor Amount owed to a supplier from the businessCurrent Asset Short-term asset (items or amounts to be used orreceived within 12 months) eg stock or cashCurrent Liability Short-term liability (items or amounts to be paid within12 months) eg supplier or bank overdraftDebit Expenses in the Profit and Loss or Asset in the Balance

sheetDebtor Amount owed to the business from a customerDouble EntryBookkeepingSystem of bookkeeping where all transaction have 2entries a debit and a credit which net to zeroExpense Amount relating to expenditure for the financial year(excluding purchases of assets or cost of sales)regardless of whether cash has been paid or notFixed Asset Long-term asset (items or amounts to be used orAccounting Basics Page 13Business amp Administrationreceived after 12 months) eg building or vehicleGross Profit Sales less Cost of SalesIncome Amount of sales made in the current financial yearregardless of whether cash has been received or not

Ledger Account An account containing transaction data relating to aspecific type of item whether in the Profit and Loss orBalance sheet The full list of ledger accounts for abusiness is called the businessrsquos Chart of AccountsLiability Amounts owed to entities outside of the business egbank loan supplier payments amp overdraftsLong-term Liability Long-term liability (items or amounts to be paid after 12months) eg bank loanNet Profit Gross Profit less Expenses Amount to be carried overto retained earnings at the end of each financial yearOwnerrsquos Equity Net worth of the business to the ownerReporting Period The 12 month period which the business runs reportsto in a normal year (period may be shorter in start andend years) Normally 1July to 30 June

Retained Earnings Total profits andor losses from start of business to dateTrial Balance A list of all the businessrsquos account balances whichshould net to zero ie should lsquobalancersquo

2

DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment60

5BASIC ACCOUNTING PRINCIPLES50 INTRODUCTIONWe have studied economic activities which have been convertedinto business activities In business activity a lot of ldquogive amptakerdquo exist which is known as transaction Transaction involvestransfer of money or moneyrsquos worth Thus exchange of moneygoods amp services between the parties is known to have resultedin a transaction It is necessary to record all these transactionsvery systematically amp scientifically so that the financialrelationship of a business with other persons may be properlyunderstood profit amp loss and financial position of the businessmay be worked out at a particular date The procedure to record

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

end of each financial year the profit and loss account balance is transferred to theRetained Earnings account in the Balance Sheet (under Equity) A new profit and lossaccount is started for the new financial yearThe Balance sheet is continuous the Profit and Loss account is just for thecurrent financial yearThe conversion period is the month in which you transfer over to a new accountingsystem If you are transferring to a new accounting system at the beginning of afinancial year the final balance in the profit and loss account would be transferred tothe new system (retained earnings account) along with all of the current balance sheetaccount balancesConversion partway through yearIf you are transferring your accounts partway through a year all of the individual Profitand Loss account balances must be individually transferred to the new system asopening balances so that all of the current yearrsquos financial data is stored The

individual balances on the balance sheet are transferred as normalOther conversion issuesOnly the balances of accounts will usually be transferred to the new system Generallya business would not re-input all of their individual transactions such as invoicesreceipts payments etc This means that there are likely to be cut-over issuesFor example you may have written a cheque to a supplier but as at the cut-over datethe supplier has not cashed the cheque Even though the bank would have beencredited and the supplierrsquos account would be correct this cheque would beoutstanding and the new accounting system eg MYOB would not have a record ofthe outstanding cheque to enable a reconciliation of the bank account This issue iscovered in the course ldquoGetting started with MYOB accounting softwarerdquoAccounting Basics Page 11Business amp AdministrationOther similar cut-over issues would include

Monies received but not yet cleared through the bankSupplier invoices not yet paidCustomer receipts not yet receivedWe hope you have found this brief introduction useful If you would like more information on EasyPCTrainingrsquos range of courses or consultancy services please contact us atPO Box 154 Northgate QLD 4013 web wwweasypctrainingcomaue-mail infoeasypctrainingcomauAccounting Basics Page 12Business amp AdministrationGlossaryAccounting Equation All accounting entries made in the books of account of abusiness have a relationship based on the accountingequation Assets = Liabilities + Ownerrsquos EquityAsset Tangible or intangible items of value owned by abusiness eg cash stock buildings amp vehiclesBalance Sheet Shows a snapshot at a given point in time of the networth of the business It details the assets liabilities and

ownerrsquos equityCapital Amount invested in the business (usually at start up butmay include additional funds raised)Conversion Period The period (month) in which the accounts are beingconverted or transferred over from one system toanotherCost of Sales Expenses in the financial year which can be directlyattributed to sales of those goods or servicesCredit Revenue in the Profit and Loss or Liability in theBalance sheetCreditor Amount owed to a supplier from the businessCurrent Asset Short-term asset (items or amounts to be used orreceived within 12 months) eg stock or cashCurrent Liability Short-term liability (items or amounts to be paid within12 months) eg supplier or bank overdraftDebit Expenses in the Profit and Loss or Asset in the Balance

sheetDebtor Amount owed to the business from a customerDouble EntryBookkeepingSystem of bookkeeping where all transaction have 2entries a debit and a credit which net to zeroExpense Amount relating to expenditure for the financial year(excluding purchases of assets or cost of sales)regardless of whether cash has been paid or notFixed Asset Long-term asset (items or amounts to be used orAccounting Basics Page 13Business amp Administrationreceived after 12 months) eg building or vehicleGross Profit Sales less Cost of SalesIncome Amount of sales made in the current financial yearregardless of whether cash has been received or not

Ledger Account An account containing transaction data relating to aspecific type of item whether in the Profit and Loss orBalance sheet The full list of ledger accounts for abusiness is called the businessrsquos Chart of AccountsLiability Amounts owed to entities outside of the business egbank loan supplier payments amp overdraftsLong-term Liability Long-term liability (items or amounts to be paid after 12months) eg bank loanNet Profit Gross Profit less Expenses Amount to be carried overto retained earnings at the end of each financial yearOwnerrsquos Equity Net worth of the business to the ownerReporting Period The 12 month period which the business runs reportsto in a normal year (period may be shorter in start andend years) Normally 1July to 30 June

Retained Earnings Total profits andor losses from start of business to dateTrial Balance A list of all the businessrsquos account balances whichshould net to zero ie should lsquobalancersquo

2

DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment60

5BASIC ACCOUNTING PRINCIPLES50 INTRODUCTIONWe have studied economic activities which have been convertedinto business activities In business activity a lot of ldquogive amptakerdquo exist which is known as transaction Transaction involvestransfer of money or moneyrsquos worth Thus exchange of moneygoods amp services between the parties is known to have resultedin a transaction It is necessary to record all these transactionsvery systematically amp scientifically so that the financialrelationship of a business with other persons may be properlyunderstood profit amp loss and financial position of the businessmay be worked out at a particular date The procedure to record

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

individual balances on the balance sheet are transferred as normalOther conversion issuesOnly the balances of accounts will usually be transferred to the new system Generallya business would not re-input all of their individual transactions such as invoicesreceipts payments etc This means that there are likely to be cut-over issuesFor example you may have written a cheque to a supplier but as at the cut-over datethe supplier has not cashed the cheque Even though the bank would have beencredited and the supplierrsquos account would be correct this cheque would beoutstanding and the new accounting system eg MYOB would not have a record ofthe outstanding cheque to enable a reconciliation of the bank account This issue iscovered in the course ldquoGetting started with MYOB accounting softwarerdquoAccounting Basics Page 11Business amp AdministrationOther similar cut-over issues would include

Monies received but not yet cleared through the bankSupplier invoices not yet paidCustomer receipts not yet receivedWe hope you have found this brief introduction useful If you would like more information on EasyPCTrainingrsquos range of courses or consultancy services please contact us atPO Box 154 Northgate QLD 4013 web wwweasypctrainingcomaue-mail infoeasypctrainingcomauAccounting Basics Page 12Business amp AdministrationGlossaryAccounting Equation All accounting entries made in the books of account of abusiness have a relationship based on the accountingequation Assets = Liabilities + Ownerrsquos EquityAsset Tangible or intangible items of value owned by abusiness eg cash stock buildings amp vehiclesBalance Sheet Shows a snapshot at a given point in time of the networth of the business It details the assets liabilities and

ownerrsquos equityCapital Amount invested in the business (usually at start up butmay include additional funds raised)Conversion Period The period (month) in which the accounts are beingconverted or transferred over from one system toanotherCost of Sales Expenses in the financial year which can be directlyattributed to sales of those goods or servicesCredit Revenue in the Profit and Loss or Liability in theBalance sheetCreditor Amount owed to a supplier from the businessCurrent Asset Short-term asset (items or amounts to be used orreceived within 12 months) eg stock or cashCurrent Liability Short-term liability (items or amounts to be paid within12 months) eg supplier or bank overdraftDebit Expenses in the Profit and Loss or Asset in the Balance

sheetDebtor Amount owed to the business from a customerDouble EntryBookkeepingSystem of bookkeeping where all transaction have 2entries a debit and a credit which net to zeroExpense Amount relating to expenditure for the financial year(excluding purchases of assets or cost of sales)regardless of whether cash has been paid or notFixed Asset Long-term asset (items or amounts to be used orAccounting Basics Page 13Business amp Administrationreceived after 12 months) eg building or vehicleGross Profit Sales less Cost of SalesIncome Amount of sales made in the current financial yearregardless of whether cash has been received or not

Ledger Account An account containing transaction data relating to aspecific type of item whether in the Profit and Loss orBalance sheet The full list of ledger accounts for abusiness is called the businessrsquos Chart of AccountsLiability Amounts owed to entities outside of the business egbank loan supplier payments amp overdraftsLong-term Liability Long-term liability (items or amounts to be paid after 12months) eg bank loanNet Profit Gross Profit less Expenses Amount to be carried overto retained earnings at the end of each financial yearOwnerrsquos Equity Net worth of the business to the ownerReporting Period The 12 month period which the business runs reportsto in a normal year (period may be shorter in start andend years) Normally 1July to 30 June

Retained Earnings Total profits andor losses from start of business to dateTrial Balance A list of all the businessrsquos account balances whichshould net to zero ie should lsquobalancersquo

2

DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment60

5BASIC ACCOUNTING PRINCIPLES50 INTRODUCTIONWe have studied economic activities which have been convertedinto business activities In business activity a lot of ldquogive amptakerdquo exist which is known as transaction Transaction involvestransfer of money or moneyrsquos worth Thus exchange of moneygoods amp services between the parties is known to have resultedin a transaction It is necessary to record all these transactionsvery systematically amp scientifically so that the financialrelationship of a business with other persons may be properlyunderstood profit amp loss and financial position of the businessmay be worked out at a particular date The procedure to record

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

Monies received but not yet cleared through the bankSupplier invoices not yet paidCustomer receipts not yet receivedWe hope you have found this brief introduction useful If you would like more information on EasyPCTrainingrsquos range of courses or consultancy services please contact us atPO Box 154 Northgate QLD 4013 web wwweasypctrainingcomaue-mail infoeasypctrainingcomauAccounting Basics Page 12Business amp AdministrationGlossaryAccounting Equation All accounting entries made in the books of account of abusiness have a relationship based on the accountingequation Assets = Liabilities + Ownerrsquos EquityAsset Tangible or intangible items of value owned by abusiness eg cash stock buildings amp vehiclesBalance Sheet Shows a snapshot at a given point in time of the networth of the business It details the assets liabilities and

ownerrsquos equityCapital Amount invested in the business (usually at start up butmay include additional funds raised)Conversion Period The period (month) in which the accounts are beingconverted or transferred over from one system toanotherCost of Sales Expenses in the financial year which can be directlyattributed to sales of those goods or servicesCredit Revenue in the Profit and Loss or Liability in theBalance sheetCreditor Amount owed to a supplier from the businessCurrent Asset Short-term asset (items or amounts to be used orreceived within 12 months) eg stock or cashCurrent Liability Short-term liability (items or amounts to be paid within12 months) eg supplier or bank overdraftDebit Expenses in the Profit and Loss or Asset in the Balance

sheetDebtor Amount owed to the business from a customerDouble EntryBookkeepingSystem of bookkeeping where all transaction have 2entries a debit and a credit which net to zeroExpense Amount relating to expenditure for the financial year(excluding purchases of assets or cost of sales)regardless of whether cash has been paid or notFixed Asset Long-term asset (items or amounts to be used orAccounting Basics Page 13Business amp Administrationreceived after 12 months) eg building or vehicleGross Profit Sales less Cost of SalesIncome Amount of sales made in the current financial yearregardless of whether cash has been received or not

Ledger Account An account containing transaction data relating to aspecific type of item whether in the Profit and Loss orBalance sheet The full list of ledger accounts for abusiness is called the businessrsquos Chart of AccountsLiability Amounts owed to entities outside of the business egbank loan supplier payments amp overdraftsLong-term Liability Long-term liability (items or amounts to be paid after 12months) eg bank loanNet Profit Gross Profit less Expenses Amount to be carried overto retained earnings at the end of each financial yearOwnerrsquos Equity Net worth of the business to the ownerReporting Period The 12 month period which the business runs reportsto in a normal year (period may be shorter in start andend years) Normally 1July to 30 June

Retained Earnings Total profits andor losses from start of business to dateTrial Balance A list of all the businessrsquos account balances whichshould net to zero ie should lsquobalancersquo

2

DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment60

5BASIC ACCOUNTING PRINCIPLES50 INTRODUCTIONWe have studied economic activities which have been convertedinto business activities In business activity a lot of ldquogive amptakerdquo exist which is known as transaction Transaction involvestransfer of money or moneyrsquos worth Thus exchange of moneygoods amp services between the parties is known to have resultedin a transaction It is necessary to record all these transactionsvery systematically amp scientifically so that the financialrelationship of a business with other persons may be properlyunderstood profit amp loss and financial position of the businessmay be worked out at a particular date The procedure to record

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

ownerrsquos equityCapital Amount invested in the business (usually at start up butmay include additional funds raised)Conversion Period The period (month) in which the accounts are beingconverted or transferred over from one system toanotherCost of Sales Expenses in the financial year which can be directlyattributed to sales of those goods or servicesCredit Revenue in the Profit and Loss or Liability in theBalance sheetCreditor Amount owed to a supplier from the businessCurrent Asset Short-term asset (items or amounts to be used orreceived within 12 months) eg stock or cashCurrent Liability Short-term liability (items or amounts to be paid within12 months) eg supplier or bank overdraftDebit Expenses in the Profit and Loss or Asset in the Balance

sheetDebtor Amount owed to the business from a customerDouble EntryBookkeepingSystem of bookkeeping where all transaction have 2entries a debit and a credit which net to zeroExpense Amount relating to expenditure for the financial year(excluding purchases of assets or cost of sales)regardless of whether cash has been paid or notFixed Asset Long-term asset (items or amounts to be used orAccounting Basics Page 13Business amp Administrationreceived after 12 months) eg building or vehicleGross Profit Sales less Cost of SalesIncome Amount of sales made in the current financial yearregardless of whether cash has been received or not

Ledger Account An account containing transaction data relating to aspecific type of item whether in the Profit and Loss orBalance sheet The full list of ledger accounts for abusiness is called the businessrsquos Chart of AccountsLiability Amounts owed to entities outside of the business egbank loan supplier payments amp overdraftsLong-term Liability Long-term liability (items or amounts to be paid after 12months) eg bank loanNet Profit Gross Profit less Expenses Amount to be carried overto retained earnings at the end of each financial yearOwnerrsquos Equity Net worth of the business to the ownerReporting Period The 12 month period which the business runs reportsto in a normal year (period may be shorter in start andend years) Normally 1July to 30 June

Retained Earnings Total profits andor losses from start of business to dateTrial Balance A list of all the businessrsquos account balances whichshould net to zero ie should lsquobalancersquo

2

DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment60

5BASIC ACCOUNTING PRINCIPLES50 INTRODUCTIONWe have studied economic activities which have been convertedinto business activities In business activity a lot of ldquogive amptakerdquo exist which is known as transaction Transaction involvestransfer of money or moneyrsquos worth Thus exchange of moneygoods amp services between the parties is known to have resultedin a transaction It is necessary to record all these transactionsvery systematically amp scientifically so that the financialrelationship of a business with other persons may be properlyunderstood profit amp loss and financial position of the businessmay be worked out at a particular date The procedure to record

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

sheetDebtor Amount owed to the business from a customerDouble EntryBookkeepingSystem of bookkeeping where all transaction have 2entries a debit and a credit which net to zeroExpense Amount relating to expenditure for the financial year(excluding purchases of assets or cost of sales)regardless of whether cash has been paid or notFixed Asset Long-term asset (items or amounts to be used orAccounting Basics Page 13Business amp Administrationreceived after 12 months) eg building or vehicleGross Profit Sales less Cost of SalesIncome Amount of sales made in the current financial yearregardless of whether cash has been received or not

Ledger Account An account containing transaction data relating to aspecific type of item whether in the Profit and Loss orBalance sheet The full list of ledger accounts for abusiness is called the businessrsquos Chart of AccountsLiability Amounts owed to entities outside of the business egbank loan supplier payments amp overdraftsLong-term Liability Long-term liability (items or amounts to be paid after 12months) eg bank loanNet Profit Gross Profit less Expenses Amount to be carried overto retained earnings at the end of each financial yearOwnerrsquos Equity Net worth of the business to the ownerReporting Period The 12 month period which the business runs reportsto in a normal year (period may be shorter in start andend years) Normally 1July to 30 June

Retained Earnings Total profits andor losses from start of business to dateTrial Balance A list of all the businessrsquos account balances whichshould net to zero ie should lsquobalancersquo

2

DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment60

5BASIC ACCOUNTING PRINCIPLES50 INTRODUCTIONWe have studied economic activities which have been convertedinto business activities In business activity a lot of ldquogive amptakerdquo exist which is known as transaction Transaction involvestransfer of money or moneyrsquos worth Thus exchange of moneygoods amp services between the parties is known to have resultedin a transaction It is necessary to record all these transactionsvery systematically amp scientifically so that the financialrelationship of a business with other persons may be properlyunderstood profit amp loss and financial position of the businessmay be worked out at a particular date The procedure to record

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

Ledger Account An account containing transaction data relating to aspecific type of item whether in the Profit and Loss orBalance sheet The full list of ledger accounts for abusiness is called the businessrsquos Chart of AccountsLiability Amounts owed to entities outside of the business egbank loan supplier payments amp overdraftsLong-term Liability Long-term liability (items or amounts to be paid after 12months) eg bank loanNet Profit Gross Profit less Expenses Amount to be carried overto retained earnings at the end of each financial yearOwnerrsquos Equity Net worth of the business to the ownerReporting Period The 12 month period which the business runs reportsto in a normal year (period may be shorter in start andend years) Normally 1July to 30 June

Retained Earnings Total profits andor losses from start of business to dateTrial Balance A list of all the businessrsquos account balances whichshould net to zero ie should lsquobalancersquo

2

DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment60

5BASIC ACCOUNTING PRINCIPLES50 INTRODUCTIONWe have studied economic activities which have been convertedinto business activities In business activity a lot of ldquogive amptakerdquo exist which is known as transaction Transaction involvestransfer of money or moneyrsquos worth Thus exchange of moneygoods amp services between the parties is known to have resultedin a transaction It is necessary to record all these transactionsvery systematically amp scientifically so that the financialrelationship of a business with other persons may be properlyunderstood profit amp loss and financial position of the businessmay be worked out at a particular date The procedure to record

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

Retained Earnings Total profits andor losses from start of business to dateTrial Balance A list of all the businessrsquos account balances whichshould net to zero ie should lsquobalancersquo

2

DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment60

5BASIC ACCOUNTING PRINCIPLES50 INTRODUCTIONWe have studied economic activities which have been convertedinto business activities In business activity a lot of ldquogive amptakerdquo exist which is known as transaction Transaction involvestransfer of money or moneyrsquos worth Thus exchange of moneygoods amp services between the parties is known to have resultedin a transaction It is necessary to record all these transactionsvery systematically amp scientifically so that the financialrelationship of a business with other persons may be properlyunderstood profit amp loss and financial position of the businessmay be worked out at a particular date The procedure to record

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment60

5BASIC ACCOUNTING PRINCIPLES50 INTRODUCTIONWe have studied economic activities which have been convertedinto business activities In business activity a lot of ldquogive amptakerdquo exist which is known as transaction Transaction involvestransfer of money or moneyrsquos worth Thus exchange of moneygoods amp services between the parties is known to have resultedin a transaction It is necessary to record all these transactionsvery systematically amp scientifically so that the financialrelationship of a business with other persons may be properlyunderstood profit amp loss and financial position of the businessmay be worked out at a particular date The procedure to record

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

all these transactions is known as ldquoBook-keepingrdquoIn other words the book keeping may be defined as an activityconcerned with the recording of financial data relating tobusiness operations in an orderly manner Book keeping isthe recording phase of accounting Accounting is based on anefficient system of book keepingAccounting is the analysis amp interpretation of book keepingrecords It includes not only the maintenance of accountingrecords but also the preparation of financial amp economicinformation which involves the measurement of transactionsamp other events relating to entryThere are various terminology used in the Accounting whichare being explained as under -1) Assets An asset may be defined as anything of use inthe future operations of the enterprise amp belonging toMODULE - 1Business EnvironmentNotes61Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

the enterprise Eg land building machinery cash etc2) Equity In broader sense the term equity refers to totalclaims against the enterprise It is further divided intotwo categoriesi Owner Claim - Capitalii Outsiderrsquos Claim ndash LiabilityCapital The excess of assets over liabilities of theenterprise It is the difference between the total assetsamp the total liabilities of the enterprise eg if on aparticular date the assets of the business amount to Rs100 lakhs amp liabilities to Rs 30000 then the capital onthat date would be Rs70000-Liability Amount owed by the enterprise to the outsidersie to all others except the owner eg trade creditorbank overdraft loan etc3) Revenue It is a monetary value of the products or servicessold to the customers during the period It results fromsales services amp sources like interest dividend ampcommission4) ExpenseCost Expenditure incurred by the enterpriseto earn revenue is termed as expense or cost The

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

difference between expense amp asset is that the benefit ofthe former is consumed by the business in the presentwhereas in the latter case benefit will be available forfuture activities of the business eg Raw materialconsumables amp salaries etc5) Drawings Money or value of goods belonging to businessused by the proprietor for his personal use6) Owner The person who invests his money or moneyrsquosworth amp bears the risk of the business7) Sundry Debtors A person from whom amounts are duefor goods sold or services rendered or in respect of acontractual obligation It is also known as debtor tradedebtor accounts receivable8) Sundry Creditors It is an amount owed by the enterpriseon account of goods purchased or services rendered or inrespect of contractual obligations eg trade creditoraccounts payableDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment6251 OBJECTIVESAt the end of this lesson you will be able

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

1048698 To maintain the books of accounts1048698 To prepare the annual accounts52 ACCOUNTING CYCLEAfter taking decisions such as selecting a business selectingthe form of organisation of business making decision aboutthe amount of capital to be invested selectingsuitable siteacquiring equipment amp supplies selecting staff gettingcustomers amp selling the goods etc a business man finallyresorts to record keepingFor all types of business organisations transactions such aspurchases sales manufacturing amp selling expenses collectionfrom customers amp payments to suppliers do take place Thesebusiness transactions are recorded in a set of ruled bookssuch as journal ledger cash book etc Unless thesetransactions are recorded properly he will not be in a positionto know where exactly he standsThe following is the complete cycle of Accountinga) The opening balances of accounts from the balance sheetamp day to day business transaction of the accounting yearare first recorded in a book known as journal

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

b) Periodically these transactions are transferred toconcerned accounts known as ledger accountsc) At the end of every accounting year these accounts arebalanced amp the trial balance is preparedd) Then the final accounts such as trading amp profit amp lossaccounts are preparede) Finally a balance sheet is made which gives the financialposition of the business at the end of the periodTransaction Journal Ledger Trial BalanceBalance Sheet Opening Balance Sheet Closing P amp L ac Trading AcMODULE - 1Business EnvironmentNotes63Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES53 ACCOUNTING ASSUMPTIONSIn the modern world no business can afford to remain secretivebecause various parties such as creditors employeesGovernment investors amp public are interested to know aboutthe affairs of the business The affairs of the business can bestudied mainly by consulting final accounts and the balancesheet of the particular business Final accounts amp the balance

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

sheet are the end products of book keeping Because of theimportance of these statements it became necessary for theaccountants to develop some principles concepts andconventions which may be regarded as fundamentals ofaccounting The need for generally accepted accountingprinciples arises from two reasons1) to be logical amp consistent in recording the transaction2) to conform to the established practices amp proceduresThe International Accounting Standards Committee (IASC) aswell as the Institute of Chartered Accountants of India (ICAI)treat (vide IAS-I amp AS-I) the following as the fundamentalassumptions1 Going Concern In the ordinary course accountingassumes that the business will continue to exist amp carryon its operations for an indefinite period in the futureThe entity is assumed to remain in operation sufficientlylong to carry out its objects and plans The values attachedto the assets will be on the basis of its current worth The

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

assumption is that the fixed assets are not intended forre-sale Therefore it may be contended that a balancesheet which is prepared on the basis of record of facts onhistorical costs cannot show the true or real worth of theconcern at a particular date The underlying principlethere is that the earning power and not the cost is thebasis for valuing a continuing business The business isto continue indefinitely and the financial and accountingpolicies are followed to maintain the continuity of thebusiness unit2 Consistency There should be uniformity in accountingprocesses and policies from one period to another Materialchanges if any should be disclosed even though there isimprovement in technique Only when the accountingprocedures are adhered to consistently from year to yearDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment64the results disclosed in the financial statements will be

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

uniform and comparable3 Accrual Accounting attempts to recognize non-cashevents and circumstances as they occur Accrual isconcerned with expected future cash receipts andpayments It is the accounting process of recognizingassets liabilities or income amounts expected to bereceived or paid in future Common examples of accrualsinclude purchases and sales of goods or services on creditinterest rent (unpaid) wages and salaries taxes Thuswe make record of all expenses and incomes relating tothe accounting period whether actual cash has beendisbursed or received or notIn order to keep a complete record of the entiretransactions of any business it is necessary to keep thefollowing accountsa) Assets Accounts These accounts relate to tangible andintangible assets eg Land ac building ac cash acgoodwill patents etcb) Liabilities Accounts These accounts relate to thefinancial obligations of an enterprise towards outsiderseg trade creditors outstanding expenses bank overdraftlong-term loans

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

c) Capital Accounts These accounts relate to the owners ofan enterprise eg Capital ac drawing acd) Revenue Accounts These accounts relate to the amountcharged for goods sold or services rendered or permittingothers to use enterprisersquos resources yieldinginterest royalty or dividend eg Sales ac discountreceived ac dividend received ac interest received ace) Expenses Account These accounts relate to the amountspent or lost in the process of earning revenue egPurchases ac discount allowed ac royalty paid acinterest payable ac loss by fire ac54 SYSTEMS OF RECORDINGThere are three methods of recording of entries which areexplained as underSingle Entry System This system ignores the two fold aspectof each transaction as considered in double entry systemMODULE - 1Business EnvironmentNotes65Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESUnder single entry system merely personal aspects of

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

transaction ie personal accounts are recorded This methodtakes no note of the impersonal aspects of the transactionsother than cash It offers no check on the accuracy of theposting and no safeguard against fraud and because it doesnot provide any check over the recording of cash transactions it is called as ldquoimperfect accountingrdquoDouble entry system The double entry system was first evolvedby Luca Pacioli who was a Franciscan Monk of Italy With thepassage of time the system has gone through lot ofdevelopmental stages It is the only method fulfilling all theobjectives of systematic accounting It recognizes the two foldaspect of every business transactionIndian (Deshi Nama) system This is the Indian system Itdiffers from region to region community to community andfrom business to business Under this system books are writtenin regional languages such as Muriya Sarafi etc Books arecalled ldquoBahisrdquo It is older than double entry system and iscomplete in itself

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

55 BASIS OF ACCOUNTING SYSTEMCash or receipt basis is the method of recording transactionsunder which revenues and costs and assets and liabilities arereflected in accounts in the period in which actual receipts oractual payments are made ldquoReceipts and payments accountrdquoin case of clubs societies hospitals etc is the example ofcash basis of accountingAccrual or mercantile basis is the method of recordingtransactions by which revenues costs assets and liabilitiesare reflected in accounts in the period in which they accrueThis basis includes considerations relating to outstandingprepaid accrued due and received in advanceHybrid or mixed basis is the combination of both the basisie cash as well as mercantile basis Income is recorded oncash basis but expenses are recorded on mercantile basis56 CLASSIFICATION OF ACCOUNTSThe classification of accounts and rules of debit and creditbased on such classification are given belowDIPLOMA IN INSURANCE SERVICES

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

MODULE - 1NotesBasic Accounting PrinciplesBusiness Environment66Classification of accountsACCOUNTSPersonal ImpersonalReal NominalPersonal AccountsAccounts recording transactions relating to individuals or firmsor company are known as personal accounts Personal accountsmay further be classified as(i) Natural Personrsquos personal accounts The accountsrecording transactions relating to individual human beingseg Anandrsquos ac Rameshrsquos ac Pankaj ac are classifiedas natural personsrsquo personal accounts(ii) Artificial Personsrsquo Personal accounts The accountsrecording transactions relating to limited companiesbank firm institution club etc Delhi Cloth Mill MsSahoo amp Sahoo Hans Raj College Gymkhana Club areclassified as artificial personsrsquo personal accounts(iii) Representative Personal Accounts The accountsrecording transactions relating to the expenses and

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

incomes are classified as nominal accounts But in certaincases (due to the matching concept of accounting) theamount on a particular date is payable to the individualsor recoverable from individuals Such amount (i) relatesto the particular head of expenditure or income and (ii)represent persons to whom it is payable or from whom itis recoverable Such accounts are classified asrepresentative personal accounts eg ldquowages outstandingaccountrdquo pre-paid Insurance account etcReal Accounts The accounts recording transactions relatingto tangible things (which can be touched purchased and sold)such as goods cash building machinery etc are classifiedas tangible real accountsWhereas the accounts recording transactions relating tointangible things (which do not have physical shape) such asMODULE - 1Business EnvironmentNotes67Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

goodwill patents and copy rights trade marks etc areclassified as intangible real accountsNominal Accounts The accounts recording transactionsrelating to the losses gains expenses and incomes eg Rentsalaries wages commission interest bad debts etc areclassified as nominal accountsRules of debit and credit (classification based)1 Personal accounts Debit the receiverCredit the giver (supplier)2 Real accounts Debit what comes inCredit what goes out3 Nominal accounts Debit expenses and lossesCredit incomes and gainsLet us consider the following example to illustrate how therules of debit and credit are applied in practiceIllustration 1Rs1 Mr A commenced business with cash 700002 Purchased goods on credit from Mr B 140003 Paid wages 5004 Paid to Mr B 100005 Purchased furniture 10006 Goods stolen by the Store-keeper 2007 Received commission 100DIPLOMA IN INSURANCE SERVICESMODULE - 1Notes

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

Basic Accounting PrinciplesBusiness Environment68(a) (b) (c) (d) (e)S No Explanation Account Equation based Classification basedInvolved analysis analysisGroup Effect Rule Group EffectI1 Business Cash amp Assets Increase 1 Real Comes incommenced with Capital Personal Increase 3 Personal Givercash Rs700002 Purchased goods Goods amp Assets Increase 1 Real Comes inon credit from Mr B Liability Increase 2 Personal GiverRs 140003 Paid wages Rs 500 Wages amp Expenses Increase 4 Nominal ExpensesCash Asset Decrease 1 Personal go out4 Paid to Mr B Mr B amp Liability Decrease 2 Personal ReceiverRs10000 Cash Asset Decrease 1 Real Goes out5 Purchased furniture Furniture Assets Increase 1 Real Comes infor cash Rs1000 amp Cash Assets Decrease 1 Real Goes out6 Goods stolen by Loss of Loss Increase 4 Nominal Lossstore-keeper Goods amp Asset Decrease 1 Real Goes outRs200 Goods7 Received Cash amp Assets Increase 1 Real Comes incommission Commis- Income Increase 5 Nominal IncomeRs100 sion57 JOURNALJournal is a book which lists accounting transactions of abusiness other than cash before posting them to ledgers Thejournal is currently only used to a limited extent to cover item

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

outside the scope of other accounting books Let us understandthe mechanism of recording business transaction in a journalExampleBusiness transactions of MrA for the month of Jan19971st January 1997 A started business with cash Rs20000-3rd January 1997 Goods purchased for cash Rs6000-5th January 1997 Goods purchased from S Rs4000-7th January1997 Goods sold for cash Rs2000-10th January 1997 Goods sold to B Rs6000-12th January 1997 Cash paid to S Rs2000-MODULE - 1Business EnvironmentNotes69Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES17th January 1997 Cash received from B Rs4000-23rd January 1997 Paid wages Rs100-25th January 1997 Furniture purchased from R Rs400-28th January 1997 Paid for interest Rs200-31st January 1997 Paid salaries Rs200-Journal EntriesDate Particulars Ledger Folio Dr Amount Cr Amount(Rs) (Rs)1997 Cash Ac Dr 20000-Jan 1 To Capital Ac 20000-(Being cash introduced by A)Jan3 Purchase Ac Dr 6000-To Cash Ac 6000-(Being cash purchases)Jan5 Purchase Ac Dr 4000-To Srsquos Ac 4000-

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

(Being credit purchase from S)Jan7 Cash Ac Dr 2000-To sales Ac 2000-(Being cash sales)Jan10 Brsquos Ac Dr 6000-To Sales Ac 6000-(Being the amount of credit sales)Jan12 Srsquos Ac Dr 2000-To Cash Ac 2000-(Being the amount of credit sales)Jan17 Cash Ac Dr 4000-To Brsquos Ac 4000-(Being receipt of cash from B)Jan23 Wages Ac Dr 100-To Cash Ac 100-(Being payment of wages in cash)Jan25 Furniture Ac Dr 400-To Rrsquos Ac 400-(Being purchase of furnitureon credit from R)Jan28 Interest Ac Dr 200-To Cash Ac 200-(Being payment of interest by cash)Jan31 Salaries Ac Dr 200-To Cash ac 200-(Being payment of salaries by cash)DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment7058 CASH BOOKAll business dealings ultimately resolve themselves into cash

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

transactions therefore recording of cash transactions in aseparate book becomes necessary To keep record of all receiptsand payments of money in business cash book is maintainedCash book with regard to the nature of business and themanner in which the cash is dealt with Money receipts areentered on debit side and payments are shown on the creditsideThere are three distinct types of Cash Book and each businesscould get its cash book ruled in a manner as would suit itsown requirements Thus the Cash Book may be ruled so as topossessndash Cash and Discount columns only on both sides orndash Cash Bank and Discount columns on both sides orndash Bank and Discount columns only on both sides59 PRINCIPAL BOOK LEDGERA ledger is a group of accounts Most of us have probably seena bound book with the word lsquoledgerrsquo printed on the cover Allthe accounts of a small businessindustry could be enteredin a ledger in concerned accounts in a summarised and

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

classified formFrom the journal a trader cannot know his total cashpurchases amount spent under each head of expense andamount earned under each head of income The journal willnot tell him what he owes to his creditors and what hiscustomers owe to him Such classified information can be gotonly by opening ledger accounts for every kind of transactionEvery ledger has two sides namely debit and credit Left handside is debit and right hand side is credit Each side of theledger has columns on date particulars journal folio andamount- In the particulars column of the debit side the nameof the account from which benefit is received is recorded andon the credit side the name of the account to which benefit isgiven is recorded The words lsquoTorsquo and lsquoByrsquo are affixed to thename of the amount entered on debit and credit sidesrespectivelyIf a business is not able to accommodate all its accounts inMODULE - 1Business EnvironmentNotes

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

71Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESone ledger it can have more than one ledgers Business mayhave an lsquoaccounts receivable ledgerrsquo an lsquoaccounts payableledgerrsquo and a lsquogeneral ledgerrsquo each containing the group ofaccounts suggested by the title The ledger is not necessarilya bound book it may consist of a set of loose leaf pages a setof punched cards or if computerised a set of impulses on amagnetic tape No matter what its form may be the essentialcharacter of the account and the rules for making entries to itremain exactly the same(i) Ledger PostingTransferring the entries from the journal or a subsidiarybook to the ledger is known as posting Posting the ledgerfrom journal is easy as the transactions in the journalare already classified into debit and credit However thefollowing points must be noted while posting the ledgerndash For the same person or expense only one accountshould be opened

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

ndash Cash and credit sales should be posted to SalesAccount and cash and credit purchases to PurchaseAccountndash The word Debit as Dr and Credit as Cr should notbe omittedndash Date and folio columns should not be left blank(ii) Balancing of Ledger Accounts At periodic intervals the debit and credit sides of individualledger accounts are totalled and balance of each accountindicated If the total of the debit side of any account ismore than the credit side there will be a debit balanceand if the credit side is more than the debit side therewill be credit balanceWith the help of the illustration which we took forrecording journal entries let us see how the ledgerpostings and balancing will be doneBased on the illustration the following accounts need tobe opened in ledgerDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment72Dr Capital Ac CrDate Particulars JF Amount Date Particulars JF AmountRs RsTo balance cd 20000- By Cash 20000-

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

20000- 20000-Feb1 By balance 20000-bfDr Cash Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 To capital 20000 1997 By purchase 6000Jan1 To sales 2000 Jan3 By S 2000Jan7 To B 4000 Jan12 By wages 100Jan17 Jan23 By interest 200Jan28 By salaries 200Jan31 By bal cd 200Jan31 1750026000 26000Feb1 To bal bf 17500Dr Purchase Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan3 To cash 6000 Jan 31 By balance cd 10000Jan5 To S 4000 1000010000Feb1 To bal bf 10000Dr Sales Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To balance 8000 Jan7 By cash 20008000 Jan10 By B 60008000Feb1 By bal bf 8000Dr Srsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan12 To cash 2000 Jan5 By Purchase 4000Jan31 To bal cd 20004000 4000Feb1 By bal bf 2000

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

MODULE - 1Business EnvironmentNotes73Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESDr Brsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan10 To sales 6000 Jan17By cash 4000Jan31By bal cd 20006000 6000Feb1 To bal bf 2000Dr Wages Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan23 To cash 100 Jan31By bal cd 100100 100Feb1 To bal bf 100Dr Furniture Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan25 To R 400 Jan31By bal cd 400400 400Feb1 To bal bf 400Dr Interest Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan28 To Cash 200 Jan31By bal cd 200200 200Feb1 To bal bf 200Dr Rrsquos Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

1997 1997Jan31 To bal cd 400 Jan25 By furniture 400400 400Feb1 By bal bf 400Dr Salaries Ac CrDate Particulars JF Amount Date Particulars JF AmountRs Rs1997 1997Jan31 To Cash 200 Jan31 By bal cd 200200 200Feb1 To bal bf 200DIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment74510 FINAL ACCOUNTSThe final accounts of a business consists of (i) Manufacturing Account(ii) Trading Account(iii) Profit and Loss Account(iv) Balance SheetBefore we look into the process of preparing final accounts wemust understand the meaning and importance of Trial BalanceThe Trial BalanceThe trial balance is simply a list of names of the accounts andthe balances in each account as at a given moment of timewith debit balances in one column and credit balances in

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

another column The preparation of trial balance serves twoprincipal purposes (i) it shows whether the equality of debitsand credits has been maintained and (ii) it provides aconvenient transcript of the ledger record as a basis for makingadjustments and closing entries for preparation of finalaccountsWhen the total debits equal total credits it does not meanthat there has been no error in recording the transactionsEntries may have been omitted entirely they may have beenposted to the wrong accounts off-setting errors may have beenmade or the transactions may have been analysed incorrectlyFor example when a debit for purchase of a truck is madeincorrectly to an expense account rather than correctly to afixed assets account the total of the trial balance is not affectedNevertheless errors that result in unequal debits and creditsare common and the existence of such errors is revealed whena trial balance does not balance that is when the debit column

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

does not add to the same total as the credit columnA trial balance may be prepared at any time A pre-adjustmenttrial balance is one prepared after the original entries for theperiod have been posted but prior to the adjusting and closingprocess A post closing trial balance is prepared after theclosing process(i) Manufacturing Account When a concern is engaged in both production and sellingMODULE - 1Business EnvironmentNotes75Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESactivities it will have to open a manufacturing account in thegeneral ledger The manufacturing account is prepared in thefollowing mannerManufacturing Account of Ms ______________ for the periodfrom __________ to __________ Dr CrParticulars Amount Particulars AmountRs RsTo Opening stock of By Closing stock ofmaterials ______ work in progress mdashmdashmdashTo Opening stock ofwork in progress mdashmdashmdash

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

To Purchases mdashmdashmdash By Cost of manufacturing (BF)Less Purchases returns mdashmdashmdash mdashmdashmdash mdashmdashmdashTo Carriage inward mdashmdashmdashTo Manufacturing wages mdashmdashmdashTo Factory rent mdashmdashmdashTo Power mdashmdashmdashTo Fuel mdashmdashmdashTo Coal mdashmdashmdashTo Water mdashmdashmdashTo Factory insurance mdashmdashmdashmdashmdashmdash mdashmdashmdashManufacturing Account is balanced by adding debit side andfinding the excess of debit over credit The excess of debit overcredit will indicate the cost of manufacturing of the finishedgoods This balancing figure will be inserted in the credit sideof the Manufacturing Account preceded by the word lsquoBy costof manufacturingrsquo during the period transferred to TradingAccount and the same figure will also be written on the debitside of a lsquoTrading Accountrsquo to be opened in General Ledger Inthe Trading Account this figure will be preceded by the wordlsquoTo cost of production transferred from the ManufacturingAccountrsquo Thus Manufacturing Account is closed and the cost

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

of production of finished goods during the period is transferredto the Trading Account The debit balance of (a) opening stockof finished goods (b) purchase less returns (c) nominalaccounts representing cost incurred in connection withpurchase of materialsgoods like carriage inward on suchDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment76purchase etc will then be cleared by crediting these accountsand debiting the Trading Account(ii) Trading AccountWhen a concern is engaged in trading activities only therewill be no Manufacturing Account The Trading Account on itsdebit side will show certain entries regarding opening stock(of saleable goods) purchase less returns and expenses relatingto purchase viz freight duty carriage inward etcThe credit balance of sales account (less the debit balance of

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

sales return accounts) will then be transferred to TradingAccount by debiting the former account and crediting the latteraccountThe excess of credit total of trading account over the debittotal is called the gross profit This amount is computed andan entry is passed by debiting this amount to Trading Account(preceded by the word lsquoTo Gross Profit transferred to Profitand Loss Accountrsquo) and crediting the Profit and Loss Account(preceded by the word lsquoBy Gross Profit brought over fromTrading Accountrsquo) The Trading Account thus indicates thegross result from selling of the goods(iii) Profit and Loss AccountAt this stage Profit and Loss Account stands credited withgross profit The Profit and Loss Account also stands adjustedwith some of the adjustment entries like bad debtsdepreciation insurance rent etc All the debit and creditbalances lying in different nominal accounts are thentransferred to Profit and Loss Account The debit balances are

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

closed by entering the respective word lsquoBy Profit and LossAccountrsquo The respective amounts are also entered on the debitside of the Profit and Loss Account preceded by the words To The credit balance of nominal accounts aresimilarly closed by passing debit entries to the respectivenominal accounts preceded by the word lsquoTo Profit and LossAccountrsquo In the credit side of the ldquoProfit and Loss Accountrdquothe corresponding credit entries are inserted preceded by theword lsquoBy rsquoThus the Profit and Loss Account on its credit shows GrossMODULE - 1Business EnvironmentNotes77Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProfit and items of miscellaneous incomes and on its debitshows Gross Loss and expenses incidental to carrying of thebusiness and arising in course of running the business The

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

excess of credit side over the debit side is known as net profitand the excess of debit side over the credit side is known asnet loss The net profit or net loss is transferred to CapitalAccounts) in case of proprietary or partnership business andto an account called Profit and Loss Appropriation Account incase of corporate businessProforma of Profit amp Loss AccountProfit and Loss Account of Ms helliphelliphelliphelliphelliphelliphelliphelliphellip for theyear ending helliphelliphelliphelliphelliphelliphelliphelliphellipDr CrParticulars Amount Particulars AmountRs RsTo Trading Ac (Gross Loss) By Trading Ac (Gross Profit)To Travelling expAc By Commission (Received)To Salaries amp Wages Ac By Interest Ac (Received)To Audit Fee Ac By Discount Ac (Received)To printing charges Ac By Rent Ac (Received)To Office establishment Ac By Net Loss (trans-To Discount Paid Ac ferred to Capital AcTo Advertisement Ac or Profit amp LossTo Insurance Ac Appropriation Ac)To Carriage outward AcTo Dock dues outward AcTo Depreciation AcTo Bad debts AcTo Repair acTo Office lighting AcTo Postage Telegram AcTo Interest PaidTo Legal charges Ac

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

To Stationary AcTo Trade expenses AcTo Bank charges AcRates and taxes AcDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment78To Brokerage AcTo Sundry expenses AcTo Rent AcTo Duty on exported goods AcTo Net Profit (transferredto Capital Ac or Profitamp Loss Appropriation Ac)(iv) The Balance SheetA balance sheet shows the financial position of an organisationas on a specified moment of time in fact it is sometimes calleda statement of financial position It is therefore a status reportrather than a flow reportAfter Trial Balance is prepared adjustments entries passedand revenue accounts drawn up all the nominal accountswill stand closed The accounts still remaining open in thegeneral ledger will represent either personal accounts or real

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

accounts The balance remaining after the preparations ofTrading and Profit and Loss Account in the Trial Balancerepresents either assets or liabilities existing on the date ofthe closing of the accounts When they are arranged in a propermanner the resultant statement is called lsquoBalance SheetrsquoThe balance sheet is a statement of position and strictlyspeaking not a part of double entry system of book keepingNo transfer of ledger accounts balances is therefore necessaryOnly the relevant particulars are extracted from the generalledger The balance sheet is prepared on a certain date andnot for a period Therefore it is true only on the date of itspreparation and not on any other day Secondly the total ofliabilities including capital must be equal to total of assetsotherwise it means that the double entry system of bookkeeping has not been followed properly in respect of all thetransactions

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

A balance sheet represents the assets of the business whetherfixed or current or fictitious on the right hand side andliabilities whether owned or borrowed on the left hand sideThe balance sheet of an organisation can be prepared in thefollowing format MODULE - 1Business EnvironmentNotes79Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICESProforma of Balance SheetBalance Sheet of Ms helliphelliphellipas on helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellipLiabilities Amount Assests AmountRs RsCapital mdash Land+ Fresh Capital mdash Building+ Profit mdash (mdash) Less Depreciation mdash- Losses __ Plant amp Machinery- Drawings __ (mdash) Less Dep mdashTerm Loan mdash Office FurnitureBank Over Draft mdash (mdash) Less Dep mdashCreditors mdash Stock in TradeBills Payables mdash Sundry DebtorsOutstanding mdash (mdash) Less Reserve forOther Liabilities mdash Doubtful Debtors mdashBills ReceivablesPrepaid Expenses mdash

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

Investments mdashCash at Bank mdashCash in Hand mdashTotal mdashmdashmdash Total mdashmdashmdash511 APPLICATION OF COMPUTERS AND INFORMATIONTECHNOLOGY TO ACCOUNTING AND FINANCIALMANAGEMENTBusiness Accounting and Financial Management are crucialmanagement functions in every enterprise Whether youmanage a small department a major division big companysmall company or your micro enterprise you work withnumbers every day Numbers are the language of businessand industrial enterprises Use of computers in general andelectronic spread sheet in particular can economically andeffectively replace traditional tools of accounting like ledgerpager stubby pencils worn-out erasers desktop calculatorsetc Use of computer and spread sheet in todayrsquos complexbusiness can take you ahead in speed accuracy and capabilityDIPLOMA IN INSURANCE SERVICESMODULE - 1

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

NotesBasic Accounting PrinciplesBusiness Environment80Computer application in accounting and financial managementcan help you in transaction recording financial planninganalysis and forecasting Best of all it gives you a method ofexamining the implications of endless ldquoWhat if rdquo situations -the tough alternatives you face in running your businessprofitably Computer software developing companies havedeveloped a large number of accounting and financialmanagement softwaresA brief account of some of the important soft wares availablein India is given below The basic function of these softwaresis to enter the transactions and the rest of things ie posting balance calculation is done by these software These softwarecan prepare the trail balance cash book balance sheet andprofit and loss account1 Tally2 Easy3 Visipak

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

4 Fact5 Fast6 Ex 30512 SUMMARY OF ACCOUNTING PROCESS(i) The first and the most important part of the accountingprocess is the analysis of transactions ie the process ofdeciding which account or accounts should be debitedwhich should be credited and in what amounts in orderto reflect events in the accounting records This requiresjudgement(ii) Next comes the purely mechanical step of journalisingoriginal entries that is recording the result of the analysis(iii) Next to journalising is ledger posting Posting is the processof recording transactions in the ledger accounts exactlyas specified by the journal entries This is another purelymechanical step(iv) At the end of the accounting period Judgement is involvedin deciding on the adjusting entries and these arejournalised and posted in the same way as original entriesMODULE - 1

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

Business EnvironmentNotes81Basic Accounting PrinciplesDIPLOMA IN INSURANCE SERVICES(v) The closing entries are journalised and posted This isalso a purely mechanical step(vi) Finally the financial statements are required to beprepared This requires judgement and knowledge Theaccuracy of financial statements will depend upon thequality of judgement made as suggested in steps (i) and(ii)513 TERMINAL QUESTIONS1 Discuss the principles of accounting2 Pass the journal entries for the following transactions inthe Books of Mr SKJaina) He Sold old furniture for Rs 5000-b) He received insurance commission of Rs 50000-c) Rent paid by cheque Rs 2000-d) He incurred traveling expenses of Rs 3900-3 Discuss the various financial statements prepared by anyinsurance broker514 OBJECTIVE TYPE QUESTIONS1 Choose the correct optiona Accounting system is either on cash or receipt basisb Accounting system is either accrual or mercantilebasis

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

c Accounting system is either hybrid or mixed basisd All of the above2 Statement A Real accounts are maintained for tangiblethingsStatement B Real accounts are also maintained forintangible thingsa Only A is true b Only B is truec Both are true d Neither of twoDIPLOMA IN INSURANCE SERVICESMODULE - 1NotesBasic Accounting PrinciplesBusiness Environment823 The final accounts of a business consists ofa Trading account b Profit amp loss Accountc Balance Sheet d All of the above4 Statement A Balance sheet is summary of the financialposition as on dateStatement B Profit and loss account shows profit or lossfor the yeara Only A is true b Only B is truec Both are true d Neither of two5 Choose the correct optionsa Single entry system is a system of recording oftransactionsb Double entry system is a system of recording oftransactions

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d

c Indian (desi nama) system is a system of recording oftransactionsd All of the above515 ANSWERS TO INTEXT QUESTIONS511 Technical activities Commercial activities Financialactivities Security activities Accounting activitiesManagerial activities consisting of planning organizingcommanding co-ordaining and controlling2 Planning means looking ahead or to foresee To foreseemeans ldquoboth to assess the future and make provision forit To plan means to foresee and provide means for future516 ANSWERS TO OBJECTIVE TYPE QUESTIONS1d 2 c 3 d 4 c 5 d