PAPER – 1 : PRINCIPLES AND PRACTICE OF ACCOUNTING
(One paper – Three hours – 100 Marks)
OBJECTIVE:
To develop an understanding of the basic concepts and principles of Accounting and apply
the same in preparing financial statements, computing accounting ratios and simple problem
solving.
CONTENTS:
1. Theoretical Framework
(i) Meaning and Scope of accounting
(ii) Accounting Concepts, Principles and Conventions
(iii) Accounting terminology - Glossary
(iv) Capital and revenue expenditure, Capital and revenue receipts, Contingent assets and
contingent liabilities
(v) Accounting Policies
(vi) Accounting as a Measurement Discipline – Valuation Principles, Accounting Estimates.
(vii) Accounting Standards – Concepts and Objectives.
(viii) Indian Accounting Standards – Concepts and Objectives.
2. Accounting Process
(i) Books of Accounts
(ii) Preparation of Trial Balance
(iii) Rectification of Errors.
3. Bank Reconciliation Statement
Introduction, reasons, preparation of bank reconciliation statement.
4. Inventories
Cost of inventory, Net realizable value, Basis and technique of inventory valuation and record
keeping.
5. Concept and Accounting of Depreciation
Concepts, Methods of computation and accounting treatment of depreciation, Change in
depreciation methods.
6. Accounting for Special Transactions
(i) Bills of exchange and promissory notes
Meaning of Bills of Exchange and Promissory Notes and their Accounting Treatment;
Accommodation bills.
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(ii) Sale of goods on approval or return basis
Meaning of goods sent on approval or return basis and accounting treatment.
(iii) Consignments
Meaning and Features of consignment business, Difference between sale and consignment,
Accounting treatments for consignment transactions and events in the books of consignor and
consignee.
(iv) Joint Ventures for non-corporate entities
Meaning and Features of joint venture transactions, Distinction between joint venture and
partnership, Methods of maintaining joint venture accounts.
(v) Royalty accounts
Meaning of the term “Royalty” and Accounting Treatment thereof.
(vi) Average due Date
Meaning, Calculation of average due date in various situations.
(vii) Account Current
Meaning of Account Current, Methods of preparing Account Current.
7. Final Accounts of Sole Proprietors
Elements of financial statements, Closing Adjustment Entries, Trading Account, Profit and Loss
Account and Balance Sheet of Manufacturing and Non-manufacturing entities.
8. Partnership Accounts
(i) Final Accounts of Partnership Firms
(ii) Admission, Retirement and Death of a Partner including Treatment of Goodwill
(iii) Introduction to LLPs and Distinction of LLPs from Partnership.
9. Financial Statements of Not-for-Profit Organizations
Significance of Receipt and Payment Account, Income and Expenditure Account and Balance
Sheet, Difference between Profit and Loss Account and Income and Expenditure Account.
Preparation of Receipt and Payment Account, Income and Expenditure Account and Balance
Sheet.
10. Introduction to Company Accounts
(i) Definition of shares and debentures
(ii) Issue of shares and debentures, forfeiture of shares, re-issue of forfeited shares
(iii) Statement of Profit and Loss and Balance Sheet as per Schedule III to the Companies Act,
2013.
11. Basic Accounting Ratios (profitability, solvency, liquidity and turnover)
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CONTENTS
MODULE 1
CHAPTER 1 : Theoretical Framework
CHAPTER 2 : Accounting Process
CHAPTER 3 : Bank Reconciliation Statement
CHAPTER 4 : Inventories
CHAPTER 5 : Concept and Accounting of Depreciation
CHAPTER 6 : Accounting for Special Transactions
MODULE 2
CHAPTER 7 : Preparation of Final Accounts of Sole Proprietors
CHAPTER 8 : Partnership Accounts
CHAPTER 9 : Financial Statements of Not-For-Profit Organizations
CHAPTER 10 : Company Accounts
CHAPTER 11 : Basic Accounting Ratios
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DETAILED CONTENTS : MODULE–1
Pages
CHAPTER 1: THEORETICAL FRAMEWORK .........................................................................1.1–1.96
Unit 1: Meaning And Scope Of Accounting
Learning Outcomes ...................................................................................................................................................... 1.1
Unit overview.................................................................................................................................................................. 1.2
1.1
Introduction ................................................................................................................................................ 1.2
1.2
Meaning of Accounting ........................................................................................................................... 1.3
1.3
Evolution of Accounting as a Social Science ................................................................................... 1.6
1.4
Objectives of Accounting ....................................................................................................................... 1.7
1.5
Functions of Accounting ......................................................................................................................... 1.8
1.6
Book-Keeping ............................................................................................................................................. 1.8
1.7
Distinction Between Book-Keeping and Accounting ................................................................... 1.9
1.8
Sub-Fields of Accounting......................................................................................................................1.10
1.9
Users of Accounting Information .......................................................................................................1.10
1.10
Relationship of Accounting with other Disciplines .....................................................................1.11
1.11
Limitations of Accounting ....................................................................................................................1.14
1.12
Role of Accountant in the Society .....................................................................................................1.14
Summary ........................................................................................................................................................................1.18
Test Your Knowledge ..................................................................................................................................................1.19
Unit 2 : Accounting Concepts, Principles And Conventions
Learning Outcomes ....................................................................................................................................................1.22
Unit Overview ...............................................................................................................................................................1.23
2.1
Introduction ..............................................................................................................................................1.23
2.2
Accounting Concepts .............................................................................................................................1.24
2.3
Accounting Principles ............................................................................................................................1.24
2.4
Accounting Conventions ......................................................................................................................1.24
2.5
Concepts, Principles and Conventions - An Overview ...............................................................1.25
2.6
Fundamental Accounting Assumptions..........................................................................................1.35
2.7
Financial Statements ..............................................................................................................................1.35
Summary ........................................................................................................................................................................1.39
Test Your Knowledge ..................................................................................................................................................1.39
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Unit 3 : Accounting Terminology – Glossary
Learning Outcomes ...................................................................................................................................................1.43
Accounting Terminology - Glossary ..................................................................................................................... 1.43
Test Your Knowledge ................................................................................................................................................. 1.57
Unit 4 : Capital And Revenue Expenditures And Receipts
Learning Outcomes ...................................................................................................................................................1.58
Unit Overview ...............................................................................................................................................................1.58
4.1
Introduction ............................................................................................................................................. 1.58
4.2
Considerations in Determining Capital and Revenue Expenditures ................................... 1.59
4.3
Capital Expenditures and Revenue Expenditures....................................................................... 1.59
4.4
Capital Receipts and Revenue Receipts ......................................................................................... 1.61
Summary .......................................................................................................................................................................1.64
Test Your Knowledge .................................................................................................................................................1.64
Unit 5 : Contingent Assets And Contingent Liabilities
Learning Outcomes ...................................................................................................................................................1.66
Unit Overview ..............................................................................................................................................................1.66
5.1
Contingent Asset .................................................................................................................................... 1.66
5.2
Contingent Liabilities ............................................................................................................................ 1.67
5.3
Distinction Between Contingent Liabilities and Liabilities ..................................................... 1.67
5.4
Distinction Between Contingent Liabilities and Provisions .....................................................1.67
Test Your Knowledge ..................................................................................................................................................1.68
Unit 6 : Accounting Policies
Learning Outcomes ...................................................................................................................................................1.70
Unit Overview ...............................................................................................................................................................1.70
6.1
Meaning ..................................................................................................................................................... 1.70
6.2
Selection of Accounting Policies ....................................................................................................... 1.71
6.3
Change in Accounting Policies .......................................................................................................... 1.71
Summary .......................................................................................................................................................................1.72
Test Your Knowledge .................................................................................................................................................1.72
Unit 7 : Accounting As A Measurement Discipline – Valuation Principles, Accounting Estimates
Learning Outcomes ...................................................................................................................................................1.74
Unit Overview ..............................................................................................................................................................1.74
7.1
Meaning of Measurement ................................................................................................................... 1.75
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7.2
Objects or Events to be Measured ................................................................................................... 1.75
7.3
Standard or Scale of Measurement ...................................................................................................1.75
7.4
Dimension of Measurement Scale ................................................................................................... 1.76
7.5
Accounting as a Measurement Discipline ..................................................................................... 1.76
7.6
Valuation Principles ............................................................................................................................... 1.77
7.7
Measurement and Valuation .............................................................................................................. 1.80
7.8
Accounting Estimates ........................................................................................................................... 1.80
Summary ........................................................................................................................................................................1.81
Test Your Knowledge ..................................................................................................................................................1.81
Unit 8 : Accounting Standards
Learning Outcomes ....................................................................................................................................................1.84
Unit Overview ...............................................................................................................................................................1.84
8.1
Introduction of Accounting Standards ............................................................................................1.85
8.2
Objectives of Accounting Standards ................................................................................................1.85
8.3
Benefits and Limitations of Accounting Standards .....................................................................1.85
8.4
Process of Formulation of Accounting Standards in India .......................................................1.87
8.5
List of Accounting Standards in India ..............................................................................................1.87
Test Your Knowledge ..................................................................................................................................................1.89
Unit 9 : Indian Accounting Standards
Learning Outcomes ....................................................................................................................................................1.91
Unit overview................................................................................................................................................................1.91
9.1
Need for Convergence towards Global Standards ......................................................................1.91
9.2
International Financial Reporting Standards as Global Standards ........................................1.92
9.3
Benefits of Convergence with IFRSS .................................................................................................1.93
9.4
Development in Indian Accounting Standards (Ind AS) ...........................................................1.93
9.5
List of IND AS .............................................................................................................................................1.94
Test Your Knowledge ..................................................................................................................................................1.95
CHAPTER 2 : ACCOUNTING PROCESS ............................................................................. 2.1–2.116
Unit 1 : Basic Accounting Procedures - Journal Entries
Learning Outcomes ...................................................................................................................................................... 2.1
Unit overview.................................................................................................................................................................. 2.1
1.1
Double Entry System ................................................................................................................................ 2.2
1.2
Advantages of Double Entry System .................................................................................................. 2.2
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1.3
Account ......................................................................................................................................................... 2.2
1.4
Debit and Credit ......................................................................................................................................... 2.4
1.5
Transactions ................................................................................................................................................. 2.7
1.6
Accounting Equation Approach ........................................................................................................... 2.8
1.7
Traditional Approach..............................................................................................................................2.12
1.8
Modern Classification of Accounts ....................................................................................................2.14
1.9
Journal .........................................................................................................................................................2.14
Summary ........................................................................................................................................................................2.24
Test Your Knowledge ..................................................................................................................................................2.24
Unit 2 : Ledgers
Learning Outcomes ....................................................................................................................................................2.31
Unit Overview ...............................................................................................................................................................2.31
2.1
Introduction ..............................................................................................................................................2.32
2.2
Specimen of Ledger Accounts ............................................................................................................2.32
2.3
Posting .........................................................................................................................................................2.32
2.4
Balancing an Account ............................................................................................................................2.32
Summary ........................................................................................................................................................................2.37
Test Your Knowledge ..................................................................................................................................................2.38
Unit 3 : Trial Balance
Learning Outcomes ...................................................................................................................................................2.41
Unit Overview ..............................................................................................................................................................2.41
3.1
Introduction ............................................................................................................................................. 2.41
3.2.
Objectives of Preparing the Trial Balance ...................................................................................... 2.42
3.3
Limitations of Trial Balance ................................................................................................................. 2.43
3.4
Methods of Preparation of Trial Balance ........................................................................................ 2.43
3.5
Adjusted Trial Balance (Through Suspense Account) ................................................................ 2.47
3.6
Rules of Preparing the Trial Balance ................................................................................................. 2.47
Summary .......................................................................................................................................................................2.49
Test Your Knowledge ..................................................................................................................................................2.50
Unit 4 : Subsidiary Books
Learning Outcomes ...................................................................................................................................................2.53
Unit Overview ...............................................................................................................................................................2.53
4.1
Introduction ............................................................................................................................................. 2.53
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4.2
Distinction between Subsidiary Books and Principal books .................................................. 2.54
4.3
Purchases Book ....................................................................................................................................... 2.56
4.4
Sales Book ................................................................................................................................................. 2.60
4.5
Sales Returns Book or Returns Inward Book ................................................................................. 2.61
4.6
Purchase Returns or Returns Outward Book ................................................................................ 2.61
4.7
Importance of Journal .......................................................................................................................... 2.63
Summary .......................................................................................................................................................................2.65
Test Your Knowledge .................................................................................................................................................2.65
Unit 5 : Cash Book
Learning Outcomes ...................................................................................................................................................2.69
Unit Overview ...............................................................................................................................................................2.69
5.1
Cash Book - A Subsidiary Book and a Principal Book ................................................................ 2.70
5.2
Kinds of Cash Book ................................................................................................................................. 2.70
5.3
Posting the Cash Book Entries ........................................................................................................... 2.76
5.4
Petty Cash Book ...................................................................................................................................... 2.76
5.5
Entries for Sale Through Credit/Debit Cards ................................................................................. 2.79
Summary .......................................................................................................................................................................2.81
Test Your Knowledge .................................................................................................................................................2.82
Unit 6: Rectification Of Errors
Learning Outcomes ...................................................................................................................................................2.85
Unit Overview ...............................................................................................................................................................2.85
6.1
Introduction ............................................................................................................................................. 2.85
6.2
Stages of Errors ........................................................................................................................................ 2.88
6.3
Types of Errors ......................................................................................................................................... 2.89
6.4
Steps to Locate Errors ........................................................................................................................... 2.90
6.5
Rectification of Errors ............................................................................................................................ 2.91
Summary .................................................................................................................................................................... 2.106
Test Your Knowledge .............................................................................................................................................. 2.107
CHAPTER 3: BANK RECONCILIATION STATEMENT ............................................................3.1–3.33
Learning Outcomes ..................................................................................................................................................... 3.1
Chapter Overview ......................................................................................................................................................... 3.1
1.
Introduction ............................................................................................................................................... 3.2
2.
Bank Pass Book .......................................................................................................................................... 3.2
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3.
Bank Reconciliation Statement ........................................................................................................... 3.3
4.
Importance of Bank Reconciliation Statement .............................................................................. 3.3
5.
Procedure for Reconciling the Cash Book Balance with the Pass Book Balance.............. 3.11
6.
Methods of Bank Reconciliation ....................................................................................................... 3.13
Summary .......................................................................................................................................................................3.28
Test Your Knowledge .................................................................................................................................................3.29
CHAPTER 4: INVENTORIES ..................................................................................................4.1–4.27
Learning Outcomes ..................................................................................................................................................... 4.1
Chapter Overview ......................................................................................................................................................... 4.1
1.
Meaning ....................................................................................................................................................... 4.2
2.
Inventory Valuation.................................................................................................................................. 4.3
3.
Basis of Inventory Valuation ................................................................................................................. 4.4
4.
Inventory Record Systems ..................................................................................................................... 4.5
5.
Formulae/Methods to Determine Cost of Inventory .................................................................... 4.6
6.
Inventories Taking .................................................................................................................................. 4.14
Summary .......................................................................................................................................................................4.18
Test Your Knowledge .................................................................................................................................................4.19
CHAPTER 5: CONCEPT AND ACCOUNTING OF DEPRECIATION .......................................5.1–5.36
Learning Outcomes ..................................................................................................................................................... 5.1
Chapter Overview ......................................................................................................................................................... 5.1
1.
Introduction ............................................................................................................................................... 5.2
2.
Factors in the Measurement of Depreciation ................................................................................. 5.4
3.
Methods for Providing Depreciation ................................................................................................. 5.7
4.
Profit or Loss on The Sale/Disposal of Property, Plant and Equipment ............................... 5.20
5.
Change in the Method of Depreciation ..........................................................................................5.22
6.
Revision of the Estimated Useful Life of Property, Plant and Equipment .......................... 5.24
7.
Revaluation of Property, Plant and Equipment ........................................................................... 5.24
8.
Provision for Repairs and Renewals ................................................................................................. 5.26
Summary .......................................................................................................................................................................5.27
Test Your Knowledge .................................................................................................................................................5.28
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CHAPTER 6: ACCOUNTING FOR SPECIAL TRANSACTIONS ............................................ 6.1–6.163
Unit 1: Bill Of Exchange And Promissory Notes
Learning Outcomes ...................................................................................................................................................... 6.1
Unit Overview ................................................................................................................................................................. 6.1
1.1
Bills of Exchange ........................................................................................................................................ 6.2
1.2
Promissory Notes ....................................................................................................................................... 6.3
1.3
Differences - Bill of Exchange and Promissory Note ..................................................................... 6.4
1.4
Record of Bills of Exchange and Promissory Notes ....................................................................... 6.5
1.5
Term of a Bill ................................................................................................................................................ 6.6
1.6
Expiry / Due Date of a Bill ....................................................................................................................... 6.6
1.7
Days of Grace .............................................................................................................................................. 6.6
1.8
Date of Maturity of Bill ............................................................................................................................. 6.6
1.9
Bill at Sight ................................................................................................................................................... 6.7
1.10
Bill after Date .............................................................................................................................................. 6.7
1.11
How to Calculate Due Date of a Bill .................................................................................................... 6.8
1.12
Noting Charges .......................................................................................................................................... 6.8
1.13
Renewal of Bill ............................................................................................................................................ 6.9
1.14
Retirement of Bills of Exchange & Rebate ......................................................................................... 6.9
1.15
Insolvency ..................................................................................................................................................6.16
1.16
Accommodation Bills .............................................................................................................................6.19
1.17
Bills of Collection .....................................................................................................................................6.21
1.18
Bills Receivable and Bills Payable Books ..........................................................................................6.22
Summary ........................................................................................................................................................................6.23
Test Your Knowledge ..................................................................................................................................................6.23
Unit 2 : Sale Of Goods On Approval Or Return Basis
Learning Outcomes ....................................................................................................................................................6.30
Unit Overview ...............................................................................................................................................................6.30
2.1
Introduction ..............................................................................................................................................6.30
2.2
Accounting Records................................................................................................................................6.31
Summary ........................................................................................................................................................................6.38
Test Your Knowledge ..................................................................................................................................................6.39
Unit 3 : Consignment
Learning Outcomes ...................................................................................................................................................6.44
Unit Overview ...............................................................................................................................................................6.44
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3.1
Meaning of Consignment Account .................................................................................................. 6.45
3.2
Distinctions ................................................................................................................................................6.45
3.3
Accounting for Consignment Transactions and Events in the Books of the Consignor 6.46
3.4
Valuation of Inventories ....................................................................................................................... 6.51
3.5
Goods Invoiced above Cost ................................................................................................................ 6.51
3.6
Normal Loss ...............................................................................................................................................6.54
3.7
Abnormal Loss ......................................................................................................................................... 6.54
3.8
Commission ...............................................................................................................................................6.55
3.9
Return of Goods from the Consignee ..............................................................................................6.56
3.10
Account Sales ........................................................................................................................................... 6.56
3.11
Accounting in the Books of the Consignee ....................................................................................6.57
3.12
Advance by the Consignee Vs Security against the Consignment ........................................6.58
Summary .......................................................................................................................................................................6.65
Test Your Knowledge ................................................................................................................................................. 6.66
Unit 4: Joint Ventures
Learning Outcomes ...................................................................................................................................................6.75
Unit Overview ...............................................................................................................................................................6.75
4.1
Meaning of Joint Venture .................................................................................................................... 6.76
4.2
Features of Joint Venture ..................................................................................................................... 6.77
4.3
Distinction of Joint Venture with Partnership .............................................................................. 6.77
4.4
Distinction of Joint Venture with Consignment .......................................................................... 6.78
4.5
Methods of Maintaining Joint Venture Accounts ....................................................................... 6.78
Summary .................................................................................................................................................................... 6.103
Test Your Knowledge .............................................................................................................................................. 6.103
Unit 5: Royalty Accounts
Learning Outcomes ................................................................................................................................................ 6.110
Unit Overview ........................................................................................................................................................... 6.110
5.1
Introduction of Royalty and Related Terminologies ............................................................... 6.111
5.2
Accounting Treatment in the Books of Lessee .......................................................................... 6.113
5.3
Accounting Treatment in the Books of Lessor .......................................................................... 6.113
Summary ..................................................................................................................................................................... 6.124
Test Your Knowledge ............................................................................................................................................... 6.124
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Unit 6 : Average Due Date
Learning Outcomes ................................................................................................................................................ 6.129
Unit Overview ............................................................................................................................................................ 6.129
6.1
Introduction .......................................................................................................................................... 6.130
6.2
Concept of due date (Date of Maturity) ...................................................................................... 6.131
6.3
Types of Problems ............................................................................................................................... 6.133
Summary .................................................................................................................................................................... 6.146
Test Your Knowledge .............................................................................................................................................. 6.146
Unit 7 : Account Current
Learning Outcomes ................................................................................................................................................ 6.150
Unit Overview ........................................................................................................................................................... 6.150
7.1
Introduction .......................................................................................................................................... 6.150
7.2
Preparation of Account Current ..................................................................................................... 6.151
Summary ..................................................................................................................................................................... 6.160
Test Your Knowledge ............................................................................................................................................... 6.161
