dr. p.c. tulsian

Dr. P.C. TULSIANM.Com., Ph.D., FCA, PGDFM

Additional Director (Former)Board of Studies

The Institute of Chartered Accountants of IndiaHead

Department of CommerceRamjas College

University of DelhiDELHI

S. CHAND & COMPANY LTD.(AN ISO 9001 : 2000 COMPANY)

RAM NAGAR, NEW DELHI - 110 055

TULSIAN’S

FINANCIALACCOUNTING

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S. CHAND & COMPANY LTD.(An ISO 9001 : 2000 Company)Head Office: 7361, RAM NAGAR, NEW DELHI - 110 055Phone: 23672080-81-82, 9899107446, 9911310888Fax: 91-11-23677446Shop at: schandgroup.com; e-mail: [email protected]

Branches :AHMEDABAD : 1st Floor, Heritage, Near Gujarat Vidhyapeeth, Ashram Road, Ahmedabad - 380 014,

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2284815, [email protected] : Blackie House, 103/5, Walchand Hirachand Marg, Opp. G.P.O., Mumbai - 400 001,

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[email protected] : 104, Citicentre Ashok, Govind Mitra Road, Patna - 800 004, Ph: 2300489, 2302100,

[email protected] : 291/1, Ganesh Gayatri Complex, 1st Floor, Somwarpeth, Near Jain Mandir,

Pune - 411 011, Ph: 64017298, [email protected] (Marketing Office)RAIPUR : Kailash Residency, Plot No. 4B, Bottle House Road, Shankar Nagar, Raipur - 492 007,

Ph: 09981200834, [email protected] : Flat No. 104, Sri Draupadi Smriti Apartments, East of Jaipal Singh Stadium, Neel Ratan

Street, Upper Bazar, Ranchi - 834 001, Ph: 2208761, [email protected](Marketing Office)

SILIGURI : 122, Raja Ram Mohan Roy Road, East Vivekanandapally, P.O., Siliguri,Dist., Jalpaiguri, (W.B.) (M) 09051064326 (Marketing Office)

VISAKHAPATNAM: Plot No. 7, 1st Floor, Allipuram Extension, Opp. Radhakrishna Towers,Seethammadhara North Extn., Visakhapatnam - 530 013, (M) 09347580841,[email protected] (Marketing Office)

© 2011, Dr. P.C. TulsianAll rights reserved. No part of this publication may be reproduced, stored in a retrievalsystem or transmitted, in any form or by any means, electronic, mechanical, photocopying,recording or otherwise, without the prior permission of the Publishers.First Edition 2011

ISBN : 81-219-3608-X Code : 07 520PRINTED IN INDIABy Rajendra Ravindra Printers Pvt. Ltd., 7361, Ram Nagar, New Delhi -110 055and published by S. Chand & Company Ltd., 7361, Ram Nagar, New Delhi -110 055.


PREFACE

This book adopts a fresh and novel approach to the study of Financial Accounting for thestudents of B.Com. It has been written in a “Teach Yourself Style”, strictly following astudent friendly approach and is essential meant to serve as a tutor at home.

The Distinct features of the book are as follows:

Pedagogical Features Simple Language: The Text is presented in the simplest language, meant to serve

beginners. Heading for each Paragraph: Each paragraph has been arranged under a suitable

heading for easy retention of concepts. Tabular Form: Wherever possible the text matter relating to a particular topic/sub-

topic has been presented in a Tabular Form. Eye-catching Screens: All important equations, formulae, figures and practical steps

have been presented in screen format to catch the eye. Uniform Format of Chapter: Each chapter has been uniformly organised under

five headings, viz., Text supported by suitable Illustrations, Solved Problems, B.ComExamination Problems, Theoretical Questions and Practical Questions.

Distinctive Features 30 Exhibits: To acquaint students with various accounting treatment and formats. 250 Illustrations: To aid better understanding of the text. 250 Solved Problems: Along with necessary working notes and alternative solutions

(if any).100 B.Com Examination Problems with full solutions

250 Very Short Answer Type Questions: To enable students to test their under-standing of the subject.

250 Short Answer Type Questions. 100 Essay Type Questions. 500 Practical Questions. Appendix-I: Important Distinctions Appendix-II: Important Short NotesI am confident that all these features would make this book an invaluable asset to

students learning Financial Accounting.I wish to express my Sincere thanks to several individuals who have been a souce of

inspiration and support both personally and professionally including Shri R.P. Tulsian,Shri S.C. Gupta, Shri Naresh Gupta, Shri N.K. Kakkar, Shri N.D. Vohra, Shri S.C. Garg,Shri N.K. Aggarwal, Shri K.B. Gupta, Shri M.M.Goyal, Shri Sandeep Aggarwal, Mrs.Renu Gupta, Mrs. Sushma Aggarwal, Mrs. Himanshu Garg, Mrs. Poonam, Mrs. Indu Jain,Shri P.V. Khatri , Mrs. Madhu Gupta, Mrs. Kusum Gupta, Shri S.K. Grover, Shri V.K.Jain, Shri Harpal Singh, Shri Pradeep Aggarwal , Shri J.M. Gupta, Shri N.K. Puri, ShriY.P. Tyagi, Shri R.D. Arora, Shri S.L. Gupta, Shri S.K. Gupta, Shri Rajeev Goel.

I must conclude that this book would never have been written without the support,encouragement and prodding of our family members. Many thanks to all of them.

Any suggestion for improvement will be gratefully acknowledged and appreciated.

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SYLLABUSB.Com. Part I

Paper-IITULSIAN'S FINANCIAL ACCOUNTING

Duration: 3 hrs. Max. Marks: 75Lectures: 75

Objective: To make the student familiar with generally accepted accounting principles offinancial accounting and their applications in business organizations excluding corporateentitles.Unit–I

(i) Financial Accounting: Nature and scope, Limitations of Financial Accounting.(ii) Basic Concepts and Conventions. Accounting Standards: Meaning, Procedure for

issue of Accounting Standards in India, Significance, Generally Accepted Account-ing Principles (GAAP).

(iii) Accounting Process: From recording of transactions to preparation of final accounts.10 Lectures

Unit–II(i) Final Accounts of a Sole-Trader.

(ii) Final Accounts of Not-For Profit Organisations: Meaniing and features.(iii) Preparation of Income and Expenditure Account and Balance Sheet: From receipts

and payments account with additional information and vice-versa.Preparation of Balance Sheets (opening and closing) from receipts and paymentsaccount and income expenditure account and additional information.

(iv) Accounts from incomplete records: statement of affairs method and final accountmethod. 15 Lectures

Unit–IIIDepreciation Accounting: Meaning of depreciation, causes, objects of providing deprecia-

tion, factors affecting depreciation, accounting treatment including provision fordepreciation accounting. Methods of deprecations: straight line method, diminishingbalance method, Change of method as per revised AS-6. 10 Lectures

Unit–IVConsignment and Joint Venture Accounts:

(i) Consignments: Features,Accounting treatment in the books of the consignor and consignee.

(ii) Joint Ventures: Accounting procedures: Joint Bank Account, Records Maintained byco-venturer of (a) all transactions (b) only his own transactions. (Memorandum jointventure account). 10 Lectures

Unit–VAccounting for Hire Purchase Transactions, Journal entries and ledger accounts in the

books of Hire Vendors and Hire purchaser for large value items including Defaultand repossession. 10 Lectures

Unit–VIInland Branches: Dependent branches only and Ascertainment of Profit by Debtors method

and Stock and Debtors method. 10 LecturesUnit–VIIDissolution of Partnership Firms: Legal Position, Accounting for simple dissolution, Ap-

plications of rule in case of Garner Vs. Murray in case of insolvency of partner(s)(excluding piecemeal distribution and sale of a firm to a company). 10 Lectures

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ROAD MAPB.Com. Part I

Paper-IITULSIAN'S FINANCIAL ACCOUNTING

Duration: 3 hrs. Max. Marks: 75Lectures: 75

Course Contents: Relevant chapterof the book

Unit–I(i) Financial Accounting: Nature and scope, Limitations of Financial

Accounting.(ii) Basic Concepts and Conventions. Accounting Standards: Meaning,

Procedure for issue of Accounting Standards in India, Significance,Generally Accepted Accounting Principles (GAAP).

(iii) Accounting Process: From recording of transactions to preparation offinal accounts.

Unit–II(i) Final Accounts of a Sole-Trader.(ii) Final Accounts of Not-For Profit Organisations: Meaning and features.(iii) Preparation of Income and Expenditure Account and Balance Sheet:

From receipts and payments account with additional information andvice-versa.Preparation of Balance Sheets (opening and closing) from receipts andpayments account and income expenditure account and additionalinformation.

(iv) Accounts from incomplete records: statement of affairs method and finalaccount method.

Unit–IIIDepreciation Accounting: Meaning of depreciation, causes, objects of providingdepreciation, factors affecting depreciation, accounting treatment includingprovision for depreciation accounting. Methods of deprecations: straight linemethod, diminishing balance method, Change of method as per revised AS-6.

Unit–IVConsignment and Joint Venture Accounts:

(i) Consignments: Features,Accounting treatment in the books of the consignor and consignee.

(ii) Joint Ventures: Accounting procedures: Joint Bank Account, RecordsMaintained by co-venture of (a) all transactions (b) only his owntransactions. (Memorandum joint venture account).

Unit–VAccounting for Hire Purchase Transactions, Journal entries and ledger accounts inthe books of Hire Vendors and Hire purchaser for large value items includingDefault and repossession.

Unit–VIInland Branches: Dependent branches only and Ascertainment of Profit by Debtorsmethod and Stock and Debtors method.

Unit–VIIDissolution of Partnership Firms: Legal Position, Accounting for simpledissolution, Applications of rule in case of Garner Vs. Murray in case of insolvencyof partner(s) (excluding piecemeal distribution and sale of a firm to a company).

78

9

10

11

12

13

14

15, 16

1

3, 4, 5, 6

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22


CONTENTS

Preface iii

1. Introduction to Accounting 1.1-1.20Introduction 1.1Meaning of Accounting 1.1Meaning of Accountancy 1.3Meaning of Book-keeping 1.3Relationship between Accountancy, Accounting and Book-keeping 1.3Distinction Between Book-keeping and Accounting 1.3Meaning of an Accounting Cycle 1.4Users of an Accounting Information and Their Needs 1.5Primary objectives of Accounting 1.6Types of Accounting Information 1.7Advantages of Accounting 1.8Limitations of Accounting 1.9Qualitative Characteristics of Accounting Information 1.10Branches of Accounting 1.13Basic Accounting Terms 1.13Double Entry System of Book-Keeping 1.18Accrual Basis of Accounting and Cash Basis of Accounting 1.19Distinction between Accrual Basis of Accounting and

Cash Basis of Accounting 1.19Theoretical Questions 1.19

2. Accounting Principles and Accounting Standards 2.1-2.12Meaning of ‘Generally Accepted Accounting Principles’ (GAAP) 2.1Accounting of Principles 2.1Acounting Standards 2.7Development of Accounting Standards 2.8Accounting Standards Board of India 2.8Theoretical Questions 2.10

3. Accounting Equation 3.1-3.5Meaning of Accounting Equation 3.1Procedure for Developing An Accounting Equation 3.1Theoretical Questions 3.4Practical Questions 3.5

4. Journalising, Posting and Balancing 4.1-4.33Meaning of an Account 4.1Traditional Classification of Accounts 4.1Accounting Equation Based Classification of Accounts 4.1Distinction Between Personal Accounts and Impersonal Accounts 4.2Distinction Between Real and Nominal Accounts 4.2Meaning and Rules of Debit and Credit 4.3Double Entry System of Book-Keeping 4.4

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Meaning and Format of a Journal 4.5Meaning of Journalising 4.5Ledger 4.11Distinction Between Journal and Ledger 4.13Compound Entry 4.14Meaning, Recording and Posting of an Opening Entry 4.15Balancing of Accounts 4.18Theoretical Questions 4.29Practical Questions 4.30

5. Subsidiary Books I—Cash Book 5.1-5.17Need for Subdivision of the Journal 5.1Meaning of Special Journals (or subsidiary books) 5.1Meaning and Types of Cash Book 5.2Trade Discount 5.3Cash Discount 5.4Petty Cash Book 5.8Theoretical Questions 5.12Practical Questions 5.15

6. Subsidiary Books II—Other Books 6.1-6.15Purchases Book 6.1Sales Book 6.3Purchase Returns Book 6.4Sales Returns Book 6.6Distinction between Debit Note and Credit Note 6.8Bills Receivable Book 6.8Bills Payable Book 6.10Journal Proper 6.10Distinction between Opening Entry and Closing Entry 6.11Theoretical Questions 6.13Practical Questions 6.13

7. Final Accounts of a Sole-trader 7.1-7.113Meaning of Financial Statements 7.1Usefulness of Financial Statements 7.1Trading Account 7.2Profit and Loss Account 7.5Balance Sheet [or Position Statement] 7.9Distinction between Tangible Assets and Intangible Assets 7.11Distinction between Fixed Assets and Current Assets 7.11Distinction between Trading and Profit and Loss Account and

Balance Sheet 7.17Distinction between a Trial Balance and a Balance Sheet 7.17Methods of Presenting the Final Accounts 7.18Treatment of Some Items Which May be Direct Items/Indirect

Items/Incomes/Expenses 7.20Classification of Capital and Revenue 7.26Distinction Between Capital Expenditure and Revenue Expenditure 7.26Rationale of Making Adjustments at the Time of Preparing the

Final Accounts 7.29

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Adjustment of Closing Stock 7.29Adjustment of Outstanding Expenses 7.30Adjustment of Prepaid Expenses (or Unexpired Expenses) 7.31Distinction between Deferred Revenue Expenses & Prepaid Expenses 7.32Distinction between Outstanding Expense and Prepaid Expense 7.32Adjustment of Accrued Income 7.33Adjustment of Income Received in Advance (or Unaccrued Income) 7.33Distinction Between Accrued Income and Unaccrued Income 7.34Adjustment of Depreciation 7.35Adjustment of Interest on Capital 7.41Adjustment of Interest on Drawings 7.42Adjustment of Abnormal Loss of Stock 7.42Adjustment of Bad Debt 7.43Adjustment of Provision for Doubtful Debts 7.44Adjustment of Provision for Discount on Debtors 7.53Adjustment of Commission on Profit 7.56Adjustment of Goods Sent on Approval 7.57Adjustment of Goods-in-Transit 7.58Provident fund 7.58Treatment of Items of Adjustment Appearing Outside the Trial Balance 7.63Treatment of Items of Adjustments Appearing in the Trial Balance 7.63Solved Problems 7.75B.Com. Examination Problems 7.88Theoretical Questions 7.100Practical Questions 7.106

8. Accounting for Not for Profit Organisations 8.1-8.122Meaning of Not for Profit Organisations 8.1Distinction between a Profit Seeking Organisation and a

Not for Profit Organisation 8.1Accounting for Not for Profit Organisation 8.1Receipts and Payments Account 8.2Income and Expenditure Account 8.4Meaning and Accounting Treatment of Some Peculiar Items 8.5Treatment of Consumable Items Consumed during the Year 8.15Treatment of Profit/Loss from Trading Activities 8.17Distinction between Receipts & Payments Account and

Income & Expenditure Account 8.18Distinction Between Income and Expenditure Account and

Profit & Loss Account 8.19Preparation of an Income & Expenditure Account 8.19Balance Sheet of a Non-profit Seeking Entity 8.21Preparation of a Receipts & Payments Account 8.42Solved Problems 8.54B.Com. Examination Problems 8.79Theoretical Questions 8.119Practical Questions 8.120

9. Accounts from Incomplete Records [or Single Entry System] 9.1-9.60Meaning of Incomplete Records 9.1

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Distinction between Double Entry System and Incomplete Records(popularly known as Single Entry System) 9.2

Preparation of Accounts from Incomplete Records 9.2Statement of Affairs Method 9.2Distinction between Statement of Affairs and Balance Sheet 9.3Final Accounts Method 9.5Hints for Tracing Missing Information 9.12Solved Problems 9.20B Com Examination Problems 9.36Theoretical Questions 9.51Practical Questions 9.52

10. Depreciation, Reserves and Provisions 10.1-10.61Meaning of Depreciation 10.1Meaning of Depreciation Accounting 10.2Causes of Depreciation 10.2Need for Charging Depreciation 10.2Factors Affecting the Amount of Depreciation 10.3Depreciation on Additions to Fixed Assets 10.4Methods of Recording Depreciation 10.4Recording of Depreciation by Charging to Asset Account Method 10.4Methods of Allocating Depreciation 10.5‘Written Down Value Method’ of Depreciation (WDV) 10.19Distinction between Straight Line Method and Written

Down Value Method 10.25Recording of Depreciation by Creating Provision for

Depreciation Account 10.26Change in the Method of Depreciation 10.30Specific Requirements of AS-6 Issued by ICAI 10.40Solved Problems 10.42B Com Examination Problems 10.51Theoretical Questions 10.57Practical Questions 10.58

11. Accounting for Consignment 11.1-11.63Meaning of Consignment 11.1Features of Consignment 11.1Distinction Between Consignment and Sale 11.1Terms Used in Consignment 11.2Distinction Between Ordinary Commission and

Del-credere Commission 11.4Distinction Between Del-credere Commission and

Over-riding Commission 11.4Valuation of Unsold Stock Lying with the Consignee 11.8Treatment of Abnormal Loss 11.11Treatment of Normal Loss 11.15Distinction between Normal Loss and Abnormal Loss in Consignment 11.17Accounting Treatment in the Books of Consignor 11.17Accounting treatment in the Books of the Consignee 11.20Solved Problems 11.34

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B.Com. Examination Problems 11.46Theoretical Questions 11.57Practical Questions 11.58

12. Accounting for Joint Venture 12.1-12.62Meaning of Joint Venture 12.1Similarities between Joint Venture and Partnership 12.1Distinction between Partnership and Joint Venture 12.1Distinction between Joint Venture and Consignment 12.2Methods of Recording Joint Venture Transactions 12.2Method I—Recording in a Separate Set of Books 12.2Joint Venture Account 12.4Method II—Recording in the Books of One Co-Venturer Only 12.11Method III—Recording in the Books of all Co-Ventures 12.15Method IV—Memorandum Joint Venture Account Method 12.17Solved Problems 12.23B.Com. Examination Problems 12.40Theoretical Questions 12.57Practical Questions 12.58

13. Accounting for Hire Purchase 13.1-13.65Meaning of Hire Purchase Agreement 13.1Contents of Hire Purchase Agreement 13.1Meaning of Instalment Purchase Agreement 13.1Distinction between Hire Purchase Agreement and

Instalment Purchase Agreement 13.2Calculation of Interest When both the Cash Price and the

Rate of Interest are Given 13.3Calculation of Interest when Cash Price is Given But

Rate of Interest is Not Given 13.4Calculation of Interest When Both the Cash Price and

the Rate of Interest are not Given 13.6Calculation of Cash Price 13.7Accounting for Hire Purchase Transactions 13.12Full Cash Price Method 13.12Journal Entries Under Full Cash Price Method 13.12Disclosure in Balance Sheet Under Full Cash Price Method 13.13Actual Cash Price Paid Method 13.16Journal Entries under Actual Cash Price Paid Method 13.16Disclosure in Balance Sheet Under Actual Cash Price Paid Method 13.17Default and Repossession 13.20Complete Repossession 13.20Partial Repossession 13.22Solved Problems 13.28B.Com. Examination Problems 13.36Theoretical Questions 13.55Practical Questions 13.56

14. Accounting for Branches 14.1-14.92Meaning of a Branch 14.1Classification of Branches 14.1

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Accounting for Dependent Branches 14.1Debtors Method 14.1Accounting Treatment of Goods Returned and Cash Remitted by

Branch Customers Directly to Head Office 14.7Accounting Treatment of Goods Sent to Another Branch and

Goods Received from Another Branch 14.8Accounting Treatment of Normal Loss, Abnormal Loss, Insurance

Claim and Agreed Allowance/Trade Discount 14.10Accounting Treatment of Branch Manager’s Commission 14.11When Goods are Sent to Branch at Cost Plus Profit 14.14Stock and Debtors Method 14.27B.Com. Examination Problems 14.51Theoretical Questions 14.83Practical Questions 14.83

15. Accounting for Partnership—Dissolution of a Firm 15.1-15.42Meaning of Dissolution 15.1Meaning of Dissolution of Partnership 15.1Meaning of Dissolution of a Firm 15.1Distinction Between Dissolution of Partnership and Dissolution of Firm 15.1Settlement of Accounts [Section 48] 15.2Treatment of Firm’s Debts and Private Debts [Sec. 49] 15.2Distinction Between Firm’s Debts and Private Debts 15.3Realisation Account 15.3Accounting Entries 15.4Treatment of Goodwill 15.16Preparation of Balance Sheet as on Date of Dissolution 15.16Calculation of Remuneration Payable to Incharge of Realisation 15.30Solved Problems 15.31Theoretical Questions 15.36Practical Questions 15.38

16. Accounting for Partnership—Insolvency of a Partner and Firm 16.1-16.40Introduction 16.1Decision in Garner vs Murray 16.1Applicability of the Decision in Garner vs Murray in India 16.2Insolvency of a Firm 16.11B.Com. Examination Problems 16.19Theoretical Questions 16.35Practical Exercises 16.35Insolvency of a Partner 16.35Insolvency of All Partners 16.38Appendix I AI.1-AI.23Appendix II AII.1-AII.2

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INTRODUCTIONIn all activities (whether business activities or non-business activities) and in all organisations(whether business organisations like a manufacturing entity or trading entity or non-businessorganisations like schools, colleges, hospitals, libraries, clubs, temples, political parties)which require money and other economic resources, accounting is required to account forthese resources. In other words, wherever money is involved, accounting is required toaccount for it. Accounting is often called the language of business. The basic function of anylanguage is to serve as a means of communication. Accounting also serves this function.

MEANING OF ACCOUNTINGMeaningAccounting is the art of recording, classifying, and summarizing in a significant manner andin terms of money, transactions and events which are, in part at least, of a financialcharacter, and interpreting the result thereof. [AICPA]

The dimension of accounting is much broader than that described above. A widelyaccepted definition of accounting is given by the American Accounting Association in 1966which treated accounting as “the process of identifying, measuring and communicatingeconomic information to permit informed judgements and decisions by the users of ac-counts.’ [AAAA]

Thus, accounting covers the following activities:

Activities Covered under Accounting

Identifying Measuring Recording Classifying

Summarising Analysing Interpreting Communication

Let us discuss these activities one by one:1. Identifying the Transactions and Events—Accounting identifies transactions and

events of a specific entity. A transaction is an exchange in which each participantreceives or sacrifices value (e.g., purchase of raw material). An event (whether internal

1INTRODUCTION TOACCOUNTING


1.2 Tulsian’s Financial Accounting

or external) is a happening of consequence to an entity (e.g., use of raw material forproduction). An entity means an economic unit that performs economic activities(e.g., TISCO, TELCO, Birla Industries Ltd., Reliance Industries Ltd.).

2. Measuring the Identified Transactions and Events—Accounting measures thetransactions and events in terms of a common measurement unit, that is the rulingcurrency of a country.

3. Recording—It is concerned with the recording of identified and measured financialtransactions in an orderly manner, soon after their occurrence in the proper books ofaccounts.

4. Classifying—It is concerned with the classification of the recorded transactions so asto group the transactions of similar type at one place. This function is performed bymaintaining the ledger in which different accounts are opened to which relatedtransactions are brought to one place by posting. For example, all purchases of goodsmade for cash or on credit on different dates are brought to purchasers account.

5. Summarising—It is concerned with the summarization of the classified transactionsin a manner useful to the users. This function involves the preparation of financialstatements such as Income Statement, Balance Sheet, Statement of Changes in FinancialPosition, Statement of Cash Flow, Statement of Value Added.

6. Analysing—It is concerned with the establishment of relationship between the variousitems or group of items taken from Income statement of Balance Sheet or both. Itspurpose is to identify the financial strengths and weaknesses of the enterprise. Itprovides the basis for interpretation.

7. Interpreting—It is concerned with explaining the meaning and significance of therelationship so established by the analysis. Nowadays, the first six functions areperformed by electronic data processing devices and the accountant has to concentratemainly on the interpretation aspects of accounting. The accountants should interpretthe statements in a manner useful to the users, so as to enable the users to makereasoned decisions out of alternative courses of action. The accountant should explainnot only what has happened but also (a) why it happened, and (b) what is likely tohappen under specified conditions.

8. Communicating—It is concerned with the transmission of summarised, analysed andinterpreted information to the users to enable them to make reasoned decisions.

Communication is preceded by an accounting cycle through which the identified andmeasured transactions and events pass. Accounting performs a basic function of a language,that is, to serve as a means of communication. It is an information system whichcommunicates the accounting information to the users (whether internal or external) toenable them to make reasoned decisions. As an information system, accounting may beviewed as under:

INPUT PROCESS OUTPUT

Economic events Recording Communicating

measured in Classifying Information tofinancial Summarising users

terms AnalysingInterpreting

Note: Economic event refers to the occurrence of economic consequence of an activity related to anaccounting entity.


Introduction to Accounting 1.3

MEANING OF ACCOUNTANCYAccountancy refers to a systematic knowledge of accounting. It explains ‘why to do’ and‘how to do’ of various aspects of accounting. It tells us why and how to prepare the books ofaccounts and how to summarize the accounting information and communicate it to theinterested parties.

MEANING OF BOOK-KEEPING

Book-keeping is a part of accounting and is concerned with record keeping or maintenanceof books of accounting which is often routine and clerical in nature. It only covers thefollowing four activities:(1) Identifying the transactions and events (2) Measuring the identified transactions andevents in a common measuring unit (3) Recording the identified and measured transactionsand events in Proper Books of Accounts (4) Classifying the recorded transactions and eventsin ledger.

RELATIONSHIP BETWEEN ACCOUNTANCY, ACCOUNTING ANDBOOK-KEEPINGBook-keeping is a part of Accounting. Accounting is a part of Accountancy, Diagrammaticallythe relationship can be viewed as follows:

DISTINCTION BETWEEN BOOK-KEEPING AND ACCOUNTINGBook-keeping differs from accounting in the following respects:

Basis of Distinction Book-keeping Accounting

1. Scope Book-keeping involves— Accounting in addition to Book-(a) identifying the transactions, keeping involves—(b) measuring the identified summarizing the classified trans-

transactions, actions, analysing the summarized(c) recording the measured results, interpreting the analysed

transactions, and results and communicating the(d) classifying the recorded interpreted information to the

transactions. interested parties.

(Contd)


Tulsian’s Financial Accounting

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