B.Com. (Hons.) / B.Com. (Prog.) Semester-I Commerce
CORE COURSE-I
FINANCIAL ACCOUNTING
Unit -I
SCHOOL OF OPEN LEARNING
University of Delhi
Department of Commerce
, Graduate Course
Core Course - 1
FINANCIAL ACCOUNTING
Contents:
Lesson 1: Accounting: Its Concepts and Conventions
Lesson 2: Accounting Standards
Lesson 3: Subsidiary Books of Accounts
Lesson 4: Trial Balance
Lesson 5: Financial Statements: Nature, Uses and Limitation of Financial
Statements
Lesson 6: Preparation of Financial Statements for Profit-Making Entities-I
Lesson 7: Preparation of Financial Statements for Profit-Making Entities-II
Lesson 8: Preparation of Financial Statements for Non-Profit-Making Entities-I
SCHOOL OF OPEN LEARNING
University of Delhi
5, Cavalry Lane, Delhi – 110007
, UNIT 1
LESSON 1
ACCOUNTING : ITS CONCEPTS AND CONVENTIONS
Definition of Accounting : Before attempting to define accounting, it may be added that there is no
among unanimity accountants as to its precise definition. However, some of the definitions are as
given below.
According to L.C. Copper, "Book-keeping may be described as the science of recording
transactions in money or money's worth in such a manner that, at any subsequent date, their nature
and effect may be clearly understood, and that, when required, a combined statement of their result
may be prepared".
R.N. Carter defines Book-keeping as "Book-keeping is the science and art of correctly recording
in books of account all those business transactions that result in the transfer of money or money's
worth"
Yet another definition is given A.H. Rosenkampff. According to him, "Book-keeping is the art of
recording business transactions in a systematic manner"
Out of the above and many more others, the most acceptable one is that given by American
Institute of Certified Public Accountants (AICPA) Committee on Terminology. According to AICPA
"Accounting is the art of recording, classifying and summarising in a significant manner and in terms
of money, transactions and events which are, in part at least, of a financial character and interpreting
the results thereof".
Book-keeping is a subject of profound importance to all kinds of business enterprises.
It is of great importance, for example, to manufacturing concerns, trading concerns, banks, transport
companies and insurance companies. They have to follow a proper accounting system if they want to
know as to whether they are earning, profits or incurring losses and how much; whether or not all the
transactions have been recorded fully and accurately; the amount they owe to their creditors as well as
the amount owed to them by their debtors.
Thus the objects of accounting are to enable the businessman to ascertain accurately and easily.
1. The amount of gain or loss during a particular period, and
2. The amount of his assets and liabilities and capital in the firm at a particular point of time.
Double Entry Principle : In the present era double entry system of book-keeping is considered to
be the best, common and universal system, because it is modem, scientific, and complete. It fulfils all
the objects of a businessman. It originated in western countries and so it is also called western system
of accounting. It is also called mercantile system of accounting because according to this system cash
and credit transactions can be recorded.
Double entry system has been defined differently by different authorities. Some of which are as
follows:-
According to Carter, "The modern system of Accounting in use is known as Double Entry.
Double Entry is a system of Book-keeping by means of both personal and impersonal accounts."
, 2
M.J. Keller defines Double Entry System as follows : "The most common system of accounting
data for an enterprise is the Double Entry System. As the name implies, the entry made for each
transaction is composed of two parts, a 'Debit' and a 'Credit."
Each business transaction that result in transfer of money or money's worth involves a twofold
aspect, (a) the yielding or giving of a benefit, and (b) the receiving of that benefit. In other words
every business transaction involves exchange of value for value, or inter-change of money or money's
worth or every business transaction involves receiving something having value and giving something
which has value. According to Double Entry System, both these aspects of the transaction, the
receiving aspect and the giving aspect, are recorded. Thus, if Building is bought from Mukesh, Building
Account receives and Mukesh's Account gives. There must, therefore, be double entry to have a
complete record of each transaction.
For a clear understanding of the principles of double entry system, it is necessary to first carefully
bear in mind that certain transactions are common to almost every business. These common transactions
are as follows :
1. The businessman enters into business dealings with a number of persons or firms;
2. He must have some assets or properties in which or with the help of which he carries on the
business; and
3. He must incur certain expenses such as office rent, salaries, advertising, etc. for carrying on
the business, and that he must have some sources from which the income of the business is
derived.
It follows, therefore, that in order to keep a complete record of all the business transactions, it will
be necessary to keep the following accounts
(i) The account of each person or firm with whom the firm has to deal;
(ii) The account of each asset or property in the business; and
(iii) The account of each head of expense or source of income.
The accounts which come under first group are called Personal Accounts, those which come
under second group are called Real Accounts, and those coming under the third group are called
Nominal accounts.
Since words 'debit and credit', and 'Account' have been used in the above definitions and discussion,
it will be better if we first understand the meaning of these words and then proceed to discuss the rules
of double entry system.
The double entry system divides the page into two equal halves. The left hand side of each
page is called the debit side, while the right hand side is called the credit side. There was no rational
reason in the way in which the sides were choosen to represent different items, and the credit side
could have easily been the left-hand side and the debit the right hand side. The Venetion merchants
who were the 'first known businessmen to use double entry just happened to select the left hand or
debit side for the assets and opposite side to represent capital and liabilities, and so it has remained
ever since.
An Account is a classified and chronological record in which the money values (some times also
the quantities or the money values and quantities together) of all the benefits given or received by a
CORE COURSE-I
FINANCIAL ACCOUNTING
Unit -I
SCHOOL OF OPEN LEARNING
University of Delhi
Department of Commerce
, Graduate Course
Core Course - 1
FINANCIAL ACCOUNTING
Contents:
Lesson 1: Accounting: Its Concepts and Conventions
Lesson 2: Accounting Standards
Lesson 3: Subsidiary Books of Accounts
Lesson 4: Trial Balance
Lesson 5: Financial Statements: Nature, Uses and Limitation of Financial
Statements
Lesson 6: Preparation of Financial Statements for Profit-Making Entities-I
Lesson 7: Preparation of Financial Statements for Profit-Making Entities-II
Lesson 8: Preparation of Financial Statements for Non-Profit-Making Entities-I
SCHOOL OF OPEN LEARNING
University of Delhi
5, Cavalry Lane, Delhi – 110007
, UNIT 1
LESSON 1
ACCOUNTING : ITS CONCEPTS AND CONVENTIONS
Definition of Accounting : Before attempting to define accounting, it may be added that there is no
among unanimity accountants as to its precise definition. However, some of the definitions are as
given below.
According to L.C. Copper, "Book-keeping may be described as the science of recording
transactions in money or money's worth in such a manner that, at any subsequent date, their nature
and effect may be clearly understood, and that, when required, a combined statement of their result
may be prepared".
R.N. Carter defines Book-keeping as "Book-keeping is the science and art of correctly recording
in books of account all those business transactions that result in the transfer of money or money's
worth"
Yet another definition is given A.H. Rosenkampff. According to him, "Book-keeping is the art of
recording business transactions in a systematic manner"
Out of the above and many more others, the most acceptable one is that given by American
Institute of Certified Public Accountants (AICPA) Committee on Terminology. According to AICPA
"Accounting is the art of recording, classifying and summarising in a significant manner and in terms
of money, transactions and events which are, in part at least, of a financial character and interpreting
the results thereof".
Book-keeping is a subject of profound importance to all kinds of business enterprises.
It is of great importance, for example, to manufacturing concerns, trading concerns, banks, transport
companies and insurance companies. They have to follow a proper accounting system if they want to
know as to whether they are earning, profits or incurring losses and how much; whether or not all the
transactions have been recorded fully and accurately; the amount they owe to their creditors as well as
the amount owed to them by their debtors.
Thus the objects of accounting are to enable the businessman to ascertain accurately and easily.
1. The amount of gain or loss during a particular period, and
2. The amount of his assets and liabilities and capital in the firm at a particular point of time.
Double Entry Principle : In the present era double entry system of book-keeping is considered to
be the best, common and universal system, because it is modem, scientific, and complete. It fulfils all
the objects of a businessman. It originated in western countries and so it is also called western system
of accounting. It is also called mercantile system of accounting because according to this system cash
and credit transactions can be recorded.
Double entry system has been defined differently by different authorities. Some of which are as
follows:-
According to Carter, "The modern system of Accounting in use is known as Double Entry.
Double Entry is a system of Book-keeping by means of both personal and impersonal accounts."
, 2
M.J. Keller defines Double Entry System as follows : "The most common system of accounting
data for an enterprise is the Double Entry System. As the name implies, the entry made for each
transaction is composed of two parts, a 'Debit' and a 'Credit."
Each business transaction that result in transfer of money or money's worth involves a twofold
aspect, (a) the yielding or giving of a benefit, and (b) the receiving of that benefit. In other words
every business transaction involves exchange of value for value, or inter-change of money or money's
worth or every business transaction involves receiving something having value and giving something
which has value. According to Double Entry System, both these aspects of the transaction, the
receiving aspect and the giving aspect, are recorded. Thus, if Building is bought from Mukesh, Building
Account receives and Mukesh's Account gives. There must, therefore, be double entry to have a
complete record of each transaction.
For a clear understanding of the principles of double entry system, it is necessary to first carefully
bear in mind that certain transactions are common to almost every business. These common transactions
are as follows :
1. The businessman enters into business dealings with a number of persons or firms;
2. He must have some assets or properties in which or with the help of which he carries on the
business; and
3. He must incur certain expenses such as office rent, salaries, advertising, etc. for carrying on
the business, and that he must have some sources from which the income of the business is
derived.
It follows, therefore, that in order to keep a complete record of all the business transactions, it will
be necessary to keep the following accounts
(i) The account of each person or firm with whom the firm has to deal;
(ii) The account of each asset or property in the business; and
(iii) The account of each head of expense or source of income.
The accounts which come under first group are called Personal Accounts, those which come
under second group are called Real Accounts, and those coming under the third group are called
Nominal accounts.
Since words 'debit and credit', and 'Account' have been used in the above definitions and discussion,
it will be better if we first understand the meaning of these words and then proceed to discuss the rules
of double entry system.
The double entry system divides the page into two equal halves. The left hand side of each
page is called the debit side, while the right hand side is called the credit side. There was no rational
reason in the way in which the sides were choosen to represent different items, and the credit side
could have easily been the left-hand side and the debit the right hand side. The Venetion merchants
who were the 'first known businessmen to use double entry just happened to select the left hand or
debit side for the assets and opposite side to represent capital and liabilities, and so it has remained
ever since.
An Account is a classified and chronological record in which the money values (some times also
the quantities or the money values and quantities together) of all the benefits given or received by a
