DEFINITION OF ACCOUNTS

MODERN CLASSIFICATION
Accounting Equation
There are two accounting equations as follows
Assets= capital + liabilities

Income = Expenses +Profit (profit & loss A/c equation)

Concept of Debit, Credit and Duality:
1. Debit: Any increase on the left hand side of the equation.
2. Credit: Any decrease on the left hand side of the equation.
3. Debit: Any decrease on the right hand side of the equation.
4. Credit: Any increase on the right hand side of equation

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DEFINITION OF ACCOUNTS

An account is a formal record, in the ledger, of all transactions relating to changes in particular item. It is a Used to convey information on transaction.

Classification of Accounts

Accounts can be classified in two ways: (a) Traditional Classification; (b) Modern classification.
1.TRADITIONAL CLASSIFICATION OF ACCOUNTS
The three types of accounts maintained for transactions with parties are as follows.

1. Real Accounts:

They are the accounts of all assets used in the business or belonging to the business
2. Personal Accounts:

They are the accounts of the all natural and artificial persons.
3. Nominal Accounts:

They are the accounts of the all income and expenses and gains and losses suffered in business.

Illustration 1.

1) Mr. Bachan started a business with a cash Rs.9,00,000/-.
2) He purchased an asset for Rs. 3,00,000/- by cash.
3) He brought in to business furniture (personal assets) worth Rs.5,00,000/-.
4) He purchased goods worth Rs. 75,000/- cash.
5) He opened bank a/c with S B I by depositing cash of Rs.1,00,000/-.
6) During the month he paid a) salary Rs. 50000/-. b) Transportation Rs. 75,000/-.
7) He sold goods worth Rs.50000/- at Rs. 90,000/-.
Solution:-

Tr. No. Affected Account Type Accounting DR./CR.

1. Capital a/c Personal a/c Cr.
Cash a/c Real a/c Dr.
2. Assets a/c Real a/c Dr.
Cash a/c Real a/c Cr.
3. Furniture a/c Real a/c Dr.
Drawings Personal a/c Cr.
4. Goods / purchase a/c Real a/c Dr.
Cash a/c Real a/c Cr.
5. S B I bank a/c Personal a/c Dr
Cash a/c Real a/c Cr.
6. Salary a/c Nominal a/c Dr.
Transportation chg. a/c Nominal a/c Dr.
Cash a/c Real a/c Cr.
7. Debtors a/c Personal a/c Dr.
Cash a/c Real a/c Cr.

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Meaning of Trail Balance

Before using the account Balances to prepare final Accounts, an attempt to prove that that the total of accounts with debit balances is in fact equal to the total of accounts with credit balances.

This proof of the equality of debit and credit balances is called a Trial Balance.

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ACCOUNTING ASSUMPTIONS

1. Money measurement concept: Every accounting transaction is major in terms of money.
2. Dual entity concept: As per this concept an accountant assume that business & businessman are two different entities.
3. Going-concern concept: According to this assumption while doing the accounting it is assumed that business will continue for fairly longer period of time.
4. Cost concept: This concept is applicable only for fixed assets accounting purpose it states that while computing the cost of fixed assets all the incidental expenditure for the acquisition of the assets should be added in cost fixed assets.
5. Dual-aspect concept: This is the fundamental accounting assumption which state that every transaction has too folds effect positive or negative in accounts it is dr. & cr.
6. Periodicity concept: Every accounting is divided in smaller periods as per this concept.
7. Cost attach concept: While computing the revenue earned by the organization all the incidental expenditures required to earn such a revenue should be accounted for as per this concept .
8. Accrual concept: As per this concept revenue or expenditure should be accounted for only on the basis of the certainty of that revenue receives or expenditure paid actual payment or receipts is irrelevant.
9. Legal aspect concept: When there is a conflict between laws & accounting account should follow law procedures first.

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ACCOUNTING ASSUMPTIONS

1. Money measurement concept: Every accounting transaction is major in terms of money.
2. Dual entity concept: As per this concept an accountant assume that business & businessman are two different entities.
3. Going-concern concept: According to this assumption while doing the accounting it is assumed that business will continue for fairly longer period of time.
4. Cost concept: This concept is applicable only for fixed assets accounting purpose it states that while computing the cost of fixed assets all the incidental expenditure for the acquisition of the assets should be added in cost fixed assets.
5. Dual-aspect concept: This is the fundamental accounting assumption which state that every transaction has too folds effect positive or negative in accounts it is dr. & cr.
6. Periodicity concept: Every accounting is divided in smaller periods as per this concept.
7. Cost attach concept: While computing the revenue earned by the organization all the incidental expenditures required to earn such a revenue should be accounted for as per this concept .
8. Accrual concept: As per this concept revenue or expenditure should be accounted for only on the basis of the certainty of that revenue receives or expenditure paid actual payment or receipts is irrelevant.
9. Legal aspect concept: When there is a conflict between laws & accounting account should follow law procedures first.

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ACCOUNTING BASICS

• Entity: Entity has a definite individual existence. Business Entity is an identifiable business enterprise such as Super Bazaar, etc.
• Transaction: Transaction is an event involving some value between two or more entities
• Assets: Assets are economic resources of an enterprise that can be expressed in monetary terms.

"Fixed Assets" are assets held on a long term basis such as land, buildings, etc.
"Current Assets" are assets held on a short term basis such as debtors, bills receivables, etc.

• Profit: Profit is the excess of the revenues of a period over its related expenses during an accounting year. Profit increases the investment of the owners.
• Gain: Gain is a profit that arises from events or transactions which are incidental to business such as sale of fixed assets, winning a court case, appreciation in the value of an asset.
• Loss: The excess of expenses of a period over its related revenues is termed as Loss.
• Discount: Discount is the deduction in the price of goods on sale.
• Voucher: The documentary evidence in support of a transaction is known as Voucher.
• Goods: Goods refer to the products which a business unit produces and sells, or by and sells.
• Drawings: Withdrawal of money and/ or goods by the owner from the business for personal use is known as drawings. Drawings reduce the investment of owners.
• Purchases: Purchases are a total amount of goods procured by business on credit and cash, for use or sale.
• Stock: Stock (inventory) is a measure of something on hand - goods, spares and other items in a business. It is called 'Stock in hand.'
• Debtors: Debtor's persons and / or other entities who owe enterprise money, having bought goods and services on credit.
• Creditors: Creditors are persons and / or other entities who have to be paid by an enterprise for providing goods and services on credit

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Accounts notes

1. Agricultural income: Any income which you receive as income from any agricultural activity is deemed as not included in total income. If your father is into agriculture and he gives you a part of the income as a gift, then you don’t need to pay tax on it, provided, your father files his tax returns.

2. Share of Income from Partnership Firm: If you receive any income for being a partner of a firm which has already been assessed separately, then the income need not be included in total income. Thus any share in the profits that you have in a firm according to the partnership deed is not taxable.

3. Travel concession/assistance for Salaried Persons: Any monies that you receive from your company for the purpose of travel to any place in India along with your family for the purpose of leave. The claim can be made two times in a bucket of 4 years.

4. Prize Money up to Rs 5,000: An amount of up to Rs 5,000 which you receive for any reason — other than as prize money and is not a recurring amount — can be excluded from your total income. It seems to be a very small amount, but sometimes this could be the difference between being in a higher slab and a lower slab.


5. Retirement/death gratuity: Any payment received under a pension or death-cum-retirement gratuity scheme by an individual or his widow, children or dependents.

The gratuity should not be more than the number of years in service multiplied by half month’s salary based on a ten-month average. For example, if the average salary for the previous ten months prior to receiving gratuity is 10,000 and years in service is 15, then 15×5,000=75,000 will be not included in total income.


6. Leave salary: Any cash amount received as compensation for earned leave which is encashed at the time of retirement. (This applies only to employees of central/state government).

7. Retrenchment: Any compensation received by a workman due to the closure of his company or change in the management of the company if new terms are less favourable than what was previously applicable.


8. Voluntary retirement: Any amount up to a maximum of Rs 500,000 paid at the time of voluntary retirement in accordance with and scheme of voluntary retirement of the company. But, the company paying the VRS should have a framework for VRS as prescribed by the government.

9. Life insurance policy: Any amount received as benefit from a life insurance policy, including bonus payment, is not included in total income. The only exception is the amounts paid as part of keyman policies.


10. Provident Fund: All payment which is received from a provident fund to which the PF Act applies or any PF fund of the government is not included in total income.

11. Superannuation: Any payment made from a superannuation fund on the death of the beneficiary or as a refund of contributions or if the employee becomes incapacitated before retirement.

12. Payment of rent: Any allowance paid by an employer to an employee to meet expenditure actually incurred on the payment of rent for accommodation. But this is not allowed if the house is owned by the employee or he has not incurred the rental.

13. Income from government securities: Any earnings from interest, premium on redemption or other payment on securities, bonds, annuity certificates, savings certificates and other instruments issued by the central government and also deposits taken by the central government.

In case of Non-Residents, if the bond have come to you by virtue of being a nominee or survivor of the Non-Resident, or if the bonds have been gifted to you by an NRI — who purchased the instrument in foreign exchange and if the principal and interest will not be taken out of India by the recipient of the gift, the amounts will not be added to income.


14. Scholarships for education are not included in total income.

15. Awards and rewards: All payments receive in cash or kind as an award given by the central or state governments or by a body recognised by the central government to give such awards will not be included in the total income.

16. Relief funds: Any amounts which are received by an individual as part of the Prime Minister’s National Relief Fund or the promotion of folk art fund or students fund or foundation for communal harmony will be treated as not included in income.

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