Accountancy Notes for FAA (By JKSSB Study Fast - Iqbal Sir)

Accounting :- is the process of recording, classifying and summarizing financial transactions in a meaningful
format to Communicate the information to intended users to be able to make economic decisions.
Accounting and Accountancy :- Accountancy is knowledge whereas accounting is the action or process.
Accounting process is carried out on the basis of the rules and principles framed by accountancy. Thus, it may
be said that accountancy is knowledge of accounting and accounting is the application of accountancy
Procedure of Accounting
 Recording  Summarizing  Interpreting
 Classifying  Analysing  Communicating
1. Recording :- It is the first step where all financial transactions are written down in books of original entry, such
as the Journal, immediately after they occur.
2. Classifying :- Recorded transactions are then sorted and grouped into different accounts (like Cash, Sales,
Purchases) in the Ledger for easy understanding.
3. Summarizing:- All classified information is combined and presented in standard statements such as the Trial
Balance, Profit & Loss Account, and Balance Sheet for a clear financial picture.
4. Analysing :- The summarized data is examined in detail to identify patterns, trends, strengths, and weaknesses
of the business.
5. Interpreting :- The analysed results are explained and given meaning, helping users understand what the
numbers indicate about financial performance and position.
6. Communicating :- Finally, the interpreted information is shared with internal and external users (owners,
investors, govt., creditors) so they can make informed economic decisions.
Users of Accounting Information
Internal Users :- Owners, Management, Employees.
External Users :- Banks and financial institutions, Investors and Potential Investors, Creditors, govt. and its
authorities, Archers, Consumers, Public.
Difference Between Bookkeeping and Accounting
Bookkeeping Accounting
It is the recording phase of an accounting system. It is the summarizing phase of an accounting system.
(1st Step of Accounting)
It is the primary stage and basis for accounting It is the secondary stage that begins after bookkeeping ends.
It is routine in nature and does not require special skills It is analytical in nature and requires special skills or knowledge.
Managerial decisions cannot be taken using these Managerial decisions can be taken using these records.
records.
Financial statements are not prepared at this stage Financial statements are prepared on the basis of bookkeeping
records.

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ACCOUNTING ASSUMPTIONS
Business Entity Assumption:- According to this assumption, the business is treated as a unit or entity apart
from its owners. The business and the owner are treated as two separate persons. This means the business’s
money and the owner’s personal money are not mixed.
Example: If the owner puts money into the business, it is recorded as the business receiving money, not the

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owner spending it.
2. Money Measurement Assumption :- Only those events that can be expressed in money are recorded in
accounting. Example: A company’s reputation is important, but since it cannot be measured in money, it is not

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recorded.
3. Going Concern Assumption :- It is assumed that the business will continue to run in the future and will not
close soon. Example: Because of this assumption, long-term assets like buildings are shown at cost and

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depreciated over many years.
4. Accounting Period Assumption :- The life of a business is divided into equal time periods—like 1 year, 6
months, etc. At the end of each period, the business prepares financial statements (Profit & Loss Account,
Balance Sheet) to know its performance.
Example: Even though a business will continue for many years, we check profits every year.
ACCOUNTING PRINCIPLES
1. Accruals concept: revenue and expenses are recorded when they occur and not when the cash is received or
paid out.
2. Consistency concept:- once an accounting method has been chosen, that method should be used unless
there is a sound reason to do otherwise.
3. Going concern: - the business entity for which accounts are being prepared is in good condition and will
continue to be in business in the foreseeable future;
4) Full Disclosure Principle :- The full disclosure principle states that all important financial information must
be clearly shown in the financial statements so that users can understand the true position of the business.
This includes any information that may affect decisions of users. Example: Showing loans, contingent
liabilities, or accounting policies in notes.
5) Matching Principle :- According to the matching principle, expenses should be recorded in the same period
as the income they help to generate. This helps in finding the correct profit or loss of a particular period.
Example: Cost of goods sold is recorded in the same period in which sales are made.
6) Dual Aspect Concept :- The dual aspect concept states that every business transaction has two
effects—one debit and one credit. This forms the basis of the double entry system of accounting. Example:
When cash is paid to buy furniture, furniture increases (debit) and cash decreases (credit).
Accountancy Terms
CAPITAL {Owner Equity):- Capital is the amount or assets invested by the owner into the business.
Example :- If the owner invests ₹1,00,000 cash and ₹50000 goods (like Furniture etc) to start a business, that is
called Capital.
DRAWINGS :- Money or goods withdrawn by the owner from the business for personal use.
Examples :- Taking ₹10,000 cash from business for personal use.
Taking home goods worth ₹2,000 for family use
Drawings reduce the owner’s capital.
ASSET :- Anything owned by a business that has monetary value.

(a) Current Assets :- Assets that will be converted into cash within one year.
Examples : Cash, Stock/Inventory, Debtors (Accounts Receivable), Bills Receivable, Short-term deposits
(b) Fixed Assets :- Assets used for long-term operations, not meant for resale.
Examples : Land, Building, Machinery, Vehicles, Furniture
TANGIBLE ASSETS :- Physical assets that can be seen and touched.
Examples : Land, Building, Plant & Machinery, Furniture, Vehicles, Inventory.
INTANGIBLE ASSETS :- Non-physical assets that cannot be touched but have value.
Examples : Goodwill, Patents, Trademarks, Copyrights, Brand Name.

LIABILITY (Uudhaar / Boj / Burden) :- Any amount the business owes to others.
(a) Short-Term Liabilities :- Payable within one year. Examples: Creditors, Outstanding expenses, Short-term
loans, Bills payable
(b) Long-Term Liabilities :- Payable after one year. Examples: Long-term loan, Mortgage loan.
(c) Contingent Liability :- A liability that may or may not arise depending on a future event.
Examples: Court case, Guarantees issued.
Contingent liabilities are shown as a note to the accounts, not in the balance sheet.
Expenditure :- Amount spent or liability incurred for acquiring assets, goods/services.
Types of Expenditure :
A. Capital Expenditure :- Money spent to acquire or improve fixed assets. Long-term benefit (more than 1 year).
Example: Purchase of machinery, building.
B. Revenue Expenditure (Expenses):- Money spent on day-to-day business operations.
Short-term benefit (within 1 year). Example: Salary, wages, electricity, rent.
Expense :- Expense is the Cost Incurred for Generating Revenue.
a) Outstanding Expanses - Expenses that are due but not yet paid. Examples: Salary unpaid, Rent unpaid, Wages
unpaid. These are shown as liabilities.
b) Prepaid Expenses - Expenses paid in advance before they become due.
Examples: Prepaid insurance, Prepaid rent, Mobile Recharge , These are shown as assets.
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Income/ Profit :- Income is the profit earned during an accounting period.
In other words, the difference between revenue and expense is termed as Income.
Income = Revenue – Expense. (1000 – 800 = 200 (profit))
a) ACCRUED INCOME :- Income earned but not yet received.
Example: Interest earned but not yet received. Shown as assets.
b) Deferred Income :- (Unearned Income) Income recieved in advance like income received before it is earned.
Examples: Rent received in advance, Subscription received in advance. Shown as a liability.
CREDITORS :- People or organizations to whom the business owes money.
These are suppliers from whom goods/services were purchased on credit.
Example : If goods worth ₹8,000 are purchased on credit from a supplier, that supplier is a creditor.
DEBTORS :- People or organizations who owe money to the business because they purchased goods/services
on credit.
Example : If a customer buys goods worth ₹5,000 on credit, they become a debtor.
ACCOUNTS PAYABLE:- Money the business must pay to suppliers (creditors).It appears on the liabilities side of
the balance sheet.
ACCOUNTS RECEIVABLE :- Money the business must receive from customers (debtors).
It appears on the assets side of the balance sheet.
DEPRECIATION :- Decrease in the value of an asset due to use, wear and tear, or time.
Examples:Machinery loses value each year. Vehicles lose value as they age
Depreciation is a non-cash expense, meaning no money goes out.

Business Transaction :- A business transaction is any financial activity or economic event between two people
or parties that starts the accounting process.
It is an event that involves money and causes a change in the financial position of a business.
In simple words, a business transaction is an agreement between two parties to exchange goods or services for
money or something of value.
Examples - Selling goods, Buying goods, Receiving money from debtors, Paying money to creditors, Buying or
selling fixed assets, Paying interest, Paying dividends
DISCOUNT :: Reduction in the price.
(a) Cash Discount :-Given to customers for quick or early [Link] is recorded in the [Link]:If bill =
₹1,000 and customer pays immediately, discount = ₹50.
(b) Trade Discount :- Given to customers for bulk [Link] is not recorded in the books; only the net price is
recorded.
BAD DEBT :- Amount that cannot be recovered from debtors is considered bad debt.
Example:A debtor who owes ₹10,000 is unable to pay → it becomes bad [Link] as a loss.
Purchase :- buying goods that a business intends to resell or use for trading.
Only goods purchased for resale are called purchases.
Buying assets (machine, furniture, computer) is not purchase.
Purchases increase the stock of the business.
Purchase Return (Return Outward) :- When goods bought from a supplier are returned back, it is called Purchase
Return or Return Outward.
Why return - Wrong quantity, Defective goods, Poor quality, Extra items delivered
Sales :- Sales refer to selling goods that the business normally trades in. Sales create income for the business.
Only goods sold from stock are called sales.
Selling fixed assets is not sales (it is disposal of asset).
Sales Return (Return Inward) :- When customers return the goods they bought earlier, it is called Sales Return
or Return Inward.
Entity :- refers to a business unit that is separate and distinct from its owner(s).
According to the Business Entity Concept, the business and the owner are treated as two separate entities for
accounting purposes.
Example: If Ram starts a business, (Ram = Owner, Ram's business = Entity Both are treated separately in
accounts).
1. Business Entity :- An entity that is established to earn profit. Examples: Sole Proprietorship, Partnership Firm,
Company.
2. Non-Business Entity (Non-Profit Entity) :- An entity that is not established to earn profit, but for service or
welfare. Examples: Schools, Hospitals, Clubs, Charitable Trusts, NGOS.
Goods :- Goods refer to the items purchased or produced for resale in a business with the aim of earning profit.
Examples: Clothes in a garment shop, Books in a bookstore.

Accounting Equation :- Accounting equation is a mathematical expression, which shows that the total of
assets is equal to the total of liabilities and capital.
Assets = Liabilities + Capital
 Capital can also be called as owner’s equity and liabilities as outsider’s equity.
 Dual Aspect Concept :- The dual aspect concept says that every business transaction affects two accounts.
This idea forms the foundation of double-entry accounting.
 It is based on the accounting equation : Assets = Liabilities + Equity
 This means that whenever something changes on one side, there will be an equal change on the other side.
Accounting equation can be written as follows:
 Assets = Capital + Liabilities
 Capital = Assets – Liabilities
 Liabilities = Assets – Capital
Notes - Capital is also called Equity / Owner's Equity/ Net Worth.
Q1. A firm has assets of ` 1,00,000 and the external liabilities of ` 60,000. Its capital would be
Solution :- Capital = Assets – Liabilities
Capital = 1,00,000 -- 60,000
Capital = 40,000.
Q2. If the Capital of a business is Rs. 150,000 and outside Labilities are Rs. 30,000, Calculate total assets of
the Business.
Solution:- Assets = Capital + Liabilities
Assets = 1,50,000 + 30,000
Assets = 1,80,000.
Q3. If total assets of a business are Rs. 2,00,000 and net worth is Rs. 1,50,000, Calculate creditors ?
Solution :- Liabilities = Assets – Capital
Liabilities = 2,00,000 -- 1,50,000
Liabilities = 50,000.
JOURNAL :-
 Journal is a book of first entry. It is a preliminary book to provide a chronological record of transactions in
which each transaction is recorded with relevant supplementary information.
 Journal is known as a book of original entry because the transactions are first recorded in journal and it is from
this record that various accounts are posted in the ledger.
 Journal is also known as subsidiary book or day book. The process of recording transactions in journal is
known as journalizing.
 Whenever something happens in business: buying, selling, paying, receiving, first entry is written in Journal,
then sent to Ledger which is called as Posting
 Journal Entries :-
Whenever we write something in the Journal, it is called a Journal Entry.
Every Journal Entry has two parts:
1. DEBIT (Dr.)
2. CREDIT (Cr.)
Types of Accounts
1. Personal Accounts :- Personal accounts are those accounts which are related to persons. These persons may
be individuals, firms, companies or institutions. Personal accounts are classified into three types:
1. Natural Personal Accounts :- Accounts of real human beings are called Natural Personal Accounts.
Examples: Raju's Account, Sameer's Account, Mohan Account, Creditors A/c, Debtor A/c, Capital A/c. .
2. Artificial (Legal) Personal Accounts :- Accounts of organizations and institutions created by law are called
Artificial Personal Accounts.
Examples - Reliance Industries Ltd Account, State Bank of India Account, Bank Account, School Account,
Hospital Account, Sports Club Account.
3. Representative Personal Accounts :-Accounts which represent a person or group of persons are called
Representative Personal Accounts.
Examples: Outstanding Salary Account, Prepaid Rent Account, Accrued Interest Account, Outstanding Wages
Account, Commission Payable Account
2. Real Accounts :- Real accounts are the accounts related to assets or properties of the business. These
accounts show what the business owns.
Real accounts are of two types:
(a) Tangible Real Accounts :- Accounts of assets which can be seen and touched are called Tangible Real
Accounts.
Examples - Cash Account, Building Account, Land Account, Plant Account, Machinery Account, Furniture Account,
Stock (Goods) Account, Vehicles Account, Computers Account
(b) Intangible Real Accounts :- Accounts of assets which cannot be seen or touched but have value are called
Intangible Real Accounts.
Examples : Goodwill Account, Trademark Account, Patent Account, Copyright Account, Franchise Account,
Brand Name Account
3. Nominal Accounts :- Nominal accounts are the accounts related to incomes, expenses, losses and gains of
the business.
Examples - Expenses: Salary Account, Rent Account, Wages Account, Electricity Account, Telephone Expenses
Account, Printing Expenses Account.
Incomes / Gains: Sales AccountInterest Received Account, Commission Received Account, Discount Received
Account
Losses: Bad Debts Account, Loss by Fire Account, Loss by Theft Account
Golden Rules of Journal Entry :
Type of Account Golden Rule
Personal Accounts Debit - the receiver Credit - the giver
Rea l Accounts Debit - What comes in Credit - What goes out
Nominal Accounts Debit- All expense & loss Credit-All income and gain

List of Accounts
8. Goods sold 16. Discount allowed
1. Salary paid 9. Cartage paid 17. Interest paid
2. Rent received 10. Prepaid salary 18. Goods returned by buyer
3. Machinery sold 11. Stationery expense 19. Drawings by proprietor
4. Wages outstanding 12. Advertisement 20. Cash received
5. Rent paid 13. Bank deposit 21. Commission received
6. Capital introduced 14. Rent outstanding 22. Furniture purchased
7. Goods purchased 15. Bank overdraft
No. Account Nature of Account Debited / Credited
1. Salary paid Nominal Salary Debited
2. Rent received. Nominal Rent Credited
3. Machinery sold Real. Machinery Credited
4. Wages paid. Nominal Wages Debited
5. Rent paid. Nominal Rent Debited
6. Capital introduced Personal Capital Credited
7. Goods purchased Real Purchases Debited
8. Goods sold Real Sales Credited
9. Cartage paid. Nominal Cartage Debited
10. Prepaid salary. Personal Prepaid Salary Debited
11. Stationery expense Nominal Stationery Debited
12. Advertisement Nominal Advertisement Debited
13. Bank deposit Personal Bank Debited
14. Rent outstanding Personal Rent Outstanding Credited
15. Bank withdrawal Personal Bank Credited
16. Discount allowed Nominal Discount Debited
17. Interest paid. Nominal Interest Debited
18. Goods sold returned by buyer Real Sales Returns Debited
19. Drawings by proprietor. Personal Drawings Debited
20. Cash received. Real. Cash Debited
21. Commission received. Nominal Commission Credited
22. Furniture purchased Real Furniture Debited
1. Business started with capital ₹5,00,000
Cash Account Dr. ₹5,00,000
To Capital Account ₹5,00,000 Pratice More Journal Entries
2. Furniture purchased for ₹75,000 1. Goods purchased from Ram on credit ₹10
Furniture Account Dr. ₹75,000 Purchase A/c Dr. 10
To Cash Account ₹75,000 To Ram A/c 10
3. Goods purchased on credit from Sameer for 2. Goods purchased from Ram for cash ₹10
₹1,00,000 Purchase A/c Dr. 10
Purchases Account Dr. ₹1,00,000 To Cash A/c 10
To Sameer Account ₹1,00,000 3. Goods sold for cash ₹10
4. Rent paid ₹10,000 Cash A/c Dr. 10
Rent Account Dr. ₹10,000 To Sales A/c 10
To Cash Account ₹10,000 4. Goods sold to Radha on credit ₹10
5. Goods sold for cash ₹18,000 Radha A/c Dr. 10
Cash Account Dr. ₹18,000 To Sales A/c 10
To Sales Account ₹18,000 5. Goods sold to Radha for cash ₹10
6. Goods sold to P for ₹15,000 at 10% cash discount Cash A/c Dr. 10
(Discount ₹1,500, Cash received ₹13,500) To Sales A/c 10
Cash Account Dr. ₹13,500 6. Loss of goods due to fire
Discount Allowed Account Dr. ₹1,500 Loss by Fire A/c Dr.
To Sales Account ₹15,000 To Purchase A/c
7. Cash deposited into bank ₹10,000 7. Salary paid to Ram ₹10
Bank Account Dr. ₹10,000 Salary A/c Dr. 10
To Cash Account ₹10,000 To Cash A/c 10
8. Paid ₹20,000 to Sameer 8. Machine purchased ₹450 + installation ₹50
Sameer Account Dr. ₹20,000 Machine A/c Dr. 500
To Cash Account ₹20,000 To Cash A/c 500
9. Cash withdrawn by proprietor for personal use 9. Capital introduced ₹10
₹2,000 Cash A/c Dr. 10
 To Capital A/c 10 Salary A/c Dr. 10
10. Furniture purchased for cash ₹10 To Cash A/c 10
Furniture A/c Dr. 10 12. Goods purchased for cash ₹10
To Cash A/c 10 Purchase A/c Dr. 10
To Cash A/c 10

LEDGER
 Ledger is a set of accounts. It is a book which contains all individual accounts of a business. Each account
is opened on a separate page or card.
 Ledger is known as: Principal Book of Accounts & Book of Final Entry.
 Posting - Posting is the process of transferring entries from Journal to Ledger.
Structure of Ledger Account
Left side of ledger account → Debit (Dr.). Right side of ledger account → Credit (Cr.)
JF (Journal Folio) column shows the page number of the Journal from where the entry is posted.

Distinction Between Journal and Ledger

Journal Ledger
 Nature Subsidiary Book Principal Book
 Also called Book of Original Entry Book of Final Entry
 Recording Chronological (date-wise). Analytical (account-wise)
 Narration. Present Not present
 Balancing. Not balanced Balanced

Types of Ledger Accounts :- Separate ledger accounts are prepared for:

Assets
Liabilities
Expenses
Incomes
Modern Approach (ager Traditional Approach nhi samj aaye to aye ye apply kar sakte ho)
Type of Account Debit (Dr.) Credit (Cr.)
 Assets. Increase Decrease
 Liabilities. Decrease Increase
 Expenses. Increase Decrease
 Incomes. Decrease Increase
Golden Rule (Modern Approach – Shortcut)
> “Debit the receiver of benefit, Credit the giver of benefit”
(Assets & Expenses → Debit on increase and Liabilities & Incomes → Credit on increase)
Balances in Ledger
Debit Balance: When Debit total > Credit total
Credit Balance: When Credit total > Debit total
Closing balance of current year becomes the Opening balance of next year.
Balancing of Ledger Accounts :- Balancing is the process of equalising debit and credit sides of a ledger
account by finding the difference.
Procedure of Balancing
1. Total the Debit side and Credit side separately.
2. Find the difference between totals.
3. Write the difference on the shorter side as: “To Balance c/d” or “By Balance c/d”
4. Now both sides become equal.
5. In the next accounting period, bring the balance as: “To Balance b/d” or “By Balance b/d”
Why Do We Balance a Ledger Account?
Ledger accounts are balanced to know the exact balance of each account at the end of an accounting period.
Objectives of Balancing:
1. To know whether an account has a Debit balance or Credit balance.
2. To find the correct balances of Assets, Liabilities, Income, and Expenses.
3. To prepare the Trial Balance.
4. To check arithmetical accuracy of ledger posting.
5. To carry forward balances to the next accounting period.

Posting from Journal to Ledger — Brief Rules

1. Debit in Journal → Debit in Ledger (write To the credited account)
2. Credit in Journal → Credit in Ledger (write By the debited account)
3. Open separate ledger account for each journal entry account
4. Amount remains same as journal
5. Posting date is same as journal date
6. Narration is not written in ledger
7. Journal Folio (J.F.) is mentioned for reference
Name Interchange (in Posting to Ledger)
While posting a journal entry into the ledger, the name of the opposite account is written in the Particulars
column.
How it Works:
Debit side of ledger → write “To (credited account name)”
Credit side of ledger → write “By (debited account name)”
Example:
Journal Entry: Ledger Posting:
Cash A/c Dr. Cash A/c → To Ram A/c
To Ram A/c Ram A/c → By Cash A/c
Journal Entries :-
April 15 – Cash received from Gupta ₹625,
April 1 – Business started with cash ₹10,000 discount allowed ₹25
Cash A/c Dr. 10,000 Cash A/c Dr. 625
To Capital A/c 10,000 Discount Allowed A/c Dr. 25
To Gupta A/c 650
April 3 – Deposited in SBI ₹6,000
Bank (SBI) A/c Dr. 6,000 April 20 – Furniture purchased ₹300
To Cash A/c 6,000 Furniture A/c Dr. 300
To Cash A/c 300
April 5 – Bought goods from Mahavir ₹1,500
Purchases A/c Dr. 1,500 April 22 – Drew cash from bank for personal
To Mahavir A/c 1,500 use ₹600
Drawings A/c Dr. 600
April 9 – Sold goods to Gupta ₹650 To Bank A/c 600
Gupta A/c Dr. 650
To Sales A/c 650 April 30 – Paid rent by cheque ₹200
Rent A/c Dr. 200
April 12 – Paid cash to Mahavir ₹990, discount To Bank A/c 200
received ₹10
Mahavir A/c Dr. 1,000 April 30 – Salary due to clerk ₹300
To Cash A/c 990 Salary A/c Dr. 300
To Discount Received A/c 10 To Outstanding Salary A/c 300
Cash Book :- A Cash Book is a special journal used for recording all cash receipts and cash payments. It
records transactions made in cash or through cheques (bank). (Book of Original Entry / Prime Entry)
When a Cash Book is maintained, there is no need to open a separate Cash Account in the ledger. It also
acts as a ledger account because it is prepared in the form of a Cash Account. Therefore, Cash Book performs
a dual role of Journal & Ledger
Features of Cash Book
1. Only cash and bank transactions are recorded in the Cash Book.
2. It performs the functions of both journal and ledger.
3. All cash receipts are recorded on the debit side.
4. All cash payments are recorded on the credit side.
5. Cash Book always shows debit balance or nil balance.
6. It never shows credit balance (except Bank Overdraft in bank column).
Why Cash Book Never Shows Credit Balance?
Cash cannot be paid unless it is available.
Hence, cash balance cannot be negative.

Types of Cash Book

1. Single Column Cash Book :- Contains only one column for cash. Records cash receipts and cash payments
only. Used in small businesses.
Example: Cash sales, cash purchases, cash expenses.
2. Double Column Cash Book :- Contains two columns: Cash column & Discount column
Records: Cash transactions, Cash discount allowed and received, Discount column does not show balance.
3. Triple Column Cash Book :- Contains three columns: Cash column, Bank column & Discount column
Records: Cash transactions, Bank transactions & Discount allowed and received. Most commonly used in
business.
4. Petty Cash Book :- Used to record small and frequent expenses. Maintained under Imprest System.
Examples - Office tea, Bus fares, Fuel, Newspapers, Postage, Cleaning charges, Casual labour
Balance of Petty Cash Book is an Asset.
Note :
Discount column never shows balance - Discount column never shows balance because discount is a nominal
item (expense or income) and is transferred to Profit & Loss Account, not carried forward.
Imprest System : Imprest System is a system of maintaining petty cash in which a fixed amount of cash is
given to the petty cashier, and at the end of a period, the exact amount spent is reimbursed so that the petty
cash balance is restored to the original fixed amount
TRIAL BALANCE :
Trial balance is a statement containing the debit and credit balances of all ledger accounts on a particular date.
It is arranged in the form of debit and credit columns placed side by side and prepared with the object of
checking the arithmetical accuracy of entries made in the books of accounts and to facilitate preparation of
financial statements.
FEATURES
It is a balance of all ledger accounts.
It is a statement not an account
It is prepared to check the arithmetic accuracy of accounts.
It is prepared on a particular date.
It serve the purpose for preparing final accounts.
Objectives of Trial Balance
It ensures that the posting from the ledgers is done correctly. If there are any arithmetic errors in the
accounting then this will get reflected in the trial balance.
Trial balance will also help in the preparation of the final accounts.• And the trial balance will also serve as a
useful summary of all accounting records. It is a summary of all the ledger accounts of a firm. We will only
refer to the individual ledger accounts if any details are needed. Otherwise, we rely on the trial balance.
Errors Disclosed by Trial Balance
✔ One-sided posting – Entry posted on only one side (debit or credit).
✔ Posting on wrong side – Amount posted on opposite side of the ledger.
✔ Wrong totaling of ledger accounts – Incorrect addition of ledger balances.
✔ Wrong balancing – Errors while balancing ledger accounts.

❌❌
Errors NOT Disclosed by Trial Balance
Error of complete omission – Transaction not recorded at all.

❌❌ Error of principle – Wrong account type used (e.g., capital vs revenue).

Error of original entry – Wrong amount recorded in original entry but posted correctly.
Compensating errors – Two or more errors cancel each other.
Therefore, agreement of trial balance is not conclusive proof of correctness.
Debit and Credit Items in Trial Balance :- Golden Rule
Assets and Expenses show Debit balance
Capital, Liabilities and Incomes show Credit balance
Source Documents :- Source documents are written proofs of business transactions. They are also called supporting
documents because they support the entries made in the books of accounts.
It is the original evidence of a business transaction. Prepared by buyer, seller, bank, or outside [Link] proves that a
transaction has occurred. Used as the basis for preparing vouchers.
Examples of Source Documents:
Invoice / Bill, Cash Memo, Receipt, Debit Note, Credit Note, Cheque, Bank Statement, Pay-in-Slip
Cash Memo - Cash memo is prepared by the seller when goods are sold against cash. It has details of goods sold, quantity,
rate of each item and the total amount received, besides the date of transaction and other terms and conditions, if any.
Invoice or bill - An invoice or bill is prepared by the seller when the goods are sold on [Link] has details of the party to
whom goods are sold, goods sold and the total sale amount. The original copy of the sales invoice is sent to the purchaser
and a duplicate copy is retained as an evidence of the sales for recording it in the books of account and for future reference.
For the purchaser, credit purchases are evidenced by bill received from the supplier
Receipt : (Proof of payment) When a trader receives cash from a customer, he issues a receipt containing the date, amount
and the name of the customer. The original copy of the receipt is given to the customer and its duplicate copy is kept for
making records in the books of accounts.
CREDIT NOTE : - A Credit Note is a document issued by a seller to a customer to reduce the amount payable by the
customer.
Issued When
1. Customer returns goods (Sales Return)
2. Seller overcharges the customer
Effect - Customer’s account is credited in the seller’s books
Amount payable by the customer decreases
Example : Actual price = ₹1,000, Charged price = ₹1,200, Extra ₹200 charged → Overcharge
Credit Note issued
DEBIT NOTE :- A Debit Note is a document issued by the buyer to the supplier to reduce or increase depending on situation
the amount payable to the supplier.
It is also issued when the supplier has undercharged the buyer.
Issued When
1. Goods are returned to the supplier (Purchase Return)
2. Supplier undercharges the buyer
Effect
Supplier’s account is debited in the buyer’s books
Amount payable to the supplier decreases
Example : Actual price = ₹1,000, Charged price = ₹800, Undercharged amount = ₹200
Debit Note is issued for ₹200
Pay-in-slip: This is a form available from a bank and is used to deposit money in the bank. Each pay-in-slip has a counterfoil
which is returned to the depositor duly stamped and signed by the cashier of the bank.
Cheque: A cheque is an order in writing drawn upon a bank to pay a specified amount to the bearer or the person named in
it.
Voucher :- It is an internal accounting document. Prepared by the accounts department of the business. It is used to record
transactions in the books of accounts. Prepared after examining source documents. “Source documents are the proof of
transactions, while vouchers are prepared on the basis of source documents to record transactions in the books.”
Types of Vouchers
1. Cash Vouchers :- These vouchers are prepared when cash is involved in the transaction.
(a) Debit Vouchers (Cash Payment) :- Prepared when cash is paid. Cash goes out of the business. Also called Payment
Vouchers
Examples: Payment of salary, Rent paid in cash, Purchase of goods in cash. Cash Account is credited potte
(b) Credit Vouchers (Cash Receipt) :: Prepared when cash is received. Cash comes into the business. Also called Receipt
Vouchers
Examples: Cash sales, Capital introduced in cash, Debtors paying cash. Cash Account is debited
2. Non-Cash Vouchers (Transfer Vouchers) :- No cash is involved. Amount is transferred from one account to another. Also
called Journal Vouchers
Examples: Credit purchase of goods, Depreciation charged, Outstanding expenses, Bad debts written off
Compound Voucher :- A document showing a transaction that contains multiple debits and one credit or which contains
multiple credits and one debit is called compound voucher.
 Source Document Vouchers
It is a support to the voucher. Voucher is supported by source document.

It is not prepared to record transactions. It is prepared for the purpose of recording of transactions.
It contains full details of a transaction. It puts emphasis on which account is to be debited and which acco
to be credited.
It is evidence of the transaction It is document of correct recording of a transaction
Procedures followed while preparing a voucher :-
1. Verify the date, amount, and details of the transaction from supporting documents
2. Ensure the voucher is supported by proper bills, invoices, or receipts
3. Confirm approval and signature of the authorised person
4. Select the correct type of voucher for the transaction
5. Record the transaction under the correct ledger accounts
6. Check accuracy of debit and credit entries before posting
Financial Statements

Financial Statements (Final Accounts) : Financial statements are formal records that show the financial performance and
financial position of a business for a specific period.
1. Income Statement :- Income Statement shows the operating results of a business during an accounting period. It is
prepared in two parts:
(A) Trading Account :- Trading Account is prepared to calculate Gross Profit or Gross Loss. Gross Profit = Net Sales – Cost
of Goods Sold (COGS). Gross Loss = Cost of Goods Sold (COGS) – Net Sales
(B) Profit & Loss Account :- Profit & Loss Account is prepared to calculate Net Profit or Net Loss. Net Profit = Gross Profit +
Other Incomes – Indirect Expenses.
Net Loss = Indirect Expenses – (Gross Profit + Other Incomes)
2. Position Statement :- It is a statement that explains the overall financial position of a business at a particular point in
time. It focuses on showing what the business owns and what it owesn (Assets & Liabilities ) helping users understand the
financial strength and stability of the business.
Balance Sheet : A Balance Sheet is a formal financial statement prepared at the end of an accounting period. It
systematically lists assets on one side and liabilities on the other side, strictly following the accounting equation:
Assets = Capital + Liabilities.
Trading account & P/L Account ko Samjhne se pehle Expance & Income ko samjna Zaroori hai.
EXPENSES : - Expenses are costs incurred to run a business or to earn income.
A. Direct Expenses - Expenses that are directly related to production or purchase of goods and can be easily linked to a
specific product.
Shown in: Trading Account
Examples of Direct Expenses
1. Wages (paid to factory workers) 6. Import Duty
2. Carriage Inward / Freight 7. Manufacturing Expenses
3. Power & Fuel (used in factory) 8. Royalty (based on production)
4. Factory Rent 9. Coal, Gas, Electricity (factory use)
5. Custom Duty
B. Indirect Expenses :- Expenses not directly connected with production, but incurred for running the business.
Shown in: Profit & Loss Account
Examples of Indirect Expenses
1. Office Rent 5. Electricity (office) 9. Telephone Expenses
2. Salary (office staff) 6. Insurance 10. Bad Debts
3. Advertising Expenses 7. Depreciation 11. Audit Fees
4. Carriage Outward 8. Legal Charges
INCOME :- Income is money received by a business from various sources.
A. Direct Income :- Income earned from the main business activity.
Shown in: Trading Account
Examples of Direct Income
1. Sales
2. Commission Received (if commission is main business)
3. Discount Received (trade discount)
4. Royalty Received (if main activity)
5. Closing Stock
B. Indirect Income :- Income earned from secondary or non-main activities.
Shown in: Profit & Loss Account
Examples of Indirect Income
1. Interest Received
2. Rent Received
3. Commission Received (if not main business)
4. Dividend Received
5. Profit on Sale of Asset
6. Discount Received (Cash Discount)
Trading Account – is a nominal account prepared by a business concern to find out Gross Profit or Gross Loss for a
particular accounting period. It shows the results of buying and selling of goods.
Rule of Nominal Account
"Debit" - All Expenses and Losses. "Credit" - All Income & gain.
It is prepared at the first stage of final accounts, followed by Profit & Loss Account and Balance Sheet.
Format of Trading Account

Items Appearing on Debit Side

(a) Opening Stock - Value of unsold goods at the beginning of the year. Always appears on Debit side
(b) Purchases - Total goods bought for resale
Net Purchases = Purchases – Purchase Returns
(c) Direct Expenses - Expenses incurred to bring goods to saleable condition:
Wages, Carriage Inwards, Freight, Import DutyOctroi, Factory Fuel.
Items Appearing on Credit Side
(a) Sales - Total goods sold during the year
Net Sales = Sales – Sales Returns
(b) Closing Stock - Value of unsold goods at the end of the year
Appears on Credit side of Trading Account and Asset side of Balance Sheet

Gross Profit and Gross Loss :-

Gross Profit :- When the credit side is more than the debit side, it results in Gross Profit. It shows profit earned from main
business activities.
Formula: Gross Profit = Net Sales – Cost of Goods Sold (COGS)
Gross Loss: When the debit side is more than the credit side, it results in Gross Loss.
It shows loss from main business activities.
Formula : Gross Loss = Cost of Goods Sold (COGS) – Net Sales
(When COGS is more than Net Sales)
Cost of Goods Sold (COGS): COGS means the total cost of goods sold during the period.
Formula: COGS = Opening Stock + Purchases + Direct Expenses – Closing Stock
Transfer of Gross Profit / Gross Loss In Profit & Loss Account:
If there is Gross Profit: It is credited to P&L Account
If there is Gross Loss: It is debited to P&L Account
Profit and Loss Account (P&L A/c) :- It is a nominal account.
The main purpose of this account is to find out the net profit or net loss of a business during an accounting [Link] the
Trading Account shows gross profit or gross loss, the Profit and Loss Account goes one step further and calculates the
final result of the business.
P&L A/c includes:
Indirect expenses and losses & Indirect incomes and gains
Gross profit or gross loss transferred from the Trading Account.
The difference between total income and total expenses is called Net Profit or Net Loss.
Note : Direct expenses and direct incomes are already included in the Trading Account. That is why direct items are not
added again in the Profit & Loss Account.
Adding them again would be double counting.
Features of Profit and Loss Account
• Prepared at the end of the accounting year.
• It is the second stage of final accounts.
• Shows only indirect expenses and indirect incomes
• Begins with Gross Profit or Gross Loss from Trading Account
• Includes all current year incomes and expenses, whether paid/received or not
• Items related to past or future years are not included

🔍
Result of Profit and Loss Account
If Credit side > Debit side → Net Profit
🔍 If Debit side > Credit side → Net Loss

Balance Sheet :
A Balance Sheet is a statement prepared to know the financial position of a business on a particular date.
It shows Assets & Liabilities of the business.
From this, we understand the financial strength or weakness of the business on a given date.
Why is Balance Sheet Prepared?
After finding net profit or net loss through the Trading and Profit & Loss Account, a businessman wants to know: How
strong the business is. Whether the business is financially sound or not. For this purpose, a Balance Sheet is prepared.

🔹
Features of Balance Sheet
Prepared on a particular date
🔹 Shows assets and liabilities
🔹 Has two sides – Liabilities (Left) and Assets (Right)
🔹 Totals of both sides are always equal
🔹 Shows financial position and solvency of the business
🔹 Only asset and liability accounts are shown
🔹 Expense and revenue accounts are not shown
🔹 Prepared after Trading and Profit & Loss Account.
Statement of affairs :- When accounting records are incomplete (single entry system), the financial position is not shown by
a formal balance sheet. Instead, it is prepared in the form of a Statement of Affairs, which is similar to a balance sheet but
based on estimates and available information. Statement of Affairs is prepared from incomplete accounting records.

Bank Reconciliation Statement (BRS) :- A Bank Reconciliation Statement (BRS) is a statement

prepared by a firm to reconcile (match) the balance shown by the Cash Book (as per firm) with the balance shown by the
Pass Book / Bank Statement (as per bank) on a particular date.
The need for BRS arises when both balances do not agree.
Why Differences Arise Between Cash Book & Pass Book?
Differences arise mainly due to:
1. Difference in timing of recording transactions
2. Errors made by bank or firm
1. Difference in Timing of Recording Transactions
These differences occur because the firm and bank record transactions at different [Link] Causes:
(a) Cheques Issued but Not Presented for Payment
Firm records payment immediately.
Bank records it only when cheque is presented.
➜ Cash Book reduced, Pass Book unchanged
(b) Cheques Deposited but Not Yet Collected
Firm records receipt.
Bank credits only after collection.
➜ Cash Book increased, Pass Book unchanged
(c) Direct Deposit by Customers into Bank
Bank records immediately.
Firm comes to know later.
➜ Pass Book increased
(d) Bank Collects Interest / Dividend
Credited directly by bank.
Firm records later.
➜ Pass Book increased
(e) Direct Payments Made by Bank
Example: Insurance premium, rent, loan installment.
Bank debits directly.
➜ Pass Book reduced
(f) Dishonour of Cheques / Bills
Firm records receipt earlier.
Bank reverses entry on dishonour.
➜ Pass Book reduced
2. Errors Made While Recording Transactions
Errors may be committed by: Firm or Bank
A. Errors Made by the Firm (Cash Book Errors)
 Wrong amount recorded (less or more)
 Transaction completely omitted
 Error in totalling or balancing cash book
 Wrong side posting (debit instead of credit)
B. Errors Made by the Bank (Pass Book Errors)
 Wrong amount credited or debited
 Omission of transaction
 Error in balancing or totalling pass book
Benefits / Importance of Bank Reconciliation Statement
 Helps in locating errors and mistakes
 Prevents frauds and misappropriation
 Helps to know actual bank balance
 Ensures accuracy of accounting records
 Improves internal control system
 Helps in timely correction of entries

Important Accounting Concepts

Favourable Balance (Normal Balance) :- When bank balance is good (money available in bank)
Credit Balance as per Pass Book
Debit Balance as per Cash Book
Meaning: Deposits in bank are more than withdrawals. This is called FAVOURABLE BALANCE. Credit balance as per pass
book or debit balance as per cash book shows favourable balance.
Unfavourable Balance / Overdraft :- When withdrawals are more than deposits
Debit Balance as per Pass Book
Credit Balance as per Cash Book
Meaning: Firm has withdrawn more money than available. This is called OVERDRAFT / UNFAVOURABLE BALANCE
Debit balance as per pass book or credit balance as per cash book indicates overdraft.
Adjustment Rules
In Cash Book - Bank balance is an Asset → Real Account Rule
👉 Debit what comes in, Credit what goes out
Debit = Increase, Credit = Decrease
In Pass Book (Bank Statement)
Customer is a Liability → Personal Account Rule
👉 Credit the giver, Debit the receiver
✔ Credit = Increase, Debit = Decrease
➕ (Add) - When to INCREASE Cash Book Balance?
Bank has credited amount, firm has not recorded
Examples:
✔ Interest credited by bank
✔ Dividend (Profit-share) collected by bank
✔ Amount deposited directly by customers
Simple - If bank balance is more and cash book is less → ADD in cash book
➖ (Less) When to DECREASE Cash Book Balance?
Bank has debited amount, firm has not recorded
Examples:
✔ Bank charges
✔ Interest on overdraft
✔ Direct payment by bank
Simple - If cash book shows extra balance → SUBTRACT
Questions asked in FAA 2022 & FAA 2024 from BRS
Q1. A bank pass book is a copy of
A) The cash column of a customer’s cash book. B) The bank column of a customer’s cash book
C) The customer account in the bank’s ledger. D) The debtor’s account in the bank’s ledger
Q2. In bank statement, cash deposited is shown as ______
A) Debit. B) Credit. C) Expense. D) Profit
Q3. A cheque is received from customer and the same is deposited in bank for collection. If it is finally returned
dishonoured then it will result into
A) Customer’s account being credited. B) Customer’s account being debited
C) No change in customer’s account. D) No change in bank account
Q4. How do we adjust Direct Deposits by customers to ascertain the balance as per Pass book, if the starting point of
BRS is balance as per Cash book?
A) Added. B) Subtracted. C) Adjusted. D) Not adjusted
PARTNERSHIP :- A partnership is a relationship between two or more persons who agree to carry on a business

and share its profits, conducted by all or any one acting for all. Defined under Indian Partnership Act, 1932
Features and Characteristics of Partnership
Two or More Persons - Minimum 2 & Maximum 50 members required to form a partnership firm
Agreement - Partnership is the result of an agreement. Agreement may be oral or written. Written agreement among
partners is called Partnership Deed.
Lawful Business - It is formed for a lawful purpose. The business must be legal.
Profit Motive - It is formed for carrying on some business. With the intention of earning profits.
Sharing of Profits - Agreement between partners must be aimed at sharing the profits of the business. It is not necessary
that all partners should share losses. It may be agreed that one or more partners shall not be liable for losses.
Business Carried on by All or Any of Them Acting for All - Each partner can participate in the conduct of business. Each
partner is bound by the acts of other partners in respect of the business of the firm.
Types of Partnership
1. General Partnership :- All partners have unlimited liability. If business cannot pay debts, partners’ personal property can be
used. All partners share profit & loss together
Risk = very high for everyone. Everyone is fully responsible for business losses.
2. Limited Partnership :- At least one partner has unlimited liability. Other partners have limited liability (only up to their
investment). Limited partners do not take part in management. One partner takes full risk, others take limited risk. One main
risk-taker, others are safe up to their investment.
3. Partnership at Will :- No fixed time period is mentioned. Partnership continues as long as partners want. Any partner can
end it by giving notice. Runs on partners’ wish — can end anytime
4. Particular Partnership :- Formed for one specific work or project. Partnership ends automatically when work is completed.
One work → One partnership → Work finished = Partnership finished
Rights of Partners
 Every partner has the right to share profits or losses in the agreed ratio.
 Every partner has the right to take part in the conduct of business.
 Every partner has the right to inspect and have a copy of the books of account.
 Every partner has the right to disallow the admission of a new partner.
 Every partner is the joint owner of the partnership property.
 If a partner gives loan to the firm, he has a right to receive interest at the agreed rate.
 If rate is not agreed, interest is paid @ 6% p.a.
 Every partner has the right to retire from the firm after giving proper notice.

Partnership Deed (Articles of Partnership) :- Partnership comes into existence by oral or written agreement. To avoid
disputes, it is better to have a written agreement. This written agreement is known as Partnership Deed.
Contents of Partnership Deed
Name and address of the firm
Name and address of the partners
Type and nature of business of the firm
Amount of capital contributed by each partner and whether capital account will be fixed or fluctuating
Interest on capital – whether interest is to be allowed and rate of interest
Drawings – amount partners are entitled to withdraw
Interest on drawings – whether interest is to be charged and rate
 Profit-sharing ratio
Salary – whether any partner will be paid salary and how much
Other matters:
 Method of goodwill on admission/retirement
 Accounting period of the firm
 Date of commencement of partnership
 Duration of partnership
 Settlement of disputes

Rules Applicable in the Absence of Partnership Deed :- In the absence of a partnership deed or oral Agreement, or if the
partnership deed is salient on certain point, the following provision of partnership of Partnership Act 1932 will be applicable:
 Profit-sharing ratio: Profits shared equally irrespective of capital contribution.
 Interest on capital: No interest allowed (only if deed provides and only when there is profit).
 Interest on drawings: No interest charged.
 Salary to partner: No partner is entitled to salary or commission.
 Interest on loan: Allowed @ 6% p.a., whether profit or loss.
 Admission of new partner: Consent of all existing partners is required.
Charge Against Profit vs Appropriation of Profit
Charge Against Profit :- An expense that is deducted first to find Net Profit or Net Loss. Deducted from revenue. Allowed
even if there is loss
Debited to Profit & Loss A/c. Done before distribution of profit
Charge against profit is paid whether profit or loss.
Examples - Interest on Partner’s Loan, Rent, Salary to employees, Depreciation.
Appropriation of Profit :- Distribution of net profit among partners. Done only if there is profit. Not allowed in case of loss.
Debited to P&L Appropriation A/c. Done after all charges are deducted
Examples :Partner’s Salary, Interest on Capital, Partner’s Commission, Transfer to Reserve
Profit & Loss Appropriation Account :- Profit & Loss Appropriation Account is an extension of the Profit & Loss
Account. It shows how the net profit (or loss) is distributed among partners according to the Partnership Deed.
It is prepared after net profit/net loss is calculated. Net Profit / Net Loss as per P&L Account This is brought on the Credit
Side as: “By Profit & Loss A/c”
Format
Accounting Rules
Partner’s Salary, Commission, Interest on Capital - Debit P&L Appropriation A/c
Interest on Drawings - Credit P&L Appropriation A/c
Capital Account of Partners :- The Capital Account shows the amount invested by each partner in the partnership firm.
 It reflects the long-term interest of the partner in the business.
 It records capital introduced by partners.
 Balance normally remains credit balance.
 It may remain fixed or change depending on the method followed.
Methods of Maintaining Capital Accounts :- In partnership accounting, capital accounts of partners can be maintained in
two ways:
1. Fixed Capital Method
2. Fluctuating Capital Method.

Fixed Capital Method: Under the fixed capital method, the capitals of the partners shall remain fixed unless additional
capital is introduced or a part of the capital is withdrawn as per the agreement among the partners.
When Fixed Capital Accounts Method is followed then two account of each Partner is maintained:
Capital Account: Partners’ capital accounts will always show a credit balance, which shall remain the same (fixed) year after
year unless there is any addition or withdrawal of capital, called Partner’s Capital Account.
Current Account: Partners’ current account on the other hand, may show a debit or a credit balance. All items like share of
profit or loss, interest on capital, drawings, interest on drawings, etc are recorded in a separate account, called Partner’s
Current Account.
The balance of Partner’s Capital A/c’s are shown in the Liabilities side of the Balance Sheet as that much amount due to
him/her.
Credit Balance of Partner’s Current A/c’s are shown in Liabilities side and Debit Balance of Partner’s Current A/c’s are
shown in Assets side of the Balance Sheet.
Fluctuating Capital Account Method :- Under the fluctuating capital method, only one account, i.e. Capital Account is
maintained for each partner.
All the adjustments such as share of profit and loss, interest on capital, drawings, interest on drawings, salary or
commission to partners, etc are recorded directly in the Capital Accounts of the partners.
This makes the balance in the capital account to fluctuate from time to time. That’s the reason why this method is called
Fluctuating Capital Method.
Credit Balance of Partner’s Capital A/c is shown in Liabilities side and Debit Balance of Partner’s Capital A/c is shown in
Assets side of the Balance Sheet.
In the absence of any instruction or information, it is assumed that Fluctuating Capital Account Method is followed for
maintaining the Partner’s Capital Accounts
Interest on Capital - Interest on Capital is the return given to partners for the capital invested by them in the firm.
It is an appropriation of profit, not an expense.
Given only if mentioned in the Partnership Deed.
Generally calculated on Opening Capital. If capital is introduced during the year → interest is calculated from the date of
introduction.
Accounting Treatment
Credited to Partner’s Capital A/c or Current A/c
Debited to Profit & Loss Appropriation A/c
Interest on Drawings :- Interest on Drawings is the charge taken from partners for withdrawing money or goods for personal
use.
Charged Only if partnership deed allows it
Calculation - On amount of drawings. Calculated for the period drawings remain withdrawn
Accounting Treatment
Debited to Partner’s Capital/Current A/c
Credited to Profit & Loss Appropriation A/c
Partner’s Salary & Commission :- Salary: Fixed amount paid to a partner for active work . Commission: Paid as a percentage
of profit
It is an appropriation of profit, not a business expense
Accounting Treatment -
Credited to Partner’s Capital/Current A/c
Debited to Profit & Loss Appropriation A/c
Interest on Partner’s Loan :- When a partner gives loan to the firm (over and above capital), the firm must pay interest on
such loan.
Rate of Interest - If Partnership Deed specifies → Interest @ agreed rate.
If deed is silent → Interest @ 6% p.a. (As per Indian Partnership Act, 1932)
Nature of Interest :- Interest on Partner’s Loan is a Charge Against Profit
✔ Allowed whether there is profit or loss
✔ Treated like interest paid to outsiders
✔ NOT an appropriation of profit
Accounting Treatment
Interest on Partner’s Loan :- Given when a partner gives loan to the firm (extra money, not capital).
Journal Entries:
Interest on Partner’s Loan A/c Dr
To Partner’s Loan A/c
(If outstanding → To Interest Accrued A/c)

Admission of a Partner –Admission of a partner means including a new partner into an existing partnership
firm with the consent of all existing partners.
Important Adjustments at the Time of Admission
 New Profit Sharing Ratio (NPSR)
 Sacrificing Ratio
 Treatment of Goodwill
  Revaluation of Assets & Liabilities
 Distribution of Accumulated Profits & Losses
 Capital Adjustment
1. New Profit Sharing Ratio (NPSR) :- The ratio in which all partners (old + new) will share profits after admission.
Example
M and N share profits in 3 : 2
P is admitted for 1/5 share.
Solution :- Remaining share = 1 − 1/5 = 4/5
Old ratio = 3 : 2
So new ratio =
M = 3/5 × 4/5 = 12/25
N = 2/5 × 4/5 = 8/25
P = 1/5 = 5/25
✅ New Ratio = 12 : 8 : 5
Q1. A, B share profits in 5 : 3. C is admitted for 1/8th share. New profit-sharing ratio is:
A) 35 : 21 : 8 B) 5 : 3 : 1 C) 10 : 6 : 2 D) 15 : 9 : 2
Ans. A. 35 : 21 : 8
Q2. X and Y share profits equally. They admit Z for 1/5th share. What will be the new ratio?
A) 4 : 4 : 2 B) 5 : 5 : 2 C) 2 : 2 : 3 D) 3 : 3 : 1
Ans. A. 4 : 4 : 2
2. Sacrificing Ratio :- Sacrificing Ratio = Old Ratio − New Ratio
Partners who give up their share are called sacrificing partners. Used to distribute Goodwill.
3. Treatment of Goodwill :- Goodwill is the reputation of the firm that helps it earn extra profits. It is an intangible asset.
At admission, the new partner gets a share in future profits.
Old partners sacrifice a part of their profit share. Therefore, the new partner compensates old partners for this sacrifice.
This compensation is called Goodwill.
Goodwill is paid by: New partner & Goodwill is received by: Old partners. Distributed in: Sacrificing Ratio. (Sacrificing Ratio =
Old Ratio − New Ratio)
Types of Goodwill at Admission
1. Book Goodwill - Already recorded in books. Appears in Balance Sheet
2. Hidden (Unrecorded) Goodwill :- Not shown in books. Found when actual value of goodwill is given
Hidden Goodwill = Actual Goodwill − Book Goodwill
How Much Goodwill New Partner Brings :- New partner brings goodwill only for his share of hidden goodwill.
Goodwill to be brought =(Actual Goodwill − Book Goodwill) × New Partner’s Share
Example :-
Actual goodwill = ₹30,000
Book goodwill = ₹12,000
Hidden goodwill = 30,000 − 12,000 = ₹18,000
New partner’s share = 1/4
Goodwill brought = 18,000 × 1/4 = ₹4,500
Accounting Treatment:
Case 1: When Goodwill is Brought in Cash :- New partner brings his share of goodwill in cash.
Accounting Effect:
Cash A/c is debited
Old partners’ Capital A/c are credited in sacrificing ratio
Case 2: When Goodwill is NOT Brought in Cash - If the new partner does not bring goodwill in cash:
Accounting Effect:
New partner’s Capital A/c is debited
Old partners’ Capital A/c are credited in sacrificing ratio
This is called Hidden Goodwill / Adjustment of Goodwill.
Methods of Valuation of Goodwill
1. Average Profit Method
A. Simple Average Profit Method: Goodwill is calculated on the basis of average profits of past years.
Formula:Goodwill = Average Profit × Years’ Purchase
Most simple and commonly used method
B. Weighted Average Profit Method :- Recent profits are given more weight than old profits.
Formula : Goodwill = Weighted Average Profit × Years’ Purchase
Used when profits show an increasing or decreasing trend
2. Super Profit Method :- Goodwill is based on extra profit earned by the firm over normal profit.
Normal Profit = Capital Employed × Normal Rate of Return
Super Profit = Average Profit − Normal Profit
Formula:Goodwill = Super Profit × Years’ Purchase
Used when firm earns more than normal profits
3. Capitalisation Method :- Capitalisation Method values goodwill on the basis of the earning capacity of the firm.
Goodwill is the excess of capitalised value of the firm over actual capital employed.
Formula - Goodwill = Capitalised Value − Capital Employed
Capitalised Value - Capitalised Value is the value of the firm based on its profits. Capitalised Value = (Average Profit × 100) /
Normal Rate of Return
Capital Employed - Actual capital invested in the business.
= Total Assets − Outside Liabilities (or total partners’ capital)
Types of Capitalisation Method
1. Capitalisation of Average Profit Method :- Based on average profits of the firm. Suitable when profits are stable
Formulas:
Capitalised Value = (Average Profit × 100) / Normal Rate of Return
Goodwill = Capitalised Value − Capital Employed
2. Capitalisation of Super Profit Method :- Based only on extra profits (super profits). More accurate method
Formulas:
Normal Profit = Capital Employed × NRR
Super Profit = Average Profit − Normal Profit
Goodwill = (Super Profit × 100) / NRR
4. Revaluation of Assets & Liabilities :- Revaluation of Assets & Liabilities means re-assessing the value of assets and
liabilities of a partnership firm at the time of admission of a partner, so that they appear at their current market value.
Purpose of Revaluation
 To show true and fair value of assets and liabilities
  To avoid future disputes among partners
 To ensure old partners get their rightful share of profit or loss arising from revaluation
 To prevent the new partner from gaining or losing due to past revaluation effects
Revaluation Account :- A nominal account prepared to record: Increase or decrease in value of assets & Increase or
decrease in value of liabilities
Rules for Revaluation Account
Assets
Increase in value of assets → Credit
Decrease in value of assets → Debit
Liabilities
Increase in liabilities → Debit
Decrease in liabilities → Credit
Reason:
Increase in assets & decrease in liabilities = gain
Decrease in assets & increase in liabilities = loss
Transfer of Revaluation Profit / Loss
Profit on Revaluation → Credited to old partners’ capital accounts in old profit-sharing ratio
Loss on Revaluation → Debited to old partners’ capital accounts in old profit-sharing ratio
👉 New partner does NOT share revaluation profit or loss
5. Distribution of Accumulated Profits & Losses
Items like:General Reserve, Profit & Loss Balance, Workmen Compensation Reserve. Distributed among old partners in old
ratio
6. Capital Adjustment :- New partner brings capital as per new ratio
Old partners may:Withdraw excess capital or Bring additional capital or To maintain proper capital ratio
Journal Entries
1. For Goodwill Brought in Cash -
Bank A/c Dr
To Goodwill A/c
2. For Distribution of Goodwill
Goodwill A/c Dr
To Old Partners’ Capital A/c
3. For Revaluation Profit
Revaluation A/c Dr
AUDIT :- In accounting, Audit refers to the independent examination of books of accounts by a qualified person called an
Auditor.

The main purpose of audit is to check whether the financial statements of an organisation are correct&complete. Show a true and fair
view of financial position
Audit is the independent examination of books of accounts and financial statements of an organisation in order to ascertain their
accuracy and truthfulness.
Independent means the auditor is not part of management.
"AUDITING STARTS WHERE ACCOUNTING ENDS"
Audit is the act of examination, while Auditing is the procedure or process of examination.
Nature of Audit:- Audit includes:Checking accounting records (cash book, ledger, journals), Verifying vouchers and bills, Physical
verification of inventory (stock), Ensuring that proper documentary evidence is maintained. Confirming that accounting principles and
standards are followed.
Audit does not guarantee 100% accuracy, it gives reasonable assurance.
Objectives of Audit
Primary Objective -To ascertain the accuracy and reliability of financial statements
Secondary Objectives - Detection of errors, Detection and prevention of frauds, Verification of assets and liabilities, Ensuring
compliance with laws and rules
Types of Audits
1. Internal Audit :- Conducted within the organisation. Performed by internal employees. Helps management. Less reliable than external
audit
2. External Audit:- Conducted by independent Chartered Accountant (CA). More reliable and official. Mandatory for companies
3. Financial Audit:- Examines financial statements. Ensures true and fair view. Used by banks, investors, shareholders
4. Tax Audit:- Ensures correctness of tax calculations. Checks compliance with Income Tax Act. Conducted by CA
5. Compliance Audit :- Checks compliance with laws, rules and regulations. Ensures legal requirements are followed
6. Forensic Audit:- Conducted for fraud detection. Used in criminalinvestigations. Evidence can be used in court
7. Interim Audit:-Interim Audit is conducted two or more times during an accounting year before the final audit,
8. Final / Annual Audit:- Conducted at end of accounting year. Final audit report is prepared
9. Statutory Audit:- Required by law. Mandatory under Companies Act

Financial Audit :- Financial Audit is the examination of financial records by an independent auditor to ensure that financial

statements present a true and fair view.

Features
✔ Conducted by independent auditor ✔ Provides reasonable assurance
✔ Focus on financial position ✔ Ensures compliance with Accounting Standards (GAAP/Ind AS)
Accounting Standards :- Accounting Standards are authoritative rules issued by the Institute of Chartered Accountants of India (ICAI)
to bring uniformity, consistency, and transparency in the preparation of financial statements.
1. GAAP (Generally Accepted Accounting Principles) refers to the traditional Indian accounting framework based on rules and historical
cost, mainly followed by small and medium enterprises.
2. Ind AS (Indian Accounting Standards) are accounting standards converged with IFRS and are principle-based, focusing on fair value
and substance over form. Ind AS are mainly applicable to listed and large companies to improve global comparability and the quality of
financial reporting.
Procedure of Financial Audit
Phase 1: Planning Phase :: In this phase, the auditor understands the nature of the business, studies its objectives, and prepares an
overall audit plan for conducting the audit effectively.
Phase 2: Internal Control Phase :- the auditor studies the internal control system of the organisation, identifies risk areas, and decides
the audit strategy to be followed.
Phase 3: Testing Phase :- During this phase, the auditor tests internal controls, verifies transactions, and detects errors or material
misstatements in the books of accounts.
Phase 4: Reporting Phase :- In the final phase, the auditor issues the audit report and expresses an opinion on the fairness and
truthfulness of the financial statements.
Types of Audit Opinion.
a) Unqualified Opinion (Clean b) Qualified Opinion c) Adverse Opinion d) Disclaimer of Opinion
Report) ✔ Some misstatements exist Financial statements are materially Auditor unable to obtain evidence
✔ Financial statements are true and ✔ Material but not pervasive misstated No opinion expressed
fair Serious disagreement with
✔ No material misstatements management

Concept of Social Accounting

Social Accounting :- Social Accounting is the process of identifying, measuring, recording and reporting the social costs and social
benefits of an organisation’s activities.
 It goes beyond profit and focuses on the organisation’s impact on society, employees, consumers, and the environment.
 Traditional accounting shows only financial performance (profit or loss).
 Social accounting adds a social dimension by answering questions like:
 Is the organisation benefiting society?
 Is it harming the environment?
  Are employees treated fairly?
 Is the business socially responsible?
Thus, social accounting measures social performance along with economic performance.
Objectives of Social Accounting
o To measure social costs and social benefits
o To assess social responsibility of business
o To inform stakeholders about social impact
o To help management take ethical decisions
o To support sustainable development
Scope of Social Accounting :- Social accounting covers the following areas:
1. Employees - Fair wages, Safety & health, Training & development
2. Consumers - Quality products, Fair pricing, Honest advertising
3. Society & Community - Education & health programmes, Employment generation, CSR activities
4. Environment - Pollution control, Waste management, Conservation of resources
5. Government - Tax compliance, Legal and social laws compliance
Social Costs & Social Benefits
Social Costs : Harmful effects like pollution, noise, environmental damage.
Social Benefits : Welfare activities, employment, infrastructure development. Social accounting tries to balance both.
Social Accounting vs Financial Accounting
Social Accounting. Financial Accounting
Focus. Society & environment. Profit & loss
Measurement. Mostly qualitative. Quantitative
Objective. Social welfare. Financial performance
Users. Society & stakeholders. Owners & government
Social Auditing :- Social Auditing is a systematic evaluation of an organisation’s social performance. It examines whether a
business is fulfilling its social responsibilities towards society, employees, consumers, government, and the environment.
Social audit is the assessment and reporting of social impact of an organisation’s activities, policies, and programmes.
Objectives of Social Auditing
To evaluate social responsibility performance
To ensure ethical business practices
To check contribution towards society & environment
To improve public image and goodwill
To promote sustainable development
Scope / Areas Covered Importance of Social Auditing
o Employee welfare (wages, safety, health)  Builds public trust
o Consumer protection (quality, fair pricing)  Improves corporate reputation
o Environmental protection (pollution control)  Encourages responsible behaviour
o Community development (education, health, CSR)  Helps management in policy decisions
o Compliance with social laws  Supports long-term growth
Difference Between Financial Audit & Social Audit
Financial Audit. Social Audit
Focus. Financial records. Social performance
Objective. True & fair view. Social responsibility
Measurement. Quantitative. Qualitative
Compulsion. Mostly statutory. Mostly voluntary
COST ACCOUNTING
Cost - Expenditure incurred to produce a product
Costing - Process by which cost of a product is calculated.
Cost Accounting - deals with classification, recording and analysis of costs.
Context of This Chapter
 Elements of Cost
 Statements of Cost (Cost Sheet)
 Classification of Costs

ELEMENTS OF COST :- In Cost Accounting, total cost is divided into Direct Costs and Indirect Costs (Overheads).

(A) Direct Costs :- Direct costs are those costs which can be identified easily & Can be directly traced to a specific product, job, or process. Direct costs
form the Prime Cost.
Direct Material - Materials that form an integral part of the finished product. Can be directly measured and charged to a product. Eg. Wood in furniture,
Cotton in cloth, Steel in machinery
Includes : Raw material purchased, Carriage inward, Import duties, Purchase-related expenses
Excludes : Indirect materials (oil, grease, small tools)
Direct Labour - Wages paid to workers who are directly engaged in production, Converting raw material into finished goods. Eg - Wages of machine
operators, Carpenters making furniture, Tailors stitching garments
Excludes - Supervisor salary, Watchman wages (indirect labour).
Direct labour is charged directly to the product.
Direct Expenses :- Expenses that: Can be directly identified with a product
Are not material or labour. Eg - Royalty paid per unit produced, Hire charges of special machinery, Cost of special drawings or designs. Also called
Chargeable Expenses
PRIME COST = Direct Material + Direct Labour + Direct Expenses
Prime cost represents the basic manufacturing cost.
(B) Indirect Costs (Overheads) :- Indirect costs are those costs which cannot be directly identified or traced to a single product. These costs are
common in nature and are shared among many products.
Not spent on one specific product. Spent for overall factory/office/sales activities. Eg. Factory rent, Electricity, Supervisor’s salary, Office expenses
👉 These costs are called Overheads.
Types of Overheads
1. Factory / Manufacturing Overheads
2. Office & Administration Overheads
3. Selling & Distribution Overheads
1. Factory / Manufacturing Overheads - Indirect costs incurred inside the factory during production. Examples - Factory rent, Power and fuel, Depreciation
of machinery, Indirect materials (lubricants), Indirect labour (supervisors). Used to calculate Factory Cost
2. Office & Administration Overheads :- Costs incurred for management and administration of business. Examples - Office rent, Manager’s salary,
Accounting department expenses, Legal and audit expenses. Not included in Prime Cost.
3. Selling & Distribution Overheads :- Costs incurred to: Sell the product, Deliver it to customers. Examples - Advertisement expenses, Salesman
commission, Carriage outward. Packing for dispatch. Added to cost to calculate Cost of Sales
COST SHEET (Statement of Cost) :- A Cost Sheet is a statement prepared to : Show detailed cost of production. Calculate cost per unit. Control and
analyse costs
Prepared periodically – Monthly / Quarterly / Annually
PRIME COST :- Prime Cost represents the basic manufacturing cost incurred directly on production. Includes - Direct Material, Direct Labour, Direct
Expenses
Prime Cost = Direct Material + Direct Labour + Direct Expenses
Examples : Raw material used, Wages of workers, Royalty, Hire of special machine
📌 Prime Cost includes only direct costs
FACTORY COST (WORKS COST) :-:Factory Cost is the cost incurred inside the factory to convert raw material into finished goods.
Factory Cost = Prime Cost + Factory Overheads (± Opening / Closing Work-in-Progress, if given)
Factory Overheads include: Factory rent, Power & fuel, Depreciation of machinery, Supervisor’s salary
COST OF PRODUCTION :- Cost of Production represents the total cost of producing finished goods.
Calculation: Factory Cost + Office & Administration Overheads
Cost of Production = Factory Cost + Office & Admin Overheads
📌 Used for valuation of Finished Goods stock
COST OF SALES :- Cost of Sales is the total cost incurred to sell the goods.
Cost of Production + Opening Stock of Finished Goods - Closing Stock of Finished Goods + Selling & Distribution Overheads

Classification of Costs
1 ⃣ By Nature – Material, Labour, Expenses
2 ⃣ By Function – Production, Administration, Selling, Distribution
3 ⃣ By Behaviour – Fixed, Variable, Semi-variable
4 ⃣ By Identifiability – Direct Cost, Indirect Cost
5 ⃣ By Time – Historical Cost, Pre-determined Cost
6 ⃣ By Controllability – Controllable, Uncontrollable
7 ⃣ By Normality – Normal Cost, Abnormal Cost
8 ⃣ By Decision-Making – Marginal, Explicit , Sunk, Opportunity, Differential
9 ⃣ By Product Association – Product Cost, Period Cost
📌 Exam Focus: Direct vs Indirect | Fixed vs Variable | Product vs Period
Classification of Costs :- Cost means expenditure incurred to produce goods or services. For better control, planning, and decision-making, costs are
classified in different ways.
1. By Nature of Cost (Based on what the cost is made of)
Material Cost – Cost of raw materials used. Eg. Wood used to make furniture.
Labour Cost – Wages paid to workers. Eg.: Salary of factory workers.
Expenses – Other costs except material & labour. [Link] rent, electricity.
2. By Function :- (Based on purpose of cost)
Production Cost – Manufacturing expenses. Eg. Factory wages, raw material
Administration Cost – Office management costs. Eg. Office staff salary
Selling Cost – Expenses to increase sales. Eg. Advertisement
Distribution Cost – Expenses to deliver goods. Eg. Transportation
3. By Behaviour :- (How cost changes with output)
Fixed Cost – Remains constant. Eg. Factory rent
Variable Cost – Changes with production. Eg. Raw material
Semi-Variable Cost – Part fixed + part variable. Eg. Electricity bill
4. By Identifiability :- (Traceability of cost)
Direct Cost – Directly related to product. Eg. Direct material, direct labour
Indirect Cost – Cannot be directly traced. Eg. Factory supervisor salary
5. By Time :- (When cost is calculated)
Historical Cost : Actual past cost. Eg. Last year’s material cost
Pre-determined Cost : Estimated in advance. Eg. Standard cost, budgeted cost
6. By Controllability :- (Manager’s control)
Controllable Cost – Can be controlled by management. Eg. Overtime wages
Uncontrollable Cost – Cannot be controlled. Eg. Government taxes
7. By Normality :- (Based on normal conditions)
Normal Cost – Incurred under normal conditions. Eg. Normal wastage
Abnormal Cost – Due to abnormal situations. Eg. Loss due to fire, theft

Classification of Costs
By Nature or Element
1. Materials: The materials directly contributed to a product and those easily identifiable in the finished product are called direct materials. Eg. Paper in
books, wood in furniture, plastic in a water tank, leather in shoes.
Other, usually lower-cost items or supporting material used in the production of a finished product are called indirect materials. Eg. length of thread used
in a garment.
2. Labour: Any wages paid to workers or a group of workers which may directly co-relate to any specific activity of production, maintenance,
transportation of material or product, and directly associate in the conversion of raw material into finished goods are called direct labour.
Labour costs which cannot be allocated but can be apportioned to or absorbed by a product are called indirect labour.
Example: salary of supervisor in factory.
3. Expenses: All expenses other than material or labour are called expenses.
Expenses specially incurred for a particular cost object and can be identified are termed Direct Expenses.
Example: Hire charges of special machinery.
Expenses other than direct expenses are known as Indirect Expenses.
Examples: factory rent, electricity, etc.
By Functions
1. Manufacturing and Product Cost:
This is the total of costs involved in manufacture, construction and fabrication of units of production.
2. Commercial Cost:
This is the total of costs incurred in the operation of a business undertaking other than the cost of manufacturing and production.
Commercial cost may further be sub-divided into:
(a) Administrative cost, and
(b) Selling and distribution cost.
By Degree of Traceability to Product
1. Direct Cost : Costs that can be directly related to the production of goods and services. Example: cost of wood, paint, varnish and labour for furniture
production.
2. Indirect Cost: Costs that cannot be directly associated with the production of goods and services. Examples: rent of building, office expenses, utility
bills, administrative expenses.
By Changes in Activity or Volume(Imp)
1. Fixed Cost :- Fixed costs are those costs which do not change in total amount even if production increases or decreases, for a given period of time.
Total fixed cost = Constant
Fixed cost per unit = Changes
Production ↑ → Fixed cost per unit ↓
Production ↓ → Fixed cost per unit ↑
Examples:. Factory rent , Insurance of factory, Manager’s salary
Fixed costs remain fixed in total but fluctuate per unit.
2. Variable Cost. :- Variable costs are those costs which change in total in direct proportion to the level of production or activity.
Total variable cost = Changes
Variable cost per unit = Almost constant
Each unit needs the same amount of variable input.
Examples:.Direct material, Direct labour, Power, Repairs
Variable costs fluctuate in total but remain constant per unit.
3. Semi-Variable Cost (Mixed Cost) :- Semi-variable costs are partly fixed and partly variable.
One part remains fixed. Another part changes with activity level
Example - Telephone expenses, Fixed monthly charge → Fixed part
Call charges → Variable part
Other examples:
Electricity bill (fixed meter rent + usage charges)
Maintenance expenses
By Controllability
1. Controllable Cost :- Costs are those which can be influenced by the action of a specified member of an undertaking, that is to say, costs which are at
least partly within the control of management. Generally speaking, all direct costs including direct materials, direct labour and some of the overhead
expenses are controllable by lower level of management.
2. Uncontrollable Cost :- Costs are those which cannot be influenced by the action of a specified member of an undertaking, that is to say, which are not
within the control of management. Most of the fixed costs are uncontrollable.
Example: Rent of the building is not controllable and so is managerial salaries.
By Normality
1. Normal Cost :- It is the cost which is normally incurred at a given level of output in the conditions in which that level of output is normally attained. It is a
part of cost of production.
2. Abnormal Cost :- It is the cost which is not normally incurred at a given level of output in the conditions in which that level of output is normally attained.
It is not a part of cost of production and charged to costing profit and loss account.
By Relationship with Accounting Period
1. Capital Cost :- The cost which is incurred in purchasing an asset either to earn income or in increasing the earning capacity of the business is called
capital cost, for example, the cost of a rolling machine in case of steel plant. Such cost is incurred at one point of time but the benefits accruing from it
are spread over a number of accounting years.
2. Revenue Cost :- If any expenditure is done in order to maintain the earning capacity of the concern such as cost of maintaining an asset or running a
business it is revenue expenditure e.g., cost of materials used in production, labour charges paid to convert the material into production, salaries,
depreciation, repairs and maintenance charges, selling and distribution charges etc.
By Time :- (When cost is calculated)
Historical Cost : Actual past cost. Eg. Last year’s material cost
Pre-determined Cost : Estimated in advance. Eg. Standard cost, budgeted cost
By Controllability :- (Manager’s control)
Controllable Cost – Can be controlled by management. Eg. Overtime wages
Uncontrollable Cost – Cannot be controlled. Eg. Government taxes
By Normality :- (Based on normal conditions)
Normal Cost – Incurred under normal conditions. Eg. Normal wastage
Abnormal Cost – Due to abnormal situations. Eg. Loss due to fire, theft
By Decision-Making
1. Marginal Cost - Extra cost incurred by producing one additional unit of output. It includes only variable costs (fixed cost remains unchanged).
Use: Helps in pricing decisions, profit planning, and output decisions.
Example:
Cost of producing 10 units = ₹1,000
Cost of producing 11 units = ₹1,080
👉 Marginal Cost = ₹80
2. Explicit Cost :- Cost involving actual cash payment. Clearly recorded in accounting books. Eg. Rent paid, Wages paid, Electricity bill
3. Sunk Cost - Cost already incurred in the past and cannot be recovered, even if the decision changes. Ignored while taking future
decisions.
Use: Helps avoid wrong decisions based on past expenses.
Example- Cost of old machinery, Money spent on past research
📌 Exam Point: Sunk costs are not relevant for decision-making.
4. Opportunity Cost - Value of the next best alternative sacrificed when one option is chosen. Not recorded in accounting books.
Use: Helps in choosing the best alternative.
Example: Choosing Job A (₹30,000) instead of Job B (₹25,000)
👉 Opportunity Cost = ₹25,000
5. Differential Cost - Difference in total cost between two alternatives.
Can be increase or decrease in cost.. Use: Helps compare alternatives.
Example:
Cost of Method A = ₹50,000
Cost of Method B = ₹45,000
👉 Differential Cost = ₹5,000
By Product Association
1. Product Cost - Costs directly related to production of goods. Included in cost of inventory (stock). Charged to Profit & Loss only when goods are sold.
Examples: Direct material, Direct labour (factory wages), Factory overheads
📌 Product costs are manufacturing costs.
2. Period Cost : Costs related to time period, not production.
Charged fully to Profit & Loss Account of the same period.
Examples: Office rent, Advertisement expenses, Salesman salary

COST MANAGEMENT – BUDGETARY CONTROL

Cost Management :- refers to planning, controlling and reducing costs so that an organisation can Use resources efficiently, Increase profitability, Take
better managerial decisions. Objective: Maximum output at minimum cost
Budget :- A Budget is a quantitative plan (in money or units) prepared for a future period to achieve organisational objectives. It shows expected income,
expenditure and productionnExample : Production budget of 10,000 units for next year
Budgetary Control : Budgetary Control is a system of planning and controlling costs by preparing budgets, Comparing actual results with budgeted figures,
Taking corrective action if deviations occur. It is a technique of cost control
Steps in Budgetary Control
1. Fix objectives 5. Compare actual with budget
2. Prepare budgets 6. Analyse variance
3. Communicate budgets to departments 7. Take corrective action
4. Record actual performance
TYPES OF BUDGETS :-
A. On the Basis of Time
1. Short-Term Budget :- Prepared for a period up to 1 year. Mostly prepared monthly/quarterly. Used for day-to-day control. [Link] budget, cash budget
2. Long-Term Budget:- Prepared for more than 1 year. Usually covers 3–5 years. Helps in long-term planning and expansion. Eg. Capital expenditurebudget,
research & development budget
B. On the Basis of Function
1. Sales Budget:- Estimates expected sales (quantity & value). First and most important budget. Basis for all other functional budgets. Sales Budget =
Starting point of budgeting
2. Production Budget :- Shows units to be produced. Prepared after sales budget. Production = Sales + Closing Stock − Opening Stock
3. Material Budget :- Estimates quantity and cost of materials required. Helps in avoiding shortage or excess stock
4. Labour Budget :- Estimates labour hours and labour cost. Helps in manpower planning.
5. Overheads Budget:- Estimates indirect costs. Like Factory overheads, Office overheads, Selling & distribution overheads
6. Cash Budget :- Estimates cash receipts and payments. Ensures adequate cash balance. Prevents cash shortage or surplus
C. On the Basis of Flexibility
1. Fixed Budget :- A Fixed Budget is prepared for one specific level of activity.
Remains unchanged despite change in output. Based on assumed level of production. Simple to prepare. Suitable whenBusiness conditions are stable
2. Flexible Budget :- A Flexible Budget is prepared for different levels of [Link] with level of output. More realistic and accurate. Helps in better
cost control.
D. BASIS OF NATURE OF EXPENDITURE AND RECEIPTS
1. Capital Budget: It is a budget prepared for capital receipts and expenditure such as obtaining loans, issue of shares, purchase of assets, etc.
2. Revenue Budget: A Budget covering revenue receipts and expenses for a certain period is called Revenue Budget. Examples: Sales, other incomes,
Purchases, administrative expenses etc.

PUBLIC FINANCIAL MANAGEMENT SYSTEM (PFMS) :- The Public Financial Management System (PFMS),
earlier known as Central Plan Schemes Monitoring System (CPSMS), is a Government of India initiative for reforming and modernising public fund
management.
It is a web-based online software application used for tracking funds, payments, accounting, and monitoring of government schemes.
PFMS is implemented by the Controller General of Accounts (CGA) under the Ministry of Finance.
Background of PFMS :- Earlier, government fund flow was manual, slow, and fragmented. No real-time tracking of funds released to States, districts,
agencies, or beneficiaries. Led to delays, leakages, idle parking of funds, and lack of transparency
To address these issues, PFMS was launched on pilot basis in 2008–09.
PFMS (as CPSMS) launched on pilot basis in 4 States: 1. Madhya Pradesh. 2. Bihar. 3. Punjab. 4. Mizoram
Flagship Schemes covered: MGNREGA, NRHM, SSA, PMGSY
At present, PFMS covers: Central Sector Schemes, Centrally Sponsored Schemes, Finance Commission Grants. Other Government of India expenditures
PFMS is also a key pillar of Digital India initiative and is integrated with Core Banking System.
Objectives of PFMS
 Monitoring flow of funds from Centre to lowest level of implementation
 Registration of all implementing agencies with bank accounts
 Direct payment to beneficiaries through banking channels
 Reduction of float / idle funds in agency bank accounts
 Just-in-time release of funds
 Real-time component-wise expenditure tracking
Indian Financial Management System (IFMS) :- Indian Financial Management System (IFMS) is a state-level integrated digital system used by
State Governments / Union Territories for financial administration and treasury management.
It helps the government in budget execution, accounting, payments, and monitoring of state finances.
Nature of IFMS
 Operates at State / UT level
 Linked with Treasury & Sub-Treasury offices
 Covers entire financial life cycle of state funds
 Implemented by State Finance Departments
Objectives of IFMS
 Ensure efficient utilisation of state funds
 Improve financial transparency & accountability
 Speed up payments and bill processing
 Reduce manual work and errors
 Strengthen budgetary control
Major Components of IFMS
1. Budget Management :- Preparation & allocation of budget, Control over expenditure, Monitoring of grants and limits.
2. Treasury Management :- Online bill submission & approval, Electronic payments, Integration with banks.
3. Accounting System :- Automatic accounting entries, Maintenance of cash book & ledgers, Generation of financial statements.
4. Payroll & Pension :- Salary processing of state employees, Pension calculation & disbursement
5. Financial Reporting :- Real-time MIS reports, Support for audit & review
Coverage under IFMS
State Government departments
State-sponsored schemes
Salary & pension payments
Payments to vendors & contractors
Double Entry System Vs Single Entry System

Double Entry System Single Entry System

Recording Both aspects of each transaction are Both aspects are not recorded
recorded

Nature Complete and scientific system Incomplete system, Traditional

Method

Accounts Maintained Personal, Real and Nominal accounts Mainly Personal accounts

Books Maintained Cash Book, Journal, Ledgers Cash Book, Debtors & Creditors
Ledger

Trial Balance Can be prepared Cannot be prepared

 Accuracy Arithmetical accuracy can be checked Accuracy cannot be checked

Profit/Loss Accurately calculated Estimated by Statement of Affairs

Suitability Suitable for large businesses Suitable for small businesses

TAXATION IN INDIA
Taxation :- is the compulsory contribution levied by the government on individuals, businesses, and other entities to:
 Run government administration
 Provide public goods and services (defence, police, roads, education, health)
 Promote economic development and social welfare
 Tax is not a voluntary payment and no direct benefit is guaranteed in return.
Objectives of Taxation
 Revenue Generation – Main source of government income
 Economic Stability – Control inflation & deflation
 Reduction of Inequality – Higher taxes on rich, relief to poor
 Resource Allocation – Encourage or discourage certain activities
 Social Welfare – Funding education, healthcare, subsidies
Authorities that Levy Taxes in India
1. Central Government :- Levies taxes applicable throughout India. Examples: Income Tax, Corporate Tax, GST (CGST & IGST), Customs Duty
2. State Governments :- Levies taxes within the state. Examples: State GST (SGST)
State Excise Duty (liquor), Stamp Duty, Land Revenue, Professional Tax.
3. Local Bodies (Municipalities & Panchayats) :- Levies taxes for local administration. Examples: Property Tax, Water Tax, Drainage Tax, Toll & Local Cess
Classification of Taxes in India :- Taxes are broadly classified into two main types:
A. DIRECT TAXES :- A Direct Tax is a tax paid directly by the person on whom it is imposed. Burden cannot be shifted to another person
Important Direct Taxes
Income Tax :- Paid by individuals, HUFs, firms, etc. Charged on income earned in a financial year. Governed by Income Tax Act, 1961
Corporate Tax :- Paid by companies on net profits. Includes: Domestic companies, Foreign companies operating in India
B. INDIRECT TAXES :- Collected by an intermediary (seller), Final burden is borne by the consumer. Burden can be shifted
Important Indirect Taxes -
Goods and Services Tax (GST). Main indirect tax in India. Levied on supply of goods & services
Customs Duty :- Levied on import and export of goods
Stamp Duty :- Levied by states on legal documents
Professional / Local Taxes :- Levied by states or local bodies
GOODS AND SERVICES TAX (GST) :- GST is a comprehensive, destination-based, indirect tax levied on: Manufacture, Sale, Consumption of
goods and services.
It replaced multiple indirect taxes to create “One Nation, One Tax”.
Key Facts about GST
 Implemented: 1 July 2017
 Based on Canadian dual GST model
 Constitutional Backing: 101st Constitutional Amendment Act, 2016
 GST is Indirect tax
Taxes Replaced by GST :- Central Excise Duty, Service Tax, Additional Customs Duty (CVD, Special Additional Duty (SAD), VAT, Entry Tax, Luxury Tax,
Entertainment Tax (except local bodies)
Types of GST
1. CGST – Central Goods and Services Tax :- Levied by Central Government. On intra-state supply. Revenue goes to Centre
2. SGST – State Goods and Services Tax :- Levied by State Government. On intra-state supply. Revenue goes to State
3. IGST – Integrated Goods and Services Tax :- On inter-state supply. Collected by Centre. Shared between Centre & State
4. UTGST – Union Territory GST :- Applicable in UTs without legislature, Levied along with CGST. Delhi & Puducherry have SGST (not UTGST)
GST RATE STRUCTURE – (Updated as of December 2025)
Nil / 0% GST (Exempted) :- This slab includes goods and services that are fully exempt from GST — meaning no tax is charged. Examples include: Fresh
fruits & vegetables
Unbranded cereals (wheat, rice, pulses), Unbranded milk, eggs, curd, Education materials, maps, charts, globes, Life & health insurance policies (now
exempt).
Purpose: To reduce the tax burden on basic necessities, agriculture, healthcare & education.
5% GST (Lower Rate) :- This is the primary lower GST rate after the 2025 reform. It applies on: Daily consumer goods, Essential toiletries & hygiene
products (soaps, toothpaste, shampoos), Packaged foods & staples, Small items like tableware, utensils, bicycles
Aim: To make everyday products more affordable for consumers.
18% GST (Standard Rate) :-This is the main standard rate for most goods and services: Covered items include: Consumer durables (TVs, ACs,
refrigerators), Automobiles (small cars & bikes up to specified limits), Electronics & appliances, Most services (consulting, hotels above threshold,
telecom, etc.). It replaces the old 12% and 28% slabs for many items under the new system.
40% GST (Luxury / “Sin” Goods) :- This higher special rate applies to luxury and sin goods such as: Premium / luxury cars, High-end motorcycles (engine
capacity >350cc), Aerated & carbonated drinks, Cigarettes and tobacco products, Yachts, private aircraft. This slab ensures the tax burden is higher on
non-essential and harmful goods.
Key Highlights of the 2025 GST Reform
✔ Simplified slabs: Earlier multiple GST rates (0%, 5%, 12%, 18%, 28%) have now been rationalized into primarily three major slabs — 0%, 5%, 18%, plus a
40% special slab for luxury/sin goods.
✔ 12% and 28% slabs mostly removed: Many items previously taxed at 12% or 28% are now moved to 5% or 18%, reducing prices for common goods.
✔ Insurance & essentials exempted: Life / health insurance and many basic educational or health-related items are now 0% GST.
✔ Film & entertainment: For example, GST on movie tickets up to ₹100 was cut to 5%, while higher-priced tickets still attract 18%.
These reforms are collectively referred to as GST 2.0 and took effect 22 September 2025.

DEVELOPMENT IN ACCOUNTING :- Development in Accounting means the gradual improvement of accounting methods, principles, and
systems to meet the changing needs of business, government, and society.
Need for Development
 Growth of business size
 Separation of ownership & management
 Government regulations & taxation
 Globalisation
 Technological advancement
Stages of Development
1. Ancient Period :- Simple record keeping. Used for trade & taxes.
2. Double Entry System (Medieval Period) :- Introduced by Luca Pacioli (1494). Debit & Credit system. Scientific accounting
3. Industrial Revolution :: Growth of factories, Introduction of Cost Accounting, Focus on cost & profit.
4. Modern Accounting :- Accounting became a decision-making tool, Financial, Cost & Management Accounting developed.
5. Standardisation :- Introduction of Accounting Standards (GAAP / Ind AS), Uniformity & comparability ensured.
6. Computerised Accounting :: Use of software & ERP. Faster, accurate & real-time reporting.
7. Digital Accounting :- Cloud accounting, E-invoicing, online tax filing, Use of data analytics & AI.
Branches Developed
 Financial Accounting  Tax Accounting
 Cost Accounting  Social Accounting
 Management Accounting  Human Resource Accounting