7 Editorial

Part-I

Accounting and Auditing

8 Accounting

8 Origin of Accounting

8 Nature of Accounting

8 Functions of Accounting

9 Accounting as an Information System

10 Classification of Accounts

15 Generally Accepted AccountingPrinciples

15 Accounting Concept

16 Accounting Conventions

16 Accounting Equation

17 Capital and Revenue Expenditure

19 Accounting Standards19 Constitution of National Advisory

Committee on Accounting Standards

21 Indian Accounting Standard

21 AS-1 Disclosure of Accounting Policies

21 AS-2 Valuation of Inventory (Revised)

25 AS-3 Cash Flow Statements

25 AS-4 Contingencies and Events Occu-rring after the Balance Sheet Date

25 AS-5 Net Profit/Loss for the Period, PriorPeriod Items and Changes in AccountingPolicies

26 AS-6 Depreciation Accounting (Revised)28 AS-7 Accounting for Construction

Contracts29 AS-8 Accounting for Research and

Development29 AS-9 Recognition of Revenue (Revised)30 AS-10 Accounting for Fixed Assets

Pratiyogita Darpan/Commerce / 3/1

32 AS-11 : The Effects of Changes inForeign Exchange Rates

32 AS-12 : Accounting for GovernmentGrants (1.4.92)

33 International Financial Reporting Stan-dard

33 AS-16 : Borrowing Costs (1.4.2000)

34 Social Accounting

38 Final Accounts

38 Final Accounts of Sole Proprietors

41 Final Accounts of Partnership Firms

43 Final Accounts of Limited Company

48 Provisions and Reserves

55 Final Accounts of Non-ProfitOrganisation & Professional Firms

68 Accounting Problems Relating toAdmission, Retirement of a Partnerand Dissolution of a Firm

78 The Limited Liability Partnership Act2008

79 Accounting for Shares andDebentures

79 Types of Capital79 Types of Shares Capital79 Types of Shares83 Issue of Shares at Premium83 Issue of Shares at Discount84 Forfeiture of Shares85 Shares Issued for Consideration other

than Cash86 Issue of Bonus Shares87 Redemption of Preference Shares89 Issue of Debentures and their

Repayment93 Redemption of Debentures

Pratiyogita Darpan / Commerce / 4

96 Analysis and Interpretation ofFinancial Statements

96 Balance Sheet97 Profit and Loss Account99 Financial Management104 Investment Decisions/Capital Expen-

diture Decisions105 Management of Working Capital107 Ratio Analysis108 Profitability Ratios109 Liquidity Ratios113 Important Financial Ratios : An Overview118 Funds Flow Analysis118 Meaning of Fund119 Objects of Funds Flow Statement119 Preparation of Funds Flow Statement125 Cash Flow Statement128 Advantages of Cash Flow Statement131 Marginal Costing and Cost Decision-

Making131 Definition of Marginal Costing131 Advantages of Marginal Costing132 Limitations of Marginal Costing134 Return on Capital Employed137 Auditing138 Audit Standards140 Objectives of Auditing140 Types of Errors141 Principles of Auditing142 Vouching142 Physical Verification143 Valuation146 Classification of Audit148 Planning of Audit148 Audit Programme149 Audit Files150 Audit Note Book150 Audit Working Papers151 Audit Procedures152 Internal Control System153 Internal Check System155 Test Checking and Sampling158 Internal and Management Audit159 Auditing and Other Disciplines

Part-II

Business Organisation &Management

162 Business162 Sole Trader

163 Partnership167 Joint Stock Company

171 Co-operative Organisation172 Business Combinations

174 Modernisation174 Rationalisation175 Social Responsibility of Business

177 Stock Exchange180 National Stock Exchange

181 Capital Markets

181 Securities and Exchange Board of India(SEBI)

190 Foreign Trade

190 Indian Share in World Trade

190 Foreign Trade in India

191 India’s Balance of Payment 2013-14

191 Composition of India’s Exports Bet-ween 2000-01 and 2013-14

192 India’s Import Growth

192 Trade Deficit

193 Direction of Trade

193 India’s Trade in Services

194 Foreign Trade Policy 2009-14

195 New Foreign Trade Policy : 2013-15

195 Important International Organiza-tions—World Bank

197 IMF197 WTO199 Business Management202 Functions of Management202 Planning203 Organising205 Staffing206 Recruitment208 Motivation209 Leadership210 Communication212 Motivation, Leadership and Commu-

nication : At A Glance213 Decision-Making215 Controlling217 Corporate Governance and Business

Ethics220 Business Ethics : At A Glance221 VAT221 Business Strategy222 Principles of Insurance

Pratiyogita Darpan / Commerce / 5

The concurrence of the views of the Editor is not neces-sary for any matter or figure published in Pratiyogita Darpan.

Editor

222 Contract of Insurance230 Company Law245 Office Management245 Elements of Office Management245 Responsibilities of Office Manager245 Relationship between Systems, Proce-

dures and Methods247 Filing248 Computer Applications in Offices251 New Terminology of Office Management252 Management Audit : An Audit of

Corporate Image252 Management Audit253 Environment Audit253 Human Resource Audit253 Energy Audit253 Marketing Audit253 Science and Technology Audit253 Secretarial Audit254 Social Environment Audit255 Marketing Management259 Service Marketing259 Human Resource Management (HRM)263 Financial System of India266 Business Statistics269 Business Economics271 Utility Analysis : Marshall s Cardinal

Approach272 Demand and Law of Demand

273 Elasticity of Demand275 Price Determination Under Perfect Com-

petition276 Price Determination Under Discriminating

Monopoly278 Price Determination Under Imperfect Compe-

tition or Monopolistic Competition279 Price and Output Determination Under

Oligopolly280 Contemporary Issues280 One Person Company (OPC)280 Project MCA-21281 Private Equity Funds—An Overview281 KRA Regulations, 2011282 Social Security Laws282 Enterprise Risk Management (ERM)283 Unique Identification Authority Bill-2010283 Goods and Service Tax (GST)284 The Sick Industrial Companies (Special Provi-

sion) Repeal Act, 2003284 Serious Fraud Investigation Office SFIO285 RIDF286 Public Private Partnership (PPP)287 BASEL-III : New Norms of RBI289 Corporate Social Responsibility (CSR)289 CSR Under the Companies Act, 2013289 Consumer Protection Act, 1986 (COPRA)292 Food Security in India294 Glossary304 Multi-Choice Questions (MCQs)

Pratiyogita Darpan/Commerce/7

The most important message of the Gita is that one should do one’s duty in a spirit ofdetachment. Performance of one’s duty is the greatest Dharma. It is only in the performance ofone’s duty that one realizes oneself. It leads to the liberation of self. Man is born in a society.He is indebted to the society in various ways. He cannot develop to the fullest extent inisolation from the society. He depends on the society for his multifarious needs. Naturally heowes sincerest duty to the society. The good effects of dedicated performance of duty are notconfined to the doer only; they affect a much wider horizon. Only that nation prospers andprogresses whose citizens do their respective duties with the utmost of devotion anddedication. We have, therefore, to be wide awake to our sense of duty.

Once Shri Krishna said in confi-dence to the great warrior Karna,‘‘you are not a son of the chariotdriver Adhirath; on the other hand,you are the son of Devi Kunti and theeldest of the Pandavas. If you leaveDuryodhan, and come to our side, wewould do your coronation imme-diately.’’

Karna replied to Shri Krishna,very humbly, Vasudeva ! I knowvery well the fact that I am the eldestson of late Shri Pandu and DeviKunti. But when everybody jeered atme by calling the son of a chariotdriver, Duryodhan embraced me,gave me due respect and placed fulltrust in me. As a matter of fact, he haschallenged the Pandavas with fullconfidence in my warriorship. ShouldI forget all his obligation and betrayhim or violate his trust ? Should I benot true to my duty ? I do not want togo against the dictates of Dharma. Ifully well know that the Pandavaswill be victorious in the end. I beseechyou to let me do my moral duty. ShriKrishna had no reply to give toKarna’s devotion to duty.

Obvious as it is, allegiance toduty imparts firmness to the personconcerned, and raises his character inthe eyes of the society. This firmnesswould make the person disregardthe biggest temptation, nothing wouldmake him languid regarding hisduties.

All great persons and valuablebooks of India and other countries laygreat stress on duty. They almostequate sense of duty with the realman.

Let our young readers think sin-cerely if they are true to their duties

as students and examinees. Are theycarrying out with full devotion theirduties as students ? For you no pro-gramme ought to be more or equallyimportant as preparations for the nextexamination or competition. It hasbeen noted that there is a sufficientnumber of such students, both maleand female, as loiter about on theplaying field or in the corridors of thecollege or do go gossiping in thecanteen while the rest of their fellowstudents are in the classrooms. Canyou say that they are true to their saltor their duties ? Do they not betraytheir commitments to their parentswho place their full trust and allhopes in their wards ? They leavehomes in the name of attendingclasses, but indulge in things whichare not in keeping with it. Are theyashamed of their treacherous beha-viour ? Let our young readers dointrospection to see if they them-selves are not in the category of irre-sponsible students, referred to above.The main reason of failure at theexaminations is that the examinees donot make serious preparations andpay no attention to the duties whichthey are expected to perform. If theycarry out their duties with full devo-tion, they can be quite sure thatchances of their success will increasemanifold. While carrying out one’sduties, one should not be appre-hensive or diffident about success.With regard to duties, there ought tobe only one thought in the mind—that I am expected to do my best, andI must do so. Swami Vishvas Ji oftensaid in his lessons that duty is not amatter of discussion or discretion, itis concerned with our thinking facultyand firm decision. This makes us

aware of our duties; and discussionor discretion about its propriety des-troys devotional aspect expected of adutiful person.

A person devoted to his dutiesnever thinks of being actionless, andhe never curses his luck or fortune,nor doer he complain of his limi-tations and insufficient means. Hefully knows that making complaintsis against the law of progress.

He accepts himself as such andtries to make the maximum use of hismeans and resources. Addressing aconvocation, Pt. Jawaharlal said “onlythe unfortunate ones curse their luckand have a heap of complaints tomake.”

One who is determined to do oneduties neither thinks of the possibleobstacles and privations on the way,nor has any fear about them. WhenShri Ram had said ‘yes’ to be in exilefor fourteen years, the difficulties tobe faced never came to his mind. As amatter of fact, the duty-bound personis wreckless of wind and weather. Inthe words of the Hindi novelist, PremChand, duty never cares for waterand fire. The path of duty is reallyvery hard and merciless. Paradoxi-cally, it is a fact, doing one’s dutiesgives indescribable peace to the heartand soul. Duty implies selflessnessand is done with no account of profitand loss on the road.

The good effects of devoted dutyare not confined to the doer only,they influence a much wider horizon.It is said that that nation prospersand progresses, whose members dotheir respective duties with cheerand devotion.

●●●

Pratiyogita Darpan/Commerce/8

ACCOUNTING AND AUDITINGPart–I

AccountingAccountingAccountingThe term ‘Accounting’ is thou-

sands of years old and the earliestaccounting records, which date backmore than 7,000 years, were found inMesopotamia (Assyrians). The peopleof that time relied on primitiveaccounting methods to record thegrowth of crops and herds. Account-ing evolved, improving over the yearsand advancing as business advanced.

Notable that early accountingserved mainly to assist the memory ofthe business person and the audiencefor the account was the proprietor orrecord keeper alone. But now-a-daysaccounting has become an importantbranch of social science. It works asan information system and data bank.It is the process of identifying, mea-suring and communicating the econo-mic information of an organisation toits users to enable them to makereasoned decisions. Hence it can beeasily said that as a means of com-munication, accounting is responsiblefor the society as a whole.

Origin of Accounting

● In 1494 Lucas Pacioli at Venicein Italy published the ‘Principlesof Double Entry Book-Keeping’.The double entry system wascapable of recording not only cashtransaction but also all types ofmercantile transactions systemati-cally.

● “Book-keeping may be defined asthe art or system of recording inclassified manner the transactionsof a merchant in books ofaccounts.” —Daver

● “Book-keeping is the science andart of correctly recording in thebooks of accounts all those trans-actions that result in the transferof money or money’s worth.”

—Carter

● “Book-keeping is the science andart of recording in books mone-tary transactions, so unremittinglyand so accurately, that you areable at any time to ascertain—(i) The result during a givenperiod, (ii) The exact state ofFinancial affairs at the end of theperiod or any portion of them withclearness and expedition and toprove their accuracy.”

—Arthur Fieldhouse● ‘De-Computiset Scriptures’ was

written by Lucas Pacioli in 1494and it is translated by Hu-Oldcasiles into English.

● “Accounting is the art of record-ing, classifying and summarisingin a significant manner and interms of money transactions andevents which are, in part atleast of

Process of Accounting● Recording—It is concerned with

the recording of only financialtransactions and business eventsaccording to specified rules.

● Classifying—It is concerned withthe process of grouping the transac-tions and events of one nature atone place, in a separate account.All the accounts are opened in abook named ‘LEDGER’.

● Summarising—It is concernedwith the preparation and presenta-tion of the classified data in amanner which is understandableand useful to management andother users of such data. Thisfunction involves balancing ofledger accounts, and preparation oftrial balance and final accounts,i.e., Trading and P & L account,Balance Sheet etc. Some otherimportant financial statements arealso prepared to know the financialposition of the business.

● Analysing and Interpreting—Itis concerned with the analysis andinterpretation aspect of accountingdata according to some specifiedrules and in a manner useful to themanagement and other users.

a financial character and inter-preting the result thereof.”

—American Institute of CertifiedPublic Accountants Committee

Nature of Accounting

There are a number of accountingtheories. It is a set of broad principlesthat :

(i) Provides a general frame ofreference by which accounting practi-ces can be evaluated.

(ii) It guides the development ofnew practices and procedures.

The primary objective of ac-counting theory is to provide acoherent set of derived principles. Atheory of accounting may be extractedfrom the practices of accountants.

Functions of AccountingAccounting performs the follow-

ing functions :● Keeping systematic records—

The main function of accountingis to keep a systematic record offinancial transactions.

● Communicating the results—The function of accounting is tocommunicate the results obtainedfrom the data to interested parties.

● Meeting legal requirements—Itdevises such a system as well tomeet legal requirements.

● Protecting properties of thebusiness—It is the function ofaccounting to protect the pro-perties of the business. Account-ing starts where the book-keep-ing ends. It is concerned with :

(i) Checking the works of thebook-keeper to ensure that allbusiness transactions have beenproperly recorded in the booksof accounts.

(ii) Preparation of Trial Balance,and

(iii) Final Accounts, Trading Acco-unt, Profit & Loss Account andBalance Sheet.

Pratiyogita Darpan/Commerce/9

Objects of Accounting

● To calculate Net Profit or Loss ofthe business.

● To know the financial position ofthe business.

● To determine taxable income ofbusiness.

● To provide information to interes-ted parties.

● To provide information for mana-gerial decisions.

● To comply with legal requirement.

Difference between Book-keeping and Accountancy (Accounting)

Difference on the basis of Book-keeping Accounting

1. Nature It is concerned with recording of businesstransactions. It is clerical or mechanical innature.

It is concerned with classification and summarisa-tion of financial records. It is semi-analytical innature.

2. Qualification No qualification is required or prescribed fora book-keeper. However, he should haveknowledge of book-keeping.

For accountant also no qualification is prescribedbut he must have knowledge of accounting princi-ples and practices.

3. Object The object of book-keeping is to merely recordthe business transactions.

The object of accountancy is to compile andanalyse business results.

4. Knowledge of subject The book-keeper has only basic knowledge ofaccounting principles and book-keeping.

An accountant should have knowledge of both thebook-keeping and accounting techniques.

5. Report A book-keeper is not required to submit anyreport.

An accountant is also not required to submit anyreport unless he has been appointed to investigateany matter.

6. Starts It starts where the commercial transactionends.

Accounting starts where the book-keeping ends.

Accounting as an Informa-tion System

● Financial information is neededby both investors and manage-ment.

● Financial information is requiredto predict, compare and evaluatethe firm's earning ability.

● Accounting is also required to aidin economic decision-makinginvestment and financing deci-sion-making.

● The main objective of accountingis to provide information to theusers to make relevant decisionand form judgement.

Users of Accounting InformationThe users of the accounting infor-

mation are :(i) Owners(ii) Managers(iii) Creditors(iv) Potential investor(v) Employees(vi) Trade Unions(vii) Customers(viii) Government

● Accounting information is beinggenerated to serve the basic objec-tives of the users.

● Accounting information is beinggenerated through processingaccounting data taken from finan-cial accounting or through pro-

cessing accounting data takenfrom cost accounting.

● The scope of an accounting infor-mation is greatly influenced bythe specified need of the users.

● Managers are responsible for theoverall performance of the firm.They make several decisionsand, therefore, need information.Accounting provides relevantinformation in which managershave a direct interest.

● If investor is as shareholder, thenhis interest is for the total periodof life of the concern. He wantsto know not only about the pre-

Users of Accountinginformation Their interested areas

Owners Financial information, financial resources, performance ofthe business.

Managers Overall performance of the firm, decisions, optimum usesof capital employed, controlling.

Creditors Profitable performance of the firm, repayment capacity ofthe firm, to determine the degree of risk, solvency position,credit standing.

Potential investor Financial strength, dividend, earning capacity, long termsolvency position.

Employees Salary determination, bonus, fringe benefits, workingcondition.

Customers Social responsibility, pricing, social role.

Government Tax liability, grant.

sent position, earning capacityand progress of the concern, butis equally interested to knowabout expected future change incapital structure, future projectsand potentialities of future deve-lopment on the basis of informa-tion contained in accountingstatements.

● Consumers need to evaluate as towhat extent these enterprises havefulfilled their social responibility.

Structure of AccountingThe Double Entry System provi-

des a basic framework for the analysisof business transaction. It is essentialthat the business transactions duringthe accounting period must be recor-ded promptly and accurately. Thebusiness transactions are recordednow as Books of Account. All busi-ness transactions in double entrysystem are recorded in a Journal.

Pratiyogita Darpan/Commerce/10

Systems or Basis of Accounting

● Cash system of Accounting—In this system an entry of the transaction is passed at the time of receipt or payment of cash.This system is followed by all non-trading organisations such as educational institutions, clubs etc.

● Accrual or Mercantile System of Accounting—This system is based on accrual concept. In this system credit transactionsand events are also recorded with cash transactions. This system or basis of accounting includes consideration relating todeferrals, allocations, depreciation and amortization. The main objective of this system is to ascertain the appropriate profitfor the accounting period. Under the Companies Act, 1956 all companies are required to maintain the books of accountingrecords according to mercantile system of accounting.

● Joint System of Accounting—This system is a combination of cash and accrual system of accounting. In this systemreceipts are shown on cash system and expenses are shown on accrual basis. This system is followed by all professionalpersons/firms and public financial institutions.

● Single Entry System of Accounting—In this system only one aspect of transactions or events is recorded in the books. Onlypersonal and cash aspect of transactions or events is recorded. Although it is a simple, easy and time saving system ofaccounting, it is an incomplete and unscientific system. Therefore it cannot be used by corporate bodies.

● Double Entry System of Accounting—In this scientific and complete method of accounting not only all the businesstransactions and events are recorded but both the aspects (Dr. and Cr.) of each transaction and event are recorded in thebooks. This system is used almost by companies and big business organisations.

Accounting-An Introduction

Vouchers (Evidences)

Primary Books (Recording)

Trial Balance (Summarising)

In Large ScaleBusiness

In Small ScaleBusiness

Final Accounts/Statements

Analysis and Interpretationof

Financial StatementsAnd

Financial Decisions

Ledger (Classifying)

� Cash Book� Sales Book� Purchase Book� S/R Book� P/R Book� B/R Book� B/P Book� Journal Proper

� Journal

� Manufacturing Account� Trading Account� Profit & Loss Account� Balance Sheet

Classification of Accounts

A record of every transaction relating to a thing is known as an account. For book-keeping purposes, accounts areclassified into the following classes :

Accounts

⏐↓ ↓ ↓

Real A/c Personal A/c Nominal A/c

↓ ↓Tangible A/c Intangible A/c

↓ ↓ ↓

(Land, Building (Goodwill, Natural Artificial Representative

Machinery, Trademark,Person Person Personal A/c

Furniture, Cash Patents, Copyright)(Ram A/c, (Bank A/c, (Prepaid Insurance

and Stock)Mohan A/c Company A/c Outstanding Rent,Ravi A/c) College A/c) Prepaid Rent)

↓ ↓ ↓ ↓Loss Expenses Profit Revenue

Club A/cGovt. Department A/c

Accrued Interest,Unearned Commission

Pratiyogita Darpan/Commerce/11

Rules Regarding Journalising

I. Traditional Approach

(i) Real Account—Debit the property which comes in and credit that property which goes out.

(ii) Personal Account—Debit the account of the receiving person and credit the account of the giving person.

(iii) Nominal Account—Debit the account of the losses and expenses and credit the account of Profit and Gains.

II. Accounting Equation Approach

Accounts can be divided into the following five categories from the recording point of view—

(i) Rules Regarding Assets : When any asset increases then the asset account is debited and on decrease it iscredited. Balance of asset account will always be debit.

(ii) Rules Regarding Liabilities : When liability is increased than liability account is credited and on decrease itis debited. Balance of liabilities account will always be credit.

(iii) Rules Regarding Capital : When owner of business contributes funds from his own sources then his capitalis increased then capital account will be credited and on drawings capital is decreased so capital account is debited.Balance of capital account will always be credit.

(iv) Rules Regarding Income : When there is income in business then capital of owner is increased, then incomeaccount is credited. Balance of income account will be always credit.

(v) Rules Regarding Expenses : On expenses capital of owner is decreased and then expenses account isdebited. Balanace of expenses account will be always debit.

Notable that incomes and expenses accounts are transferred to profit and loss account and the balance ofprofit and loss account is transferred to capital account.

Accounting Equation :Assets = Capital (Equity) + Liabilities

Or

Capital = Assets – Liabilities

Or

Equity + Longterm Liabilities + Current Liabilities = Fixed Assets + Current Assets

JournalEach business transaction is to be recorded in a book named as Journal. It is recorded on the very day and is

known as original record. It is a chronological record of business transactions and events. With the help of this ‘Bookof Original Entry’ ledger posting is made in various accounts.

Form of the Journal

Date Particulars L/F Amount

(Dr.)

Amount

(Cr.)

Rs. Rs.

Example :

Enter the following transactions in the Journal of Dineshji Marwari :

2013 Jan. 1 Dineshji started business with cash Rs. 1,00,000; Goods worth Rs. 75,000; Furniture worthRs. 40,000.

2013 Jan. 8 Bought goods for cash Rs. 30,000.

2013 Jan. 17 Sold goods for Rs. 17000 to Gopal.

2013 Jan. 20 Gave away as charity cash Rs. 101 and goods valued Rs. 50.

2013 Jan. 31 Proprietor withdrew for his personal use Rs. 400.2013 Jan. 31 Salary paid for the month Rs. 500.

Pratiyogita Darpan Extra Issue Series-24 Commerce

Publisher : Upkar Prakashan Author : Pratiyogita Darpan

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