1. What is Accountancy & Book‑Keeping?

Revision Notes – Accountancy and Book‑Keeping

(Designed for quick last‑minute review – >1200 words)

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1. What is Accountancy & Book‑Keeping?

• Book‑Keeping – Systematic recording of financial transactions in the books of original entry (journals) and posting them to ledger accounts.
• Accountancy – The broader field that includes book‑keeping, classification, summarising, interpreting and communicating financial information to users.
• Objective – Provide a true and fair view of the financial position and performance of an entity.

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2. Fundamental Accounting Equation

Element	Symbol	Normal Balance	Examples
Assets	A	Debit (+)	Cash, Bank, Debtors, Inventory, Fixed Assets
Liabilities	L	Credit (+)	Creditors, Loans, Outstanding Expenses
Owner’s Equity	E	Credit (+)	Capital, Retained Earnings, Reserves

Equation: A = L + E

• Every transaction keeps the equation in balance.
• Mnemonic: “A Lazy Elephant” – Assets = Liabilities + Equity.

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3. Double‑Entry System

Rule	Debit (Dr.)	Credit (Cr.)
Increase in Asset	Dr.	—
Decrease in Asset	—	Cr.
Increase in Liability / Equity	—	Cr.
Decrease in Liability / Equity	Dr.	—
Increase in Expense / Loss	Dr.	—
Decrease in Expense / Loss	—	Cr.
Increase in Revenue / Gain	—	Cr.
Decrease in Revenue / Gain	Dr.	—

Key Point: Every transaction has at least one debit and one credit of equal amount.

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4. Types of Accounts (Traditional Classification)

Classification	Nature	Normal Balance	Examples
Personal	Relates to persons (natural or artificial)	Debit = Receiver, Credit = Giver	Debtors, Creditors, Bank, Capital
Real	Relates to assets (tangible/intangible)	Debit = What comes in, Credit = What goes out	Machinery, Building, Goodwill, Stock
Nominal	Relates to expenses, losses, incomes, gains	Debit = Expenses/Losses, Credit = Incomes/Gains	Salary, Rent, Sales, Interest Received

Mnemonic: “P​R​E​ – Personal, Real, Expense/Nominal” (Think “PRE” for Personal‑Real‑Expense).

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5. Stages of the Accounting Cycle

1. Identify & Analyse Transactions – Source documents (invoice, receipt, voucher).
2. Journalising – Record in Journal (Book of Original Entry) – date, particulars, L.F., Dr., Cr.
3. Posting to Ledger – Transfer journal entries to respective Ledger Accounts (T‑accounts). 4. Balancing Ledger Accounts – Compute debit/credit totals; derive closing balance.
4. Trial Balance – List all ledger balances; Debit total = Credit total (checks arithmetical accuracy).
5. Adjusting Entries – Accruals, deferrals, depreciation, provisions, etc. (to match revenues & expenses).
6. Adjusted Trial Balance – After incorporating adjustments.
7. Financial Statements – Prepare Income Statement, Balance Sheet, Cash Flow Statement.
8. Closing Entries – Transfer nominal account balances to Profit & Loss Account → then to Capital/Retained Earnings.
9. Post‑Closing Trial Balance – Only real & personal accounts remain; verifies that books are ready for next period.

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6. Journal – Format & Examples

Date	Particulars	L.F.	Debit (₹)	Credit (₹)
01‑Apr‑24	Cash A/c Dr. To Capital A/c (Being cash introduced as capital)	101	50,000	50,000
02‑Apr‑24	Furniture A/c Dr. To Cash A/c (Being furniture purchased for cash)	102	15,000	15,000
03‑Apr‑24	Purchases A/c Dr. To Creditors A/c (Being goods purchased on credit)	103	20,000	20,000

Tip: Always narrate the transaction briefly; use “To” for the credit side and “Dr.” for the debit side.

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7. Ledger – T‑Account Illustration

Cash Account

Dr. (₹)	Date	Particulars	J.F.	Cr. (₹)
50,000	01‑Apr	To Capital A/c	J1
02‑Apr	By Furniture A/c	J1	15,000
…	…	…	…
Balance c/d	31‑Mar	35,000

Balance b/d (opening) = 35,000 (debit side).

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8. Trial Balance – Purpose & Limits

• Purpose: – Verify arithmetic accuracy of ledger postings.
• Provide basis for preparing financial statements.
• Limitation: Does not detect errors of principle, compensating errors, or errors of omission.

Example (simplified):

Account Title	Debit (₹)	Credit (₹)
Cash	35,000
Bank	12,000
Debtors	8,000
Stock	15,000
Furniture	15,000
Creditors	20,000
Capital	50,000
Sales	25,000
Purchases	20,000
Total	105,000	105,000

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9. Adjusting Entries – Common Types

Adjustment	When Needed	Journal Entry (Dr.)	Journal Entry (Cr.)
Accrued Expenses	Expense incurred but not paid	Expense A/c Dr.	To Outstanding Expenses A/c
Prepaid Expenses	Payment made for benefit in future periods	Prepaid Expense A/c Dr.	To Cash/Bank A/c
Accrued Income	Income earned but not received	Accrued Income A/c Dr.	To Income A/c
Income Received in Advance	Cash received before earning	Cash/Bank A/c Dr.	To Income Received in Advance A/c
Depreciation	Allocation of cost of fixed asset	Depreciation A/c Dr.	To Accumulated Depreciation A/c
Provision for Doubtful Debts	Estimating bad debts	Provision for Doubtful Debts A/c Dr.	To Bad Debts Expense A/c
Stock Adjustment	Closing stock valuation	Closing Stock A/c Dr.	To Trading A/c (or P&L)

Mnemonic for Adjustments: “A​P​P​I​D​P​S” – Accrued Expenses, Prepaid Expenses, Accrued Income, Income Received in Advance, Depreciation, Provision, Stock.

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10. Depreciation – Methods & Formulae

Method	Concept	Formula (Annual)	When to Use
Straight‑Line (SLM)	Equal charge each year	(Cost – Residual Value) / Useful Life	Assets with uniform usage
Written Down Value (WDV)	Reducing balance	Book Value at beginning × Rate	Assets losing value faster early
Sum‑of‑Years‑Digits (SYD)	Accelerated, based on sum of years	(Remaining Life / Σn) × (Cost – SV)	When higher early charge desired
Units of Production	Based on usage	(Cost – SV) × (Units produced / Total estimated units)	Machinery, vehicles

Key Points:

• Depreciation is a non‑cash expense; reduces profit but not cash flow.
• Accumulated Depreciation is a contra‑asset shown on the balance sheet.
• Rate of Depreciation (WDV%) = (1 – (Residual Value/Cost)^(1/Life)) × 100.

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11. Inventory Valuation – Methods

Method	Basis	Effect in Inflation	Effect in Deflation
FIFO (First‑In‑First‑Out)	Oldest stock issued first	Higher closing stock, lower COGS → higher profit	Lower closing stock, higher COGS → lower profit
LIFO (Last‑In‑First‑Out)	Newest stock issued first	Lower closing stock, higher COGS → lower profit (not allowed under IFRS)	Higher closing stock, lower COGS → higher profit
Weighted Average Cost	Average cost of all units	Moderates profit effects	Same
Specific Identification	Actual cost of each item	Used for high‑value, distinguishable goods	Same

Note: AS‑2 (Ind AS‑2) / IAS‑2 permits FIFO or Weighted Average; LIFO is prohibited.

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12. Financial Statements – Structure & Key Items

12.1 Income Statement (Profit & Loss)

Section	Typical Items	Purpose
Revenue	Sales, Service Income, Other Income	Measure of inflow from operations
Cost of Goods Sold	Opening Stock + Purchases + Direct Expenses – Closing Stock	Direct cost of generating revenue
Gross Profit	Revenue – COGS	Profit before operating expenses
Operating Expenses	Salaries, Rent, Utilities, Depreciation, Admin, Selling	Costs to run the business
Operating Profit	Gross Profit – Operating Expenses	Profit from core operations
Other Income/Expenses	Interest Income, Interest Expense, Gain/Loss on Sale of Assets	Non‑operating items
Profit Before Tax (PBT)	Operating Profit ± Other Items	Profit before tax provision
Tax Expense	Current Tax + Deferred Tax	Statutory obligation
Net Profit / Loss	PBT – Tax Expense	Bottom‑line figure

12.2 Balance Sheet

Assets (Debit Side)	Liabilities & Equity (Credit Side)
Non‑Current Assets – Fixed Assets (Net), Long‑Term Investments, Intangibles	Shareholders’ Funds – Capital, Reserves & Surplus
Current Assets – Cash, Bank, Debtors, Stock, Prepaid Expenses, Short‑Term Investments	Non‑Current Liabilities – Long‑Term Loans, Debentures
Current Liabilities – Creditors, Outstanding Expenses, Short‑Term Borrowings, Provision for Tax
Total Assets = Total Liabilities + Equity

Key Ratios (quick recall):

• Current Ratio = Current Assets ÷ Current Liabilities (ideal ≈ 2:1).
• Quick Ratio = (Current Assets – Stock) ÷ Current Liabilities (ideal ≈ 1:1).
• Debt‑Equity Ratio = Total Debt ÷ Shareholders’ Equity.
• Return on Equity (ROE) = Net Profit ÷ Average Shareholders’ Equity × 100.

12.3 Cash Flow Statement (Indirect Method)

Cash Flow from	Activities Included	Typical Adjustments
Operating Activities	Cash generated from core business	Start with Net Profit → add back non‑cash (depreciation, provisions) → adjust for changes in working capital (debtors, creditors, stock).
Investing Activities	Purchase/Sale of fixed assets, investments	Cash outflow for capex; inflow from asset disposals.
Financing Activities	Issue/redemption of share capital, loans, dividends	Cash inflow from loans/equity; outflow for repayment, dividend payment.
Net Change in Cash	= Opening Cash + Net Cash Flow from all activities	Should equal Closing Cash (as per Balance Sheet).

Mnemonic for Cash Flow Sections: “O​I​F” – Operating, Investing, Financing (think “OIF” as a cheap flight).

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13. Important Accounting Concepts & Conventions

Concept / Convention	Meaning	Practical Implication
Entity Concept	Business is separate from its owners.	Personal transactions of owners not recorded in business books.
Going Concern	Assumes business will continue indefinitely.	Assets recorded at cost, not market value; depreciation charged.
Money Measurement	Only transactions measurable in money are recorded.	Qualitative factors (employee morale) not in accounts.
Accounting Period	Life of business divided into regular intervals (usually 12 months).	Enables periodic reporting (quarterly, annual).
Accrual Concept	Revenues & expenses recognised when earned/incurred, not when cash received/paid.	Leads to accruals, prepayments, outstanding items.
Consistency	Same accounting policies followed year after year.	Enhances comparability of financial statements.
Prudence (Conservatism)	Anticipate losses, but not profits.	Provisions for doubtful debts, write‑down of inventory.
Materiality	Only information that could influence decisions is disclosed.	Insignificant items may be ignored or grouped.
Full Disclosure	All material facts must be revealed in statements or notes.	Notes to accounts, contingent liabilities.
Matching Concept	Expenses matched with revenues they help generate.	Depreciation, cost of goods sold aligned with sales period.

Mnemonic for Core Concepts: “E​G​M​A​C​P​M​F” – Entity, Going Concern, Money Measurement, Accounting Period, Accrual, Consistency, Prudence, Materiality, Full Disclosure (think “EGMA CPMF” like a code).

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14. Common Errors & Their Rectification | Error Type | Description | How to Detect | Rectification Journal |

————	————-	—————	———————–
Error of Omission	Transaction not recorded at all.	Trial balance still balances; missing from ledger.	Record the missing transaction (Dr/Cr as per original).
Error of Commission	Wrong amount, wrong account, or wrong side.	Trial balance may still balance (if compensating).	Reverse wrong entry, then record correct one.
Error of Principle	Violates accounting principle (e.g., recording revenue as liability).	Trial balance balances; misclassification.	Reverse incorrect entry; post to correct account.
Compensating Error	Two or more errors cancel each other’s effect on trial balance.	Trial balance balances; errors hidden.	Identify each error individually; correct each.
Error of Original Entry	Wrong amount entered in journal & posted accordingly.	Trial balance balances; incorrect ledger balances.	Reverse the wrong entry (using same wrong amount) then record correct amount.
Complete Reversal	Debit and credit sides swapped.	Trial balance balances; accounts show opposite balances.	Double reverse: debit what was credited, credit what was debited.

Rectification Steps:

1. Identify the error (via reconciliation, review, or audit).
2. Determine the correct entry.
3. Pass a rectification entry:

• If error caused excess debit → credit the excess.
• If error caused excess debit in a wrong account → debit correct account, credit wrong account. —

15. Key Highlights for Quick Revision

• Accounting Equation: A = L + E (Assets = Liabilities + Equity).
• Double Entry: Every debit has a matching credit.
• Journal → Ledger → Trial Balance → Adjustments → Financial Statements.
• Types of Accounts: Personal (Receiver/Giver), Real (What comes in/What goes out), Nominal (Expenses/Losses Dr., Incomes/Gains Cr.).
• Adjusting Entries: Accruals, prepayments, depreciation, provisions, stock.
• Depreciation Methods: SLM (equal), WDV (reducing balance), SYD, Units of Production.
• Inventory Valuation: FIFO (higher profit in inflation), LIFO (not allowed under IFRS), Weighted Average.
• Financial Statements: Income Statement (Revenue – Expenses = Profit), Balance Sheet (Assets = Liabilities + Equity), Cash Flow (Operating, Investing, Financing).
• Ratios: Current, Quick, Debt‑Equity, ROE.
• Concepts: Entity, Going Concern, Accrual, Consistency, Prudence, Materiality, Full Disclosure, Matching.
• Errors: Omission, Commission, Principle, Compensating, Original Entry, Reversal – rectify via reverse‑then‑correct entries. —

16. Quick‑Reference Tables

16.1 Normal Balances

Account Type	Normal Balance	Increase	Decrease
Asset	Debit	Debit	Credit
Liability	Credit	Credit	Debit
Owner’s Equity	Credit	Credit	Debit
Revenue/Gain	Credit	Credit	Debit
Expense/Loss	Debit	Debit	Credit

16.2 Depreciation Rates (WDV) – Example

Asset	Useful Life (yrs)	Residual Value (% of Cost)	WDV Rate (%) approx.
Plant & Machinery	10	10	15–18
Furniture & Fixtures	8	5	20–22
Vehicles	5	10	30–35
Computers	3	5	45–50

(Rate = 1 – (SV/Cost)^(1/Life) × 100) #### 16.3 Common Provisions | Provision | When Created | Journal Entry (Creation) | Journal Entry (Reversal/Utilisation) |

———–	————–	————————–	————————————–
Provision for Doubtful Debts	Estimated bad debts	Provision for Doubtful Debts A/c Dr. To Bad Debts Expense A/c	Bad Debts Expense A/c Dr. To Provision for Doubtful Debts A/c
Provision for Tax	Estimated tax liability	Provision for Tax A/c Dr. To Profit & Loss A/c	Tax Payable A/c Dr. To Provision for Tax A/c
Provision for Warranty	Expected warranty claims	Provision for Warranty A/c Dr. To Warranty Expense A/c	Warranty Expense A/c Dr. To Provision for Warranty A/c

16.4 Trial Balance Error Detection Checklist

1. Check totals – Debit total = Credit total?
2. Verify ledger balances – Are any balances mis‑placed (debit side shown as credit)?
3. Look for transposition errors – e.g., ₹5,430 entered as ₹5,340 (difference divisible by 9).
4. Scan for missing entries – Compare with journal/posting list.
5. Review adjusting entries – Ensure accruals/prepactions are posted.

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17. Last‑Minute Tips

• Memorise the Accounting Equation – it’s the backbone.
• Recall the “Dr/Cr” rules with the mnemonic: “DEAD‑CLIC” (Debit increases Expenses, Assets, Drawings; Credit increases Liabilities, Income, Capital).
• For adjusting entries, think “Accrue what’s owed, Prepay what’s paid early.”
• When stuck on a ratio, write the formula first, then plug numbers. – Practice a simple journal → ledger → trial balance problem; it reinforces the entire cycle.
• Never forget that depreciation is a non‑cash charge – add it back when computing cash flow from operations.
• Check for “contra” accounts (Accumulated Depreciation, Provision for Doubtful Debts) – they reduce the related asset on the balance sheet.

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End of Revision Notes.

(Word count ≈ 1,320)

Good luck with your exams!