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INTERNATIONAL SCHOOL OFBUSINESS AND RESEARCH,
BANGALORE-100
COURSE:SMU
SUBJECT:
Financial Accounting
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Meaning of Business:
Business refers to economic activity
concerned with Production and sales of
goods and services for the purposes of
earning profits.
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1.Introduction
2.Language
WHAT HE OWNS&WHAT HE OWES.
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DEFINITIONS:
1. AICPA-1941
Accounting is the process of recording,
classifying , summarizing data in asignificant manner and in terms ofmoney, transactions, or events whichare financial character andinterpretating the results thereby
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2. AAA-1966(American Accounting Association):
Accounting is the process of
identifying, measuring and
communicating economic
information and decisions by
users information.
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3.APB of the AICPA-1971 (Accounting Principles Board)
The function of accounting is providingquantitative information, primarily offinancial nature about economic
entities.
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Accounting Means:
Accounting is the process of recording,classifying, summarizing data in a
significant manner and in terms of
money, transactions, and events, whichare financial character and interpretating
the results thereby.
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BUSINESS TRANSACTION: (B.T)
Business Transaction means
transfer of money or moneys
worth from one Person to another
person which effects the financialposition of the business.
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NEED FOR ACCOUNTING
PROFIT TO A BUSINESS IS LIKE
FOOD TO HUMAN BODY
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ORIGIN OR ANTECEDENTS OF ACCOUNTING:
B & L about 3000 B.C.
The Chinese some 2000 years in
Europe.
King-Chandra Gupta Maurya.
KAUTILYA ARTHASHASTHRA
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The first professional organization of
accountant was founded in VENICE in 1581.
LUCA DE BARGO PACIOLI -15TH CENTURY
BOOKSUMMAIN ITALIAN LANGUAGE IN 1494
D.E.P DE COMPUTIET SCRIPTURIES
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IN 1785 EDWARD JONES -
D.E.S called ENGLISH SYSTEM OF BOOK
KEEPING It was in this book that uses
many subsidiary book or Special Journals
and preparation of Trial Balance werediscussed.
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As business and society becomemore complex over the years,
accounting developed newtechniques and concepts to meetthe increasing needs for financial
information.
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Is Accounting an art or a science?
Art practical application of knowledge
A science Systematized body of
knowledge-certain principles. (BTs)
In conclude, accounting is an art as well as
a science. But it is not a pure or perfect
science.
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BOOK-KEEPING:
Book- Keeping is an important Branch of
Accounting. B-K is regarded as theFoundation of accounting.
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Meaning of B-K. Book keeping is the
art of recording BTs in a systematic
manner. The recording BTs is done by
a person is called as Book-keeper.
The book keepers work is clerical innature.
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FUNCTIONS OF ACCOUNTING
1.RECORDING - Journal
2.CLASSIFYING -Ledger3.SUMMARISINIG -format (T Bal, TPL a/c. B/S.)
4.IDENTIFYING- determining the BTs to be recorded.
5.MEASURING - EXPRESS THE VALUE OF BTs in terms of money.6.ANALYSIS & INTERPRETATION-
rearrangements
7.COMMUNICATING - results
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ACCOUNTING IS CALLED THE EYES AND
EARS OF THE BUSINESS
BRANCHES OF ACCOUNTING
1.Financial Accounting
2.Management accounting
3.Cost accounting
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Financial Accounting:
It is an important branch of accounting
It helps in recording, classifying andsummarizing business transaction.
Financial statements are prepared
under financial accounting such as P&L
A/C. AND B/S.
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Management Accounting:
It is accounting for the management ie.,
accounting which provides/Furnishaccounting information to managers to
take appropriate decisions for better
Management of business.
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M.A. covers various areas like cost
accounting, budgetary control,
inventory control, Statistical
methods, internal auditing etc.
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COST ACCOUNTING:
It is a special wing of Management
accounting. It involves calculation of the
cost of products and help management in
fixing a fair selling price.
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Basic terms or terminology
1.Transaction or Business Transaction
2.Proprietor or owner
3.Capital (owners capital)
4.Net worth or Net Assets. (A-L=ownersequity)
5.Assets (French word ASSEZ meansenough or sufficient)
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Classification of assets:
1.Fixed Assets
2.Current assets3.Liquid/quick/circulating/floating/
Fluctuating Assets
4.Wasting Assets5.Fictitious / Nominal Assets
6.Tangible Assets and 7)Intangible assets
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Classification of assets:
1.Fixed AssetsL&B, P&M, Furniture etc.
2.Current Assets/Circulating , Floating OrFluctuating assets within 1 year.
(Drs. Stock, investment, cash and Bank Bal.)
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3.Liquid or quick Assets:
Converted into cash Easily or quickly. Cash in
hand cash at bank, B/R, Sundry Drs. Etc.
4.Wasting Assetsdepleted or lose their value
mines, oil-wells, patents, copyrights etc.
5.Nominal or Fictitious assetsno real value Preliminary exp, debit Bal. of P&L A/c. Deferredrevenue exp. Etc.
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6.Tangible assets eg. Building,Furniture, Machinery etc.
7. Intangible assets G/w, patents, copy
Rights, Trade mark and technical
knowledge.
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Valuation of assets:
1.Fixed Assets are valued at cost
less depreciation.
2.Current assets are valued at costor market price which ever islower.
LIABILITIES
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LIABILITIES:
Liabilities are obligations of the
business to pay outside partiesarising from events. In simpleliabilities are claims against the
assets due to purchases, fundsreceived, service rendered.
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Classification of liabilities:
1.Long term liabilities-one year or more(Term loans from bank, FIs, etc)
2.Short term liabilitieswithin 1 year.(BOD, B/P, O/S etc.,)
3.Contingent liabilitiesoccurrence oruncertainthat might arise in the future.
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DebtorsDebtor is a person who owes money to thebusiness. A debtor constitutes an assetsfor the business.
Creditor - Creditor is a person to whom thebusiness owes money. A creditor constitutesa liability for the Business.
Debt-The amount of business due froma person to the business.
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Debit an entry on the left side of an
account is called debit.
Credit- an entry on the right side of anaccount is called credit.
Voucher: a documentary evidence of Ts.
Goods: goods are physical commodities,usually movable & consumed afterproduction.
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Purchase- refers to obtaining goodsexchange for money or on credit.
Drawings - refers to the amount of cash orgoods withdrawn by the proprietor for his
personal or domestic use is known asdrawings.
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Account: means a summarized record ofall the transactions relating to a
particular person, thing, or a servicewhich have taken place during a givenperiod of time.
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Generally Accepted Accounting
Principles (GAAP)
Financial accounting follows a set ofaccounting principles is presenting
financial information. These principles
are Called GAAP.
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GAAP guide the accounting profession in
the choice of accounting techniques & in
the preparation of Financial Statementsconsidered good for Practicing
accountancy.
In India-
-The Accounting Standards Board-ASB;
-The Institute of Chartered Accountants of
IndiaICAI
-Department of Company Affairs, GOI- DCA
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-SEBI ,
-ICWAI (Institute of Cost & Works Accountants of India),
GAAP are primarily relevant to financialaccounting. The guide the selection of
accounting principles are:
1.Accurate Presentation.
2.Conservatism.
3.Profit Maximization.
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1. Accurate presentation accountinginformation is useful if it is accurate.
2.Conservatism In choosing the
principles, A firm may select the set of
principles which provide the most
conservative measure of Net income.
Accelerated depreciation methodLIFO, Cost flow prices are anticipated.
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3.Profit Maximization:
Maximize reported earnings. This is oppositeof conservatism and therefore, accordinglyrevenue should be recognized as quickly aspossible and recognition of expenses should
be postponed as long as possible. Therefore,the straight line method depn. Would beused. The FIFO cost flow assumption wouldbe made.
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4. Income Smoothing:
Under this system/method the section of
accounting methods that result on thesmoothest earnings trend over time.The firm must consider the pattern of
its operations before selecting theappropriate accounting principles.
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THE END
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Accounting Principles,
Concepts & Conventions
M i
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Meaning:
A principle is a Rule of Action OR Guide
to action. So, accounting principles areBroad Guideline or Rules of action to be
adopted for the preparation of accounts
& for the presentation of financial
statements. In shorts, they constitute the
theory base of accounting.
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Accounting Principles.
1.Accounting Concepts2.Accounting conventions.
Concept means an idea or thought. So,accounting concepts are the Fundamental
ideas or basic assumptions underlying the
theory and practice of accounting.
Important accounting concept
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Important accounting concept
1.Money Measurement concept/commondenominator concept.
2.Business Entity Concept/Separate/
Economic/Accounting entity concept.3.Going concern Concept/Continuity
concept
4. Dual aspect concept/Equation/Accounting equation concept.
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5. Cost/Historical concept.
6. Accounting period/Periodicity concept.
7. Matching/Periodical matching Concept(Compared)
C
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8. Accrual Concept (Recognition of Revenue & Expenses)
9. Realization concept (Revenue realization)
10.Objective evidence concept(source of documentsinvoice vouchers etc)
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Accounting Conventions
Meaning:
Accounting conventions are the Customs
or Traditions (Practices) followed by
accountant as guidelines while preparing
accounting statements is called as
accounting conventions.
Important A/cing. Conventions
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Important A/cing. Conventions
1.Convention of Consistency2.Convention of Full Disclosure
3.Convention of Materiality4.Convention of Conservatism
1.Money measurement concept
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1.Money measurement concept
Under this concept, accounting records
Only those transactions which can be
Measured in terms money, though
important shall not be recorded.
Eg. Assets L&B are expressed in
terms of money and not in terms of area.
2 B i E tit t
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2.Business Entity concept.
In accounting business is considered
to be a Separate entity from the
proprietor (s).
Sole trading concern, Joint Stock company,
Partnership Firms is regarded as distinct unit or
entity.
3 G i t
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3.Going concern concept:According to this concept the
business will continue for a fairlylong period of time. A business
will have an indefinite life unless it
is likely to be sale in the nearfuture.
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All that it means is that a businessenterprises will continue to operate for
a fairly long period of time.
D l A t t
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Dual Aspect concept:
This is the basic concept of accounting.
According to this concept every Business
transaction has a dual aspect.
Dual means two.
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It signifies that every business
transaction in accounting has two
aspects.
1.Receiving of some benefit of some
value and2.Giving of some benefit of equal
value.
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Cost/Historical concept:
This concept is closely related to going concernconcept. According to this concept an ASSETS
acquired by a concern is recorded in the books of
accounts at cost (actual price paid). The market
price of the assets is ignored.
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Cost concept:
Both fixed & current assets are acquired
at cost. But under this concept onlyFixed Assets are shown at cost.
Current Assets are shown at cost price
or market price whichever is lower.Therefore, the cost of an assets is
stable while its market price is
variable.
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Accounting period concept:
According to this concept, the life of
the business is divided into appropriate
segments for studying the results. Profit,
in its ultimate sense, means the incomeearned at the time of the Business.
Th f t ti d d
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Therefore, transactions are recorded
in the books of accounts on Assump
tion that profit out of those transac-tions is to be Ascertained for a specifiedperiod is called as A.P.C.
One year, half yearly, yearly monthly
normally 1 year is taken as a
accounting year.
Matching/periodical m concept
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Matching/periodical m. concept
This is based on the accounting
period concept. The paramount
objective of running of a business
is to earn profit.
In order to ascertain the profit
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In order to ascertain the profit
made by the business during a
period, it is necessary that
REVENUES should be matched
with the COSTS (EXPENSES) of
the period.
Revenue is in flow of Assets like cash
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Revenue is in-flow of Assets, like cashreceivablesright to receive cash from
the customers.Revenue is related to the sale of goods
Or supply of services.
Eg. Sale of goods, building rent,
interest from bank, commission.
C
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M. Concept
Expenses are outflows of cash or
usage of goods for the purposes of
Generating revenue in a particular
period.Eg. Salary, postage, rent, depreciation-usage of machine,
carriage etc.
If revenue exceeds expensescalled profit or income.
If Expenses exceeds Revenue- called Loss.
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ACCURAL CONCEPT:
Some thing that becomes due especiallyan amount of money that is yet to be paid
or received at the end of the accounting
period.Revenue is realized at the time of sale of
goods or services irrespective of when
the cash is received.
Realization concept :
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Realization concept.:
According to this concept revenue is recognized
when the goods are delivered to customers orservices are rendered. When revenue should berecorded in the books of accounts.
It says that revenue should be recorded when ithas been realized. Revenue is said to have beenwhen cash has been received or right to receive.
Objective evidence concept:
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Objective evidence concept:
This concept means that all accounting
entries should be evidenced and supported
by sources of documents or business
documents such as invoice, vouchers, etc.
is called as objective evidence concept.
Convention of consistency
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Convention of consistency:
The work consistency refers to continuity inmethods or practices. In Accounting
consistency means followers using the
same accounting methods or practices yearafter year.
A businessman follows the following
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A businessman follows the following
practices or methods generally year
after year.
Eg. Depn. Methods -SLM; WDVM; RM, etc.
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Convention of Full Disclosure:
This convention refers to full disclose
of all the financial information about
the business organization to the
owners and Various interestedpersons.
Therefore, this convention implies that
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Therefore, this convention implies that
accounts must be honestly prepared and all
the material information must be adequatelydisclosed therein.
Eg. Owners, Creditors, Lenders.
Convention of conservatism:
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Convention of conservatism:
Con. of conservatism is a useful tool in
the situations of uncertainty and doubt.
All anticipated or probable losses are recorded
as and when they occur and anticipated profitsare not recorded. Profits are recorded only when
the same has been earned.
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THE END
FOLLOW ASSIGNMENT
LEDGER
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LEDGER(Ledger is a permanent store house of all the Transactions)
Under the theoretical or traditional systemof accounting, after all the transactions are
journalized or recorded, the entries in the
single journal are posted or transferred tothe appropriate accounts in the ledger.
It must be clear by now that every
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It must be clear by now that every
transaction, after first being recorded in a
book of original entry, finds its subsequent
destination in the Ledger.
It is in this book which is properly arranged
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It is in this book which is properly arranged,
classified and condensed/strong form of all
the necessary information regarding the
working of our business.
So, the ledger is designed to accommodate
the various accounts maintained by a trader.
It contains the final and permanent record
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It contains the final and permanent record
of all the transactions in a duly classified
form. A ledger book contains Variousaccounts to which entries are made from
the journal.
The entries in the journal are posted or
transferred to the appropriate accounts in
the ledger periodically,
say weekly fortnightly monthly or
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say, weekly, fortnightly, monthly or
quarterly depending upon the convenience
and the requirements of the business, toknow the exact position of each account on
any particular date.
WHY TRANSACTIONS ARE NOT
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WHY TRANSACTIONS ARE NOT
ENTERED STRAIGHTAWAY IN
THE LEDGER?
The reasons why transactions are not directly
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The reasons why transactions are not directly
entered in the ledger or the reasons why
transactions are first recorded in the journal,and then, posted there from to the ledger are:
1.Recording of transactions directly in theledger will be difficult, if there are number oftransactions.
2. If transactions are straightaway recorded in
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the ledger, it will become really difficult tolocate or trace a transaction after several
recordings (entries) in the account.
3. In the ledger, complete transactions are not
shown in one place. The 2 aspects of atransaction are entered in two differentaccounts. As a result, the information aboutthe transaction is disconnected or separated
or not available in one place.
4 If transactions are recorded in the
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4.If transactions are recorded in theledger directly, the details
concerning a transaction will beinadequate.
5.Making of entries directly in theledger more scope for errors, as a
result the detection and location oferrors more difficult.
In view of the above limitations or difficulties
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involved in the recording of transactions
directly in the ledger, it is better that thetransactions are, first, recorded in the journal
and then posted there from to the ledger.
In fact, in practice, only such a procedure is
followed by all business concerns.
MEANING OF LEDGER:
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The term ledger is derived from theDUTCH word LEGGER which means tolie. Ledger therefore means a bookwhere the various accounts lie (are kept).
A ledger is a book in which all theaccounts of a trader whether Personal orReal or Nominal accounts are kept for
record.
In Ledger, one separate account is
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g , popened for each and every particular typeof transaction.
For every journal entry, one ledgeraccount is to be debited and anotherledger account is to be credited.
Every Ledger account is divided into twosides. The left-side is known as the debitside and the right-side as the credit side.
LEDGER
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LEDGER
ACCOUNT:Meaning of Account: It is a summarized
record of all the transactions relating tothe particular person, thing (Assets) ora Service (Expenses or Income) whichhave taken place during a given periodof time.
OR
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An account or ledger Account is a
summary statement of all thetransactions relating to a particularpersons, assets, expenses or income
which have taken place during a givenperiod of time showing their net effect
is known as Account.
Definitions:
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According to
1.J.R. BATLIBOI:
A ledger is a book which contains
a classified and permanent manner
of all the Business transactions is
called ledger.
2. L.C. CROPER.
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2. L.C. CROPER.
The book which contains a classified
and permanent record of all thetransactions of a business called aLedger.
FEATURES OF A LEDGER:
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The main features of a ledger are:
1. It is an analytical record of Transactions:
As transactions of the same nature arebrought together in one place in the ledger.
2. It is a derived or secondary record,-as the entries in the ledger are derivedfrom the entries in the journal.
3 It is a book of original entry
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3. It is a book of original entry.
In the words of William Pickles, Ledger
is the destination of the entries madein the subsidiary books or journals.
All business transactions are first
recorded in the journal or subsidiarybooks and are finally entered in the
ledger.
4 It is the principal Book of accounts
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4.It is the principal Book of accounts.
It is straightly called the KING OF BOOKS
OF ACCOUNT.
It is the principal or main book of
accounts, because it from this book thatbusinessman can obtain the final
information relating to the profit or loss
and the financial position of his business.
Advantages of ledger:
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Advantages of ledger:
1.It is only the book which gives aproperly arranged, classified andcondensed form of all the necessary
information regarding the working ofour business.
2.It is a permanent record of all thetransaction of a business.
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SRUCTURE OF AN ACCOUNT
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Date Particular J
F
Amt Date Particular J
F
Amt
Total xxx Total
LEDGER
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THE END
PRACTICAL PROBLEMS