SHAHEEN FALCONS PU COLLEGE

Accountancy
CA-Foundation
Arshiya Nousheen

Dreams don’t work unless you do.

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 Chapter 1 – Basis of Accountancy

Accountancy is the art of recording, classifying and summarising in a significant manner and
in terms of money, transactions and events which are, in part at least, of financial character,
and interpreting the results thereof.

On the basis of above definition we can simply say that accounting is just means of record
keeping in a business enterprise.

Accounting Cycle
Identification of transaction

Recording in the books of Journal

Posting to Ledger

Preparation of Trail Balance

Preparation of Final Accounts (Balance Sheet)

Basic Accounting Assumptions (Link to remember-GAC)

It means, while preparation of accounts it has to be kept in mind that the following accounting
assumptions have been followed. In case of default in following these assumptions the financial
statements are erroneous.

1. Going concern.
2. Accrual.
3. Consistency.

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 Users of Accounting Information
Internal Users External Users
-Board of Directors -Investors
-Partners -Lenders
-Officers -Suppliers
-Managers -Govt. agencies
-Customers

General Purpose Financial Statements

They include,

1. Profit & Loss Account.

2. Balance Sheet.
3. Cash Flow Statements.
4. Notes to Accounts.

What is an Asset?

It is a result of past events that helps in future transactions by providing cash

inflows.

Eg: Mr.A rents a building to start a college. Where, the rental agreement is the past
event that can be used in future and in return the usage of building brings cash to
Mr.A

What is a liability?

It is a result of past event that helps in future transactions by providing cash

outflows.

Eg: Mr.A takes loan from bank. Where loan agreement is the past event and
repayment of loan installments in future results in cash outflow

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Difference between an asset and income

This can be understood with an example,

Mr.A opens bank account with deposit of Rs.1000.He receives interest of Rs.50
per quarter.

In the above situation the deposit of Rs.1000 is an asset (Apna money)and the
interest that is received extra is income for Mr.A.

Difference between liability and expense

Eg: Mr.A borrowed a sum of Rs.5000.He pays interest of Rs.20 per month

In this situation the borrowing amount is the liability of Mr.A (Paraya money) and
interest to be paid is his expense.

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 Chapter 2 – Journal entries
The book in which transactions are first entered to show which account should be debited and
which is credited is called journal.

Format of journal is given below:

Date Particulars L. Amount(Dr.) Amount(Cr.)

F

Modern Rules of Accounting

 Debit - 1. Assets (Apna)

2. Expenses :(

 Credit- 1. Liability (Paraya)

2. Incomes :)

Account Increase Decrease

Asset Debit Credit

Liability Credit Debit
Expenses or Loses Debit Credit
Income or Gains Credit Debit

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 Test your knowledge:

Identify the following to their respective balances.

Title of Account Balance (Use pencil to answer )

1 Capital
2 Building
3 Purchases
4 Bank deposit
5 Rent
6 Cash
7 Discount Allowed
8 Bills Payable
9 Drawings
1 Sales
0
1 Stock
1
1 Depreciation
2
1 Investments
3
1 Sundry Debtors
4
1 Salary
5
1 Sundry Creditors
6
1 Machinery
7
1 Goodwill
8
1 Telephone
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2 Bank overdraft
0
2 Bad Debts
1
2 Bills Receivable
2
2 Taxes payable
3
2 Outstanding expenses
4
2 Prepaid expenses
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Answer:

Title of Account Answer

1 Capital Credit balance-Liability
2 Building Debit Balance-Asset
3 Purchases Debit Balance-Expense
4 Bank deposit Debit Balance-Asset
5 Rent Debit Balance-Expense
6 Cash Debit Balance-Asset
7 Discount Allowed Debit Balance-Expense
8 Bills Payable Credit Balance-Liability
9 Drawings Debit Balance- Expense
1 Sales Credit Balance-Income
0
1 Stock Debit Balance-Asset
1
1 Depreciation Debit Balance-Expense
2

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1 Investments Debit Balance-Asset
3
1 Sundry Debtors Debit Balance-Asset
4
1 Salary Debit Balance-Expense
5
1 Sundry Creditors Credit Balance-Liability
6
1 Machinery Debit Balance-Asset
7
1 Goodwill Debit Balance-Asset
8
1 Telephone Debit Balance-Expenses
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2 Bank overdraft Credit Balance- Liability
0
2 Bad Debts Debit Balance- Expense\loss
1
2 Bills Receivable Debit Balance- Asset
2
2 Taxes payable Debit Balance-Liability
3
2 Outstanding expenses Credit Balance-Liability
4
2 Prepaid expenses Debit Balance-Asset
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Chapter 3 - Accounting Standards

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Accounting standards are written policy documents issued by the expert accounting body or by
government covering aspects of recognition, measurement, presentation and disclosure of
accounting transactions and events in the financial statements.

They are the rules or guidelines constituted by ICAI (Institute of Chartered Accountancy of
India).It further constituted ASB (Accounting Standard Board) in 1977 that is responsible for
setting standards.

Objectives of Accounting Standard

1. Helps in meaningful comparison of financial statements.

2. Directs decision making
3. Provides set of standard accounting policies, valuation norms and disclosure
requirements.

List of Accounting Standards (Applicable for exam portions only)

AS 1 Disclosure of Accounting Policies

AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 9 Revenue Recognition
AS 13 Accounting for Investments
AS 14 Accounting for Amalgamation
AS 16 Borrowing Costs
AS 19 Leases
AS 26 Intangible Assets
AS 29 Provisions, Contingent Liabilities & Contingent Assets

Chapter 4 – Accounting Ratios

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Ratio is mathematical relationship between two interrelated variables. It is a process of
determining, interpreting and presenting numerical relationship of items and group of items
in the financial statements.

Objectives of Ratios

1. To know the areas of business which needs more attention.

2. To judge the earning capacity of business.
3. To provide a deeper analysis of profitability, solvency and efficiency levels in the
business.
4. To determine efficiency of business.
5. To make investment decisions.

Types of Ratios

A. Liquidity Ratios
(a)Current Ratio
(b)Quick Ratio\Acid Test Ratio
(c)Cash Ratio/Absolute Liquidity Ratio
(d)Net Working Capital Ratio

(a) Current Ratio=Current Assets/Current Liability

Where,
Current Assets=Inventories+Sundry Debtors+Cash & Bank Balances+
Receivables/Accruals+Loans and Advances+Disposable Investments etc.

Current Liability=Creditors for goods and services+Short Term Loans+Bank

Overdraft+Cash Credit+Outstanding expenses+Provision for Taxation+Dividend
Payable etc.

(b) Quick Ratio=Quick Assets/Quick Liability

Where,

Quick Assets=Current Assets-Inventories-Prepaid Expenses

Quick Liability= Current Liability-Bank Overdraft

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 (c) Cash Ratio= Cash and Bank balances+ Marketing Securities/Current Investments
Current Liability

(d) Net Working Capital=Current Assets- Current Liability(excluding short term

borrowings)

B. Capital Structure Ratios

(a) Equity Ratio
(b) Debt to Equity Ratio
(c) Debt to Total Assets Ratio
(d) Capital Gearing Ratio
(e) Proprietary Ratio

(a)Equity Ratio= Equity shareholders’ Fund ÷ Capital Employed

Where,

Shareholders Fund = Share Capital+ General Reserve+ Surplus + Retained Earnings

Capital Employed = Total Asset*- Current Liability

Or

Fixed Asset + Working Capital

*Total Assets does not include fictitious assets for example preliminary expenses, discount on
issue of shares.

(b) Debt to Equity Ratio = Long term Debts ÷ Shareholders’ Equity

Or

Total outside Liability ÷ Shareholders’ Equity

Or

Total Debt ÷ Shareholders’ Equity

Where, Shareholders’ Equity = Equity Share Capital + Preference Share Capital+ Surplus –
Losses.

(c) Debt to Total Asset Ratio = Total Debt ÷ Total Assets

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 Or

Total outside Liability ÷ Total Assets

*If nothing is mentioned in question, consider only long term debt.

Total Asset = Fixed Asset + Current Asset – Fictitious Assets

(d) Capital Gearing Ratio = (Preference share capital + Debentures + Other Borrowed Funds)

(Equity Share Capital + Reserves & Surplus – Losses)

(e) Proprietary Ratio = Proprietary Fund ÷ Total Assets

Proprietary Fund includes Equity Share Capital + Preference Share Capital + Reserves &
Surplus.

Total Assets exclude Fictitious Assets.

Revise Practical Problems from the following heads,

1. Journal
2. Trading Account & Profit & Loss Account
3. Balance Sheet

IF YOU DON’T SACRIFICE FOR WHAT YOU WANT, WHAT YOU WANT BECOMES THE SACRIFICE

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