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UNIT 2

SYLLABUS

 Introduction of Accounting Process- Journal and Ledger, Trial Balance, Classification of capital and revenue expenses, Preparation of Final Accounts- Trading and Manufacturing, Profit and Loss Account and Balance Sheet, Policies related with Intangible assets like copyright, trademark, patents and goodwill.

Introduction of Accounting Process:

The Accounting Process means the step-by-step method of recording, classifying, and summarizing all the financial transactions of a business.
It helps in finding out how much profit or loss a business has made and what is its financial position at the end of the year.

This process starts with recording transactions in the Journal, then transferring them to the Ledger, preparing a Trial Balance to check accuracy, and finally making Final Accounts (Trading Account, Profit & Loss Account, and Balance Sheet).

It also includes the proper treatment of expenses (capital and revenue) and managing intangible assets like goodwill, patents, trademarks, and copyrights.

In short, the Accounting Process is like a complete cycle that begins when a transaction happens and ends when the financial statements are prepared — showing the real performance and condition of the business.

🧾 1. Journal

Definition:

A Journal is the first book of original entry where all business transactions are recorded in the order in which they happen.

10 Key Points:

  1. Journal is the starting point of the accounting process.

  2. It records each transaction date-wise.

  3. Every transaction is recorded with debit and credit sides.

  4. The rule is “Debit the receiver, Credit the giver.”

  5. It provides a complete record of all transactions.

  6. It helps in avoiding mistakes and confusion.

  7. Each entry in the journal is called a Journal Entry.

  8. The narration (short explanation) is written under each entry.

  9. Journal helps to transfer entries to the ledger later.

  10. Example:

  • Bought goods for cash ₹5,000
    → Goods A/c Dr ₹5,000
    → To Cash A/c ₹5,000

📚 2. Ledger

Definition:

A Ledger is called the book of final entry, where all journal entries are grouped and recorded account-wise.

10 Key Points:

  1. Ledger shows all transactions related to one account in one place.

  2. It helps to know the total debit and credit of each account.

  3. Ledger is made after posting from the journal.

  4. Each page in the ledger is an individual account (like Cash A/c, Sales A/c).

  5. It helps to prepare the Trial Balance.

  6. The difference between debit and credit shows the balance of the account.

  7. Ledger helps in analyzing financial information.

  8. Helps to find out profit or loss.

  9. Example: Cash A/c, Sales A/c, Rent A/c.

  10. It is known as the “King of All Books.”

⚖️ 3. Trial Balance

Definition:

A Trial Balance is a list of all ledger accounts with their debit or credit balances at the end of the accounting period.

10 Key Points:

  1. It is made after posting to the ledger.

  2. The purpose is to check mathematical accuracy.

  3. Total of debit = total of credit → shows books are correct.

  4. It is not an account; it is a statement.

  5. It helps in preparing the final accounts.

  6. It can be prepared by balance method or total method.

  7. Errors can be detected easily through trial balance.

  8. It ensures accuracy of double entry system.

  9. Example: If Cash A/c debit ₹5,000, Sales A/c credit ₹5,000 → it balances.

  10. If both sides don’t match → there is an error.

💰 4. Classification of Capital and Revenue Expenses

Definition:

Expenses are classified into Capital and Revenue based on their nature and purpose.

Capital Expenses:

  1. Money spent on buying fixed assets (like machinery, building).

  2. Gives benefit for many years.

  3. It is recorded in Balance Sheet as an asset.

  4. Example: Purchase of machinery ₹50,000.

Revenue Expenses:

  1. Money spent for day-to-day business operations.

  2. Gives benefit for one accounting year only.

  3. It is recorded in Profit & Loss Account.

  4. Example: Rent, Salary, Electricity, Repairs.

10 Key Points:

  1. Capital expenses = Long-term benefit.

  2. Revenue expenses = Short-term or current year benefit.

  3. Capital expenses increase earning capacity.

  4. Revenue expenses maintain existing earning capacity.

  5. Both are necessary for smooth business operation.

  6. Wrong classification can affect profit calculation.

  7. Capital expenses shown as assets.

  8. Revenue expenses shown as expenses.

  9. Depreciation is charged on capital assets.

  10. Example: Buying computer = capital; paying electricity = revenue.

🏭 5. Preparation of Final Accounts

Definition:

Final accounts are the last stage of accounting, prepared to know the profit/loss and financial position of the business.

It includes:

  1. Trading Account

  2. Profit & Loss Account

  3. Balance Sheet

(a) Trading Account

Shows the gross profit or gross loss of the business.

10 Key Points:

  1. Made to find gross profit or gross loss.

  2. It includes opening stock, purchases, sales, wages, direct expenses.

  3. Gross Profit = Sales – (Opening Stock + Purchases + Direct Expenses).

  4. It helps to check efficiency of production/selling.

  5. Direct expenses like wages, carriage inwards are added.

  6. If sales > cost → Gross Profit.

  7. If sales < cost → Gross Loss.

  8. It is the first part of final accounts.

  9. Helps management plan production cost.

  10. Example: Sales ₹1,00,000, Cost ₹80,000 → GP ₹20,000.

(b) Manufacturing Account

Shows the cost of goods produced in factories.

10 Key Points:

  1. Prepared by manufacturing companies only.

  2. It shows total cost of production.

  3. Includes raw materials, wages, factory rent, power.

  4. Helps to know per-unit cost of goods.

  5. Output is transferred to Trading Account.

  6. It includes opening and closing stock of raw materials.

  7. Factory expenses = direct + indirect manufacturing costs.

  8. Helps to control production cost.

  9. Useful for pricing products.

  10. Example: Total factory cost ₹50,000 transferred to Trading A/c.

(c) Profit and Loss Account

Shows the net profit or net loss of the business.

10 Key Points:

  1. Prepared after Trading Account.

  2. Records indirect incomes and indirect expenses.

  3. Net Profit = Gross Profit + Incomes – Expenses.

  4. Expenses: Rent, Salary, Advertisement, Depreciation.

  5. Incomes: Commission, Interest Received.

  6. It shows efficiency of management.

  7. Helps in decision making.

  8. Net profit transferred to Capital Account.

  9. Important for investors and owners.

  10. Example: GP ₹20,000 – Expenses ₹10,000 = NP ₹10,000.

(d) Balance Sheet

Shows the financial position of the business on a particular date.

10 Key Points:

  1. It is a statement, not an account.

  2. Shows assets, liabilities, and capital.

  3. Total assets = total liabilities + capital.

  4. Prepared after Profit & Loss Account.

  5. Helps to know the financial strength of business.

  6. Left side → Liabilities; Right side → Assets.

  7. It shows what the business owns and owes.

  8. It helps investors, creditors, and management.

  9. It acts like a “snapshot” of business position.

  10. Example: Assets ₹1,00,000 = Liabilities ₹40,000 + Capital ₹60,000.

💼 6. Policies Related to Intangible Assets

Definition:

Intangible assets are non-physical assets that have value, like goodwill, patents, trademarks, and copyrights.

10 Key Points:

  1. Intangible means you cannot touch, but they have value.

  2. They give long-term benefits to the business.

  3. Examples: Goodwill, Patents, Trademarks, Copyrights.

  4. Shown on the asset side of Balance Sheet.

  5. Their value is usually estimated or purchased.

  6. Amortization is charged (like depreciation for intangibles).

  7. Goodwill arises when a business earns more profit than normal.

  8. Patents = legal right for inventions.

  9. Trademarks = company’s brand identity.

  10. Copyright = right to protect written or creative work.

✅ Conclusion

The Accounting Process starts from recording transactions in the Journal, then posting to the Ledger, preparing the Trial Balance, and finally making Final Accounts (Trading, Profit & Loss, Balance Sheet).
It also includes handling Intangible Assets properly.
This complete process helps in knowing the true financial result and position of the business.

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