Accounting Basics

Accountancy

7,000 years ago in MesopotamiaHistory

Definition

Accounting is defined by the American Institute of Certified Public Accountants (AICPA) as "the art of recording, classifying, and summarizing 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."

Objectives of Accounting System

Timely and accurate picture of performanceTo ascertain the financial position of the business as a whole.

Generate financial reports for management, lenders, creditors

Facilitate filing of tax returns (sales and payroll taxes more important than income tax)

Prevent and detect fraud, waste and theft

Types of Accounts

Personal A/c

Impersonal A/c

Real A/c Nominal A/c

Personal A/c

1 • Natural Personal A/c

2 • Artificial Personal A/c

3 • Representative Personal A/c

Natural Personal A/cFirm Individual Persons

Ex:- Raju A/c, Ram A/c etc.

Artificial Personal A/cBusiness Business

Ex:- Bank A/c, Xyz & Co Ltd. etc

Representative Personal A/c

Outstanding Expenses

Prepaid Incomes

Rules for Personal A/cCredit the G

iverDeb

it th

e Re

ceiv

er

Types of Accounts

Personal A/c Impersonal A/c

Real A/c Nominal A/c

Real A/c

1 •Tangible Real A/c

2 •In-Tangible Real A/c

Tangible Real A/c

Properties

Buildings a/c Machinery a/c

In-Tangible Real A/c

Patents Copy Rights

Rules for Real A/c

Credit What Goes Out

Debit What Comes in

Types of Accounts

Personal A/c Impersonal A/c

Real A/c Nominal A/c

Nominal A/c

Credit all Incomes and gains

Debit all Losses and Expences

ACCOUNTING EQUATION:

Assets=Liabilities + capitalCapital=Assets-LiabilitiesLiabilities=Assets -Capital

Accounting equation is an extension of businessEntity (or) dual aspect concept.

ACCOUNTING CONCEPTS: These are basic conditions assumptions guidelines on which the accounting is based. they are:

Business entity concept: It means of separation of owner and business

Dual aspect concept: It means two, any transaction will have two aspects

Accounting period concept: The period of checking the books of accounts from the beginning to end of the financial year.

Going concern concept: It means continuously any person start a business new and should go on. To start a business with an intension to of earning more profits

Cost concept: The total amount of expenditure which is incurred in a financial year.

Money measurement concept: it means the value of every transaction should measure in terms of money

Matching concept: To measure the profits for a particular period is essential to match accurately that cost associated with revenues.

Realization concept: imaginary value should be anticipated but not a security have a greater value.

Accrual concept: costs are recognized when they are incurred when they are not paid.

Rupee value concept: it assumes that the value of a rupee constant.

Business entity concept: It means of separation of owner and business Dual aspect concept: It means two, any transaction will have two

aspects Accounting period concept: The period of checking the books of

accounts from the beginning to end of the financial year. Going concern concept: It means continuously any person start a

business new and should go on. To start a business with an intension to of earning more profits

Cost concept: The total amount of expenditure which is incurred in a financial year.

Money measurement concept: it means the value of every transaction should measure in terms of money

Matching concept: To measure the profits for a particular period is essential to match accurately that cost associated with revenues.

Realization concept: imaginary value should be anticipated but not a security have a greater value.

Accrual concept: costs are recognized when they are incurred when they are not paid.

Rupee value concept: it assumes that the value of a rupee constant.

Business Owner

Business Entity Concept

Dual Aspect Concept

Debit Credit

Accounting Period Concept

All the transactions are recorded in the books of accounts on the assumption that profits on these transactions are to be

ascertained for a specified period. This is known as accounting period concept. Thus,

this concept requires that a balance sheet and profit and loss account

should be prepared at regular intervals. This is necessary for different purposes

like, calculation of profit, ascertaining financial position, tax computation

etc.

Going Concern Concept

DepreciationFuture Profit Estimation

Investors

Cost Concept

Cost of the Machine

Before 1 Month 100000

Before 1 Month 80000

Money Measurement Concept

This concept assumes that all business transactions must be in terms ofMoney. It should not record the transactions with is not related to money.

Matching Concept

Costs Revenues

To Calculate Profit

Realization Concept

Wrong

accounting records only when it is realized

Right

Accrual Concept

costs are recognized when they are incurred when they are not paid.

Credit Sale

Rupee Value Concept

It assumes that the value of a Rupee Constant.

ACCOUNTING CONVENTIONS: These are the rules and regulations,customs,usages,which are followed inorder to record the transactions in financial accounting.

There are 5 important conventions are follow under:-

o Convention of consistency: the formats and forum ales procedures are not changing till long period of time.

o Convention of disclosure: every transaction should be recorded and nothing should be hidden

o Convention of materiallity.: there must be heading and terms related to the heading can be taken at one place.

o Convention of conservetism.: play safe means taking necessary steps to safeguard the cash flow.

o Convention of feasability.: minimizing the expenditure and wastage should be avoided.

There are 5 important conventions are follow under:-oConvention of consistency: the formats and forum ales

procedures are not changing till long period of time.oConvention of disclosure: every transaction should be

recorded and nothing should be hiddenoConvention of materiallity.: there must be heading and

terms related to the heading can be taken at one place.oConvention of conservetism.: play safe means taking

necessary steps to safeguard the cash flow.oConvention of feasability.: minimizing the expenditure

and wastage should be avoided.

AAAomiomiAccounting

Cycle

1.Identifyingthe transaction

2.Analyse the transaction

3.journalise

4.Ledger And posting

5. Prepare the Trial balance

6.Adjustingentries

7. AdjustingTrial balance

8. Preparing The financialstatement

9. Closing The entries

ACCOUNTING CYCLE

1.Identifyingthe transaction

2.Analyse the transaction

Transaction:Cash Received from Raju

Analyse:-

Cash related to Real Account

Raju Related to Personal Account

The Rules of that accounts should be applied.

3.journalise

Date Particulars L.F No

Debit Amount

Credit Amount

Jan 1 2011

Cash A/c Dr

To Raju A/c

(Being Cash Received From Raju

XXXXX

XXXXX

Journals

4.Ledger And posting

Date Particulars J.F No

Amount Date Particulars J.F No

Amount

Jan 1 To Raju A/c XXXXX Jan 31 By Balance C/d XXXXX

Date Particulars J.F No

Amount Date Particulars J.F No

Amount

Jan 31 To balance c/d XXXXX Jan 1 By Cash A/c XXXXX

Dr

Dr

Cr

CrCash A/c

XXXXX XXXXX

Feb 1 To balance b/d XXXXX

XXXXX XXXXX

Feb 1 by balance b/d XXXXX

Raju A/c

5. Prepare the Trial balance

S.NO Particulars Debit Amount

Credit Amount

12

Cash A/c Raju A/c

XXXXX

XXXXX

XXXXXXXXXX

Trial Balance

6.Adjustingentries

Adjusting Entries are journal entries that are made at the end of the accounting period, to adjust expenses and revenues to the accounting period where they actually occurred.

Accrued revenues Revenues already earned but not yet paid or recorded.

Unearned revenues Revenues received in cash and recorded as liabilities prior to being earned.

Accrued expenses expenses already incurred but not yet paid or recorded.

Prepaid expensesexpenses paid in cash and recorded as assets prior to being used.Other adjusting entries include depreciation of fixed assets, allowances for bad debts, and inventory adjustments.

7. AdjustingTrial balance

7. AdjustingTrial balance

Adjusted Trial BalanceJanuary 31, 2010

Debit CreditCash $20,430 −Accounts Receivable 5,900 −

Office Supplies 4,320 −Prepaid Rent 24,000 −Equipment 80,000 −Accumulated Depreciation − $1,100

Accounts Payable − 5,200

Utilities Payable − 3,964

Unearned Revenue − 1,000

Interest Payable − 150

Notes Payable − 20,000Common Stock − 100,000

Service Revenue − 85,600

Wages Expense 38,200 −

Supplies Expense 18,480 −

Rent Expense 12,000 −Miscellaneous Expense 3,470 −

Electricity Expense 2,470 −

Telephone Expense 1,494 −

Depreciation Expense 1,100 −

Interest Expense 150 −

Dividend 5,000 −Total $217,014 $217,014

8. Preparing The financialstatement

1.Trading Account2.Profit and Loss A/c3.Balance Sheet

AAAomiomiAccounting

Cycle

1.Identifyingthe transaction

2.Analyse the transaction

3.journalise

4.Ledger And posting

5. Prepare the Trial balance

6.Adjustingentries

7. AdjustingTrial balance

8. Preparing The financialstatement

9. Closing The entries

ACCOUNTING CYCLE