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Basic
Understandingof Accounting
Chapter 1
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Transactions & Events Transaction is used to mean A business,
Performance of an act, an Agreement.
Event is used to mean A happening, as aconsequence of transaction, a result.
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Accounting MeaningAccording to American Institute of Certified Public Accountants in
1961 Accounting is an art of recording, classifyingand summarizingin asignificant manner and in termsof money, transactionsand eventswhich are in part at
least, of financial character and interpreting theresult thereof.
According to American Accounting Association, The process of
Identifying, Measuring & Communicating economicinformation to permit informed judgments anddecisionsby theusersoof accounts.
It isdifferent from book keeping
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Book KeepingIt is an activity, complementary to the accounting
process which is concerned with the recording offinancial data relating to business operation inspecific manner .
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Objectives of Accounting Meansof recording the monetary transactionsand events
Earnings of the company, achieved by preparing Profit & LossA/ c
Identify the obligations (Liabilities) & resources (Asset) of theorganization, by preparing Balance Sheet
It is required to maintain statutorily by certain government &
regulatory body Required by management for taking financial decisions
Investors and certain lenders also require the preparation offinancial statements
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Economic & Non economic
Transactions Those transactions in which money is exchanged or
such things or services are exchanged which can be
measured in terms of money are called economictransactions
E.g.. If we invite a friend for a dinner, it is not an
economic transaction, because the cost of dinner isnot to be recovered from the fr iend
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Cash & Credit Transactions
A transaction in which there is a receipt orpayment of cash is a cash transaction. Cash
or bank balance is affected by such atransaction
In credit transaction, there is no receipt or
payment of cash immediately, but it ispostponed to some future date.
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How to determine Cash & Credit
transaction? If the word cash or cheque is mentioned in the
transaction, it is treated as a cash transaction. E.g.
Sold goods for cash Rs.720
It the transaction does not mention the word cashbut containsonly the name of a person, it is a credit
transaction. E.g. Sold goodsto Mr. A
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How to determine Cash & Credit
transaction? When the transaction doesnot indicate cash or credit,
and does not mention the name of any person, then it
must be cash transaction. E.g. Sold goodsRs.720
If in a transaction, the name of any person ismentioned and also cash receipt or payment is
indicated, then it is a cash transaction. E.g. Sold goods
for cash Rs.720 to Mr. A
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Classify the transaction as
cash or credit1. Sold furniture to Sita for cash Rs.5000
2. Bought goods from Mohan Rs.3000
3. Sold goods Rs.2000
4. Paid for railway freight Rs.100
5. Expenses incurred on running the cattle camp
during the draught period Rs.60006. A gift of Rs. 10000 given to daughter on her
birthday
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Classify the transaction as
cash or credit
7. Purchased stationery from Dinesh Stationery
Mart Rs.3008. Purchased cupboard from Chintan Furniture
Mart by cheque Rs.3000
9.Sold goods to Pulin Rs.10000 and cheque for halfof the amount was received
10. Paid to Dhruvi for shop rent Rs1000
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Accounting Process
Identification of Transaction
Preparation of Business Documents (Voucher)
Recording of Transactions (Journal)
Posting to respective Accounts (Ledger,Subsidiary Books, Journal Proper)
Preparation of Trial Balance
Passing of Adjusting Entries
Preparation of Financial Statements
Profit & Loss A/ c
Balance Sheet
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The Anatomy of BusinessAssets Fixed assets
Current assets
Investments
Liabilities Long term liabilities
Current l iabil it ies
Financial position
IncomeExpenses
Financial Performance
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Users of Financial Statements
Internal Users External Users
Management Group BOD Partners Managers Officers
Financial Group Investors
Lenders
Suppliers
Public Group Governmental
Agencies Employees Customers Others Likeacademicians,researchers, analysts.
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Branches of Accounting
Cost
Accounting
Financial
Accounting
Management
Accounting
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