Basic Accounting

BASIC ACCOUNTINGBASIC ACCOUNTING

What is Book-keeping ?What is Book-keeping ?Book-keeping simply means Book-keeping simply means recording of transactions. In recording of transactions. In absence of transaction, the absence of transaction, the

question of book-keeping does question of book-keeping does not arise at all. So, transactions not arise at all. So, transactions are the basic raw materials of are the basic raw materials of

book-keeping .book-keeping .

Some definitions of book-keeping:Some definitions of book-keeping: "Book-keeping is the art of recording business "Book-keeping is the art of recording business

dealings in a set of books."dealings in a set of books." - J.R.BATLIBOI - J.R.BATLIBOI "Book-keeping is the science of recording "Book-keeping is the science of recording

transactions in money or money's worth in such a transactions in money or money's worth in such a manner that at any subsequent date, the nature manner that at any subsequent date, the nature and effect of each transaction and the combined and effect of each transaction and the combined effect of all the transactions may be clearly effect of all the transactions may be clearly understood, and so that the accounts thus kept understood, and so that the accounts thus kept may show the owner of the books the true final may show the owner of the books the true final position."position."

- L.C.Cropper- L.C.Cropper Thus ,book-keeping teaches us the correct Thus ,book-keeping teaches us the correct

process of keeping records of business process of keeping records of business transactionstransactions..

What is Accounting ?What is Accounting ?

Accounting is defined by the Accounting is defined by the American Accounting Association American Accounting Association (AAA) as : (AAA) as :

"the process of identifying, measuring "the process of identifying, measuring and communicating economic and communicating economic information to permit informed information to permit informed judgments and decisions by the judgments and decisions by the users of the information".users of the information".

Accounting and Book- keepingAccounting and Book- keeping There lies important difference between There lies important difference between

Accounting and Book keeping. Accounting deals Accounting and Book keeping. Accounting deals with the entire system for providing accurate and with the entire system for providing accurate and up-to -date financial information - from the up-to -date financial information - from the design of the system through its operation to design of the system through its operation to interpretation of the information that is interpretation of the information that is obtained. To become an accountant, an individual obtained. To become an accountant, an individual must undergo years of training and chalk up a must undergo years of training and chalk up a great deal of practical experiencesgreat deal of practical experiences..

Book keeping, on the other hand, is the Book keeping, on the other hand, is the routine, day-to-day record keeping. Book keepers routine, day-to-day record keeping. Book keepers are responsible for obtaining financial data that are responsible for obtaining financial data that the accounting system process. An accounting the accounting system process. An accounting system cannot operate without good accurate system cannot operate without good accurate book keeping, but a book keeper can generally book keeping, but a book keeper can generally be trained within a year or so.be trained within a year or so.

PRINCIPLES & CONCEPTS OF PRINCIPLES & CONCEPTS OF ACCOUNTINGACCOUNTING

Accounting is the language of Accounting is the language of business. The concepts which guide business. The concepts which guide accounting practices and procedures accounting practices and procedures are commonly referred to as are commonly referred to as Accounting Principles. Accounting Accounting Principles. Accounting principles are general guide -lines for principles are general guide -lines for sound accounting practices. The sound accounting practices. The basic principles and concepts which basic principles and concepts which are ground rules of accounting is are ground rules of accounting is called Generally Accepted Accounting called Generally Accepted Accounting Principles (GAAP). Principles (GAAP).

Generally Accepted Accounting Generally Accepted Accounting Principles (GAAP) Principles (GAAP)

1.1. BUSINESS ENTITY CONCEPT :BUSINESS ENTITY CONCEPT : Accounts Accounts are kept for entities, rather than for the persons are kept for entities, rather than for the persons who own, operate or otherwise are associated who own, operate or otherwise are associated with those entities. For example, when the with those entities. For example, when the Balance Sheet for the business entity is Balance Sheet for the business entity is prepared, the personal assets and liabilities of prepared, the personal assets and liabilities of owners are not considered.owners are not considered.

2.2. MONEY MEASUREMENT CONCEPT :MONEY MEASUREMENT CONCEPT : In In accounting, a record is made only of those facts accounting, a record is made only of those facts which can be expressed in monetary terms, i.e. which can be expressed in monetary terms, i.e. all business transactions are recorded in terms all business transactions are recorded in terms of money.of money.

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3.3. GOING CONCERN CONCEPT :GOING CONCERN CONCEPT : Accounting assumes that an entity or concern Accounting assumes that an entity or concern normally keep on going one year to the next. normally keep on going one year to the next. More specifically, the entity will continue to More specifically, the entity will continue to operate indefinitely unless there is evidence to operate indefinitely unless there is evidence to the contrary. It treats business to create values the contrary. It treats business to create values (out put & services) on a continuing basis.(out put & services) on a continuing basis.

4.4. COST CONCEPT :COST CONCEPT : Accounting is based Accounting is based on the cost concept. It states that accounting on the cost concept. It states that accounting focuses on the cost value of assets, rather than focuses on the cost value of assets, rather than on their market value.on their market value.

GAAP--------------GAAP--------------

5.5. DUAL ASPECT CONCEPT:DUAL ASPECT CONCEPT: It states that It states that every transaction must have two aspects, every transaction must have two aspects, 'Debit' and 'Credit'. This concept can be written 'Debit' and 'Credit'. This concept can be written as an equation, that is, a statement that as an equation, that is, a statement that 'Something is equal to something else'. 'Something is equal to something else'. Equation is: Assets= Liability+ Equity. The Equation is: Assets= Liability+ Equity. The Double Entry System of Accounting is based on Double Entry System of Accounting is based on this concept.this concept.

6.6. OBJECTIVE EVIDENCE:OBJECTIVE EVIDENCE: Objective Objective evidence should be maintained in support of evidence should be maintained in support of business transactions and data reported in the business transactions and data reported in the financial statements in order to claim the financial statements in order to claim the confidence of the people who use those confidence of the people who use those statements.statements.

GAAP--------------GAAP--------------

7.7. ACCOUNTING PERIOD:ACCOUNTING PERIOD: For the purpose For the purpose of reporting to outsiders the 'Year' is the usual of reporting to outsiders the 'Year' is the usual accounting period. It is necessary to prepare accounting period. It is necessary to prepare periodic reports on operations, financial periodic reports on operations, financial position and changes in financial position of the position and changes in financial position of the enterprise to get the result of success or failure.enterprise to get the result of success or failure.

8.8. CONSISTENCY CONCEPT:CONSISTENCY CONCEPT: There should There should be consistency in the use of accepted principles be consistency in the use of accepted principles of accounting from one year to another, of accounting from one year to another, especially in comparing the financial especially in comparing the financial statements of one year with those of a statements of one year with those of a proceeding year.proceeding year.

GAAP--------------GAAP--------------

9.9. MATERIALITY CONCEPT :MATERIALITY CONCEPT : The accountant The accountant does not attempt to record a great many does not attempt to record a great many events which are so insignificant that events which are so insignificant that recording of them in books is not all recording of them in books is not all justified by usefulness of the result.justified by usefulness of the result.

10.10.FULL DISCLOSURE :FULL DISCLOSURE : Accountants are Accountants are obliged to transmit all significant financial obliged to transmit all significant financial data preferably in the body of the data preferably in the body of the financial reports but also in explanatory financial reports but also in explanatory foot notes for understanding by third foot notes for understanding by third parties.parties.

GAAP--------------GAAP--------------

11.11.CONSERVATISM :CONSERVATISM : It means that when the It means that when the accountant has reasonable choice, he usually will accountant has reasonable choice, he usually will show the lower of two assets amounts for a given show the lower of two assets amounts for a given item. The concept is often stated as follows : item. The concept is often stated as follows : "Anticipate no profit and provide for all possible "Anticipate no profit and provide for all possible losses.“losses.“

12.12. ACCRUAL CONCEPT :ACCRUAL CONCEPT : The accrual concept The accrual concept implies that revenues are reported in the period implies that revenues are reported in the period in which they are earned, and expenses are in which they are earned, and expenses are reported in the period which they incurred in an reported in the period which they incurred in an attempt to produce revenues. The accrual basis attempt to produce revenues. The accrual basis of accounting requires the use of an adjusting of accounting requires the use of an adjusting process at the end of the accounting period to process at the end of the accounting period to match revenues and expenses for the period match revenues and expenses for the period properly.properly.

GAAP--------------GAAP--------------

13.13. MATCHING REVENUE AND MATCHING REVENUE AND EXPENDITURE :EXPENDITURE : The determination of periodic The determination of periodic net income is a two-fold problem involving (a) net income is a two-fold problem involving (a) the revenue recognized during the period & (b) the revenue recognized during the period & (b) the expenditure to be allocated to the period. the expenditure to be allocated to the period. Thus, revenues and expenditures must be Thus, revenues and expenditures must be matched to determine net income or net loss matched to determine net income or net loss for the period.for the period.

14.14. FAIRNESS :FAIRNESS : The financial reports should The financial reports should be fair in the sense that they should not favour be fair in the sense that they should not favour certain groups at the cost of others. The certain groups at the cost of others. The standard of fairness intends to ensure justice standard of fairness intends to ensure justice and equity in reporting financial events of any and equity in reporting financial events of any business entity.business entity.

Different Types of Accounts Different Types of Accounts

Account may also be termed as a group Account may also be termed as a group or a class of transactions relating to a or a class of transactions relating to a particular 'person', 'properties', 'income' particular 'person', 'properties', 'income' 'expenditure'.'expenditure'.

Types of Accounts Types of Accounts

In conventional method, account may be In conventional method, account may be classified as follows :classified as follows :

Personal Account: relating to a person or Personal Account: relating to a person or institutioninstitutionexample: Rahim A/c, BJMC A/c.example: Rahim A/c, BJMC A/c.

Real Account: relating to a propertyReal Account: relating to a property example: Building A/c, Furniture A/c.example: Building A/c, Furniture A/c. Nominal Account: relating to income or Nominal Account: relating to income or

expenditure,expenditure,example: Salary A/c, Commission A/c.example: Salary A/c, Commission A/c.

Types of AccountsTypes of Accounts In modern method, accounts are classified In modern method, accounts are classified

into five accounts, namely :into five accounts, namely : Asset :Asset :

-- Properties & rights owned by an enterprise.Properties & rights owned by an enterprise.-- A valuable item that is owned or controlledA valuable item that is owned or controlled

by the entity.by the entity.-- That was acquired at a measurable cost.That was acquired at a measurable cost.

Liability :Liability : -- Obligations of a business entity.Obligations of a business entity.-- The claims of the creditors to the business The claims of the creditors to the business enterprise. enterprise.-- The rights of creditors represent debts of The rights of creditors represent debts of the business.the business.

Types of AccountsTypes of Accounts

Income :Income : -- The amount by which equity The amount by which equity

increased as a result of operations during increased as a result of operations during a period of time.a period of time.

-- An inflow of assets.An inflow of assets. Expense :Expense : -- An decrease in equity resulting An decrease in equity resulting

from operations during an accounting from operations during an accounting period.period.

-- Resources used up or consumed Resources used up or consumed during an accounting period.during an accounting period.

- Out flow of assets.- Out flow of assets.

Business TransactionsBusiness Transactions A transaction means an exchange of A transaction means an exchange of

value measured in terms of money or value measured in terms of money or money's worth. money's worth.

A transaction conducted by a trading A transaction conducted by a trading concern is called business transaction.concern is called business transaction.

A business transaction is the occurrence A business transaction is the occurrence of an event of a condition that must be of an event of a condition that must be recorded.recorded.

For example, payment of monthly salary For example, payment of monthly salary of Tk.50,000/-, purchase of goods on of Tk.50,000/-, purchase of goods on credit worth Tk.1,00,000/- acquisition of credit worth Tk.1,00,000/- acquisition of land and building of Tk.2,00,000/- are land and building of Tk.2,00,000/- are illustrative of the variety of business illustrative of the variety of business transaction.transaction.

Characteristics of Transactions Characteristics of Transactions

Event must be measurable in terms Event must be measurable in terms of money.of money.

Financial change must be brought by Financial change must be brought by the events.the events.

There must have two parties or There must have two parties or accounts in each transaction.accounts in each transaction.

Transaction must be independent.Transaction must be independent.

Double Entry SystemDouble Entry System

The system of book-keeping in which the The system of book-keeping in which the doubly effect of each transaction is recorded is doubly effect of each transaction is recorded is called the called the Double Entry System.Double Entry System.

In 1494, 'Lucas Pacioli', an Italian scholar wrote In 1494, 'Lucas Pacioli', an Italian scholar wrote a book named as "SUMMA DE ARITHMETICA a book named as "SUMMA DE ARITHMETICA GEOMETRIA PROPORTIONIET PROPORTIONLITA" GEOMETRIA PROPORTIONIET PROPORTIONLITA" wherein a chapter on 'Double Entry System' was wherein a chapter on 'Double Entry System' was incorporated. Later on, that was published in the incorporated. Later on, that was published in the form of a book, named as 'DE COMPUTIS ET form of a book, named as 'DE COMPUTIS ET SCRUPTURIS'. SCRUPTURIS'.

The people of the present world follow the The people of the present world follow the principles and methods as adopted in that book. principles and methods as adopted in that book. Hence, Luca Pacioli is known as founder of Hence, Luca Pacioli is known as founder of modern book-keeping and Italy, birth place of modern book-keeping and Italy, birth place of book-keepingbook-keeping

Double Entry SystemDouble Entry System However, Double Entry of Book-keeping has been However, Double Entry of Book-keeping has been

defined by William Pickles as, "Double Entry defined by William Pickles as, "Double Entry System seeks to record every transaction in System seeks to record every transaction in money or money's worth in its double aspect - money or money's worth in its double aspect - the receipt of benefit by one account and the receipt of benefit by one account and surrender of a like benefit by another account, surrender of a like benefit by another account, the former entry being to the debit of the the former entry being to the debit of the account receiving, the later to the credit of the account receiving, the later to the credit of the account surrendering.“account surrendering.“

Simply, we can say that it refers to the necessity Simply, we can say that it refers to the necessity of recording the two-fold aspect of each of recording the two-fold aspect of each transaction property. In any transaction, the transaction property. In any transaction, the account gives value is called the 'Creditor' and account gives value is called the 'Creditor' and the account that receives the value is called the the account that receives the value is called the 'Debtor'. In other words, every transaction 'Debtor'. In other words, every transaction creates two effects of opposite nature and equal creates two effects of opposite nature and equal sum-one is 'Debit' and the other 'Creditsum-one is 'Debit' and the other 'Credit'.'.

RULES FOR DETERMINING RULES FOR DETERMINING DEBIT AND CREDITDEBIT AND CREDIT

CONVENTIONAL METHOD :CONVENTIONAL METHOD : Personal AccountPersonal Account : : Receiver of ValueReceiver of Value -- Dr.Dr. Giver of Value Giver of Value - - Cr.Cr. Real Account :Real Account : Value coming inValue coming in -- Dr.Dr. Value going outValue going out -- Cr.Cr. Nominal Account :Nominal Account : All expenses or lossesAll expenses or losses -- Dr.Dr. All income or gainsAll income or gains -- Cr.Cr.

MODERN METHOD MODERN METHOD

Asset Account :Asset Account : Asset Increase(+)Asset Increase(+) -- Dr.Dr. Asset Decrease(-)Asset Decrease(-) -- Cr.Cr. Liability Account :Liability Account : Liability Increase(+)Liability Increase(+) -- Cr.Cr. Liability Decrease(-)Liability Decrease(-) -- Dr.Dr. Expense Account :Expense Account : Expense Increase(+)Expense Increase(+) - - Dr.Dr. Ext Decrease(-)Ext Decrease(-) -- Cr.Cr. Income Account:Income Account: Income Increase(+)Income Increase(+) -- Cr.Cr. Income Decrease(-)Income Decrease(-) -- Dr.Dr. Owner's Equity Account:Owner's Equity Account: O/E Increase(+)O/E Increase(+) -- Cr.Cr. O/E Decrease(-)O/E Decrease(-) - Dr. - Dr.

SUMMARYSUMMARY

Asset & Expense A/c.Asset & Expense A/c. Dr. Dr. Cr. Cr.

Increase (+) Decrease (-) Increase (+) Decrease (-)

Liability/Income /O.E. A/c.Liability/Income /O.E. A/c. Dr.Dr. Cr.Cr.

Decrease (-)Decrease (-) Increase (+)Increase (+)

EXAMPLESEXAMPLES

1.1. Bought Office Furniture for Tk.5000.00 Bought Office Furniture for Tk.5000.00 #Furniture A/c. #Cash A/c#Furniture A/c. #Cash A/c

Office Furniture A/c.Office Furniture A/c. -- Dr.Dr. Cash A/cCash A/c - - Cr.Cr. 2.2. Credit of goods for Tk.4000.00 from Mr. AliCredit of goods for Tk.4000.00 from Mr. Ali

#Purchase A/c. #Ali's A/c#Purchase A/c. #Ali's A/c Purchase A/c.Purchase A/c. - - Dr.Dr. Ali's A/c (Account Payable)Ali's A/c (Account Payable) -- Cr.Cr. 3.3. Paid Salaries Tk.2500.00 Paid Salaries Tk.2500.00

#Salary A/c. #Cash A/c#Salary A/c. #Cash A/c Salary A/c.Salary A/c. -- Dr.Dr. Cash A/c Cash A/c - - Cr.Cr.

EXAMPLESEXAMPLES

4.4. Received Interest on Investments Received Interest on Investments Tk.1200.00 #Cash A/c,# Int. A/C Tk.1200.00 #Cash A/c,# Int. A/C Cash A/c.Cash A/c. -- Dr.Dr.

Interest on Inv. A/c Interest on Inv. A/c -- Cr.Cr. 5.5. Mr. X started business with Mr. X started business with

Tk.2000.00 #Cash A/c, #X's Capital Tk.2000.00 #Cash A/c, #X's Capital A/cA/c

Cash A/c.Cash A/c. -- Dr.Dr. X's Capital A/c X's Capital A/c -- Cr.Cr.