'Basics of Accounting

Dr. Teena Shivnani

Transactions There are two type of transactions:-

1. Financial Transaction

2. Non Financial Transaction

• Financial Transaction are those transaction which can measure in

term of money and have two sided effect.

E.g. sales, purchase etc.

• Non financial transaction are those transactions which can/ cannot

measure in the term of money and have only one sided effect.

E.g. donation, charity etc.

15 January 2014 Basics of Accounting / Teena 2

Accounting


Small Concept Large Concept

Accounting According to small concept accounting is:-

In the period when ownership and management were

one , the sole objective of accounting was to certain

profit or loss and financial position of the firm.

According to large concept accounting is :-

accounting became an important tool in helping

decision making.

In other words, accounting means an information

system that provides the accounting information to

users therefore to arrive at the correct decision. 15 January 2014 Basics of Accounting / Teena 4

Definition:- “Accounting is 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 a financial character and interpreting the

results therefore.”


Accounting Process / Functions


Financial Transactions

Recording (Journals)

Classification (Ledger)

Summarizing Final A/C

Analysis and Interpretation

Features of Accounting It records transactions of financial character:-

the transaction which can measure in term of money.

It is an art:-

It is a part of knowledge which enable us to achieve our

objective of ascertaining the financial results by recording,

classifying the business information.

It is recording system:-

After summarized data , this recording is carried out in the

book called Journal. 15 January 2014 Basics of Accounting / Teena 7

Cont……… It is an art of classifying business information:-

Classifying is the process of grouping of transaction or

entries of one nature at one place. This book called Ledger.

It is the art of summarizing the business data:-

Summarizing is the art of presenting the classified data

(ledger) in a manner. this involves preparation of final

accounts.


Accounting & Accountancy

Accounting:-

It begins where book keeping ends. it is concern with activity

like summarizing of transaction, interpreting and

communicating the results.

Accountancy:-

The knowledge of how to maintain accounts is called

accountancy. It tell us how to maintain various books of

accounts, how to prepare them and how to communicated

accounting information to the parties.


Users of Accounts

The Investor Group

Groups includes owner of shares in companies

The Lender Group

Groups includes providers of secured & unsecured, long & short term loans.

The employees Group

Groups includes employees of the organization.


Cont.…….

The Business Contact Group

Groups includes customers & suppliers of the organization.

The Government

Groups includes taxation authorities & other Govt. agencies & departments.

The Public

Groups includes society (taxpayer, consumers & other community)


Branches of Accounting


Branches

Financial Accounting

Cost Accounting

Management Accounting

Financial Accounting It is the original form of accounting. It means accounting of

financial transactions.

Financial accounting is concerned with recording the

transactions of financial character, summarizing and

interpreting them.

It ascertains profit earned or loss suffered during the period

and show the financial position of a firm.


Functions of Financial accounting 1. Recording

2. Classifying

3. Summarizing

4. Interpreting

15-Jan-14 Management Accounting / Ms. Teena 16

Cost Accounting

It means accounting of cost transactions.

It ascertains the cost of products manufactured or services

rented and help the management in decision making.

In cost accounting our aim is to determine the selling price of the

product.

(e.g. Price fixing)


Management Accounting

It is most recently developed branch of accounting.

It is concerned with generating accounting information relating to

funds, cost, profit etc. as will enable the management in decision

making.

The term management accounting refers to accounting for

management.

The functions of management are planning, controlling and

comparing .


Functions of MA 1. Provides data:- MA serves as a vital source of data

for management planning. The accounts and documents are a repository of a vast quantity of data about the past progress of the enterprise which are a must for making forecast for the future.

2. Classify Data :- the accounting data required for managerial decisions is properly complied and classified. MA help accountant to classify data as per nature wise, product wise, supply wise.


Cont.…….

3. Analysis and interprets Data:- the accounting data is analyzed meaningfully for effective planning and decision making. For this purpose data is presented in a comparative form. E.g. ratio.

4. Uses qualitative information also :- MA does not restrict itself to financial data for helping the management in decision making but also uses such information which may not be capable of being measured in monetary terms. Such information may be collected from special surveys, statistical records etc.


Cont.….. 5. Serves as means of communicating :-

It helps to communicating the management plans upward, downward and outward through the organization.

At later stage it keeps all parties informed about the plan that have been agreed upon and their roles in these plans.


Basic Accounting Terms

Capital:- it means the amount which the owner has invested in the firm or can claim from the firm.

Proprietor:- the person who makes the investment and bears all the risks connected with the business is called proprietor.

Drawings:- it is the amount of money or the value of goods which the proprietor takes for his domestic or personal use.


Capital = Assets - Liabilities

Cont……..

Liabilities:- It means the amount which the firm owes to outsiders, that is excepting the proprietors invested amount.

Liabilities are two types:-

1. Long term Liability:- which are payable after a long time or more than one year. (e.g. debentures, shares etc.)

2. Current Liability:- which are payable in near future (within one year). (e.g. Bank O/D ,B/P , Creditors)


Liabilities= Assets - Capital

Cont……. Assets:- assets are things of value owned. anything

which will enable the firm to get cash or a benefit in future, is an assets.

Assets are two types:-

Fixed assets:- which are purchased for the purpose of operating the business and not for resale.

(e.g. land, build., furniture etc.)

Current assets:- those assets of the business which are kept for short term for converting into cash.

(e.g. debtors, B/R, bank balance)


Cont……. Debtors:- a person who owes money to the firm

generally on account of credit sales called a debtors.

Creditors:- a person to whom the firm owes money called creditors. (when the goods are purchased on credit)

Receivables:- the term receivables is used for the amount that is receivable by the firm, other then amount due from the debtors.

Payables:- This term is used for the amount payable by the firm , other than the amt. due to creditors.


Cont…….

Stock:- this term includes goods lying unsold on a particular date.

The stock is valued on the basis of cost or market price whichever is less principal.

It may be opening and closing stock.

Opening stock:- goods lying unsold in the beginning of the accounting period.

Closing stock:- goods lying unsold at the end of the accounting period.


Cont…….

Revenue:- the amt. which as a result of operations is added to the capital. Revenue are receipts from sale of goods, rent, income etc.

Expenses:- the amt. spent in order to produce and sell the goods and services which produce the revenue.

Profit :- it is the profit earned during a period of time. In other words, the difference between revenue and expenses is called profit.

Losses:- loss really means something against which the firm receives no benefit.


Profit = Revenue - Expenses

Cont…..

Cost of goods sold:- cost of goods sold is the direct costs of the goods or services sold.

Gain:- it is a term used to describe profit of an irregular nature.

Gross profit:- it is the difference between sales revenue and services rendered over its direct cost.

Net profit:- it is profit made after allowing for all expenses. In case, expenses are more than the revenue, it is net loss.


Cont…..

Purchase:- the term purchase is used only for the purchase of goods. Goods are those things which are finished products, which also are meant to be sold.

Sales:- this term is used for the sale of goods only. when goods are sold for cash, they are cash sales, but if goods are sold and payment is not received at the time of sale , it is referred to as credit sales.


Objectives of Accounting

1. To keep systematic records:- Accounting is done to keep a systematic record of financial transaction . In the absence of accounting there would have been terrific burden on human memory which is most cases would have been impossible to bear.

2. To protect business properties:- accounting provides protection to business properties from unjustified and unwarranted use. E.g. how much the business has to pay to others or recovers from others, how much business has in the form of FA , cash , stock etc.

3. To ascertain the operational profit or loss:- Accounting helps in ascertaining the net profit earned or loss suffered on account of carrying the business.


Cont…. 4. To ascertain the financial position of business:- the profit

and loss a/c gives the amount of profit & loss made by the business during a particular period. However it is not enough. The business man must know about the financial position i.e. where he stand , what he owes and what he owns?

5. To facilitate rational decision making:-Accounting these days has taken upon itself the task of collection, analysis and reporting of information at the required points of time to the required levels of authority in order to facilitate rational decision making.


Account

An account is a summarized record of relevant transaction at one place relating to a particular head. It records not only the amount of transaction but also their effect and direction.

Classification of Accounts


Traditional Approach Modern Approach

Traditional Approach


Accounts

Personal Impersonal

Nominal a/c (Revenue or Expenses)

Real a/c

Personal Account:- Account which relate to persons with whom the business deals.

Natural personal a/c :- means person who are creation of god.

(e.g. mohan , ram , seeta etc.) Artificial personal a/c:- these include a/c of corporate bodies

or institutions or firms.(eg. Insurance co., government a/c, society a/c)

Impersonal Accounts:- a/c which are not personal such as

machinery a/c, cash a/c, rent a/c. Nominal Account:- account which relate to expenses, losses,

gains, revenue etc. the net result of all the nominal a/c is profit or loss which is transferred to the capital account.


Cont………. Real Account:- Account which relate to tangible or

intangible assets of the firm. Tangible assets:- Tangible a/c are those which

relate to such things which can be touched ,felt, measure , etc. eg. land, building, plant, investment.

Intangible assets:- these a/c represent such things which cannot be touched of course they can be measure in term of money. goodwill , patent, trademark.


Modern Approach According to modern approach a/c are classified

into five categories:-

1. Assets a/c

2. Liability a/c

3. Capital a/c

4. Revenue a/c

5. Expenses a/c


E.g. 1. Capital A/c 2. Drawings 3. Salary 4. Wages 5. Commission received 6. Rent Paid 7. Furniture 8. Building 9. Goodwill 10. Cash 11. Sales tax 12. Harish Chandra & Co. 13. Govt. of India a/c 14. Mohan a/c 15. Center for ESBM a/c 16. Carriage Inward 17. Stock 18. Debtors 19. Loans 20. Creditors


Accounting Equation

Accounting equation is based on dual aspect concept. In the dual aspect, we discussed that every business transaction has a two-sided effect. Always the total claims will equal the total assets of the firm.


Assets = Equities ( Total Claims)

Assets = liabilities + Capital

Liabilities = assets - capital

Capital = assets - liabilities

Accounting Equation


Assets Capital + Liabilities

Cash Bank

Bills Receivable Debtors

Stock Furniture

Machinery Building

Capital +

Liabilities Creditors

Bills Payable Outstanding Exp.

Bank O/D Loans

Double Entry system Every transaction has two aspects and according to

this system , both the aspect are recorded.

“ The system which recognizes and record both the aspect of transaction” is called double entry system.


Meaning of Voucher

It is a document providing evidence of some business transaction. Whenever a transaction takes place an evidence to that effect is also established. Such evidence are source documents:-

cash memo, Bill , pay-in-slip , cheque etc.


Principles of Accounting

Accounting principles may be defined as those rules of action adopted by the accountant universally while recording accounting transaction.


Principles

Concepts Conventions

Concepts The term ‘concept’ includes those basic

assumptions or conditions upon which the science of accounting is based.

1. Going concern concept:- Accounting to this concept it is

assumed that the business will continue for a fairly long time to come.

2. Money measurement concept:- accounting records only

monetary transactions. Transaction which cannot measure in money do not find place in the books of accounts.

3. Cost Concept:-In this concept all the monetary transaction

which is related to cost is entered. We have to pay some money to get anything for business.


Cont….. 4. Dual aspect concept:- this is the basic concept of

accounting. According to this concept every business transaction has a dual effect. (E.g. debit & credit)

5. Accounting period concept:- according to this concept the life of business is divided into appropriate segments for studying the result shown by the business after each segment. In accounting such a segment or time interval is called ‘accounting period’. It is usually of a one year.


Cont….. 6. Separate entity concept:- in accounting, business

is considered to be separate entity from the proprietor. It means owner and business both are separate. E.g. capital invested by owner is recorded in the books of a/c.

7. Realisation concept:- according to this concept revenue is recognized when a sale is made. Sale is considered to be made at the point when the property in goods passes to the buyer and he became legally liable to pay.


CONVENTIONS Accounting convention means the guidelines or

behavior that is followed for preparing financial statements.

The types of accounting conventions:-

1. Convention of full disclosure

2. Convention of consistency

3. Convention of conservatism

4. Convention of materiality


Convention of full Disclosure

This convention holds that “ there should be complete and understandable reporting on the financial statement of all significant information relating to the economic affairs of the entity.”

Whether information should be disclosed or not always depends on the nature, importance of the information.


Convention of Consistency According to this convention, accounting practices

ones selected and adopted, should be applied consistently year after year.

This concept helps in better understanding of accounting information and makes it comparable with that of previous year.

This concept is particularly important when alternative accounting practices are equal acceptable.


Convention of Materiality

This convention refer to the relative importance of an item or an event.

It thus, means that it is a matter of exercising judgment to decide which item is material and which is not.

Only those items should be disclosed that have significant effect or are relevant to the user.


Convention of Conservatism As per this convention, the accountant follows the

policy of “playing safe”. On account of this convention, the inventory is valued at “ cost price & market price” which ever is less.

Similarly a provision is made for possible bad and doubtful debts out of current year profit.

It encourage the accountant to create secret reserves.

In this convention accountant follow the rule “anticipate no profit but provide for all possible losses”.


A/C standard In order to bring uniformity in technology, approach &

presentation of accounting results, the Institute of Chartered Accountants of India established on 22nd April 1977 an Accounting Standards Board (ASB).

The main function of the ASB is to formulate accounting standards. Total 32 standards we have in India.

While formulating the accounting standards the ASB will give due consideration to the international accounting standards.

It will also take into consideration the applicable laws, customs, usages and business environment prevailing in India.


A/C Standards AS Number Name

A S 1 Disclosure of Accounting policies

A S 2 Valuation of Inventories

A S 3 Cash Flow statement

A S 4 Contingencies

A S 5 Changes in Accounting Policies

A S 6 Depreciation

A S 7 Construction ( Contract)

A S 8 A/c for Research & Development

A S 9 Revenues

A S 10 A/c for Fixed Assets

A S 13 A/c for Investment

A S 14 A/c for Amalgamation

A S 15 A/c for Retirement

A S 19 Leases 15 January 2014 Basics of Accounting / Teena 2

A/C Standards AS Number Name

A S 20 Consolidated Financial Statement

A S 21 Earning per Share

A S 22 A/c for taxes on Income

A S 25 Interim Financial Reporting

A S 26 Intangible Assets

A S 28 Impairment of Assets

A S 29 Provisions, Contingent Assets & Liabilities

AS 30

Financial Instruments- Measurement and Recognition

AS 31 Financial Instruments- Presentation

AS 32 Financial Instruments- Disclosures


International A/c Standards (IAS)

Guidelines and rules set by the International Accounting Standard Board (IASB) that companies and organizations can follow when compiling financial reports.

The International Financial Reporting Standards (IFRS) were previously called the International Accounting Standards (IAS)

Organizations in the United States are required to use the Generally Accepted Accounting Principles (GAAP).

We have total 41 IAS.


List of all IAS IAS 1- Presentation of Financial Statements

IAS 2- Inventories

IAS 3- Consolidated Financial Statements

IAS 4 - Depreciation Accounting

IAS 5 - Information to Be Disclosed in Financial Statements

IAS 6- Accounting Responses to Changing Prices Superseded by IAS 15

IAS 7 - Statement of Cash Flow

IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors

IAS 9 - Accounting for Research and Development Activities

IAS 10- Events After the Reporting Period


Cont.…. IAS 11 - Construction Contracts

IAS 12- Income Taxes

IAS 13- Presentation of Current Assets and Current Liabilities Superseded by IAS 1.

IAS 14- Segment Reporting

IAS 15- Information Reflecting the Effects of Changing Prices Withdrawn December 2003

IAS 16- Property, Plant and Equipment

IAS 17- Leases

IAS 18- Revenue

IAS 19- Employee Benefits

IAS 20- Accounting for Government Grants and Disclosure of Government Assistance

IAS 21 - The Effects of Changes in Foreign Exchange Rates


Cont.…. IAS 22- Business Combinations Superseded by IFRS 3 effective

31 March 2004.

IAS 23- Borrowing Costs

IAS 24- Related Party Disclosures

IAS 25- Accounting for Investments Superseded by IAS 39 and IAS 40 effective 2001.

IAS 26- Accounting and Reporting by Retirement Benefit Plans

IAS 27- Consolidated and Separate Financial Statements

IAS 28- Investments in Associates

IAS 29- Financial Reporting in Hyperinflationary Economies

IAS 30- Disclosures in the Financial Statements of Banks and Similar Financial Institutions Superseded by IFRS 7 effective 2007.


Cont.…. IAS 31- Interests In Joint Ventures

IAS 32- Financial Instruments: Presentation Disclosure provisions superseded by IFRS 7 effective 2007.

IAS 33- Earnings Per Share

IAS 34- Interim Financial Reporting

IAS 35- Discontinuing Operations Superseded by IFRS 5 effective 2005.

IAS 36- Impairment of Assets

IAS 37- Provisions, Contingent Liabilities and Contingent Assets

IAS 38 - Intangible Assets

IAS 39 - Financial Instruments: Recognition and Measurement

IAS 40- Investment Property

IAS 41 - Agriculture


Thanking You


'Basics of Accounting

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