The slide covers an introduction to the basics of accounting, concepts, processes and practices

1. CHAPTER 1
INTRODUCTION TO ACCOUNTING
& ACCOUNTING SYSTEMS
BY
PROF. SUKU THOMAS SAMUEL
DEPARTMENT OF MANAGEMENT

2. Payment
Goods or Services
WHAT IS A BUSINESS TRANSACTION?
• The economic activity of exchange of goods or services in
exchange for money or moneys worth is called as transaction.
• The entity that carries out transaction is called as a Business.
Buye
r
Selle
r

3. IMPORTANT TERMINOLOGIES
• Proprietor/ Owner: The person who commences a business and
undertakes the risk of carrying out the various business transaction.
• Capital: The initial money contributed the owner or proprietor to start a
business.
• Drawings: The money withdrawn by the owner for personal use.
• Assets: The resources needed by a business to function effectively.
• Liability: The obligations of a business are called as liabilities.
• Sales: The exchange of a product or service for money.
• Purchase: The acquisition of a product or service for money.

4. IMPORTANT TERMINOLOGIES
• Revenue: The income received by a firm from its business activities are
called as revenue.
• Expenses: The cost incurred by a firm due to its business activities is
called as expenses.
• Profit: When revenue is more than a firm's expenses, the condition is
called as profit.
• Loss: When expenses of a firm is more than its income, the condition is
called as loss.

5. ACCOUNTING - DEFINITION
Accounts is the art & science of recording, classifying and
summarizing transactions in a business
• Art – Presentation matters in accounts
• Science – Has definite laws & principles

6. ACCOUNTING - DEFINITION
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’.
- American Institute of Certified Public Accountants (AICPA)
'The process of identifying, measuring and communicating
economic information to permit informed judgments and
decisions by users of information’.
- American Accounting Association (AAA)

7. ACCOUNTING - OBJECTIVES
Why does a business need accounting?
• Systematic record of transactions.
• Determine profitability based on incomes and expenses.
• Determine financial position in terms of assets and liabilities.

8. ACCOUNTING - HISTORY
• Evolution traced 7,000 yeas back to Mesopotamia civilization.
• In India, Chanakya wrote ‘Arthashasthra’ with details of books of
account.
• Roman Empire developed account audit systems.
• Luca Pacioli, Italian mathematician is considered as Father of
Accounting.
• 18 century, industrial revolution brought needs for accounting
system.

9. ACCOUNTING – BRANCHES OF ACCOUNTING
• Deals with preparing books of Accounts
• Chartered Accountant
Financial Accounting
• Study of cost & methods to reduce them
• Cost Accountant
Cost Accounting
• Analyzing account information to take meaningful business decisions
• Management Accountant
Management Accounting

10. RELATIONSHIP BETWEEN BRANCHES

11. USERS OF ACCOUNTING INFORMATION
• Located within an organization
• Have access to extensive information
• Employees, directors, top management etc.
Internal Users
• Located outside an organization
• Have access to limited information
• E.g. Government, creditors etc.
External Users

12. LIMITATIONS OF ACCOUNTING
• Records only monetary transactions.
• Historical in nature.
• No global practices or policies in place.
• Limited scope for future assessments.
• Requires a qualified professional.

13. ACCOUNTING SYSTEMS
Single Entry System Double Entry System
Considers only one effect of the
transaction
Considers both effects of the
transactions
Unscientific system of accounting Scientific system of accounting
Incomplete system of accounting Complete system of accounting
Used by small traders and firms Used by large firms
Does need a qualified, dedicated
resource
Need a qualified and dedicated
resources

14. ACCOUNTING EQUATION
• Basic principle of accounting.
• Foundation of double-entry system of accounting.
• Forms the fundamental element of the balance sheet.
Total Assets = Capital + Total Liabilities
For a company, it can be rewritten as:
Total Assets = Share holders' equity + Total
Liabilities

15. ACCOUNTING EQUATION

16. ACCOUNTING EQUATION – TOTAL LIABILITIES
• Total of all the obligations of the business.
Total Liabilities = Long Term Liabilities + Current Liabilities
• Long term Liabilities :
– Obligations of a company that are due more than one year in the
future.
– Obligation amount is higher.
– Example: Debenture, Loan etc.
• Current Liabilities:
– Short-term liabilities of a business which are expected to be
settled within 12 months.

17. ACCOUNTING EQUATION – CAPITAL
• Total of all the resources of the business used for carrying out its
activities.
Shareholders Equity = Share Capital + Retained Earnings
• Share Capital:
– Resources contributed in return of the ownership of business.
• Retained Earnings:
– Portion of the profit kept aside for reinvestment into business.

18. • Total resources owned by a company used for carrying out its
activity and could be converted into cash.
• Fixed Assets:
– Assets that are used for long term use.
– Cannot be converted into cash quickly.
– Example: Land, Machinery etc.
• Current Assets:
– Assets that are consumed within a short period of time.
– Can be converted to cash quickly.
– Example: Stock, Debtors etc.
ACCOUNTING EQUATION – ASSETS
Total Assets = Fixed Assets + Current Assets

19. ACCOUNTING EQUATION
• Mr. ABC started a business by contributing Rs 1,20,000. The business
now has a total assets of Rs 5,50,000. Calculate the liabilities of the
firm.
• If the assets of a firm is Rs 3,40,000 and the liabilities are Rs 2,10,000
how much would the capital amount be?

20. ACCOUNTING PROCESS
The systematic process of Recording, Classifying and Summarizing
transactions in a business
Transaction
• Journals
Recording
• Ledgers
Classifying
• Final
Accounts
Summarizing

21. ACCOUNTING EQUATION – RECORDING
• First step in the accounting process.
• Recorded irrespective of the nature or type.
• Transactions are recorded chronologically.
• Recorded into books of accounts called as Journals.
• Journals are ‘Primary books of Accounts’.
• Process of writing transaction into journals is called as
Journalizing.

22. ACCOUNTING EQUATION – CLASSIFYING
• Second step in the accounting process.
• Transactions are grouped based on its nature and type.
• Similar transactions are grouped and rewritten.
• Rewritten into books of accounts called as Ledgers.
• Ledgers are Secondary books of Accounts.
• Process of transferring transactions from Journals to
Ledgers is called as Posting.

23. ACCOUNTING EQUATION – SUMMARISING
• Final step in the accounting process.
• Outcome of the transactions are determined.
• Profit position and Financial position of the business is
estimated.
• Estimated by preparing the Final accounts of business.

24. ACCOUNTING PRINCIPLES

25. ACCOUNTING PRINCIPLES
• Accounting principles are the rules and guidelines that
companies must follow when reporting financial data.
• Financial Accounting Standards Board (FASB) issues a
standardized set of accounting principles is referred to as
generally accepted accounting principles (GAAP).

26. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
• Common set of accounting principles, standards and
procedures.
• Companies must follow while preparing books of accounts
& financial statements.
• Indian Accounting Standard is referred to as Ind-AS.
• Issued by Accounting Standards Board (ASB) of Institute of
Chartered Accountants of India (ICAI).
• Comprises of ‘Accounting Concepts’ and ‘Accounting
Conventions’.

27. GAAP: ACCOUNTING CONCEPTS

28. ACCOUNTING CONCEPTS
• Accounting concepts are the fundamental accounting
assumptions
• Act as a foundation for preparation of books of accounts.

29. ACCOUNTING CONCEPTS
• Business Entity Concept: The concept assumes that the
business enterprise is independent of its owners.
• Money Measurement Concept: As per this concept, only
those transaction which can be expressed in monetary
terms are recorded in the books of accounts.
• Cost concept: This concept holds that all the assets of the
enterprise are recorded in the accounts at their purchase
price

30. ACCOUNTING CONCEPTS
• Going Concern Concept: The concept assumes that the
business will have a perpetual existence, i.e. it will continue
its operations for an indefinite period.
• Dual Aspect Concept: It is the primary rule of accounting,
which states that every transaction has two effects, and
both need to be accounted.
• Realization Concept: As per this concept, revenue should be
recorded by the firm only when it is realized.

31. ACCOUNTING CONCEPTS
• Accrual Concept: Expenses should be recognized when they
become due for payment.
• Accounting Period Concept: The concept says that financial
statement should be prepared for every period, i.e. at the
end of the financial year.
• Matching Concept: The concept holds that, the revenue for
the period, should match the expenses.

32. GAAP: ACCOUNTING CONVENTIONS

33. ACCOUNTING CONVENTIONS
• Accounting conventions are the methods and procedures
which have universal acceptance.
• To be followed by the firm during the preparation of
financial statement.

34. ACCOUNTING CONVENTIONS
• Consistency: Financial statements can be compared only
when the accounting policies are followed consistently by
the firm over the period. However, changes can be made
only in special circumstances.
• Disclosure: This principle state that the financial statement
should be prepared in such a way that it fairly discloses all
the material information to the users, to help them in taking
a rational decision.

35. ACCOUNTING CONVENTIONS
• Materiality: This concept is an exception to the full
disclosure convention which states that only those items to
be disclosed in the financial statement which has a
significant economic effect.
• Conservatism: This convention states that the firm should
not anticipate incomes and gains but provide for all
expenses and losses.

36. TYPES OF ACCOUNTS

37. TYPES OF ACCOUNTS
• An account is a functional unit.
• It is fundamental element in an accounting system.
• It helps to classify and summarize measurements of
business activity.
• There are mainly three types of accounts in accounting.
1. Personal Account
2. Real Account
3. Nominal Account

38. TYPES OF ACCOUNTS – PERSONAL ACCOUNT
• Represents an individual or an organization.
• These accounts are related to individuals, firms, companies,
etc.
• Example: Amazon Account, Thomas Account, etc.

39. TYPES OF ACCOUNTS – REAL ACCOUNT
• Represents Assets of a firm.
• All assets of a firm, which are tangible or intangible, fall
under the category.
• Example: Land Account, Machinery Account.

40. TYPES OF ACCOUNTS – NOMINAL ACCOUNT
• Represents incomes, gains, expenses and losses of a firm.
• The result of all nominal accounts is either profit or loss.
• Example: Commission, Interest, etc.

41. IDENTIFY THE TYPE ACCOUNT
From the following, identify the type of account:
• Land
• Amazon
• Rent
• Machinery
• Motor van
• Thomas
• Salary
• Flipkart
• Computer
• Capital
• Drawings
• Interest received
• Interest paid
• Furniture
• Motor van repair
• Electricity
• Rent received
• Commission paid
• Raju’s loan
• Depreciation
• ICICI Bank
• Kristu Jayanti
College
• Purchase
• Sales
• Wages
• Fuel

42. GOLDEN RULES OF ACCOUNTING
• Forms the very basis of accounting.
• Acts as a cornerstone for all bookkeeping.
• Used to prepare an accurate journal entry.
Effect Personal Real Nominal
Debit The receiver What comes in All expenses and losses
Credit The giver What goes out All incomes and gains

43. IDENTIFY TYPES OF ACCOUNT & EFFECT
From the provided transactions, identify the accounts, types
of account and effect of the transaction.
Transaction Account Type of Account Effect
1.
2.
Transaction Account Type of Account Effect
Paid rent for cash Rs
1,200
1. Rent Account Nominal Account Debit
2. Cash Account Real Account Credit