basics of accounting

1. BOOK KEEPING
• According to Carter
“book keeping is the science and art of
correctly recording in the books of
accounts all those transactions that
results in the transfer of money or
money’s worth”

2. ACCOUNTING
• American Accounting Association
defines
"the process of identifying, measuring
and communicating economic
information to permit informed
judgments and decision by users of
the information.”

3. Objectives of Accounting
1. To ascertain whether the business
operations have been profitable or
not.
2. To ascertain the financial position of
the business.
3. To generate information.

4. Functions of Accounting
1. Systematic record of business
transactions.
2. Protecting the property of the
business.
3. Communicating the results to
interested parties.
4. Compliance with legal requirements

5. Is Accounting a science or an Art?
Accounting is both a science and an
art.

6. Distinction between Book keeping
and Accounting
Book keeping
It refers to recording of
business transactions in
an orderly manner, in
the journal or
subsidiary books or
posting them to ledger
accounts.
Accounting
It involves not only
recording of
transaction but present
it in the form of
financial statements
and interpreting the
same for forming
judgments.

7. Distinction between Accountancy and
Accounting
Accountancy
It relates to the
formulation of rules
and principles while
recording the business
transactions.
Accounting
It refers to the actual
recording of business
transaction in
accordance with the
rules and principles
laid by accountancy.

8. Users of Accounting information
1. Owners.
2. Creditors.
3. Investors.
4. Employees.

9. Users of Accounting information
5. Government.
6. Public.
7. Research scholars.
8. Managers.

10. Accounting branches
1. Financial accounting.
2. Cost accounting.
3. Management accounting.

11. Advantages of Accounting
1. It provides the records which will
furnish information as and when
desired.
2. Properly maintained accounts are
treated as a good evidence in the
court.
3. Accounts assist the businessman in
settlement of taxation liability.

12. Advantages of Accounting
4. It provides the facility of comparative
study
5. Helps to ascertain the proper purchase
price on sale of business.
6. It assist the insolvent person to explain
about the past.
7. Assistance to the various parties like
owners, creditors, government and
managers etc.

13. Limitations of Accounting
1. Records only monetary transactions.
2. Effects of price level changes not
considered.
3. No realistic information.
4. Personal bias of accountant affects
the accounting statements.

14. Limitations of Accounting
5. It permits alternative treatments.
6. Profit no real test of managerial
performance.
7. It is historical in nature.

15. BASIC TERMS USED IN ACCOUNTING
• Business transactions – A business transaction
is an event which can be expressed in terms of
money.
Example-purchase of goods
sale of goods
receipt of cash
Payment of cash
Business transaction may be
(1) cash transaction
(2) credit transaction

16. Cash transaction
When a payment for a business
activity is made immediately, it
is called cash transaction

17. Credit transaction
When a payment for a business
activity is postponed to future date,
it is called credit transaction

18. Debtor : is a person who owes money to
the business. The amount due from him is
called debt.
Creditor: is a person to whom money is
owed by the business.
Assets : an asset is a valuable thing which
is owned by business concern. It can be
tangible or intangible. Example Land
machinery, cash, goodwill, furniture and
bank balance.

19. Liabilities: It is debt or amount due from
business to others. Example Loan, creditors,
bank overdraft and out standing liabilities.
Capital: It is the funds contributed to a business
by the owners.
Solvent : Is a person who is able to meet his
financial obligation. His assets will be more
than his liabilities.
Goods: Are the physical commodities in which a
trader deals with a view to reselling them.

20. Drawings: It is withdrawing of cash goods by the
proprietor, from the business for his personal
use.
Account: It is a statement recording all business
transactions relating to a particular person, thing
or service during a particular period.
Entry: It refers to record of transaction or other
event in a journal or a ledger.
Carried down(c/d): It is written at the time of
closing an account to indicate that the balance in
that account has been carried down to next
period.

21. • Brought down(b/d): It is written at the time
of opening an account to indicate that the
balance in that account has been brought
down from the previous period.
Stock : It is unsold part of goods lying in the
business house on any given date.

22. Accounting principles and policies
GAAP are common set of accounting
principles, standards and procedures that
companies use while preparing their financial
statements. Companies are expected to follow
GAAP rules while reporting their financial data
through financial statements.

23. Accounting principles
In order to make financial statement easily
understandable and meaningful, it is
necessary that accounting should be based on
certain uniform scientifically laid down norms,
which are called accounting principles.
Accounting principles can be classified as
1-Accounting concepts
2-Accounting conventions

24. Accounting concepts
Accounting concepts may be considered as
basic assumptions or conditions upon
which the science of accounting is based.

25. Accounting conventions
Accounting conventions are customs or
traditions or usages which are in use
since long time. These are nothing but
unwritten laws.

26. Accounting principles
Accounting concepts Accounting conventions
Business entity Consistency
Money measurement Full disclosure
Going concern Conservatism
Cost materiality
Duel aspect
Accounting period
Matching
Realisation
Objectivity
Accrual

27. Accounting concepts
Business Entity
The business is accounted for
separately from other business
entities, including its owner
Money measurement
Express transactions and events in
monetary, or money, units
Now Future
Going-Concern Principle
Reflects assumption that the
business will continue operating
instead of being closed or sold
Accounting Period
The economic life of business can be
divided into artificial time period for
the purpose of financial reporting

28. Historical Cost
Accounting information is based
on actual cost.
Revenue Recognition
1. Recognize revenue when it is
earned.
2. Proceeds need not be in cash.
3. Measure revenue by cash
received plus cash value of items
received.
Matching
Expenses are matched against
revenues, and recorded in the
same period in which the related
revenues are earned
Accounting concepts

29. Accounting Conventions
Conservatism
Income and assets be reported at
their lowest reasonable amounts (i.e.
minimizing the assets and
understating the income)
Materiality
Accountants are required to
accurately account for significant
items and transactions
Full Disclosure
Report enough information for
users to make knowledgeable
decisions about the company

30. Accounting systems
There are two systems of book keeping
(1)Single entry system
(2)Double entry system of book keeping

31. Single entry system of book
keeping
Single entry system is incomplete,
inaccurate,inadequate,unscientific records
of book-keeping, which are used by small
business firm and individual etc.

32. Double entry system of book-
keeping
It is system of book keeping where every
debit has corresponding credit and every
credit has corresponding debit. Under this
system each transaction is recorded in
both of its aspects.

33. Advantages of double entry system
• It is scientific and systematic method of book-
keeping
• It complete record of each and every
transaction
• Arithmetical accuracy can be tested
• It gives accurate and complete information
• It helps to know the profit or loss of a
particular period
• It helps to know the financial position of the
business entity

34. Limitations of double entry system
of book-keeping
• It is expensive to maintain all books of
accounts
• It is not suitable for small concerns
• There is no guarantee of absolute accuracy of
the books of accounts

35. Accounting process
Accounting cycle
Transaction
journal
Ledger
Trial balance
Final
accounts

36. Accounting equation
Assets = liabilities + capital
Or Capital = Assets –liabilities
Or Liabilities = Assets - capital

37. Calculate the missing figures
assets liabilities capital
a) 25,000 3,600 ?
b) 56,000 9,800 ?
c) 33,600 ? 25,000
d) 39,200 ? 32,900
e) ? 12,600 38,400
f) ? 23,300 79500

38. Classification of accounts
Accounts
Personal account Impersonal
account
Natural
persons
accounts
Artificial
persons account
Representative
persons account
Real account
Nominal
account

39. Natural person’s personal account
An account recording transactions relating to
an individual human being is known as a
natural person’s personal account. Example-
Rajesh’s account, Rajani’s account, Mahesh's
account etc.

40. Artificial person's personal
account
Any institution created by law or otherwise is
called artificial person. Example –Himalaya
publications, vijaya bank, Dayananda sagar
institutions etc.

41. Representative personal account
An account indirectly representing a person or
persons is know as a representative personal
account. Example outstanding salary,
outstanding rent, prepaid insurance etc.

42. Real account
Real accounts are accounts of assets, properties
or things owned by a business. Example
building, land, cash, goodwill etc.
Real account can be tangible or intangible
Tangible real account relates to an asset which
can be touched, felt, seen, and measured e.g.
machinery account, cash account .
Intangible real account relates to an asset which
cannot be touched physically but can be
measured in value. For example, Goodwill
account, patent account, trade marks, copy
rights

43. Rules of the double entry
Personal account Nominal
account
Credit
Giver
Real account
Credit
Incomes
and gains
Debit
Receiver
Debit
Expenses
and losses
Credit
What goes out
Debit
What comes in