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ACCOUNTING CONCEPTS
-RITESH KUMAR SINGH
riteshsingh197@outlook.com
1RITESH SINGH
Accounting is defined as the art of Recording, Classifying and
Summarizing transactions in monetary terms (in Money terms) for
preparation of Financial Statements
2
JOURNAL
PAYMENT
Vision Enterprises
Financial Statement
at December 31, 1997
Assets
Cash
Account Receivable
Land
Total Assets
Liability
Account Payable
Notes Payable
Total Liability
Stockholder’s Equity
Contributed Capital
Retained Earnings
Total Stockholder’sEquity
$4,456
$5,714
$ 981
---------
$11,151
======
$3,830
$ 416
---------
$4,246
======
$2,365
$ 367
---------
$2,732
======
Vision Enterprises
Financial Statement
at December 31, 1997
Assets
Cash
Account Receivable
Land
Total Assets
Liability
Account Payable
Notes Payable
Total Liability
Stockholder’s Equity
Contributed Capital
Retained Earnings
Total Stockholder’sEquity
$4,456
$5,714
$ 981
---------
$11,151
======
$3,830
$ 416
---------
$4,246
======
$2,365
$ 367
---------
$2,732
======
Vision Enterprises
Financial Statement
at December 31, 1997
Assets
Cash
Account Receivable
Land
Total Assets
Liability
Account Payable
Notes Payable
Total Liability
Stockholder’s Equity
Contributed Capital
Retained Earnings
Total Stockholder’sEquity
$4,456
$5,714
$ 981
---------
$11,151
======
$3,830
$ 416
---------
$4,246
======
$2,365
$ 367
---------
$2,732
======
?
What is AccountingWhat is Accounting
RITESH SINGH
What is Accounting
• Accounting is the art of recording, classifying and Summarizing financial
transactions in the Preparation of Financial Statements
– Recording refers to creating Journal entry for every financial transaction with
Debit and Credit amounts.
– Classifying refers to Classifying each of the Debit / Credit Transaction to
Capital or Revenue and Asset, Liability, Revenue or Expense
– Summarizing refers to Grouping the Transactions of Asset, Liability, Revenue
and Expenses and preparing the Financial Statements (Trading, Profit and
Loss Account and Balance Sheet)
– In case of
• Trading, Manufacturing and Customer Service oriented Organization, the
sum of all income and expenses is referred to as Profit and Loss account
• Social Service oriented Organization like Schools, Hospitals and
Government Organizations, Banks it is referred to as Income and
Expenditure account .
Note:- Trial Balance is not a Financial Statement. It is only a summary of all
Debit and Credit Transactions.
3RITESH SINGH
MEANING AND DEFINITION OF BOOKKEEPING
• Meaning
• Book- keeping includes recording of journal,
posting in ledgers and balancing of accounts. All
the records before the preparation of trail
balance is the whole subject matter of book-
keeping.
• Definition
• “Book- keeping is the science and art of
correctly recording in books of account all
those business transactions that result in the
transfer of money or money’s worth”.
R.N.Carter 4RITESH SINGH
Objectives of Book- keeping
i) Book- keeping provides a permanent record of
each transactions.
ii) Soundness of a firm can be assessed from the
records of assets and abilities on a particular
date.
iii) Entries related to incomes and expenditures
of a concern facilitate to know the profit and loss
for a given period.
iv) It enables to prepare a list of customers and
suppliers to ascertain the amount to be received
or paid.
5RITESH SINGH
Count….,
• v) It is a method gives opportunities to review
the business policies in the light of the past
records.
• vi) Amendment of business laws, provision of
licenses, assessment of taxes etc., are based
on records.
6RITESH SINGH
ACCOUNTING
• Meaning of Accounting
• Accounting, is an information system is the
process of identifying, measuring and
communicating the economic information of
an organization to its users who need the
information for decision making.
7RITESH SINGH
• Definition of Accounting
• American Institute of Certified Public
Accountants (AICPA) which defines accounting
as “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
thereof”.
8RITESH SINGH
Objective of Accounting
• To keeping systematic record
• To ascertain the results of the operation
• To ascertain the financial position of the
business
• To portray (show / describe) the liquidity
position
• To protect business properties
• To facilitate rational decision – making
• To satisfy the requirements of law
9RITESH SINGH
Importance of Accounting
Owners Management
Creditors Employees
Investors Government
Consumers Research Scholars
10RITESH SINGH
Functions of Accounting
• Record Keeping Function (primary)
• Managerial Function (decision making)
• Legal Requirement function (auditing)
• Language of Business (There are many parties-
owners, creditors, government, employees
etc., who are interested in knowing the results
of the)
11RITESH SINGH
Methods of Accounting
• Business transactions are recorded in two
different ways.
1 Single Entry
2 Double Entry
1 Single Entry: It is incomplete system of
recording business transactions. The business
organization maintains only cash book and
personal accounts of debtors and creditors.
So the complete recording of transactions
cannot be made and trail balance cannot be
prepared.
12RITESH SINGH
Count….,
• 2. Double Entry: It this system every business
transaction is having a two fold effect of
benefits giving and benefit receiving aspects.
The recording is made on the basis of both
these aspects. Double Entry is an accounting
system that records the effects of transactions
and other events in at least two accounts with
equal debits and credits.
13RITESH SINGH
Steps involved in Double entry system
(a) Preparation of Journal: Journal is called
the book of original entry. It records the
effect of all transactions for the first time.
Here the job of recording takes place.
(b) Preparation of Ledger: Ledger is the
collection of all accounts used by a
business. Here the grouping of accounts
is performed. Journal is posted to ledger.
14RITESH SINGH
Count….,
c) Trial Balance preparation: Summarizing. It is a
summary of ledge balances prepared in the form of a
list.
(d) Preparation of Final Account: At the end of the
accounting period to know the achievements of the
organization and its financial state of affairs, the final
accounts are prepared.
15RITESH SINGH
.
 Accounting Cycle
As an Information
INPUT
Economic events in
Financial Terms
PROCESS
Recording
Classifying
Summarizing
Interpreting
OUTPUT
Information to
Users
16
RITESH SINGH
Steps involved in an Accounting cycle
• Journalizing
• Posting
• Balancing
• Trial Balance
• Income Statement
• Position Statement
17RITESH SINGH
Users of accounting information
• Management or manager
• People with direct financial interest
– Existing investors
– Potential investors
– Creditors
– Financial institutions
• People with indirect financial interest
– Customers
– Taxation authorities
– Government regulatory body etc
18RITESH SINGH
Accounting Concepts/Conventions
(US GAAP/UK GAAP/IFRS/SOX)
• The Concepts and conventions of accounting are developed by IASC
(International Accounting Standards Committee) which is in-charge
of releasing International Accounting Standards (IAS)
• The IASC Decides the preferred Accounting practices worldwide and
encourages the worldwide acceptance
• There are 41 International Accounting Standards
• Now IFRS (International Financial Reporting Standards) gain more
importance which came up from US GAAP and UK GAAP
19RITESH SINGH
Difference between Concepts and Conventions
• The Accounting Concepts / Principles evolved out of the Practice
and Procedures followed by different countries and later on
established by the International Statutory Accounting Bodies like
The Institute of Chartered Accountants of India, The Institute of
Chartered Accountants of England, etc to become an Accounting
Principle statutorily need to be followed while preparing the
Financial Statements. In nutshell this has evolved out of standard
Practice followed by several countries while preparing the
Trading, Profit and Loss Account and Balance Sheet.
• The Accounting Conventions / Practices are basically assumptions
and expected to be followed while preparing the Financial
Statements.
20RITESH SINGH
Accounting Concepts / Principles
• Business Entity Concept
• Money Measurement Concept
• Dual Aspect Concept
• Cost Concept
• Accounting Period
• Realization Concept
• Accrual/Matching Concept
• Objectivity
21RITESH SINGH
Accounting Conventions / Practices
• Conservatism
• Consistency
• Materiality
22RITESH SINGH
Accounting Concepts
• Business Entity Concept
The business and its owner(s) are two separate
existence entity
– Any private and personal incomes and expenses of the
owner(s) should not be treated as the incomes and expenses
of the business
• Examples
– Insurance premiums for the owner’s house should be
excluded from the expense of the business
– The owner’s property should not be included in the premises
account of the business
– Any payments for the owner’s personal expenses by the
business will be treated as drawings and reduced the
owner’s capital contribution in the business
23RITESH SINGH
Accounting Concepts
• Business Entity Concept
– Ex 1: You are running your own Textile Showroom as a Dealer in Cloth as a Sole
Proprietor/Individual Owner of the Business. The entire capital amount for the Business is
provided by you. In this case also for the purpose of accounting you need to maintain Two set
of books.
• One set of books for the purpose of Textile Business in which, Business owes you
equivalent to the Capital Provided (Capital + Profit earned) or (Capital – Losses)
• In your own Books the amount of Capital invested will be shown as an Investment in
Business as an Asset. This need not be maintained as a Normal Set of Books but required
to know the Cash Inflow and Cash Outflow from Income Tax Perspective.
– Ex 2: You are working for Oracle Corporation and Oracle has a Bank Account with Bank of
America and You have Bank Account with Citi Bank and the salary at end of every month is
transferred from Bank of America to Citi Bank. How many accounting Entities involved in this
case?
• If your answer is 4, then you are right (You, Oracle Corp, Bank of America, Citi Bank)
– Ex 3: You run your own Business in Software Consulting and your Friend has agreed to
provide a Loan of 50000 Rs. which he goes and deposit directly into your Bank account - How
many accounting Entities involved in this case?
• If you say 3, You are right, it is only Three. (You, Your Friend and Bank)
24RITESH SINGH
Accounting Concepts
Money Measurement Concept
• Meaning
– All transactions of the business are recorded in
terms of money
– It provides a common unit of measurement
• Examples
– Market conditions, technological changes and the
efficiency of management would not be disclosed
in the accounts
25RITESH SINGH
Accounting Concepts
Money Measurement Concept
Record should be made only of that information which can be expressed in
Monetary Terms.
Ex 1. Sole Proprietor had 40 Tables & Chairs. This cannot be recorded
unless a Value of Furniture is known in monetary value
Ex 2. Very Famous Indian Example – Rama Killed Ravana. Can this be
Accounted? – NO
Ex 3. My parents Loves me so much – Can this be accounted?
– A Big NO (Hahhah). This is Flaw in Financial Accounting as it does
not understand the human values
Ex 4. My Father in Law gave his Personal Property to start my Business. Can
this be Accounted – Yes (If the Value of the Property is provided)
26RITESH SINGH
Accounting Concepts
• Money Measurement Concept
A Normal Doubt comes to your mind in the first and fourth example in
previous slide how to get the value. We should not be taking the Purchase
value, but we should take the Market value on the date of transferring the
assets to Business. This is an exception to cost concept only in case of
transfer to another business
Ex 5: Siva started his software consulting Business with his own Property
(Cost Price 10,00,000 Rs. and Market Value 15,00,000 Rs. ) and Furniture's
Cost price 50000 worth Market Value 30000 Rs.
- In this case, You can record Siva Capital (1530000) and Building 1500000
and Furniture 30000 as Assets
LiabilitiesLiabilities AssetsAssets
Siva Capital 1530000Siva Capital 1530000 Building 1500000Building 1500000
Furniture 30000Furniture 30000
Total 1530000Total 1530000 Total 1530000Total 1530000
27RITESH SINGH
Accounting Concepts
• Dual Aspect Concept
The Value of the Assets owned by the concern is equal to the claims on the Assets
ASSETS = LIABILITIES + OWNER’S EQUITY
OWNER’S EQUITY = ASSETS – LIABILITIES
LIABILITIES = ASSETS – OWNER’S EQUITY
Ex: If Owners Equity is 600000 and Liabilities are 400000, then Total Asset =
1000000
AssetAsset Owner’s Equity + LiabilitiesOwner’s Equity + Liabilities
LiabilitiesLiabilities Assets – Owner’s EquityAssets – Owner’s Equity
Owner’s EquityOwner’s Equity Assets - LiabilitiesAssets - Liabilities
28RITESH SINGH
Accounting Concepts
• Cost Concept
Assets are always shown at their Cost and not at their
current Market Value
Ex 1. A Land Purchased for Rs.5 Lacs will be recorded
only at Rs.5 Lacs even though Market value may be lower
say Rs.4 Lacs or Higher Rs.6 Lacs than the Cost Price
Ex 2. You are acquiring a Business for Rs. 10 lacs and its
value as per Books is Rs. 8 lacs, then the difference of Rs. 2
lacs is termed as Goodwill and you should records the
assets and liabilities at the price you have paid for the
Business (i.e.)
29RITESH SINGH
Accounting Concepts
Accounting Period
Accounting measures activity for a specified interval of time, usually a year
(e.g) Calendar Year (Jan’07-Dec’07)
Financial Year (Apr’07-Mar’08)
Choosing the Accounting period is the entities choice, but there are legal rules
like Companies Act and Income Tax Act which prescribes the period in which
the entity has to report to them.
Remember still Entities can have different accounting period for their own
Internal Management Reporting
A Company in India can have for Company Law Purpose (Jan-Dec) Year and
Income Tax Purpose (Apr-Mar) Year and for own internal Reporting (Jul-Jun)
Year
Note: The Entities cannot change their accounting period without getting
proper approval only in case of Companies Act and not possible with Income
Tax Authorities.
30RITESH SINGH
Accounting Concepts
• Realization Concept
The Sales is considered to have taken place only when either the cash is received
or some third party becomes legally liable to pay the amount. Revenues are
recognized when they are earned or realized. Realization is assumed to occur
when the seller receives cash or a claim to cash (receivable) in exchange for
goods or services
Ex 1: A Sales invoice for Rs One Lacs
Credit Note for Rs.15000 received
Ex 2: For instance, if a company is awarded a contract to build an office building
the revenue from that project would not be recorded in one lump sum but rather
it would be divided over time according to the work that is actually being done.
31RITESH SINGH
Accounting Concepts
• Matching Concept
When an Event affects both the revenues and expenses, the effect on each
should be recognized in the same accounting period
Ex 1: Generally Employees Salaries are paid for the previous month at the
beginning of the next month. But they have rendered their services to produce
goods and sold and Sales revenue is recognized in previous month. So to match
the cost with the revenue earned, we need to make provision for Salaries in
previous month itself. (i.e.) March Salary paid in April, but a Salary Payable
provision will be made in March itself
EX 2: Insurance Premium paid for Jan- Dec whereas your accounting period
closes on March. In this case only three months premium need to be treated as
Expense and balance 9 months treated as advance premium paid as an asset
32RITESH SINGH
Accounting Concepts
• Going Concern
Accounting Records , Events and Transactions on
the assumption that the entity will continue to
operate for an indefinitely Long period of time
Ex. An Entity will not be started with an intention to
close within the specified time period. Business is
always not started with an intention to close and it
is expected to continue forever.
33RITESH SINGH
Accounting Concepts
• Accruals/Matching
• Meaning
– Revenues are recognized when they are earned, but not when cash is
received
– Expenses are recognized as they are incurred, but not when cash is paid
– The net income for the period is determined by subtracting expenses
incurred from revenues earned
• Example
– Expenses incurred but not yet paid in current period should be treated
as accrual/accrued expenses under current liabilities
– Expenses incurred in the following period but paid for in advance
should be treated as prepayment expenses under current asset
– Depreciation should be charged as part of the cost of a fixed asset
consumed during the period of use
34RITESH SINGH
Accounting Concepts
• Objectivity Concept
An Evidence of the happening of the Transaction should support every
Transaction in the form of paper. External Evidence is considered to be more
authenticated proof than Internal Evidence. This rule is more important from
Audit perspective as Auditors always consider and bound to get more external
evidences than internal Evidences.
Ex 1: Third Party Evidence (Credit Note from Supplier)
Ex 2: Auditors Collect Statements from Customer and Suppliers for the
amount showing as Outstanding from Customers and amounts Payable to
Suppliers.
Ex 3: The Sales Invoices alone is not considered as an objective evidence
unless it is not supported by Delivery challan and acknowledgement of Goods
Received by Customer.
35RITESH SINGH
Accounting Conventions
• Materiality
– Immaterial amounts may be aggregated with the amounts
of a similar nature or function and need not be presented
separately
– Materiality depends on the size and nature of the item
• Example
– Small payments such as postage, stationery and cleaning
expenses should not be disclosed separately. They should be
grouped together as sundry expenses
– The cost of small-valued assets such as pencil sharpeners
and paper clips should be written off to the profit and loss
account as revenue expenditures, although they can last for
more than one accounting period 36RITESH SINGH
Accounting Conventions
• Consistency
The Accounting Policies and methods followed by the company
should be the same every year
Ex 1. Period should not be changed frequently from Jan-Dec to
Apr-Mar
Ex 2. Inventory Valuation change from FIFO to LIFO or Weighted
Average not permitted frequently
Ex 3. Changing Depreciation Policy from Straight Line to Reducing
Balance Method frequently
Note: If any Company decides to change the policy, then that
Company has to report on the effect of Profit/Loss due to the
change for past 5 Years.
37RITESH SINGH
Accounting Conventions
• Conservatism
Anticipate no Profits but provide for all possible losses.
– Revenues and profits are not anticipated. Only realized
profits with reasonable certainty are recognized in the profit
and loss account
– However, provision is made for all known expenses and
losses whether the amount is known for certain or just an
estimation
– This treatment minimizes the reported profits and the
valuation of assets.
• Example
– Stock valuation sticks to rule of the lower of cost and net
realizable value
– The provision for doubtful debts should be made
– Fixed assets must be depreciated over their useful economic
lives 38RITESH SINGH
BRANCHES OF ACCOUNTING
39RITESH SINGH
Classification of Accounting Event
 Capital Item: Any expenditure that creates an asset, for example::
◦ Purchase of plant or machinery
◦ Improvements to assets that increase their usefulness or extend
their effective useful life of the asset
 Revenue Item: An Income or Expenditure and the benefit of which will
be exhausted within a year (i.e.) The Calendar Year or the Financial
Year whichever is set up for the Set of Books
◦ Ex: Salary and wages, Printing and Stationery, Sales Revenue,
Interest Income, Salary Payable, Bonus Payable, Tax Payable etc.,
◦ In Simple terms this is an event which generates revenue and the
related cost to earn the revenue are accounted as expense.
40RITESH SINGH
Types of Accounting
• To achieve this object, business transactions
have been classified into three categories:
• (i) Transactions relating to persons. (Personal
Accounts)
• (ii) Transactions relating to properties and
assets (Real Accounts )
• (iii) Transactions relating to incomes and
expenses.(Nominal Accounts)
41RITESH SINGH
Accounts
Personal accounts
Nominal
accountReal account
Impersonal accounts
42RITESH SINGH
43RITESH SINGH
Personal A/c
Personal Accounts: Accounts recording transactions with
a person or group of persons are known as personal
accounts.
(a) Natural persons: An account recording transactions
with an individual human being is termed as a natural
persons’ personal account. eg., Kamal’s account, Mala’s
account, Sharma’s accounts. Both males and females are
included in it.
(b) Artificial or legal persons: An account recording
financial transactions with an artificial person created by
law or otherwise is termed as an artificial person,
personal account, e.g. Firms’ accounts, limited companies’
accounts, educational institutions’ accounts, Co-operative
society account.
44RITESH SINGH
Count….,
(c) Groups/Representative personal Accounts:
An account indirectly representing a person or
persons is known as representative personal
account. When accounts are of a similar nature
and their number is large, it is better to group
them under one head and open a representative
personal account. e.g., prepaid insurance,
outstanding salaries, rent, wages etc.
RULE
Debit the receiver and Credit the giver.
45RITESH SINGH
46RITESH SINGH
Real Accounts
• Accounts relating to properties or assets are
known as ‘Real Accounts’, A separate account is
maintained for each asset e.g., Cash Machinery,
Building, etc., Real accounts can be further
classified into tangible and intangible.
• (a) Tangible Real Accounts: These accounts
represent assets and properties which can be
seen, touched, felt, measured, purchased and
sold. e.g. Machinery account Cash account,
Furniture account, stock account etc.
47RITESH SINGH
Count…,
• (b) Intangible Real Accounts: These accounts
represent assets and properties which cannot
be seen, touched or felt but they can be
measured in terms of money. e.g., Goodwill
accounts, patents account, Trademarks
account, Copyrights account, etc.
• The rule for Real accounts is: Debit what
comes in and Credit what goes out.
48RITESH SINGH
Nominal Accounts
Accounts relating to income, revenue, gain
expenses and losses are termed as nominal
accounts. These accounts are also known as
fictitious accounts as they do not represent any
tangible asset. A separate account is maintained
for each head or expense or loss and gain or
income. Wages account, Rent account
Commission account, Interest received account
are some examples of nominal account
The rule for Nominal accounts is: Debit all
expenses and losses and Credit all incomes and
gains 49RITESH SINGH
Rules of Accounting
50
Accounts
Personal Impersonal
Real Nominal
Debit the Receiver
Credit the Giver
Debit what comes in
Credit what goes out
Debit Expenses and Losses
Credit Revenue and Income
Ex: Sole Prop, Company
Ex: Cash, Bank, Building,Inv Ex: Sales, Power, Rent
RITESH SINGH
Application of Accounting Rule
• Check whether is there a Money Transaction Involved?
• Is that transaction affects your set of books?
• Check whether does the transaction falls under which accounting period.
• Does the transaction involve a personal account (i.e.) Siva as a Person or a
Company or any other entity as mentioned in Business entity concept
• Is that person is receiver or giver in the transaction and accordingly debit or
credit the person account.
• Does the transaction involves any Cash inflow or Cash outflow? (i.e.) Cash
or Bank involved
• If there is no cash involvement then the choices are as follows
– Both can be real ( Debit and credit both real accounts)
– One real and one nominal (Either Debit/Credit for Real or Credit/ Debit for
Nominal accounts)
51RITESH SINGH
Accounting Rule of Thumb
Nature of TransactionNature of Transaction IncreaseIncrease DecreaseDecrease
AssetAsset DebitDebit CreditCredit
LiabilityLiability CreditCredit DebitDebit
RevenueRevenue CreditCredit DebitDebit
ExpenseExpense DebitDebit CreditCredit
ProfitProfit CreditCredit DebitDebit
LossesLosses DebitDebit CreditCredit
52RITESH SINGH
Combination of Rules
53
Dr Personal A/c
Cr Real A/c
Ex:Drawings or Advance to Employee,
Payment to Supplier
Dr Real A/c
Cr Personal A/c
Ex:Capital invested, Payment Received
from Customer
Dr Real A/c
Cr Nominal A/c
Ex: Interest Recd by Cash, Cash Sales
Dr Nominal A/c
Cr Real A/c
Ex: Rent Paid by Cash
Dr Personal A/c
Cr Nominal A/c
Ex: Interest Accrued on Investment,
Dividend accrued on Investment
Dr Nominal A/c
Cr Personal A/c
Ex: Hire Purchase Charges accrued, Interest
Payable, Salary Payable
Dr Real A/c
Cr Real A/c
Ex:Purchase of Inventory by Cash
Dr Real A/c
Cr Real A/c
Ex: Cash withdrawal or Deposit
RITESH SINGH
Practical Question
• Started business with cash 5,000
• Purchased goods on credit 400
• Purchased goods for cash100
• Purchased furniture 50
• Withdrew for personal use 70
• Paid Rent 20
• Received Interest 10
54RITESH SINGH

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Accounting basics

  • 1. ACCOUNTING CONCEPTS -RITESH KUMAR SINGH riteshsingh197@outlook.com 1RITESH SINGH
  • 2. Accounting is defined as the art of Recording, Classifying and Summarizing transactions in monetary terms (in Money terms) for preparation of Financial Statements 2 JOURNAL PAYMENT Vision Enterprises Financial Statement at December 31, 1997 Assets Cash Account Receivable Land Total Assets Liability Account Payable Notes Payable Total Liability Stockholder’s Equity Contributed Capital Retained Earnings Total Stockholder’sEquity $4,456 $5,714 $ 981 --------- $11,151 ====== $3,830 $ 416 --------- $4,246 ====== $2,365 $ 367 --------- $2,732 ====== Vision Enterprises Financial Statement at December 31, 1997 Assets Cash Account Receivable Land Total Assets Liability Account Payable Notes Payable Total Liability Stockholder’s Equity Contributed Capital Retained Earnings Total Stockholder’sEquity $4,456 $5,714 $ 981 --------- $11,151 ====== $3,830 $ 416 --------- $4,246 ====== $2,365 $ 367 --------- $2,732 ====== Vision Enterprises Financial Statement at December 31, 1997 Assets Cash Account Receivable Land Total Assets Liability Account Payable Notes Payable Total Liability Stockholder’s Equity Contributed Capital Retained Earnings Total Stockholder’sEquity $4,456 $5,714 $ 981 --------- $11,151 ====== $3,830 $ 416 --------- $4,246 ====== $2,365 $ 367 --------- $2,732 ====== ? What is AccountingWhat is Accounting RITESH SINGH
  • 3. What is Accounting • Accounting is the art of recording, classifying and Summarizing financial transactions in the Preparation of Financial Statements – Recording refers to creating Journal entry for every financial transaction with Debit and Credit amounts. – Classifying refers to Classifying each of the Debit / Credit Transaction to Capital or Revenue and Asset, Liability, Revenue or Expense – Summarizing refers to Grouping the Transactions of Asset, Liability, Revenue and Expenses and preparing the Financial Statements (Trading, Profit and Loss Account and Balance Sheet) – In case of • Trading, Manufacturing and Customer Service oriented Organization, the sum of all income and expenses is referred to as Profit and Loss account • Social Service oriented Organization like Schools, Hospitals and Government Organizations, Banks it is referred to as Income and Expenditure account . Note:- Trial Balance is not a Financial Statement. It is only a summary of all Debit and Credit Transactions. 3RITESH SINGH
  • 4. MEANING AND DEFINITION OF BOOKKEEPING • Meaning • Book- keeping includes recording of journal, posting in ledgers and balancing of accounts. All the records before the preparation of trail balance is the whole subject matter of book- keeping. • Definition • “Book- keeping is the science and art of correctly recording in books of account all those business transactions that result in the transfer of money or money’s worth”. R.N.Carter 4RITESH SINGH
  • 5. Objectives of Book- keeping i) Book- keeping provides a permanent record of each transactions. ii) Soundness of a firm can be assessed from the records of assets and abilities on a particular date. iii) Entries related to incomes and expenditures of a concern facilitate to know the profit and loss for a given period. iv) It enables to prepare a list of customers and suppliers to ascertain the amount to be received or paid. 5RITESH SINGH
  • 6. Count…., • v) It is a method gives opportunities to review the business policies in the light of the past records. • vi) Amendment of business laws, provision of licenses, assessment of taxes etc., are based on records. 6RITESH SINGH
  • 7. ACCOUNTING • Meaning of Accounting • Accounting, is an information system is the process of identifying, measuring and communicating the economic information of an organization to its users who need the information for decision making. 7RITESH SINGH
  • 8. • Definition of Accounting • American Institute of Certified Public Accountants (AICPA) which defines accounting as “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 thereof”. 8RITESH SINGH
  • 9. Objective of Accounting • To keeping systematic record • To ascertain the results of the operation • To ascertain the financial position of the business • To portray (show / describe) the liquidity position • To protect business properties • To facilitate rational decision – making • To satisfy the requirements of law 9RITESH SINGH
  • 10. Importance of Accounting Owners Management Creditors Employees Investors Government Consumers Research Scholars 10RITESH SINGH
  • 11. Functions of Accounting • Record Keeping Function (primary) • Managerial Function (decision making) • Legal Requirement function (auditing) • Language of Business (There are many parties- owners, creditors, government, employees etc., who are interested in knowing the results of the) 11RITESH SINGH
  • 12. Methods of Accounting • Business transactions are recorded in two different ways. 1 Single Entry 2 Double Entry 1 Single Entry: It is incomplete system of recording business transactions. The business organization maintains only cash book and personal accounts of debtors and creditors. So the complete recording of transactions cannot be made and trail balance cannot be prepared. 12RITESH SINGH
  • 13. Count…., • 2. Double Entry: It this system every business transaction is having a two fold effect of benefits giving and benefit receiving aspects. The recording is made on the basis of both these aspects. Double Entry is an accounting system that records the effects of transactions and other events in at least two accounts with equal debits and credits. 13RITESH SINGH
  • 14. Steps involved in Double entry system (a) Preparation of Journal: Journal is called the book of original entry. It records the effect of all transactions for the first time. Here the job of recording takes place. (b) Preparation of Ledger: Ledger is the collection of all accounts used by a business. Here the grouping of accounts is performed. Journal is posted to ledger. 14RITESH SINGH
  • 15. Count…., c) Trial Balance preparation: Summarizing. It is a summary of ledge balances prepared in the form of a list. (d) Preparation of Final Account: At the end of the accounting period to know the achievements of the organization and its financial state of affairs, the final accounts are prepared. 15RITESH SINGH
  • 16. .  Accounting Cycle As an Information INPUT Economic events in Financial Terms PROCESS Recording Classifying Summarizing Interpreting OUTPUT Information to Users 16 RITESH SINGH
  • 17. Steps involved in an Accounting cycle • Journalizing • Posting • Balancing • Trial Balance • Income Statement • Position Statement 17RITESH SINGH
  • 18. Users of accounting information • Management or manager • People with direct financial interest – Existing investors – Potential investors – Creditors – Financial institutions • People with indirect financial interest – Customers – Taxation authorities – Government regulatory body etc 18RITESH SINGH
  • 19. Accounting Concepts/Conventions (US GAAP/UK GAAP/IFRS/SOX) • The Concepts and conventions of accounting are developed by IASC (International Accounting Standards Committee) which is in-charge of releasing International Accounting Standards (IAS) • The IASC Decides the preferred Accounting practices worldwide and encourages the worldwide acceptance • There are 41 International Accounting Standards • Now IFRS (International Financial Reporting Standards) gain more importance which came up from US GAAP and UK GAAP 19RITESH SINGH
  • 20. Difference between Concepts and Conventions • The Accounting Concepts / Principles evolved out of the Practice and Procedures followed by different countries and later on established by the International Statutory Accounting Bodies like The Institute of Chartered Accountants of India, The Institute of Chartered Accountants of England, etc to become an Accounting Principle statutorily need to be followed while preparing the Financial Statements. In nutshell this has evolved out of standard Practice followed by several countries while preparing the Trading, Profit and Loss Account and Balance Sheet. • The Accounting Conventions / Practices are basically assumptions and expected to be followed while preparing the Financial Statements. 20RITESH SINGH
  • 21. Accounting Concepts / Principles • Business Entity Concept • Money Measurement Concept • Dual Aspect Concept • Cost Concept • Accounting Period • Realization Concept • Accrual/Matching Concept • Objectivity 21RITESH SINGH
  • 22. Accounting Conventions / Practices • Conservatism • Consistency • Materiality 22RITESH SINGH
  • 23. Accounting Concepts • Business Entity Concept The business and its owner(s) are two separate existence entity – Any private and personal incomes and expenses of the owner(s) should not be treated as the incomes and expenses of the business • Examples – Insurance premiums for the owner’s house should be excluded from the expense of the business – The owner’s property should not be included in the premises account of the business – Any payments for the owner’s personal expenses by the business will be treated as drawings and reduced the owner’s capital contribution in the business 23RITESH SINGH
  • 24. Accounting Concepts • Business Entity Concept – Ex 1: You are running your own Textile Showroom as a Dealer in Cloth as a Sole Proprietor/Individual Owner of the Business. The entire capital amount for the Business is provided by you. In this case also for the purpose of accounting you need to maintain Two set of books. • One set of books for the purpose of Textile Business in which, Business owes you equivalent to the Capital Provided (Capital + Profit earned) or (Capital – Losses) • In your own Books the amount of Capital invested will be shown as an Investment in Business as an Asset. This need not be maintained as a Normal Set of Books but required to know the Cash Inflow and Cash Outflow from Income Tax Perspective. – Ex 2: You are working for Oracle Corporation and Oracle has a Bank Account with Bank of America and You have Bank Account with Citi Bank and the salary at end of every month is transferred from Bank of America to Citi Bank. How many accounting Entities involved in this case? • If your answer is 4, then you are right (You, Oracle Corp, Bank of America, Citi Bank) – Ex 3: You run your own Business in Software Consulting and your Friend has agreed to provide a Loan of 50000 Rs. which he goes and deposit directly into your Bank account - How many accounting Entities involved in this case? • If you say 3, You are right, it is only Three. (You, Your Friend and Bank) 24RITESH SINGH
  • 25. Accounting Concepts Money Measurement Concept • Meaning – All transactions of the business are recorded in terms of money – It provides a common unit of measurement • Examples – Market conditions, technological changes and the efficiency of management would not be disclosed in the accounts 25RITESH SINGH
  • 26. Accounting Concepts Money Measurement Concept Record should be made only of that information which can be expressed in Monetary Terms. Ex 1. Sole Proprietor had 40 Tables & Chairs. This cannot be recorded unless a Value of Furniture is known in monetary value Ex 2. Very Famous Indian Example – Rama Killed Ravana. Can this be Accounted? – NO Ex 3. My parents Loves me so much – Can this be accounted? – A Big NO (Hahhah). This is Flaw in Financial Accounting as it does not understand the human values Ex 4. My Father in Law gave his Personal Property to start my Business. Can this be Accounted – Yes (If the Value of the Property is provided) 26RITESH SINGH
  • 27. Accounting Concepts • Money Measurement Concept A Normal Doubt comes to your mind in the first and fourth example in previous slide how to get the value. We should not be taking the Purchase value, but we should take the Market value on the date of transferring the assets to Business. This is an exception to cost concept only in case of transfer to another business Ex 5: Siva started his software consulting Business with his own Property (Cost Price 10,00,000 Rs. and Market Value 15,00,000 Rs. ) and Furniture's Cost price 50000 worth Market Value 30000 Rs. - In this case, You can record Siva Capital (1530000) and Building 1500000 and Furniture 30000 as Assets LiabilitiesLiabilities AssetsAssets Siva Capital 1530000Siva Capital 1530000 Building 1500000Building 1500000 Furniture 30000Furniture 30000 Total 1530000Total 1530000 Total 1530000Total 1530000 27RITESH SINGH
  • 28. Accounting Concepts • Dual Aspect Concept The Value of the Assets owned by the concern is equal to the claims on the Assets ASSETS = LIABILITIES + OWNER’S EQUITY OWNER’S EQUITY = ASSETS – LIABILITIES LIABILITIES = ASSETS – OWNER’S EQUITY Ex: If Owners Equity is 600000 and Liabilities are 400000, then Total Asset = 1000000 AssetAsset Owner’s Equity + LiabilitiesOwner’s Equity + Liabilities LiabilitiesLiabilities Assets – Owner’s EquityAssets – Owner’s Equity Owner’s EquityOwner’s Equity Assets - LiabilitiesAssets - Liabilities 28RITESH SINGH
  • 29. Accounting Concepts • Cost Concept Assets are always shown at their Cost and not at their current Market Value Ex 1. A Land Purchased for Rs.5 Lacs will be recorded only at Rs.5 Lacs even though Market value may be lower say Rs.4 Lacs or Higher Rs.6 Lacs than the Cost Price Ex 2. You are acquiring a Business for Rs. 10 lacs and its value as per Books is Rs. 8 lacs, then the difference of Rs. 2 lacs is termed as Goodwill and you should records the assets and liabilities at the price you have paid for the Business (i.e.) 29RITESH SINGH
  • 30. Accounting Concepts Accounting Period Accounting measures activity for a specified interval of time, usually a year (e.g) Calendar Year (Jan’07-Dec’07) Financial Year (Apr’07-Mar’08) Choosing the Accounting period is the entities choice, but there are legal rules like Companies Act and Income Tax Act which prescribes the period in which the entity has to report to them. Remember still Entities can have different accounting period for their own Internal Management Reporting A Company in India can have for Company Law Purpose (Jan-Dec) Year and Income Tax Purpose (Apr-Mar) Year and for own internal Reporting (Jul-Jun) Year Note: The Entities cannot change their accounting period without getting proper approval only in case of Companies Act and not possible with Income Tax Authorities. 30RITESH SINGH
  • 31. Accounting Concepts • Realization Concept The Sales is considered to have taken place only when either the cash is received or some third party becomes legally liable to pay the amount. Revenues are recognized when they are earned or realized. Realization is assumed to occur when the seller receives cash or a claim to cash (receivable) in exchange for goods or services Ex 1: A Sales invoice for Rs One Lacs Credit Note for Rs.15000 received Ex 2: For instance, if a company is awarded a contract to build an office building the revenue from that project would not be recorded in one lump sum but rather it would be divided over time according to the work that is actually being done. 31RITESH SINGH
  • 32. Accounting Concepts • Matching Concept When an Event affects both the revenues and expenses, the effect on each should be recognized in the same accounting period Ex 1: Generally Employees Salaries are paid for the previous month at the beginning of the next month. But they have rendered their services to produce goods and sold and Sales revenue is recognized in previous month. So to match the cost with the revenue earned, we need to make provision for Salaries in previous month itself. (i.e.) March Salary paid in April, but a Salary Payable provision will be made in March itself EX 2: Insurance Premium paid for Jan- Dec whereas your accounting period closes on March. In this case only three months premium need to be treated as Expense and balance 9 months treated as advance premium paid as an asset 32RITESH SINGH
  • 33. Accounting Concepts • Going Concern Accounting Records , Events and Transactions on the assumption that the entity will continue to operate for an indefinitely Long period of time Ex. An Entity will not be started with an intention to close within the specified time period. Business is always not started with an intention to close and it is expected to continue forever. 33RITESH SINGH
  • 34. Accounting Concepts • Accruals/Matching • Meaning – Revenues are recognized when they are earned, but not when cash is received – Expenses are recognized as they are incurred, but not when cash is paid – The net income for the period is determined by subtracting expenses incurred from revenues earned • Example – Expenses incurred but not yet paid in current period should be treated as accrual/accrued expenses under current liabilities – Expenses incurred in the following period but paid for in advance should be treated as prepayment expenses under current asset – Depreciation should be charged as part of the cost of a fixed asset consumed during the period of use 34RITESH SINGH
  • 35. Accounting Concepts • Objectivity Concept An Evidence of the happening of the Transaction should support every Transaction in the form of paper. External Evidence is considered to be more authenticated proof than Internal Evidence. This rule is more important from Audit perspective as Auditors always consider and bound to get more external evidences than internal Evidences. Ex 1: Third Party Evidence (Credit Note from Supplier) Ex 2: Auditors Collect Statements from Customer and Suppliers for the amount showing as Outstanding from Customers and amounts Payable to Suppliers. Ex 3: The Sales Invoices alone is not considered as an objective evidence unless it is not supported by Delivery challan and acknowledgement of Goods Received by Customer. 35RITESH SINGH
  • 36. Accounting Conventions • Materiality – Immaterial amounts may be aggregated with the amounts of a similar nature or function and need not be presented separately – Materiality depends on the size and nature of the item • Example – Small payments such as postage, stationery and cleaning expenses should not be disclosed separately. They should be grouped together as sundry expenses – The cost of small-valued assets such as pencil sharpeners and paper clips should be written off to the profit and loss account as revenue expenditures, although they can last for more than one accounting period 36RITESH SINGH
  • 37. Accounting Conventions • Consistency The Accounting Policies and methods followed by the company should be the same every year Ex 1. Period should not be changed frequently from Jan-Dec to Apr-Mar Ex 2. Inventory Valuation change from FIFO to LIFO or Weighted Average not permitted frequently Ex 3. Changing Depreciation Policy from Straight Line to Reducing Balance Method frequently Note: If any Company decides to change the policy, then that Company has to report on the effect of Profit/Loss due to the change for past 5 Years. 37RITESH SINGH
  • 38. Accounting Conventions • Conservatism Anticipate no Profits but provide for all possible losses. – Revenues and profits are not anticipated. Only realized profits with reasonable certainty are recognized in the profit and loss account – However, provision is made for all known expenses and losses whether the amount is known for certain or just an estimation – This treatment minimizes the reported profits and the valuation of assets. • Example – Stock valuation sticks to rule of the lower of cost and net realizable value – The provision for doubtful debts should be made – Fixed assets must be depreciated over their useful economic lives 38RITESH SINGH
  • 40. Classification of Accounting Event  Capital Item: Any expenditure that creates an asset, for example:: ◦ Purchase of plant or machinery ◦ Improvements to assets that increase their usefulness or extend their effective useful life of the asset  Revenue Item: An Income or Expenditure and the benefit of which will be exhausted within a year (i.e.) The Calendar Year or the Financial Year whichever is set up for the Set of Books ◦ Ex: Salary and wages, Printing and Stationery, Sales Revenue, Interest Income, Salary Payable, Bonus Payable, Tax Payable etc., ◦ In Simple terms this is an event which generates revenue and the related cost to earn the revenue are accounted as expense. 40RITESH SINGH
  • 41. Types of Accounting • To achieve this object, business transactions have been classified into three categories: • (i) Transactions relating to persons. (Personal Accounts) • (ii) Transactions relating to properties and assets (Real Accounts ) • (iii) Transactions relating to incomes and expenses.(Nominal Accounts) 41RITESH SINGH
  • 44. Personal A/c Personal Accounts: Accounts recording transactions with a person or group of persons are known as personal accounts. (a) Natural persons: An account recording transactions with an individual human being is termed as a natural persons’ personal account. eg., Kamal’s account, Mala’s account, Sharma’s accounts. Both males and females are included in it. (b) Artificial or legal persons: An account recording financial transactions with an artificial person created by law or otherwise is termed as an artificial person, personal account, e.g. Firms’ accounts, limited companies’ accounts, educational institutions’ accounts, Co-operative society account. 44RITESH SINGH
  • 45. Count…., (c) Groups/Representative personal Accounts: An account indirectly representing a person or persons is known as representative personal account. When accounts are of a similar nature and their number is large, it is better to group them under one head and open a representative personal account. e.g., prepaid insurance, outstanding salaries, rent, wages etc. RULE Debit the receiver and Credit the giver. 45RITESH SINGH
  • 47. Real Accounts • Accounts relating to properties or assets are known as ‘Real Accounts’, A separate account is maintained for each asset e.g., Cash Machinery, Building, etc., Real accounts can be further classified into tangible and intangible. • (a) Tangible Real Accounts: These accounts represent assets and properties which can be seen, touched, felt, measured, purchased and sold. e.g. Machinery account Cash account, Furniture account, stock account etc. 47RITESH SINGH
  • 48. Count…, • (b) Intangible Real Accounts: These accounts represent assets and properties which cannot be seen, touched or felt but they can be measured in terms of money. e.g., Goodwill accounts, patents account, Trademarks account, Copyrights account, etc. • The rule for Real accounts is: Debit what comes in and Credit what goes out. 48RITESH SINGH
  • 49. Nominal Accounts Accounts relating to income, revenue, gain expenses and losses are termed as nominal accounts. These accounts are also known as fictitious accounts as they do not represent any tangible asset. A separate account is maintained for each head or expense or loss and gain or income. Wages account, Rent account Commission account, Interest received account are some examples of nominal account The rule for Nominal accounts is: Debit all expenses and losses and Credit all incomes and gains 49RITESH SINGH
  • 50. Rules of Accounting 50 Accounts Personal Impersonal Real Nominal Debit the Receiver Credit the Giver Debit what comes in Credit what goes out Debit Expenses and Losses Credit Revenue and Income Ex: Sole Prop, Company Ex: Cash, Bank, Building,Inv Ex: Sales, Power, Rent RITESH SINGH
  • 51. Application of Accounting Rule • Check whether is there a Money Transaction Involved? • Is that transaction affects your set of books? • Check whether does the transaction falls under which accounting period. • Does the transaction involve a personal account (i.e.) Siva as a Person or a Company or any other entity as mentioned in Business entity concept • Is that person is receiver or giver in the transaction and accordingly debit or credit the person account. • Does the transaction involves any Cash inflow or Cash outflow? (i.e.) Cash or Bank involved • If there is no cash involvement then the choices are as follows – Both can be real ( Debit and credit both real accounts) – One real and one nominal (Either Debit/Credit for Real or Credit/ Debit for Nominal accounts) 51RITESH SINGH
  • 52. Accounting Rule of Thumb Nature of TransactionNature of Transaction IncreaseIncrease DecreaseDecrease AssetAsset DebitDebit CreditCredit LiabilityLiability CreditCredit DebitDebit RevenueRevenue CreditCredit DebitDebit ExpenseExpense DebitDebit CreditCredit ProfitProfit CreditCredit DebitDebit LossesLosses DebitDebit CreditCredit 52RITESH SINGH
  • 53. Combination of Rules 53 Dr Personal A/c Cr Real A/c Ex:Drawings or Advance to Employee, Payment to Supplier Dr Real A/c Cr Personal A/c Ex:Capital invested, Payment Received from Customer Dr Real A/c Cr Nominal A/c Ex: Interest Recd by Cash, Cash Sales Dr Nominal A/c Cr Real A/c Ex: Rent Paid by Cash Dr Personal A/c Cr Nominal A/c Ex: Interest Accrued on Investment, Dividend accrued on Investment Dr Nominal A/c Cr Personal A/c Ex: Hire Purchase Charges accrued, Interest Payable, Salary Payable Dr Real A/c Cr Real A/c Ex:Purchase of Inventory by Cash Dr Real A/c Cr Real A/c Ex: Cash withdrawal or Deposit RITESH SINGH
  • 54. Practical Question • Started business with cash 5,000 • Purchased goods on credit 400 • Purchased goods for cash100 • Purchased furniture 50 • Withdrew for personal use 70 • Paid Rent 20 • Received Interest 10 54RITESH SINGH