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Basic Accounting Concepts
Maruti Pratapa

2.
Agenda
• What is Accounting
• What's an Account?
• Debit and Credit
• Accounting Terminology
• Some Basic Information
• Accounting Equation
• Double Entry system
• What is Debit and Credit
• Accounting vs. Finance
• Advantages of Accounting
• Accounting Method
• Accounting Concepts and Conventions
• Generally Accepted Acct. principles
• Thumb Rules of Accounting
• Financial Statements
• Usage of Accounting
• Preparation of Reports
• In ERP Perspective

3.
What is Accounting
• A Business Language
• A set of Rules to record business transactions in a consistent Manner
• The Basis of Business Operations
• Constantly changing
In a layman’s language accounting is
 Keeping track of the Financials activities
 recording them in a specific order
 keeping them for reference of future use.

4.
What is Accounting
Accounting is a difficult term to define. However, it is formally defined
by the American Accounting Association as
“The classification and recording of monetary transactions, the
presentation and interpretation of the results of those transactions in
order to assess performance over a period and the financial position at a
given date, and the monetary projection of future activities arising from
alternative planned courses of action”.
Using this definition, accounting can be seen to be about the
identification and recording of business transactions as a way of assisting
the management and planning of a business.
Definition:
Accounting is defined as Recording, Classifying and Summarizing the
transactions in monetary terms for preparation of Financial Statements.
Ex: Profit & Loss account, Balance Sheet

5.
What's an Account?
An account is a summarized record of business transactions that effect
a particular type of asset, liability or capital
The System Of Double Entry
Every Business Transaction involving money or money’s worth gives rise to
two aspects
1) The receiving of value on one hand
2) The giving of the same value on the other hand
Giving & receiving aspects takes place between accounts Rules:
Debit Expenses and losses
Credit income and gains

6.
Accounting Terminology
Accountants use the terms debit and credit to describe whether
money is being transferred to or from an account. Money is
recorded in the debit column, which is always the left column,
when it is being transferred to an account. Money is recorded in
the credit column, which is always the right column, when it is
being transferred from an account. Money always flows from the
right column of one account to the left column of another account.
The main rule of accounting is this: For every transaction, total
debits must equal total credits. This is the way of double entry
rule, that for each transaction, the amount of money transferred
from accounts must equal the amount transferred to other
accounts

7.
Some Basic information
Basic accounting rules group all finance related things into fundamental
types of “accounts”. That is, everything that accounting deals with can
be placed into one of these 5 accounts
1. Assets - things you own.
2. Liabilities - things you owe.
3. Equity - overall net worth. (Capital-in case of a Sole Trader &
Partnerships)
4. Income - increases the value of your accounts.
5. Expenses - decreases the value of your accounts.
It is clear that it is possible to categorize financial world into these 5
groups. For example, the cash in bank account is an asset, Housing
Loan is a liability, salary is income, and the cost of dinner last night is
an expense for an Individual.

8.
The Accounting Equation
The relationship between 5 basic accounts and How they affect the others?
Your net worth is calculated by subtracting your liabilities from your assets
Assets - Liabilities = Equity
Furthermore, you can increase your equity through income, and decrease
equity through expenses. This makes sense of course, when you receive a
paycheck you become "richer" and when you pay for dinner you become
"poorer". This is expressed mathematically in what is known as the
Accounting Equation:
Assets - Liabilities = Equity + (Income - Expenses)

9.
Double Entry
Double entry accounting has been around since the late 15th century, when it
was described by an Italian friar, Luca Pacioli.
• Double entry accounting is recording transactions in a book called a ledger.
• Copying each part of the transaction to separate books called journals.
• This method is used to avoid entry errors and to track source of errors.
• This Book-keeping lets to track where money comes from and where it goes.
• Double entry means value for money is never gained nor lost - an equal
amount is always transferred from one place to another.
Example:
When you purchase any thing from grocery store, money is transferring from
your pocket to the grocery store. And you are receiving the equivalent
groceries from the store.

10.
Double Entry
The accounting equation is the very heart of a double entry
accounting system. For every change in value of one account in the
Accounting Equation, there must be a balancing change in another.
This concept is known as the Principle of Balance, and is of
fundamental importance for double entry accounting systems.
Double entry accounting serves two purposes. The first is to create
an accounting trail, money always has to come from somewhere and
go to somewhere. Additionally, double entry accounting historically
served to double check the math of an accountant. Because the
numbers are entered into multiple accounts simultaneously, there
are multiple places to check to make sure the totals match. Of
course, with the advent of computers, the chances of a
mathematical problem are low, but it is good to know that the
concept still exists!

11.
Accounting and Finance
• Sourcing and Application of Funds
• Means for Investment Decisions
• Financing Decisions (Application)
• Always Futuristic (Forecast)
• Cost of Capital
• Cash Flow / Funds Flow
• Project Appraisal
• Ratio Analysis
• Recording of an Financial event
• Always Expressed in Monetary Terms
• Record, Classify, Summarize the
Transactions
• Preparation of Financial Statements
(Trading, P&L and Balance Sheet)
• Historical (Post Mortem)
• Compliance with Statutory Matters
of Companies Act, Income Tax
Act,Sales Tax etc
Finance
Accounts

12.
Advantages of Accounting
•Provides a vision for the Business
•Provides the sources and application of the funds in correct way
•Before and after effects can be managed in Finance
•Accounting is a record of all financial activities
» Allows to manage the financial activities
» Financial Control and integration
•Provides a complete understanding about the business for all.

13.
There are some accounting methods by which we can practice the Accounting
Ex: Cash Method, Accrual Method and Mixed (Hybrid) Method
Cash Basis
Cash-basis accounting is a method of bookkeeping that records financial events
based on cash flows and cash position. Revenue is recognized when cash is
received and expense is recognized when cash is paid. In cash-basis accounting,
revenues and expenses are also called cash receipts and cash payments.
Accrual-basis
Accrual-basis accounting records financial events based on events that change
your net worth (the amount owed to you minus the amount you owe others).
Standard practice is to record and recognize revenues in the period in which
they incur and to match them with related expenses in a process known as
matching or expense matching. Even though cash is not received or paid in a
credit transaction, they are recorded because they are consequential in the
future income and cash flow of the company. Accrual-basis is GAAP compliant.
Accounting Method

14.
Accounting Concepts/Conventions
• Accounting Principles were historically developed
through common acceptance and Usage
• In General they satisfy the following
– Usefulness
– Objectivity
– Feasibility

15.
Generally Accepted Accounting Principles (GAAP)
1. There are some principles that govern the double entry
book-keeping, they are called GAAP
2. These GAAP are defined by the statutory bodies

16.
Accounting Concepts/Conventions
(US GAAP/UK GAAP)
• 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 and 29 Indian
Accounting Standards

17.
Accounting Concepts / Principles
• Business Entity Concept
• Money Measurement Concept
• Dual Aspect Concept
• Cost Concept
• Accounting Period
• Conservatism
• Realization Concept
• Matching Concept
• Materiality Concept
• Objectivity

18.
Accounting Conventions / Practices
• Going Concern
• Consistency
• Accrual

19.
Accounting Concepts
• Business Entity Concept
Accounts can only be kept for Entities, which are different from
the persons who are associated with these entities
(e.g) Sole Proprietary, Partnership firm, Company
• Money Measurement Concept
Record should be made only of that information which can be
expressed in Monetary Terms
(e.g) Sole Proprietor had 40 Tables & Chairs

20.
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
EQUITY = ASSETS – LIABILITIES
• Cost Concept
Assets are always shown at their Cost and not at their current
Market Value
(e.g) 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

21.
Accounting Concepts
• Accounting Period
Accounting measures activity for a specified interval of time,
usually a year
(e.g) Calendar Year (Jan’04-Dec’04), Financial Year
(Apr’04-Mar’05)
• Conservatism
Anticipate no Profits but provide for all possible losses
(e.g) A pharmaceutical Company going to Loose the case filed for
Patent Right filed for a medicine
Company is likely to Win a Major Legal Dispute or a Sales Contract

22.
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
(e.g) A Sales invoice for Rs.10 Lacs
Credit Note for Rs.15000 received
• Matching Concept
When an Event affects both the revenues and expenses, the
effect on each should be recognized in the same accounting
period
(e.g) March Salary paid in April

23.
Accounting Concepts
• Materiality concept
Insignificant events would not be recorded, if the benefit of
recording them does not signify the cost
(e.g) A calculator worth Rs.500 not recorded asset rather than
charged off as Expenses even though the benefit is enduring in
nature
• Objectivity Concept
An Evidence of the happening of the Transaction should support
every Transaction
(e.g) Third Party Evidence (Cr.Note from Supplier)

24.
Accounting Conventions
• Going Concern
Accounting Records , Events and Transactions on the assumption
that the entity will continue to operate for an indefinitely Long
period of time
(e.g) An Entity will not be started with an intention to close within
the specified time period
• Consistency
The Accounting Policies and methods followed by the company
should be the same every year
(e.g) Period should not be changed frequently from Jan-Dec to Apr-
Mar

25.
Accounting Conventions
• Accrual
In General it is assumed that Accounts are always prepared based
on Accrual basis. However there are entities which follow Cash
Basis of Accounting Also
(e.g) Salary Payable to employees(March salary paid in April),
Interest Receivable on Investments (NSC interest), Dividend
Receivable on shares, Tax Payable to Govt (March sales Tax and
Annual Income Tax)

26.
Thumb Rules for Accounting
Accounts
Nominal
Real
Personal
1. Debit the Receiver and Credit the giver
2. Debit What comes in and Credit what Goes out
3. Debit all Expenses and losses and Credit all Incomes and Gains

27.
Combination of Rules
Dr Personal A/c
Cr Real A/c
Ex:Drawings or Advance to Emp
Dr Real A/c
Cr Personal A/c
Ex:Capital invested
Dr Real A/c
Cr Nominal A/c
Ex: Interest Recd by Cash
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 Invst
Dr Nominal A/c
Cr Personal A/c
Ex: Hire Purchase Charges accrued
Dr Real A/c
Cr Real A/c
Ex:Purchase of Inv by Cash
Dr Real A/c
Cr Real A/c
Ex: Cash withdraw or Deposit

28.
Combination of Accounting Rules
Combination Personal Real Nominal
Personal X  
Real   
Nominal   X
Debit
Credit

29.
Recording of Accounting Transactions
• Recording of an Accounting event is known as Journal entry
• Recording is made in Primary and Secondary Books
• Primary Books
– General Ledger
– Cash Book
Secondary Books
– Purchase Register
– Sales Register
– Fixed Assets Register
– Returns (Purchase return/Sales Return)
– Journal Register

30.
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 useful life
• Expenditure incurred in transporting an asset to its
site and preparing it for use.

31.
Classification of Accounting Event
• Revenue Item: An Income or Expenditure and the
benefit of which will be exhausted within a year
– (e.g) Salary and wages, Printing and Stationery, Sales
Revenue, Interest Income

32.
Classification of Accounting Event
• Deferred Revenue Expenditure: It is neither a
Capital nor Revenue and the benefit of which
will be realized for more than a year and does
not result in creation of an asset
– Advertisement Expenditure the benefit of which is
likely to be obtained over a period more than one
year

33.
Preparation of Financial Statements
• Preparation of Trial Balance
– Balances Extracted from General Ledger
– Sum of debit and credit balances = 0
• Preparation of Trading, Profit & Loss Account and Balance sheet
– Trial Balance is the base for preparing Financial Statements
– Adjustment entries are made in adjustment period and passed as
Journal Vouchers before making the financial statements
– Trading and Profit and Loss Account is Always for a period say for an
Year (Jan - Dec or Apr - Mar)
– Balance Sheet is always as on Date (As on 31-12-2006 or 31-03-2007)

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