Introduction to Accounting

1. Introduction to Accounting
Presented by;
Mayur Khatri

2. What is accounting?
• Accounting as a language
• “Accounting is the art of recording, classifying and
summarizing in a significant manner in terms of money,
transactions and events that are of financial character and
interpreting the results thereof.’
• The art of recording involves writing the transactions of
financial character reasonable soon after the occurrence, in
the records maintained by the company.
• The classifying is concerned with the systematic analysis of
the recorded data under appropriate heads.
• The summarizing is presenting data in a manner which is
useful to internal and external end users of accounts.

3. End users of accounts
• External users:
• Individuals and organizations
• Regulatory authorities and government agencies
• Labor unions, stock brokers and trade associations
• Auditor of the business
• Share holders
Internal users:
• Owners of the business
• Managers at various levels, chief executives
• Employees of the business

4. Kinds of accounting activities
• Financial accounting
• Income-tax accounting
• Cost accounting
• Management accounting
• Management reporting

5. Accounting terms
1. Accrual: recognition of revenues and costs as they earned or
incurred but not paid or received.
2. Amortization: the gradual and systematic writing off an asset
over an appropriate period. Eg. Advertising expenses.
3. Annual report: the information provided annually by the
management of an enterprise to the owners and other
interested persons, eg. Different financial statements.
4. Assets: tangible objects or intangible rights owned by an
enterprise and carrying probable future benefits.
5. Balance sheet: a statement of financial position of an
enterprise at a given date with its assets, liabilities , capital,
reserves and other balances at their book values.

6. Contd.
6. Bonus shares: shares allotted by capitalization of the reserves
or surplus.
7. Book value: the amount at which an item appears in the books
of account or financial statement.
8. Contingent liability: an obligations relating to an existing
condition or situation which may arise in the future
depending on the occurrence or non-occurrence of uncertain
events.
9. Cost of goods sold: the cost of goods sold during an
accounting period. In manufacturing operations, it includes
cost of material, labor and factory costs.

7. Contd.
10. Cost of sales: cost of goods sold plus selling and
administrative expenses.
11. Current assets: cash and other assets that are expected to be
converted into cash in the normal course of business.
12. Current liability: liability including loans, deposits and bank
overdraft which falls due for payment in relatively short
period, normally not more than twelve months.
13. Debentures: a formal document constituting
acknowledgement of debt by an enterprise, normally
containing provisions regarding payment of interest,
repayment of principle and security.

8. Contd.
14. Depreciation: a measure of consumption or other loss of value of
a depreciable value arising from use, because of time or
obsolescence through technology and market changes.
15. Earning per share: the earnings in monetary terms attributable to
each equity share based on net profit for the period where all other
liabilities are paid.
16. Fixed assets: assets held for the purpose of providing or producing
goods or services and that is not held for resale in the normal
course of business.
17. Goodwill: an intangible asset arising from business connections,
trade name or reputation of the business. Accounting conventions
do not permit the recording of self generated goodwill, but once it
is acquired by the other firm the premium prices are paid in terms
of goodwill.

9. Contd.
18. Gross margin or gross profit: the excess of the proceeds of
good sold and services rendered during a period over their
costs.
19. Income and expenditure statement: a financial statement
often prepared by non profit enterprises like clubs,
associations etc. to show their revenues and expenses.
20. Intangible assets: asset which does not have a physical
identity, eg. Goodwill, patent.
21. Inventory: tangible property held for sale in the ordinary
course of business or in the process of production for such
sale, or for consumption in the production of goods or
services.

10. Contd.
22. Investments: assets held not for operational purposes or for
rendering services. Eg. Securities, shares, debentures, etc.
23. Liability: the financial obligation of an enterprise.
24. Long term liability: liability which does not fall due for
payment in a relatively short period.
25.Mortgage: a transfer of interest in specific immovable
property for the purpose of securing loan.
26.Net fixed assets: fixed assets less depreciation.
27.Net profit: the excess of revenue over expenses during a
particular accounting period. When the result is negative it is
net loss.

11. Contd.
28. Profit and loss statement: a financial statement which
presents the revenues and expenses of an enterprise for an
accounting period and shows net profit or net loss.
29. Provision: an amount retained by way of providing for any
liability the amount of which can not be determined with
substantial accuracy.
30. Reserve: the portion of earnings, receipts, surplus or profit
appropriated by the management for a general or specific
purpose. Reserve can be of two types; capital reserve and
revenue reserve.
A capital reserve is not available for distribution as dividend.
Any reserve that is not a capital reserve is a revenue reserve.

12. Contd.
31. Sales turnover: the aggregate amount for which sales are
effected or services rendered by an enterprise.
32. Secured loan: loan secured wholly or partly against an asset.
33. Share premium: the excess of issue price of shares over their
face value. Share premium usually shown in the reserve.
Share premium is not a revenue reserve. It can be issued as
bonus share.
34. Work in process: work in process includes all material which
have undergone manufacturing or processing operations, but
upon which further operations are necessary before the
products is ready for sale.

13. Concepts – B/S
1. The Business Entity concept
2. Going concern concept
3. Monetary unit concept
4. Cost concept
5. Conservatism concept
6. Accounting equivalence concept:
Assets = Owner's equity + Liability

14. Concepts – P & L A/C
1. The accounting period concept
2. Realization concept
3. Accrual concept
4. Matching concept with revenue

15. Recording Transactions – Journal entry
• Recording (Journal): recording refers to the
prime record of every transaction and event in
“Journal”. Thus, recording is journalizing and
the entry is called journal entry.
• Types of accounts: all the transactions can be
classified under three types of accounts:
- Personal Accounts
- Real accounts
- Nominal Accounts

16. Contd.
• Rule of debit and credit:
1. Personal Account: Debit the receiver and
credit the giver
2. Real Account: Debit what comes in and
credit what goes out
3. Nominal Account: Debit the expense and
credit the incomes