2. 1- 2
What is accounting?
• The language of business
– Measures financial aspects of a business
– Communicates this information to decision
makers
3. The Need for Accounting
Managers, investors, and other internal groups
want the answers to two important questions:
How well did
the organization
perform?
Where does
the organization
stand?
4. The Need for Accounting
Accountants answer these questions
with three major financial statements:
Income
statement
Balance
sheet
Statement of
cash flows
5. Users of Accounting Information
Different categories of users need different
kinds of information for making decisions.
These users can be divided into :
•Internal Users; and
•External Users.
8. ACCOUNTING PRINCIPLES
• Accounting Concepts
• Accounting Conventions
The term „concept‟ is used to connote
accounting postulates, that is necessary
assumptions and conditions upon which
accounting is based. The term „convention‟
is used to signify customs and traditions as
a guide to the presentation of accounting
statements.
12. Business Entity Concept
Business is treated as a separate entity or
unit apart from its owner and others. All the
transactions of the business are recorded in
the books of business from the point of view
of the business as an entity and even the
owner is treated as a creditor to the extent
of his/her capital.
13. Money Measurement Concept
In accounting, we record only those
transactions which are expressed in terms
of money. In other words, a fact which can
not be expressed in monetary terms, is not
recorded in the books of accounts.
14. Cost Concept
Transactions are entered in the books of
accounts at the amount actually involved.
Suppose a company purchases a car for
Rs.1,50,000/- the real value of which is
Rs.2,00,000/-, the purchase will be recorded
as Rs.1,50,000/- and not any more. This is
one of the most important concept and it
prevents arbitrary values being put on
transactions.
15. Going Concern Concept
It is persuaded that the business will exists
for a long time and transactions are
recorded from this point of view.
16. Dual Aspect Concept
Each transaction has two aspects, that is,
the receiving benefit by one party and the
giving benefit by the other. This principle is
the core of accountancy.
17. Dual Aspect Concept continue…
For example, the proprietor of a business
starts his business with Cash Rs.1,00,000/-,
Machinery of Rs.50,000/- and Building of
Rs.30,000/-, then this fact is recorded at
two places. That is Assets account (Cash,
Machinery & Building) and Capital accounts.
The capital of the business is equal to the
assets of the business.
18. Dual Aspect Concept continue…
Thus, the dual aspect can be expressed as
under
Capital + Liabilities = Assets
or
Capital = Assets – Liabilities
19. Realization Concept
Accounting is a historical record of
transactions. It records what has happened.
It does not anticipate events. This is of
great important in preventing business firms
from inflating their profits by recording sales
and income that are likely to accrue.
20. Accounting Period Concept
Strictly speaking, the net income can be
measured by comparing the assets of the
business existing at the time of its
liquidation. But as the life of the business is
assumed to be infinite, the measurement of
income according to the above concept is
not possible. So a twelve month period is
normally adopted for this purpose. This time
interval is called accounting period.
22. Convention of Consistency
In order to enable the management to draw
important conclusions regarding the working
of the company over a few years, it is
essential that accounting practices and
methods remain unchanged from one
accounting period to another. The
comparison of one accounting period with
that of another is possible only when the
convention of consistency is followed.
23. Convention of Disclosure
This principle implies that accounts must be
honestly prepared and all material
information must be disclosed therein. The
contents of Balance Sheet and Profit and
Loss Account are prescribed by law. These
are designed to make disclosure of all
material facts compulsory.
24. Convention of Conservation
Financial statements are always drawn up
on rather a conservative basis. That is,
showing a position better than what it is,
not permitted. It is also not proper to show
a position worse than what it is. In other
words, secret reserves are not permitted.
25. FUNCTIONS OF ACCOUNTING
• Keeping systematic records
• Protecting properties of the business
• Communicating the results
• Meeting legal requirements
26. Keeping systematic records
The first function of accounting is to keep a
systematic record of financial transactions,
to post them to the ledger accounts and
ultimately prepare final statements.
27. Protecting properties of the business
The second important function is to protect
the property of the business. The system
accounting is designed in such a way that it
protects its assets from an unjustified and
unwarranted use.
28. Meeting legal requirements
The fourth and the last function of
accounting is to meet the legal
requirements under the Companies Act,
Income Tax Act, Sales Tax Act and so on.
29. THE ACCOUNTING CYCLE
Recording transactions in subsidiary books.
Classifying data by posting from subsidiary
books to the accounts.
Closing the books and preparation of final
accounts.
30. CLASSIFICATION OF ACCOUNTS
• Accounts in the names of persons are known as
“Personal Accounts”
• Accounts in the names of assets are known as
“Real Accounts”
• Accounts in respect of expenses and incomes
are known as “Nominal Accounts”
32. PERSONAL ACCOUNTS
Accounts in the name of persons are known as
personal accounts.
Eg: Babu A/C,
Babu & Co. A/C,
Outstanding Salaries A/C, etc.
33. REAL ACCOUNTS
These are accounts of assets or properties. Assets
may be tangible or intangible. Real accounts are
impersonal which are tangible or intangible in
nature.
Eg:- Cash a/c, Building a/c, etc are Real
Accounts related to things which we can
feel, see and touch.
Goodwill a/c, Patent a/c, etc Real Accounts
which are of intangible in nature.
34. NOMINAL ACCOUNTS
These accounts are impersonal, but invisible and
intangible. Nominal accounts are related to those
things which we can feel, but can not see and
touch. All “expenses and losses” and all “incomes
and gains” fall in this category.
Eg:- Salaries A/C, Rent A/C, Wages A/C, Interest
Received A/C, Commission Received A/C,
Discount A/C, etc.
35. DEBIT AND CREDIT
Each accounts have two sides – the left side and
the right side. In accounting, the left side of an
account is called the “Debit Side” and the right
side of an account is called the “Credit Side”. The
entries made on the left side of an account is
called a “Debit Entry” and the entries made on the
right side of an account is called a “Credit Entry”.
36. RULES FOR DEBIT AND CREDIT
Personal
Account
Debit the Receiver
Credit the Giver
Real Accounts
Debit what comes in
Credit what goes
out
Nominal
Accounts
Debit all Expenses
and Losses
Credit all Incomes
and Gains
37. Steps for finding the debit and credit aspects of a
particular transaction
• Find out the two accounts involved in the
transaction.
• Check whether it belongs to Personal, Real or
Nominal account.
• Apply the debit and credit rules for the two
accounts.
38. Exercise
• Purchased a Building for Rs.20,000/-.
• Paid Cash Rs.1,000/- to Satheesh.
• Paid Salary Rs.1000/-.
• Received Commission Rs.250/-.
• Sold goods for Cash Rs.3500/-.
39. Journal
Journal is the prime or original book of entry in
which all transactions are recorded in the form of
entries. Journalising is an act of recording or
entering transactions in a Journal in the order of
date.
Date Particulars LF Debit
Amount
Credit
Amount
40. Journal Entry
Jan 1, 2013 Prakash Started a business Rs.
50,000/-
Date Particulars LF Debit
Amount
Credit
Amount
2013
Jan 1
Cash a/c Dr.
To Prakash’s Capital
a/c
(Being cash invetsed to
business)
50,000
50,000
