DEFINITION OF ACCOUNTING The systematic recording, reporting, and analysis of financial transactions of a business.

The person in charge of accounting is known as an accountant, and this individual is typically required to follow a set of rules and regulations, such as the Generally Accepted Accounting Principles. Accounting allows a company to analyze the financial performance of the business, and look at statistics such as net profit. PURPOSE OF ACCOUNTING The purpose of accounting is to accumulate and report on financial information about the performance, financial position, and cash flows of a business. This information is then used to reach decisions about how to manage the business, or invest in it, or lend money to it.This information is accumulated in accounting records with accounting transactions, which are recorded either through such standardized business transactions as customer invoicing or supplierinvoices, or through more specialized transactions, known as journal entries.Once this financial information has been stored in the accounting records, it is usually compiled into financial statements, which include the following documents: - INOME STATEMENT BALANCE SHEET STATEMENT OF CASH FLOWS STATEMENT OF RETAINED EARNINGS

Nature of Accounting
We know Accounting is the systematic recording of financial transactions and presentation of the related information of the appropriate persons. The basic features of accounting are as follows: 1. Accounting is a process: A process refers to the method of performing any specific job step by step according to the objectives, or target. Accounting is identified as a process as it performs the specific task of collecting, processing and communicating financial information. In doing so, it follows some definite steps like collection of data recording, classification summarization, finalization and reporting. 2. Accounting is an art: Accounting is an art of recording, classifying, summarizing and finalizing the financial data. The word art refers to the way of performing something. It is a behavioral knowledge involving certain creativity and skill that may help us to attain some specific objectives. Accounting is a systematic method consisting of definite techniques and its proper application requires applied skill and expertise. So, by nature accounting is an art. 3. Accounting is means and not an end: Accounting finds out the financial results and position of an entity and the same time, it communicates this information to its users. The users then take their own decisions on the basis of such information. So, it can be said that mere keeping of accounts can be the primary objective of any person or entity. On the other hand, the main objective may be identified as taking decisions

on the basis of financial information supplied by accounting. Thus, accounting itself is not an objective, it helps attaining a specific objective. So it is said the accounting is a means to an end and it is not an end in itself. 4. Accounting deals with financial information and transactions; Accounting records the financial transactions and date after classifying the same and finalizes their result for a definite period for conveying them to their users. So, from starting to the end, at every stage, accounting deals with financial information. Only financial information is its subject matter. It does not deal with non-monetary information of nonfinancial aspect. 5. Accounting is an information system: Accounting is recognized and characterized as a storehouse of information. As a service function, it collects processes and communicates financial information of any entity. This discipline of knowledge has been evolved out to meet the need of financial information required by different interested groups.

What are the important functions of accounting.

Record Keeping Function:The primary function of accounting is to keep a systematic record of financial transaction - journalisation, posting and preparation of final statements. The purpose of this function is toreport regularly to the interested parties by means of financial statements. Protect Business Property:The second function of accounting is to protect the property of business from unjustified and unwanted use. The accountant thus has to design such a system of accounting which protect its assets from an unjustified and unwanted use. Legal Requirement Function:The third function of accounting is to devise such a system as will meet the legal requirements. Under the provision of law, a business man has to file various statements e.g.,income tax returns, returns for sales tax purpose etc. Accounting system aims at fulfilling the requirements of law. Accounting is a base, with the help of which various returns, documents, statements etc., are prepared. Communicating the Results:Accounting is the language of business. Various transactions are communicated through accounting. There are many parties owners, creditors, government, employees etc, who are interested in knowing the results of the firm. The fourth function of accounting is to communicate the results to interested parties. The accounting shows a real and true position of the firm of the business.

Scope of Accounting:
Accounting has got a very wide scope and area of application. Its use is not confined to the business world alone, but spread over in all the spheres of the society and in all professions. Now-a-days, in any social institution or professional activity, whether that is profit earning or not, financial transactions must take place. So there arises the need for recording and summarizing these transactions when they occur and the necessity of finding out the net result of the same after the expiry of a certain fixed period.

Besides, the is also the need for interpretation and communication of those information to the appropriate persons. Only accounting use can help overcome these problems. In the modern world, accounting system is practiced no only in all the business institutions but also in many non-trading institutions like Schools, Colleges, Hospitals, Charitable Trust Clubs, Co-operative Society etc.and also Government and Local SelfGovernment in the form of Municipality, Panchayat.The professional persons like Medical practitioners, practicing Lawyers, Chartered Accountants etc.also adopt some suitable types of accounting methods. As a matter of fact, accounting methods are used by all who are involved in a series of financial transactions. The scope of accounting as it was in earlier days has undergone lots of changes in recent times. As accounting is a dynamic subject, its scope and area of operation have been always increasing keeping pace with the changes in socio-economic changes. As a result of continuous research in this field the new areas of application of accounting principles and policies are emerged. National accounting, human resources accounting and social Accounting are examples of the new areas of application of accounting systems.

MAIN OBJECTIVES OF ACCOUNTING:

To keep systematic records: Accounting is done to keep a systematic record of financial transactions. In the absence of accounting there would have been terrific burden on human memory which in most cases would have been impossible to bear. To protect business properties: Accounting provides protection to business properties from unjustified and unwarranted us. This is possible on account of accounting supplying the information to the manager or the proprietor. To ascertain the operational profit or loss: Accounting helps is ascertaining the net profit earned or loss suffered on account of carrying the business. This is done by keeping a proper record of revenues and expenses of a particular period. The profit and loss account is prepared at the end of a period and if the amount of revenue for the period is more than the expenditure incurred in earning that revenue, there is said to be a profit. In case the expenditure exceeds the revenue, there is said to be a loss. To ascertain the financial position of business: The profit and loss account gives the amount of profit or loss made by the business during a particular period. However, it is not enough. The businessman must know about his financial position i.e., where he stands; what he owes and what he owns? This objective is served by the balance sheet or position statement. To facilitate rational decision making:

Accounting these days has taken upon itself the task of collection, analysis and reporting of information at the required points of time to the required levels of authority in order to facilitate rational decision making.

BRANCHES OF ACCOUNTING
1.Book-Keeping: Primary recording of the day-to-day transactions of any business unit and their subsequent posting into the Ledger Accounts are the functions of this part of accounting. As this part of the job of the Accountant is only keeping the proper records, it is therefore termed as Book-Keeping. 2.Accounting: To prepare the Trial Balance and thereby to check the arithmetical accuracy of the books and records, to prepare the Revenue statements of Profit or Loss Accounts, to prepare the statement of Affairs or Balance Sheets, or , in other words, to prepare the Final Accounts and also to make plans and programmes for smooth running of this part of Accounting procedures and to act accordingly are, in short, the functions of the Accountant. This of his work is generally termed as accounting. 3.Cost Accounting: In any manufacturing concern, it is necessary to keep the records of daily stocks in hand, their issues and receipts, payment of wages, calculated regarding overhead charges, fixing the sale-price of the products, to prepare the budget and thereby to help in cost control etc. These functions are the functions of the Cost Accountant. 4. Management Accounting: The present-day Management is very much dependent on the Accountant in all the levels of managerial activities. By furnishing regular reports regarding various necessary information required daily by the management, the Accountant very ably helps in their work. Cost Control, Quality Control, Budgetary Control, Planning etc.are therefore, the functions of the Management Accountant. 5. Decision Accounting: This means that part of the functions of the Accountant by which he prepares and presents necessary information to the Management for making decisions. This function is one which has developed a great during the recent years. As and when there arises a particular problem in any business unit, the accounting personnel are thereupon called to present the necessary information in all possible details and in a most appropriate manner. Decision Accounting is thus, a part of the Managerial Accounting. 6.Household Accounting: With the development of the Socialistic Pattern of economy and the emergence of the Welfare States, the present-days Governments in all the countries in the World are becoming more and more interested in collecting taxes not only form the corporate bodies of form the employed persons but also from the selfemployed men and professional personalities. These types of persons are now

required to maintain their professional accounts Household Income and Expenditure Accounts separately. 7. Government Accounting: Government Accounting is quite different from Commercial Accounting. This is because in Welfare States is present day World, any Government has to collect taxes, compute National Income, fix the Gross National Product Target, ascertain the Balance of Payments position etc.governments, therefore have their own system of Accounting which is called Government Accounting. 8. Auditing: Whether the Books of Accounting have been maintained correctly or not has to be proved. For this purpose, the Accounts are to be checked by some qualified persons from the Book of Prime entry up to the Final Accounts every year. This is also necessary for the benefit of the share-holders as well as for the Government which will collect taxes on the basis of the Published Accounts.

Users of accounting information

Internal users (Primary Users) of accounting information include the following: Management: for analyzing the organization's performance and position and taking appropriate measures to improve the company results. Employees: for assessing company's profitability and its consequence on their future remuneration and job security. Owners: for analyzing the viability and profitability of their investment and determining any future course of action. Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements. External users (Secondary Users) of accounting information include the following: Creditors: for determining the credit worthiness of the organization. Terms of credit are set by creditors according to the assessment of their customers' financial health. Creditors include suppliers as well as lenders of finance such as banks. Tax Authourities: for determining the credibility of the tax returns filed on behalf of the company. Investors: for analyzing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company. Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term. Regulatory Authorities: for ensuring that the company's disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such information in forming their decisions.

External users are communicated accounting information usually in the form of financial statements. The purpose of financial statements is to cater for the needs of such diverse users of accounting information in order to assist them in making sound financial decisions.

BASIC PROFESSIONAL VALUES AND ETHICS

According to the code, a professional accountant shall comply with the following fundamental principles: (a) Integrity to be straightforward and honest in all professional and business relationships. (b) Objectivity to not allow bias, conflict of interest or undue influence of others to override professional or business judgments. (c) Professional Competence and Due Care to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques and act diligently and in accordance with applicable technical and professional standards. (d) Confidentiality to respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the professional accountant or third parties. (e) Professional Behavior to comply with relevant laws and regulations and avoid any action that discredits the profession.

Basic forms of ownership / organizations and their activities

Although forms of business ownership vary by jurisdiction, there are several common forms: Sole proprietorship: A sole proprietorship is a business owned by one person. The owner may operate on his or her own or may employ others. The owner of the business has total and unlimited personal liability of the debts incurred by the business. Partnership: A partnership is a form of business in which two or more people operate for the common goal of making profit. Each partner has total and unlimited personal liability of the debts incurred by the partnership. There are three typical

classifications of partnerships: general partnerships, limited partnerships, and limited liability partnerships. Corporation: A business corporation is a for-profit, limited liability entity that has a separate legal personality from its members. A corporation is owned by multiple shareholders and is overseen by a board of directors, which hires the business's managerial staff. Cooperative: Often referred to as a "co-op business" or "co-op", a cooperative is a for-profit, limited liability entity that differs from a corporation in that it has members, as opposed to shareholders, who share decision-making authority. Cooperatives are typically classified as either consumer cooperatives or worker cooperatives. Cooperatives are fundamental to the ideology of economic democracy.

Guidelines on Basic Accounting Principles and Concepts

GAAP is the framework, rules and guidelines of the financial accounting profession with a purpose of standardizing the accounting concepts, principles and procedures. Here are the basic accounting principles and concepts under this framework: 1. Business Entity A business is considered a separate entity from the owner(s) and should be treated separately. Any personal transactions of its owner should not be recorded in the business accounting book, vice versa. Unless the owners personal transaction involves adding and/or withdrawing resources from the business. 2. Going Concern It assumes that an entity will continue to operate indefinitely. In this basis, assets are recorded based on their original cost and not on market value. Assets are assumed to be used for an indefinite period of time and not intended to be sold immediately. 3. Monetary Unit The business financial transactions recorded and reported should be in monetary unit, such as US Dollar, Canadian Dollar, Euro, etc. Thus, any non-financial or nonmonetary information that cannot be measured in a monetary unit are not recorded in the accounting books, but instead, a memorandum will be used. 4. Historical Cost All business resources acquired should be valued and recorded based on the actual cash equivalent or original cost of acquisition, not the prevailing market value or future value. Exception to the rule is when the business is in the process of closure and liquidation. 5. Matching This principle requires that revenue recorded, in a given accounting period, should have an equivalent expense recorded, in order to show the true profit of the business. 6. Accounting Period This principle entails a business to complete the whole accounting process of a business over a specific operating time period. It may be monthly, quarterly or annually. For annual accounting period, it may follow a Calendar or Fiscal Year.

7. Conservatism This principle states that given two options in the valuation of business transactions, the amount recorded should be the lower rather than the higher value. 8. Consistency This principle ensures consistency in the accounting procedures used by the business entity from one accounting period to the next. It allows fair comparison of financial information between two accounting periods. 9. Materiality Ideally, business transactions that may affect the decision of a user of financial information are considered important or material, thus, must be reported properly. This principle allows errors or violations of accounting valuation involving immaterial and small amount of recorded business transaction. 10. Objectivity This principle requires recorded business transactions should have some form of impartial supporting evidence or documentation. Also, it entails that bookkeeping and financial recording should be performed with independence, thats free of bias and prejudice. 11. Accrual This principle requires that revenue should be recorded in the period it is earned, regardless of the time the cash is received. The same is true for expense. Expense should be recognized and recorded at the time it is incurred, regardless of the time that cash is paid. There are three major elements of accounting: Assets, Liabilities, and Capital. These terms are used widely so it is necessary that we take a look at each element. Also, it is important to know what they are before we try to understand how they relate to each other in the accounting equation and in the accounting cycle.

ACCOUNTING ELEMENTS OR VALUES

The term "account" is used often in this tutorial. Thus, we need to define it before we proceed. In accounting, an account is a storage unit used to collect and store information of similar nature. For example, "Cash". Cash is an account that stores all transactions that involve cash receipts and cash payments. All cash receipts are recorded as increase in Cash and all cash disbursements are recorded as deductions to the same account. Another example, "Building". Suppose a company acquires a building and pays in cash. That transaction would be recorded in the "Building" account for the acquisition of the building and in the "Cash" account for the payment in cash. Assets Assets refer to resources owned and controlled by the entity as a result of past transactions and events and from which future economic benefits are expected to flow to the entity. In simple terms, assets are properties or rights owned by the business. They may be classified as current or non-current.

A. Current assets Assets are considered current if they are held for the purpose of being traded, expected to be realized or consumed within twelve months after the end of the period or its normal operating cycle (whichever is longer), or if it is cash. Examples of current asset accounts are: 1. Cash bills, coins, funds for current purposes, checks, cash in bank 2. Receivables Accounts Receivable (receivable from customers), Notes Receivable (receivables supported by promissory notes), Rent Receivable, Interest Receivable, Due from Employees (or Advances to Employees), and others Allowance for Doubtful Accounts This is a valuation account which represents the estimated uncollectible amount of accounts receivable. It is considered a contraasset account and is presented as a deduction to the related asset, accounts receivable. Doubtful accounts are discussed in detail in another lesson. 3. Inventories assets held for sale in the ordinary course of business 4. Prepaid expenses expenses paid in advance, such as, Prepaid Rent, Prepaid Insurance, Prepaid Advertising, and Office Supplies B. Non-current assets Assets that do not meet the criteria to be classified as current. Hence, they are long-term in nature useful for a period longer that 12 months or the company's normal operating cycle. Examples of non-current asset accounts include: 1. Long-term investments investments for long-term purposes such as investment in stocks, bonds, and properties; and funds set up for long-term purposes 2. Land land area owned for business operations (not for sale) 3. Building such as office building, a factory, warehouse, or store 4. Equipment Machinery, Furniture and Fixtures (shelves, tables, chairs, etc.), Office Equipment, Computer Equipment, Delivery Equipment, and others Accumulated Depreciation This is a valuation account which represents the cumulative depreciation expense. It is considered a contra-asset account and is presented as a deduction to the related assets, building and equipment. Depreciation is discussed in detail in another lesson. 5. Intangibles long-term assets with no physical substance, such as goodwill, trademark, copyright, etc. 6. Other non-current assets Liabilities Liabilities are economic obligations or payables of the business. They represent claims by other parties (aside from the owners) against the assets of a company. Company assets come from 2 major sources borrowings from lenders or creditors, and contributions by the owners. The first refers to liabilities. Like assets, liabilities may be classified as either current or non-current. A. Current liabilities A liability is considered current if it is due within 12 months after the end of the balance sheet date, or its normal operating cycle. In other words, they are to be paid next year counted from the end of the current period. If the company's normal operating cycle is longer than 12 months, a liability is considered current if it is due within the operating cycle.

1. 2. 3. 4.

5.

1. 2. 3.

1. 2. 3. 4.

Current liabilities include: Trade and other payables such as Accounts Payable, Notes Payable, Interest Payable, Rent Payable, Accrued Expenses, etc. Current provisions estimated short-term liabilities that are probable and can be measured reliably Short-term borrowings financing arrangements, credit arrangements or loans that are short-term in nature Current-portion of a long-term liability the portion of a long-term borrowing that is currently due (for example, in long-term loans that are to be paid in annual installments, the portion to be paid next year is considered a current liability) Current tax liabilities taxes for the period and currently payable B. Non-current liabilities Liabilities are considered non-current if they are not currently payable, i.e. they are not due within the next 12 months after the end of the accounting period or the company's normal operating cycle, whichever is shorter. In other words, non-current liabilities are those that do not meet the criteria to be considered current. Hah! Make sense? Non-current liabilities include: Long-term notes, bonds, and mortgage payables; Deferred tax liabilities; and Other long-term obligations Capital Also known as net assets or equity, capital refers to what is left to the owners after all liabilities are settled. Simply stated, capital is equal to total assets minus total liabilities. Capital is affected by the following: Initial and additional contributions of owner/s (investments), Withdrawals made by owner/s (dividends for corporations), Income, and Expenses. Owner contributions and income increase capital. Withdrawals (or dividends) and expenses decrease it. The terms used to refer to a company's capital portion varies according to the form of ownership. In a sole proprietorship business, the capital is often called Owner's Equity or Owner's Capital; in partnerships, it is called Partners' Equity or Partners' Capital;and in corporations, Stockholders' Equity. In addition to the three elements mentioned above, there are two items that are also considered as key elements in accounting. They are income and expense. Nonetheless, these items are ultimately included as part of capital. Income Income refers to an increase in economic benefit during the accounting period in the form of inflow or increase in asset or decrease in liability that result in increase in equity, other than contribution from owners. Income encompasses revenues and gains. Revenues refer to the amounts earned from the companys ordinary course of business such as professional fees or service revenue for service companies andsales for merchandising and manufacturing concerns.

Gains come from other activities, such as gain in selling old equipment, gain on sale of short-term investments, and other gains. Income is measured every period and is ultimately included in the capital account. Examples of income accounts are: Service Revenue, Professional Fees, Rent Income, Commission Income, Interest Income, Royalty Income, and Sales. Expense Expenses are decreases in economic benefit during the accounting period in the form of an outflow or decrease in asset or increase in liability that result in decrease in equity, other than distribution to owners. Expenses include ordinary expenses such as Cost of Sales, Advertising Expense, Rent Expense, Salaries Expense, Income Tax, Repairs Expense, etc.; and lossessuch as Loss from Fire, Typhoon Loss, and Loss from Theft. Like income, expenses are also measured every period and then closed as part of capital. Net income refers to all income minus all expenses. Conclusion And we've come to the end of this lesson. We have covered all the elements of accounting. For a recap: assets are properties owned by the business; liabilities are obligations to other parties; and, capital refers to the portion of the assets available to the owners of the business. DEFINITION OF ACCOUNTING The systematic recording, reporting, and analysis of financial transactions of a business. The person in charge of accounting is known as an accountant, and this individual is typically required to follow a set of rules and regulations, such as the Generally Accepted Accounting Principles. Accounting allows a company to analyze the financial performance of the business, and look at statistics such as net profit. PURPOSE OF ACCOUNTING The purpose of accounting is to accumulate and report on financial information about the performance, financial position, and cash flows of a business. This information is then used to reach decisions about how to manage the business, or invest in it, or lend money to it.This information is accumulated in accounting records with accounting transactions, which are recorded either through such standardized business transactions as customer invoicing or supplierinvoices, or through more specialized transactions, known as journal entries.Once this financial information has been stored in the accounting records, it is usually compiled into financial statements, which include the following documents: - INOME STATEMENT BALANCE SHEET STATEMENT OF CASH FLOWS STATEMENT OF RETAINED EARNINGS

Nature of Accounting

We know Accounting is the systematic recording of financial transactions and presentation of the related information of the appropriate persons. The basic features of accounting are as follows: 1. Accounting is a process: A process refers to the method of performing any specific job step by step according to the objectives, or target. Accounting is identified as a process as it performs the specific task of collecting, processing and communicating financial information. In doing so, it follows some definite steps like collection of data recording, classification summarization, finalization and reporting. 2. Accounting is an art: Accounting is an art of recording, classifying, summarizing and finalizing the financial data. The word art refers to the way of performing something. It is a behavioral knowledge involving certain creativity and skill that may help us to attain some specific objectives. Accounting is a systematic method consisting of definite techniques and its proper application requires applied skill and expertise. So, by nature accounting is an art. 3. Accounting is means and not an end: Accounting finds out the financial results and position of an entity and the same time, it communicates this information to its users. The users then take their own decisions on the basis of such information. So, it can be said that mere keeping of accounts can be the primary objective of any person or entity. On the other hand, the main objective may be identified as taking decisions on the basis of financial information supplied by accounting. Thus, accounting itself is not an objective, it helps attaining a specific objective. So it is said the accounting is a means to an end and it is not an end in itself. 4. Accounting deals with financial information and transactions; Accounting records the financial transactions and date after classifying the same and finalizes their result for a definite period for conveying them to their users. So, from starting to the end, at every stage, accounting deals with financial information. Only financial information is its subject matter. It does not deal with non-monetary information of nonfinancial aspect. 5. Accounting is an information system: Accounting is recognized and characterized as a storehouse of information. As a service function, it collects processes and communicates financial information of any entity. This discipline of knowledge has been evolved out to meet the need of financial information required by different interested groups.

What are the important functions of accounting.

Record Keeping Function:The primary function of accounting is to keep a systematic record of financial transaction - journalisation, posting and preparation of final statements. The purpose of this function is toreport regularly to the interested parties by means of financial statements. Protect Business Property:The second function of accounting is to protect the property of business from unjustified and unwanted use. The accountant thus has to design such a system of accounting which protect its assets from an unjustified and unwanted use.

Legal Requirement Function:The third function of accounting is to devise such a system as will meet the legal requirements. Under the provision of law, a business man has to file various statements e.g.,income tax returns, returns for sales tax purpose etc. Accounting system aims at fulfilling the requirements of law. Accounting is a base, with the help of which various returns, documents, statements etc., are prepared. Communicating the Results:Accounting is the language of business. Various transactions are communicated through accounting. There are many parties owners, creditors, government, employees etc, who are interested in knowing the results of the firm. The fourth function of accounting is to communicate the results to interested parties. The accounting shows a real and true position of the firm of the business.

Scope of Accounting:
Accounting has got a very wide scope and area of application. Its use is not confined to the business world alone, but spread over in all the spheres of the society and in all professions. Now-a-days, in any social institution or professional activity, whether that is profit earning or not, financial transactions must take place. So there arises the need for recording and summarizing these transactions when they occur and the necessity of finding out the net result of the same after the expiry of a certain fixed period. Besides, the is also the need for interpretation and communication of those information to the appropriate persons. Only accounting use can help overcome these problems. In the modern world, accounting system is practiced no only in all the business institutions but also in many non-trading institutions like Schools, Colleges, Hospitals, Charitable Trust Clubs, Co-operative Society etc.and also Government and Local SelfGovernment in the form of Municipality, Panchayat.The professional persons like Medical practitioners, practicing Lawyers, Chartered Accountants etc.also adopt some suitable types of accounting methods. As a matter of fact, accounting methods are used by all who are involved in a series of financial transactions. The scope of accounting as it was in earlier days has undergone lots of changes in recent times. As accounting is a dynamic subject, its scope and area of operation have been always increasing keeping pace with the changes in socio-economic changes. As a result of continuous research in this field the new areas of application of accounting principles and policies are emerged. National accounting, human resources accounting and social Accounting are examples of the new areas of application of accounting systems.

MAIN OBJECTIVES OF ACCOUNTING:

To keep systematic records: Accounting is done to keep a systematic record of financial transactions. In the absence of accounting there would have been terrific burden on human memory which in most cases would have been impossible to bear. To protect business properties:

Accounting provides protection to business properties from unjustified and unwarranted us. This is possible on account of accounting supplying the information to the manager or the proprietor. To ascertain the operational profit or loss: Accounting helps is ascertaining the net profit earned or loss suffered on account of carrying the business. This is done by keeping a proper record of revenues and expenses of a particular period. The profit and loss account is prepared at the end of a period and if the amount of revenue for the period is more than the expenditure incurred in earning that revenue, there is said to be a profit. In case the expenditure exceeds the revenue, there is said to be a loss. To ascertain the financial position of business: The profit and loss account gives the amount of profit or loss made by the business during a particular period. However, it is not enough. The businessman must know about his financial position i.e., where he stands; what he owes and what he owns? This objective is served by the balance sheet or position statement. To facilitate rational decision making: Accounting these days has taken upon itself the task of collection, analysis and reporting of information at the required points of time to the required levels of authority in order to facilitate rational decision making.

BRANCHES OF ACCOUNTING
1.Book-Keeping: Primary recording of the day-to-day transactions of any business unit and their subsequent posting into the Ledger Accounts are the functions of this part of accounting. As this part of the job of the Accountant is only keeping the proper records, it is therefore termed as Book-Keeping. 2.Accounting: To prepare the Trial Balance and thereby to check the arithmetical accuracy of the books and records, to prepare the Revenue statements of Profit or Loss Accounts, to prepare the statement of Affairs or Balance Sheets, or , in other words, to prepare the Final Accounts and also to make plans and programmes for smooth running of this part of Accounting procedures and to act accordingly are, in short, the functions of the Accountant. This of his work is generally termed as accounting. 3.Cost Accounting: In any manufacturing concern, it is necessary to keep the records of daily stocks in hand, their issues and receipts, payment of wages, calculated regarding overhead charges, fixing the sale-price of the products, to prepare the budget and thereby to help in cost control etc. These functions are the functions of the Cost Accountant.

4. Management Accounting: The present-day Management is very much dependent on the Accountant in all the levels of managerial activities. By furnishing regular reports regarding various necessary information required daily by the management, the Accountant very ably helps in their work. Cost Control, Quality Control, Budgetary Control, Planning etc.are therefore, the functions of the Management Accountant. 5. Decision Accounting: This means that part of the functions of the Accountant by which he prepares and presents necessary information to the Management for making decisions. This function is one which has developed a great during the recent years. As and when there arises a particular problem in any business unit, the accounting personnel are thereupon called to present the necessary information in all possible details and in a most appropriate manner. Decision Accounting is thus, a part of the Managerial Accounting. 6.Household Accounting: With the development of the Socialistic Pattern of economy and the emergence of the Welfare States, the present-days Governments in all the countries in the World are becoming more and more interested in collecting taxes not only form the corporate bodies of form the employed persons but also from the selfemployed men and professional personalities. These types of persons are now required to maintain their professional accounts Household Income and Expenditure Accounts separately. 7. Government Accounting: Government Accounting is quite different from Commercial Accounting. This is because in Welfare States is present day World, any Government has to collect taxes, compute National Income, fix the Gross National Product Target, ascertain the Balance of Payments position etc.governments, therefore have their own system of Accounting which is called Government Accounting. 8. Auditing: Whether the Books of Accounting have been maintained correctly or not has to be proved. For this purpose, the Accounts are to be checked by some qualified persons from the Book of Prime entry up to the Final Accounts every year. This is also necessary for the benefit of the share-holders as well as for the Government which will collect taxes on the basis of the Published Accounts.

Users of accounting information

Internal users (Primary Users) of accounting information include the following: Management: for analyzing the organization's performance and position and taking appropriate measures to improve the company results. Employees: for assessing company's profitability and its consequence on their future remuneration and job security.

Owners: for analyzing the viability and profitability of their investment and determining any future course of action. Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements. External users (Secondary Users) of accounting information include the following: Creditors: for determining the credit worthiness of the organization. Terms of credit are set by creditors according to the assessment of their customers' financial health. Creditors include suppliers as well as lenders of finance such as banks. Tax Authourities: for determining the credibility of the tax returns filed on behalf of the company. Investors: for analyzing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company. Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term. Regulatory Authorities: for ensuring that the company's disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such information in forming their decisions. External users are communicated accounting information usually in the form of financial statements. The purpose of financial statements is to cater for the needs of such diverse users of accounting information in order to assist them in making sound financial decisions.

BASIC PROFESSIONAL VALUES AND ETHICS

According to the code, a professional accountant shall comply with the following fundamental principles: (a) Integrity to be straightforward and honest in all professional and business relationships. (b) Objectivity to not allow bias, conflict of interest or undue influence of others to override professional or business judgments. (c) Professional Competence and Due Care to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques and act diligently and in accordance with applicable technical and professional standards. (d) Confidentiality to respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such

information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the professional accountant or third parties. (e) Professional Behavior to comply with relevant laws and regulations and avoid any action that discredits the profession.

Basic forms of ownership / organizations and their activities

Although forms of business ownership vary by jurisdiction, there are several common forms: Sole proprietorship: A sole proprietorship is a business owned by one person. The owner may operate on his or her own or may employ others. The owner of the business has total and unlimited personal liability of the debts incurred by the business. Partnership: A partnership is a form of business in which two or more people operate for the common goal of making profit. Each partner has total and unlimited personal liability of the debts incurred by the partnership. There are three typical classifications of partnerships: general partnerships, limited partnerships, and limited liability partnerships. Corporation: A business corporation is a for-profit, limited liability entity that has a separate legal personality from its members. A corporation is owned by multiple shareholders and is overseen by a board of directors, which hires the business's managerial staff. Cooperative: Often referred to as a "co-op business" or "co-op", a cooperative is a for-profit, limited liability entity that differs from a corporation in that it has members, as opposed to shareholders, who share decision-making authority. Cooperatives are typically classified as either consumer cooperatives or worker cooperatives. Cooperatives are fundamental to the ideology of economic democracy.

Guidelines on Basic Accounting Principles and Concepts

GAAP is the framework, rules and guidelines of the financial accounting profession with a purpose of standardizing the accounting concepts, principles and procedures. Here are the basic accounting principles and concepts under this framework: 1. Business Entity A business is considered a separate entity from the owner(s) and should be treated separately. Any personal transactions of its owner should not be recorded in the business accounting book, vice versa. Unless the owners personal transaction involves adding and/or withdrawing resources from the business. 2. Going Concern It assumes that an entity will continue to operate indefinitely. In this basis, assets are recorded based on their original cost and not on market value. Assets are assumed to be used for an indefinite period of time and not intended to be sold immediately.

3. Monetary Unit The business financial transactions recorded and reported should be in monetary unit, such as US Dollar, Canadian Dollar, Euro, etc. Thus, any non-financial or nonmonetary information that cannot be measured in a monetary unit are not recorded in the accounting books, but instead, a memorandum will be used. 4. Historical Cost All business resources acquired should be valued and recorded based on the actual cash equivalent or original cost of acquisition, not the prevailing market value or future value. Exception to the rule is when the business is in the process of closure and liquidation. 5. Matching This principle requires that revenue recorded, in a given accounting period, should have an equivalent expense recorded, in order to show the true profit of the business. 6. Accounting Period This principle entails a business to complete the whole accounting process of a business over a specific operating time period. It may be monthly, quarterly or annually. For annual accounting period, it may follow a Calendar or Fiscal Year. 7. Conservatism This principle states that given two options in the valuation of business transactions, the amount recorded should be the lower rather than the higher value. 8. Consistency This principle ensures consistency in the accounting procedures used by the business entity from one accounting period to the next. It allows fair comparison of financial information between two accounting periods. 9. Materiality Ideally, business transactions that may affect the decision of a user of financial information are considered important or material, thus, must be reported properly. This principle allows errors or violations of accounting valuation involving immaterial and small amount of recorded business transaction. 10. Objectivity This principle requires recorded business transactions should have some form of impartial supporting evidence or documentation. Also, it entails that bookkeeping and financial recording should be performed with independence, thats free of bias and prejudice. 11. Accrual This principle requires that revenue should be recorded in the period it is earned, regardless of the time the cash is received. The same is true for expense. Expense should be recognized and recorded at the time it is incurred, regardless of the time that cash is paid. There are three major elements of accounting: Assets, Liabilities, and Capital. These terms are used widely so it is necessary that we take a look at each element. Also, it is important to know what they are before we try to understand how they relate to each other in the accounting equation and in the accounting cycle.

ACCOUNTING ELEMENTS OR VALUES

The term "account" is used often in this tutorial. Thus, we need to define it before we proceed. In accounting, an account is a storage unit used to collect and store information of similar nature. For example, "Cash". Cash is an account that stores all transactions that involve cash receipts and cash payments. All cash receipts are recorded as increase in Cash and all cash disbursements are recorded as deductions to the same account. Another example, "Building". Suppose a company acquires a building and pays in cash. That transaction would be recorded in the "Building" account for the acquisition of the building and in the "Cash" account for the payment in cash. Assets Assets refer to resources owned and controlled by the entity as a result of past transactions and events and from which future economic benefits are expected to flow to the entity. In simple terms, assets are properties or rights owned by the business. They may be classified as current or non-current. A. Current assets Assets are considered current if they are held for the purpose of being traded, expected to be realized or consumed within twelve months after the end of the period or its normal operating cycle (whichever is longer), or if it is cash. Examples of current asset accounts are: 5. Cash bills, coins, funds for current purposes, checks, cash in bank 6. Receivables Accounts Receivable (receivable from customers), Notes Receivable (receivables supported by promissory notes), Rent Receivable, Interest Receivable, Due from Employees (or Advances to Employees), and others Allowance for Doubtful Accounts This is a valuation account which represents the estimated uncollectible amount of accounts receivable. It is considered a contraasset account and is presented as a deduction to the related asset, accounts receivable. Doubtful accounts are discussed in detail in another lesson. 7. Inventories assets held for sale in the ordinary course of business 8. Prepaid expenses expenses paid in advance, such as, Prepaid Rent, Prepaid Insurance, Prepaid Advertising, and Office Supplies B. Non-current assets Assets that do not meet the criteria to be classified as current. Hence, they are long-term in nature useful for a period longer that 12 months or the company's normal operating cycle. Examples of non-current asset accounts include: 7. Long-term investments investments for long-term purposes such as investment in stocks, bonds, and properties; and funds set up for long-term purposes 8. Land land area owned for business operations (not for sale) 9. Building such as office building, a factory, warehouse, or store 10. Equipment Machinery, Furniture and Fixtures (shelves, tables, chairs, etc.), Office Equipment, Computer Equipment, Delivery Equipment, and others Accumulated Depreciation This is a valuation account which represents the cumulative depreciation expense. It is considered a contra-asset account and is

presented as a deduction to the related assets, building and equipment. Depreciation is discussed in detail in another lesson. 11. Intangibles long-term assets with no physical substance, such as goodwill, trademark, copyright, etc. 12. Other non-current assets Liabilities Liabilities are economic obligations or payables of the business. They represent claims by other parties (aside from the owners) against the assets of a company. Company assets come from 2 major sources borrowings from lenders or creditors, and contributions by the owners. The first refers to liabilities. Like assets, liabilities may be classified as either current or non-current. A. Current liabilities A liability is considered current if it is due within 12 months after the end of the balance sheet date, or its normal operating cycle. In other words, they are to be paid next year counted from the end of the current period. If the company's normal operating cycle is longer than 12 months, a liability is considered current if it is due within the operating cycle. Current liabilities include: 6. Trade and other payables such as Accounts Payable, Notes Payable, Interest Payable, Rent Payable, Accrued Expenses, etc. 7. Current provisions estimated short-term liabilities that are probable and can be measured reliably 8. Short-term borrowings financing arrangements, credit arrangements or loans that are short-term in nature 9. Current-portion of a long-term liability the portion of a long-term borrowing that is currently due (for example, in long-term loans that are to be paid in annual installments, the portion to be paid next year is considered a current liability) 10. Current tax liabilities taxes for the period and currently payable B. Non-current liabilities Liabilities are considered non-current if they are not currently payable, i.e. they are not due within the next 12 months after the end of the accounting period or the company's normal operating cycle, whichever is shorter. In other words, non-current liabilities are those that do not meet the criteria to be considered current. Hah! Make sense? Non-current liabilities include: 4. Long-term notes, bonds, and mortgage payables; 5. Deferred tax liabilities; and 6. Other long-term obligations Capital Also known as net assets or equity, capital refers to what is left to the owners after all liabilities are settled. Simply stated, capital is equal to total assets minus total liabilities. Capital is affected by the following: 5. Initial and additional contributions of owner/s (investments), 6. Withdrawals made by owner/s (dividends for corporations), 7. Income, and 8. Expenses.

Owner contributions and income increase capital. Withdrawals (or dividends) and expenses decrease it. The terms used to refer to a company's capital portion varies according to the form of ownership. In a sole proprietorship business, the capital is often called Owner's Equity or Owner's Capital; in partnerships, it is called Partners' Equity or Partners' Capital;and in corporations, Stockholders' Equity. In addition to the three elements mentioned above, there are two items that are also considered as key elements in accounting. They are income and expense. Nonetheless, these items are ultimately included as part of capital. Income Income refers to an increase in economic benefit during the accounting period in the form of inflow or increase in asset or decrease in liability that result in increase in equity, other than contribution from owners. Income encompasses revenues and gains. Revenues refer to the amounts earned from the companys ordinary course of business such as professional fees or service revenue for service companies andsales for merchandising and manufacturing concerns. Gains come from other activities, such as gain in selling old equipment, gain on sale of short-term investments, and other gains. Income is measured every period and is ultimately included in the capital account. Examples of income accounts are: Service Revenue, Professional Fees, Rent Income, Commission Income, Interest Income, Royalty Income, and Sales. Expense Expenses are decreases in economic benefit during the accounting period in the form of an outflow or decrease in asset or increase in liability that result in decrease in equity, other than distribution to owners. Expenses include ordinary expenses such as Cost of Sales, Advertising Expense, Rent Expense, Salaries Expense, Income Tax, Repairs Expense, etc.; and lossessuch as Loss from Fire, Typhoon Loss, and Loss from Theft. Like income, expenses are also measured every period and then closed as part of capital. Net income refers to all income minus all expenses. Conclusion And we've come to the end of this lesson. We have covered all the elements of accounting. For a recap: assets are properties owned by the business; liabilities are obligations to other parties; and, capital refers to the portion of the assets available to the owners of the business. DEFINITION OF ACCOUNTING The systematic recording, reporting, and analysis of financial transactions of a business. The person in charge of accounting is known as an accountant, and this individual is typically required to follow a set of rules and regulations, such as the Generally Accepted Accounting Principles.

Accounting allows a company to analyze the financial performance of the business, and look at statistics such as net profit. PURPOSE OF ACCOUNTING The purpose of accounting is to accumulate and report on financial information about the performance, financial position, and cash flows of a business. This information is then used to reach decisions about how to manage the business, or invest in it, or lend money to it.This information is accumulated in accounting records with accounting transactions, which are recorded either through such standardized business transactions as customer invoicing or supplierinvoices, or through more specialized transactions, known as journal entries.Once this financial information has been stored in the accounting records, it is usually compiled into financial statements, which include the following documents: - INOME STATEMENT BALANCE SHEET STATEMENT OF CASH FLOWS STATEMENT OF RETAINED EARNINGS

Nature of Accounting
We know Accounting is the systematic recording of financial transactions and presentation of the related information of the appropriate persons. The basic features of accounting are as follows: 1. Accounting is a process: A process refers to the method of performing any specific job step by step according to the objectives, or target. Accounting is identified as a process as it performs the specific task of collecting, processing and communicating financial information. In doing so, it follows some definite steps like collection of data recording, classification summarization, finalization and reporting. 2. Accounting is an art: Accounting is an art of recording, classifying, summarizing and finalizing the financial data. The word art refers to the way of performing something. It is a behavioral knowledge involving certain creativity and skill that may help us to attain some specific objectives. Accounting is a systematic method consisting of definite techniques and its proper application requires applied skill and expertise. So, by nature accounting is an art. 3. Accounting is means and not an end: Accounting finds out the financial results and position of an entity and the same time, it communicates this information to its users. The users then take their own decisions on the basis of such information. So, it can be said that mere keeping of accounts can be the primary objective of any person or entity. On the other hand, the main objective may be identified as taking decisions on the basis of financial information supplied by accounting. Thus, accounting itself is not an objective, it helps attaining a specific objective. So it is said the accounting is a means to an end and it is not an end in itself. 4. Accounting deals with financial information and transactions; Accounting records the financial transactions and date after classifying the same and finalizes their result for a definite period for conveying them to their users. So, from starting to the end, at every stage, accounting deals with financial information. Only financial information is its subject matter. It does not deal with non-monetary information of non-

financial aspect. 5. Accounting is an information system: Accounting is recognized and characterized as a storehouse of information. As a service function, it collects processes and communicates financial information of any entity. This discipline of knowledge has been evolved out to meet the need of financial information required by different interested groups.

What are the important functions of accounting.

Record Keeping Function:The primary function of accounting is to keep a systematic record of financial transaction - journalisation, posting and preparation of final statements. The purpose of this function is toreport regularly to the interested parties by means of financial statements. Protect Business Property:The second function of accounting is to protect the property of business from unjustified and unwanted use. The accountant thus has to design such a system of accounting which protect its assets from an unjustified and unwanted use. Legal Requirement Function:The third function of accounting is to devise such a system as will meet the legal requirements. Under the provision of law, a business man has to file various statements e.g.,income tax returns, returns for sales tax purpose etc. Accounting system aims at fulfilling the requirements of law. Accounting is a base, with the help of which various returns, documents, statements etc., are prepared. Communicating the Results:Accounting is the language of business. Various transactions are communicated through accounting. There are many parties owners, creditors, government, employees etc, who are interested in knowing the results of the firm. The fourth function of accounting is to communicate the results to interested parties. The accounting shows a real and true position of the firm of the business.

Scope of Accounting:
Accounting has got a very wide scope and area of application. Its use is not confined to the business world alone, but spread over in all the spheres of the society and in all professions. Now-a-days, in any social institution or professional activity, whether that is profit earning or not, financial transactions must take place. So there arises the need for recording and summarizing these transactions when they occur and the necessity of finding out the net result of the same after the expiry of a certain fixed period. Besides, the is also the need for interpretation and communication of those information to the appropriate persons. Only accounting use can help overcome these problems. In the modern world, accounting system is practiced no only in all the business institutions but also in many non-trading institutions like Schools, Colleges, Hospitals, Charitable Trust Clubs, Co-operative Society etc.and also Government and Local SelfGovernment in the form of Municipality, Panchayat.The professional persons like Medical practitioners, practicing Lawyers, Chartered Accountants etc.also adopt some suitable types of accounting methods. As a matter of fact, accounting methods are

used by all who are involved in a series of financial transactions. The scope of accounting as it was in earlier days has undergone lots of changes in recent times. As accounting is a dynamic subject, its scope and area of operation have been always increasing keeping pace with the changes in socio-economic changes. As a result of continuous research in this field the new areas of application of accounting principles and policies are emerged. National accounting, human resources accounting and social Accounting are examples of the new areas of application of accounting systems.

MAIN OBJECTIVES OF ACCOUNTING:

To keep systematic records: Accounting is done to keep a systematic record of financial transactions. In the absence of accounting there would have been terrific burden on human memory which in most cases would have been impossible to bear. To protect business properties: Accounting provides protection to business properties from unjustified and unwarranted us. This is possible on account of accounting supplying the information to the manager or the proprietor. To ascertain the operational profit or loss: Accounting helps is ascertaining the net profit earned or loss suffered on account of carrying the business. This is done by keeping a proper record of revenues and expenses of a particular period. The profit and loss account is prepared at the end of a period and if the amount of revenue for the period is more than the expenditure incurred in earning that revenue, there is said to be a profit. In case the expenditure exceeds the revenue, there is said to be a loss. To ascertain the financial position of business: The profit and loss account gives the amount of profit or loss made by the business during a particular period. However, it is not enough. The businessman must know about his financial position i.e., where he stands; what he owes and what he owns? This objective is served by the balance sheet or position statement. To facilitate rational decision making: Accounting these days has taken upon itself the task of collection, analysis and reporting of information at the required points of time to the required levels of authority in order to facilitate rational decision making.

BRANCHES OF ACCOUNTING
1.Book-Keeping: Primary recording of the day-to-day transactions of any business unit and their subsequent posting into the Ledger Accounts are the functions of this

part of accounting. As this part of the job of the Accountant is only keeping the proper records, it is therefore termed as Book-Keeping. 2.Accounting: To prepare the Trial Balance and thereby to check the arithmetical accuracy of the books and records, to prepare the Revenue statements of Profit or Loss Accounts, to prepare the statement of Affairs or Balance Sheets, or , in other words, to prepare the Final Accounts and also to make plans and programmes for smooth running of this part of Accounting procedures and to act accordingly are, in short, the functions of the Accountant. This of his work is generally termed as accounting. 3.Cost Accounting: In any manufacturing concern, it is necessary to keep the records of daily stocks in hand, their issues and receipts, payment of wages, calculated regarding overhead charges, fixing the sale-price of the products, to prepare the budget and thereby to help in cost control etc. These functions are the functions of the Cost Accountant. 4. Management Accounting: The present-day Management is very much dependent on the Accountant in all the levels of managerial activities. By furnishing regular reports regarding various necessary information required daily by the management, the Accountant very ably helps in their work. Cost Control, Quality Control, Budgetary Control, Planning etc.are therefore, the functions of the Management Accountant. 5. Decision Accounting: This means that part of the functions of the Accountant by which he prepares and presents necessary information to the Management for making decisions. This function is one which has developed a great during the recent years. As and when there arises a particular problem in any business unit, the accounting personnel are thereupon called to present the necessary information in all possible details and in a most appropriate manner. Decision Accounting is thus, a part of the Managerial Accounting. 6.Household Accounting: With the development of the Socialistic Pattern of economy and the emergence of the Welfare States, the present-days Governments in all the countries in the World are becoming more and more interested in collecting taxes not only form the corporate bodies of form the employed persons but also from the selfemployed men and professional personalities. These types of persons are now required to maintain their professional accounts Household Income and Expenditure Accounts separately. 7. Government Accounting: Government Accounting is quite different from Commercial Accounting. This is because in Welfare States is present day World, any Government has to collect taxes, compute National Income, fix the Gross National Product Target, ascertain the Balance of Payments position etc.governments,

therefore have their own system of Accounting which is called Government Accounting. 8. Auditing: Whether the Books of Accounting have been maintained correctly or not has to be proved. For this purpose, the Accounts are to be checked by some qualified persons from the Book of Prime entry up to the Final Accounts every year. This is also necessary for the benefit of the share-holders as well as for the Government which will collect taxes on the basis of the Published Accounts.

Users of accounting information

Internal users (Primary Users) of accounting information include the following: Management: for analyzing the organization's performance and position and taking appropriate measures to improve the company results. Employees: for assessing company's profitability and its consequence on their future remuneration and job security. Owners: for analyzing the viability and profitability of their investment and determining any future course of action. Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements. External users (Secondary Users) of accounting information include the following: Creditors: for determining the credit worthiness of the organization. Terms of credit are set by creditors according to the assessment of their customers' financial health. Creditors include suppliers as well as lenders of finance such as banks. Tax Authourities: for determining the credibility of the tax returns filed on behalf of the company. Investors: for analyzing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company. Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term. Regulatory Authorities: for ensuring that the company's disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such information in forming their decisions. External users are communicated accounting information usually in the form of financial statements. The purpose of financial statements is to cater for the needs of such diverse users of accounting information in order to assist them in making sound financial decisions.

BASIC PROFESSIONAL VALUES AND ETHICS

According to the code, a professional accountant shall comply with the following fundamental principles: (a) Integrity to be straightforward and honest in all professional and business relationships. (b) Objectivity to not allow bias, conflict of interest or undue influence of others to override professional or business judgments. (c) Professional Competence and Due Care to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques and act diligently and in accordance with applicable technical and professional standards. (d) Confidentiality to respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the professional accountant or third parties. (e) Professional Behavior to comply with relevant laws and regulations and avoid any action that discredits the profession.

Basic forms of ownership / organizations and their activities

Although forms of business ownership vary by jurisdiction, there are several common forms: Sole proprietorship: A sole proprietorship is a business owned by one person. The owner may operate on his or her own or may employ others. The owner of the business has total and unlimited personal liability of the debts incurred by the business. Partnership: A partnership is a form of business in which two or more people operate for the common goal of making profit. Each partner has total and unlimited personal liability of the debts incurred by the partnership. There are three typical classifications of partnerships: general partnerships, limited partnerships, and limited liability partnerships. Corporation: A business corporation is a for-profit, limited liability entity that has a separate legal personality from its members. A corporation is owned by multiple shareholders and is overseen by a board of directors, which hires the business's managerial staff. Cooperative: Often referred to as a "co-op business" or "co-op", a cooperative is a for-profit, limited liability entity that differs from a corporation in that it has members, as opposed to shareholders, who share decision-making authority. Cooperatives are

typically classified as either consumer cooperatives or worker cooperatives. Cooperatives are fundamental to the ideology of economic democracy.

Guidelines on Basic Accounting Principles and Concepts

GAAP is the framework, rules and guidelines of the financial accounting profession with a purpose of standardizing the accounting concepts, principles and procedures. Here are the basic accounting principles and concepts under this framework: 1. Business Entity A business is considered a separate entity from the owner(s) and should be treated separately. Any personal transactions of its owner should not be recorded in the business accounting book, vice versa. Unless the owners personal transaction involves adding and/or withdrawing resources from the business. 2. Going Concern It assumes that an entity will continue to operate indefinitely. In this basis, assets are recorded based on their original cost and not on market value. Assets are assumed to be used for an indefinite period of time and not intended to be sold immediately. 3. Monetary Unit The business financial transactions recorded and reported should be in monetary unit, such as US Dollar, Canadian Dollar, Euro, etc. Thus, any non-financial or nonmonetary information that cannot be measured in a monetary unit are not recorded in the accounting books, but instead, a memorandum will be used. 4. Historical Cost All business resources acquired should be valued and recorded based on the actual cash equivalent or original cost of acquisition, not the prevailing market value or future value. Exception to the rule is when the business is in the process of closure and liquidation. 5. Matching This principle requires that revenue recorded, in a given accounting period, should have an equivalent expense recorded, in order to show the true profit of the business. 6. Accounting Period This principle entails a business to complete the whole accounting process of a business over a specific operating time period. It may be monthly, quarterly or annually. For annual accounting period, it may follow a Calendar or Fiscal Year. 7. Conservatism This principle states that given two options in the valuation of business transactions, the amount recorded should be the lower rather than the higher value. 8. Consistency This principle ensures consistency in the accounting procedures used by the business entity from one accounting period to the next. It allows fair comparison of financial information between two accounting periods. 9. Materiality Ideally, business transactions that may affect the decision of a user of financial information are considered important or material, thus, must be reported properly. This

principle allows errors or violations of accounting valuation involving immaterial and small amount of recorded business transaction. 10. Objectivity This principle requires recorded business transactions should have some form of impartial supporting evidence or documentation. Also, it entails that bookkeeping and financial recording should be performed with independence, thats free of bias and prejudice. 11. Accrual This principle requires that revenue should be recorded in the period it is earned, regardless of the time the cash is received. The same is true for expense. Expense should be recognized and recorded at the time it is incurred, regardless of the time that cash is paid. There are three major elements of accounting: Assets, Liabilities, and Capital. These terms are used widely so it is necessary that we take a look at each element. Also, it is important to know what they are before we try to understand how they relate to each other in the accounting equation and in the accounting cycle.

ACCOUNTING ELEMENTS OR VALUES

The term "account" is used often in this tutorial. Thus, we need to define it before we proceed. In accounting, an account is a storage unit used to collect and store information of similar nature. For example, "Cash". Cash is an account that stores all transactions that involve cash receipts and cash payments. All cash receipts are recorded as increase in Cash and all cash disbursements are recorded as deductions to the same account. Another example, "Building". Suppose a company acquires a building and pays in cash. That transaction would be recorded in the "Building" account for the acquisition of the building and in the "Cash" account for the payment in cash. Assets Assets refer to resources owned and controlled by the entity as a result of past transactions and events and from which future economic benefits are expected to flow to the entity. In simple terms, assets are properties or rights owned by the business. They may be classified as current or non-current. A. Current assets Assets are considered current if they are held for the purpose of being traded, expected to be realized or consumed within twelve months after the end of the period or its normal operating cycle (whichever is longer), or if it is cash. Examples of current asset accounts are: 9. Cash bills, coins, funds for current purposes, checks, cash in bank 10. Receivables Accounts Receivable (receivable from customers), Notes Receivable (receivables supported by promissory notes), Rent Receivable, Interest Receivable, Due from Employees (or Advances to Employees), and others Allowance for Doubtful Accounts This is a valuation account which represents the estimated uncollectible amount of accounts receivable. It is considered a contra-

asset account and is presented as a deduction to the related asset, accounts receivable. Doubtful accounts are discussed in detail in another lesson. 11. Inventories assets held for sale in the ordinary course of business 12. Prepaid expenses expenses paid in advance, such as, Prepaid Rent, Prepaid Insurance, Prepaid Advertising, and Office Supplies B. Non-current assets Assets that do not meet the criteria to be classified as current. Hence, they are long-term in nature useful for a period longer that 12 months or the company's normal operating cycle. Examples of non-current asset accounts include: 13. Long-term investments investments for long-term purposes such as investment in stocks, bonds, and properties; and funds set up for long-term purposes 14. Land land area owned for business operations (not for sale) 15. Building such as office building, a factory, warehouse, or store 16. Equipment Machinery, Furniture and Fixtures (shelves, tables, chairs, etc.), Office Equipment, Computer Equipment, Delivery Equipment, and others Accumulated Depreciation This is a valuation account which represents the cumulative depreciation expense. It is considered a contra-asset account and is presented as a deduction to the related assets, building and equipment. Depreciation is discussed in detail in another lesson. 17. Intangibles long-term assets with no physical substance, such as goodwill, trademark, copyright, etc. 18. Other non-current assets Liabilities Liabilities are economic obligations or payables of the business. They represent claims by other parties (aside from the owners) against the assets of a company. Company assets come from 2 major sources borrowings from lenders or creditors, and contributions by the owners. The first refers to liabilities. Like assets, liabilities may be classified as either current or non-current. A. Current liabilities A liability is considered current if it is due within 12 months after the end of the balance sheet date, or its normal operating cycle. In other words, they are to be paid next year counted from the end of the current period. If the company's normal operating cycle is longer than 12 months, a liability is considered current if it is due within the operating cycle. Current liabilities include: 11. Trade and other payables such as Accounts Payable, Notes Payable, Interest Payable, Rent Payable, Accrued Expenses, etc. 12. Current provisions estimated short-term liabilities that are probable and can be measured reliably 13. Short-term borrowings financing arrangements, credit arrangements or loans that are short-term in nature 14. Current-portion of a long-term liability the portion of a long-term borrowing that is currently due (for example, in long-term loans that are to be paid in annual installments, the portion to be paid next year is considered a current liability)

15. Current tax liabilities taxes for the period and currently payable B. Non-current liabilities Liabilities are considered non-current if they are not currently payable, i.e. they are not due within the next 12 months after the end of the accounting period or the company's normal operating cycle, whichever is shorter. In other words, non-current liabilities are those that do not meet the criteria to be considered current. Hah! Make sense? Non-current liabilities include: 7. Long-term notes, bonds, and mortgage payables; 8. Deferred tax liabilities; and 9. Other long-term obligations Capital Also known as net assets or equity, capital refers to what is left to the owners after all liabilities are settled. Simply stated, capital is equal to total assets minus total liabilities. Capital is affected by the following: 9. Initial and additional contributions of owner/s (investments), 10. Withdrawals made by owner/s (dividends for corporations), 11. Income, and 12. Expenses. Owner contributions and income increase capital. Withdrawals (or dividends) and expenses decrease it. The terms used to refer to a company's capital portion varies according to the form of ownership. In a sole proprietorship business, the capital is often called Owner's Equity or Owner's Capital; in partnerships, it is called Partners' Equity or Partners' Capital;and in corporations, Stockholders' Equity. In addition to the three elements mentioned above, there are two items that are also considered as key elements in accounting. They are income and expense. Nonetheless, these items are ultimately included as part of capital. Income Income refers to an increase in economic benefit during the accounting period in the form of inflow or increase in asset or decrease in liability that result in increase in equity, other than contribution from owners. Income encompasses revenues and gains. Revenues refer to the amounts earned from the companys ordinary course of business such as professional fees or service revenue for service companies andsales for merchandising and manufacturing concerns. Gains come from other activities, such as gain in selling old equipment, gain on sale of short-term investments, and other gains. Income is measured every period and is ultimately included in the capital account. Examples of income accounts are: Service Revenue, Professional Fees, Rent Income, Commission Income, Interest Income, Royalty Income, and Sales. Expense Expenses are decreases in economic benefit during the accounting period in the form of an outflow or decrease in asset or increase in liability that result in decrease in equity, other than distribution to owners.

Expenses include ordinary expenses such as Cost of Sales, Advertising Expense, Rent Expense, Salaries Expense, Income Tax, Repairs Expense, etc.; and lossessuch as Loss from Fire, Typhoon Loss, and Loss from Theft. Like income, expenses are also measured every period and then closed as part of capital. Net income refers to all income minus all expenses. Conclusion And we've come to the end of this lesson. We have covered all the elements of accounting. For a recap: assets are properties owned by the business; liabilities are obligations to other parties; and, capital refers to the portion of the assets available to the owners of the business. DEFINITION OF ACCOUNTING The systematic recording, reporting, and analysis of financial transactions of a business. The person in charge of accounting is known as an accountant, and this individual is typically required to follow a set of rules and regulations, such as the Generally Accepted Accounting Principles. Accounting allows a company to analyze the financial performance of the business, and look at statistics such as net profit. PURPOSE OF ACCOUNTING The purpose of accounting is to accumulate and report on financial information about the performance, financial position, and cash flows of a business. This information is then used to reach decisions about how to manage the business, or invest in it, or lend money to it.This information is accumulated in accounting records with accounting transactions, which are recorded either through such standardized business transactions as customer invoicing or supplierinvoices, or through more specialized transactions, known as journal entries.Once this financial information has been stored in the accounting records, it is usually compiled into financial statements, which include the following documents: - INOME STATEMENT BALANCE SHEET STATEMENT OF CASH FLOWS STATEMENT OF RETAINED EARNINGS

Nature of Accounting
We know Accounting is the systematic recording of financial transactions and presentation of the related information of the appropriate persons. The basic features of accounting are as follows: 1. Accounting is a process: A process refers to the method of performing any specific job step by step according to the objectives, or target. Accounting is identified as a process as it performs the specific task of collecting, processing and communicating financial information. In doing so, it follows some definite steps like collection of data recording, classification summarization, finalization and reporting. 2. Accounting is an art: Accounting is an art of recording, classifying, summarizing

and finalizing the financial data. The word art refers to the way of performing something. It is a behavioral knowledge involving certain creativity and skill that may help us to attain some specific objectives. Accounting is a systematic method consisting of definite techniques and its proper application requires applied skill and expertise. So, by nature accounting is an art. 3. Accounting is means and not an end: Accounting finds out the financial results and position of an entity and the same time, it communicates this information to its users. The users then take their own decisions on the basis of such information. So, it can be said that mere keeping of accounts can be the primary objective of any person or entity. On the other hand, the main objective may be identified as taking decisions on the basis of financial information supplied by accounting. Thus, accounting itself is not an objective, it helps attaining a specific objective. So it is said the accounting is a means to an end and it is not an end in itself. 4. Accounting deals with financial information and transactions; Accounting records the financial transactions and date after classifying the same and finalizes their result for a definite period for conveying them to their users. So, from starting to the end, at every stage, accounting deals with financial information. Only financial information is its subject matter. It does not deal with non-monetary information of nonfinancial aspect. 5. Accounting is an information system: Accounting is recognized and characterized as a storehouse of information. As a service function, it collects processes and communicates financial information of any entity. This discipline of knowledge has been evolved out to meet the need of financial information required by different interested groups.

What are the important functions of accounting.

Record Keeping Function:The primary function of accounting is to keep a systematic record of financial transaction - journalisation, posting and preparation of final statements. The purpose of this function is toreport regularly to the interested parties by means of financial statements. Protect Business Property:The second function of accounting is to protect the property of business from unjustified and unwanted use. The accountant thus has to design such a system of accounting which protect its assets from an unjustified and unwanted use. Legal Requirement Function:The third function of accounting is to devise such a system as will meet the legal requirements. Under the provision of law, a business man has to file various statements e.g.,income tax returns, returns for sales tax purpose etc. Accounting system aims at fulfilling the requirements of law. Accounting is a base, with the help of which various returns, documents, statements etc., are prepared. Communicating the Results:Accounting is the language of business. Various transactions are communicated through accounting. There are many parties owners, creditors, government, employees etc, who are interested in knowing the results of the firm. The fourth function of accounting is to communicate the results to

interested parties. The accounting shows a real and true position of the firm of the business.

Scope of Accounting:
Accounting has got a very wide scope and area of application. Its use is not confined to the business world alone, but spread over in all the spheres of the society and in all professions. Now-a-days, in any social institution or professional activity, whether that is profit earning or not, financial transactions must take place. So there arises the need for recording and summarizing these transactions when they occur and the necessity of finding out the net result of the same after the expiry of a certain fixed period. Besides, the is also the need for interpretation and communication of those information to the appropriate persons. Only accounting use can help overcome these problems. In the modern world, accounting system is practiced no only in all the business institutions but also in many non-trading institutions like Schools, Colleges, Hospitals, Charitable Trust Clubs, Co-operative Society etc.and also Government and Local SelfGovernment in the form of Municipality, Panchayat.The professional persons like Medical practitioners, practicing Lawyers, Chartered Accountants etc.also adopt some suitable types of accounting methods. As a matter of fact, accounting methods are used by all who are involved in a series of financial transactions. The scope of accounting as it was in earlier days has undergone lots of changes in recent times. As accounting is a dynamic subject, its scope and area of operation have been always increasing keeping pace with the changes in socio-economic changes. As a result of continuous research in this field the new areas of application of accounting principles and policies are emerged. National accounting, human resources accounting and social Accounting are examples of the new areas of application of accounting systems.

MAIN OBJECTIVES OF ACCOUNTING:

To keep systematic records: Accounting is done to keep a systematic record of financial transactions. In the absence of accounting there would have been terrific burden on human memory which in most cases would have been impossible to bear. To protect business properties: Accounting provides protection to business properties from unjustified and unwarranted us. This is possible on account of accounting supplying the information to the manager or the proprietor. To ascertain the operational profit or loss: Accounting helps is ascertaining the net profit earned or loss suffered on account of carrying the business. This is done by keeping a proper record of revenues and expenses of a particular period. The profit and loss account is prepared at the end of a period and if the amount of revenue for the period is more than the expenditure

incurred in earning that revenue, there is said to be a profit. In case the expenditure exceeds the revenue, there is said to be a loss. To ascertain the financial position of business: The profit and loss account gives the amount of profit or loss made by the business during a particular period. However, it is not enough. The businessman must know about his financial position i.e., where he stands; what he owes and what he owns? This objective is served by the balance sheet or position statement. To facilitate rational decision making: Accounting these days has taken upon itself the task of collection, analysis and reporting of information at the required points of time to the required levels of authority in order to facilitate rational decision making.

BRANCHES OF ACCOUNTING
1.Book-Keeping: Primary recording of the day-to-day transactions of any business unit and their subsequent posting into the Ledger Accounts are the functions of this part of accounting. As this part of the job of the Accountant is only keeping the proper records, it is therefore termed as Book-Keeping. 2.Accounting: To prepare the Trial Balance and thereby to check the arithmetical accuracy of the books and records, to prepare the Revenue statements of Profit or Loss Accounts, to prepare the statement of Affairs or Balance Sheets, or , in other words, to prepare the Final Accounts and also to make plans and programmes for smooth running of this part of Accounting procedures and to act accordingly are, in short, the functions of the Accountant. This of his work is generally termed as accounting. 3.Cost Accounting: In any manufacturing concern, it is necessary to keep the records of daily stocks in hand, their issues and receipts, payment of wages, calculated regarding overhead charges, fixing the sale-price of the products, to prepare the budget and thereby to help in cost control etc. These functions are the functions of the Cost Accountant. 4. Management Accounting: The present-day Management is very much dependent on the Accountant in all the levels of managerial activities. By furnishing regular reports regarding various necessary information required daily by the management, the Accountant very ably helps in their work. Cost Control, Quality Control, Budgetary Control, Planning etc.are therefore, the functions of the Management Accountant. 5. Decision Accounting: This means that part of the functions of the Accountant by which he prepares and presents necessary information to the Management for making decisions. This function is one which has developed a great during the recent years.

As and when there arises a particular problem in any business unit, the accounting personnel are thereupon called to present the necessary information in all possible details and in a most appropriate manner. Decision Accounting is thus, a part of the Managerial Accounting. 6.Household Accounting: With the development of the Socialistic Pattern of economy and the emergence of the Welfare States, the present-days Governments in all the countries in the World are becoming more and more interested in collecting taxes not only form the corporate bodies of form the employed persons but also from the selfemployed men and professional personalities. These types of persons are now required to maintain their professional accounts Household Income and Expenditure Accounts separately. 7. Government Accounting: Government Accounting is quite different from Commercial Accounting. This is because in Welfare States is present day World, any Government has to collect taxes, compute National Income, fix the Gross National Product Target, ascertain the Balance of Payments position etc.governments, therefore have their own system of Accounting which is called Government Accounting. 8. Auditing: Whether the Books of Accounting have been maintained correctly or not has to be proved. For this purpose, the Accounts are to be checked by some qualified persons from the Book of Prime entry up to the Final Accounts every year. This is also necessary for the benefit of the share-holders as well as for the Government which will collect taxes on the basis of the Published Accounts.

Users of accounting information

Internal users (Primary Users) of accounting information include the following: Management: for analyzing the organization's performance and position and taking appropriate measures to improve the company results. Employees: for assessing company's profitability and its consequence on their future remuneration and job security. Owners: for analyzing the viability and profitability of their investment and determining any future course of action. Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements. External users (Secondary Users) of accounting information include the following: Creditors: for determining the credit worthiness of the organization. Terms of credit are set by creditors according to the assessment of their customers' financial health. Creditors include suppliers as well as lenders of finance such as banks. Tax Authourities: for determining the credibility of the tax returns filed on behalf of the company.

Investors: for analyzing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company. Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term. Regulatory Authorities: for ensuring that the company's disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such information in forming their decisions. External users are communicated accounting information usually in the form of financial statements. The purpose of financial statements is to cater for the needs of such diverse users of accounting information in order to assist them in making sound financial decisions.

BASIC PROFESSIONAL VALUES AND ETHICS

According to the code, a professional accountant shall comply with the following fundamental principles: (a) Integrity to be straightforward and honest in all professional and business relationships. (b) Objectivity to not allow bias, conflict of interest or undue influence of others to override professional or business judgments. (c) Professional Competence and Due Care to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques and act diligently and in accordance with applicable technical and professional standards. (d) Confidentiality to respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the professional accountant or third parties. (e) Professional Behavior to comply with relevant laws and regulations and avoid any action that discredits the profession.

Basic forms of ownership / organizations and their activities

Although forms of business ownership vary by jurisdiction, there are several common forms:

Sole proprietorship: A sole proprietorship is a business owned by one person. The owner may operate on his or her own or may employ others. The owner of the business has total and unlimited personal liability of the debts incurred by the business. Partnership: A partnership is a form of business in which two or more people operate for the common goal of making profit. Each partner has total and unlimited personal liability of the debts incurred by the partnership. There are three typical classifications of partnerships: general partnerships, limited partnerships, and limited liability partnerships. Corporation: A business corporation is a for-profit, limited liability entity that has a separate legal personality from its members. A corporation is owned by multiple shareholders and is overseen by a board of directors, which hires the business's managerial staff. Cooperative: Often referred to as a "co-op business" or "co-op", a cooperative is a for-profit, limited liability entity that differs from a corporation in that it has members, as opposed to shareholders, who share decision-making authority. Cooperatives are typically classified as either consumer cooperatives or worker cooperatives. Cooperatives are fundamental to the ideology of economic democracy.

Guidelines on Basic Accounting Principles and Concepts

GAAP is the framework, rules and guidelines of the financial accounting profession with a purpose of standardizing the accounting concepts, principles and procedures. Here are the basic accounting principles and concepts under this framework: 1. Business Entity A business is considered a separate entity from the owner(s) and should be treated separately. Any personal transactions of its owner should not be recorded in the business accounting book, vice versa. Unless the owners personal transaction involves adding and/or withdrawing resources from the business. 2. Going Concern It assumes that an entity will continue to operate indefinitely. In this basis, assets are recorded based on their original cost and not on market value. Assets are assumed to be used for an indefinite period of time and not intended to be sold immediately. 3. Monetary Unit The business financial transactions recorded and reported should be in monetary unit, such as US Dollar, Canadian Dollar, Euro, etc. Thus, any non-financial or nonmonetary information that cannot be measured in a monetary unit are not recorded in the accounting books, but instead, a memorandum will be used. 4. Historical Cost All business resources acquired should be valued and recorded based on the actual cash equivalent or original cost of acquisition, not the prevailing market value or future value. Exception to the rule is when the business is in the process of closure and liquidation.

5. Matching This principle requires that revenue recorded, in a given accounting period, should have an equivalent expense recorded, in order to show the true profit of the business. 6. Accounting Period This principle entails a business to complete the whole accounting process of a business over a specific operating time period. It may be monthly, quarterly or annually. For annual accounting period, it may follow a Calendar or Fiscal Year. 7. Conservatism This principle states that given two options in the valuation of business transactions, the amount recorded should be the lower rather than the higher value. 8. Consistency This principle ensures consistency in the accounting procedures used by the business entity from one accounting period to the next. It allows fair comparison of financial information between two accounting periods. 9. Materiality Ideally, business transactions that may affect the decision of a user of financial information are considered important or material, thus, must be reported properly. This principle allows errors or violations of accounting valuation involving immaterial and small amount of recorded business transaction. 10. Objectivity This principle requires recorded business transactions should have some form of impartial supporting evidence or documentation. Also, it entails that bookkeeping and financial recording should be performed with independence, thats free of bias and prejudice. 11. Accrual This principle requires that revenue should be recorded in the period it is earned, regardless of the time the cash is received. The same is true for expense. Expense should be recognized and recorded at the time it is incurred, regardless of the time that cash is paid. There are three major elements of accounting: Assets, Liabilities, and Capital. These terms are used widely so it is necessary that we take a look at each element. Also, it is important to know what they are before we try to understand how they relate to each other in the accounting equation and in the accounting cycle.

ACCOUNTING ELEMENTS OR VALUES

The term "account" is used often in this tutorial. Thus, we need to define it before we proceed. In accounting, an account is a storage unit used to collect and store information of similar nature. For example, "Cash". Cash is an account that stores all transactions that involve cash receipts and cash payments. All cash receipts are recorded as increase in Cash and all cash disbursements are recorded as deductions to the same account.

Another example, "Building". Suppose a company acquires a building and pays in cash. That transaction would be recorded in the "Building" account for the acquisition of the building and in the "Cash" account for the payment in cash. Assets Assets refer to resources owned and controlled by the entity as a result of past transactions and events and from which future economic benefits are expected to flow to the entity. In simple terms, assets are properties or rights owned by the business. They may be classified as current or non-current. A. Current assets Assets are considered current if they are held for the purpose of being traded, expected to be realized or consumed within twelve months after the end of the period or its normal operating cycle (whichever is longer), or if it is cash. Examples of current asset accounts are: 13. Cash bills, coins, funds for current purposes, checks, cash in bank 14. Receivables Accounts Receivable (receivable from customers), Notes Receivable (receivables supported by promissory notes), Rent Receivable, Interest Receivable, Due from Employees (or Advances to Employees), and others Allowance for Doubtful Accounts This is a valuation account which represents the estimated uncollectible amount of accounts receivable. It is considered a contraasset account and is presented as a deduction to the related asset, accounts receivable. Doubtful accounts are discussed in detail in another lesson. 15. Inventories assets held for sale in the ordinary course of business 16. Prepaid expenses expenses paid in advance, such as, Prepaid Rent, Prepaid Insurance, Prepaid Advertising, and Office Supplies B. Non-current assets Assets that do not meet the criteria to be classified as current. Hence, they are long-term in nature useful for a period longer that 12 months or the company's normal operating cycle. Examples of non-current asset accounts include: 19. Long-term investments investments for long-term purposes such as investment in stocks, bonds, and properties; and funds set up for long-term purposes 20. Land land area owned for business operations (not for sale) 21. Building such as office building, a factory, warehouse, or store 22. Equipment Machinery, Furniture and Fixtures (shelves, tables, chairs, etc.), Office Equipment, Computer Equipment, Delivery Equipment, and others Accumulated Depreciation This is a valuation account which represents the cumulative depreciation expense. It is considered a contra-asset account and is presented as a deduction to the related assets, building and equipment. Depreciation is discussed in detail in another lesson. 23. Intangibles long-term assets with no physical substance, such as goodwill, trademark, copyright, etc. 24. Other non-current assets Liabilities Liabilities are economic obligations or payables of the business. They represent claims by other parties (aside from the owners) against the assets of a company. Company

assets come from 2 major sources borrowings from lenders or creditors, and contributions by the owners. The first refers to liabilities. Like assets, liabilities may be classified as either current or non-current. A. Current liabilities A liability is considered current if it is due within 12 months after the end of the balance sheet date, or its normal operating cycle. In other words, they are to be paid next year counted from the end of the current period. If the company's normal operating cycle is longer than 12 months, a liability is considered current if it is due within the operating cycle. Current liabilities include: 16. Trade and other payables such as Accounts Payable, Notes Payable, Interest Payable, Rent Payable, Accrued Expenses, etc. 17. Current provisions estimated short-term liabilities that are probable and can be measured reliably 18. Short-term borrowings financing arrangements, credit arrangements or loans that are short-term in nature 19. Current-portion of a long-term liability the portion of a long-term borrowing that is currently due (for example, in long-term loans that are to be paid in annual installments, the portion to be paid next year is considered a current liability) 20. Current tax liabilities taxes for the period and currently payable B. Non-current liabilities Liabilities are considered non-current if they are not currently payable, i.e. they are not due within the next 12 months after the end of the accounting period or the company's normal operating cycle, whichever is shorter. In other words, non-current liabilities are those that do not meet the criteria to be considered current. Hah! Make sense? Non-current liabilities include: 10. Long-term notes, bonds, and mortgage payables; 11. Deferred tax liabilities; and 12. Other long-term obligations Capital Also known as net assets or equity, capital refers to what is left to the owners after all liabilities are settled. Simply stated, capital is equal to total assets minus total liabilities. Capital is affected by the following: 13. Initial and additional contributions of owner/s (investments), 14. Withdrawals made by owner/s (dividends for corporations), 15. Income, and 16. Expenses. Owner contributions and income increase capital. Withdrawals (or dividends) and expenses decrease it. The terms used to refer to a company's capital portion varies according to the form of ownership. In a sole proprietorship business, the capital is often called Owner's Equity or Owner's Capital; in partnerships, it is called Partners' Equity or Partners' Capital;and in corporations, Stockholders' Equity. In addition to the three elements mentioned above, there are two items that are also considered as key elements in accounting. They are income and expense. Nonetheless, these items are ultimately included as part of capital.

Income Income refers to an increase in economic benefit during the accounting period in the form of inflow or increase in asset or decrease in liability that result in increase in equity, other than contribution from owners. Income encompasses revenues and gains. Revenues refer to the amounts earned from the companys ordinary course of business such as professional fees or service revenue for service companies andsales for merchandising and manufacturing concerns. Gains come from other activities, such as gain in selling old equipment, gain on sale of short-term investments, and other gains. Income is measured every period and is ultimately included in the capital account. Examples of income accounts are: Service Revenue, Professional Fees, Rent Income, Commission Income, Interest Income, Royalty Income, and Sales. Expense Expenses are decreases in economic benefit during the accounting period in the form of an outflow or decrease in asset or increase in liability that result in decrease in equity, other than distribution to owners. Expenses include ordinary expenses such as Cost of Sales, Advertising Expense, Rent Expense, Salaries Expense, Income Tax, Repairs Expense, etc.; and lossessuch as Loss from Fire, Typhoon Loss, and Loss from Theft. Like income, expenses are also measured every period and then closed as part of capital. Net income refers to all income minus all expenses. Conclusion And we've come to the end of this lesson. We have covered all the elements of accounting. For a recap: assets are properties owned by the business; liabilities are obligations to other parties; and, capital refers to the portion of the assets available to the owners of the business. DEFINITION OF ACCOUNTING The systematic recording, reporting, and analysis of financial transactions of a business. The person in charge of accounting is known as an accountant, and this individual is typically required to follow a set of rules and regulations, such as the Generally Accepted Accounting Principles. Accounting allows a company to analyze the financial performance of the business, and look at statistics such as net profit. PURPOSE OF ACCOUNTING The purpose of accounting is to accumulate and report on financial information about the performance, financial position, and cash flows of a business. This information is then used to reach decisions about how to manage the business, or invest in it, or lend money to it.This information is accumulated in accounting records with accounting transactions, which are recorded either through such standardized business transactions as customer invoicing or supplierinvoices, or through more

specialized transactions, known as journal entries.Once this financial information has been stored in the accounting records, it is usually compiled into financial statements, which include the following documents: - INOME STATEMENT BALANCE SHEET STATEMENT OF CASH FLOWS STATEMENT OF RETAINED EARNINGS

Nature of Accounting
We know Accounting is the systematic recording of financial transactions and presentation of the related information of the appropriate persons. The basic features of accounting are as follows: 1. Accounting is a process: A process refers to the method of performing any specific job step by step according to the objectives, or target. Accounting is identified as a process as it performs the specific task of collecting, processing and communicating financial information. In doing so, it follows some definite steps like collection of data recording, classification summarization, finalization and reporting. 2. Accounting is an art: Accounting is an art of recording, classifying, summarizing and finalizing the financial data. The word art refers to the way of performing something. It is a behavioral knowledge involving certain creativity and skill that may help us to attain some specific objectives. Accounting is a systematic method consisting of definite techniques and its proper application requires applied skill and expertise. So, by nature accounting is an art. 3. Accounting is means and not an end: Accounting finds out the financial results and position of an entity and the same time, it communicates this information to its users. The users then take their own decisions on the basis of such information. So, it can be said that mere keeping of accounts can be the primary objective of any person or entity. On the other hand, the main objective may be identified as taking decisions on the basis of financial information supplied by accounting. Thus, accounting itself is not an objective, it helps attaining a specific objective. So it is said the accounting is a means to an end and it is not an end in itself. 4. Accounting deals with financial information and transactions; Accounting records the financial transactions and date after classifying the same and finalizes their result for a definite period for conveying them to their users. So, from starting to the end, at every stage, accounting deals with financial information. Only financial information is its subject matter. It does not deal with non-monetary information of nonfinancial aspect. 5. Accounting is an information system: Accounting is recognized and characterized as a storehouse of information. As a service function, it collects processes and communicates financial information of any entity. This discipline of knowledge has been evolved out to meet the need of financial information required by different interested groups.

What are the important functions of accounting.

Record Keeping Function:The primary function of accounting is to keep a systematic record of financial transaction - journalisation, posting and preparation of final

statements. The purpose of this function is toreport regularly to the interested parties by means of financial statements. Protect Business Property:The second function of accounting is to protect the property of business from unjustified and unwanted use. The accountant thus has to design such a system of accounting which protect its assets from an unjustified and unwanted use. Legal Requirement Function:The third function of accounting is to devise such a system as will meet the legal requirements. Under the provision of law, a business man has to file various statements e.g.,income tax returns, returns for sales tax purpose etc. Accounting system aims at fulfilling the requirements of law. Accounting is a base, with the help of which various returns, documents, statements etc., are prepared. Communicating the Results:Accounting is the language of business. Various transactions are communicated through accounting. There are many parties owners, creditors, government, employees etc, who are interested in knowing the results of the firm. The fourth function of accounting is to communicate the results to interested parties. The accounting shows a real and true position of the firm of the business.

Scope of Accounting:
Accounting has got a very wide scope and area of application. Its use is not confined to the business world alone, but spread over in all the spheres of the society and in all professions. Now-a-days, in any social institution or professional activity, whether that is profit earning or not, financial transactions must take place. So there arises the need for recording and summarizing these transactions when they occur and the necessity of finding out the net result of the same after the expiry of a certain fixed period. Besides, the is also the need for interpretation and communication of those information to the appropriate persons. Only accounting use can help overcome these problems. In the modern world, accounting system is practiced no only in all the business institutions but also in many non-trading institutions like Schools, Colleges, Hospitals, Charitable Trust Clubs, Co-operative Society etc.and also Government and Local SelfGovernment in the form of Municipality, Panchayat.The professional persons like Medical practitioners, practicing Lawyers, Chartered Accountants etc.also adopt some suitable types of accounting methods. As a matter of fact, accounting methods are used by all who are involved in a series of financial transactions. The scope of accounting as it was in earlier days has undergone lots of changes in recent times. As accounting is a dynamic subject, its scope and area of operation have been always increasing keeping pace with the changes in socio-economic changes. As a result of continuous research in this field the new areas of application of accounting principles and policies are emerged. National accounting, human resources accounting and social Accounting are examples of the new areas of application of accounting systems.

MAIN OBJECTIVES OF ACCOUNTING:

To keep systematic records: Accounting is done to keep a systematic record of financial transactions. In the absence of accounting there would have been terrific burden on human memory which in most cases would have been impossible to bear. To protect business properties: Accounting provides protection to business properties from unjustified and unwarranted us. This is possible on account of accounting supplying the information to the manager or the proprietor. To ascertain the operational profit or loss: Accounting helps is ascertaining the net profit earned or loss suffered on account of carrying the business. This is done by keeping a proper record of revenues and expenses of a particular period. The profit and loss account is prepared at the end of a period and if the amount of revenue for the period is more than the expenditure incurred in earning that revenue, there is said to be a profit. In case the expenditure exceeds the revenue, there is said to be a loss. To ascertain the financial position of business: The profit and loss account gives the amount of profit or loss made by the business during a particular period. However, it is not enough. The businessman must know about his financial position i.e., where he stands; what he owes and what he owns? This objective is served by the balance sheet or position statement. To facilitate rational decision making: Accounting these days has taken upon itself the task of collection, analysis and reporting of information at the required points of time to the required levels of authority in order to facilitate rational decision making.

BRANCHES OF ACCOUNTING
1.Book-Keeping: Primary recording of the day-to-day transactions of any business unit and their subsequent posting into the Ledger Accounts are the functions of this part of accounting. As this part of the job of the Accountant is only keeping the proper records, it is therefore termed as Book-Keeping. 2.Accounting: To prepare the Trial Balance and thereby to check the arithmetical accuracy of the books and records, to prepare the Revenue statements of Profit or Loss Accounts, to prepare the statement of Affairs or Balance Sheets, or , in other words, to prepare the Final Accounts and also to make plans and programmes for smooth running of this part of Accounting procedures and to act accordingly are, in short, the functions of the Accountant. This of his work is generally termed as accounting.

3.Cost Accounting: In any manufacturing concern, it is necessary to keep the records of daily stocks in hand, their issues and receipts, payment of wages, calculated regarding overhead charges, fixing the sale-price of the products, to prepare the budget and thereby to help in cost control etc. These functions are the functions of the Cost Accountant. 4. Management Accounting: The present-day Management is very much dependent on the Accountant in all the levels of managerial activities. By furnishing regular reports regarding various necessary information required daily by the management, the Accountant very ably helps in their work. Cost Control, Quality Control, Budgetary Control, Planning etc.are therefore, the functions of the Management Accountant. 5. Decision Accounting: This means that part of the functions of the Accountant by which he prepares and presents necessary information to the Management for making decisions. This function is one which has developed a great during the recent years. As and when there arises a particular problem in any business unit, the accounting personnel are thereupon called to present the necessary information in all possible details and in a most appropriate manner. Decision Accounting is thus, a part of the Managerial Accounting. 6.Household Accounting: With the development of the Socialistic Pattern of economy and the emergence of the Welfare States, the present-days Governments in all the countries in the World are becoming more and more interested in collecting taxes not only form the corporate bodies of form the employed persons but also from the selfemployed men and professional personalities. These types of persons are now required to maintain their professional accounts Household Income and Expenditure Accounts separately. 7. Government Accounting: Government Accounting is quite different from Commercial Accounting. This is because in Welfare States is present day World, any Government has to collect taxes, compute National Income, fix the Gross National Product Target, ascertain the Balance of Payments position etc.governments, therefore have their own system of Accounting which is called Government Accounting. 8. Auditing: Whether the Books of Accounting have been maintained correctly or not has to be proved. For this purpose, the Accounts are to be checked by some qualified persons from the Book of Prime entry up to the Final Accounts every year. This is also necessary for the benefit of the share-holders as well as for the Government which will collect taxes on the basis of the Published Accounts.

Users of accounting information

Internal users (Primary Users) of accounting information include the following: Management: for analyzing the organization's performance and position and taking appropriate measures to improve the company results. Employees: for assessing company's profitability and its consequence on their future remuneration and job security. Owners: for analyzing the viability and profitability of their investment and determining any future course of action. Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements. External users (Secondary Users) of accounting information include the following: Creditors: for determining the credit worthiness of the organization. Terms of credit are set by creditors according to the assessment of their customers' financial health. Creditors include suppliers as well as lenders of finance such as banks. Tax Authourities: for determining the credibility of the tax returns filed on behalf of the company. Investors: for analyzing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company. Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term. Regulatory Authorities: for ensuring that the company's disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such information in forming their decisions. External users are communicated accounting information usually in the form of financial statements. The purpose of financial statements is to cater for the needs of such diverse users of accounting information in order to assist them in making sound financial decisions.

BASIC PROFESSIONAL VALUES AND ETHICS

According to the code, a professional accountant shall comply with the following fundamental principles: (a) Integrity to be straightforward and honest in all professional and business relationships. (b) Objectivity to not allow bias, conflict of interest or undue influence of others to override professional or business judgments. (c) Professional Competence and Due Care to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and

techniques and act diligently and in accordance with applicable technical and professional standards. (d) Confidentiality to respect the confidentiality of information acquired as a result of professional and business relationships and, therefore, not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for the personal advantage of the professional accountant or third parties. (e) Professional Behavior to comply with relevant laws and regulations and avoid any action that discredits the profession.

Basic forms of ownership / organizations and their activities

Although forms of business ownership vary by jurisdiction, there are several common forms: Sole proprietorship: A sole proprietorship is a business owned by one person. The owner may operate on his or her own or may employ others. The owner of the business has total and unlimited personal liability of the debts incurred by the business. Partnership: A partnership is a form of business in which two or more people operate for the common goal of making profit. Each partner has total and unlimited personal liability of the debts incurred by the partnership. There are three typical classifications of partnerships: general partnerships, limited partnerships, and limited liability partnerships. Corporation: A business corporation is a for-profit, limited liability entity that has a separate legal personality from its members. A corporation is owned by multiple shareholders and is overseen by a board of directors, which hires the business's managerial staff. Cooperative: Often referred to as a "co-op business" or "co-op", a cooperative is a for-profit, limited liability entity that differs from a corporation in that it has members, as opposed to shareholders, who share decision-making authority. Cooperatives are typically classified as either consumer cooperatives or worker cooperatives. Cooperatives are fundamental to the ideology of economic democracy.

Guidelines on Basic Accounting Principles and Concepts

GAAP is the framework, rules and guidelines of the financial accounting profession with a purpose of standardizing the accounting concepts, principles and procedures. Here are the basic accounting principles and concepts under this framework: 1. Business Entity A business is considered a separate entity from the owner(s) and should be treated separately. Any personal transactions of its owner should not be recorded in the business accounting book, vice versa. Unless the owners personal transaction involves adding and/or withdrawing resources from the business.

2. Going Concern It assumes that an entity will continue to operate indefinitely. In this basis, assets are recorded based on their original cost and not on market value. Assets are assumed to be used for an indefinite period of time and not intended to be sold immediately. 3. Monetary Unit The business financial transactions recorded and reported should be in monetary unit, such as US Dollar, Canadian Dollar, Euro, etc. Thus, any non-financial or nonmonetary information that cannot be measured in a monetary unit are not recorded in the accounting books, but instead, a memorandum will be used. 4. Historical Cost All business resources acquired should be valued and recorded based on the actual cash equivalent or original cost of acquisition, not the prevailing market value or future value. Exception to the rule is when the business is in the process of closure and liquidation. 5. Matching This principle requires that revenue recorded, in a given accounting period, should have an equivalent expense recorded, in order to show the true profit of the business. 6. Accounting Period This principle entails a business to complete the whole accounting process of a business over a specific operating time period. It may be monthly, quarterly or annually. For annual accounting period, it may follow a Calendar or Fiscal Year. 7. Conservatism This principle states that given two options in the valuation of business transactions, the amount recorded should be the lower rather than the higher value. 8. Consistency This principle ensures consistency in the accounting procedures used by the business entity from one accounting period to the next. It allows fair comparison of financial information between two accounting periods. 9. Materiality Ideally, business transactions that may affect the decision of a user of financial information are considered important or material, thus, must be reported properly. This principle allows errors or violations of accounting valuation involving immaterial and small amount of recorded business transaction. 10. Objectivity This principle requires recorded business transactions should have some form of impartial supporting evidence or documentation. Also, it entails that bookkeeping and financial recording should be performed with independence, thats free of bias and prejudice. 11. Accrual This principle requires that revenue should be recorded in the period it is earned, regardless of the time the cash is received. The same is true for expense. Expense should be recognized and recorded at the time it is incurred, regardless of the time that cash is paid.

There are three major elements of accounting: Assets, Liabilities, and Capital. These terms are used widely so it is necessary that we take a look at each element. Also, it is important to know what they are before we try to understand how they relate to each other in the accounting equation and in the accounting cycle.

ACCOUNTING ELEMENTS OR VALUES

The term "account" is used often in this tutorial. Thus, we need to define it before we proceed. In accounting, an account is a storage unit used to collect and store information of similar nature. For example, "Cash". Cash is an account that stores all transactions that involve cash receipts and cash payments. All cash receipts are recorded as increase in Cash and all cash disbursements are recorded as deductions to the same account. Another example, "Building". Suppose a company acquires a building and pays in cash. That transaction would be recorded in the "Building" account for the acquisition of the building and in the "Cash" account for the payment in cash. Assets Assets refer to resources owned and controlled by the entity as a result of past transactions and events and from which future economic benefits are expected to flow to the entity. In simple terms, assets are properties or rights owned by the business. They may be classified as current or non-current. A. Current assets Assets are considered current if they are held for the purpose of being traded, expected to be realized or consumed within twelve months after the end of the period or its normal operating cycle (whichever is longer), or if it is cash. Examples of current asset accounts are: 17. Cash bills, coins, funds for current purposes, checks, cash in bank 18. Receivables Accounts Receivable (receivable from customers), Notes Receivable (receivables supported by promissory notes), Rent Receivable, Interest Receivable, Due from Employees (or Advances to Employees), and others Allowance for Doubtful Accounts This is a valuation account which represents the estimated uncollectible amount of accounts receivable. It is considered a contraasset account and is presented as a deduction to the related asset, accounts receivable. Doubtful accounts are discussed in detail in another lesson. 19. Inventories assets held for sale in the ordinary course of business 20. Prepaid expenses expenses paid in advance, such as, Prepaid Rent, Prepaid Insurance, Prepaid Advertising, and Office Supplies B. Non-current assets Assets that do not meet the criteria to be classified as current. Hence, they are long-term in nature useful for a period longer that 12 months or the company's normal operating cycle. Examples of non-current asset accounts include: 25. Long-term investments investments for long-term purposes such as investment in stocks, bonds, and properties; and funds set up for long-term purposes 26. Land land area owned for business operations (not for sale)

27. Building such as office building, a factory, warehouse, or store 28. Equipment Machinery, Furniture and Fixtures (shelves, tables, chairs, etc.), Office Equipment, Computer Equipment, Delivery Equipment, and others Accumulated Depreciation This is a valuation account which represents the cumulative depreciation expense. It is considered a contra-asset account and is presented as a deduction to the related assets, building and equipment. Depreciation is discussed in detail in another lesson. 29. Intangibles long-term assets with no physical substance, such as goodwill, trademark, copyright, etc. 30. Other non-current assets Liabilities Liabilities are economic obligations or payables of the business. They represent claims by other parties (aside from the owners) against the assets of a company. Company assets come from 2 major sources borrowings from lenders or creditors, and contributions by the owners. The first refers to liabilities. Like assets, liabilities may be classified as either current or non-current. A. Current liabilities A liability is considered current if it is due within 12 months after the end of the balance sheet date, or its normal operating cycle. In other words, they are to be paid next year counted from the end of the current period. If the company's normal operating cycle is longer than 12 months, a liability is considered current if it is due within the operating cycle. Current liabilities include: 21. Trade and other payables such as Accounts Payable, Notes Payable, Interest Payable, Rent Payable, Accrued Expenses, etc. 22. Current provisions estimated short-term liabilities that are probable and can be measured reliably 23. Short-term borrowings financing arrangements, credit arrangements or loans that are short-term in nature 24. Current-portion of a long-term liability the portion of a long-term borrowing that is currently due (for example, in long-term loans that are to be paid in annual installments, the portion to be paid next year is considered a current liability) 25. Current tax liabilities taxes for the period and currently payable B. Non-current liabilities Liabilities are considered non-current if they are not currently payable, i.e. they are not due within the next 12 months after the end of the accounting period or the company's normal operating cycle, whichever is shorter. In other words, non-current liabilities are those that do not meet the criteria to be considered current. Hah! Make sense? Non-current liabilities include: 13. Long-term notes, bonds, and mortgage payables; 14. Deferred tax liabilities; and 15. Other long-term obligations Capital Also known as net assets or equity, capital refers to what is left to the owners after all liabilities are settled. Simply stated, capital is equal to total assets minus total liabilities. Capital is affected by the following:

17. Initial and additional contributions of owner/s (investments), 18. Withdrawals made by owner/s (dividends for corporations), 19. Income, and 20. Expenses. Owner contributions and income increase capital. Withdrawals (or dividends) and expenses decrease it. The terms used to refer to a company's capital portion varies according to the form of ownership. In a sole proprietorship business, the capital is often called Owner's Equity or Owner's Capital; in partnerships, it is called Partners' Equity or Partners' Capital;and in corporations, Stockholders' Equity. In addition to the three elements mentioned above, there are two items that are also considered as key elements in accounting. They are income and expense. Nonetheless, these items are ultimately included as part of capital. Income Income refers to an increase in economic benefit during the accounting period in the form of inflow or increase in asset or decrease in liability that result in increase in equity, other than contribution from owners. Income encompasses revenues and gains. Revenues refer to the amounts earned from the companys ordinary course of business such as professional fees or service revenue for service companies andsales for merchandising and manufacturing concerns. Gains come from other activities, such as gain in selling old equipment, gain on sale of short-term investments, and other gains. Income is measured every period and is ultimately included in the capital account. Examples of income accounts are: Service Revenue, Professional Fees, Rent Income, Commission Income, Interest Income, Royalty Income, and Sales. Expense Expenses are decreases in economic benefit during the accounting period in the form of an outflow or decrease in asset or increase in liability that result in decrease in equity, other than distribution to owners. Expenses include ordinary expenses such as Cost of Sales, Advertising Expense, Rent Expense, Salaries Expense, Income Tax, Repairs Expense, etc.; and lossessuch as Loss from Fire, Typhoon Loss, and Loss from Theft. Like income, expenses are also measured every period and then closed as part of capital. Net income refers to all income minus all expenses. Conclusion And we've come to the end of this lesson. We have covered all the elements of accounting. For a recap: assets are properties owned by the business; liabilities are obligations to other parties; and, capital refers to the portion of the assets available to the owners of the business.