1 2 3 OF ACCOUNTING

By. Prof. Naveen.N Chartered Accountant

NEED FOR INFORMATION

INFORMATION

NON QUANTITATIVE INFORMATION

QUANTITATIVE INFORMATION

ACCOUNTING INFORMATION

NON ACCOUNTING INFORMATION

OPERATING INFORMATION

FINANCIAL ACCOUNTING

MANAGEMENT ACCOUNTING

DEFINITION OF ACCOUNTING

THE process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.
-American Accounting Association Committee

ACCOUNTING HISTORICAL ANTECEDENTS

When humans began keeping accounting records in their head ? Symbols recording transactions 3200BC Sumerian civilisation in Mesopotamia kept records in clay tablets. 1400BC In Greece slaves used as scribes and auditors, it was assumed that statements from slaves who could be tortured would be more reliable that those from freemen 990BC Scribes in Babylonia and Egypt received formal accounting training in school. 521-486BC Persia under Darius had government scribes who performed surprise audits of accounts of the province 4AD In Byzantine empire, Constantine founded a public administration school in which accounting was taught. 642-814AD - Roman empire under Charlemagne continued examples of government accountants and auditors. In the 15th century, branches of the Medici Bank were required to submit annual balance sheets to the main office in Florence.

ACCOUNTING A LANGUAGE
ACCOUNTING LANGUAGE OF BUSINESS. COMPLICATION SIMILAR TO TASK OF LEARNING NEW LANGUAGE. WORDS USED IN A DIFFERENT SENSE IN ACCOUNTING THAN IN THEIR COLLOQUIAL MEANING (EG: NET WORTH). SOME ACCOUTING RULES ARE DEFINITE OTHERS ARE NOT.

ACCOUNTING NOT STATIC RULES SUBJECT TO CHANGE

BASIC CONCEPTS
1. Money measurement. Record is made only of information that can be expressed in monetary terms.
2. Entity. Accounts kept for entities, as distinguished from the persons who are associated with these entities. 3. Going concern. Entity will continue to operate for an indefinitely long period in the future. 4. Cost concept. The economic resources of an entity is ordinarily entered in the accounting records at the price paid to acquire it. 5. Dual aspect. Since all of the assets of a business are claimed by someone and since the total of these claims cannot exceed the amount of assets to be claimed it follows that ASSETS = LIABILITIES & EQUITIES

BASIC CONCEPTS
6. Accounting period. Accounting measures activities for a specified interval of time called accounting period. (Pacioli, first author of an accounting text, wrote in 1494: Books should be closed each year, especially in a partnership, because frequent accounting makes for long partnership.)
7. Conservatism. Recognition of revenues requires better evidence than does recognition of expenses.

8. Consistency. All the policies adopted for preparing financial statements should be consistently Followed by the entity.
9. Materiality. Insignificant events may be disregarded, but there must be full disclosure of all important information.

ACCOUNTING PROCESS
ACCOUNTING PROCESS

IDENTIFICATION OF THE ECONOMIC EVENTS

CLASSIFYING THE BUSINESS TRANSACTIONS

MEASUREMENT IN RUPEES

RECORDING THE BUSINESS TRANSACTIONS

ANALYSING AND INTERPRETING THE BUSINESS TRANSACTIONS

ACCOUNTING CYCLE
TRANSACTIONS

PREPARATION OF JOURNAL AND SUBSIDIARY BOOKS

LEDGER POSTINGS

EXTRACTING TRIAL BALANCE

PREPARING FINANCIAL STATEMENTS, TRADING AND PROFIT AND LOSS ACCOUNTS AND BALANCE SHEET

ACCOUNTING EQUATION

OWNERS CAPITAL + LIABILITIES

= ASSETS

FORMAL ACCOUNTING - DOUBLE ENTRY SYSTEM OF BOOK KEEPING

METHOD OF RECORDING TWO-FOLD EFFECTS OF EVERY TRANSACTION. BOTH DEBIT AND CREDIT ASPECT OF A TRANSACTION IS RECORDED. FORMAL ACCOUNTING USES A SET OF BOOKS AND LEDGERS TO RECORD TRANSACTIONS.

LEDGER ( T-ACCOUNTS) ARE PREPARED FROM WHICH TRIAL BALANCES AND FINANCIAL STATEMENTS ARE DRAWN.

RULES OF DEBIT AND CREDIT

T - ACCOUNT DEBIT SIDE CREDIT SIDE

ASSET

INCREASE OR ADDITIONS ON THE DEBIT SIDE " + " ON LEFT HAND SIDE

DECREASE OR DEDUCTION ON THE CREDIT SIDE - " ON RIGHT HAND SIDE

RULES OF DEBIT AND CREDIT

T - ACCOUNT DEBIT SIDE CREDIT SIDE

LIABILITY (EXTERNAL) & CAPITAL(INTERNAL)

DECREASE OR DEDUCTION ON THE DEBIT SIDE - " ON LEFT HAND SIDE

INCREASE OR ADDITIONS ON THE CREDIT SIDE " + " ON RIGHT HAND SIDE

RULES OF DEBIT AND CREDIT

T - ACCOUNT DEBIT SIDE CREDIT SIDE

EXPENSES / LOSSES

INCREASE OR ADDITIONS ON THE DEBIT SIDE " + " ON LEFT HAND SIDE

DECREASE OR DEDUCTION ON THE CREDIT SIDE - " ON RIGHT HAND SIDE

RULES OF DEBIT AND CREDIT

T - ACCOUNT DEBIT SIDE CREDIT SIDE

REVENUES / GAINS

DECREASE OR DEDUCTION ON THE DEBIT SIDE - " ON LEFT HAND SIDE

INCREASE OR ADDITIONS ON THE CREDIT SIDE " + " ON RIGHT HAND SIDE

GREEN COMPANY

GREEN COMPANY Transaction 1

RAMASWAMY STARTED BUSINESS WITH CASH RS 1,00,000 Dr Capital CASH (ASSET) Rs 1,00,000 Cr

Dr

RAMASWAMY CAPITAL (EQUITY AND LIABILITY) Cash

Cr

Rs 1,00,000

GREEN COMPANY Transaction 2

GREEN COMPANY RAISED BANK LOAN OF RS 50,000 Dr Capital Bank loan CASH (ASSET) 1,00,000 50,000 Cr

Dr

BANK LOAN (EQUITY AND LIABILITY) Cash

Cr 50,000

GREEN COMPANY Transaction 3

GREEN COMPANY BOUGHT A BUILDING FOR RS 25,000 AND PAID IN CASH. Dr Capital Bank loan CASH (ASSET) 1,00,000 Building 50,000 Cr 25,000

Dr Cash

BUILDING (ASSET) 25,000

Cr

GREEN COMPANY Transaction 4

GREEN COMPANY BOUGHT STOCK OF SUGAR FOR RS 10,000 Dr Capital Bank loan CASH (ASSET) 1,00,000 Building 50,000 Stock Cr 25,000 10,000

Dr Cash

STOCK (ASSET) 10,000

Cr

GREEN COMPANY Transaction 5

GREEN COMPANY SOLD THE ENTIRE STOCK OF SUGAR FOR RS 12,000 Dr Capital Bank loan Sales Dr Cash Dr Stock CASH (ASSET) 1,00,000 Building 50,000 Stock 12,000 STOCK (ASSET) 10,000 Cost of goods sold COST OF GOODS SOLD (EXPENSE) 10,000 Cr 25,000 10,000

Cr 10,000 Cr

Dr

SALES (INCOME) Cash

Cr 12,000

GREEN COMPANY
RECOLLECT HOW MANY T ACCOUNTS HAVE WE PREPARED 1. 2. 3. 4. 5. 6. 7. CASH ACCOUNT (Asset) RAMASWAMY CAPITAL ACCOUNT (Liability) BANK LOAN ACCOUNT (Liability) BUILDING ACCOUNT (Asset) STOCK ACCOUNT (Asset) COST OF GOODS SOLD ACCOUNT (Expense) SALES ACCOUNT (Income)

YELLOW COMPANY

YELLOW COMPANY Transaction 1

RAMASWAMY STARTED BUSINESS WITH CASH RS 50,000 AND AVAILED LOAN OF RS 75,000 Dr Capital Loan Dr CASH (ASSET) Rs 50,000 Rs 75,000 RAMASWAMY CAPITAL (EQUITY AND LIABILITY) Cash Cr Rs 50,000 Cr

Dr

MRS RAMASWAMY LOAN(EQUITY AND LIABILITY) Cash

Cr Rs 75,000

YELLOW COMPANY Transaction 2

YELLOW COMPANY BOUGHT A BUILDING FOR RS 10,000 AND PAID IN CASH. Dr Capital Loan CASH (ASSET) 50,000 75,000 Furniture Cr 10,000

Dr Cash

FURNITURE(ASSET) 10,000

Cr

YELLOW COMPANY Transaction 3

YELLOW COMPANY BOUGHT RS 50,000 WORTH OF CEMENT ON CREDIT. Dr Creditors STOCK(ASSET) 50,000 Cr

Dr

CREDITORS (LIABILITY) Stock

Cr 50,000

YELLOW COMPANY Transaction 4

YELLOW COMPANY SOLD ENTIRE STOCK OF CEMENT FOR RS 60,000 ON CREDIT.

Dr Creditors Dr Sales

STOCK(ASSET) 50,000 Cost of goods sold DEBTORS (ASSET) 60,000

Cr 50,000 Cr

Dr Stock

COST OF GOODS SOLD (EXPENSE) 50,000

Cr

Dr

SALES (INCOME) Debtors

Cr 60,000

YELLOW COMPANY Transaction 5

YELLOW COMPANY RECEIVED FROM CEMENT PURCHASER RS 60,000 Dr Capital Loan Debtor Dr Sales CASH (ASSET) 50,000 Furniture 75,000 60,000 DEBTORS (ASSET) 60,000 Cash Cr 10,000

Cr 60,000

YELLOW COMPANY Transaction 6

YELLOW COMPANY PAID RS 50,000 TO SUPPLIER Dr Capital Loan Debtor CASH (ASSET) 50,000 75,000 60,000 Furniture Creditor Cr 10,000 50,000

Dr

CREDITORS (LIABILITY)

Cr

Cash

50,000 Stock

50,000

YELLOW COMPANY Transaction 7

YELLOW COMPANY REPAID LOAN RS 25,000 Dr Capital Loan Debtor CASH (ASSET) 50,000 75,000 60,000 Furniture Creditor Loan Cr 10,000 50,000 25,000

Dr Cash

MRS RAMASWAMY LOAN(EQUITY AND LIABILITY) 25,000 Cash

Cr Rs 75,000

GREEN COMPANY
RECOLLECT HOW MANY T ACCOUNTS HAVE WE PREPARED 1. CASH ACCOUNT (Asset) 2. RAMASWAMY CAPITAL ACCOUNT (Liability) 3. MRS RAMASWAMY LOAN ACCOUNT (Liability) 4. FURNITURE ACCOUNT(Asset) 5. STOCK ACCOUNT (Asset) 6. CREDITOR ACCOUNT (Liability) 7. DEBTOR ACCOUNT (Asset) 8. COST OF GOODS SOLD ACCOUNT (Expense) 9. SALES ACCOUNT (Income)

FINANCIAL STATEMENTS
STAGES IN ACCOUNTING

1)Journal 2)Ledger 3)Trial Balance to verify the accuracy of ledger account balance 4)Preparation of financial statements

TYPES OF BUSINESS ESTABLISHMENTS

TYPES 1) TRADING CONCERNS 2) MANUFACTURING CONCERNS Trading concerns purchase finished goods from market and sell it at a profit. Such firm prepare 1) Trading account 2) Profit and loss account 3) Balance sheet Manufacturing concerns are those which purchase raw material and effect certain productive activities on it and convert the same into marketable goods and then sell it. Such concern while preparing final accounts prepare 1) Manufacturing account 2) Trading account 3) Profit and loss account 4) Balance sheet

TRADING & MANUFACTURING ACCOUNT

Particulars To To To To Opening stock Purchases Less Returns Direct expenses Gross profit c/d to profit and loss account TOTAL XXX TOTAL XXX Amount Particulars By Sales Less Returns By Closing stock By Gross Loss c/d to profit and loss account Amount

PROFIT AND LOSS ACCOUNT FORMAT

Particulars To To Gross loss c/d from Trading account Indirect expenses Amount Particulars By Gross profit c/d from trading account By Interest income Amount

To
To To

Interest expenses
Depreciation Net profit transferred to capital account TOTAL XXX

By Miscellaneous income
By Net loss transferred to capital account

TOTAL

XXX

BALANCE SHEET
LIABILITIES Amount ASSET Amount

CAPITAL

FIXED ASSETS

LIABILITIES

CURRENT ASSETS

TOTAL

XXX

TOTAL

XXX

DIFFERNCE TRADING AND P&L ACCOUNT

TRADING ACCOUNT PROFIT AND LOSS ACCOUNT

FIRST STAGE OF FINAL ACCOUNT

SECOND STAGE OF FINAL ACCOUNT

IT RECORDS SALES AND DIRECT COSTS

THIS ACCOUNT RECORDS GROSS PROFIT, INCOMES, INDIRECT COSTS AND LOSSES

IT DISCLOSES GROSS PROFIT OR GROSS LOSS

IT DISCLOSES NET PROFIT OR NET LOSS

DIFFERNCE BETWEEN GP AND NP

GROSS PROFIT NET PROFIT

It is the difference between sales and direct costs Gross profit is transferred to profit and loss account

It is the difference between gross profit and indirect expenses Net profit is transferred to capital account

Drawing of a owner does not depend on the gross profit

Drawings of the owner depends on the net profit