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Jayanthi Iyer

Accounting
Not a rocket technology
As simple as adding and subtracting

What is Accounting?
Language of business serve as a

means of communication of matters


relating to various aspects of
business operations.
Accounting provides information

Information System
Inputs
Processes
Outputs
Users

Users of accounting
information
Owners and shareholders
Managers
Employees
Prospective Investors
Lenders
Security Analysts and advisers
Suppliers
Customers
Government and regulatory agencies

Financial Statements
Balance sheet Which shows the

financial status of a company at a


particular
instant
in
time.
It
summarizes the resources of an
enterprise
[assets]
and
claims
against these resources [liabilities].
Reveals what a company owns and
what it owes.

Financial Statements
Profit and Loss Account

[Income
Statement] This reports the results of
the operation of an enterprise during
the accounting period. Measures the
economic performance of a company.

Financial Statements
Statement of cash flows Outlines

where a company gets its cash and


how it spends that cash.

Financial and Management


Accounting
Financial Accounting Consolidated

information for external users


Management Accounting Detailed
information for internal users
Tax reporting Separate statement
according to tax laws

Quality and Supply of


Information
Forms of business organization

Forms of Business
Organization
Sole proprietorship
Partnership
Company
Private Company
Public Company- not listed
Public company Listed

Limited Liability Partnership


Refer pg 31 of the textbook.

Accounting Concepts
Reporting Entity Concept

Business
is distinct and separate from its
owners and other firms. Defines the
scope of the activities to be included
in the financial statements.

Going Concern Concept


Business will continue for

long time or goes on for ever

a fairly

Periodicity
Life of the business is divided into

artificial time periods for studying the


results usually a year.

Money Measurement
Accounting records only monetary

transactions. Events or transactions


which cannot be expressed in terms
of money will have no place in
accounting statements.

Cost concept
All transactions are recorded at their

monetary cost of acquisition.

Dual Aspect Concept


Every transaction has a dual effect.

At any given time


economic
resources belonging to a business is
equal to the claims against those
resources.

Dual Aspect
Economic resources = Claims.

Assets
Assets are resources owned by the

enterprise
from
which
future
economic benefits are expected to
flow to the enterprise.
What the enterprise owns
Economic benefit- higher cash inflow
or lower cash outflow

Claims
Who has the rights to the assets?
Who has the claim on the assets?

Claims
Owners Equity
Liability

Liabilities
Liabilities are present obligations of

the enterprise to outsiders


What the enterprise owes to others.
The
settlement of Liability is
expected to result in an outflow of
economic resources.

Owners Equity
Equity represents the owners claim

on the assets.
Owners Equity is the residual
interest
in the assets of the
enterprise after deducting all its
liabilities.

Accounting Equation
Economic resources = Claims.
Assets = Liabilities + Owners Equity.

Business Activities
Service Organization
Merchandising Organization
Manufacturing Organization

Balance sheet of Wonder


Homes Services as on 1/4/2012
Liabilities

Sanath Equity
100000

Assets

Cash

100000
100000

100000

Balance sheet as on 2/4/2012


Liabilities and

Equity
Owners Equity 100000
Loan creditors
50000

Assets

Cash

150000

150000
150000

Balance sheet as on 5/4/2012


Liabilities and Equity

Assets

Owners Equity
Loan creditors

Cash
Office Equipment

100000
50000
150000

10000
140000
150000

Balance sheet as on 8/4/2012


Liabilities and Equity

Assets

Owners Equity
Loan creditors
Accounts payable

Cash
Office Equipment
Office furniture

100000
50000
20000
170000

10000
140000
20000
170000

Balance sheet as on 9/4/2012


Liabilities and Equity

Assets

Owners Equity
Loan creditors
Accounts payable

Cash
Office Equipment
Office furniture

96000
50000
20000

166000

6000
140000
20000

166000

Balance sheet as on 11/4/2012


Liabilities and

Equity
Owner's equity
116000
Loan creditors
50000
Accounts payable
20000

Assets

Cash
26000
Office Equipment
140000
Office furniture
20000

186000
186000

Balance sheet as on 15/4/2012


Liabilities and

Equity
Owner's equity
126000
Loan creditors
50000
Accounts payable
20000

Assets

Cash
36000
Office Equipment
140000
Office furniture
20000

196000
196000

Balance sheet as on 18/4/2012


Liabilities and

Equity
Owner's equity
126000
Loan creditors
50000
Accounts payable
10000

Assets

Cash
26000
Office Equipment
140000
Office furniture
20000

186000
186000

Balance sheet as on 24/4/2012


Liabilities and

Equity
Owner's equity
141000
Loan creditors
50000
Accounts payable
10000

201000

Assets

Cash
26000
Office Equipment
140000
Office furniture
20000
Accounts Receivables
15000
201000

Balance sheet as on 28/4/2012


Liabilities and

Equity
Owner's equity
128000
Loan creditors
50000
Accounts payable
10000

188000

Assets

Cash
13000
Office Equipment
140000
Office furniture
20000
Accounts Receivables
15000
188000

Balance sheet as on 30/4/2012


Liabilities and

Equity
Owner's equity
126000
Loan creditors
50000
Accounts payable
10000

186000

Assets

Cash
11000
Office Equipment
140000
Office furniture
20000
Accounts Receivables
15000
186000

Income Statement
Revenues

Service Revenue
Expenses
Advertisement
Salary
Rent
Total expenses
Net Profit
28000

45000
4000
5000
8000
17000

Income Statement
Revenues

Service Revenue
Expenses
Advertisement
Salary
Rent
8000
Depreciation
Total expenses
Net Profit
26000

45000
4000
5000
2000
19000

Balance sheet as on 30/4/2012


Liabilities and

Equity
Owner's equity
124000
Loan creditors
50000
Accounts payable
10000

184000

Assets

Cash
11000
Office Equipment
138000
Office furniture
20000
Accounts Receivables
15000
184000

Income Statement
Revenues

Service Revenue
Expenses
Advertisement
Salary
Rent
8000
Electricity exp
Depreciation
Total expenses
Net Profit
25500

45000
4000
5000
500
2000
19500

Balance sheet as on 30/4/2012


Liabilities and

Equity
Owner's equity
123500
Loan creditors
50000
Accounts payable
10000
Electricity payable
500
184000

Assets

Cash
11000
Office Equipment
138000
Office furniture
20000
Accounts Receivables
15000
184000

Owners Equity
Capital contributions/investments by the

owner(s)
Withdrawals/ Dividend
Revenues
Expenses

Revenues
Revenues

are amounts earned from


for goods sold or services

customers
rendered.
Revenues result in assets coming into
business for performing work/services.
Revenues increase Owners equity

Expenses
Expenses are costs of earning revenues.
Sacrificies made to earn revenues.
Expenses decrease Owners equity

Net Income or Net Profit


Net profit = Revenues Expenses.

Retained Earnings
Dividends decrease Owners equity
Retained Earnings = Net Profit Dividend
Retained Earnings= Revenues-Expenses-Dividend

Owners Equity
Retained Profits increases Owners

equity
Revenues increase Owners equity,
expenses decrease Owners equity,
dividends decrease Owners equity.
Withdrawal by the owner equity
decreases owners equity and fresh
capital brought in increases the same.

Other Concepts
Accrual Concept- Revenues are recognized when

sales are made or services are performed. Expenses


are recognized when goods are used and when
services are received, whether or not cash is paid
Matching Concept Expenses should be recorded in
the same accounting period in which the revenues
were earned as a result of the expenses.
Realization Concept States that the amount that is
reasonably certain to be realized- that is , the
customers are reasonably certain to pay should be
recognized as revenue.

Conventions
Consistency Accounting practices to remain

unchanged from period to period; necessary for


the purpose of comparison; does not mean
inflexibility.
Conservatism Anticipate no profits but provide
for all possible losses.
Full Disclosure Accounting reports should be
honestly prepared and sufficiently disclose
information which is of material interest to the
users.
Materiality Attach importance to material details
and ignore insignificant details.