Basic Concepts of

Accounting
 For reference sources
References:
Accounting for managers by Paul
M.Collier
Advanced accounting by R.L.Gupta &
Radhaswamy
Management Accounting by Khan & Jain
Management Accounting by
S.N.Maheswari
Fundamentals of accounting by A
Mukherjee & M hanif
FATHER OF ACCOUNTING

Fra Luca Bartolomeo

de Pacioli
(sometimes Paccioli or Paciolo; c. 14471517) was an
Italian mathematician, Franciscan friar, collaborator
with Leonardo da Vinci, and a seminal contributor
to the field now known as accounting.
Classification of Accounts
Personal Accounts
Natural persons
Artificial persons
Representative personal accounts
Real Accounts
Tangible Real A/c
Intangible Real A/c
Nominal Accounts
Incomes & Gains
Expenses & Losses
 Furniture A/c

Class Activity:
Sales A/c
Lets give it a short!!!
Tuition Fees
Cash A/c
Goodwill A/c
Shah Rukh A/c
Investments A/c
Loose Tools A/c
Salary A/c
Pre-Paid Expenses A/c
Purchases A/c
Machinery A/c
Bank A/c Rent A/c
Outstanding Salary A/c
 Test Your knowledge!!!
1. Salary prepaid 1. Personal A/c
2. Rent account 2. Nominal A/c
3. Salary outstanding A/c 3. Representative Personal A/c
4. Bank account 4. Artificial Personal A/c
5. Capital account 5. Artificial Personal A/c
6. Goodwill account 6. Intangible Real A/c
7. Patents account 7. Intangible Real A/c
8. Purchases account 8. Nominal A/c
9. Investments 9. Tangible Real A/c
10. Corporation Bank Ltd.
10. Artificial Personal A/c
11. Brokerage Account
11. Nominal A/c
Recording of Transactions:
Rule for Personal
Accounts:
Debit the Receiver
Credit the Giver
Rule for Real Accounts:
Debit what Comes in
Credit what goes out
Rule for Nominal
Accounts:
Debit all expenses & Losses
Credit all incomes & gains.
 Class- Problem
Illustration From the following transactions find out the nature
of account and also state which account should be debited
and which should be credited.
a) Rent paid.
b) Salaries paid.
c) Interest received.
d) Dividends received.
e) Furniture purchased for cash.
f) Machinery sold.
g) Outstanding for salaries.
h) Telephone charges paid.
i) Paid to Suresh.
j) Received from Mohan (the proprietor)
k) Lighting expense paid
 Transaction A/c involved Nature of A/c Debit/Credit
(a) Rent paid Rent a/c Nominal a/c Debit
Cash A/c Real A/c Credit
(b) Salaries paid Salaries A/c Nominal A/c Debit
Cash A/c Real A/c Credit
(c) Interest received Cash A/c Real A/c Debit
Interest A/c Nominal A/c Credit
(d) Dividends received Cash A/c Real A/c Debit
Dividends A/c Nominal A/c Credit
(e) Furniture purchased Furniture A/c Real A/c Debit
Cash A/c Real A/c Credit
(j) Machinery sold Cash A/c Real A/c Debit
Machinery A/c Real A/c Credit
(g) Outstand. for salaries Salaries A/c Nominal A/c Debit
Outstan. SalA/c Personal A/c Credit
(h) Telephone charges Tel. Bill A/c Nominal A/c Debit
Cash A/c Real A/c Credit
(i) Paid to Suresh Suresh Personal A/c Debit
Cash A/c Real A/c Credit
(J) Received from Mohan Cash A/c Real A/c Debit
(The Proprietor) Capital A/c Personal A/c Credit
(k) Lighting Lighting A/c Nominal A/c Debit
Cash A/c Real A/c Credit
Accounting Equation

Assets = Sources of finance

Assets = Liabilities + Equity
Give one transaction for each of the following
that will
(a) increase an asset and decrease another asset.
(b) increase an asset and increase a liability.
(c) decrease an asset and decrease a liability.
(d) increase an asset and increase capital.
(e) decrease an asset and decrease capital.
Business & Accounting
Accounting is the universal language of Business and
Finance.
More CEOs from fortune 500 companies have come up
through the ranks of accounting than from any other area in
business. Currently: 54%
Small businesses and usually fail because of poor accounting
understanding.
Marriages usually fail because of poor financial management
(80% of divorces are $$$$ related.)
If you want to get ahead in business & marriage determine
that you are going to understand accounting basics.
What do Accountants
Account For?
Everything of value!
Accounting?
Financial AUDITING
Managerial
Cost COST FINANCIAL
Auditing
Tax TAX
MANAGERIAL
The Role of Accounting
Role Users Decisions Preferred Characteristics
Managerial Internal Managers Planning Measure Inputs and Outputs
Directing Timeliness
Controlling Identify Responsibility
Forward-Looking
Financial Shareholders Investment Verifiable
Creditors Credit Measure Organizational Value
Other External Measure Risk of Organization
Users Consistent with IFRS
Tax Taxing Authorities Tax Liability Verifiable
Measure Past Income
Accounting and Accountability
Process of identifying, measuring, and
communicating economic information to permit
informed judgements and decisions by the users of
the information (American Accounting Association,
1966)
Stewardship function:usually owners and managers
are separate
Increase shareholders wealth
Financial Accounting
Terms
Assets: Tangible and Non-tangible
resources of a business that have
future value. Usually sub-classified as
follows:
Quick Assets (Liquid Assets)
Cash Petty Cash Receivables - Securities
Current Assets (Turn into cash/use annually)
All the above + Inventories, Supplies
Fixed Assets (Depreciated over several yrs.)
Buildings, Equipment, Natural Resources
Land (Fixed, but never depreciated)
Intangible Assets: Patents, Trademarks,
Copyrights
What are your Assets?
Bank Account & Money in your pocket
Car
Clothes
Books
Stocks/Bonds/CDs
Prepaid rent
Computers & Electronic Equip.
Knowledge????
Abilities????
Accounting Term:
Liabilities
Other peoples claims against your
assets!
What you owe!! Debts!
Classified as:
Current Liabilities (one year debt)
Credit Card Debt, Accounts Payable
Long Term Liabilities
Car, Mortgage, Note Payable
Unearned revenues
Bonds (usually super long term)
What are your liabilities?
School Loan
Car Loan
Credit Card Balance
Name of the friends Account
Petty shop/beauty parlour Amount
Due
 Accounting and its
shareholders value
 Generally accepted accounting principles (GAAP) encompass the
conventions, rules, and procedures for determining acceptable
accounting practices at a particular time.
Financial Accounting Standards Board (FASB) is primarily
responsible for evaluating, setting, or modifying GAAP in the U.S.
Sarbanes-Oxley Act responded to cases of accounting fraud.
Created the Public Accounting Oversight Board,
which sets audit standards and investigates and
sanctions accounting firms that certify the books of
publicly traded firms.
Senior executives must personally certify that the
financial information reported by the company is
correct.
Resulted in increase in demand for accountants.
Accounting is?
The Need for Accounting
Managers, investors, and other internal groups
want the answers to two important questions:

How well did

the organization
perform? Where does
the organization
stand?
 The Need for Accounting

Accountants answer these questions

with three major financial statements:

Income Balance
statement sheet

Statement of
cash flows
The Need for Accounting

A transaction is any event that affects

the financial position of an
organization and requires recording.
The Basic Accounting
Equation
Financial accounting is based upon the
accounting equation.
Assets = Liabilities + Owners' Equity
This is a mathematical equation which
must balance.
If assets total $300 and liabilities total
$200, then owners' equity must be $100.
The Basic Accounting
Equation
The balance sheet is an expanded
expression of the accounting equation.
Characteristics of accounting
From the many definitions contain
four essential characteristics of
accounting
Economic events
identification, measurement, recording,
classification, analyzing and
communication
Organization and
Interested users of information
System of double entry
system
Every business transaction has two
fold effect. Its one is debited and
another is credited with the same
amount.

Assets = liabilities + Capital

Liabilities = Assets Capital
Capital = Assets Liabilities
Objectives of accounting
Keep systematic records
Protect business properties
Ascertain operational profit or loss
Ascertain financial position of the
business
Facilitate rational decision making
 Functions of accounting

Process
Input Recording Communicati
Economic events Classifying ng
measured in Summarizing information
financial terms Analyzing to users
Interpreting
STEPS INVOVLED IN AN ACCOUNTING
CYCLE OR PROCESS
STEP 1: business transaction are created
STEP 2: analyze and record the transaction
STEP 3: post the information from the journal to the
ledger
STEP 4:prepare a trial balance
STEP 5:journalise adjusting entries
STEP 6: post adjustments form the journal to the ledger
STEP 7: prepare an adjusted trial balance
STEP 8:journalise closing entries
STEP 9:post closing entries from the journal to ledger
STEP 10:prepared a post closing trial balance
Step 11: prepare the financial statements
Accounting concepts &
conservations

Accountin
g
principles

Accountin
Accountin g
g concepts conventio
ns

Going Accountin
Money
Separate concern & g period & Conservati Full Consistenc Materialit
measurem
entity dual cost sm disclosure y y
ent
aspect concept
Trial balance ??????
It is a statement, prepared with the
debit and credit balances of ledger
accounts to test the arithmetical
accuracy of the books
If the totals of the debit and credit
amount columns of the trial balance
are equal, its presumed that the
posting to the ledger in terms of debit
and credit amounts is accurate.
TRADING ACCOUNT
(For the year ended 31st March)
Purpose of trading account
Ascertaining gross profit or loss
Ascertaining ratio of direct expenses to gross
profit
Ascertaining ratio between purchase and direct
expenses
Calculation of cost of goods sold
Calculation of gross profit ratio
Comparison of stock with stock of previous year
Comparing the actual Versus desired or previous
year performance
 Particulars Amount Particulars Amount
Dr. (Rs) Cr. (Rs)
To opening Stock a/c By sales a/c .
To Purchases a/c Less : Sales Returns a/c ...
Less : Purchases Returns a/c By Closing Stock a/c
To Direct Expenses: By stock destroyed by fire a/c
Wages a/c .
Manufacturing a/c or By Gross LOSS a/c
Producing Expenses a/c Transferred to P & L a/c
Coal, gas and fuel a/c XXXXX
Motive power/
Octroi or local taxes a/c
Imported Duty a/c
Custom Duty a/c
Consumable Stores a/c
Foreman/Works
Managers Salary a/c
Royalty a/c
Factory expenses a/c
Packing charges a/c
Carriage inwards a/c
To Gross PROFIT a/c XXXXX
if any transferred to P & L a/c ________ _________
XXXXX XXXXX
________ _________
PROFIT AND LOSS
ACCOUNT
(For the year ended 31st March)
Purpose of preparation of P&L
account
Knowledge of net profit or loss
information
Calculation of ratios
Comparison of actual with desired
performance
Ascertain ratio between net profit and
sales
Maintaining provision and reserves
Determining future line of action
 Dr. Particulars Amoun Particulars Amount
Cr. t (Rs)
(Rs)
To Gross LOSS
(if any transferred form Trading a/c) By Gross PROFIT (if any)
To Salaries a/c By Interest on investments a/c
To Travelling Expenses a/c
By Interest on Deposits a/c
To Godown Rent a/c
By Rent received a/c
To Postage & Telegrams a/c By Commission received a/c
To Rent, Rates & Taxes a/c By Discount received a/c
To Carriage outwards a/c By Interest received a/c
To insurance a/c By Other Incomes a/c ..
To Stationery and Printing a/c
To Interest paid a/c
To Discount Allowed a/c
To Commission paid a/c
To financial expenses a/c
To administrative expenses a/c
To export charges a/c
To selling expenses a/c
 Particulars Amoun Particulars Amoun
t (Rs) t (Rs)
To brokerage or audit fees a/c
To interest on capital a/c
To donation a/c
To sample expenses a/c
To Advertisement a/c
To General Expenses a/c
To Legal Expenses a/c
To Audit Fees a/c
To Bad Debts a/c
To Depreciation a/c
To Interest on Loan a/c
To Loss on Fire a/c
(uncovered by insurance) By Net LOSS (if any)
To Net PROFIT transferred to XXXXX transferred to Capital a/c XXXXX
Capital a/c _______ _______
XXXXX XXXXX
_______ _______
BALANCE SHEET
(For the year ended 31st March)
Purpose of preparation of
balance sheet
Financial position
Knowledge of proprietary ratio
Protection against uncertainty
Liabilities Amount Assets Amount (Rs.)
(Rs.)
Capital : Fixed assets :
Share capital Goodwill
Add: net profit Or Land and building
Less: net loss Plant and machinery
Less: Drawings . Furniture and fittings

Long term liabilities : Investments: ..

Loan . Current assets:
Current Liabilities: Closing stock
Income received in Accrued income
advance Prepaid expenses
Sundry creditors Sundry debtors
Outstanding expenses Bills receivable
Bills payable Cash at bank
Bank overdraft Cash in hand
Total XXXXXX Total XXXXXX
 International Accounting Standards Committee (IASC)
promotes worldwide consistency in financial reporting practices.
In 2001, became the International Accounting Standards
Board (IASB). International Financial Reporting Standards
(IFRS) are the standards.

Exchange Rates - ratio at which a countrys currency can be

exchanged for other currencies.
Consolidated financial statements must reflect gains and losses
due to changes in exchange rates.
Can have significant impact on financial statement.
Case Study
A finance professor and a marketing professor
were recently comparing notes on their
perceptions of corporations. The finance
professor claimed that the goal of a
corporation should be to maximize the value
to the shareholders. The marketing professor
claimed that the goal of a corporation should
be to satisfy customers.
What are the similarities and differences in
these goals?
 Review Questions
Discuss critically historical cost concept and money
measurement concept as applied in financial
accounting.
State the factors that can be used to determine whether
a business unit is a going concern.
A trial balance is merely a proof of arithmetical
accuracy - Explain this statement
Distinguish between journal and ledger
How are ledger accounts balanced? Explain clearly.
Discuss the role of financial manager in the modern
business environment
Note: assignments last date for submission on or before 07.09.16