Introduction to accounting

• Business :
• Works ,efforts and acts of people , which are
connected with the production of wealth
• Activities which are directed with the object
of making profit
• Transaction :
• Transfer of money , goods or services from
one person to another
• Expenditure :
• Spending of money or incurring an obligation
to pay at a later date
• Eg: payment for a pen or purchase of a
machine
• Expense:
• An expenditure whose benefit is enjoyed and
finished immediately
• E.g.: payment of taxi charges , wages etc
• Losses :
• Money or money’s worth given up without any
benefit
• E.g. :loss due to fire, payment of damages to
others
• Assets :
• Expenditure results in the acquiring of some
property or benefit of a lasting nature
• E.g.: pays for building , furniture or
machinery
• Liability :
• Amount due by a business house to others
• Capital :
• Total interest of the proprietor or the
proprietors in the business
• E.g.: profit increase capital and loss will
decrease capital
• Owner’s equity
• Debtor and creditor:
• Debtor is the person who owes an amount to
somebody
• Creditor is the person to whom an amount is
owned by somebody
• EG:X lends money to Y -------------------
 Accounting
• American Institute of Certified Public
Accountants,
• “the art of recording classifying and
summarizing in a significant manner and in
terms of money, transactions and events
which are , in part at least , of financial
character and interpreting the results
thereof”.
 Branches of accounting
• Financial accounting :
• Preparation of Journal, ledger, trial balance,
trading - profit and loss account and balance
sheet

• Cost accounting:
• Ascertain the cost of a product, cost sheet,
types of costing
• Management accounting:

• Supply of information to management

• All analysis…. Ratios, cash and fund flow
statements, budgeting etc
 Objectives of accounting
• Keeping systematic records
• Protecting and controlling business properties
• Ascertaining the operational profit or loss
• Ascertaining the financial position of the
business
• Facilitating rational decision making
 Users of accounting information
• Proprietors
• Managers
• Prospective investors
• Creditors , bankers and other lending institutions
• Government
• Employees
• Regulatory agencies
• Researchers
 Systems of accounting
• Cash system of accounting :
• Accounting entries are made only when cash
is received or paid
• Accrual system of accounting:
• Entries are made on the basis of amounts
having become due for payment or receipt
 Accounting principles , concepts and
convention
• Accounting principles:
• “the body of doctrines commonly associated
with the theory and procedure of accounting
serving as an explanation of current practices
and as a guide for the selection of conventions
or procedures where alternatives exists”
 Accounting concepts
• Business entity concept
• Money measurement concept
• Cost concept
• Going concern concept
• Dual aspect concept
• Realization concept
• Accrual concept
 Conventions
• Consistency
• Disclosure
• Conservatism
• Materiality
• Accounting equation:

• Capital+ liabilities=Assets
• Capital =Assets-Liabilities
 Double entry system
• Two systems of keeping records:

• Single entry system

• Double entry system
• Single entry system appears to be time saving
and economical
• Some transactions are not recorded some are
partially recorded
• Double entry system recognizes that every
transaction has two aspects-Debit &credit
• Crux-which account is debited ,which account
is credited
 Merits of Double entry system
• 1.Keeps complete record of business
transaction
• 2.It provides a check on the arithmetical
accuracy
• 3.The detailed profit and loss account is
prepared
• 4.Comparison of purchase as well as sales
expenditure and income
• 5. The balance sheet can be prepared at any
specified point of time
• 6.It prevents commission of fraud and if
committed it can be detected
• 7.The accurate details with regard to any
account can be easily obtained
 Accounts
• According to Kohler’s dictionary for
Accountants , “a formal record of a particular
type of transaction expressed in money”
• Specimen of an account
 Classification of accounts
• Classified into two:
• 1.Personal account
• 2.Impersonal account
• Impersonal accounts are further divided into:
• Real account
• Nominal account