FUNDAMENTALS OF ACCOUNTING

BY MUTHU GOPALAKRISHNAN.M, FACULTY OF FINANCE, XIME, BANGALORE- 100. Cell 9198860-49464

INTRODUCTION TO ACCOUNTING

INTRODUCTION
THE LANGUAGE OF BUSINESS THE RECORD OF FINANCIAL TRANSACTIONS IT INFORMS ABOUT THE PERFORMANCE OF BUSINESS IT IS AS OLD AS MONEY ITSELF IT IS NOW A SEPARATE PROFESSION

EVOLUTION OF ACCOUNTING It has been practiced from centuries Arthashastra contained the accounting methods It developed in response to social and economic needs of the society Modern accounting system based on double entry system took its birth in 1494 in Italy From this period onwards it has taken its shape

EVOLUTION OF ACCOUNTING

At the time of Sole trader era At the time of Partnership era At the time of Corporate era

Meaning of Accounting
Accounting refers to the process of recording, classifying and summarising of business transactions in terms of money, the preparation of financial reports, the analysis and interpretation of these reports for the information and guidance of management.

Definition of Accounting

Accounting is a process of Identifying, Measuring and Communicating economic information to permit informed Judgments and decisions by the users of information. - American Accounting Association (AAA) Accounting is defined as the art of recording, classifying and summarising in a significant manner in terms of money transactions and events which are in part at least of a financial character and interpreting the results thereof - American Institute of Certified Public Accountants

Meaning of Book Keeping

Book Keeping refers to the process of systematically recording the business transactions in the appropriate books of accounts with maximum information. It refers only the clerical part of accounting.

MEANING OF ACCOUNTANCY

Accountancy can be described as being science which relates to the formulation of rules and principles of accounting. And thus accountancy proposes the theory of accounting. - It is a broader term which includes accounting and book keeping.

OBJECTIVES OF ACCOUNTING

To maintain records of business To know the results of business (profit or loss ) To ascertain financial position To make information available to various groups

PROCESS OF ACCOUNTING
Identifying the transactions Classifying the transactions Summarising the transactions Finding out the results Interpreting the results Informing the needy

USERS OF ACCOUNTING INFORMATION

INTERNAL USERS EXTERNAL USERS

INTERNAL USERS

OWNERS MANGEMENT EMPLOYEES

EXTERNAL USERS
CREDITORS FINANCIERS POTENTIAL INVESTORS CONSUMERS TAX AUTHORITIES GOVERNMENT RESREACH SCHOLARS

BRANCHES OF ACCOUNTING
FINACIAL ACCOUNTING COST ACCOUNTING MANGEMENT ACCOUNTING

METHODS OF ACCOUNTING

SINGLE ENTRY SYSTEM DOUBLE ENTRY SYSTEM

DOUBLE ENTRY SYSTEM

Every transaction has a two fold effects, viz.,

Receiving of benefit Giving of benefit Double entry system is a system of accounting in which, two aspects namely debit and credit are recorded by applying certain rules.

SINGLE ENTRY SYSTEM

Single entry system is a method employed for recording of transactions, which ignore the two fold aspect and consecutively fails to provide the businessman with the information necessary for him to be able to ascertain the position.

GAAP
Generally Accepted Accounting Principles (GAAP) is a technical accounting term which refers a common set of accounting principles, concepts, conventions, rules, procedures and standards necessary to define accepted accounting practices at a particular time and are used to prepare financial statements of the companies. GAAP is a combination of authoritative standards set by policy boards and simply the commonly accepted ways of recording and reporting accounting information.

ACCOUNTING CONCEPTS, CONVENTIONS, POSULATES,PRINCIPLES AND STANDARDS

Concepts
Accounting concepts provide the conceptual guidelines for application in the process of recording, measuring, analysing and communicating the information about an organisation.

Conventions
Accounting conventions refer to procedures and practices followed by accountants on the basis of long standing customs in preparation of financial statements to make them clear and meaningful.

Contd.

POSULATES
Accounting postulates are basic assumptions which are generally accepted as self-evident truths in accounting. These are established or general truths which do not require any evidence to prove them. They are the propositions taken for granted.

PRINCIPLES
Principle means a general law or rule adopted or professed as a guide to action, a settled ground or basis of conduct or practice, so accounting principles are characterised as how to apply concepts.

ACCOUNTING STANDARDS
Accounting Standards may be defined as written statements issued from time to time by institutions of the accounting profession or institutions in which it has sufficient involvement and which are established expressly for this purpose namely., India - Accounting Standard Board (1977) USA - Financial Accounting Standards Board UK - Accounting Standard Board Canada - Accounting standards Committee

International Accounting Standards Committee

At International Level, International Accounting Standards Committee has been created to formulate and publish, in the public interest, basic standards to be observed in the presentation of audited accounts and financial statements and to promote their world wide acceptance and observance.

ACCOUNTING CONCEPTS & CONVENTIONS

Accounting Concepts Business Entity Concept Going Concern Concept Accrual Concept Money Measurement Concept Dual Aspect Concept Cost Concept Accounting Period Concept Legal Aspect Concept Matching Concept Realisation Concept Objective Evidence Concept Accounting Conventions Convention of Disclosure Convention of Materiality Convention of Consistency Convention of Conservatism

FUNDAMENTAL ACCOUNTING CONCEPTS

BUSINESS ENTITY CONCEPT Business is separated from its owner. Personal transactions are excluded. GOING CONCERN CONCEPT
Business entity has no need or intention to close down. It is a base for credit transactions.

ACCRUAL CONCEPT
Accrual refers to right to receive or pay the cash with respect to revenues and expenses. It is base for mercantile system of accounting.

OTHER ACCOUNTING CONCEPTS

MONEY MEASUREMENT CONCEPT

Money is a common unit of measurement. It excludes all transactions which cannot be measured in terms of money.

DUAL ASPECT CONCEPT

Ever transaction has two aspects namely receiving of benefit and giving of benefit. Both aspects must be recorded.

Contd.

COST CONCEPT Assets are recorded at the price paid. Market value of asset is not consider. ACCOUNTING PERIOD CONCEPT Performance of the business is measured for a particular period. such period is called as accounting period, generally one year.

Contd.

LEGAL ASPECT CONCEPT Accounting methods and other policies should not be illegal. The policy, procedures, principles and methods followed in accounting should adhere the prevailing law and enactments

MATCHING CONCEPT Comparing the revenue with expenditure. Direct costs are matched with sales revenue and Indirect costs are matched with gross profit.

Contd.

REALIZATION CONCEPT Revenue should be recognized only when it is legally due and realizable. It determines incomes pertaining to an accounting period. OBJECTIVE EVIDENCE CONCEPT Entries should be based on verifiable documentary evidence. It is a base for auditing of accounts.

ACCOUNTING CONVENTIONS

CONVENTION OF DISCLOSURE Accounting statements should disclose all the significant information. It is facilitated through foot notes, comments, descriptive captions, supplementary schedules etc. CONVENTION OF MATERIALITY All important items or material facts should be disclosed in the accounting statements. Material facts refer to any facts which would influence the decision of others

Contd.

CONVENTION OF CONSISTENCY There should be continuity in principle, practices, rules and concepts used. CONVENTION OF CONSERVATISM It is a defensive accounting mechanism against uncertainty The principle to value closing stock, is at cost price or market price which ever is lower.

ACCOUNTING POLICIES

Accounting policies represent choices among different accounting methods that can be used in reporting financial transactions and preparing financial statements

ACCOUNTING TERMINOLOGIES
TRANSACTIONS CAPITAL - IT REPRESENTS FUNDS INVESTED IN A BUSINESS. - IT IS ALSO CALLED AS OWNERS EQUITY OR NET WORTH. LABILITIES INTEREST OF OUTSIDE CREDITORS IN THE ASSETS OF BUSINESS

Contd.

DEBTOR

CREDITOR

GOODS

Contd. ASSETS

EQUITY

INCOME

Contd. EXPENDITURE

EXPENSES

DRAWINGS

Contd. VOUCHER

TURNOVER

NET WORTH

Contd.

DISCOUNT
TRADE DISCOUNT CASH DISCOUNT

Contd.

PURCHASES SALES BAD DEBTS

TYPES OF ACCOUNTS

PERSONAL ACCOUNT IMPERSONAL ACCOUNT - REAL ACCOUNT - NOMINAL ACCOUNT

PERSONAL ACCOUNT

IT INCLUDES NATURAL PERSONS ARTIFICIAL PERSONS REPRESENTATIVE PERSONAL - (PREPAID AND OUTSTANDING)

REAL ACCOUNT

IT INCLUDES ASSETS TANGIBLE AND INTANGIBLE ASSETS

NOMINAL ACCOUNT

IT RELATES TO EXPENSES AND INCOMES RENT AND SALARY COMMISSION AND INTEREST RECIEVED

RULES OF ACCOUNTING
PERSONAL A/C DEBIT THE RECIEVER CREDIT THE GIVER REAL A/C DEBIT WHAT COMES IN CREDIT WHAT GOES OUT NOMINAL A/C DEBIT ALL EXPENSES AND LOSSES CREDIT ALL INCOMES AND GAINS

Reporting Revenue and Expenses

THREE METHODS
Cash Basis of Accounting Accrual Basis of Accounting Mixed or Hybrid Basis of accounting

Under the cash basis for the accounting period concept, revenues and expenses are reported in the income statement in the period in which cash is received or paid.

Under the accrual basis for the accounting period concept, revenues are reported in the income statement in the period in which they are earned.

Accrual Basis of Accounting

Revenue reported when earned Expense reported when incurred Properly matches revenues and expenses in determining net income Requires adjusting entries at end of period

ACCOUNTING EQUATION

BALANCE SHEET EQUATIONS SOURCES OF FUNDS = USES OF FUNDS EQUITIES = ASSETS ASSETS = LIABILITIES + CAPITAL CAPITAL = ASSETS LIABILITIES LIABILITIES = ASSETS CAPITAL

RULES OF ACCOUNTING EQUATION

ITEMS ASSETS LIABILITIES CAPITAL EXPENSES INCOMES LOSSES

DEBIT INCREASE DECREASE DECREASE INCREASE DECREASE INCREASE

CREDIT DECREASE INCREASE INCREASE DECREASE INCREASE DECREASE

BOOKS OF ACCOUNTS

JOURNAL SUBSIDIARY BOOKS LEDGER

JOURNAL

Journal refers to a daily record of business transactions It is a book of original entry Because transactions are first entered in journal

JOURNAL
SPECIMEN OF JOURNAL DATE PARTICULARS
Name of the a/c Dr To Name of the Account credited (Narration or explanation)

LF

DEBIT (RS)

CREDIT (RS)

LEDGER
Ledger means a register having a number of pages, consecutively numbered to maintain the ledger accounts A Ledger account can be defined as a summary statement of all the transactions relating to a a person, asset, expense or income which have take place a given period of time and shows their net effect.

SUBSIDIARY BOOKS

Subsidiary books refer to the special journal usually subdivided into various books which will enable recording of transactions of similar nature. Where subsidiary books are maintained, there will be several special journals instead of one journal.

TYPES OF SUBSIDIARY BOOKS

Purchase Book Sales Book Purchase Returns Book Sales Return Book Bills Receivable Book Bills Payable Book Cash Book Journal Proper

PROFORMA OF LEDGER

Dr
DATE

Name of the Account

PARTICULARS JF Rs. Rs. DATE

Cr
PARTICULARS JF Rs. Rs.

TRIAL BALANCE
A statement containing the balances of all ledger accounts, as at any given date, arranged in the form of debit and credit columns placed side by side and prepared with object of checking the arithmetical accuracy of ledger postings

PROFORMA OF TRIAL BALANCE TRIAL BALANCE OF .... AS ON ...

S.No Name of the Account L.F Debit (Rs) Credit (Rs)

TOTAL

ACCOUNTING CYCLE
RECTIFICATION OF ERRORS F I N A L A C C O U N T S Viz., BALANCE SHEET PROFIT & LOSS A/C TRADING A/C

T T R R A A N N S A C T T I I O O N N S S

JOURNAL JOURNAL OR

LEDGER LEDGER

TRIAL BALANCE TRIAL BALANCE

SUBSIDIARY SUBSIDIARY BOOKS BOOKS