Chapter 1

Accounting

Learning Objectives
After studying this chapter, you should be able to:

Students are able to understand the concept of accounting Describe the elements of the accounting. Students are able to understand the difference between revenue and profit Students are able to understand the difference expenses and expenditures. Students are able to understand the important terms of accounting

Introduction of Accounting

Accounting is the art of recording, classifying and summarizing in terms of money to interpreting the result. Every business transaction is processed in four different steps: Recording: In the first step the transaction is recorded date wise in the books of accounts.

Introduction of Accounting

Classifying: In the second stage the transaction of similar nature account are recorded separately according to account wise. Summarizing: In this stage all necessary information are summarized on the base of classification. Interpretation: Here to find out the true results of business.

Need and Importance of Accounting

When a person starts a business, whether large or small, his main aim is to earn profit. He receives money from certain sources like sale of goods, interest on bank deposits etc. He has to spend money on certain items like purchase of goods, salary, rent, etc. These activities take place during the normal course of his business. He would naturally be anxious at the year end, to know the progress of his business. Business transactions are numerous, that it is not possible to recall his memory as to how the money had been earned and spent. At the same time, if he had noted down his incomes and expenditures, he can readily get the required information. Hence, the details of the business transactions have to be recorded in a clear and systematic manner to get answers easily and accurately .

Elements of Accountings
There are five different elements of accounts. Elements of Accounting: 1. Assets

Current Assets Fixed Assets

Tangible Fixed Assets Intangible Fixed Assets

2. Liabilities

Current Liabilities Long Term Liabilities

Elements of Accountings
3. Expense 4. Capital 5. Income Assets: Property of things having certain value possessed by the business are called assets such as building, furniture, cash etc.

Elements of accounting

Current Assets: Means assets which are converted into cash with in the year e.g sundry debtor, bill receivable, stock. Fixed Assets ( Non Current Assets ): Means these are the assets which is acquired not for sale but for permanent use in the business e.g. land, building, machinery, plant.
Tangible Fixed Assets: Those fixed assets that can see and touch like building, Furniture etc. Intangible Fixed Assets: Those fixed assets that can not see and touch like Goodwill etc.

Elements of accounts

Liabilities: Means obligations or debts which are payable by a business to its owner and others. Current Liabilities : these are liabilities which are payable immediately or in near future such as creditors, bank loan. Fixed Liabilities : These are liabilities which are payable after a long period of time such as long term loan, debenture, bonds.

Elements of accounts

Expenses: Means an expenditure whose benefit is finished or enjoyed immediately such as salaries, rent etc. Expenditure: Means expenditure take place when assets or services is acquired.

Elements of accounts

Revenue: Means collection of money from the sale of goods or services. Profit: Means collection of money from the sale of goods or services all expenses of the business.

Elements of accounting

Capital: The amount with which the trader starts his business or the amount which is actually invested in the business.

Some Important Terms of accounting

Transaction: Any dealing between two parties is called transaction Kinds of Transaction: Cash Transaction When cash is paid or received as a result of an exchange.

Some Important Terms of accounting

Credit Transaction: When the payment or receipt of cash is postponed for a future date. Business: It include any activity undertaking for the purpose of earning profit e.g banking business, merchandise / good business etc.

Purchases: Goods bought by the business for the prime purpose of selling them again. Cash Purchases: If goods are purchased and payment is made at the spot is called cash purchase. Credit Purchase: When goods are purchased and payment is not made at the same time, payment is to be made in future is called credit purchase.

Some Important Terms of accounting

Some Important Terms of accounting

Drawings: The Cash or goods taken away by the proprietor from the business for his personal use. Proprietor: He is the owner of the business. He invest capital in it, gives his time and attention to it. He is entitled to receive the profit or bear loss arising out of it.

Some Important Terms of accounting

Purchases Return/Return outwards: When Goods found defective then goods returned to suppliers as known as purchases return. Sales: When saleable goods are sold to customers is known as sales. Cash Sales: When saleable goods are sold and cash received at the same time is called cash sale.

Some Important Terms of accounting

Credit Sales: when goods sold to customer but cash not received at the spot is known as credit sales. Sales Return/Return inwards: When goods returned by customers due to any reason known as sales return

Some Important Terms of accounting

Creditor/Accounts payable: When any thing is purchased on credit basis, creditors or accounts Payable come into existence. Debtors/Accounts Receivable: When any thing is sold on credit basis, Debtors or Accounts Receivable come into existence.

Some Important Terms of accounting

Cash Discount: A deduction given by the creditor if the amount due is paid before the due date. Trade Discount: A deduction from the list price of things.

Some Important Terms of accounting

Capital: The amount or things that owner invested in business are called Capital. Bad Debts: A debt that a business will not be able to collect.

Some Important Terms of accounting

Prepaid expenses: an expense which has been paid in advance, the benefits from which will be received in the next period. It is included in the balance sheet under current assets as prepayments. Discounts allowed: A deduction from the amount due given to customers is known as Discount allowed.

Some Important Terms of accounting

Discount received: A deduction from the amount due given to a business by a supplier is known as Discount Received.

BRANCHES OF ACCOUNTING

Financial Accounting It is the original form of accounting. It is mainly confined to the preparation of financial statements for the use of outsiders like creditors, banks and financial institutions. The chief purpose of financial accounting is to calculate profit or loss made by the business during the year.

BRANCHES OF ACCOUNTING Cost Accounting Function of cost accounting is to ascertain the cost of a product and to help the management in the control of cost. It facilitates to management for internal control and discharging its functions efficiently. Management Accounting: It is the accounting for the management i.e accounting which provides necessary information to the management for discharging its functions.