Fundamentals of Accounting

Created By : Sudheer Movva

Overview
Accounting Definition Types of Accounts and its Rules Accounting Terms Accounting Concepts Accounting Policies Financial Statements

Accounting
Its a system of recording and summarizing business and financial transactions and analysing, verifying and reporting the results

Accounting is one of the key functions for almost any business. It may be handled by a bookkeeper and accountant at small firms or by sizable finance departments with dozens of employees at larger companies

Accounting Cycle

Types of Account and its Rules

Personal Account : These are accounts of parties with whom
the business is a carried on. Ex: Ram A/c, ABC & Co A/c Rules of Accounting: Debit the Receiver Credit the Giver

Real Account : These are asset accounts that are owned by

businesses and the balances in these accounts at the end of an accounting period will be carried over to the next period. Ex: Cash Account, Land Account, Building Account etc.

Rules of Accounting:
Debit what comes in Credit what goes out

Types of Account and its Rules

Nominal Account : These are accounts of expenses and losses
which a business incurs and income & gains which a business earn in the course of business. Ex: Rent Account, Interest Account Rules of Accounting: Debit all expenses and losses Credit all income and gains

Accounting

Accounting Terms
Entity : Organization or a Company Asset : What an Entity Owns Ex : Furniture, Own Buildings Liability : What an Entity Owes. Ex : Bank Loans Income/Revenue : Amount received by an Entity. Ex : Interest Received Expenses : Amount spend by an Entity. Ex : Salaries Paid Owners Equity : Owners equity represents the owners investment in the business minus the owners draws or withdrawals from the business plus the net income (or minus the net loss) since the business began. Mathematically, the amount of owners equity is the amount of assets minus the amount of liabilities

Accounting Concepts
Accounting Concepts are the guidelines used by the accountants in the preparation of Financial Statements. Entity Concept Going Concern Concept Monetary Concept Historical Cost Concept Accounting Equivalence Concept Accounting Period Concept Conservatism Concept Realization Concept Matching Concept

Accounting Concepts
1.Entity Concept : Accounting is carried out for a given Entity, as distinct from its promoters Ex : Ram Started a Green Company with 1,00,000. Green Company is an Entity and Ram is the Promoter of the Entity. The Capital contributed by Ram is treated as liability of the Green Company to Ram 2. Going Concern Concept : It Assumes that business will continue to trade for the foreseeable future. Allows costs and Revenues to be allocated to future accounting periods. Provides a more realistic value of business assets Ex : Work in Progress being forwarded to next financial period

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Accounting Concepts
3. Monetary Concept : Every recorded event or transaction is measured in terms of money. Using this principle, a fact or a happening which cannot be expressed in terms of money is not recorded in the accounting books. Thus, it is not acceptable to record such non-quantifiable items as employee skill levels or the quality of customer service in Financial Statements. 4. Historical Cost Concept : A Building at the Purchase Price of Rs.25,000 appreciated sharply to Rs.50,000. By Historical Cost Concept we would continue report the building gross value at Rs.25,000 and not at Rs.50,000

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Accounting Concepts
5. Accounting Equivalence Concept : Accounting Equivalence Concept is that ASSETS = LIABILITIES Ex : Ram Started a Green Company with Rs.1,00,000. Here the amount is a liability which the Green Company needs to return to Ram and at the same time Green Company has Rs.1,00,000 cash which is an asset. 6. Accounting Period Concept : The income Statement is always prepared for a specified accounting period. Its central purpose is to show the profits/losses made in that specified period. Profits or Losses represent the difference between Revenues and Expenses.

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Accounting Concepts
7.Conservatism Concept : The Concept Determines when profits are recognized. Ex: The Brown Company has stocks of Rs.50,000 on 1st Aug. Suppose the market Value of these stocks was raised to Rs.70,000 on 31st Aug. Based on the Historical cost concept we will consider the value of the stocks as Rs.50,000 and record them in Balance sheet. If the same stock value comes down to Rs.40,000 then we will mention the value of stock as Rs.40,000 only not as Rs.50,000

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Accounting Concepts
8.Realization Concept : The Concept determines the amount of revenue to be recognized. The Simple rule is that the amount recognized as revenue is the amount that is reasonably certain to be ultimately collected as cash. Ex : A Blue Company obtained an order from Government for supply of Computers. Should revenue be recognized When the Blue Company obtained the order or When it completed assembling the Computers or When it delivered the systems to Government or When Government accepts the delivery When the government paid up In First two cases there is uncertainty that the Company can complete the order so it is too early to recognize the revenue.
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Accounting Concepts
In third case even the company delivered the systems we cant recognize the revenue as the government might accept or reject the delivery The Revenue will be recognized when the government accepts the order and paid the order amount.

So the revenue will be always recognized when there is a certainty that we will receive the amount.

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Accounting Concepts
9.Matching Concept : Matching Concept specifies how expenses should be recognized. This concept specifies that all the expenses related to the revenue recognized for an accounting period should be reflected in the Income statement. Ex: All the expenses incurred to assemble the Computers will need to be accounted in the same period when revenue is being recognized.

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Accounting Policies
Each Entity needs to define a set of accounting policies consistent with the nature of its business. These policies provide clear guidelines for Revenue Recognition, Fixed assets valuation, Inventory Valuation, Depreciation of Fixed Assets and so on. Below are the few Policies: Revenue Recognition Inventory Valuation Fixed Assets and Depreciation

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Accounting Policies
1.Revenue Recognition : It provides guidelines with respect to the timing and the amount of revenue to be recognized. The most standard time of revenue recognition is at the time of delivery of goods. It is assumed that there is reasonable certainty about collection of cash. However applying this policy to preparation of income statement of a builder of Residential block of flats may create problems. If a builder completes the entire block in 2 years, this policy would mean all revenues would be recognized only in second year. No revenues will be recognized in the first year, even though lot of effort might have gone in the first year.

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Accounting Policies
The policy on revenue recognition would provide an option of recognition of revenue on basis of percentage of work completed in the first year. Ex: If 40% of work completed in first year then the percent completion method would permit recognition of 40% of revenue in the first year. 2. Inventory Valuation : Inventories can be valued using several methods. The common ones that are used are Weighted average method FIFO(First In First Out) LIFO(Last In First Out)

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Accounting Policies
3.Fixed Assets and Depreciation : Fixed Assets are recorded at the cost incurred to make the asset usable Ex : A company acquires a personal computer for Rs.50,000, it then pays Rs.1,000 for transport and Rs.2,000 for installation. Now as the computer is ready the company will show the cost of the asset as Rs.53,000(50,000+1,000+2,000) This Rs.53,000 company has to written off as Depreciation over the life of the asset. Below are few Depreciation methods. a. Straight Line method b. Diminishing balance method c. Units of production

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Financial Statements
A Financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form easy to understand. They typically include basic financial statements, accompanied by a management discussion and analysis:

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Financial Statements
Statement of financial position: Also referred to as a balance sheet, reports on a company's assets, liabilities, and ownership equity at a given point in time.

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Financial Statements
Statement of comprehensive income: Reports on a company's income, expenses, and profits over a period of time. A profit and loss statement provides information on the operation of the enterprise. These include sales and the various expenses incurred during the processing state.

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Financial Statements
Statement of cash flows: Reports on a company's cash flow activities, particularly its operating, investing and financing activities.

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Financial Statements
For large corporations, these statements are often complex and may include an extensive set of notes to the financial statements and management discussion and analysis. The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements.

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Fundamentals of Accounting

Thank You

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