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BASIC ACCOUNTING

What is Book-keeping ?
Book-keeping simply means
recording of transactions. In
absence of transaction, the
question of book-keeping does not
arise at all. So, transactions are
the basic raw materials of book-
keeping .
Some definitions of book-keeping:
 "Book-keeping is the art of recording business
dealings in a set of books."
- J.R.BATLIBOI
 "Book-keeping is the science of recording
transactions in money or money's worth in such a
manner that at any subsequent date, the nature
and effect of each transaction and the combined
effect of all the transactions may be clearly
understood, and so that the accounts thus kept
may show the owner of the books the true final
position."
- L.C.Cropper
 Thus ,book-keeping teaches us the correct
process of keeping records of business
transactions.
What is Accounting ?

 Accounting is defined by the


American Accounting Association
(AAA) as :
"the process of identifying,
measuring and communicating
economic information to permit
informed judgments and decisions by
the users of the information".
Accounting and Book- keeping

There lies important difference between
Accounting and Book keeping. Accounting deals
with the entire system for providing accurate and
up-to -date financial information - from the
design of the system through its operation to
interpretation of the information that is obtained.
To become an accountant, an individual must
undergo years of training and chalk up a great
deal of practical experiences.

 Book keeping, on the other hand, is the routine,


day-to-day record keeping. Book keepers are
responsible for obtaining financial data that the
accounting system process. An accounting system
cannot operate without good accurate book
keeping, but a book keeper can generally be
trained within a year or so.
PRINCIPLES & CONCEPTS OF
ACCOUNTING

Accounting is the language of


business. The concepts which guide
accounting practices and procedures
are commonly referred to as
Accounting Principles. Accounting
principles are general guide -lines for
sound accounting practices. The basic
principles and concepts which are
ground rules of accounting is called
Generally Accepted Accounting
Principles (GAAP).
Generally Accepted Accounting
Principles (GAAP)
 1. BUSINESS ENTITY CONCEPT : Accounts
are kept for entities, rather than for the
persons who own, operate or otherwise are
associated with those entities. For example,
when the Balance Sheet for the business entity
is prepared, the personal assets and liabilities
of owners are not considered.
 2. MONEY MEASUREMENT CONCEPT : In
accounting, a record is made only of those facts
which can be expressed in monetary terms,
i.e. all business transactions are recorded in
terms of money.
GAAP--------------
 3. GOING CONCERN CONCEPT : Accounting
assumes that an entity or concern normally
keep on going one year to the next. More
specifically, the entity will continue to operate
indefinitely unless there is evidence to the
contrary. It treats business to create values
(out put & services) on a continuing basis.
 4. COST CONCEPT : Accounting is based on
the cost concept. It states that accounting
focuses on the cost value of assets, rather than
on their market value.
GAAP--------------
 5. DUAL ASPECT CONCEPT: It states that
every transaction must have two aspects,
'Debit' and 'Credit'. This concept can be written
as an equation, that is, a statement that
'Something is equal to something else'.
Equation is: Assets= Liability+ Equity. The
Double Entry System of Accounting is based on
this concept.

 6. OBJECTIVE EVIDENCE: Objective evidence


should be maintained in support of business
transactions and data reported in the financial
statements in order to claim the confidence of
the people who use those statements.
GAAP--------------
 7. ACCOUNTING PERIOD: For the purpose
of reporting to outsiders the 'Year' is the usual
accounting period. It is necessary to prepare
periodic reports on operations, financial position
and changes in financial position of the
enterprise to get the result of success or
failure.
 8. CONSISTENCY CONCEPT: There should
be consistency in the use of accepted principles
of accounting from one year to another,
especially in comparing the financial statements
of one year with those of a proceeding year.
GAAP--------------
 9. MATERIALITY CONCEPT : The accountant
does not attempt to record a great many
events which are so insignificant that
recording of them in books is not all
justified by usefulness of the result.

 10.FULL DISCLOSURE : Accountants are


obliged to transmit all significant financial
data preferably in the body of the financial
reports but also in explanatory foot notes
for understanding by third parties.
GAAP--------------
 11.CONSERVATISM : It means that when the
accountant has reasonable choice, he usually will
show the lower of two assets amounts for a given
item. The concept is often stated as follows :
"Anticipate no profit and provide for all possible
losses.“
 12. ACCRUAL CONCEPT : The accrual concept implies
that revenues are reported in the period in which
they are earned, and expenses are reported in the
period which they incurred in an attempt to produce
revenues. The accrual basis of accounting requires
the use of an adjusting process at the end of the
accounting period to match revenues and expenses
for the period properly.
GAAP--------------
 13. MATCHING REVENUE AND
EXPENDITURE : The determination of periodic
net income is a two-fold problem involving (a)
the revenue recognized during the period & (b)
the expenditure to be allocated to the period.
Thus, revenues and expenditures must be
matched to determine net income or net loss
for the period.
 14. FAIRNESS : The financial reports
should be fair in the sense that they should not
favour certain groups at the cost of others. The
standard of fairness intends to ensure justice
and equity in reporting financial events of any
business entity.
Different Types of Accounts

 Account may also be termed as a group


or a class of transactions relating to a
particular 'person', 'properties', 'income'
'expenditure'.
Types of Accounts

In conventional method, account may be


classified as follows :
 Personal Account: relating to a person or
institution
example: Rahim A/c, BJMC A/c.
 Real Account: relating to a property

example: Building A/c, Furniture A/c.


 Nominal Account: relating to income or
expenditure,
example: Salary A/c, Commission A/c.
Types of Accounts
In modern method, accounts are classified
into five accounts, namely :
 Asset :
- Properties & rights owned by an enterprise.
- A valuable item that is owned or controlled
by the entity.
- That was acquired at a measurable cost.
 Liability :
- Obligations of a business entity.
- The claims of the creditors to the business
enterprise.
- The rights of creditors represent debts of
the business.
Types of Accounts
 Income :
- The amount by which equity
increased as a result of operations during
a period of time.
- An inflow of assets.
 Expense :
- An decrease in equity resulting
from operations during an accounting
period.
- Resources used up or consumed
during an accounting period.
- Out flow of assets.
Business Transactions
 A transaction means an exchange of
value measured in terms of money or
money's worth.
 A transaction conducted by a trading
concern is called business transaction.
 A business transaction is the occurrence
of an event of a condition that must be
recorded.
For example, payment of monthly salary of
Tk.50,000/-, purchase of goods on credit
worth Tk.1,00,000/- acquisition of land
and building of Tk.2,00,000/- are
illustrative of the variety of business
transaction.
Characteristics of Transactions
 Event must be measurable in terms of
money.
 Financial change must be brought by
the events.
 There must have two parties or
accounts in each transaction.
 Transaction must be independent.
Double Entry System
 The system of book-keeping in which the
doubly effect of each transaction is recorded is
called the Double Entry System.
 In 1494, 'Lucas Pacioli', an Italian scholar wrote
a book named as "SUMMA DE ARITHMETICA
GEOMETRIA PROPORTIONIET PROPORTIONLITA"
wherein a chapter on 'Double Entry System' was
incorporated. Later on, that was published in the
form of a book, named as 'DE COMPUTIS ET
SCRUPTURIS'.
 The people of the present world follow the
principles and methods as adopted in that book.
Hence, Luca Pacioli is known as founder of
modern book-keeping and Italy, birth place of
book-keeping
Double Entry System
 However, Double Entry of Book-keeping has been
defined by William Pickles as, "Double Entry
System seeks to record every transaction in
money or money's worth in its double aspect - the
receipt of benefit by one account and surrender of
a like benefit by another account, the former
entry being to the debit of the account receiving,
the later to the credit of the account
surrendering.“

 Simply, we can say that it refers to the necessity


of recording the two-fold aspect of each
transaction property. In any transaction, the
account gives value is called the 'Creditor' and
the account that receives the value is called the
'Debtor'. In other words, every transaction
creates two effects of opposite nature and equal
sum-one is 'Debit' and the other 'Credit'.
RULES FOR DETERMINING
DEBIT AND CREDIT

CONVENTIONAL METHOD :
 Personal Account :
Receiver of Value - Dr.
Giver of Value - Cr.
 Real Account :
Value coming in - Dr.
Value going out - Cr.
 Nominal Account :
All expenses or losses - Dr.
All income or gains - Cr.
MODERN METHOD
 Asset Account :
Asset Increase(+) - Dr.
Asset Decrease(-) - Cr.
 Liability Account :
Liability Increase(+) - Cr.
Liability Decrease(-) - Dr.
 Expense Account :
Expense Increase(+) - Dr.
Ext Decrease(-) - Cr.
 Income Account:
Income Increase(+) - Cr.
Income Decrease(-) - Dr.
 Owner's Equity Account:
O/E Increase(+) - Cr.
O/E Decrease(-) - Dr.
SUMMARY
Asset & Expense A/c.
 Dr. Cr.
Increase (+) Decrease (-)

Liability/Income /O.E. A/c.


 Dr. Cr.
Decrease (-) Increase (+)
EXAMPLES

 1. Bought Office Furniture for Tk.5000.00


#Furniture A/c. #Cash A/c
Office Furniture A/c. - Dr.
Cash A/c - Cr.
 2. Credit of goods for Tk.4000.00 from Mr. Ali
#Purchase A/c. #Ali's A/c
Purchase A/c. - Dr.
Ali's A/c (Account Payable) - Cr.
 3. Paid Salaries Tk.2500.00

#Salary A/c. #Cash A/c


Salary A/c. - Dr.
Cash A/c - Cr.
EXAMPLES

 4. Received Interest on Investments


Tk.1200.00 #Cash A/c,# Int. A/C
Cash A/c. - Dr.
Interest on Inv. A/c - Cr.
 5. Mr. X started business with
Tk.2000.00 #Cash A/c, #X's Capital A/c
Cash A/c. - Dr.
X's Capital A/c - Cr.