LEARNING OBJECTIVES

After studying this chapter you should be able to:

Appreciate the need of accounting
Explain the meaning of accounting
Explain the meaning of accounting principles
Describe the different systems of book-keeping
Glossary
 Accounting is the recording of all business
transactions to provide a financial picture
of an organization

Say
Cheese
!
(a) Accounting is the art
(b) Of recording ,classifying and summarizing, in a
significant manner and
(c) In terms of money, transactions and events
which are, in part at least, of financial
character, and
(d) Interpreting the results thereof.
 CONTD
Accounting is the art
Of recording ,classifying and summarizing
Recording
Recording is done through a book called Journal

Classification
Is the process of grouping of transactions in the subsidiary

Summarizing
Is the art of making (i) Trial balance (ii) Trading and profit
and loss account (iii) balance Sheet (iv) Cash flow
 THE NEED FOR
ACCOUNTING
Managers, investors, and other internal groups want the
answers to two important questions:

How well did the

organization perform?

Where does the

organization stand?
OBJECTIVES OF
ACCOUNTING
Systematic recording of the business transactions
Calculation of profit or loss
Depiction of financial position
To make information available to various group and users at
a particular time.
To facilitate rational decision making
BOOK-KEEPING

Book-keeping is the science and art of

recording transactions in money or moneys worth
so accurately and systematically that the true state
of businessmans affairs can be correctly
ascertained.
SYSTEMS OF BOOK-
KEEPING
Single Entry System
Double Entry System
BOOK-KEEPING PROCESS

1. Identifying the business transactions

2. Recording at first stage i.e. Journal or Sub-Journal
3. Posting in Ledger
4. Ledger account balancing
5. Preparation of Trial Balance
NECESSITY OF BOOK-
KEEPING
Limitation of human memory
Owners and Managers being different persons
Determination of amounts recoverable and payable by
the business
Preparation of financial statement
Need for financial information
DOUBLE ENTRY SYSTEM

Double Entry System of book-keeping adheres to the rule,

without any exception, that for each transaction the debit
amount must equal the credit amount(s). This is why this
system is called double-entry.
RULES OF DOUBLE ENTRY
SYSTEM
RULES FOR PERSONAL ACCOUNTS
Debit the Receiver
Credit the Giver
RULES FOR REAL ACCOUNTS
Debit what comes in
Credit what goes out
RULES FOR NOMINAL ACCOUNTS
Debit all expenses and losses
Credit all gains and incomes
 THE ACCOUNTING CYCLE

Analyze Journalize Post entries to Prepare a trial

source transactions in the accounts in balance.
documents. the general the general
journal. ledger.

Prepare financial
statements.
IMPORTANT TERMS IN
ACCOUNTING
Proprietor: The person who takes initiatives to start the
business, invest his money or moneys worth and bears the
risk of the business is called proprietor.
Capital: It is the amount invested by the proprietor into the
business.
Drawings: It is the amount or benefit withdrawn by the owner
from the business for personal or domestic use. It may be in
form of cash, goods or assets.
Debtor: The person from whom amounts are due for goods
sold or services rendered or in respect of contractual
obligations is called debtor.
Creditor: The person to whom amounts is owned by the
enterprise on account of goods purchased or services rendered
or in respect of contractual obligations is called creditor.
CONTD
Debit: When an amount is entered on the left side of the
account, it is known as debit .
Credit : When an amount is entered on the right side of the
account, it is known as credit.
Receivables: It means the amount which outsiders owe to the
business on revenue accounts
Payables: It means the amount which business owes to
outsiders on revenue accounts.
Goods: It implies all those articles which have been purchased
by the enterprise for sale in the usual course of business
Purchases: The purchase of raw materials for production or
purchase of finished goods for sale is called purchase.
Sales: For the sale of finished goods, the term sales is used.
CONTD
Purchases Return or Return Outward: It is that part of the goods
purchased which is returned to the seller.
Sales Return or Return Inward: It is that part of the goods sold, which
is returned by the customer to us.
Stock: The goods left unsold at the end of the accounting period is
called closing stock. The stock may be raw material, work-in-progress,
finished goods.
Assets are economic resources or properties owned by the firm.
Classification of assets:
Fixed assets
Current assets
Fictitious assets

CONTD
Current assets (liquid assets) are those which can be converted
into cash within a year in the normal course of business.
Current assets include:
Cash
Tradable (marketable) securities
Debtors (account receivables)
Stock of raw material
Work-in-process
Finished goods
CONTD
Fixed assets are long-term assets.
Tangible fixed assets are physical assets like land,
machinery, building, equipment.
Intangible fixed assets are the firms rights and claims, such
as patents, copyrights, goodwill etc.

Fictitious assets: It refers to those assets which do not have

any physical form and have no realizable value. These are
shown as assets because of their non-recurring nature.
CONTD
Liability is a firms obligation to pay cash or provide goods or
services in the future.
Classification of liabilities:
Current liabilities
Fixed liabilities
Contingent liabilities
CONTD
Current liabilities are payable within a year in the normal
course of business.
They include:
Accounts payable (creditors)
Outstanding expenses
Advances from customers
Provision for tax
Provision for dividend
Fixed Liabilities are long term liabilities which are payable
after a period of one year.
Contingent Liabilities refers to those amounts which may or
may not become payable in future. For e.g. financial cases
pending etc.
CONTD
Expenses: the cost of doing business
Revenue: income an organization has earned
Profits (or earnings or income): the excess of revenues over
expenses.
Income: It is increase in the net worth of the enterprise
Gain: It is a profit of an irregular nature
Expenditure: It is the amount spent or liability incurred for the
value received.
FUNDAMENTAL
CONCEPTS
Who uses accounting information?
Owners
Managers
Investors (including potential)
Analysts on their behalf
Creditors (including potential)
Government (tax assessment)
Regulators
Customers

23 Introduction to Accounting
ACCOUNTING
CONCEPTS
Business Entity Concept:
1.
o Business considered to be distinct from its owners-proprietors, partners
or members.
o Considered as two distinct and separate entities.
o Transaction has to be recorded from point of view of business and not
owners.
o Cash contributed by the proprietor, for example, adds to the cash
resources of the business and hence, is debited to Cash account, though
it reduces the cash resources of the proprietor. The businessman is just
like a creditor of the business.
2. Money measurement concept:
o Only monetary transactions come under accounting framework.
o Money is a common denominator.
o A stable monetary unit to be adopted.
3. Going concern concept:
o Business has an indefinite life.
o Not end or liquidate in the near future.
24 Introduction to Accounting
CONTD.
4. Accounting period concept:
o Divides entire indefinite life of business into smaller periods.
o 12 months considered as one accounting period. Reports the
results of the activity undertaken in specific period.
5. Cost concept:
o Asset is ordinarily recorded in the books at the price at which it
was acquired i.e. at its cost price.
o Though recorded in the books at cost, in the course of time, they
become reduced in value on account of depreciation charges.
o Known as historical cost concept.
o Assets do not reflect the real worth i.e. Price level changes
6. Dual aspect concept:
o For every debit, there is a credit.
o Two sided effect to the extent of same amount.
o This concept has resulted in an accounting equation:
Assets Liabilities = Proprietors claim to Accounting
25 Introduction
CONTD.
7. Revenue Recognition Concept:
o Profit should be considered only when realized.
o No anticipated profit should be taken credit of.
8. Matching Concept:
o Expenses should be matched to the revenue of the appropriate accounting
period. For Example- Salary paid in January 2011 relating to December
2010 should be treated as expenditure for the year 2010 and not 2011.
9. Accrual Concept:
o Accrual is concerned with expected future cash receipts and payments.
o Make record of all expenses and incomes relating to accounting period
whether actual cash has been disbursed or received or not.
o For e.g. purchases and sales of goods on credit, rent (not yet paid),
salaries outstanding etc.
10. Stable monetary unit concept:
o Purchasing power of monetary unit remains same throughout.
o
26 Introduction to Accounting
ACCOUNTING
CONVENTIONS
1. Relevance
2. Objectivity
3. Feasibility
SUB FIELDS OF
ACCOUNTING

Management Financial
accounting accounting

Cost
accounting
CONTD..
Financial accounting
Primarily prepared for users external to the company.
Revenues, earnings, assets, etc.
Management accounting
Primarily for internal purposes
Costing, budgeting, net present value, etc.
Cost accounting
THE ACCOUNTING
EQUATION

ASSETS= LIABILITIES +CAPITAL

Or
CAPITAL = ASSETS - LIABILITIES
CONTD..

Fundamental Accounting Equation:

Assets = Liabilities + Owners Equity
This equation is always in balance
In order for this equation to remain in balance, double-entry
bookkeeping is employed.
That is, the recording of every transaction or event must have at
least two parts
Either an equal impact (increase or decrease) to both sides of
the equation or equal and opposite impact to one side.
The recording of every transaction must keep this equation in
balance

31 Introduction to Accounting
Summary

Accounting is a process of recording classifying, summarising

in a significant manner of transactions which are in financially
character and finally results are interpreted.
The revenue are recognized only at the moment of realization
but the expenses are recognized at the moment of payment.
The financial statements are found to be more useful to many
people.
Duality is the only concept which portrays the two sides of
single transactions.
GLOSSARY
Accounting
Accounting Concepts
Asset
Capital
Financial Accounting
Goods
Liability
Management Accounting