AC Introduction

8/3/2019 AC Introduction

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ACCOUNTINGACCOUNTING


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ACCOUNTINGACCOUNTING

AccountingAccounting is is thethe languagelanguage of of businessbusiness. .TheThe affairsaffairs andand thethe resultsresults of of thethebusinessbusiness areare communicatedcommunicated to to othersothersthroughthrough accountingaccounting information,information, whichwhichhashas toto bebe systematicallysystematically recordedrecorded andandpresentedpresented. .


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Accounting Accounting - - DefinitionDefinition

Accounting can be defined as the process of

identifying, measuring, recording and

communicating the economic events of an

organization to the interested users of theinformation.


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Chara cte r istics of AccountingChara cte r istics of Accounting

E conomic eventsE conomic eventsIdentification, measuring, recordingIdentification, measuring, recordingand communicationand communicationOrganizationOrganizationInterested users of informationInterested users of information


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E conomic Ev entsE conomic Ev ents

An economic event has been defined as a

happening of consequence to a business

entity. Economic events are classified into

External types

Internal types.


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E conomic Ev entsE conomic Ev ents C ontinueC ontinue

An external event which involves the

transfer or exchange of something of value

between two or more entities.


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y S ale of goods to customers.

Payment of monthly rent to the landlord.y Purchase of raw materials by an

enterprise from some other businessenterprise.

y Rendering of services to customers, etc.


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An internal event is an economic event that

occurs entirely within one enterprise.

Eg : S upply of raw materials or equipment

by the stores department to the

manufacturing department.


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Id entific a tionId entific a tion

It means determining what to record, i.e. toidentify recordable events. It involvesobserving activities and selecting thoseevents that are considered to be evidenceof economic activity.


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Id entific a tionId entific a tion continue continue

T he value of human resources, changes in

managerial policies or changes in personnelare important but none of these items isrecorded in financial accounts. However,

when a company makes a cash sale orpurchase, even if the item is small, it isrecorded in the books of account.


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M e a su r ementM e a su r ement

It means quantification, including estimates

of business transactions into financial terms,

i.e. rupees and paise. If an event cannot be

quantified in monetary terms, it is not considered for recording in financial

accounts.


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R eco r d ingR eco r d ing

O nce the economic events are identified

and measured in financial terms, they are

recorded, i.e. a chronological diary of these

measured events is kept in an orderly andsystematic manner.


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C ommunic a tionC ommunic a tion

T he economic events are identified,measured and recorded is communicated insome form to management and others forinternal and external uses. T he informationis communicated through the preparation

and distribution of accounting reports. T hemost common reports are in the form of financial statements (Balance S heet and

Profit and LossS

tatement).


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O r ga niz a tionO r ga niz a tion

It can be a business entity or a non-

business entity, depending upon the profit

or non-profit motive.


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U se r s of Accounting Info r m a tionU se r s of Accounting Info r m a tion

D ifferent categories of users need different

kinds of information for making decisions.T hese users can be divided into :

Internal Users; and

External Users.


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Inte r nal U se r sInte r nal U se r s

T hese are the persons who manage the

business, i.e. management at the top,

middle, and lower levels. T heir requirements

of information are different because theymake different types of decisions.


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Inte r nal U se r sInte r nal U se r s continuecontinue

T he top level is more concerned withplanning; the middle level is concernedequally with planning and control; and thelower level is concerned more withcontrolling operations. Information is

supplied on different aspects, e.g. cashresources, sales estimates, results of operations, financial position, etc.


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Ex te r nal U se r sEx te r nal U se r s

All persons other than internal users comein the group of external users. Externalusers can be divided into two groups:

y those having direct interest; and

y those having indirect interest in a business organization.


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Ex te r nal U se r sEx te r nal U se r s continuecontinue

T he main sources of information forexternal users are annual reports of business organizations, which state thefinancial position and performance and givethe auditor s report, director s report and

other information.


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Ex te r nal U se r sEx te r nal U se r s continuecontinue

Investors and creditors are the externalusers having direct interest. T ax authorities,regulatory agencies, customers, labourunions, trade associations, stock exchanges,investors, etc are indirectly interested in the

company s financial strength, its ability tomeet short-term and long-term obligations,its future earning power, etc for making

various decisions.


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ASS ET S ASS ET S

T hese are economic resources of anenterprise that can be usefully expressed inmonetary terms. Assets are things of valueused by the business in its operations.

y F ixed Assets

y Current Assets


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ASS ET S ASS ET S continuecontinue

y F ixed Assets are assets held on a long-term basis.

e.g. Land, Building, Machinery, Plant,Furniture and F ixtures, etc.


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ASS ET S ASS ET S continuecontinue

y Current Assets are assets held on ashort-term basis.

e.g. D ebtors, Bills receivable,S tock(Inventory), Cash and Bankbalances, etc.


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L I AB IL IT IE SL I AB IL IT IE S

T hese are obligations or debts that the

enterprise must pay in money or services at

some time in the future.

Long-term liabilities

S hort-term liabilities


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L I AB IL IT IE SL I AB IL IT IE S continue..continue..

y Long-term liabilities are those that are

usually payable after a period of one year.

e.g. A term loan from a financial institution,

debentures (bonds) issued by a company.


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L I AB IL IT IE SL I AB IL IT IE S continue..continue..

y S hort-term liabilities are obligations that

are payable within a period of one year.

e.g. Creditors, bills payable, overdraft from

a bank for a short period.


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C AP IT ALC AP IT AL

Investment by the owner for use in the firm

is known as capital. O wner s equity is the

ownership claim on total assets. It is equal

to total assets minus total liabilities.


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R EVEN U E SR EVEN U E S

T hese are the amounts the business earns

by selling its products or providing servicesto customers. O ther titles and sources of

revenue common to many businesses are:

sales, fees, commission, interest, dividends,

royalties, rent received, etc.


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EX P EN S E SEX P EN S E S

T hese are costs incurred by a business inthe process of earning revenue. Generally,expenses are measured by the cost of assets consumed or services used during anaccounting period. T he usual titles of

expenses are: depreciation, rent, wages,salaries, interest, costs of heat, light andwater, telephone, etc.


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P UR CH AS E SP UR CH AS E SPurchases are total amount of goodsprocured by a business on credit and forcash, for use or sale. In a trading concern,

purchases are made of merchandise forresale with or without processing.

In a manufacturing concern, raw materials

are purchased, processed further intofinished goods and then sold. Purchasesmay be cash purchase or credit purchase.


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SA L E SSA L E S

S ales are total revenues from goods or

services sold or provided to customers.S ales may be cash sales or credit sales.


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S T O CKS T O CK

S tock (Inventory) is a measure of

something on hand goods, spares and

other items in a business.

It is called stock on hand.


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S T O CK: S T O CK: continuecontinue

In a trading concern, the stock on hand is

the amount of goods which have not been

sold on the date on which the balance sheet

is prepared. T his is also called closingstock .


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S T O CK S T O CK continuecontinueIn a manufacturing concern, closing stock

comprises raw materials, semi-finished

goods and finished goods on hand on theclosing date.

S imilarly, opening stock is the amount of stock at the beginning of the accounting

year.


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DE BT OR SDE BT OR S

D ebtors are persons and/or other entities whoowe to an enterprise an amount for receivinggoods and services on credit.

T he total amount standing against such persons

and/or entities on the closing date, is shown in theBalance S heet as S undry D ebtors on the asset side.


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C R E DIT OR SC R E DIT OR S

Creditors are persons and/or other entities whohave to be paid by an enterprise an amount forproviding the enterprise goods and services oncredit.

T he total amount standing to the favour of suchpersons and/or entities on the closing date, isshown in the Balance S heet as S undry Creditorson the liability side.


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ACC OU NT ING P R IN C IP L E S ACC OU NT ING P R IN C IP L E S

Accounting principles can be subdivided into

two categories:y Accounting Concepts ; and

y

Accounting Conventions .


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y Accounting Concepts

y Accounting Conventions

T he term concept is used to connoteaccounting postulates, that is necessaryassumptions and conditions upon which

accounting is based. T he term convention is used to signify customs and traditions asa guide to the presentation of accountingstatements.


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Accounting Concepts

Business Entity Concept

Money Measurement Concept

Cost Concept

Going Concern Concept

D ual Aspect Concept

Realization Concept

Accounting Period Concept


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Accounting Conventions

Convention of Consistency

Convention of D isclosure

Convention of Conservation


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Accounting Concepts

The term concept is used to connoteaccounting postulates, that is necessary

assumptions and conditions upon whichaccounting is based.


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Business E ntity C onceptBusiness E ntity C oncept

Business is treated as a separate entity orunit apart from its owner and others. All thetransactions of the business are recorded inthe books of business from the point of viewof the business as an entity and even the

owner is treated as a creditor to the extent of his/her capital.


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M oney M e a su r ement C onceptM oney M e a su r ement C oncept

In accounting, we record only those

transactions which are expressed in termsof money. In other words, a fact which can

not be expressed in monetary terms, is not recorded in the books of accounts.


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C ost C onceptC ost C oncept

T ransactions are entered in the books of accounts at the amount actually involved.S uppose a company purchases a car forRs.1,50,000/- the real value of which isRs.2,00,000/-, the purchase will be recorded

as Rs.1,50,000/- and not any more. T his isone of the most important concept and it prevents arbitrary values being put ontransactions.


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G oing C once r n C onceptG oing C once r n C oncept

It is persuaded that the business will exists

for a long time and transactions arerecorded from this point of view.


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Du al Aspect C onceptDu al Aspect C oncept

Each transaction has two aspects, that is,

the receiving benefit by one party and thegiving benefit by the other. T his principle is

the core of accountancy.


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Du al Aspect C onceptDu al Aspect C oncept continuecontinue

For example, the proprietor of a businessstarts his business with Cash Rs.1,00,000/-,Machinery of Rs.50,000/- and Building of Rs.30,000/-, then this fact is recorded at two places. T hat is Assets account (Cash,

Machinery & Building) and Capital accounts.T he capital of the business is equal to theassets of the business.


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Du al Aspect C onceptDu al Aspect C oncept continuecontinue

T hus, the dual aspect can be expressed asunder

Capital + Liabilities = Assets

or

Capital = Assets Liabilities


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R e al iza tion C onceptR e al iza tion C oncept

Accounting is a historical record of

transactions. It records what has happened.It does not anticipate events. T his is of

great important in preventing business firmsfrom inflating their profits by recording sales

and income that are likely to accrue.


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Accounting Pe r iod C oncept Accounting Pe r iod C oncept

S trictly speaking, the net income can bemeasured by comparing the assets of thebusiness existing at the time of itsliquidation. But as the life of the business isassumed to be infinite, the measurement of

income according to the above concept isnot possible. S o a twelve month period isnormally adopted for this purpose. T his timeinterval is called accounting period.


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Accounting Conventions

T he term convention is used to signifycustoms and traditions as a guide to the

presentation of accounting statements.


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C on v ention of C onsistencyC on v ention of C onsistency

In order to enable the management to drawimportant conclusions regarding the workingof the company over a few years, it isessential that accounting practices andmethods remain unchanged from one

accounting period to another. T hecomparison of one accounting period withthat of another is possible only when theconvention of consistency is followed.


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C on v ention of Disc losu r eC on v ention of Disc losu r e

T his principle implies that accounts must behonestly prepared and all materialinformation must be disclosed therein. T hecontents of Balance S heet and Profit andLoss Account are prescribed by law. T hese

are designed to make disclosure of allmaterial facts compulsory.


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C on v ention of C onse r v a tionC on v ention of C onse r v a tion

F inancial statements are always drawn upon rather a conservative basis. T hat is,showing a position better than what it is,not permitted. It is also not proper to showa position worse than what it is. In other

words, secret reserves are not permitted.


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FU N C T IO N S OF FU N C T IO N S OF ACC OU NT ING ACC OU NT ING

Keeping systematic records

Protecting properties of the business Communicating the results

Meeting legal requirements


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K eeping system a tic r eco r d sK eeping system a tic r eco r d s

T he first function of accounting is to keep a

systematic record of financial transactions,to post them to the ledger accounts and

ultimately prepare final statements.


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P r otecting p r ope r ties of t h eP r otecting p r ope r ties of t h ebusinessbusiness

T he second important function is to protect

the property of the business. T he systemaccounting is designed in such a way that it

protects its assets from an unjustified andunwarranted use.


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M eeting leg al r equi r ementsM eeting leg al r equi r ements

T he fourth and the last function of

accounting is to meet the legalrequirements under the Companies Act,

IncomeT

ax Act,S

alesT

ax Act and so on.


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T H E ACC OU NT ING CYC L ET H E ACC OU NT ING CYC L E

Recording transactions in subsidiary books.

Classifying data by posting from subsidiarybooks to the accounts.

Closing the books and preparation of final

accounts.


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S Y S TE M S OF ACC OU N INGS Y S TE M S OF ACC OU N ING

Cash S ystem

S ingle Entry S ystem

D ouble Entry S ystem


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Ca s h SystemCa s h System

T his system takes into account only cashreceipts and payments on the assumptionthat there are no credit transactions. Even if there are any, they will not be recorded.T his system may be suitable for charitable

institutions like schools, colleges, socialclubs, etc.


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Sing le E nt r y SystemSing le E nt r y System

As the name itself implies, it deals with onlyone aspect of transaction. T his systemrecognizes cash and personal items of thetransactions and it ignores the impersonalitems. S o it is incomplete, inaccurate and

unscientific.


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Doub le E nt r y SystemDoub le E nt r y System

T his is the most scientific system that recognizes both the aspects of eachtransaction and also records each aspect.T his system takes into account everybusiness transaction in its double aspect,

i.e., receiving benefit by one party andgiving the like benefit by another. S o it records the two-fold aspect of everybusiness transaction.


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Doub le E nt r y SystemDoub le E nt r y System continuecontinue

Example: When A purchases a car, hereceives the benefit in the form of a car andgives the benefit in the form of money.S imilarly, the car seller receives the benefit in the form of money and gives the benefit

in the form of a car.


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Doub le E nt r y SystemDoub le E nt r y System continuecontinue

D efinition

T he process by which the dual aspects of business transactions are recorded is knownas the double entry book-keeping. It is acomplete book-keeping in the sense that it records all the two aspects, debit and credit in each business transaction, in equal value.


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C L ASS IF IC AT IO N OF ACC OU NT SC L ASS IF IC AT IO N OF ACC OU NT S

Every business deal with other Person ,possesses Assets , pay Expenses and receive

Income .S o from the above, we can see every businesshas to keep

An account for each person An account for each asset and

An account for each expense or income.


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Accounts in the names of persons are known as Personal Accounts

Accounts in the names of assets are known as Real Accounts

Accounts in respect of expenses and incomes

are known as Nominal Accounts


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ACCO UNTS

PERSO NAL ACCO UNTS

IMPERSO NAL ACCO UNTS

REAL ACCO UNTS

NO MINAL ACCO UNTS


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P E R S O N AL ACC OU NT SP E R S O N AL ACC OU NT S

Accounts in the name of persons are known aspersonal accounts.

Eg: Babu A/C,

Babu & Co. A/C,

O utstanding S alaries A/C, etc.


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R E AL ACC OU NT SR E AL ACC OU NT S

T hese are accounts of assets or properties. Assetsmay be tangible or intangible. Real accounts are

impersonal which are tangible or intangible innature.

Eg:- Cash a/c, Building a/c, etc are Real Accounts related to things which we canfeel, see and touch.

Goodwill a/c, Patent a/c, etc Real Accountswhich are of intangible in nature.


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N OM IN AL ACC OU NT SN OM IN AL ACC OU NT S

T hese accounts are impersonal, but invisible andintangible. Nominal accounts are related to those

things which we can feel, but can not see andtouch. All expenses and losses and all incomesand gains fall in this category.

Eg:- S alaries A/C, Rent A/C, Wages A/C, Interest Received A/C, Commission Received A/C,D iscount A/C, etc.


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DE BIT AN D C R E DITDE BIT AN D C R E DIT

Each accounts have two sides the left side andthe right side. In accounting, the left side of anaccount is called the D ebit S ide and the right side of an account is called the Credit S ide . T heentries made on the left side of an account iscalled a D ebit Entry and the entries made on theright side of an account is called a Credit Entry .


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RUL E S FOR DE BIT AN D C R E DITRUL E S FOR DE BIT AN D C R E DIT

P ersonalP ersonal

AccountAccount

Debit the ReceiverDebit the Receiver

Credit the GiverCredit the Giver

Real AccountsReal AccountsDebit what comes inDebit what comes in

Credit what goesCredit what goes

outout

NominalNominalAccountsAccounts

Debit all Ex pensesDebit all Ex pensesand Lossesand Losses

Credit all IncomesCredit all Incomes

and Gainsand Gains


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Steps fo r find ing t h e d ebit a nd c r e d it a spectsSteps fo r find ing t h e d ebit a nd c r e d it a spectsof a par ticu lar tra ns a ctionof a par ticu lar tra ns a ction

F ind out the two accounts involved in thetransaction.

Check whether it belongs to Personal, Real orNominal account.

Apply the debit and credit rules for the twoaccounts.


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Ex e r ciseEx e r cise

Purchased a Building for Rs.20,000/-.

Paid Cash Rs.1,000/- to S atheesh. Paid S alary Rs.1000/-.

Received Commission Rs.250/-.

S old goods for Cash Rs.3500/-.


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Subsi d iar y BooksSubsi d iar y Books

General JournalS pecial Journals

Purchase BookS ales Book

Purchase Return BookS ales Return Book

Bills Receivable Book Bills Payable Book Cash Book Petty Cash Book


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J ou r nalJ ou r nal

Journal is the prime or original book of entry inwhich all transactions are recorded in the form of entries. Journalising is an act of recording orentering transactions in a Journal in the order of date.

DateDate P articularsP articulars LFLF DebitDebitAmountAmount

CreditCreditAmountAmount


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J ou r nal E nt r yJ ou r nal E nt r y

Jan 1, 1981 Prakash S tarted a business Rs.15,000/-

DateDate P articularsP articulars LFLF DebitDebitAmountAmount

CreditCreditAmountAmount

19811981Jan 1Jan 1

Cash a/cCash a/cDr.Dr.

To P rakashs CapitalTo P rakashs Capital

a/ca/c(Being cash invetsed to(Being cash invetsed tobusiness)business)

15,00015,00015,00015,000


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Debit N oteDebit N ote

It is a statement prepared by a businessIt is a statement prepared by a businessorganization informing another personorganization informing another personthat his account has been debited for thethat his account has been debited for thereasons given in the debit note.reasons given in the debit note.Reasons for issue of debit notesReasons for issue of debit notes1. P urchase returns1. P urchase returns\ \2 Short receipt of goods2 Short receipt of goods

3. P rice reduction claimed by a buyer or3. P rice reduction claimed by a buyer orhigher price charged by a supplierhigher price charged by a supplierDeduction for discountDeduction for discount


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Increase in rate quantity in case of Increase in rate quantity in case of sale of goodssale of goodsIncrease in duty and sale ta xIncrease in duty and sale ta x

Recovery of packing transportationRecovery of packing transportationcharges etccharges etc


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Accounting fo r d ebit notes Accounting fo r d ebit notes

It is accounted by passing journal entryIt is accounted by passing journal entryImplications in auditImplications in auditE ffect of Cenvat credit on goods returnedE ffect of Cenvat credit on goods returned

Reduction in rates also has its effect onReduction in rates also has its effect oncenvat creditcenvat creditIncrease in rate attracts increased dutyIncrease in rate attracts increased dutyUse of input for job works has cenvatUse of input for job works has cenvatcredit effectcredit effectRetention of scrap by job worker also hasRetention of scrap by job worker also hasthe same effectthe same effect


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Cr e d it noteCr e d it note

It is a statement prepared by the businessIt is a statement prepared by the businessorganization informing the other personorganization informing the other personthat his account is credited.that his account is credited.

Sales returns, damage or spoiled goodsSales returns, damage or spoiled goodsrejected, shortage of goods dispatched.rejected, shortage of goods dispatched.Return of empty container or packagesReturn of empty container or packagesAccounting is the same as that of debitAccounting is the same as that of debitnote through journal entries.note through journal entries.


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Le d ge r Le d ge r

Ledger is the book where variousLedger is the book where variousaccounts are maintainedaccounts are maintainedAfter journalizing the ne x t step in theAfter journalizing the ne x t step in theaccounting process is making entriesaccounting process is making entriesin the ledgerin the ledger


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F o r m a t of le d ge r F o r m a t of le d ge r

Ledger account has two sides. DebitLedger account has two sides. Debitside and credit side. The followingside and credit side. The followingcolumns are present in each sidecolumns are present in each side1.Date1.Date2. P articulars2. P articularsJournal folioJournal folioAmountAmount

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