Accounting(Introduction) 1

7/28/2019 Accounting(Introduction) 1

1/66

FUNDAMENTAL

OF

ACCOUNTING


2/66

COURSE OUTLINE

PURPOSE AND NATURE OF

ACCOUNTING,

VARIOUS AREAS OF ACCOUNTING,

FORM OF BUSINESS,

G A A P,

USERS OF ACCOUNTING,

BUSINESS TRANSACTION,

ACCOUNTING EQUATION,


3/66

COURSE OUTLINE

CHANGING IN FINANCIAL POSITION,

DOUBLE ENTRY SYSTEM,

JOURNAL,

LEDGER,

TRIAL BALANCE,

ACCOUNTING CYCLE, MEASURING BUSSINESS INCOME


4/66

COURSE OUTLINE

ADJUSTMENT PROCESS,

COMPLETION OF ACCOUNTING CYCLE,

WORK SHEET,

FINANCIAL STATEMENTS,

ACCOUNTING FOR MERCHANDISES,

BANK RECONCILIATION STATEMENT, DEPRECIATION METHODS,


5/66

COURSE OUTLINE

INVENTORIES ACCOUNTING METHODS,

CASH FLOW STATEMENTS AND THEIR

CLASSIFICATION, etc.


6/66

ACCOUNTING

BASIC

TERMONOLOGIES


7/66

ACCOUNTING:

ACCOUNTING IS SPECIALISED

INFORMATION SYSTEM THAT PROVIDES

ECONOMIC INFORMATION TO THE

DIFFERENT GROUPS OF PEOPLE


8/66

BRANCHES OF ACCOUNTING

FINANCIALACCOUNTING

accounting is an art ofrecordingclassifing andsummarizing in terms of

money' transaction andevent of financialcharacter and interpretingthe results to differentusers

COST ACCOUNTING:is to ascertain the cost ofproduct and help themanagement in the controlof cost

MANAGEMENT ACCOUNTING:Which provides necessaryinformation to the managementfor discharging its functions. itenable the management to takedecision and control activities

ACCOUNTING

FINANCIAL COST MANAGEMENT


9/66

BOOK-KEEPING:

recording of

business transactionin a systematic way

BUSINESS:

any activityundertaken for the

purpose of earning

profit.

PROPRIETOR:

the owner of concern,

invest capital, timeand attention, bear

loss n enjoy profit.

CAPITAL:

any thing n amount

invest by the owner.


10/66

TRANSACTION

ANY DEALING BETWEEN TWO PERSON

OR THINGS.

IT MAY BE FOR CASH

IT MAY BE ON CREDIT


11/66

DRAWINGS:

good n cash taken

away by the owner. GOOD/MERCHANDIZ:

all thing in which

business deals

PURCHASES:

Any thing purchase for re

sale purpose.

ASSETS:

all the things own or

possessed by the biz.

LIABILITIES:

any debts due by biz.

SALES:

goods are sold forprofit.

RETURNS:

if return by customerits sales return and ifreturn to

seller/supplier itspurchases reutrn


12/66

REVENUE:

Any income

generating by biz. DISCOUNT:

Any reduction in

price.

TRADE DISCOUNT:

Any concession in

listed/printed

price,at the spot.

CASH DISCOUNT:

Deduction allowed by

the creditor to the

debtor for prompt

payment.

ALLOWANCE:

Any reduction in price

due to defect.


13/66

DEBTORS:

from whom the biz

receive. CREDITOR:

To whom the biz pay.

EXPENDITURE/COST:

Any assets acquired.

EXPENCES:

Used/enjoyed benefit of

expenditure

STOCK/INVENTORY:

Unsold goods. ACCOUNT:

Brief record of

transaction; about

person or things.

EQUITY:

Part, share or

investment


14/66

ACCOUNTING CYCLETRANSACTION

JOURNAL

LEDGER

TRIAL BALANCE

PROFIT/LOSS STATMENT

BALANCE SHEET


15/66

GROUPS

OF

ACCOUNTINGUSERS


16/66

OWNER

MANAGEMENT

LABOUR/EMPLOYEECREDITORS

SUPPLIER

CUSTOMER

GOVERNMENT


17/66

G A A P


18/66

GENERALLY ACCEPTED ACCOUNTING

PRINCIPLES(GAAP)ACCOUNTING

CONCEPTS:

BIZNESS ENTITY

GOING CONCERN

MONEYMEASUREMENT

COST

DUAL ASPECT

ACCOUNTINGPERIOD

MATCHING

REALISATION

ACCOUNTINGCONVENTIONS:

DISCLOSURE

MATERIALITY

CONSISTENCY

CONSERVATISM


19/66

ACCOUNTING

CONCEPTS


20/66

BUSINESS ENTITY CONCEPT

Business and business man/owner both are

separate entities accounting deals and

concerned with only business, financial

matters. in short we done our work ofaccounting with business point of view.


21/66

GOING CONCERN CONCEPT

It shows that the business will exist for a long

time to come.


22/66

MONEY MEASUREMENT

CONCEPT

Accounting records only those transaction

which can be expressed in terms of money.

transaction or event which can not be

expressed in money do not place in books ofaccounts.


23/66

(HISTORICAL)COST CONCEPT

recording of an assets at there purchasing

price.


24/66

ACCOUNTING PERIOD CONCEPT

The life of the business is divided into equal

segments, for studying the results after each

segments.

The time/duration of business period istwelve(12)months or a year.


25/66

Matching concept

Compare business expense of a particular

period with its relevant periods revenue.

Match the expenses with revenue


26/66

REALISATION CONCEPT

Record the revenue at the time of delivering

of product to the customer.


27/66

DUAL ASPECT CONCEPT

Every transaction has two aspect.

One what benefit business is receiving and

other what benefit business is giving.


28/66

ACCOUNTING

CONVENTIONS


29/66

CONVENTION OF DISCLOSURE

Disclose all the significant information.

All the material information is clearly

show/disclose, which are in the interest of its

users.


30/66

CONVENTION OF

MATERIALITY Relevant importance of an item or event.

Simply, expensive transaction have place as

well as relatively important one.


31/66

CONVENTION OF CONSISTENCY

The accounting practice remain unchanged

from one year to another.


32/66

CONVENTION OF

CONSERVATISM

CAUTION APPROACH

POLICY OF PLAY SAFE

IGNORE ANTICIPATED PROFIT AND

ACCOUNT FOR ALL POSSIBLE LOSSES


33/66

BASIS OF ACCOUNTING

CASH BASIS OF

ACCOUNTING

Its a system in which

entries/recording aremade only when

cash/cheque is

received or paid.

ACCRUALS BASIS OF

ACCOUNTING:

Its a system in which

entries are madewhen they occur.


34/66

FINANCIAL REPORTING

PROCESSProvide information for;

Decision making

Sources and resources

Financial performance

In and out flow of cash


35/66

KIND OF FINANCIAL

STATMENTS BALANCE SHEET

INCOME STATEMENT

CASH FLOW STATEMENT

CHANGE IN EQUITY STATEMENTS

NOTES


36/66

Most businesses prepare the following financialstatements to report accounting information:

1. Income Statement

2. Balance Sheet3. Statement of Cash Flows

4. Statement of Stockholders Equity

5. Statement of Retained Earnings

Overview of Financial Statements


37/66

A Balance Sheet(Statement of

Financial Condition) identifies

a companys assets and claims

to those assets by creditors and

owners at a specific date.(A = L + SE) (a snapshot)



38/66

Company XYZZ

Balance Sheet

At December 31, 2006

AssetsCurrent assets:

Cash $ 12,600

Accounts receivable 9,600

Merchandise inventory 22,000

Supplies 800

Prepaid rent 1,000

Total current assets $ 46,000

Long-term (Fixed) Assets:

Property and equipment, at cost 300,000Less Accumulated depreciation (60,000)

Total Long-term (Fixed) Assets $240,000

Total assets $286,000

Continued

Li biliti d St kh ld E it


39/66

Liabilities and Stockholders Equity

Current liabilities:

Accounts payable $ 8,500

Unearned revenue 3,800

Interest payable 700

Notes payable, current portion 4,000

Total current liabilities $ 17,000

Long-term liabilities:

Notes payable, long-term 80,000Total liabilities $ 97,000

Stockholders equity:

Common stock 150,000

Retained earnings 39,000Total stockholders equity $189,000

Total liabilities and stockholders equity $286,000


40/66

BALANCE SHEET

A lists ofASSETS,

L IAB IL ITY and

OWNERS

EQUITYof biznessas of a specific

date,usually at the

close of the last day of

a month or year.

Any properties & possessions

of the business.

CURRENT ASSETS:whose

benefits are for/in one

year.e.g.cash,bank,A/R,B/R,N/R,STOCK etc.

FIXED ASSETS:whose

benefits are for more than one

year.e.g.plant,machinery,furniture,fixture

,fittings,vehicles,building,land

etc.


41/66

KINDS OF FIXED ASSETS

TANGIBLE ASSETS:

THOSE WHICH HAVE

PHYSICAL

EXISTENCE,PROOFWITH FIVE SENCES.

INTANGIBLE

ASSETS:

THOSE WHICH HAVE

NO PHYSICALEXISTANCE,e.g.good

will,patents,right,trad

emark,copy right etc.


42/66

LIABILITIES

Any debts and

obligation of the

business.

CURRENTLIABILITIES:

FOR ONE

YEAR;e.g.credit,B/P,N

/P,creditors,b.o.d etc.

FIXED LIABILITIES:

FOR MORE THAN ONE

YEAR.e.g.loan,mortga

ge,capital.etc.


43/66

INCOME STATMENT

A summary of the REVENUE and

EXPENSES of a biz. For a specific period of

time,such a month or a year.


44/66

The I ncome Statement(Statement

of Earnings) reports revenues and

expenses for an accounting periodas a means of determining how well

a company has performed ingenerating profits for its owners.


Company XYZZ


45/66

Company XYZZ

Income Statement

For the Year Ended December 31, 2006

Sales revenue $700,500Cost of goods sold (450,200)

Gross profi t 250,300

Depreciation Expense (60,000)

Selling, general, & administrative exp. (90,300)

Operating income 100,000Interest expense (5,000)

Pretax income 95,000

Income taxes (40% tax rate) (38,000)

Net income $ 57,000Earnings per share

Average number of common shares 4,000$ 14.25


46/66

STATEMENT OF CASH FLOW

A summary of CASH RECIEPT and CASH

PAYMENTS,i.e.operating,investing and

financing activities.of business for specific

date,month or a year.


47/66

STATEMENT OF OWNERS

EQUITY A summary of the changes in owner's equity

of a biz. That have occurred during a specific

period of time,month or a year.


48/66

NOTES

ANY DETAIL OR EXPLATION OF ANY

ACCOUNT OR ITEMS ARE DENOTED

WITH NUMBERS IN ANNUAL REPORT,IT

IS QUALITATIVE DATA.


49/66

Assets = Liabilities

Stock-

holders

Equity+

The Financial Obligations or

Debts of a Business

The Basic Accounting Equation

Economic Resources

Owned by a BusinessOwners Claims on the

Assets of a Business


50/66

ACCOUNTING EQUATION

Like balance sheet but in form of equation.

RESOURCES = SOURCES

ASSETS = EQUTIES(LIABILITIES)

ASSETS = LIABILITIES + CAPITAL

A = L + O


51/66

DIFFERENT PROCEDURE FOR

ACCOUNTING EQUATION

A = L + O

L = A - O

O = A - L

EXPESES ARE ALWAYS LESS IN

OWNERS EQUITY

REVENUE ARE ALAYS ADD IN OWNERS

EQUITY


52/66

Single Entry Book-Keeping

In single entry book keeping system, as is clear from the name,

only one aspect of the transaction is recorded.

This actually is not a system but is a procedure by which small

business concerns, like retailers and small shopkeepers, keep

record of their sale / income.

In this system there are usually two to three registers Khata.

In one register cash received from customers is recorded whereas

the other one is a person-wise record of goods sold on credit

UdharKhata. There may or may not be a register of suppliers to

whom money is payable.

Which means that only one aspect of transaction i.e. either cashreceipt or the fact that money is receivable from someone is

recorded.


53/66

Double Entry Book-Keeping

The concept of double entry is based on the fact that every

transaction has two aspects i.e. receiving a benefit and giving abenefit.

The accounting system that records both the aspects of

transaction in the same books of accounts is called double

entry system.

The account that receives the benefit is debited and the accountthat provides the benefit is credited.

Debit and Credit are denoted by Dr and Cr respectively.

The ultimate result of the system is that for every Debit (Dr) there

is an equal Credit (Cr).


54/66

HISTORY OF Dr. AND Cr.

Debit and credit are formal bookkeeping andaccounting terms that have oppositemeanings and come from Latin. Debit comesfrom debere, which means "to owe". The Latin

debitum means "debt". Credit comes from theLatin word credere, which means "to believe".

It is more common to use the terms in theplural, Debits and Credits.

DEBIT is abbreviated as Dr., while credit isabbreviated as Cr
http://en.wikipedia.org/wiki/Bookkeepinghttp://en.wikipedia.org/wiki/Accountinghttp://en.wikipedia.org/wiki/Latinhttp://en.wiktionary.org/wiki/deberehttp://en.wiktionary.org/wiki/debitumhttp://en.wikipedia.org/wiki/Latinhttp://en.wiktionary.org/wiki/crederehttp://en.wiktionary.org/wiki/crederehttp://en.wikipedia.org/wiki/Latinhttp://en.wiktionary.org/wiki/debitumhttp://en.wiktionary.org/wiki/deberehttp://en.wikipedia.org/wiki/Latinhttp://en.wikipedia.org/wiki/Accountinghttp://en.wikipedia.org/wiki/Bookkeeping


55/66

Debit and Credit Butwe can develop an understanding as to what does

these terms stand for.DEBIT

It signifies the receiving of benefit. In simple words

it is the left hand side.

CREDIT

It signifies the providing of a benefit. In simple

words it is the right hand side.

Debit and Credit will be explained in details and withexamples in our future discussions.


56/66

Basic Principle of Double Entry

We can devise the basic principle of double

entry book-keeping from our discussion to this

point.

Every Debit has a Credit which meansthat All Debits are always equal to All

Credits.

A


57/66

Account

An accounting system keeps separate record

of each item like assets, liabilities, etc. For

example a separate record is kept for cash

that shows increase and decrease in it.This record that summarizes movement in

an individual item is called an Account.

Cl ifi i f A


58/66

Classification of Accounts

We have to date studied following classification ofaccounts:

Assets,

Liabilities,

Income,

Expenses

Expenses can be further divided into capital and

revenue expenses.

We have already studied about these classifications

in different lectures but to refresh your memory we

will gather them at one place.

A Li bili i


59/66

Assets, Liabilities

ASSETS

Assets are the properties and possessions of thebusiness.

LIABILITIES

Liabilities are the debts and obligations of the

business.

Liability is the obligation of the business to provide a

benefit or asset on a future date.

Asset is a right to receive and liability an obligation to

pay, therefore these are opposite to each other.

R l f D bi d C di


60/66

Rules of Debit and Credit

Any account that obtains a benefit is Debit.

OR

Anything that will provide benefit to the business is

Debit. Both these statements may look different but in fact if

we consider that whenever an account benefits as a

result of a transaction it will have to return that benefit

to the business then both the statements will look likedifferent sides of the same picture.

l f D bi d C di


61/66

Rules of Debit and Credit

For credit

Any account that provides a benefit is Credit.

OR

Anything to which the business has a responsibility toreturn a benefit in future is Credit.

As explained in the case of Debit, whenever an

account provides benefit to the business the business

will have a responsibility to return that benefit at sometime in future and so it is Credit.

R l f D bi C di f A


62/66

Rules of Debit & Credit for Assets

Similarly we have established that whenever abusiness transfers a value / benefit to an account andas a result creates some thing that will provide futurebenefit; the thing is termed as Asset.

When an asset is created or purchased, value /

benefit is transferred to that account so it is Debitedi. Increase in Asset is Debit

if the asset is sold, which is termed as disposing off,Therefore, the asset account is debit

ii. Decrease in Asset is Credit


63/66

Rules of Debit & Credit for Liabilities

When a liability is created the benefit isprovided to business by that account so it is

Credited

iii. Increase in Liability is CreditWhen the business returns the benefit or repays

the liability, the liability account benefits form the

business so it is Debited

iv. Decrease in Liability is Debit


64/66

Rules of Debit & Credit for Expenses

the benefit from expenses is for a short run.Therefore Expenditure is just like Asset but for

a short run.Now we can lay down our rule for Expenditure:

i. Increase in Expenditure is DebitReversing the above situation if return any item that

we had purchased we will receive cash in return.Cash account will receive benefit from that

Expenditure account. Therefore Expenditureaccount will be credited

ii. Decrease in Expenditure is Credit

R l f D bi d C di f


65/66

Rules of Debit and Credit for

Income/Capital Income accounts are exactly opposite to

expense accounts just as liabilities are

opposite to that of assets.

Therefore using the same principle we candraw our rules of Debit and Credit for Income

iii. Increase in Income is Credit

iv. Decrease in Income is Debit

NORMAL BALANCES


66/66

NORMAL BALANCES

DEBIT FOR ASSETS AND

EXPENSES

CREDIT FOR INCOME,CAPITALAND LIABILITY

Date post:	03-Apr-2018
Category:	Documents
Upload:	-
View:	219 times
Download:	0 times

Accounting(Introduction) 1

Documents