Financial Accounting & Reporting. Basic Concepts & Terminologies.

1. Financial
Accounting
&
Reporting
Basic Concepts & Terminologies

2. Basic definitions of Accounting
• Accounting:
Accounting is the maintenance of daily record of
economic activities in such a manner, so that it
is helpful in preparing specific information
regarding business or individual’s financial
affairs.
• Business:
Any legal and economic activity, for which
purpose is to earn money.
• Economic activity:
Any activity which involves money.

3. Accounting terminologies
Transaction:
Any dealing between a buyer and a seller, which involve
money.
There are two types of transactions,
 Cash transaction:
When payment for goods/services is to be made on the
spot.(e.g.) A sale of Rs. 300 for cash.
 Credit transaction:
When payment for goods/services is to be made in
future. (e.g.) A sale of Rs. 300 for which payment will
be received after 30 days.

4. Accounting terminologies
Purchase,Purchasereturn,Sale,Salesreturn
Purchases or
Goods or Merchandise Sale
Supplier Business Customer
Purchase return or Sales return or
return out-ward return in-ward

5. Accounting terminologies
• Discount or concession:
Deduction in the normal selling price of
something.
Types of discount:
I. Trade discount (on the spot/not entered)
II. Cash discount (at the time of payment)
Types of cash discount:
I. Discount received (at the time of purchase)
II. Discount allowed (at the time of sales)

6. Accounting terminologies
• Creditors or Accounts payables:
To whom amount will be paid in future.
• Debtors or Accounts receivables:
From whom amount will be received in
future.
• Capital/Owner’s Equity:
The fund which is provided by the owner to business.
• Liabilities:
Any amount which is payable by the business, i.e.;
Capital & Other liabilities.

7. Accounting terminologies
• Asset:
Any source which is kept by business and
is expected to earn profit for business.
Types of asset:
 Tangible asset:
An asset which have a physical
existence, like building.
 Intangible asset:
An asset which do not have physical
existence like goodwill & copyrights.

8. Accounting terminologies
• Types of tangible asset:
 Short-term asset/Current asset:
Asset used for a short period of time(less
than one year), e.g. – goods, cash.
 Long-term asset/Fixed asset:
Asset used for a long period of time(more
than one year), e.g. – buildings, furniture
• Drawings:
Cash or goods withdrawn by the owner
from business, for personal use.

9. Accounting terminologies
• Accounting period
A span of time for which the profit/loss
and liabilities/assets are calculated.
• Revenue/Income:
Charges of the goods or services
provided to customer.
• Profit:
Profit is revenue minus expenses.
• Expenses:
The cost of generating the revenue.

10. Accounting terminologies
• Depreciation:
Gradual decrease in the value of fix asset,
due to its use and normal wear and tear.
It is a non cash expense for the business.
(e.g.) A building could be depreciated at
10% per annum.

11. Accounting Principles
• Separate Entity concept:
Business and owner are two different
entities.
• Going concern concept:
Business entity will continue to operate
indefinitely.
• Dual aspect concept:
Every transaction has two equal affects
and they both should be recorded.

12. Accounting Principles
• Cost concept:
An asset is always recorded at the cost at
which it is acquired instead of recording at
current market price.
• Money measurement concept
Only those transactions are recorded,
which can be expressed in terms of money
or which involve money.

13. Accounting Principles
• Accounting period concept:
The life of the business is divided into
series of equal periods for calculating
profit or loss, assets and liabilities.
• Realization concept:
Revenue should be recorded at the time,
when it is incurred, irrespective of when
actual payment is received.

14. Accounting Principles
• Matching concept:
Revenue of a particular period should be
offset against expenses incurred in that
period to generate that revenue, whether
the revenue is received or not.
• Conservatism/Prudence Concept:
Anticipated or expected losses are
recorded while expected profit is not
recorded. e.g.; Provision for bad debts

15. Accounting Principles
• Bad debts:
Amount which debtors deny to pay.
• Provision for bad debts:
Amount reserved in advance to cover bad
debts.
• Consistency Concept:
There should be consistency in accounting
methods being used by the business, over
the years.(e.g.) In Depreciation method.

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