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1. 1. What is accounting?
American Institute of CPAS (AICPA) defined
accounting as: "Accounting is the Art of Recording,
Classifying and Summarizing in terms of money,
transactions and events which are of a financial
character and interpreting the
results thereof.
Accounting is done by a person who is qualified
and demonstrates his skills by maintaining books of
accounts and provides reports to various
stakeholders.
2. Objectives of Accounting
Following are the Primary Objectives of Accounting
Provide Management with data needed for decision
making
 Provide accounting information for the owners who
provide capital for the business
 Disclose true and fair value of the assets
 Ensure to follow good accounting controls and cost
reduction
 External reporting to entity stake-holders (share-
holders, creditors, lenders etc.)
 Timely preparation of Financial statements (P&L
A/c. & Balance sheet)

2.  Related party disclosure
 Consolidated Financial statements (consolidated
financial statement of holding and subsidiary)
 Statutory disclosure etc.
 Various MIS for Management Decision making
 Profit planning and control (Budgeting and variance
analysis)
These rules and conventions of accounting are
commonly referred to as principles of accounting.
3. Basic Accounting Principles and guidelines
Basic accounting principles and guidelines can be
sub-categorized as:
 Accounting assumptions
 Accounting concepts (postulates or conditions
guiding recording of transactions)
 Accounting conventions (customs or traditions
guiding accounting statement)

3. 4. Accounting Assumptions
To ensure uniformity in preparation of accounts
across entities, following assumptions are applied
when recording accounting transactions.
Business Entity Assumptions
The business for which accounts are maintained is
treated as an entity' distinct from its owners and other
businesses. The transactions of the business should be
recorded and maintained separately from the personal
transactions of the Owner. This should also apply to
partnership and sole proprietorship firms.Failure to
recognize the business as a separate accounting entity
would make it extremely difficult to evaluate the
performance of the business. Normally initial capital has
to be brought in to start up a business. For example
Richards wants to start a Retail Grocery shop. If he has
to do so, he has to bring money as a start-up capital to
buy Goods, Furniture, Computer etc.,
In this case, Richard's Capital will the money brought
in by him into the business and Furniture and
Computer will be his assets and Goods bought by him
will be part of his stock.
Monetary unit Assumption
This assumption assumes that all the transactions and
events are recorded in terms of money i.e.,
Transactions, events or assets are expressed in terms

4. of equivalent monetary value are recorded in the books
of accounts. For example, if a business owns 2000 kg of
Raw Material, Three Vans, 5000 square feet of Plant,
Rs.20,000 in cash etc.,
These numbers cannot be put together to provide a
meaningful value of the business. All the items should
be converted into money terms like Rs.50,000 of Raw
Materials, Rs.3,00,000 of Vans, Rs.10,00,000 of Plant,
Rs.20,000 of cash in hand, all the above items can be
added to find out the value of the assets owned by the
business and will provide a precise and meaningful
estimate. Also, recording of transaction should be in the
base currency of the country. In our country transactions
are recorded in terms of Rupees. In case of a
multinational company operating from different
Geographical Regions, the transactions will be recorded
in the base currency of the country from where the
organization is operating. For E.g., if the organization
has a branch in United Kingdom, the base currency will
be GBP (Sterling Pounds).
Events or transactions which cannot be expressed in
terms of money are not recorded, even if they are very
important or useful for the business. For example, Death
of an executive, resignation of a manager, integrity of
persons etc., are events which cannot be expressed in
money and not recorded as an accounting transaction.
In general Transaction and events are recorded in
common currency monetary unit and are adjusted for
inflation (based on National Indices) to reflect the

5. accurate value of the assets and liabilities. All the
organizations will pass entries related to Currency
fluctuation in case they involve in exports or Imports,
and adjust Forex (Foreign Exchange) Gain/Loss.
Going Concern Assumption
This accounting principle assumes that the business will
be in operation for a long time and not likely
liquidated in foreseeable future. In other words, it means
that the business will continue to operate for fairly a long
time and does not imply permanent existence but there
is neither the necessity nor the intention to liquidate.
This assumption validates accounting asset
capitalization, depreciation and amortization. For
example, if a business holds Fixed Assets worth Rs.5,
00,000 with an estimated life span of 10 years, then
probably, it will charge a depreciation of Rs.50,000 per
year.
If the company's financial situation is such that the
liquidation is certain or the concerned venture will exist
only for a limited time, the accounting record will be kept
accordingly and will no more come under Going
Concern Assumption
Periodic reporting Assumption
This accounting principle assumes that it is possible to
report complex and ongoing business operations in a
relative distinct time-interval referred as accounting
period. An "accounting period" is the interval of time at
the end of which the Income and Expenditure statement

6. or Profit and Loss Account and Balance Sheet are
prepared to know the results and resources of the
business. For Example if the year begins from 1 January
and ends on 31 December, it is known as Calendar
Year. Year begging with 1st April and ending with 31"
March of the following years known as Financial Year.
Organizations have the liberty either to follow either
Calendar Year or Financial Year or any one year period
as their accounting period. Most of the organizations will
split the year into 12 months and Quarters to effectively
monitor their performance (including present and past
period) and take corrective actions
5. Accounting Concepts
Accounting Concepts are postulates or conditions
upon which accounting transactions are recorded.
Historic Cost Concept This principle requires
companies to account and report based on
acquisition costs i.e., Original Purchase price
which will include cost of acquisition, transportation
and installation, rather than fair market value for
assets.
Cost concept
Cost concept brings objectivity in the preparation and
presentation of financial statements. Figures shown in
the
accounting records should be based on objective
evidence and not on the subjective views of a person.

7. For Example, if an organization purchases a piece
of land for say Rs.2,00,000 and if the factual market
value is
Rs.2.25,000, but the entry to be recorded in the
books of accounts will be only Rs.2,00,000, the cost
actually paid.
In short, every transaction is recorded at actual cost to
the business and not perceived value.
The effect of concept is that if the organization does
not pay anything for acquiring an asset, the same will
not appear in the books of accounts. E.g., Goodwill.
Goodwill appears in the books of accounts only if the
business had purchased this intangible asset for a
price. Another example can be, that there could be
few instances where Assets are transferred at "Zero
Cost" and hence will reflect with Zero cost are
recorded in books.
Dual Aspect Concept
Every transaction has two aspects -a 'debit' and a
'credit' - and the sum of all debits will equal the sum of
all credits
When an asset is acquired, one of the following
events will also take place:
Another asset is forgone or

8. A liability (obligation to pay) is undertaken
For example, if Mohan starts a business with a Capital
of Rs.1,00,000, then, per Dual Aspect Concept, two
entries Get generated in the books of accounts viz.,
the asset (Cash) of the business goes up; On the
other hand the Business has to pay Mohan
(Proprietor) Rs.1,00,000, which is the Capital.
This method of recording transaction gives rise to
fundamental Accounting Equation
Assets = Liabilities + Capital or
Capital = Assets -Liabilities
Matching Concept
This concept states that Expenses incurred have to be
matched with revenues as long as it is reasonable to
do so and both expenses and revenues must belong
to the same accounting period.
After the accounting period is over, the entity will
prepare Profit and Loss Account to understand the
profit generated/Loss incurred. P&L statement will
also give an indication on the overall performance of
the business and provide an insight to the Leadership
team to take up necessary action.
For example, if a business has earned Rs.5,00,000
against expenses of Rs.450,000, the differential is
treated as profit earned during that period which is

9. Rs.50,000. If the Revenue is more than the Expenses
it is called Profit. If the Revenue is less the Expenses,
then it is called as Loss.
Revenue recognition/accrual concept
Revenue and expenses are recorded in the period in
which they are earned or incurred immaterial of
whether the income/expense has been actually
received or paid. This concept is contrary to CASH
accounting system of recording wherein revenues and
expenses are recorded only if they are actually
received or paid irrespective of the accounting period
to which they belong. In short, this concept does not
require waiting for the physical receipt of cash or
cheque, which will happen at a later stage. income is
recorded when goods are supplied or a service is
rendered, even if the proceeds (monetary receipts) for
sale or service is received later. Similarly, expenditure
is recorded when goods are procured or a service is
availed, even if the payment for purchase or service is
made in later period
For Example, an organisation sells goods for
Rs.25,000 on 28th March and even if the payment is
due for receipt on 01" of April, the organisation must
include the sales as part of their revenue for the
ending 31" March. Similarly, if
the firm purchases goods on 25 March for Rs.5, 000,
which is due for payment on 10 of April, the
organisation

10. even though payment is not made before 31" March,
has to include the expenses for the period ending 31"
March.
6. Accounting Conventions
Conventions are generally the guidelines for
preparing various financial statements. Convention
of full disclosure. Every Company must disclose all
material information which is necessary for better
understanding of financial statements by its stake
holders (Government Agency, Investors, Lenders,
creditors, Employees etc.). Information to be
disclosed should be decided based on its relevance
and should include Contingent Liability to users of
financial
statements (to be used for cost-benefit analysis).
Contingent Liability has been defined by Institute of
Chartered Accountants of India in its Guidance
Note on Terms used in Financial Statements as "An
obligation relating to an existing condition or
situation which may arise in future depending on
the occurrence or non-occurrence of one or
more uncertain future events". Generally,
disclosure to accounts (or notes to accounts)
Information is presented below the main body of
financial statements, as supplementary information.
Few Disclosures are necessary as per
statutory requirements. Few examples of
Disclosure are:

11. Change in method of Depreciation
Claims against company not acknowledged as debts
Excise / Customs duty or any Tax matters under
appeal
Convention of conservatism
This principle guides the accountant to anticipate or
disclose losses but does not allow similar action for
gains.
For example in case of Inventory, there will always be
a fluctuation in the market prices. Hence while
reporting it is
prudent to compare the market price and Book value
and adopt the lower value. Similarly, if the business
find out
any missing assets or inventory (out of Physical
Verification) it is judicious to prepare a write off
proposal and
remove them from the books of accounts, so that the
account will show the actual value.
The convention of conservatism is a very useful tool in
situation of uncertainty and doubts.
Convention of consistency
This concept implies that the procedures used in
accountancy for a given entity should be appropriate

12. for the size of its activities and to be followed
consistently from period to period. For example, if an
organization follows 'Straight Line Method' for
charging depreciation, then the same should be
followed consistently. In case the entity wants to
change the deprecation method to WDV (Written
down Value), the entity has to inform the Company
Law Board and also disclose the intention as part of
notes to accounts. Reliability of accounting depends
on the uniformly applying Accounting Principles, laid
down procedures with regular check on how they are
put in place. Any changes or deviation in practice
should be sufficiently disclosed.
Consistency does not mean lack of flexibility and does
not preclude desired change in accounting policy. Any
change in applying accounting principles, procedures
and practices should be disclosed in the year of
change along with the impact of such change on the
profit/loss and asset / liability
Convention of Materiality
Accountants have to exercise professional judgment
to determine whether or not an item is material for
disclosure. Trivial matters are to be disregarded so
that the disclosure is not over burdened with minute
details. Items which are important and material to
matter are to be disclosed. Sometimes even trivial
matter may be material.
For example if a director is remunerated more than
what is authorized by an agreement, the said matter

13. ought to be disclosed and get approval from the
shareholders, though it may not be material in value
terms. Detailed rules and standards are issued by
accounting boards for bringing uniformity in
accounting and disclosure of accounting transactions.
These standards may either be rule or principle
based.
7. Accounting Statements
Accounting statements are prepared in standard
accounting language with common accounting
rules. These rules are called 'Generally Accepted
Accounting Principles' (GAAP).
The phrase "Generally accepted accounting
principles" (or "GAAP') consists of three important
set of rules: -
Basic accounting principles and guidelines
 Detailed rules and standards issued by
Accounting Boards
 Generally accepted industry practices.
 The above sets of rules are accepted all over
the world as general guidelines for preparing
 Accounting Statements.
With business going more global, there is a

14. need for all countries to follow a single
accounting standard for recording and
disclosing uniform accounting transactions
 Accounting procedures should follow standard
industry practice
 The generally accepted industry practices
serve as a guide for recording and disclosing
accounting information
 Certain industries like Banking, Insurance etc.,
and statues governing these industries have
provided guidelines
for accounting and disclosing information.
8. Systems of Book Keeping
The recording of transactions may be done in the
following two systems:
 Single Entry System
 Double Entry System
Single Entry System:
It is a book-keeping system, which identify transaction
pertaining to Cash Transaction and Personal
Accounts and record entries in the books of accounts.
It is exactly opposite to Double Entry system.
Accounting is always completed with incomplete
records.

15. Double Entry System:
As the name says, this system recognizes that every
transaction will have two fold effects, which is in line
with the dual aspect concept as discussed as part of
accounting concepts. Cash and Mercantile System
In the Cash system of accounting, transactions are
entered into books of accounts, only when cash is
either received or paid. No entries are passed, based
on accrual or due basis. On the other hand, in
Mercantile system, transactions are recorded based
on the Receipt or Payment become due or accrued.
Most of the Industries follow mercantile system, since
it takes into consideration, the amounts that become
due, which is based on accrual concept.
9. Classification of Accounts
Transactions to be recorded in the books of
accounts can be ascertained based on the following
Classification:
PERSONAL
 Natural
 artificial
 Representative
REAL
 Tangible

16.  tangible
NOMINAL
 Expenses and losses
 Incomes and Gains
Personal Accounts relate to Natural Persons (Name
of a person - Chandra, Subash) & Artificial Persons
(Company Corporation - Chandra & Co., TVS Motor
Limited) Impersonal Accounts are those which are
not Personal Accounts (Real and Nominal Account)
Real Accounts represent Properties and Assets
including Tangible (Land, Building, Plant &
Machinery, Automobiles, Computers etc.) and
Intangible (Goodwill, Patents, trademarks, designs,
copy rights, trade secrets, Franchises,
Licenses etc.)
nominal Accounts do not have existence, form or shape.
Relate to Incomes (Sales, Interest Earned etc.,) and
Gains (Profit on sale of an asset) and Expenses (Salary,
Travel etc.,) & Losses (Loss on sale of an Investment)
10. Basic Accounting Rules
Based on the classification, basic Accounting rules
are defined. These rules are also called as 'Golden
Rules of
Accounting'. Accounting rules support in

17. journalizing various transactions.
Few examples are given below for better
understanding of the accounting rule.
Personal Account
 Debit the receiver or who owes to
business
 Credit the giver or to whom
business owes
Real Account
• Debit what comes into business
• Credit what goes out of business
Nominal Account
- Debit the expenses and losses
• Credit the incomes or galns
An example of Personal Account Journal entry
'A' gave a loan of Rs.100 to 'B' where A is the 'Giver'
and B is the 'Receiver and the following entry will be
passed.
Debit 'B' Account - Rs.100
Credit 'A' Account - Rs. 100

18. An example of Real Account Journal entry
'A Ltd' purchased a Building for Rs.100 on cash. Here
the asset (Building) comes in and cash goes out and
the following entry will be passed.
Debit 'Building (Asset)' Account - Rs.100
Credit 'Cash' Account - Rs. 100
An example of Nominal Account (Income) Journal
entry Received a commission of Rs.100 by cash.
Cash being a real account will be debited and
commission being an income is credited
Debit Cash Account' - Rs.100
Credit Commission Account'- Rs.100
An example of Nominal Account (Expenses) Journal
entry
Salary of Rs.100 paid through Bank for an employee.
Salary being an expense is debited and cash being a
real account is credited and following entry will be
passed.
Debit Salaries Account - Rs.100
Credit Bank Account'- Rs.100
Accruals and Provision Entries:
As part of accrual concept, both revenue and
expenses are to be recognised as they occur.
Revenues that have been earned but are not yet
recorded in the accounts,
Expenses that have been incurred but are not yet
recorded in the accounts.
The accruals need to be added via adjusting entries
so that the financial statements report these amounts.

19. An example of a Revenue Accrual is interested
earned in the year on the Fixed Deposit held with the
Bank. An example of an accrual involving an expense
is an employee's bonus that was earned in 2011, but
will not be paid until 2012.
The 2011 financial statements need to reflect the
bonus expense and the bonus liability. Therefore,
prior to issuing the 2011 financial statements an
adjusting entry is prepared to record this.
Apart from accruals, certain provision has to be
provided in the books of accounts based on the
necessity for the business, as part of prudence. For
example, if the entity feels that recovery from a
particular debtor seems to be difficult, since the debtor
has become bankrupt, and then based on the
estimated recovery, the value of outstanding has to be
brought down suitably.
11 Accounting Cycle:
Accounting cycle starts with recording of a transaction
and gets completed with Book closing Basic
accounting definition says that it is an art of recording,
classifying and summarising the financial transactions
and interpreting the results there of. Given below is a
picture which depicts the various stages of accounting
cycle:
Accounting Process Cycle
Giving below the accounting cycle, which starts from
 Accounting Transaction

20.  Journal Entry Opening Balance Sheet Entry +
Other Transactional Entry)
 Ledger Posting
 Trial Balance
 Manufacturing/Trading Account
 Profit and Loss Account
 Balance Sheet (Closing)
 Recording of Transactions - Recording of
Transaction are done in the books through
Vouchers 1 Journals
 Classification of Transaction - This is done in the
book termed as Ledger
 Summarising of Transaction - This includes
preparation of Trial Balance, Manufacturing or
Trading Account, (Income and Expenditure
Account, Receipts and Payments Account in case
of Charitable or Non Profit Institutions)
 Profit and Loss Account and Balance Sheet of a
Business
 Interpretation of Results - This involves Analysis
and computation of various ratios to understand
the performance of the Business