UNIT 1 ACCOUNTING FOR BUSINESS.pptx

1. ACCOUNTINGFORBUSINESS-1
UNIT-1

2. Meaning of Accounting:
 Accounting is the systematic process of identifying,
measuring, recording, classifying, summarizing, interpreting
and communicating financial information.
Definition of Accounting:
 According to the American Institute of Certified Public
Accountants “Accountingistheartofrecording,classifyingand
summarizinginasignificantmannerandintermsof money, transactions
andevents whichareinpart,atleast ofafinancialcharacterand
interpretingthe results thereof ”.

3. Need for Financial Accounting:
 Financialaccounting provides
companies with important information,
and it also shows them where their
money is going. This helps companies
determine which areas they need to
allot more of their budget to.
 Financialaccounting also helps
companies makeprojections about
their future.

4. Users of Financial Accounting:
There are several persons who need the accounting information for various
purposes. They can be classified into two:
(A) Internal users and (B) External users.

5. Advantages of Financial Accounting:
1. Systematic Records.
2. Preparation of financial statements.
3. Assessment of progress.
4. Aid to decision making.
5. Statutory Requirements.
6. Information to interested groups.
7. Evidence in courts.
8. Taxation Problems.
9. Merger of firms.

6. Limitations of Financial Accounting:
1. No Provision for Material Control
2. Non-availability of Detailed Particulars About Labor Cost.
3. Classification of Accounts in a General Manner
4. No Classification of Costs into Direct and Indirect Items
5. Ascertainment of True Cost of Production Not Possible
6. No Provision for a System of Standards
7. No Records for Wastages
8. No Assistance in Fixing Selling Price and Calculating Tender Price
9. No Assistance in Cost Control
10. Financial Accounts Deal Only with the Overall Profitability of the Business Concern
11. No Provision for Comparison of Costs
12. No Assistance in Planning and Decision-making

7. Branches of Accounting:
1. Financial Accounting: Theaccounting for revenues,expenses,assetsandliabilities thatis commonly
carried oninthegeneral offices of businessis knownasfinancial accounting. Thefinancial accounting
information isexpressedintwomaintypesof financial statements,viz:
(i) Profit &Loss Account (matchingtheincomesand expensesof theaccounting period toascertainprofit or
loss).
(ii) The Balance sheet(showing assetsandliabilities, revealing financial position asonthedate.)
The owners, creditors, management,employees,financiers etc.,makeuseof information provided byFinancial
accounting.
2. Cost Accounting: Itinvolves thecollection, recording, classification and appropriate allocation of
expenditurefor thedetermination of thecostsof productsor servicesandfor thepresentationofdatafor the
purposesof costcontrol andmanagerial decision making.
3. Management Accounting: Itisconcerned withthepresentationof accounting information insucha
wayastoassistmanagementindecisionmaking andintheday-to-day operations of anenterprise. The
information collected from financial accounting, costaccounting, etc.aregrouped, modified andpresentedas
pertherequirementsof managementfor dischargingtheirfunctions andfor decisionmaking.

8. Bases of Accounting – Cash and Accrual Basis:
1. Cash basis:
Under cashbasisofaccounting,actualcashreceiptsandactualcashpaymentsarerecorded.Inthis
basis,revenueisrecognizedwhencashisreceivedandexpensesarerecognizedwhencashispaid.
Credittransactionsarenotrecordedtillcashisactuallyreceivedorpaid.Underthisbasis,
(a) Anyincomereceived(b) Anyexpenditurepaid(c)Anyassetpurchasedforwhichcashispaid(d)
Anyliabilitypaidduringtheaccountingperiodwhetherrelatedtothepast,presentorfutureis
takenintoaccount.
2. Accrual or mercantile basis:
Underaccrualbasisofaccounting,therevenuewhetherreceivedornot,buthasbeenearnedor
accruedduringtheaccountingperiodandexpensesincurredwhetherpaidornotarerecorded.
Inotherwords,revenueisrecognizedwhenitisearnedoraccruedandexpensesarerecognized
whentheseareincurred.Underthisbasis,(a)Anyincomeearnedwhetherreceivedornot(b)
Anyexpenditureincurredwhetherpaidornot (c)Anyassetpurchasedwhethercashispaidor
not(d)Anyliabilityincurredwhetherpaidornotduringtheaccountingperiodisrecorded.
Undersection128(1)oftheIndianCompaniesAct,2013,allthecompaniesarerequiredto
maintainthebooksofaccountsaccordingtotheaccrualbasisofaccounting.

9. Accounting Concepts:
(i)Businessentityconcept
(ii)Moneymeasurementconcept.
(iii)Goingconcernconcept
(iv)Costconcept
(v)Dualaspectconcept
(vi)Periodicityconcept
(vii)Matchingconcept
(viii)Realisationconcept
(ix)Objectiveevidenceconcept
(x)Accrualconcept
Accounting Conventions:
(xi)Conventionofconsistency.
(xii)Conventionoffulldisclosure.
(xiii)Conventionofmateriality.
(xiv)Conventionofconservatismorprudence

10. Meaning of Journal:
Journalisthe bookoforiginalentry inwhichbusinesstransactionsarerecordedin
chronologicalorder, thatis, inthe orderofoccurrence.Transactionsarerecorded for
thefirst timeinthejournal.Entries aremadeinthejournalbased onsourcedocuments.
Record ofbusiness transactionsinthejournalisknownas Journalentry. Theprocess of
recordingthe transactionsinjournaliscalledas journalising.
Format:
DATE PARTICULARS L.F DEBIT Rs. CREDIT Rs.

11. Rules Regarding Journal Entries:
Alltheaboveclassifiedaccountshavetworuleseach,onerelatedtodebitandanotherrelatedtocreditforrecordingthe
transactionswhicharetermedasGolden rules of accounting.

12. Understanding Compound entries:
 Compound entry is an entry in which more than two accounts are involved.
Either more than one account is debited or more than one account is credited
or both.
 In a compound journal entry, there are two or more debits, credits, or
both. Rather than making separate journal entries for the same
transaction, you can combine the debits and credits under one entry.
EXAMPLE:

13. Preparation of Journal:

14. Meaning of Ledger:
 Ledger account is a summary statement of all the transactions relating to a
person, asset, liability, expense or income which has taken place during a given
period of time and it shows their net effect.
 From the transactions recorded in the journal, the ledger account is prepared
Ledger is known as principal book of accounts.
FORMAT:

15. Posting of Ledger entry:
The process of transferringthe debit and credit items from the journal to the ledger accounts is called
posting.The procedure of posting from journal to ledger is as follows:
(a) Locate the ledger account that is debited in the journal entry. Open the respective account in the
ledger, if already not opened. Write the name of the account in the top middle. If already opened, locate the
account from the ledger index. Now entries are to be made on the debit side of the account.
(b) Record the date of the transaction in the date column on the debit side of that account.
(c) Record the name of the account credited in the journal with the prefix ‘To’ in particularscolumn.
(d) Record the amount of the debit in the ‘amountcolumn’.
(e) Locate the ledger account that is credited in the journal entry. Open the respective account in the
ledger, if already not opened. Write the name of the account in the top middle. If already opened, locate the
account from the ledger index. Now entries are to be made on the credit side of the account. Record the date
of the transaction in the date column. Record the name of the account debited in the journal entry in the
particulars column with the prefix ‘By’ and write the amount in the amount column.

16. Importance of Ledger Balance:
• Figuring of Profit/Loss: Its planning is an inescapable advance for any
association for computing the situation of profit or loss in their
make further accounts without getting ready pertinent ledgers.
• The Definite Situation of an Account: It refers to the situation of the
accounts whether they have a remarkable or owing balance at the hour
• Time Saver: As all the entries are recorded in one spot, it gets simpler
and efficient while getting further accounts ready, for example,
• Imperative: One importance of ledger is that it encourages in keeping
up the rightness or precision of the exchanges held during the life
organization.

17. Preparation of Ledger accounts:
ILLUSTRATION:

18. Solution:

19. Meaning of Trial Balance:
 Trial balance is a statement containing the debit and credit balances of all ledger accounts on a
particular date. It is arranged in the form of debit and credit columns placed side by side and prepared
with the object of checking the arithmetical accuracy of entries made in the books of accounts and to
facilitate preparation of financial statements.
Definition of Trial Balance:
According to M.S. Gosav (the substance of accountancy) “ Trial Balance is the statement containing the
balances of all ledger accounts, as at any given date, arranged in the form of debit and credit columns
placed side by side and prepared with the object of checking the arithmetical accuracy of ledger
postings.”
FORMAT Of Trial Balance:

20. Objectives of preparing trial balance:
Trial balance is prepared with the following objectives:
(i) Test of arithmetical accuracy:
Trial balance is the means by which the arithmetical accuracy of the book-keeping work
is checked.
When the totals of debit column and credit column in the trial balance are equal, it is
assumed that posting from subsidiary books, balancing of ledger accounts, etc. are
arithmetically correct.
However, there may be some errors which are not disclosed by trial balance.
(ii) Basis for preparing final accounts:
Financial statements, namely, trading and profit and loss account and balance
sheet are prepared on the basis of summary of ledger balances obtained from
the trial balance.
(iii) Location of errors:
When the trial balance does not tally, it is an indication that certain errors have
occurred.
The errors may have occurred at one or more of the stages of accounting process,
namely, journalising or recording in subsidiary books, totalling subsidiary books, posting
in ledger accounts, balancing the ledger accounts, carrying ledger account balances to
the trial balance, totalling the trial balance columns, etc.
Hence, the errors should be located and rectified before preparing the financial
statements.

21. Functions of Trial Balance:
1.Error Detection: One of the primary purposes of a trial balance is to detect errors in the
accounting process. If the total debits do not equal the total credits on the trial balance, it
indicates that there are errors in the accounting records that need to be identified and
corrected.
2.Accuracy Verification: By comparing the total debits and credits, a trial balance helps
verify the overall accuracy of the accounting records. If the trial balance is in balance
(debits equal credits), it suggests that the accounts have been recorded correctly,
although it doesn't guarantee that individual transactions within those accounts are error-
free.
3.Preparation for Financial Statements: Before preparing financial statements such as
the income statement and balance sheet, accountants often create a trial balance. This
trial balance provides a summary of account balances, making it easier to compile the
financial statements.
4.Organization and Summarization: A trial balance organizes and summarizes the
balances of all accounts, making it easier for accountants and financial analysts to review
and analyze financial data.
5.Basis for Adjustments: When preparing financial statements, accountants may identify
adjusting entries that are necessary to ensure the accounts accurately reflect the
company's financial position. The trial balance serves as a starting point for making these
adjustments.
6.Identification of Missing Accounts: The trial balance can help identify if any accounts
are missing or if there are duplicate accounts in the accounting records. This ensures that

22. Limitations of Trial Balance:
(a) It is possible to prepare trial balance of an organisation, only if the double
entry system is followed.
(b) Even if some transactions are omitted, the trial balance will tally.
(c) Trial balance may tally even though errors are committed in the books of
account.
(d) If trial balance is not prepared in a systematic way, the final accounts
prepared on the basis of trial balance may not depict the actual state of affairs of
the concern.
(e) Agreement of trial balance is not a conclusive proof of arithmetical accuracy
of entries made in the accounting records. This is because there are certain errors
which are not disclosed by trial balance such as complete omission of a
transaction, compensating errors and error of principle.
The following are the limitations of trial balance:

23. Preparation of Trial Balance:

24. Preparation of JOURNAL, LEDGER, TRIAL BALANCE: