This document provides an overview of accounting concepts and processes. It begins with introductory information about accounting rules, basic processes, terminology, and objectives. It then discusses the accounting equation, different types of accounts, rules of debit and credit, journal entries, ledger posting, trial balances, and year-end adjustment entries. The purpose is to familiarize students with the fundamental principles and steps of accounting.

1. Dr. Makesh K.G

2. LEARNING
Rules of Accounting
Basic Accounting Processes
Documents in Accounting

3. Class Room Etiquette
Ask Doubts Carry Doubts
DO DO NOT
Very Attentive Sleep, Talk, Dream
Punctual Skip Classes
Constructive Negative
Use Resources Ignore Resources

4. Students with NO Accounting background
Students with background expected to be positive
Semester 1: Financial Accounting
Semester 2: Cost and Management Accounting
Semester 3: Financial Management [Common Paper]

5. Objectives of the Course
Familiarize with accounting terminologies
Acquaint with Accounting Processes
Appreciate the need for accounting
Develop Expertise in Accounting activities

6. Simply means recording business activities
Systematic method

7. Need for Accounting
is the “ ”
Means of Communication of business results
Not limited to corporate uses
Housewives, government etc. uses it
Probably every layman uses it, may be sub-consciously
Part of common life
Note for Non-Commerce Students
You are Not learning a new subject, rather a new LANGUAGE
Remember how much you persevered
Commit yourself with relentless efforts

8. Need for Accounting

9. How would a typical home-maker’s accounts diary look like?
TOTAL 12,000 8,300
Accounting in Daily Life
Items Receipts Payments
Salary
Groceries
Electricity Bill
Stationeries
Home repairs
Cash gifts from relatives
Clothing
10,000
--
--
--
--
2,000
--
--
500
300
2,000
3,000
--
2,500
Balance -- 3,700
TOTAL 12,000 12,000

10. Definition of Accounting
“The art of recording, classifying and summarizing the
transactions in a business, in terms of money”
FUNCTIONS OF ACCOUNTING
Recording
Classifying
Summarizing
Analyzing
Interpreting
Communicating

11. Knowing 2 aspects are important for a business
Is the business
…It may be making losses or profits
How good is its
…It may be getting richer or poorer

12. INTRODUCTION
How to know if business is Profitable?
For a period, prepare
Known as Period Statement
How to know if businesses’ Financial Position is good?
On a date, prepare
Known as Position Statement

13. Shows the Financial Position of the firm
2 items are included:
Economic resources owned by business
Used in business for productive purposes
Obligations owed to other parties
Burden on business

14. Structure of Balance Sheet
LIABILITIES Rs. ASSETS Rs.
Capital --
Long term Loan --
Reserves --
Provision --
Plant &Machinery --
Land & Building --
Stock --
Investments --
Creditors --
Bills Payable --
Advance Income --
Outstanding Expense --
Overdraft --
Debtors --
Bills Receivable --
Accrued Income --
Advance Expense --
Cash --
TOTAL -- TOTAL --

16. Shows Profits/Losses of business [Bottom line]
2 items are included:
Objective for which business is run
Generated from major activity
Suffered for generating income

17. Structure of Profit and Loss Account
EXPENSES Rs. INCOME Rs.
Opening Stock --
Purchases --
Wages --
Direct Expenses --
Closing Stock --
Sales --
Discount Received --
Interest received --
Discount Allowed --
Bad-debts --
Depreciation --
Postage, Telegram --
Provision --
TOTAL -- TOTAL --
PROFITS --

18. Exercise
Prepare a Balance Sheet from the following figures
Cash
Overdraft
Machine
Creditors
Bills Receivable
Loan
Outstanding Expense
100
60
120
60
40
200
40
Investments
Building
Bills Payable
Capital
Stock
Advance Income
Reserve
50
70
30
40
60
10
80

19. Exercise
Prepare a Profit and Loss A/c from the following figures
Opening stock
Bad debts
Interest received
Depreciation
Discount allowed
Provision for bad-debts
Wages
30
10
40
20
10
20
50
Closing stock
Purchases
Sales
Direct expenses
Discount received
Postage
Salaries
50
200
320
40
20
30
60

20. Initiated by a business transaction
Transaction should be:
Financial in nature
Supported by Documentary evidence
……like bills, invoice, cheques etc.
Now recorded in books of accounts

21. STEPS IN PROCESS OF ACCOUNTING
Identify financial
transaction
Authenticate by
documents
Record in JournalPost to Ledger
Make Adjustment
Entries
Prepare
Trial Balance
Prepare
Final Accounts

23. 2 bases of accounting
CASH BASIS
ACCRUAL BASIS

24. CASH BASIS OF ACCOUNTING
Make entries when:
Profits will be based on cash flows
Cash inflow Cash Outflow = Cash Profits
Method followed by professionals like doctors, lawyers
Cash received as Consultation Fee
: Cash paid as staff salary
1000
850
CASH PROFITS 150

25. ACCRUAL BASIS OF ACCOUNTING
Make entries when:
PERIOD is very important
Includes CASH and CREDIT transactions
Profits will NOT be based on cash flows
Income Expense = Profits
Method followed by large corporate houses

26. ACCRUAL BASIS OF ACCOUNTING
Accounting period is Jan. 1 to Dec. 31, 2012
The following transactions happened in the period:
Cash received as Fees in 2012: Rs. 10,000
Fees for 2012, not yet received: Rs. 2000
Fees for Jan 1- Dec. 31, 2013, received in 2012: Rs. 1500
What is the income of 2012 ?

27. Based on principle of accounting
Means all transaction has 2 aspects
and
The equation is:
Capital: owed to the owner
Liability: owed to others

28. ACCOUNTING EQUATION
Holds good at all times
Started business with Rs. 10,000
LIABILITIES Rs. ASSETS Rs.
Capital
Liability
10,000
0
Cash 10,000
TOTAL 10,000 TOTAL 10,000

29. ACCOUNTING EQUATION
Holds good at all times
Took bank loan of Rs. 5,000
LIABILITIES Rs. ASSETS Rs.
Capital
Loan
10,000
5000
Cash 15,000
TOTAL 15,000 TOTAL 15,000

30. ACCOUNTING EQUATION
Holds good at all times
Bought Building for Rs. 8,000
LIABILITIES Rs. ASSETS Rs.
Capital
Loan
10,000
5000
Building
Cash
8,000
7,000
TOTAL 15,000 TOTAL 15,000

31. ACCOUNTING EQUATION
Holds good at all times
Bought goods for Rs. 3000
LIABILITIES Rs. ASSETS Rs.
Capital
Loan
10,000
5,000
Building
Goods
Cash
8,000
3,000
4,000
TOTAL 15,000 TOTAL 15,000

32. ACCOUNTING EQUATION
Holds good at all times
Bought goods for Rs. 1000 on CREDIT
LIABILITIES Rs. ASSETS Rs.
Capital
Loan
Creditors
10,000
5,000
1,000
Building
Goods
Cash
8,000
4,000
4,000
TOTAL 16,000 TOTAL 16,000

33. ACCOUNTING EQUATION
Holds good at all times
Repaid Loan Rs. 2,000
LIABILITIES Rs. ASSETS Rs.
Capital
Loan
Creditors
10,000
3,000
1,000
Building
Goods
Cash
8,000
4,000
2,000
TOTAL 14,000 TOTAL 14,000

34. is a special statement dealing with one item
eg. Machine Account
Talks about every thing happening to machine
PERSONAL ACCOUNT
REAL ACCOUNT
NOMINAL ACCOUNT

35. TYPES OF ACCOUNTS
Natural Person: Mr. X, Creditor, Debtor
Artificial Person: Bank
Representative Person: Capital
Tangible: Machine, Land
Intangible: Patent, Trademark
Expenses, Losses: Wages, Salaries
Incomes, Gains: Interest received

36. TYPES OF ACCOUNTS
Mr. X : Natural Person
Creditor : Natural Person
Debtor : Natural Person
Capital : Representative Person
Bank : Artificial Person
Drawings: Representative Person
Drawings can be of Cash [capital] or goods

37. TYPES OF ACCOUNTS
Plant, Machine : Physical Asset
Land, Building : Physical Asset
Copyright, Patent, Trademark : Intangible Asset
Cash : Physical Asset

38. TYPES OF ACCOUNTS
Salaries, Wages, Rent : Expense
Carriages IN/OUT : Expense
Interest Received : Income
Interest, Dividend Paid : Income

39. TYPES OF ACCOUNTS
Goods bought for sale in course of business
Goods returned to supplier due to poor quality
Goods sold in course of business
Goods returned by customer due to poor quality
All four related to GOODS which are Assets
All are REAL ACCOUNTS

40. TYPES OF ACCOUNTS
Obviously RENT is a NOMINAL Account
Expense Incurred, Not Yet Paid off
Expense Not Yet Incurred, but already Paid off
Income Earned, Not Yet Received
Income Not Yet Earned, but Received already
All four are PERSONAL ACCOUNTS
Rule: Pre-fix Added to Nominal account: becomes Personal account

41. RULES OF DEBIT AND CREDIT
CREDIT the Giver, DEBIT the Receiver
CREDIT what Goes Out, DEBIT what Comes In
CREDIT all Incomes/Gains, DEBIT all Expenses/Losses

42. RULES OF DEBIT AND CREDIT
2 things happen:
1. Owner gives Capital 2. Money comes In
2 accounts are affected:
1. Owners’ Capital Account: Personal Account
2. Cash Account: Real Account
Rules of Debit/Credit:
1. Owner’s Account: Personal a/c: GIVER: CREDIT the Giver
2. Cash Account: Real a/c: COMES IN: DEBIT what Comes In

43. RULES OF DEBIT AND CREDIT
2 things happen:
1. Machine Comes In 2. Cash Goes Out
2 accounts are affected:
1. Machine Account: Real Account
2. Cash Account: Real Account
Rules of Debit/Credit:
1. Machine Account: Real a/c: COMES IN: DEBIT what Comes In
2. Cash Account: Real a/c: GOES OUT: CREDIT what Goes Out

44. Transactions are recorded as:
Book of Original Entry
Chronological order – cluttered with different types
Posted from Journal
Homogenous group

45. JOURNAL ENTRY
Book of Original Entry
Started business with capital Rs. 10,000
Bought machine for Rs. 5,000
Date Particulars Debit Credit
Jan. 1 Cash account Dr.
To Capital account
10,000
10,000
Date Particulars Debit Credit
Jan. 5 Machine account Dr.
To Cash account
5,000
5,000

46. JOURNAL ENTRY
Started business with capital Rs. 20,000
Bought Goods for Rs. 10,000
Deposited into Bank Rs. 5,000
Sold Goods for Rs. 12,000
Bought furniture for Rs. 2,000 paid by cheque
Paid telephone charges Rs. 200
Withdrew cash for personal use Rs. 500
Withdrew goods for personal use Rs. 1,000

47. COMPOUND JOURNAL ENTRY
eg. Paid to Ram Rs. 1000, and he allowed a discount Rs. 100
3 accounts are affected:
1. Cash Account: Goes Out – CREDIT
2. Ram’s Account: Recipient – DEBIT
3. Discount Received Account: Income – CREDIT
Date Particulars Debit Credit
Jan. 5 Ram’s a/c Dr.
To Cash a/c
To Discount Received a/c
1,000
900
100

48. COMPOUND JOURNAL ENTRY
Prepare compound journal entry
1. Customer owing Rs. 1000 offered payment; on payment
allowed discount of Rs. 150
2. Paid for Salaries [Rs. 500] and Telephone charges [Rs. 200]

49. POSTING TO LEDGER
homogeneous Set of items
All causes of cash coming in and going out are recorded here
Debit Side: cash coming in
Credit Side: cash going out
Debit Cash Account Credit
Date Item Rs. Date Item Rs.
To… By…

50. POSTING TO LEDGER
Debit Cash Account Credit
Date Item Rs. Date Item Rs.
Jan 1 To Capital 1000 By…
Date Particulars Debit Credit
Jan. 1 Cash account Dr.
To Capital account
1000
1000
Debit Capital Account Credit
Date Item Rs. Date Item Rs.
To.. Jan 1 By Cash 1000

51. POSTING TO LEDGER
Prepare a Cash Account and find the cash balance
Jan.1: Started business Rs. 10,000
Jan.9: Bought goods Rs. 5,000
Jan.17: Deposited into bank Rs. 2,000
Jan.22: Paid to Mr. X Rs. 500
Jan.31: Received from Mr. Y Rs. 1,000

52. BALANCING A LEDGER
Balancing figure equates Debit and Credit columns
Shows how much Cash is at hand
Debit Cash Account Credit
Date Item Rs. Date Item Rs.
Jan. 1
Jan. 31
To Capital
To Mr. Y
10,000
1,000
Jan. 9
Jan. 17
Jan. 22
By Purchases
By Bank
By Mr. X
5,000
2,000
500
TOTAL 11,000 TOTAL 11,000
Feb. 1
--
To Balance b/d
--
3,500
--
-- -- --
Debit Cash Account Credit
Date Item Rs. Date Item Rs.
Jan. 1
Jan. 31
To Capital
To Mr. Y
10,000
1,000
Jan. 9
Jan. 17
Jan. 22
Jan. 31
By Purchases
By Bank
By Mr. X
By Balance c/d
5,000
2,000
500
3,500
TOTAL 11,000 TOTAL 11,000

53. TRIAL BALANCE
To check arithmetical accuracy of accounts
Prepared towards end of a period
Prepared before P&L and B/S
TRIAL BALANCE
Particulars Debit Credit
Cash
Capital
Machine
Purchases
Sales
6,000
--
5,000
3,000
--
10,000
--
--
4,000
TOTAL 14,000 14,000

54. TRIAL BALANCE
Prepare a Trial Balance
Statement of Ledger balances
Particulars Rs. Particulars Rs.
Cash
Capital
Machine
Purchases
4,000
10,000
6,000
12,000
Debtors
Creditors
Bank
Sales
3,000
6,000
5,000
14,000

55. TRIAL BALANCE
Prepare Journal, Ledgers, Trial Balance, and final accounts as
on Jan 31.
1 Jan. Started business with Rs. 25,000
5 Jan. Bought Building for Rs. 12,000
10 Jan. Bought goods for Rs. 10,000
20 Jan. Paid wages for Rs. 5,000
25 Jan. Sold entire goods for Rs. 20,000

56. TRIAL BALANCE
Prepare Journal, Ledgers, Trial Balance, and final accounts as
on Jan 31.
1 Jan. Started business with Rs. 50,000
5 Jan. Bought Machine for Rs. 25,000
10 Jan. Bought Goods for Rs. 20,000 on credit
20 Jan. Paid wages for Rs. 5,000
25 Jan. Sold Goods [costing Rs. 15,000] Rs. for Rs. 30,000 on
credit
DEBTORS A/C DR
TO SALES

57. Needed due to peculiar items
Adjustments to accounts to make it more realistic
Some items are known only after preparing Trial Balance
Some items NOT included in Trial Balance
Make entries, Modify Trial Balance
Then prepare Final accounts

58. ADJUSTMENT ENTRIES

59. ADJUSTMENT ENTRIES
Remember:
Opening stock given INSIDE the Trial Balance
Closing stock given OUTSIDE the Trial Balance
Both Opening and Closing Stock will NEVER be inside Trial
Balance together
…………………………….
Date Particulars Debit Credit
Dec. 31 Closing stock Dr.
To Trading and P&L a/c
--
--

60. ADJUSTMENT ENTRIES
Expense Incurred, Not yet paid in Cash
Accountant comes to know that Wages of Rs. 1000 is NOT yet
paid
Extract of Trial Balance
Particulars Debit Credit
Cash
Wages
--
5,000
5,000
--
TOTAL 5,000 5,000

61. ADJUSTMENT ENTRIES
Pass Adjustment entry
Date Particulars Debit Credit
Dec. 31 Wages a/c Dr.
To Outstanding Wages a/c
1000
1000
Extract of Trial Balance
Particulars Debit Credit
Cash
Wages
Outstanding Wages
--
6,000
5,000
--
1000
TOTAL 6,000 6,000

62. ADJUSTMENT ENTRIES
Impact on Final Accounts
Dr. Profit and Loss Account Cr.
Expense Rs. Income Rs.
Wages paid
Add: O/S wage
5000
1000 6000
Balance Sheet
Liability Rs. Asset Rs.
Outstanding Wages 1000

63. ADJUSTMENT ENTRIES
The following points are important:
1. Provision is a PREPAREDENESS to meet FUTURE bad debts
2. Is done at year-end, taking from P & L
3. Is created by DEBIT-ing the current year’s P & L Account
4. Taken to Liability side of current year’s Balance Sheet
5. Available to meet NEXT YEAR’S bad debts
6. NOT available for current year’s bad debts
7. Current year’s Bad debt is charged to P & L as usual
8. Next year’s bad debt is charged to Provision for Bad Debts
9. Replenishment to Provision happens from P&L year on

64. ADJUSTMENT ENTRIES
Dr. Profit and Loss Account [Current Year] Cr.
Expense Rs. Income Rs.
To Bad debts
To Provision for B/D
xxx
xxx
Balance Sheet [Current Year]
Liability Rs. Asset Rs.
Provision for B/D xxx Debtors xxx

65. ADJUSTMENT ENTRIES
Dr Provision for B/D [Next Year] Cr.
Expense Rs. Income Rs.
To Bad Debts
To Closing balance
xxx
xxx
By Opening balance
By P & L
xxx
xxx
Balance Sheet [Next Year]
Liability Rs. Asset Rs.
Provision for B/D xxx Debtors xxx

66. Trial balance is prepared from ledger balances
All ledgers are closed:
At year-end
After preparing Trial Balance
Balances in ledgers taken either to:
Profit and Loss account, or
Balance Sheet

67. CLOSING ENTRIES
Following ledgers are closed by transferring balances to P&L:
All NOMINAL Accounts
All GOODS Accounts [6 types]
Dr. Expense Account Cr.
Item Rs. Item Rs.
To Cash 1000 By Balance 1000
TOTAL 1000 TOTAL 1000
Taken to Trial Balance

68. CLOSING ENTRIES
Following ledgers are closed by transferring balances to P&L:
All NOMINAL Accounts
All GOODS Accounts [6 types]
Dr. Expense Account Cr.
Item Rs. Item Rs.
To Cash 1000 By P and L 1000
TOTAL 1000 TOTAL 1000

69. CLOSING ENTRIES
Following ledgers are CARRIED to next year by transferring
balances to Balance Sheet
All REAL Accounts
All PERSONAL Accounts
Dr. Machine Account Cr.
Item Rs. Item Rs.
To Cash 1000 By Closing Balance 1000
TOTAL 1000 TOTAL 1000
To Opening Balance 1000

70. Adjustment Entries
1. Bought machine Rs. 50,000, and incurred installation
charges Rs. 5,000
2. Bought goods from Mr X, Rs. 50,000, returned goods
worth RS. 2,000 being poor in quality
3. Sold goods Rs. 60,000, customer returns goods worth Rs.
1,000 being poor in quality
4. Incurred wages Rs. 15,000, paid only Rs. 12,000
5. Paid insurance premium for next year Rs. 2,500
6. Commission payable to agents is Rs. 2000
7. Create Provision for Bad debts Rs. 5,000
8. Charge bad debts Rs. 1,000 to Provision for bad debts

71. Final Accounts
Prepare a Manufacturing Account for year ended 31-12-08
Stock on 1-1-08:
Raw Material
Work-in-Progress
10,000
5,000
Stock on 31-12-08:
Raw Material
Work-in-Progress
5,000
15,000
Purchase of Raw Material
Direct Wages
Carriages
Factory Power
Factory Depreciation
Factory Repairs
50,000
10,000
2,500
2,000
10,000
1,500

72. Final Accounts
Prepare Manufacturing & Trading Account
Raw Materials purchased in the year Rs. 50,000
Sale of finished goods Rs. 1,00,000
Stock on 1-1-08:
Raw Material
W-in-P
Finished Goods
3,500
2,000
18,000
Carriage Inwards
Wages
Factory Power
Packing of Finished Goods
Cartage of Finished Goods
1,100
27,000
2,000
3,000
1,000Stock on 31-12-08
Raw Material
W-in-P
Finished Goods
4,000
4,500
28,000

73. Final Accounts with Adjustment
Pass Journal Entries and create Debtors account
Opening balance of Debtors Rs. 25,000. Following transactions
happened in the year:
1. Sold goods on credit Rs. 30,000
2. Received from Debtors Rs. 18,000
3. Debtors worth Rs. 10,000 make payment, and firm allows
them a discount of Rs. 2,000
4. Bad debts incurred Rs. 2,500
5. Create Provision for Bad debts @ 10% of closing balance of
debtors
Also show the impact of these transactions on P&L
Account and Balance Sheet

74. Final Accounts with Adjustment
Closing stock is Rs. 6,000; Wages unpaid is Rs. 2,000; Depreciate
machine by 10 %. Prepare final accounts
Particulars Debit Credit
Capital
Cash
Wages
Opening stock
Purchase and Sales
Returns
Salary
Machine
Debtors and Creditors
Loan
--
10,000
5,000
4,000
50,000
2,000
15,000
15,000
20,000
--
20,000
--
--
--
80,000
1,000
--
--
15,000
5,000
TOTAL 1,21,000 1,21,000

75. Final Accounts with Adjustment
a. Closing Stock Rs. 3,000
b. Additional Bad Debts Rs. 500
c. Owner withdrew Rs. 5,000
from business
d. Interest on Drawings 10 %
e. Interest on Capital 10 %
f. Create Provision for Bad debts
at 10 % of debtors
Item Dr. Cr.
Capital
Debtors
Machinery
Purchases
Sales
Opening Stock
Cash
Salaries
Bad-Debts
Interest
--
20,000
10,000
25,000
--
3,000
9,000
2,000
1,000
--
30,000
--
--
--
38,000
--
--
--
2,000
TOTAL 70,000 70,000

76. Also called Accounting standards
Rules universally followed in accounting
Governs the Theory and Procedures in accounting
2 categories of Principles:
ACCOUNTING CONCEPTS
ACCOUNTING CONVENTIONS

77. ACCOUNTING PRINCIPLES
1. Separate Entity
2. Going Concern
3. Money Measurement
4. Cost
5. Dual Aspect
6. Accounting Period
7. Matching of Revenue and Cost
8. Realization

78. 1. Conservatism
2. Full Disclosure
3. Consistency
4. Materiality
ACCOUNTING PRINCIPLES