2. MEANING OF ACCOUNTING
IT IS THE PRACTICE OF MAINTAINING PRECISE RECORDS OF THE FINANCIAL DEALINGS OF
A BUSINESS.
IT INVOLVES IDENTIFYING BUSINESS TRANSACTIONS, RECORDINGS THEM &
SUMMARIZING THE SAME IN A SYSTEMATIC MANNER.
IT IS ALSO CALLED AS “ LANGUAGE OF BUSINESS”.
4. OBJECTIVES OF ACCOUNTING
● RECORD BUSINESS ACTIVITIES IN A SYSTEMATIC MANNER
● EVALUATE THE PERFORMANCE OF THE BUSINESS IN TERMS OF PROFIT
● KNOW THE FINANCIAL POSITION OF THE BUSINESS
● CONTROL BUSINESS ACTIVITIES EFFECTIVELY
● PROVIDE INFORMATION TO VARIOUS STAKEHOLDERS IN THE BUSINESS
5. BASIC TERMS IN ACCOUNTING
1. ENTITY
IT HAS A DEFINITE INDIVIDUAL EXISTENCE. BUSINESS ENTITY IS AN IDENTIFIABLE
BUSINESS ENTERPRISE
2. TRANSACTIONS
IT IS AN EVENT INVOLVING SOME VALUE BETWEEN 2 OR MORE ENTITIES. IT CAN BE
EITHER A CASH TRANSACTION OR A CREDIT TRANSACTIONS
6. 3. ASSETS
ASSET IS A PROPERTY OR ECONOMICS RESOURCES OWNED BY AN ORGANIZATION WHICH PROVIDE
ECONOMIC BENEFIT TO THE ORGANIZATION SO THEY ARE SHOWN IN THE ASSET SIDE OF THE BALANCE
SHEET.
ASSETS CAN BE BROADLY CLASSIFIED INTO;
FIXED ASSETS: FIXED ASSETS ARE ASSETS HELD LONG TERM BASIS. THEY ARE MEANT FOR LONG TERM
USE NOT FOR RESALE. eg: machinery, furniture, buildings, etc…
CURRENT ASSETS: CURRENT ASSETS ARE ASSET HELD ON A SHORT TERM BASIS. eg: debtors, bills
receivable, closing stock, etc…
PHYSICAL/ REAL/ TANGIBLE ASSETS: INTANGIBLE ASSETS ARE THE ASSETS WHICH CAN BE TOUCHED,
SEEN, FELT. eg: machinery, furniture, buildings, etc…
INTANGIBLE ASSETS: INTANGIBLE ASSETS ARE THE ASSET WHICH CAN NOT BE TOUCHED, SEEN, FELT.
eg: eg: goodwill, copyright, trademark, etc…
7. 4. LIABILITIES
LIABILITIES ARE THE FINANCIAL OBLIGATION WHICH AN ORGANIZATION OWES TO
OTHERS. THESE REPRESENT AMOUNT PAYABLE BY THE BUSINESS IN THE FUTURE.
LIABILITIES CAN BE CLASSIFIED INTO;
LONG TERM LIABILITIES: THEY ARE PAYABLE AFTER THE PERIOD OF ONE YEAR.
eg: mortgage loans, etc…
SHORT TERM LIABILITIES: SHORT TERM LIABILITIES ARE PAYABLE WITHIN ONE YEAR.
eg: mortgage loan. etc…
8. 5. CAPITAL ( OWNER’S EQUITY )
CAPITAL IS THE AMOUNT INVESTED BY THE PROPRIETOR THE ESTABLISHMENT OF THE
BUSINESS. THE CAPITAL IS INCREASED BY PROFITS EARNED OR THROUGH INTRODUCTION
OF ADDITIONAL CAPITAL AND DECREASED. IF LOSSES ARE INCURRED OR IF ANY AMOUNT
WITHDRAWN. IT IS THE OWNER CLAIM ON THE TOTAL ASSETS OF THE BUSINESS.
CAPITAL = ASSETS + LIABILITIES
9. 6. REVENUE
REVENUE REPRESENTS THE AMOUNT A BUSINESS EARNS THROUGH SALE ITS
PRODUCTS OR PROVIDING SERVICE TO CUSTOMERS. eg: sales, rent received, etc…
10. 7. EXPENSES
EXPENSES REPRESENT THE COSTS INCURRED IN THE PROCESS OF EARNING
REVENUE. EXPENSES ARE MEASURED IN TERMS OF COST OF SERVICES USED DURING
AN ACCOUNTING PERIOD. eg: rent, wages, and salaries, ect…
OR
IN TERMS OF COST OF ASSETS CONSUMED DURING AN ACCOUNTING PERIOD.
eg: depreciation
11. 8. EXPENDITURE
EXPENDITURE REPRESENTS AMOUNT CONSUMED FOR THE ACQUISITION OF
ASSETS, THE BENEFIT FROM WHICH IS DERIVED OVER A PERIOD WHICH
EXTENDS BEYONDS THE ACCOUNTING YEAR. IT IS LONG TERM IN NATURE.
13. 10. LOSS
IT IS THE EXCESS OF EXPENSES OF A PERIOD OVER. ITS RELATED REVENUE.
IT DECREASE THE OWNER’S EQUITY. IT IS ALSO REFERS TO MONEY’S WORTH
LOST (OR COST INCURRED) WITHOUT RECEIVING ANY BENEFIT IN RETURN.
14. 11. PROFIT
PROFIT IS THE EXCESS OF REVENUE OF A PERIOD OVER ITS RELATED EXPENSES
DURING AN ACCORDING PERIOD. IT INCREASES TH INVESTMENT OF THE
OWNERS.
15. 12. GAIN
IT IS AN PROFIT THAT ARISES FROM EVENTS OR TRANSACTIONS WHICH ARE
INCIDENTAL TO BUSINESS.
16. 13. DISCOUNT
IT IS THE DEDUCTION IN THE PRICE OF GOODS ON SALE.
DISCOUNT AS CLASSIFIED AS;
TRADE DISCOUNT: IT IS THE DEDUCTION OF AN AGREED PERCENTAGE ON LIST PRICE AT
THE TIME OF THE SALE. IT IS GENERALLY OFFERED BY MANUFACTURERS TO
WHOLESALERS AND WHOLESALERS TO RETAILERS.
CASH DISCOUNT: AFTER SELLING THE GOODS ON CREDIT BASIS, DEBTORS MAY BE GIVEN
A CERTAIN DEDUCTION. IN THE AMOUNT DUE IF THEY PAY THE AMOUNT IN THE
STIPULATED PERIOD OR EARLIER.THIS DEDUCTION IS GIVEN AT THE TIME OF PAYMENT
ON THE AMOUNT PAYABLE.
17. 14. VOUCHER
IT IS THE DOCUMENTARY EVIDENCE IN SUPPORT OF A TRANSACTION.
15. GOODS
GOODS ARE THE PRODUCTS WHICH A BUSINESS UNIT PRODUCE AND SELLS OR BUY OR SELLS. THE
ITEMS WHICH PURCHASED FOR USE IN THE BUSINESS ARE NOT CALLED GOODS.
16. DRAWINGS
ITS REFERS TO THE WITHDRAWAL OF MONEY OR GOODS BY THE OWNER FROM THE BUSINESS FOR
PERSONAL USE. IT REDUCES THE INVESTMENT OF THE OWNERS.
17. PURCHASE
PURCHASE ARE THE TOTAL AMOUNT GOODS PRODUCED BY A BUSINESS ON CREDIT OR CASH FOR
USE FOR SALE. PURCHASES MAY EITHER BE CASH OR CREDIT PURCHASES.
18. 18. PURCHASE RETURN
PURCHASE RETURN MEANS GOODS THAT HAVE BEEN PURCHASED BUT ARE RETURNED TO THE
SELLERS BEFORE CONSUMPTION DUE TO REASON LIKE POOR QUALITY, DAMAGE, etc…
19. SALES
SALES REFERS TO THE AMOUNT OF GOODS SOLD AFTER BEING PURCHASES OR MANUFACTURED BY
THE BUSINESS. PURCHASE MAY EITHER BE CASH OR CREDIT PURCHASES. SALES MAY EITHER BE CASH
OR CREDIT SALES.
20. SALES RETURN
SALES RETURN MEANS GOODS THAT HAVE BEEN SOLD BUT ARE RETURNED BY THE BUYER BEFORE
CONSUMPTION, DUE TO REASON LIKE POOR QUALITY AND DAMAGE.
19. STOCK ( INVENTORY )
STOCK IS A MEASURE OF SOMETHING ON HAND. GOODS, SPARES AND OTHER ITEMS IN A
BUSINESS, CALLED, STOCK IN HAND.
STOCK CAN BE;
OPENING STOCK: IT IS THE AMOUNT OF STOCK AT THE BEGINNING OF THE ACCOUNTING
PERIOD. IT IS ALSO CALLED “BEGINNING INVENTORY”.
CLOSING STOCK: IT IS THE AMOUNT OF STOCK AT THE ENDING OF THE ACCOUNTING
PERIOD. IT IS ALSO CALLED “ ENDING INVENTORY”.
20. 22. DEBTORS
IT IS A PERSON WHO RECEIVES BENEFITS FROM THE BUSINESS IMMEDIATELY, BUT IS
OBLIGATED TO PAY FOR THE SAME IN FUTURE.
23. CREDITORS
IT IS A PERSON WHO PROVIDES BENEFITS WITHOUT RECEIVING IMMEDIATE PAYMENT FOR
THE SAME, AND WHO WILL CLAIM THE PAYMENT IN FUTURE.
24. ACCOUNTS RECEIVABLE ( B/R )
IT INCLUDES AMOUNT DUE FROM DEBTORS AS WELL AS ON A/C’S OF BILLS RECEIVABLE.
25. ACCOUNTS PAYABLE ( B/R )
IT INCLUDES AMOUNT DUE FROM CREDITORS AS WELL AS ON A/C’S OF BILLS PAYABLE.
26. EXAMPLE
1/4/2018 - ARJUN STARTED BUSINESS WITH CASH Rs - 5,00,000/-
CASH A/C - ASSET - INCREASE - Dr
To CAPITAL A/C - CAPITAL - INCREASE - Cr
2/4/2018 - OPEN A BANK A/C IN CANARA BANK A/C Rs - 2,50,000/-
CANARA BANK A/C - ASSET - INCREASE - Dr
To CASH A/C - ASSET - DECREASE - Cr
3/4/2018 - RECEIVED RENT BY CHEQUE
RECEIVED RENT A/C - INCOME - INCREASE - Cr
To BANK A/C - ASSET - INCREASE - Dr
27. 4/4/2018 - PAID SALARY BY CASH
CASH A/C - ASSET - DECREASE - Cr
To SALARY A/C - EXPENSES - INCREASE - Dr
5/4/2018 - PAID COMMISSION BY CASH
CASH A/C - ASSET - DECREASE - Cr
To COMMISSION A/C - EXPENSES - INCREASE - Dr
6/4/2018 - WITHDREW CASH FROM BANK FOR OFFICE USE Rs - 25,000/-
BANK A/C - ASSET - DECREASE - Cr
To CASH A/C - ASSET - INCREASE - Dr
28. 7/4/2018 - TRANSFER AMT FROM CANARA BANK TO AXIS BANK Rs - 75,000/-
CANARA BANK A/C - ASSET - DECREASE - Cr
To AXIS BANK A/C - ASSET - INCREASE - Dr
8/4/2018 - ARJUN WITHDRAW Rs - 5,000/- FOR PERSONAL USE
DRAWINGS A/C - CAPITAL - DECREASE - Dr
To CASH A/C - ASSET - DECREASE - Cr
9/4/2018 - PAID INSURANCE BY CASH Rs - 5,000/-
INSURANCE A/C - EXPENSES - INCREASE - Dr
To CASH A/C - ASSET - DECREASE - Cr