Accounting Basics

Definition
Accounting is defined by the American Institute
of Certified Public Accountants (AICPA) as "the
art of recording, classifying, and summarizing in
a significant manner and in terms of money,
transactions and events which are, in part at
least, of financial character, and interpreting the
results thereof."

Timely and accurate picture of performance
To ascertain the financial position of the
business as a whole.
Generate financial reports for management,
lenders, creditors
Facilitate filing of tax returns
 (sales and payroll taxes more important than income tax)
Prevent and detect fraud, waste and theft

Types of
Accounts

Personal Impersonal
A/c A/c

Nominal
Real A/c
A/c

Personal A/c
•Natural Personal A/c
1

•Artificial Personal A/c
2

•Representative Personal A/c
3

Natural Personal A/c
Firm Individual Persons

Ex:- Raju A/c, Ram A/c etc.

Artificial Personal A/c
Business Business

Ex:- Bank A/c, Xyz & Co Ltd. etc

Representative
Personal A/c

Outstanding Expenses

Prepaid Incomes

Rules for Personal A/c
Debit the Receiver

Credit the Giver

Real A/c

• Tangible Real A/c
1

• In-Tangible Real A/c

2

Tangible Real A/c
Properties

Buildings a/c Machinery a/c

In-Tangible Real A/c

Patents Copy Rights

Rules for Real A/c

Debit What Comes in

Credit What Goes Out

Nominal A/c

Debit all Losses and Expences

Credit all Incomes and gains

ACCOUNTING EQUATION:
Accounting equation is an extension of business
Entity (or) dual aspect concept.

Assets=Liabilities + capital
Capital=Assets-Liabilities
Liabilities=Assets -Capital

 Business entity concept: It means of
separation of owner and business



Dual aspect concept: It means two, any
transaction will have two aspects
Accounting period concept: The period
of checking the books of accounts from
the beginning to end of the financial
ACCOUNTING
year.
 Going concern concept: It means
continuously any person start a business
new and should go on. To start a
business with an intension to of earning
more profits
CONCEPTS:
 Cost concept: The total amount of
expenditure which is incurred in a
financial year.
 Money measurement concept: it means
the value of every transaction should
measure in terms of money
 Matching concept: To measure the
profits for a particular period is essential
to match accurately that cost associated
with revenues.
 Realization concept: imaginary value
should be anticipated but not a security
have a greater value.
 Accrual concept: costs are recognized
when they are incurred when they are
not paid.
 Rupee value concept: it assumes that
the value of a rupee constant.

 Business entity concept: It means of separation of owner and
business
 Dual aspect concept: It means two, any transaction will have two
aspects
 Accounting period concept: The period of checking the books of
accounts from the beginning to end of the financial year.
 Going concern concept: It means continuously any person start a
business new and should go on. To start a business with an
intension to of earning more profits
 Cost concept: The total amount of expenditure which is incurred in
a financial year.
 Money measurement concept: it means the value of every
transaction should measure in terms of money
 Matching concept: To measure the profits for a particular period is
essential to match accurately that cost associated with revenues.
 Realization concept: imaginary value should be anticipated but not
a security have a greater value.
 Accrual concept: costs are recognized when they are incurred
when they are not paid.
 Rupee value concept: it assumes that the value of a rupee constant.

Business Entity Concept

Business Owner

Dual Aspect Concept

Debit Credit

Accounting Period Concept
All the transactions are recorded in the books of
accounts on the assumption
 that profits on these transactions are to be
ascertained for a specified period.
 This is known as accounting period concept. Thus,
this concept requires
 that a balance sheet and profit and loss account
should be prepared at regular
 intervals. This is necessary for different purposes
like, calculation of profit,
 ascertaining financial position, tax computation
etc.

Going Concern Concept

 Depreciation Investors
 Future Profit
 Estimation

Cost Concept
Cost of the Machine
Before 1 Month Before 1 Month
100000 80000

Money Measurement Concept
This concept assumes that all business
transactions must be in terms of
Money. It should not record the transactions
with is not related to money.

Matching Concept
To Calculate Profit

Costs Revenues

Realization Concept
accounting records only when it is realized

Wrong Right

Accrual Concept
costs are recognized when they are incurred
when they are not paid.

Credit
Sale

Rupee Value Concept

It assumes that the value of a
Rupee Constant.

ACCOUNTING
There are 5 important conventions are
follow under:-
CONVENTIONS:
o Convention of consistency: the
formats and forum ales procedures
are not changing till long period of
time.
o Convention of disclosure: every
transaction should be recorded and
nothing should be hidden
o Convention of materiallity.: there
must be heading and terms related
to the heading can be taken at one
place.
o Convention of conservetism.: play
safe means taking necessary steps to
safeguard the cash flow.
o Convention of feasability.:
minimizing the expenditure and
wastage should be avoided.

There are 5 important conventions are follow under:-
oConvention of consistency: the formats and forum ales
procedures are not changing till long period of time.
oConvention of disclosure: every transaction should be
recorded and nothing should be hidden
oConvention of materiallity.: there must be heading and
terms related to the heading can be taken at one place.
oConvention of conservetism.: play safe means taking
necessary steps to safeguard the cash flow.
oConvention of feasability.: minimizing the expenditure
and wastage should be avoided.

ACCOUNTING CYCLE

9. Closing
8. Preparing The entries
The financial
statement 1.Identifying
the transaction
7. Adjusting
Trial balance Accounting
AAAomiomi 2.Analyse the
6.Adjusting Cycle transaction
entries
3.journalise
5. Prepare the
Trial balance 4.Ledger
And posting

Transaction:
Cash
Received
from Raju

Analyse:-

Cash related to Real Account

2.Analyse the Raju Related to Personal Account
transaction
The Rules of that accounts should
be applied.

Journals
Date Particulars L.F Debit Credit
No Amount Amount
Jan 1 Cash A/c Dr XXXXX
2011 To Raju A/c XXXXX
(Being Cash Received
From Raju

3.journalise

Dr Cash A/c Cr
Date Particulars J.F Amount Date Particulars J.F Amount
No No

Jan 1 To Raju A/c XXXXX Jan 31 By Balance C/d XXXXX

XXXXX XXXXX

Feb 1 To balance b/d XXXXX

Dr Raju A/c Cr
Date Particulars J.F Amount Date Particulars J.F Amount
No No
Jan 31 To balance c/d XXXXX Jan 1 By Cash A/c XXXXX

4.Ledger
And posting XXXXX XXXXX

Feb 1 by balance b/d XXXXX

Trial Balance
S.NO Particulars Debit Credit
Amount Amount

1 Cash A/c XXXXX
2 Raju A/c XXXXX

5. Prepare the XXXXX XXXXX
Trial balance

Adjusting Entries are journal entries
that are made at the end of the
accounting period, to adjust expenses
and revenues to the accounting period
where they actually occurred.

6.Adjusting
entries

Accrued revenues
Revenues already earned but not yet paid or
recorded.

Unearned revenues
Revenues received in cash and recorded as
liabilities prior to being earned.

Accrued expenses
expenses already incurred but not yet paid or recorded.

Prepaid expenses
expenses paid in cash and recorded as assets prior to being
used.
Other adjusting entries include depreciation of fixed
assets, allowances for bad debts, and inventory
adjustments.

Telephone Expense 1,494 −
Depreciation
1,100 −
Expense
Interest Expense 150 −
Dividend 5,000 −
Total $217,014 $217,014

7. Adjusting
Trial balance

1.Trading Account
2.Profit and Loss A/c
3.Balance Sheet

8. Preparing
The financial
statement

Accounting Basics

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