Accounting involves recording, classifying, and summarizing financial transactions and events. It has the objectives of keeping systematic records, protecting business assets, and facilitating decision making. The key concepts in accounting include separate entity, going concern, money measurement, cost, dual aspect, accounting period, and matching. Financial statements like the balance sheet, income statement, and statement of cash flows are prepared using accounts from the general ledger in accordance with accounting principles.

1. ACCOUNTING
DEFINITION
“Accounting is an art of recording, classifying and summarizing in a
significant manner and in terms of money, transaction and events, which
are in part at least of a financial character and interpreting the results thereof”.
-AICPA
FUNCTIONS OF ACCOUNTING
 Recording
 Classifying
 Summarizing
 Deals with financial transactions
 Interprets
OBJECTIVES OF ACCOUNTING
To keep systematic records
To protect business properties
To ascertain the operational profit or loss
To ascertain the financial position of the
business
To facilitate rational decision making
Informs

2. Accounting Principles
Accounting Concepts
 Separate entity concept
 Going concern concept
 Money measurement
concept
 Cost concept
 Dual aspect concept
 Accounting period concept
 Matching concept
 Realization concept
Accounting Convention
 Conservatism convention
 Full discloser convention
 Consistency convention
 Materiality

3. Accounting Principles
Separate entity concept
In accounting business is considered to be a separate entity from the proprietor[s].
Thus when one person invest Rs. 10,000 into business. It will be deemed that the proprietor
has given that such of money to the business which will shown as a ‘liability’ in the books of
the business.
Going concern concept
According to this concept it is assumed that the business will continue for a fairly long time to
come. There is neither the intention nor the necessity to liquidate the particular business
venture in the foreseeable future.
Money measurement concept
Accounting records only monetary transactions. Events or transactions which cannot be
expressed in money do not find place in the books of accounts though they may be very useful
for the business.
Cost concept
The cost concept does not mean that the asset will always be shown at cost but it become the
basis for all future accounting for the assets. It means that asset is recorded at cost at the time
of its purchase but it may systematically be reduced in its value by charging depreciation.

4. Dual aspect concept
This is the basic concept of accounting as per this concept every business
transaction has a dual effect.
eg: if A started a business with a capital of Rs. 10,000. there are two aspect of the
transaction. On the one hand the business has asset of Rs. 10,000 while on the
other hand the business has to pay to the proprietor a sum of Rs. 10,000 which is
taken as proprietor’s capital.
Accounting period concept
According to this concept, the life of the business is divided into appropriate
segment. This is because though the life of the business is considered to be
indefinite, the measurement of income and studying the financial position of the
business after a very long period would not be helpful in taking proper corrective
steps at the appropriate time. It is, therefore, absolutely necessary that after each
segment or time interval the business man must ‘stop’ and ‘seek back’, how things
are going. In accounting such a segment or time interval is called ‘accounting
period.’ It is usually a year.

5. Matching concept
The paramount objective of running a business is to earn profit. In order to
ascertain the profit made by the business during the period, it is necessary
that revenue of the period should be matched with the costs of that period.
The term matching means appropriate association of related revenues and
expenses.
Realization concept
According to this concept revenue is recognized when a sale is made. Sale is
considered to be made at the point when the property in goods passes to
the buyer and he becomes legally liable to pay.
Full discloser convention
According to this convention accounting reports should disclose fully and
fairly the information they purport to represent. They should be honestly
prepared and sufficiently disclose information which is of material interest
to proprietors, present and potential creditors and investors.

6. Conservatism convention
In the initial stages of accounting certain anticipated profits which were recorded,
did not materialize. This resulted in less acceptability of accounting figures by the
end users. On account of this reason the accountants follow the rule ‘anticipated
no profit but provide for all possible losses’, while recording business transaction.
In other words, the accountant follows the policy of “playing safe”. On account of
this convention, the inventory is valued at cost or market price whichever is less’.
Similarly a provision is made for possible bad and doubtful debts out of current
year’s profits.
Materiality
According to this convention the accountant should attach importance to material
details and ignore insignificant details. This is because otherwise accounting will
be unnecessarily overburdened with minute details. The question what
constitutes a material detail is left to the discretion of the accountant. Moreover,
an item may be material for one purpose while immaterial for another.
Consistency convention
According to this convention accounting practices should remain unchanged from one
period to another. For example, if stock is valued at ‘cost or market price whichever is
less’. This principle should be followed year to year.

7. Accounting Equation
The properties owned by a business are called assets. The rights to the
properties are called equities. Equities may be sub-divided into two principal
types: the rights of the creditors and the rights of the owner. The equities of
creditors represented debts of the business and are called liabilities. The
equity of the owners is called capital, or proprietorship or owner’s equity.
Thus:
Assets = Liabilities + Capital
or
Assets – Liabilities = Capital
The accounting equation can be understood with the help of the following
transaction:
A starts business with a capital of Rs. 10,000.
There are two aspects of the transaction. The business has received cash of Rs.
10,000. It is its asset but on the other hand it has to pay a sum of Rs. 10,000, to A,
the proprietor. Thus:
CAPITAL & LIABILITIES Rs. Assets Rs.
CAPITAL 10,000 Cash 10,000

8. Accounting basics
1. Journal:- Recording of financial transactions
2. Ledger:- Classifying those financial transactions
3. Trial balance:- Final summary of the classified transactions
These are basic three steps of accounting before preparing any financial
report.
Let’s consider few financial transactions:-
a) Capital infused into the business 5,00,000
b) Purchase of land 1,00,000
c) Purchase of building 1,00,000
d) Goods purchased 1,00,000
e) Sales 5,00,000
These transactions hardly make any sense. So I will dedicate 1 page for each
type of transactions i.e. I will record these transactions and then will classify
these transactions. Then I will prepare the final summary of these
transactions. Once the final summary is prepared then I will prepare the
different financial reports.

9. Journal
S.N Date Particulars LF DR CR
1 Cash acc Dr
To capital Acc
5,00,000
5,00,000
2 Land acc Dr
To Cash acc
1,00,000
1,00,000
3 Building acc Dr
To cash acc
1,00,000
1,00,000
4 Goods acc Dr
To cash acc
1,00,000
1,00,000
5 Cash acc Dr
To Sales acc
5,00,000
5,00,000

10. Preparing Ledger or
separate accounts for all the items in the financial transaction
One page for each item, let’s say I am preparing cash account, then I will
record all cash related transactions on a page. I will put cash that I received on
the left side and the cash which I paid on the right side.
Cash Ledger
Similarly different ledgers will be prepared (building account, Land account,
Sales account and goods account) and I will dedicate one page to all these
Ledgers. Event now I can not show this to my manager. What I need to do is to
prepare the finally summary of these transactions. So I will prepare the final
summary, i.e. the trial balance.
Debit credit
Capital inflow 5,00,000 Purchase of land 1,00,000
Sales 5,00,000 Purchase of building 1,00,000
Balance cash 7,00,000 Purchase of goods 1,00,000

11. Trial balance
Total amount of cash left and total amount of land, total amount of building
and total amount of goods left will be mentioned in the final summary. This
final summary would be shown to the manager. This is called the trial balance.
Then I will go to the financial statements.
Trial Balance can be defined as “a list of all balances standing in the Ledger
Accounts and Cash Book of a concern at any given time.
Advantages:
1. It is the shortest method of verifying the arithmetical accuracy of entries
made in the Ledger. If the Trial balances agree, it is an indication that the
Accounts are correctly written up; but it is not a conclusive proof.
2. It helps to prepare the Trading A/c, Profit & Loss a/c and Balance Sheet.
3. It presents to the businessman consolidated lists of all Ledger Balances.
Preparation:
• There are two methods for preparing the Trial Balance

12. Trial Balance
First Method:
• In this method, Ledger Accounts are not balanced. They are totaled. The
debit side totals and the credit side totals are entered in a separate sheet.
The grand total of Debit Column will be equal to the grand total of the
Credit Column.
• Second Method:
• This method is more widely used. In this method, Ledger accounts are
balanced. The brought down balances are then brought to a sheet as given
bellow.

13. Financial statements
Balance sheet: a big box with two sides. On one side we will mention all the
liabilities the business will incur and on the other side I will mention all the assets .
The total of assets should be equal to the total of liabilities. In accounting terms it
is said that your balance sheet should tally. Both sides of the balance sheet should
tally. Why these two should tally? There are two explanation for this . One is
mathematical and another one is logical.
Mathematical reason is that for every transaction we make two entries one is
debit and another is credit and one part will go to the asset side and the another
part will go to the liability side so the balance sheet will tally. The other reason is
logical.
Logical reason:- to this liabilities we call them as sources of fund and to these
assets we call them as applications of fund. So there can not be a scenario that
your sources of fund and application of fund will differ.
Balance sheet is prepared on a particular date and is only true on a particular date.

14. BALANCE SHEET
Assets Liabilities
All of a firm’s identifiable assets and liabilities appear on the balance
sheet, and the difference between a firm’s assets and its liabilities
represents the value of the firm.
• Mirrors the Accounting Equation
Assets = Liabilities + Equity
Uses of funds = Sources of funds
• Assets are listed in order of liquidity
– Current and non-current
• Liabilities are listed in order of maturity
• Equity consists of Contributed Capital and
Retained Earnings
To be reported on a balance sheet,
an asset must:
1. Be owned or controlled by
the company
2. Must possess expected
future benefits

15. Most assets are recorded at historical
costs
• Historical Cost is
– Objective
– Verifiable
– Therefore, not subject to bias
• However, historical cost is not
particularly “relevant” to most
readers of the balance sheet
• “Relevance vs. Reliability” is an
important issue with accountants.
Liabilities are listed in order of
maturity
Current Liabilities come due in
less than a year.
Noncurrent liabilities come due
after a year.
Companies desire more current
assets than current liabilities – this
difference is called net working
capital
Equity consists of:
– Contributed Capital (cash raised from the issuance of shares)
Earned Capital (retained earnings). Retained Earnings is updated each
period as follows:

16. Profit and loss account or income statement
Income statement is all about how much income is generated in a financial
Year. Income statement is prepared for a particular period and is true for a
particular period, let’s say for a financial year.

17. Statement of Cash flows
Cash flow statement is all about the cash generated in a particular period.
Through what sources we generated the cash. Cash flow is ultimately what
matters to a firm and its investors; therefore, it is not really necessary to worry
about the definition of earnings used in the preparation of the income
statement. Rather, one need only consider the sources and uses of cash as
reflected on the firm’s statement of cash flows.
• Statement of cash flows (SCF) reports cash inflows and outflows
• Cash flows are reported based on the three business activities of a
company:
1. Operating activities: transactions related to the operations of the
business.
2. Investing activities: acquisitions and divestitures of long-term assets
3. Financing activities: issuances and payments toward equity,
borrowings, and long-term liabilities.

18. Capital 1,00,000
Bank loan 5,00,000
Purchase of material 3,00,000
Purchase of furniture 2,00,000
Prepare balance sheet for these transactions
Putting assets on right side and liabilities on the left side is just a convention.
In US assets are put on the left side and liabilities on the right side. There is
no logic behind this.
Our accounting system is based on double entry system. For every transaction
there would be corresponding transaction s of opposite effect i.e. debit and a
credit side entry.
Capital is a liability for the business, as soon as we will put capital in the
liability side its opposing effect would be increase in cash by the same amount
so we will write cash in the asset side. For the next transaction which is a bank
loan, it is again liability for the business and it would be mentioned on the left
Side with an opposing entry of similar amount of cash in the right side or in the
asset side, as cash will increase in the business and cash is an asset for the
Business.

19. Liabilities Assets
Cap 1,00,000 Cash (1+5-3-2) 1,00,000
Bank Loan 5,00,000 Purchase of mat 3,00,000
--------------------------------------------------------- Purchase of furniture 2,00,000
6,00,000 ------------------------------------------------------------
6,00,000
Next is purchase of material. This transaction will again has two entries as
this will increase asset by 3 lakh but this will either reduce cash by 3 lakh or
will create new liability of 3lakh to the business. Similarly for the next
transaction purchase of Furniture will increase furniture asset by 2 lakh but it
will either reduce cash asset by 2 lakh or it will create new liability to the
business (if it is a credit sell). So ultimately the two sides will tally and the
balance sheet will look like:-
So in the balance sheet both sides are equal.

20. 1. Capital 5L
2. Bank loan 5L
3. Land & building 3L
4. Sales 10L
5. Expenses 4L
For these transactions prepare balance sheet and profit and loss account both.
Here for the first two transactions liability will increase by 10L and cash in the
asset side will increase in the assets side. For the 3rd transaction land and
building asset will increase at the same time considering it a cash purchase the
cash asset will decrease by the same amount. 4th transaction will increase cash
by 10Lin the asset side and the 5th transaction will reduce cash by 4L

21. Balance sheet will look like
Liabilities Assets
Cap 5 L&B 3
BL 5
Res 6 Cash 13
Total 16 Total 16
Expense income
Sal exp 4 Sales 10
Profit 6
Total 10 Total 10