This document provides an overview of accounting concepts, principles, and processes. It defines accounting as recording financial transactions and defines key terms like assets, liabilities, equity, revenues and expenses. It describes the accounting equation, accounting standards and various books of accounts used like journal, ledger, trial balance. It also summarizes accounting concepts like business entity, money measurement, going concern, dual aspect and key accounting conventions like consistency, full disclosure and conservatism.
2. Accounting is the process of recording financial transactions pertaining to a
business.
The accounting process includes summarizing, analyzing, and reporting these
transactions to oversight agencies, regulators, and tax collection entities.
Accounting is the act of computing something
ACCOUNTING
3. • Financial accounting.
• Cost accounting.
• Managerial accounting.
• Tax accounting.
• Forensic accounting.
• Green Accounting
• Human Resources Accounting
BRANCHES OF ACCOUNTING
5. 1.Recording of business transactions
1.Calculation of profit earned or loss incurred
1.Depiction of financial position of the firm
1.Assisting management
1.Assessing the progress of the business
1.Detecting and preventing errors and frauds
to portray the liquidity position
1.To file tax returns
communicating accounting information's to various users
OBJECTIVES OF FINANCIAL ACCOUNTING
6. Basic Accounting Terms
Business Transaction
Dealings between persons involving exchange of value are called business transactions.
A business transaction is an exchange of goods or services between persons in which each
person receives or sacrifices value. It is an economic event of a business entity involving
transfer or money or money's worth.
There are three types of business transactions:
a) Cash transaction&
b) Credit transaction and
c) Barter transaction
Transactions involving immediate receipt or payment of money are called cash transactions
Transactions in which receipt or payment of money are postponed to a future date are called
credit transactions.
Exchange of goods for goods is called barter transaction.
7. 2. Capital
The investment of the owner in the business is called capital. It is the excess of
assets over liabilities. It is owner's claim on the assets of the enterprise. It is
also called owner's equity or net worth.
Capital = Assets-Liabilities
Capital is increased by the amount of profits earned and additional capital
introduced and decreased by the amount of losses incurred and amount
withdrawn.
3.Drawings
Cash and goods withdrawn by the proprietor from business for domestic or
personal purpose are called drawings. It is shown as deduction from capital
account.
8. 4.Assets
Things of value owned by a person or firm are called assets.
Assets refer to tangible objects or intangible rights of an enterprise
which carry future benefits.
Assets may be classified as follows:
a. Fixed assets - Assets meant for permanent use in the business
for long period are called fixed assets. They are held for producing
or providing goods or services and not for resale in the normal
course of business. E.g. Land and Building, Plant and Machinery,
Furniture etc.
b. Current Assets - Assets purchased for resale are called current
assets or floating assets. Such assets are held in the form of cash or
can be converted into cash within a period of 12 months. E.g. Stock,
Sundry Debtors, Bills Receivable etc.
c. Liquid Assets - Liquid assets also known as Quick assets are current
assets other than stock and prepaid expenses.
Liquid Assets = Current Assets - (Stock + Prepaid Expenses)
9. d. Tangible Assets - Assets having realisable value and physical existence are called
tangible assets. E.g. Cash at Bank, Machinery, Furniture etc.e.
e. Intangible Assets - Assets having realisable value and no physical existence are
called intangible assets. E.g. Patent, Goodwill, Trade marks etc.
f. Wasting Assets- Assets exhausted in the process of earning revenue are called
wasting assets. E.g. Mines, Quarries, Oil Wells etc.
g. fictitious Assets- Assets having no realisable value are called fictitious These are
accumulated losses or deferred revenue expenses incurred in the past but not charged
to Profit and Loss account. E.g. Preliminary expenses, Discount on shares or
debentures, Underwriting commission etc.
h. Contingent Assets An asset the existence, value and ownership of which depends
on the occurrence or non-occurrence of a specified event or performance or non
performance of a specified act is called contingent asset. Such assets are not
disclosed in the Balance Sheet.
Examples: 1. Asset in respect of which a case is pending in the Court of Law.
2. Patent applied for
10. 5. Liabilities
Debts owed by a person or firm to outsiders are called liabilities.
Liabilities are financial obligations of an enterprise other than owner’s fund.
Liabilities may be:
a. Current liabilities
b. long Term liabilities
c. Internal Liabilities
d. External Liabilities
e. Contingent liabilities
Debts repayable with in a year are called current liabilities. Eg busine
Sundry creditors, B/P, Bank Overdraft etc. sale.
Debts repayable after one year are called long term liabilities. Eg.
Debentures.
11. Debts repayable to owners of the firm are called internal liabilities. These are financial
obligations of an enterprise towards owners. E.g. Capital and General Reserve.
Debts repayable to outsiders are called external liabilities. E.g. Bank Overdraft and
Sundry Creditors.
Liability the occurrence of which is uncertain is called contingent liability. It may or
may not involve payment of money. It is shown as footnote in the Balance Sheet. Examples
of contingent liabilities are:
1. Liability on partly paid shares
2. Arrears of dividend on cumulative preference shares
3. Liability on bills discounted
6.Debtors
A person or firm who owes money to another person or firm is called debtor.
The total amount due to a firm from all debtors at the end of an accounting period on
account of goods sold or services rendered on credit is known as Sundry Debtors or Trade
Debtors. It is an asset.
12. 7. Creditors
A person or firm to whom money is owing is called creditor.
The total amount due from a firm to all creditors at the end of an accounting
period for goods purchased or services rendered on credit is known as Sundry
Creditors or Trade Creditors. It is a liability.
8. Stock
The value of goods remaining unsold with a business concern on a particular
date is called stock. Stock refers to goods held for sale in the ordinary course
of business or for consumption in the production of goods or services for sale.
Stock at the beginning of an accounting period is called opening stock and at
the end of an accounting period is called closing stock.
In the case of a manufacturing concern, stock consists of. Raw materials, work
in progress and finished goods
13. An accounting standard is a common set of principles, standards, and
procedures that define the basis of financial accounting policies and
practices.
These are written statements specifying uniform rules and practices for
preparing the financial statements.
Accounting Standards (AS 1~32) are issued/ amended by the Accounting
Standards Board of ICAI.
Presently, the Institute of Chartered Accountants of India (ICAI) has
issued 39 Indian Accounting Standards (Ind AS) which have been notified under
the Companies (Indian Accounting Standards) Rules, 2015 ('Ind AS Rules'), of
the Companies Act, 2013.
Accounting Standards
14. ACCOUNTING PRINCIPLES
(GAAP)
1. Business Entity Concepts
2. Money Measurement Concepts
3. Going Concern Concepts
4. Dual Aspect Concepts
5. Matching Concepts
6. Cost Concepts
7. Accounting Period Concepts
8. Realisation Concepts /Revenue
Recognition concept
9. Objective Evidence Concepts /
Objectivity principle
1. Convention of Full Disclosure
2. Convention of Consistency
3. Convention of Conservation
4. Convention of Materiality
ACCOUNTING CONCEPTS
ACCOUNTING CONVENTIONS
15. ACCOUNTING PRINCIPLES
ACCOUNTING CONCEPTS
Guidelines for the maintenance of the books of
accounts. It explains the conditions and rules
which provide the base for the maintenance of
accounts.
It is the techniques for the preparation of books
of accounts.
ACCOUNTING CONVENTIONS
16. ACCOUNTING
CONCEPTS
Separate entity or Economic entity.
Owner and the business are treated as
separate two entities.
All the transactions that affects the
business is only considered.
The owners’ personal events are not
considered.
So it helps to asses the true performance
and position.
Business Entity Concept
17. ACCOUNTING
CONCEPTS
All transactions which are in monetary
terms are only recorded in the books of
accounts.
Quantitative information are only
considered.
Qualitative data are ignored.
Money Measurement Concept
18. ACCOUNTING
CONCEPTS
The business has an indefinite period of
life.
All transactions are recorded on the
assumption that it is a continuing
enterprise and would not liquidated in
near future.
Going concern Concept
19. ACCOUNTING
CONCEPTS
All transactions has two aspects.
Debit and credit aspects.
All the debit should be equal to all
credits.
This is why the balance sheet is always
tallied.
Assets = Liabilities + Capital
Dual aspect Concept
20. ACCOUNTING
CONCEPTS
All the expenses incurred and revenue
earned during an accounting period are
recorded.
Comparing the revenues and expenses to
determine the net profit or net loss from
the business operations.
All the revenues and expenses
irrespective of cash receipt and payment
are considered.
Matching Concept
21. ACCOUNTING
CONCEPTS
Assets are recorded on the original cost
in the books of accounts.
The actual purchase price is considered.
And the market value is irrelevant for
accounting.
The original cost recorded is the basis for
all further calculations.
Cost Concept
22. ACCOUNTING
CONCEPTS
Periodicity or Timeliness principle.
It is the period for which the books of
accounts are prepared.
The indefinite period of life of business
are divided into smaller span of time to
assess the performance and financial
position.
Accounting year is usually a period of 12
months starting from 1st April to 31st
March of next year.
Accounting period Concept
23. ACCOUNTING
CONCEPTS
Revenue recognition concept.
Revenue is recognised when the
ownership of goods are transferred to
the purchaser irrespective of the receipt
of amount.
Revenue realisation is independent of
cash receipt.
Realisation Concept
24. ACCOUNTING
CONCEPTS
All financial transactions should be
verifiable and free from bias or error.
Source document for each and every
transactions should be maintained.
Objective evidence Concept
25. ACCOUNTING
CONCEPTS
The transactions are recorded at the
time it take place and not at the time of
settlement of cash.
It is applicable to all incomes and
expenses.
To ascertain the actual profit or loss and
financial position.
Accrual Concept
26. ACCOUNTING
CONVENTIONS
Accounting practices and principles used
for preparing the financial statements
should be followed for all subsequent
years.
The practice once followed cannot be
changed unless otherwise law specifies.
It makes the comparison more
meaningful.
Consistency
27. ACCOUNTING
CONVENTIONS All the significant information should be
disclosed through financial statements.
It will helps in taking accurate decisions
by the stakeholders.
Full disclosure
28. ACCOUNTING
CONVENTIONS
Prudence principle.
Golden principle of accounting.
All the anticipated losses are recorded
but anticipated incomes are not
considered.
Act like a prudent man.
Chance of creating secret reserves.
Conservatism
29. ACCOUNTING
CONVENTIONS
All the material facts should be disclosed
and ignore all immaterial information.
The term material is subjective in
nature.
What is material for one firm may not be
material for another concern.
Materiality
30. IDENTIFYING, RECORDING AND CLASSIFYING ACCOUNTING
INFORMATION
ACCOUNTING RULES:
EVERY TRANSACTION HAS TWO ASPECTS: DEBIT AND CREDIT
DEBIT = CREDIT
Traditional Approach (English Approach)
According to the types of accounts:
Debit and Credit rules are framed on the basis of different classification of accounts, personal, real and
nominal account.
31. Rules Personal account Real account Nominal account
Debit The receiver What comes in
Expenses and
losses
Credit The giver What goes out
Revenues and
gains
GOLDEN RULE OF ACCOUNTING
32. Modern Approach (American approach)
According to the elements of financial statement:
Debit and Credit rules are framed on the basis of five elements of financial statements, they are assets,
liabilities, capital, expenses and revenues.
Elements Balances
Asset Debit
Liability Credit
Capital Credit
Expenses Debit
Revenues Credit
33. Rules Asset Liabilities Capital
Expense
s
Revenue
s
Debit Increases Decreases
Decrease
s
Increases
Decrease
s
Credit Decreases Increases Increases
Decrease
s
Increases
34. JOURNAL
It is the first entry of transactions into the books of accounts.
All the transactions should be entered chronologically.
All transactions are entered into the journal through journal entries.
Journal entries are framed on the basis of rules f debit and credit.
36. LEDGER
It is the posting of journal entries recorded into the separate ledger accounts.
All the similar transactions are entered on same account..
Date Particulars J/F Rs. Date Particulars J/
F
Rs.
Cash a/c (Ledger name)
Dr. Cr.
37. TRIAL BALANCE
It is the summary of all account balances. It proves that all debits are equal to
credit.
It check the arithmetical accuracy of books if accounts.
Particulars Debit Rs. Credit Rs.
Trial Balance
38. FINANCIAL STATEMENTS
It is prepared at the end of the accounting year.
To ascertain the income or loss of the business.
To understand the financial position of the business.
Trading and Profit & Loss Account (Income Statement)
Balance Sheet (Position Statement)