ACCOUNTING

1. ACCOUNTING SYSTEMS

2. BASES OF ACCOUNTING
Cash Basis
Accrual Basis

3. CASH BASIS
Actual cash receipts and actual cash payments
are recorded.
Credit transactions are not recorded at all until
the cash is actually received or paid.
Ignores outstanding, prepaid expenses, accrued
income, income received in advance.

4. ACCRUAL BASIS
Income if earned or
due(accrued) and cash paid or
payment outstanding(due)
forms part of the period in
which services have been
given or received even if actual
cash has not been received or
paid.

5. ACCRUAL BASIS VS CASH BASIS
Accrual Basis of
Accounting
Cash Basis of
Accounting
1. Under this method there may
be outstanding expenses,
prepaid expenses, accrued
income, income received in
advance in the Balance Sheet
1. There is no outstanding or
prepaid expenses, accrued
income, income received in
advance in the Balance Sheet
2. Income statement will show
relatively higher income
because of prepaid expenses
and accrued income
2. Income statement will show
lower income in case there are
prepaid expenses and accrued
income
3. Income statement will show
relatively lower income because
of outstanding expenses and
3. Income statement will show
higher income if there are items
of outstanding expenses and

6. Accrual Basis Cash Basis
4. The basis is recognized
under the Companies Act 1956
4. The basis is not recognized
under the Companies Act 1956
5. Depreciation is recorded 5. Depreciation cannot be
recorded
6. Enterprises with cash and
credit transactions prefer this
basis
6. Enterprises with mostly cash
transactions prefer this basis of
accounting
7. Business enterprises with
profit motive ascertain their
profit or loss under this basis
Professional people like
doctors, lawyers etc. and small
non-trading concerns ascertain
their profit or loss under cash
basis

7. Accrual Basis Cash Basis
8. Reliable Basis as it makes a
complete record of all cash and
credit transactions and
ascertains correct profit & loss
8. Not reliable
9. Is technical because it
involves adjustments of
accounts for preparing the final
accounts
9. Simple basis
10. Basis gives a true and fair
view of P&L for a particular
period and exhibits true financial
position of business on a
particular day
10. Does not give true and fair
view.

8. ACCOUNTING STANDARDS
To maintain uniformity in accounting principles
throughout the world, International Accounting
Standards Committee (IASC) came into being
on 29th June, 1973.
The Institute of Chartered Accountants of
India(ICAI) being the premier accounting body
in India has tried to improve its accounting and
auditing standards continuously.

9. CONTINUED…
ICAI set up Accounting Standard Board (ASB)
in 1977 whose main function is to formulate
accounting standards so that the standards
are established by the Council of the ICAI.
In the formulation and finalization of AS, the
ASB seeks the views and guidance of
members of ICAI, ICWAI, ICSI, Government,
Industrial concerns are taken.

10. TASK OF ASB
RMPTD
R=Recognition
M=Measurement
P=Presentation
T=Treatment
D=Disclosure

11. CONTINUED…
 Areas (Eg: Fixed Assets,
Depreciation)
 Definition
 Class of enterprise
 Date
 Content
Exposure Draft
STANDARD

12. EXAMPLES
AS 2: Inventory
AS 3: Cashflow
AS 6: Depreciation
AS 10: Fixed assets

13. CLASSIFICATION OF ACCOUNTS
An account is an individual
representation of assets,
liabilities, incomes or
expenses

14. ACCOUNTS ARE OF TWO TYPES
Personal Account
Impersonal Account

15. PERSONAL ACCOUNTS ARE OF 3 TYPES
1. Natural Personal Account(Ram A/C, Hari
A/C, Sangeeta A/C etc.)
2. Artificial Personal Account (Companies
Eg: Vinod & Bros Co., etc, Bank)
3. Representative Personal Accounts
(Outstanding Expenses, Prepaid
expenses, Income received in advance,
Accrued Income)

16. CONTINUED…
Any nominal account suffixed
or prefixed becomes a
representative personal
account. Eg- Outstanding
rent, Prepaid salary etc.

17. IMPERSONAL ACCOUNTS ARE OF 2 TYPES
Real Account (Assets)
Nominal Account(Expenses)

18. REAL ACCOUNTS ARE AGAIN OF 2 TYPES
Tangible (that can be touched, felt,seen
and measured eg: furniture a/c,goods a/c,
P&M a/c, Cash a/c)
Intangible (Eg: Goodwill, Patents,
Copyrights, Trademarks)

19. IDENTIFY THE TYPE OF ACCOUNTS BELOW
Drawings
Bank
Cash
Discount
Patent
Arihant Industries Ltd
Goodwill
Salaries
Bad Debts
Capital
Machinery
Salary Outstanding
Unexpired
Insurance/Prepaid
Insurance
Stock Account
Bank Overdraft
Purchases
Bills Receivable
Reserve for Discount on
creditors

20. ANSWERS
Personal Personal
Personal Personal
Real Real
Nominal Personal
Real Real
Personal Real
Real Nominal
Nominal
Nominal
Personal
Real

21. THERE ARE TWO SYSTEMS OF ACCOUNTING
 Single Entry System: Only personal accounts are maintained.
It does not record complete business transactions during a
specified period. Hence final accounts cannot be prepared. It is
less costly system and is adopted by small business concerns
where business transactions are few.
 Double Entry System: Owes its origin to Fra Luca Pacioli. All
business transactions have two sides i.e receipt and payment.
Eg: Purchase of goods. This method of recording every
transaction in two accounts is known as Double Entry system.
One account is debited and the other is credited with the same
amount

22. POINTS TO REMEMBER
Real and personal accounts
reflect in the balance sheet
Nominal account reflects in the
P&L Account

23. WHAT IS AN ASSET?
Resources owned by a company which have
future economic value that can be measured
and can be expressed in monetary terms.
 Examples: cash, investments, accounts
receivable, inventory, supplies, land, buildings,
equipment, and vehicles.
Anything which has an income generating ability
and is a property owned by the organization.

24. WHAT IS A LIABILITY?
Where the company is liable to pay
outsiders
Obligations of a company or organization.
Eg: Amounts owed to lenders and
suppliers, income received in advance,
loan,creditors, outstanding expenses
Liabilities often have the word
"payable" in the account title.

25. WHAT IS INCOME?
An excess of revenue over expenses for
an accounting period. It is also called
earnings or gross profit.
Accrued Income
Accrued income is income that is earned
but not yet received.

26. ACCRUED
EXPENSES/OUTSTANDING
EXPENSES
Accrued expenses are
those expenses which
have been incurred but
not paid.

27. WHAT IS EXPENSE?
Expense is any amount paid by the organisation
the benefit of which has already been exhausted.
Costs that have been consumed in the process of
producing revenue are expired costs or expenses.
Example: Insurance, Wages, Advertising, Interest .

28. Expense
is different from Loss

29. WHAT IS REVENUE?
1. Revenue results from the sale of
goods and rendering of services.
2. Revenue is the increase in capital
attributable to business activities.
3. Net income can be calculated by
subtracting expenses from revenue

30. REVENUE VS GAIN VS INCOME.
 Revenue is the amount earned from a company’s
main activities such as selling merchandise or
providing services.
 A gain results from secondary activities, such as
selling the old delivery truck. A gain is the amount
received that is in excess of the asset’s carrying
amount (book value). For example, if the company
receives Rs 3,000 for the truck, and its carry amount
was Rs 600, the company will report a gain of Rs
2,400.

31. CONTINUED…
Income is sometimes used instead of the
word revenue.
Generally, accountants use the word
income to mean “net of revenues and
expenses.” For example, a retailer’s
income from operations is sales minus
the cost of goods sold minus other
expenses.

32. WHAT IS EXPENDITURE?
Expenditure is the amount
incurred by the organization the
benefit of which is yet to be
exhausted.
Eg: P&M, L&B, Furniture etc.

33. WHAT IS CAPITAL?
1. Cash or goods used to generate income
either by investing in a business or a
different income property.
2. The net worth of a business or the amount
by which its assets exceed its liabilities.
3. The money, property, and other valuables
which collectively represent the wealth of an
individual or business.

34. WHAT IS MEANT BY DEFERRED REVENUE
EXPENDITURE?
The expenditure done in the initial stage
but the benefit of which will also be
available in subsequent years is called
deferred revenue expenditure.
Eg: Advertisement