The document discusses the basic concepts of book keeping and accounting. It explains that book keeping involves systematically recording business transactions, while accounting builds on book keeping by analyzing records to prepare financial statements and interpret financial results. The key principles of accounting include the money measurement concept, business entity concept, going concern concept, and matching concept. Financial statements like the manufacturing account, trading account, profit and loss account, and balance sheet are prepared according to accounting principles and concepts.

1. BOOK KEEPING
Basic concept

2. • Existed in ancient times
• Modern system took its birth in 1494
• One Luca Pacioli, an Italian monk
published a book called ‘Summa’,
primarily a book on mathematics –
foundation for the modern double-entry
book keeping.

3. • Need for Book Keeping:
• Profit to a business is like food to a human
body – W.C.F.Harteley
• So every businessman is forced to record
his business transaction in a set of
account books called ‘Books of Accounts’
• Thus Book Keeping can be defined as the
art of recording business transactions in a
systematic manner.

4. • Essential Aspect of Book Keeping:
• Recording of
• only business transactions
• That business transaction in terms of
money
• Recording of only the monetary or
financial aspects of business transactions/
activities

5. • Advantages of Book Keeping
• It has complete information about its
expenses and losses, income and gains
• There by ascertain its net profit or losses
• Compare the results with that of the last yr
• Keep a good control over various activities
of the business. That is why ‘Book
Keeping Records are called the eyes of a
business.

6. Differences between Book Keeping
and Accountancy
• Book keeping is mere recording of
business transaction
• Accountancy denotes not only recording
of business transaction but also an
analysis of the recording leading to
preparation of final accounts and
interpretation of financial statement

7. • Accountancy begins where book keeping
ends
• Accountancy lays down the principles
while book keeping practices.
• The process of accounting begins with
Identifying the transaction, recording of
transaction, classification, summerising,
Analysis and interpretation, and ends with
communication of information

8. • Modern definition of Accounting
• An information system with
• Financial transactions and events as
inputs
• Process them in the form of ledgers and
Trial Balance, Final a/c, FFS,CFS,
Analysis and interpretation etc.
• Accounting reports communicated to the
users as outputs

9. Principles of accounting
• The general rules or principles adopted in
accounting are called Accounting
Standards or Accounting principles.
• Accounting principles can be classified
into
• Accounting concepts –assumptions upon
which accounting is based
• Accounting conventions

10. • Important accounting concepts are:
• Money measurement concept –
• record is made only of those transactions
which can be expressed in terms of
money
• Ex: Team of dedicated employees,
Inefficiency of management etc

11. • Business entity concept/Separate entity
concept –
• The business and the proprietor who owns the
business are treated as separate entity.
• To record the transactions between
businessman and the business
• Not to record the pvt transactions of business
man in the books of business
• This concept conflicts with law.

12. • Going-concern concept/concept of
continuity:
• A concern that will continue to operate for a
fairly long time and it is from this point of
view the transactions are recorded.
• It is due to this aspect that:
• Proper distinction is made between capital
and revenue expenditure
• Assets and liabilities are classified into long
term and short Term

13. • Cost concept –
• an asset acquired by a concern is recorded in the
books of account at cost at the time of purchase and
the market value is ignored.
• An asset for which the concern has not paid is not
recorded in the balance sheet of the concern
• Disadvantage: does not reflect the true and fair view
of the value of the asset
•

14. • Advantages
• In the absence of this concept, the figures
shown in the accounting records becomes a
subjective views of a person.
• Drawbacks
• Financial transactions does not depict the
true and fair position of the business

15. • Dual-aspect concept -
• Basic concept of accounting
• Every transaction will result in receiving
some benefit and giving some benefit
• Either Increases/decreases one
asset/liability and decreases/increase
another asset/liability
• Give example
• Leads to accounting equation
• Liabilities=Assets

16. • Accounting period concept –
• This concept comes from the ongoing
concern concept.
• The performance of the business have
to be analysed from time to time to
keep a check on its performance
• The accounts are prepared generally
for a period of one year.

17. • Objective evidence concept:
• All accounting entries should be
evidenced and supported by business
documents like invoices, vouchers
etc.,
• Exceptions
• Estimation of depreciation, bad and
doubtful debts etc.

18. • Realization concept/The Revenue
Recognition Concept
• When the revenue should be
recognised?
• Sale should be recognised when
property in goods passes to the buyer
and he becomes liable to pay.
• Ex: If ‘A’ places an order for goods, the
transaction is presumed to have been
made only when the goods are
delivered

19. • The Accrual concept:
• Revenues recognised when they are earned and
not when they are settled
• Similarly expenditure –when they are incurred
and not when they are paid.
• Transaction recorded when it actually takes
place and not when the settlement is made
• Examples: Building taken on Rent on 1st August
and rent not paid for three months. Total Rent
for 8 months should be shown in P & L a/c

20. • Matching concept:
• The expenses of an accounting period
should be matched with the revenues
whether received or not during a
period.
• When an item of revenue is entered
the P&L a//c then all the expenses
incurred to earn that income should be
entered.
• Ex: outstanding expenses, accrued
income etc.

21. • Hence a statement or an account known as
income & expenditure statement or profit and
loss account is prepared
• Profit or loss is the result of two factors
• Revenue/income
• Expenses and losses
• If the revenues is more than expenses, it results
in profit
• If the revenues is less than expenses, it results
in loss.
•

22. • Legal aspect concept –
• the accounting records and books should reflect
the legal position -
• if goods are sold on an approval basis, the
customers to whom goods are sold on approval
basis should not be shown as debtors unless the
goods are approved by them
• It mainly affects the current assets and not the
fixed assets

23. Accounting conventions
• Convention of conservatism/prudence –
Provide for all possible losses like
provision for doubtful debts, discount on
debtors etc, but anticipate no profits.
• Ex: we don’t make provision for discount
on creditors
• Inventory is valued at cost or market price
whichever is lower.

24. • Draw backs:
• Confliction with the convention of
consistency
• Confliction with the principle of full
disclosure-when you create a secret
reserve

25. • Convention of consistency – ex:
depreciation, valuation of closing stock
• FIFO, LIFO, Deprn etc

26. • Convention of full disclosure
• Financial Statement should act as means of
conveying information and not as
• Means of concealing information
• On this prinnciple, company Act prescribes the
format for financial statement
• Contingent liabilites, market values of
investments are shown as annexure
• Ex: in the case of fixed assets their cost prices
and the depreciation written off to date should be
disclosed

27. • Convention of materiality
• A modified form of the principle of full disclosure
• Detailed record of transactions which are
trivial/insignificant to the users of accounts may
not be disclosed.
• What is significant?
• Any information or misstatement changing the
decision of users of financial statements-AS-1

28. Users of accounting
• Internal users
• Management
• External users
• Creditors
• Investors- present and potential
• Employee groups
• General public
• Govt Agency

29. Financial Statements
• It is the presentation of business transactions
in a proper way by converting them in figures
and assembling them.
• Types of Financial statements
• Mfg Account, Tdg Account & P& L Account,
Balance Sheet
• Income Statement
• Cash flow statement
• Fund Flow Statement

30. • In case a manufacturing firm is engaged in
manufacturing more than one product then it
prepares a separate mfg a/c for each type of
product.
• A Mfg account is intended to disclose the
factory cost of production
• Cost of materials consumed: this is also
referred to as direct materials. The balancing
fig. gives cost of materials consumed.

31. • Direct Labour Cost:
• Labour cost which can be identified with and
allocated to cost centre or cost units
• Cost Unit: A mfg business is set up for mfg
some articles like pencils, bricks etc., These
things, the enterprise is set up to provide, are
termed “Cost Units”
• Prime Cost: also referred to direct cost –
made up of direct materials, direct wages and
direct expenses

32. • Trading a/c – Need & importance
• Ascertainment of Gross Profit or Loss
• Calculation of cost of goods sold
• Comparison of stock with that of previous
year’s
• Comparison of actual performance with the
desired performance
• Comparison of current Yr’s performance with
that of the previous Yr.

33. • Profit and Loss Account: Need &
importance
• Knowledge of Net Profit or Net loss
• Net profit/sales ratio
• Maintaining of Provisions & reserves
• Determination of future line of action.

34. • Balance Sheet
• Knowledge of financial position
• Ascertainment of current Assets & current
liabilities
• Proprietor's equity
• Working Capital position
• Comparing of current Yr’s position with
the last yr’s position

35. • Income Statement
• It matches the income and expenditure of
a particular period. It deals with only
Revenue Items