Chapter 1 Basic Concepts_Updated.pptx

Points to be covered
 Forms of business organization
 Accounting
 Basic terminologies of Accounting
 Users of Accounting Information
 Accounting concepts and conventions
 Fundamental Accounting Information
 Journal
 Ledger
 Trial Balance

Business and Business
Organization
 Business : refers to
human activities which
involve production or
exchange of goods and
services regularly with
the object of earning
profit.
 Business Organization
refers to place where all
the resources brought
together and put them
into action in a
systematic way, and
coordinate and control
these activities properly.
This arrangement is
known as business
organization

FORMS OF BUSINESS
ORGANISATION
Forms of Business
Organization
Sole proprietorship Partnership
Joint Stock
Company

Sole Proprietorship
 refers to a business enterprise exclusively
owned, managed and controlled by a single
person with all authority, responsibility and
risk.

Partnership
 ‘Partnership’ is an association of two or more persons
who pool their financial and managerial resources and
agree to carry on a business, and share its profit.
 The persons who form a partnership are individually
known as partners and collectively a firm or partnership
firm.

Joint Stock Company
 A joint-stock company is a business owned
by people called shareholders.
 Each shareholder owns company stock in
proportion to the number of their shares

Basic terminologies of
Accounting
 Business
Transaction
 Goods
 Profit or Loss
 Assets, Liabilities
and Net Worth
 Capital and
Drawings
 Debtor and Creditor
 Expenditure and
Type of Expenditure
 Cash Discount and
Trade Discount
 Solvent and
Insolvent
 Accounting year
 Trading concern and
Not for profit
concern
 Goodwill

Business Transaction
 Cash Transaction
 Credit Transaction

Goods
 The commodities or articles in which trader
deals.

Profit or Loss
 Difference between Income and Expenses

Assets
 Properties Owned by the business
 Fixed Assets
 Current Assets
 Fictitious Assets

Liabilities
 Financial obligations of a business.
 Fixed Liabilities
 Current Liabilities
 Contingent Liabilities

Net Worth
 Net Worth = Assets - Liabilities

Capital and Drawings
 Capital : Total
amount invested
into the business by
owner
 Drawing : Owner
withdraw money,
goods or assets for
personal use.

Debtor and Creditor
 Debtor is a person who
has to pay to business
for getting goods and
services on credit
 E.g. Customer
 Creditor is a person to
whom we owe money for
getting goods and
services on Credit
 E.g. Supplier

Expenditure
 It is the amount spent in order to produce and
sell the goods and services.
Expenditure
Capital
Expenditure
Expenditure
on Fixed
Assets
Benefit for
more than
year
Revenue
Expenditure
Expenditure
on Current
Assets
Benefit for
less than year
Deferred
Revenue
Expenditure
Revenue
expenditure in
nature
Benefit will be
more than
year

Discount
 Trade Discount  Cash Discount

Solvent and Insolvent
 Solvent
 Assets > Liabilities
 Insolvent
 Assets < Liabilities

Accounting Year
 1st April to 31st
March

Trading Concern and Not for Profit
Concern
 Trading Concern :
 Profit oriented
 Not for Profit
Concern
 Service oriented

Questions to answer
 What is the result of the business transactions?
 What are the earnings and expenses?
 How much amount is receivable from customers
to whom goods have been sold on credit?
 How much amount is payable to suppliers on
account of credit purchases?
 What are the nature and value of assets
possessed by the business concern?
 What are the nature and value of liabilities of the
business concern?

Chitragupta
 assigned with the task
of keeping complete
records of actions of
human beings on the
earth
 Upon their
death, Chitragupta h
as the task of
deciding heaven or
the hell for the
humans, depending
on their actions on the
earth.

Arthashastra by Kautilya
 A book on Arthashasthra
written by Kautilya who
was a minister in Chandra
Gupta’s kingdom twenty
three centuries ago
mentions about the
accounting practices in
India.
 It describes how
accounting records have to
be maintained.
 In China and in Egypt
accounting was used for
maintaining revenue
records of the government
treasury.

Arithmetica Geometrica, Proportion
at Proportionality
 First authentic book
on double entry book
keeping.
 Debit (Dr.) and Credit
(Cr).
 Journal, ledger and
specialised
accounting
procedures.
 “all entries have to be
double entries, i.e. if
you make one
creditor you must
make some debtor.

Answer to the Questions
 Recording all business transactions
 Book Keeping
 Accounting

BUSINESS TRANSACTIONS
 Business activities.
 Exchange of goods or services for money or
money’s worth.
 Monetary in nature.
 Cash business transactions
 Credit business transactions

Book Keeping
 Book-keeping involves the systematic
recording of the financial transactions and the
maintenance of the correct & up-to-date
financial records of the organization.

Accounting
 “Accounting is 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”
- American Institute of Certified Public Accountants
(AICPA)

 “The art of recording, classifying, summarising,
analysing and interpreting the business
transactions systematically and
communicating business results to interested
users in accounting”
- American Accounting
Association

Branches of Accounting
Branches of
Accounting
Financial
Accounting
Cost
Accounting
Management
Accounting

Branches of Accounting
 Financial Accounting refers to Accounting with a
view to prepare financial statements.
 Financial Statements
 Trading Account
 Profit and Loss Account
 Balance Sheet
 Cost Accounting refers to accounting with a view
to ascertain the cost and cost control.
 Management accounting refers to accounting with
a view to help management in decision making
and exercising proper control.

Users of Accounting
• Owners
• Management
• Employees
Internal
Users
• Suppliers or Trade Creditors
• Lenders or Bankers
• Government and Regulator Agencies
• Prospective Investors
• Customers
• Research Scholars
External
Users

Owner
 Profit or Loss
 Financial Position
 Assets
 Liabilities

Management
 To arrive at informed decisions
 Determination of selling price,
 Cost controls and reduction,
 Investment into new projects, etc.

Employees and Workers
 Entitled to bonus at the year end, which is
linked to the profit earned by an enterprise.
 The financial statements also reflect whether
the enterprise has deposited its dues into the
provident fund and employees state insurance
accounts, etc., or not.

Banks and Financial Institutions
 They watch the performance of the business to
know, whether it is making progress as
projected to ensure the safety and recovery of
the loan advanced.

Investors and Potential
Investors
 Rely on the accounting information available to
them and seek answers to the questions such
as –
 what is the earning capacity of the enterprise
and
 how safe is their investment?

Creditors
 Before granting credit, creditors satisfy
themselves about the credit worthiness of the
business.

Government and Its Authorities
 To compile national income accounts and
other information.
 The information so available to it enables them
to take policy decisions.
 Government levies varied taxes such as GST
and Income Tax.
 These government authorities assess the
correct tax dues from an analysis of financial
statements.

Researchers
 Researchers use accounting information in
their research work.

Consumers
 Consumers require accounting information for
establishing good accounting control so that
cost of production may be reduced with the
resultant reduction of the prices of products
they buy.
 Sometimes, prices of some products are fixed
by the government, so it needs accounting
information to fix fair prices so that consumers
and producers are not exploited.

Public
 They want to see the business running since it
makes substantial contribution to the economy
in many ways, e.g., employment of people,
patronage to suppliers, etc.

Accounting
Concepts and
Conventions

Accounting concepts refer to the basic
assumptions, rules and principles which work
as the basis for recording of business
transactions and preparing accounts
To maintain uniformity and consistency
Accounting Concepts

• The business and its owner(s)
are two separate entities
• Thus, the business and personal
transactions of its owner are
separate.

Hence…
The Books Of Accounts
are prepared from the
point of view of the
business

Capital (Liability)
Drawings (Asset)

The Personal Transactions of
the Owner are not recorded.
For Example:
A Car purchased by the owner for
personal use is not Recorded in the
Books Of Account Of the Business.

Example
 Suppose Mr. Sahoo started business investing Rs.100000.
 Purchased goods for Rs.40000,
 Furniture for Rs.20000 and
 Plant and machinery of Rs.30000.
 Rs.10000 remains in hand.
 These are the assets of the business and not of the owner.
According to the business entity concept Rs.100000 will be
treated by business as capital i.e. a liability of business
towards the owner of the business.
 Now suppose, he takes away Rs.5000 cash or goods worth
Rs.5000 for his domestic purposes.
 This withdrawal of cash/goods by the owner from the
business is his private expense and not an expense of the
business. It is termed as Drawings.

In accounting, a record is made
only of those transactions or
events which can be measured
and expressed in terms of
money. that is in the currency of
a country.

Non monetary transactions are
not recorded in accounting.
Attitude Experience
Innovativeness
Honesty
Team work
Passion
skill

Example
 For example, sale of goods worth Rs.200000,
purchase of raw materials Rs.100000, Rent
Paid Rs.10000 etc. are expressed in terms of
money, and so these are recorded in the
books of accounts.
 For example, sincerity, loyalty, honesty of
employees are not recorded in books of
accounts because these cannot be measured
in terms of money although they do affect the
profits and losses of the business concern.

Example
 an organization may have a factory on a piece
of land measuring 10 acres, office building
containing 50 rooms, 50 personal computers,
50 office chairs and tables, 100 kg of raw
materials etc.
 These are expressed in different units. But for
accounting purposes they are to be recorded
in money terms i.e. in rupees.

 In this case, the cost of factory land may be
say Rs. 12 crore, office building of Rs. 10
crore, computers Rs. 10 lakhs, office chairs
and tables Rs. 2 lakhs, raw material Rs. 30
lakhs. Thus, the total assets of the
organisation are valued at Rs. 22 crore and
Rs. 42 lakhs.
 Therefore, the transactions which can be
expressed in terms of money is recorded in the
accounts books, that too in terms of money
and not in terms of the quantity.

It is assumed that the entity is a
going concern, i.e., it will continue
to operate for an indefinitely long
period in future and transactions
are recorded from this point of
view.

Example
 For example, a company purchases a plant and
machinery of Rs.100000 and its life span is 10
years.
 According to this concept every year some
amount will be shown as expenses and the
balance amount as an asset.
 Thus, if an amount is spent on an item which will
be used in business for many years, it will not be
proper to charge the amount from the revenues of
the year in which the item is acquired.
 Only a part of the value is shown as expense in
the year of purchase and the remaining balance is
shown as an asset.

For measuring the financial
results of a business
periodically, the working life of
an undertaking is split into
convenient short periods called
accounting period.

 Further, this concept assumes that, indefinite
life of business is divided into parts.
 These parts are known as Accounting Period.
It may be of one year, six months, three
months, one month, etc.
 Year that begins from 1st of January and ends
on 31st of December, is known as Calendar
Year.
 The year that begins from 1st of April and ends
on 31st of March of the following year, is
known as financial year.

An asset acquired by a concern is
recorded in the books of accounts
at historical cost (i.e., at the price
actually paid for acquiring the
asset). The market price of the
asset is ignored.

Historical
Cost Of
Market Value
Of

Example
A machine was purchased by XYZ Limited for
 Rs. 5,00,000 for manufacturing shoes.
 Rs. 1,000 were spent on transporting the machine to
the factory site.
 Rs. 2000 were spent on its installation.
 The total amount at which the machine will be
recorded in the books of accounts would be the sum
of all these items i.e. Rs. 503000.
 This cost is also known as historical cost.
 Suppose the market price of the same is now Rs.
90000 it will not be shown at this value.

For Every Debit,
there is a Credit
Every transaction should
have a two- sided effect to
the extent of same amount

• Cash Account Rs. 10,000
Debit
• Sales Account Rs. 10,000
Credit
For Example:
Cash Sales Rs. 10,000

• Purchases Account Rs. 20,000
Debit
• Ram’s Account Rs. 18,000
• Discount Recd. Account 2,000
Credit
For Example: Purchased From Ram goods
worth Rs. 20,000 and discount received Rs.
2,000.

This Concept has resulted in
THE
ACCOUNTING
EQUATION

Revenue is said to have
been realized when cash
has been received or right to
receive cash on the sale of
goods or services or both
have been created.

Examples
 N.P. Jeweller received an order to supply gold
ornaments worth Rs. 5,00,000. They supplied
ornaments worth Rs. 2,00,000 up to the year
ending 31st November 2019 and rest of the
ornaments were supplied in January 2020.
 Bansal sold goods for Rs. 1,00,000 for cash in
2019 and the goods have been delivered during
the same year.
 Akshay sold goods on credit for Rs. 50,000 during
the year ending 31st December 2019. The goods
have been delivered in 2013 but the payment was
received in March 2014.

 An order, to supply goods for Rs. 20,00,000 is
received in the year 2006. The goods have been
supplied only for Rs. 10,00,000 in 2006.
 What will be the revenue if the payment of Rs.
6,00,000 is received in cash in 2006 and the balance
payment of Rs. 4,00,000 received in 2007.
 What will be the revenue if the goods have been sold
on credit and the payment of Rs. 1500000 is received
in the year 2007, while all the goods of Rs. 20,00,000
are supplied in the year 2006.
 What will be the revenue if an advance payment of
Rs. 100,000 is received in the year 2006 and the
balance received in the year 2007

The meaning of accrual is something that
becomes due especially an amount of
money that is yet to be paid or received at
the end of the accounting period.
The matching principle is the basis on
which the accrual accounting method of
book- keeping is built.

For Example
Salary paid in 2012-13 relating
to 2011-12
Such salary is treated as Expenditure for
2011-12 under Outstanding Salaries
Account, not for the year 2012-13

Example
 A firm sells goods for Rs. 55000 on 25th March
2014 and the payment is not received until
10th April 2014, the amount is due and
payable to the firm on the date of sale i.e. 25th
March 2014.
 It must be included in the revenue for the year
ending 31st March 2014.

The matching principle ensures that
revenues and all their associated
expenses are recorded in the same
accounting period.
The matching principle is the basis on
which the accrual accounting method of
book- keeping is built.

For Example
 Let us study the following transactions of a business during the
month of December, 2006
(i) Sale : cash Rs. 2000 and credit Rs. 1000
(ii) Salaries Paid Rs. 350
(iii) Commission Paid Rs. 150
(iv) Interest Received Rs. 50
(v) Rent received Rs. 140, out of which Rs. 40 received for the year
2007
(vi) Carriage paid Rs. 20
(vii) Postage Rs. 30
(viii) Rent paid Rs. 200, out of which Rs. 50 belong to the year 2005
(ix) Goods purchased in the year for cash Rs. 1500 and on credit Rs.
500
(x) Depreciation on machine Rs. 200

Accounting Conventions are the
common practices which are
universally followed in recording
and presenting accounting
information of business. It helps in
comparing accounting data of
different business or of same units
for different periods.

 You may visit some business units doing a
particular kind of business. Enquire them and find
out how unsold goods are being valued.
 You will find that they follow the same method of
valuation of unsold stock of goods.
 If you ask them, why do they value the unsold
goods at cost or market price, whichever is lower,
even though the market price is higher than the
cost price, the businessman may answer that it is
the convention, tradition or practice or custom of
the business, that business is following year after
year.

 Apart from these, the Institute of Chartered
Accountants of India (ICAI), which is the main
regulatory body for standardization of
accounting policies in the country has issued a
number of accounting standards from time to
time to bring consistency in the accounting
practices.

Only those transactions,
important facts and items
are shown which are
useful and material for
the business. The firm
need not record
immaterial and
insignificant items.

Illustration:
Company XYZ Ltd. bought 6 months supplies of
stationary worth Rs. 6000
Question:
Should the Company spread the cost of this stationary
for 6 months by expensing off Rs. 1000 per month to
the income statement?
Answer:
Based on this concept, as the amount is so small or
immaterial, it can be expensed off in the next month
instead of tediously expensing it in the next 6 months.

For Example
 A businessman is dealing in electronic goods. He
purchases T.V., Refrigerator, Washing Machine,
Computer etc. for his business. In buying these items
he uses larger part of his capital. These items are
significant items; thus, these should be recorded in
the books of accounts in detail.
 At the same time to maintain day to day office work he
purchases pen, pencil, match box, scented stick, etc.
For this he will use very small amount of his capital.
 Thus according to this convention, important and
significant items should be recorded in their respective
heads and all immaterial or insignificant transactions
should be clubbed under a different accounting head.

All material and
relevant facts
concerning
financial
statements should
be fully disclosed.

 Full disclosure means that there should be full,
fair and adequate disclosure of accounting
information.
 Adequate means sufficient set of information
to be disclosed.
 Fair indicates an equitable treatment of
users.
 Full refers to complete and detailed
presentation of information.

Example
 Let us take an example. As per accounts, net sales are Rs.
1,50,000, it is important for the interested parties to know the
amount of gross sales which may be Rs. 2,00,000 and the sales
return Rs. 50,000. The disclosure of 25% sales returns may help
them to find out the actual sales position. Therefore, whatever
details are available, that must be honestly provided. Additional
information should also be given in the financial statements.
 For example, in a balance sheet the basis of valuation of assets,
such as investments, inventories, land and building etc. should be
clearly stated. Similarly, any change in the method of depreciation
or in making provision for bad debts or creating any reserve must
also be shown clearly in the Balance Sheet.
 Therefore, in order to achieve the purpose of accounting, all the
transactions of a business and any change in accounting policies,
methods and procedures are fully recorded and presented in
accounting

Anticipate No Profits but
Provide for all Losses
Accountant should
always be on side of
safety.

For Example
 For example, valuing closing stock at cost or
market price whichever is lower, creating
provision for doubtful debts, discount on
debtors, writing off intangible assets like
goodwill, patent, etc.
 The convention of conservatism is a very
useful tool in situation of uncertainty and
doubts.

 A business has unsold stock at the end of
year. The cost price is Rs. 2,00,000 and the
market price is Rs. 2,50,000. At which price
the unsold stock be recorded ?
 What will be your decision if the cost price in
the above case is Rs. 2,10,000 ?
 A businessman anticipates that it may not be
possible to collect Rs. 50,000 from one of his
debtors. will he record this transaction in the
books of accounts and at what value?

For Example
• Making Provision for
Bad and Doubtful Debts
• Showing Depreciation on
Fixed Assets, but not
appreciation

Same accounting principles
should be used for preparing
financial statements year after
year.

For
Example
2009-10
• Straight
Line
Method
2010-11
• Written
Down
Value
Method
2011-12
• Units of
Measure
Method
Year
Method of
Depreciation
followed

Process of Financial
Accounting
Recording
Classifying
Summarizing
Journal
Ledger
Trial Balance
Preparation of Financial Statements

Chapter 1 Basic Concepts_Updated.pptx

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