Basics of accounting

1. Introduction to accounting
(part 1)
prepared
By
Sowndarya shree A.S

2. Introduction:
Business entities and other organizations carry on activities which
involve exchange of money or money’s worth or economic resources.
The volume of these activities are large in number it is necessary
that these are recorded for the purpose of taking important decisions
as to whether the activities are viable, gainful and are to be continued
or not.
Information regarding interested users such as the government,
investors, customers, employees and researchers.
Accounting is the language of business.

3. Meaning:
Accounting is the systematic process of
identifying, measuring, recording, classifying,
summarizing, interpreting and communicating to
the users.

4. Definition:
Accounting as “the process of identifying, measuring, and
communicating economic information to permit informed
judgements and decisions by users of the information”.
-American Accounting Association

6. Accounting equation :
ASSET = LIABILITY + CAPITAL

7. Evolution of accounting:
1494 --- Luca Pacioli Italian developed double entry book keeping
system.
18th and 19th century – Large scale operation was carried on.
20th century --- Need for analysis of financial information for
managerial decision.
21st century ---- Social responsibility accounting was developed.

8. Basic accounting terms
 Asset (OWN)
 Liability (OWE)
 Capital
 Invoice
 Sales
 Purchase
 Stock / Inventory
 Sales return / Return inward
 Purchase return / Return outward
 Drawings(ITGDRAING)
 Debtors
 Creditors
 Bad debts
 Income
 Expenses
 Voucher
 Depreciation
 Appreciation
 Fixed asset
 Current asset
 Bills payable
 Bills receivable
 Transaction
 Cash transaction
 Credit transaction
 Accounting year
 Financial year

9. TYPES OF ASSET:
1. Current asset:
A current asset is a company's cash and its other
assets that are expected to be converted to cash
within one year of the date appearing in the
heading of the company's balance sheet.

10. 2. Fixed asset:
Assets which are purchased for long-term use and are
not likely to be converted quickly into cash, such as
land, buildings, and equipment.

11. 3. Tangible asset & Intangible asset:
Which can be seen, touch, felt
Which cannot be seen, touch, felt

12. Liability:
State of being legally responsible for something.
The sum of amount which is payable by the business to the
outsider or supplier.
Example: Siva is going to start a business but he did not
have a sufficient funds. So, he lends some money from his
friends. The amount is called liability of the business.

13. List of liability:
1. Bills payable / Acceptance/ Accounts payable
2. Outstanding
3. Sundry Creditors (suppliers)
4. Bank overdraft
5. General reserve
6. Reserve fund
7. Loans
8. Provisions
9. Capital
10.Drawings

14. Debtor VS creditor:
Customer
Supplier

15. Depreciation:
Decrease in the value of fixed asset
Appreciation:
Increase in the value of fixed asset.

16. Transaction:
A transaction is a business event that has a monetary impact on an
entity's financial statements, and is recorded as an entry in its accounting
records.
Examples of transactions are as follows:
Paying a supplier for services rendered or goods delivered.
 Paying an employee for hours worked.

17. Ways of making transaction
1. Cash transaction:
A cash transaction is the immediate payment of cash for the purchase of
an asset.
2. Credit transaction:
‘Buying on credit’ means receiving goods or services straight away and
paying for them later. Similarly for ‘selling on credit’: goods or services are
sold to a customer, who will pay for them later.

18. Bad debts:
A bad debt is a sum of money that has been
lent but is not likely to be repaid.
Accounting year: Jan 1 to Dec 31
Financial year: April 1 to March 31

19. List of assets:
Current assets:
1. Stock or Inventory
2. Investment
3. Sundry debtors
4. Bills receivable
5. Marketable securities
6. Prepaid expenses
7. Cash at bank
8. Cash in hand (bank)
9. Accrued income
Fixed assets:
1. Land and building
2. Plant and machinery
3. Horse and cart
4. Patents
5. Goodwill
6. Copy right
7. Trade mark
8. Computer

20. 1. Identifying the transaction and journalizing
2. Posting to ledger accounts
3. Preparing trial balance
4. Preparing financial statements
(A) Trading account
(B) Profit and loss account or Income statement
(C) Balance sheet or position statement
Accounting cycle:

21. 1. Identifying the transaction and journalizing:
•All the monetary transactions are recorded in the books of
original entry called journals.
•Recording the transactions in the journal is called journalizing.
•Entries are made in the journals on the basis of source documents
in the chronological order, i.e., the order of occurrence of the
transactions.

22. 2. Posting and balancing:
Transferring the entries from the journal to the ledger is
called posting.
Ledger, entries are made in each account after
classifying them under common heads.
 Finding the difference between the total of the debit
column and credit column of all the ledger accounts is
called balancing.

23. 3. Preparation of trial balance:
On the basis of ledger balances the financial statements are
prepared.

24. 4. Trading account:
All the direct revenues and direct expenses are transferred to
trading account. The balance in the trading account is the gross
profit or gross loss.

25. 5. Preparation of profit and loss account:
•All the indirect revenues and indirect expenses along with
gross profit or gross loss are transferred to profit and loss
account.
• The balance in the profit and loss account is the net profit or
net loss

26. 6. Preparation of balance sheet:
•A statement showing the balances of assets and liabilities
namely balance sheet is prepared.
•It is prepared on a particular date, normally, on the last
day of the accounting period.
•The closing balances of an accounting year are taken as
the opening balances for the next accounting year .

27. Objectives of accounting:
(I) To keep a systematic record of financial transactions and
events
(ii) To ascertain the profit or loss of the business enterprise
(iii) To ascertain the financial position or status of the
enterprise
(iv) To provide information to various stakeholders for their
requirements
(v) To protect the properties of an enterprise and

28. Bases of accounting:
1. Cash basis
2. Accrual and Mercantile basis
3. Mixed or Hybrid basis. (combination of 1&2)
Cash basis:
Only actual cash receipts and cash payments transactions are recorded.
Credit transactions are not recorded.
Accrual or Mercantile basis:
1. Any income earned whether received or not.
2. Any expenditure incurred whether paid or not.
3. Any asset purchased whether paid or not.
4. Any liability incurred whether paid or not.

29. Users of accounting information:
1. Internal users:
(a)Owners
(b)Management
(c)Employees
2. External users:
(a) Creditors
(b) Investors
(c) Customers
(d) Government
(e) Tax authorities
(f) Researchers
(g) Public