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Introduction To Accounting (Sheet.1)

Accounting involves recording financial transactions and preparing financial statements to assess a business's profitability and financial position. Bookkeeping records transactions, while accounting uses this data to generate income statements and balance sheets. An income statement calculates profit or loss, and a balance sheet outlines assets, liabilities, and capital to indicate a business's net worth. Together, these financial statements help owners evaluate performance and make informed decisions.

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Rithvik Sangiliraj
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83 views

Introduction To Accounting (Sheet.1)

Accounting involves recording financial transactions and preparing financial statements to assess a business's profitability and financial position. Bookkeeping records transactions, while accounting uses this data to generate income statements and balance sheets. An income statement calculates profit or loss, and a balance sheet outlines assets, liabilities, and capital to indicate a business's net worth. Together, these financial statements help owners evaluate performance and make informed decisions.

Uploaded by

Rithvik Sangiliraj
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Accounting

Accounting is divided into two parts:-


1. Book-keeping(Maintaining accounting records for reference)=>
Recording the transaction in the Books of Accounts.
2. Accounting => To calculate profit(income>expense) or
loss(expense>incomes).

Book-keeping
Book-keeping is a process of detailed recording of all the financial
transactions of a business. It is necessary for even the smallest business
to make a record of every transaction which affects the business. If the
records are not maintained, it is likely that something will be forgotten or
overlooked. The basis of maintaining these detailed records is double
entry book-keeping.

Accounting
Accounting uses the book-keeping records to prepare financial statements
at regular intervals. The owner of a business needs to know whether the
business is making a profit or a loss. Periodically (often at yearly intervals),
an income statement is drawn up. This shows the calculation of the profit
or loss earned by the business. If the business has earned a profit then the
owner is receiving a return on his investment and funds are available for
expanding or improving the business. However, if the business has made a
loss then it may eventually close down as the owner is not receiving any
return on his investment and funds are not available for running or
maintaining the business.

Financial Statements:
1. Income Statement
This shows the calculation of the profit or loss earned by the
business.
2. Statement of Financial Position/(Balance Sheet)
This shows what the business owns and what is owing to it, its
assets; and what the business owes, its liabilities.

Assets, liabilities and capital


When a person decides to start a business he will have to provide the
necessary funds (resources). This is often in the form of monetary
funds(money), but may consist of buildings, motors, goods and so on. Any
resources provided by the owner of the business are known as capital.
This represents the amount owed by the business to the owner of that
business.

Once the business is formed and capital introduced, the business will own
the money or other items provided by the owner. Things owned by the
business (or owed to the business) are regarded as the resources of the
business or the assets of the business.

In addition to the owner, other people may also provide assets to the
business. The amount owed by the business to these people is known as
liabilities.

Coffee Shop (Business)


Capital + Liabilities Assets
Capital :- own saving = 500000 Furniture = 100000
Bank Loan = 300000 Premises = 400000
Bank Bal. = 300000
800000 800000
Assets = Capital (owned/owners fund) + Borrowed Fund(Outside Liability)

Drawings:
Whenever the owner of a business takes value from the business for
his/her own use this is known as drawings.

Liabilities:
In addition to the owner, other people may also provide assets to the
business. The amount owed by the business to these people is known as
liabilities.

Liabilities are divided into three types. These are:

1. Capital:
Capital represents the owner’s investment in the business and is the
amount owed by the business to the owner.

2. Non-current liabilities(Long-term Liabilities):


Non-current liabilities are amounts owed by the business which are not due
for repayment within the next 12 months. Examples of non-current
liabilities include long-term loans and mortgages.

3. Current liabilities(Short-term Liabilities):


Current liabilities are short-term liabilities. Since current liabilities, like
current assets, arise from the normal trading activities of the business,
their amounts are constantly changing. They are amounts owed by the
business which are due for repayment within the next 12 months.
Examples of current liabilities include trade payables and bank overdraft,
any other outstanding expense or accrued expenses(expense due but not
paid) .

Assets
Assets are divided into two types. These are:
1. Non-current assets: There are two types of non-current assets:
a)Tangible non-current assets
Tangible non-current assets are long-term assets which are obtained for
use rather than for resale. They help the business earn revenue. Examples
of tangible noncurrent assets include land and buildings, machinery,
fixtures and motors.

In a statement of financial position, it is usual for the non-current assets to


be arranged in increasing order of liquidity. This means that the most
permanent assets are shown first.
A typical order for showing tangible non-current assets in a statement of
financial position is as follows:
Land and buildings
Machinery
Fixtures and equipment
Motor vehicles

b)Intangible non-current assets


Intangible non-current assets are long-term assets which do not have
material substance (they cannot be seen or touched). However, they
belong to the business and do have value.
Examples of intangible non-current assets include goodwill, brand names
and trademarks.
(Note:- Goodwill is the amount by which the value of a business as a whole
exceeds the value of the separate assets and liabilities.)
In a statement of financial position the intangible non-current assets are
shown before the tangible non-current assets.

2. Current assets:
Current assets are short-term assets. Because they arise from the normal
trading activities of the business their amounts are constantly changing.
These are assets which are either in the form of cash or which can be
turned into cash relatively easily.
Examples of current assets include inventory, trade receivables, bank and
cash.
In a statement of financial position, it is usual for current assets to be
arranged in increasing order of liquidity. This means that the assets
furthest away from cash are shown first.
A typical order for showing current assets in a statement of financial
position is: Inventory, Trade receivables, Bank, Cash.
STATEMENT OF FINANCIAL POSITION(BALANCE SHEET)
Cost$ Accumulated NET BOOK
Dep.$ VALUE$
L.Y+C.Y
ASSETS
NON-CURRENT ASSETS(NCA)
Machinery 20000 (12000) 8000
Delivery Vehicle XXX (XX) XXX
Equipment XXX (XX) XXX
TOTAL NON-CURRENT ASSETS 20000 (12000) 8000

CURRENT ASSETS(CA)
Closing Inventory 3000
Trade Receivable/(Debtors)/(Credit Customers) 1000
Bank & Cash Balances 500
Other Receivables(Expenses Prepaid, Incomes to XXX 4500
be Received)

TOTAL ASSETS[NCA + CA] 12500


CAPITAL & LIABILITIES:
FINANCED BY
Opening Capital 6000
Add:- Profit for the year/(Loss) 7500
13500
Less:- Drawings for the year (4500)
CLOSING CAPITAL BALANCE 9000

NON-CURRENT LIABILITIES:-
(more than 12 months)
Bank Loan(Repayable in 2008) 2800
CURRENT LIABILITIES:-
Trade payables/Creditors/(Credit Suppliers) 700
Short term loans XX
Bank Overdraft XX
Other Payables(Expenses outstanding, Incomes XX 700
received in Advance)

TOTAL CAPITAL & LIABILITIES: 12500


Bonnie Clyde
Trial Balance
Meaning
A list of the balances on each account extracted from the ledgers at a
particular date. Its purpose is to check that the total of the debit balances
equals the total of the credit balances.
It is important to remember that the trial balance is not a part of the double
entry system of book-keeping as it is simply a list of balances.

The purpose of a trial balance


1. The trial balance can help in locating arithmetical errors. However, the
balancing of the trial balance is not proof that the entries in the ledger
accounts are completely free from errors.
2. A trial balance is useful in preparing financial statements.

Preparation of Trial Balance:


Debit Balance Credit Balance
[DEA-PSA] [LIC-PSA]
Drawings Liabilities
Expenses Incomes
Assets Capital
Purchases Purchase Return
Sales Return Sales
Any losses Any provisions
Format of Preparing a Trial Balance
Details Folio Debit($) Credit($)

Limitations of Trial Balance


If a trial balance does not agree, there must be a mistake somewhere in the
bookkeeping.Unfortunately, even if a trial balance agrees, it does not mean
that there are no errors. It only proves that for every debit entry an equal
credit entry has been made. However, it does not prove that those entries
have been made in the correct accounts! There are six types of error that
do not affect the agreement of the trial balance. They are as follows

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