COMMERCE GURU AND SPOKEN ENGLISH CLASSES

Introduction of Accounting

American Institute of Certified Public Accountants(AICPA) defines “accounting as an art of recording,

classifying and summarising 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.
It can also be defined as the process of identifying, measuring, recording & communicating the
information related to economic events of an organisation to interested users of such information. It is
the language of business.
Economic Events
Events which consist of transactions which are measurable in terms of money. For e.g. Payment of Salary,
Wages.
Interested users of information
Interested users mean those who are interested in knowing the economic events of a business
organisation. It includes internal as well as external users of organisation.
Internal means users inside the organisation (CEO, Vice president) and external means outside the
organisation (Creditors, Banks, Stock Exchange.
Sub Disciplines of Accounting
 Financial Accounting
 Cost Accounting
 Management Accounting
Financial Accounting
Assists keeping record of financial transactions of an entity.
Cost Accounting
Analysing the expenditure for finding the cost of various products produced or services rendered.
Management Accounting
Provides necessary information to people within the organisation in helping them in planning and
controlling business operations and enables them to take decisions.
Qualitative Characteristics of Accounting Information
Reliability Means information can be relied or trusted upon
Relevance Information must be available in time, must help in prediction and feedback.
Understandibility Information must be interpreted in same sense as it is prepared and conveyed.
Comparability Must be comparable over different time period and with other entities.

Objectives of Accounting
 Maintenance of Records of Business Transactions
 Calculation of profit and loss
 Showing Financial Position
 Providing Accounting information to users

Book Keeping
Part of accounting being a process of recording financial transaction and events in the books of account. It
involves identifying, measuring, recording and classifying.
Accountancy
Systematic knowledge of Accounting. Explains how to deal with various aspects of accounting. It educates
how to maintain the books of account and how to summarize the accounting information and
communicate it to the users.
Users of Accounting
Internal Users External Users
Owners Banks & Financial Institutes, Investors
Management, Employees & Workers Creditors, Government, Researchers and Public

Basic Terms

Entity
Identifiable business enterprise having separate existence.
Transaction
Event involving two or more entities.
Assets
Economic benefit of an enterprise that can be usefully expressed in money terms.
Fixed Assets – Hold for longer period of time (more than 1 year) and used for normal operations of
business. e.g. Lands, Buildings.
Fixed Assets are of 2 types
Tangible Assets - The Assets Which possess physical existence
Intangible Assets – Cannot be touched.
Fictitious Assets – Actually these are the losses which cannot be written off in the year in which they are
incurred. E.g. Advertisement Expenditure
Current Assets – Hold for shorter period of time (less than 1 year). E.g. Cash, Stock.
Liabilities
Responsibility or Burden to pay.
Types of liabilities.
Long term - Usually payable after a period of 1 year.
Short term – Usually payable within 1 year.
Capital (Owners’ equity or net worth)
Amount invested by the owner in the business. It may be in money or money worth.
Sales
Total Revenues earned form sale of goods or providing of services.
Receipts
Amount received or receivable for selling assets, goods or services.
Revenue Receipts
Amount received or receivable in normal course of business against sale of goods or render of services.

Capital Receipts
Amount realised from activities not routine in nature. E.g. Sale of machinery.
Expenses
Amount incurred by a business in process of earning revenues.
Expenditure
Amount spend or liability incurred or acquiring goods and services.
Capital Expenditure
Expenditure incurred to acquire assets or improve the existing assets that will improve the earning
capacity of business. Non Regular and Non-Recurring in nature.
Revenue Expenditure
Benefit of such expenditure is exhausted within the accounting period.
Deferred Revenue Expenditure
It is revenue expenditure in nature but written off charged in more than 1 accounting period because
benefit of that expenditure will accrue in more than 1 accounting period. E.g. Advertisement Expenditure.
Expense
Cost incurred for generating revenue. It is the monetary measure of input.
Income
Profit earned during an accounting year
Profit
Income earned by business from operating activities
Gross Profit
Revenue from sale – Direct Cost (Directly Related to products)
Net Profit
Profit after deducting total expense from total revenue.
Gain
Profit from that activity which is not regular for the business.
Discount
Reduction in price of goods sold. Sales is shown at net value
Trade Discount – Given at the time of sales to convince the customers to buy the product or avail the
service.
Cash Discount – Given at the time of payment to debtors to induce them to pay at a given time. Recorded
in both the books of both parties.
Voucher
Document in support of a transaction
Goods/Stock
Products in which the entity deals. Tangible assets held by the owner for resale purpose or to be used in
production of goods meant for sale.
Drawings
Amount withdrawn by the owner for his/her personal use from the business. It is deducted from capital.
Purchases
Use to denote goods that are bought by the business for resale purpose. Can be Cash purchase, credit
purchase, Purchase Return/ Return Outward.
Sales
Use to denote goods that are sold by the entity. Can be Cash Sales, Credit Sales, Sales Return/Return
Inward.
Stock
Total Goods underlying with the business the end of accounting period.
Trade Receivables
Amount receivable for sale of goods and services in the ordinary course of business. It comprises of
Debtors and Bills Receivables.
Debtors
Persons or entities from whom the business needs to take money on account of credit sales or credit
services.
Bills Receivables
Bills of exchange accepted by a debtor, the amount of which will be paid on a specified date.
Trade Payables
Amount payable for sale of goods and services in the ordinary course of business. It comprises of
Creditors and Bills Payables.
Creditors
Persons or entities which the business needs to pay for receipt of services on credit or purchase of goods
on credit
Bills Payables Bill of exchange accepted by the person the amount of which will be payable at a specified
date.
Bad Debts
That amount of money to be received by a company that is written off because of becoming
irrecoverable.
Book Value
The amount written in the books of Account
Book of Account
Books in which the financial transaction of an entity are recorded.
Cost of goods sold
Value of goods sold
Depreciation
Loss in value of an asset because of usage, passage of time or accident.
Entity
Economic unit which performs economic transactions.
Insolvent
Person or entity which is not able to pay debts
Solvent
Person or entity which is able to pay its debts
Balance Sheet
Statement showing financial position of an enterprise. Liabilities. Assets. Capital, Reserves and other
account balances are shown in this.
Accounting Period
Period of 12 months starting from 1st April to 31st March.
Account
Record of transaction under a particular head
Business transaction
A financial transaction or economic event entered into by 2 parties that initiates the accounting process of
recording in the books of account.

Systems of Accounting
Double Entry System
A transaction has two aspects debit and credit aspects at the time of recording a transaction. In this
system of accounting both debit and credit aspects of transactions are recorded.
Accounts of Incomplete Records or Single Entry System
Only Personal and Cash books are maintained. Used by Small Business

ACCOUNTING PRINCIPLES, CONCEPTS AND CONVENTIONS

These are commonly known as Generally Accepted Accounted Principles. These are given by ICAI
(Institute of Chartered Accountants of India).
These are the basic rules that define the parameters and constraints within which the accounting
operates. These are classified into 2 categories
1. Accounting Concepts - Basic assumption within which accounting operates
2. Accounting Conventions –

Accounting Concepts
Going Concern Assumptions
As per this concept it is assumed that the business shall continue for a foreseeable(unlimited) period &
there is no intention to close down a business or scale down its operations significantly.
Consistency Assumption
As per this concept accounting practice once adopted should be adopted consistently year after year so
that it gives the clear understanding of the business and makes it comparable with previous years.
Accrual Assumption
As per this concept a transaction is recorded in the books of account at the time when it is entered into
and not when the settlement takes place. Thus revenue is recognized i.e. when sale or services is
rendered, receivable of cash is immaterial.

Accounting Principles

Business Entity: As per this principle Business is considered to be a separate entity form its owner. It is
because of this reason all the transactions are recorded in the books of Account from the point of view of
business and owners are treated as creditors of the business.
Money Measurement Building
As per this principle only those transactions are recorded in the books of account which can be measured
in monetary terms.
Accounting Period
As per this principle life of an entity is broken into smaller periods so that its performance can be
measured after the completion of every period which is known as Accounting Period.
Full Disclosure Period
As per this principle there should be complete & clear reporting on the financial statements of all the
important information relating to the economic affairs of the country.
Materiality Principle
As per this principle all the material (important) items should be recorded in the books of Account.
Whether an item is important or not will depend on the amount and nature of the item whether or not it
will have an effect on the position of the business.
Prudence/ Conservatism Principle
As per this principle all probable losses should be accounted for and expectation of profits and property
should not be accounted for. It means that the books of Account should show a realistic picture of an
entity and not a better picture.
Cost Concept/ Historical Cost Concept
As per this principle an Asset is recorded in the books of Account at the price paid to acquire it & the cost
is the basis of all subsequent accounting of the Assets.
Matching Concept
As per this principle the expenses of an Accounting Period are matched against related revenue rather
than cash paid or received. It ensures true and fair profitability of financial position
Dual Aspect/Duality Concept
As per this principle every transaction has 2 aspects of debit and credit. In other words, for every debit
there is credit of equal amount in one or more account.
Revenue Recognition Concept: As per this principle revenue is considered to be realised when transaction
has been entered into & the right to receive the amount has been established.
Verifiable Objective Concept
As per this principle Accounting should be free from personal bias. Measurements that are based on
verifiable evidences are regarded as objectives. In other words, all transactions should be evidenced and
supported by business documents.
Accounting Standards A code of conduct imposed an Accountant by Custom, Law & a Professional Body

IFRS – International Financial Reporting Standards

IASB – International Accounting Standard Board

SPECIAL EXPENSES AND INCOMES

Outstanding Expenses
These are the expenses which have become due during the accounting period but have not been paid. It
is a liability.
Prepaid Expenses
These are the expenses which have been paid in advance. It is an Asset.
Accrued Income
It is the income which was earned during the accounting period but has not been received yet. It is an
Asset.
Unearned Income
It is the income which has been received before it has been earned. It is a liability. It is received in
advance.
 ACCOUNTING EQUATION
Accounting Equation is a mathematical expression that shows the assets and liabilities of a firm are equal.
It is based on dual aspect concept i.e. every transaction has a debit as well as credit effect.

Assets = Liabilities + Capital

Liabilities = Assets – Capital
Capital = Assets – Liabilities

It is also known as Accounting Equation or Balance Sheet Equation.