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Introduction to Acounting 130206062732 Phpapp02 Converted (1)

Accounting is the process of classifying, summarizing, analyzing, and reporting financial transactions to evaluate performance and inform decision-making. It includes various types such as financial, cost, and management accounting, and relies on the double-entry system where each transaction has a receiving and giving aspect. The accounting equation, Assets = Liabilities + Capital, maintains balance in financial records, and understanding the rules of debit and credit is essential for accurate transaction recording.

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Michael Allen Jones
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3 views48 pages

Introduction to Acounting 130206062732 Phpapp02 Converted (1)

Accounting is the process of classifying, summarizing, analyzing, and reporting financial transactions to evaluate performance and inform decision-making. It includes various types such as financial, cost, and management accounting, and relies on the double-entry system where each transaction has a receiving and giving aspect. The accounting equation, Assets = Liabilities + Capital, maintains balance in financial records, and understanding the rules of debit and credit is essential for accurate transaction recording.

Uploaded by

Michael Allen Jones
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 PDF, TXT or read online on Scribd
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WHAT IS IT ?

 ACCOUNTING is the process of classifying,

summarizing, analyzing and reporting the

financial transactions in a manner that adheres to

certain accepted standard formats, helping to

evaluate a past performance, present

condition, and future prospects as well.


● Classifying

● Summarising

● Analysing

● Reporting
 Accounting helps answering questions like;

▪ Am I making or losing money from my business?

▪ How much am I worth?

▪ Should I put more money in my business or sell it and go into


another business?

▪ How much is owed to me, and how much do I owe?

▪ How can I change the way I operate to make


more profit?
Transaction

The act of exchange or transfer of


goods or services

Can you think of a few examples of a


business transaction?
Double Entry System

A system of recording accounting transactions


that recognises that there are two aspects/sides
to every transaction.
Purchase of Computer equipment for
business:
Question:

Whose point of view are we always looking at


for every transaction?
Payment of Salaries

Receiving Aspect:

Giving Aspect:
Purchase of Materials for production
and paying by cheque

Receiving aspect:

Giving Aspect:
 Financial Accounting:

It is the original form of accounting. It is mainly concerned

with the preparation of financial statements for the use of

outsiders like creditors, debenture holders, investors and

financial institutions.
 Cost Accounting:

Cost accounting seeks to ascertain the cost of unit produced and

sold or the services rendered by the business unit with a view to

exercising control over these costs to assess profitability and

efficiency of the enterprise.


 Management Accounting:

▪ It is an accounting for the management, In other

words; the presentation of accounting information in

such a way as to assist management in the creation

of policies and the strategies of day-to-day

operations.
● The accounting system uses Accounts to keep track of
information.

● It is a history of all transactions of a similar nature

● For example you may have a seperate file for utility bills,
phone bills, employee wages, bank deposits, bank loans etc.
Each account like a file folder.

● Accounts keep track of money spent, earned, owned, or


owed. Each account keeps track of a specific nature only.

● It has two sides: A Debit side and a Credit side


Cash Account
Dr. Cr.
REVENUE

● It means the amount which, as a result of


operations, is added to the capital.
● It includes all incomes like sales receipts
interest, commission, brokerage etc.
● The terms ‘expense’ refers to the
amount incurred in the process of
earning revenue.
● Examples are payment of
salaries and rent.
● An Asset is a property of value owned by a
business.
● Physical objects and intangible rights such as
money, accounts receivable, merchandise,
machinery, buildings, and inventories for sale
are common examples of business assets as they
have economic value for the owner.
● A Liability is a legal obligation of a business to
pay a debt. The most common liabilities are
bills payable and creditors .

● Creditors or Accounts payable is an unwritten


promise to pay suppliers or lenders specified
sums of money at a definite future date.
● It is the amount of money invested in the
business.
● It could be owned or borrowed or a
combination of both

Note: Withdrawal of Capital is known as


DRAWINGS
 Now let us discuss the Accounting equation,
which keeps all the business accounts in
balance.

Assets = Liabilities + Capital


 The Assets of the company consists of the money
invested by the owner, (i.e. Capital), and for example
a loan taken from the bank (i.e. a Liability).


IDENTIFYING THE TWO ACCOUNTS IN A TRANSACTION:

Sl. Transaction Accounts involved


No

1 Purchased goods from Ramesh and paid by Cheque

2. Paid salaries to staff in cash

IMPORTANT:

The accounts involved must belong to any of the 5 account classes: A/L/R/E/C
IDENTIFYING THE TWO ACCOUNTS IN A TRANSACTION:

Sl. Transaction Accounts involved


No

1 Purchased goods from Ramesh and paid by Cheque 1. Purchases (goods)


2. Bank

2. Paid salaries to staff in cash 1. Salaries


2. Cash

IMPORTANT:

The accounts involved must belong to any of the 5 account classes: A/L/R/E/C
We know that,

EVERY TRANSACTION HAS TWO ASPECTS, RECEIVING AND GIVING

Now we will replace this receiving and giving by the accounting terms
debit and credit

Where,

DEBIT= RECEIVING ASPECT

CREDIT= GIVING ASPECT

In a transaction, a debit aspect will have a corresponding credit aspect.

Eg. Sale of goods for $2000 cash

Receiving aspect Debit Cash $2000

Giving aspect Credit Goods(Sales) $2000


THE NATURE OF ACCOUNTS:
Now that you agree, DEBITS =CREDITS,

Let’s see how this has been derived:

Assets = Liabilities + Capital(+Revenue-Expenses)

Assets+Expenses=Liabilities+Capital+Revenue

DEBITS CREDITS
ACCOUNT CLASS NATURE

ASSET DEBIT

EXPENSE DEBIT

LIABILITY CREDIT

REVENUE CREDIT

CAPITAL CREDIT
 Recording of transactions require a thorough
understanding of the rules of debit and credit relating
to accounts.

 Both debit and credit may represent either increase


or decrease, depending upon the nature of account.

 For convenience ‘Dr’ is used for debit and


‘Cr’ is used for credit.
Cash Account
Dr. Cr.

Trade Payables Account


Dr. Cr.
THE MECHANISM:

● A Debit account
Increases when debited
Decreases when credited

● A Credit account
Increases when credited
Decreases when debited
MODERN ACCOUNTING RULES
Type of Nature Action Effect
Account

ASSET Debit Debit Increase

LIABILITY Credit Credit Increase

EXPENSE Debit Credit Decrease

REVENUE Credit Debit Decrease


Cash Account-Asset-Debit Nature
Dr. Cr.

1/4/20 Balance 10000


4/4/20 Rent 4000
3/4/20 Sales 50000

INCREASE DECREASE
STEPS INVOLVED IN IDENTIFYING DEBIT AND CREDIT

Read the transaction carefully

Identify the relevant accounts involved ( must belong to the account classes)

Recall the normal Nature of the account

Analyse if there is an Increase or Decrease

Apply the Modern Accounting rule

TRANSACTION: Purchased Furniture by cheque

Accounts: Furniture, Bank

Nature: Furniture-Debit ; Bank-Debit

Effect: Furniture-Increase; Bank-Decrease

Action (Rule): Furniture account- To be Debited; Bank account- To be Credited


Assets Debit

Liabilities Credit

Owner's Credit
Equity
Revenue Credit

Expenses Debit
Assets Increase Debit

Liabilities Increase Credit

Owner's Increase Credit


Equity
Assets Decrease Credit

Liabilities Decrease Debit

Owner's Decrease Debit


Equity
Revenue Increase Credit

Expense Increase Debit


Revenue Decrease Debit

Expense Decrease Credit

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