BASIC CONCEPTS OF ACCOUNTING

Agenda:

•Basics of Accounting
•Concepts
•Basic Accounting Terms
•Accounting Equation
•Classification of Accounts
•Accounting Process
Fundamentals of Accounting
Bookkeeping (also book-keeping or book keeping) is the recording of all financial transactions
undertaken by an individual or organization. The organization may be a business, a charitable organization
or even a local sports club. Bookkeeping is "keeping records of what is bought, sold, owed, and owned;
what money comes in, what goes out, and what is left." [1] A financial transaction is any event that involves
money. Individual and family bookkeeping involves keeping track of income and expenses in a cash account
record, checking account register, or savings account passbook. Individuals who borrow or lend money track
how much they owe to others or are owed from others.
Methods
Bookkeeping may be performed using paper and a pen or pencil. With increasing complexity in tax
regulations and to minimize calculation errors, many organizations use accounting software.
[edit] Single / Double-entry
Two common bookkeeping methods used by businesses and other organizations are the
single-entry bookkeeping system and the double-entry bookkeeping system. Single-entry bookkeeping uses
only income and expense accounts, recorded primarily in a "Revenue and Expense Journal". Single-entry
bookkeeping is adequate for many small businesses. Double-entry bookkeeping requires posting (recording)
each transaction twice, using debits and credits.[2]
However, many small, simple businesses maintain only a single-entry system that records the "bare-
essentials." In some cases only records of cash, accounts receivable, accounts payable and taxes paid
may be maintained.
Data may not be available to management for effectively planning and controlling the business.
Lack of systematic and precise bookkeeping may lead to inefficient administration and reduced control
over the affairs of the business.
Single-entry records do not provide a check against clerical error, as does a double-entry system. This is
one of the most serious defects of single-entry systems.
Single-entry records seldom make provision for recording all transactions. In addition, many internal
transactions, such as adjusting entries are often not recorded.
Because no accounts are provided for many of the items appearing in both the Income Statement and
Balance Sheet, omission of important data is possible.
In the absence of detailed records of all assets, lax administration of those assets may occur.
 Accoun What is Accounting?
Accounting is the language of a business unit communicated to
others as well as to those who own or manage it through
accounting information which has to be suitably recorded,
classified, summarized and presented.
and presented.
Basic Accounting Terms
Assets
An asset is anything of value owned by an enterprise. They consist of
tangible objects or intangible rights owned by an enterprise and carrying
probable future benefits.
Fixed Asset held for the purpose of providing or producing goods or
services and not held for resale in the normal course of business.
Examples: Furniture, Land and buildings, Plant and machinery, etc.
Current Assets are cash and other assets that are expected to be
converted into cash or consumed in the production of goods, or rendering
of services in the normal course of business.
Examples: Cash and bank balance, bills receivable, inventory, prepaid
rent, etc.
Basic Accounting Terms
Liability

Liability is a financial obligation of an enterprise other than the

owner’s funds. They are debts. They consist of obligations to
pay money or other assets, or to render services, to another
person or persons either now or in future.
Long term liability

Long Term Liability which does not fall due for payment in a
relatively short period, that is, normally a period not more than
twelve months.
Example: Long term loan from bank, etc.
Current Liability including loans, bills payable, deposits and
bank overdrafts which fall due for payment in a relatively short
period, normally not more than twelve months.
Example: Accounts Payables, overdrafts, etc.
Basic Accounting Equation

The assets of the business are acquired out of money

contributed by the proprietor(s) and creditor(s) of the business.

CAPITAL + LIABILTIES = ASSETS

Basic Accounting Equation
An detailed Accounting equation:

Capital + Assets
Liabilities
Proprietor’s Capital Buildings
+ Land
Liabilities Machinery
=
Furniture
Stock in trade
Income in advance
expenses
Outstanding
Bills Payable
Creditors
Bank Overdraft
Loans

Debtors
Bills receivable
Bank
Cash
Classification of Accounts
What is an Account ?

• An Account is a device to record each change or the effect of each

transaction.
• An account looks like a bigger ‘T’ and is therefore, often called as ‘T-
Account’

Example: Cash Account

1. Transactions that affect the cash account during the accounting period can either
increase cash or
Decrease Cash. Thus, one side of the T –account is for Increase and another side for
Decrease.
Generally, Increase is on Left Side and Decrease on Right side.
E. g :
• The entity received $300 Cash from Customer
• The entity borrowed $5000 from a bank.
• The entity paid $2000 cash to a supplier.
• The entity sold merchandise for $800 cash.

Cash
Received cash 300
Cash paid to supplier 2000
Borrowed cash from bank 5000
Sold merchandise 800
Closing 4100
6100 6100
Classification of Accounts

There are three classes of accounts maintained for recording

the business transactions:
• Personal accounts - Transactions relating to persons or
individuals

• Real or property accounts - Transactions relating to

property, assets or
possessions

• Nominal accounts - Transactions relating to incomes and

expenses
Classification of Accounts
Personal accounts record the dealings of a trader with persons
or firms.
These accounts can take the following forms:
Natural person’s accounts: Proprietor’s account, suppliers
account, receiver’s account (like Mohan’s a/c, Shashi’s a/c,
Naresh’s a/c).
Artificial accounts: Bank a/c, Insurance company’s a/c, any firm’s
a/c, any government’s a/c, any institution’s a/c, any club’s
account
Representative personal accounts:
If an account represents a certain person(s), it is called a
representative personal account.
Examples: Rent prepaid a/c, Interest outstanding a/c, Interest
received in advance a/c, etc.
Classification of Accounts
Real or Property accounts record dealings in or with property,
assets or possessions.
These accounts can take the following forms:

Tangible real account: Accounts of such that can be touched, felt,

measured, purchased, sold, etc.
Examples: Land ac/, Building a/c, Furniture a/c, Machinery a/c,
stock a/c, cash a/c, etc.

Intangible real account: They are accounts of such things that are
difficult to touch in the physical sense of the company but can be
measured in terms of money.
Examples: Goodwill a/c, Trademarks a/c, Patent rights a/c, etc.
Classification of Accounts
Nominal accounts or fictitious accounts record a trader’s
expenses or gains.

Example :
If in a factory the manager gets salary, the agent gets a
commission, the worker gets wages, the carrier of goods gets
carriage, the lender of money gets interest on money, in fact, they
all get cash.

Cash is the real thing which exists and salary, commission, wage,
carriage, interest, etc. are only ways of describing the nature of
head for which cash has been paid.

Such account is debited when an expense or loss is incurred and is

credited when there is any gain.
Classification of Accounts
Rules of Double entry - Three golden
rules
Each transaction has two aspects under double entry system of boo
keeping.
One aspect is -
The receiving or incoming aspect. Also known as the ‘Debit’ aspect.
Another aspect is giving or outgoing aspect. Also known as ‘Credit’
aspect.

Three golden rules:

Personal accounts Debit the Receiver Credit the
Giver
Real accounts Debit what comes in Credit what goes out
Nominal accountsDebit all expenses and losses Credit all incomes
and gains
Classification of Accounts
Rules of Debit & Credit:
 
Dr. Assets Account Cr
Increase in the value of asset Decrease in the value
of asset
 
Dr. Liability Account Cr.
Decrease in the value of Liability Increase in the value of
Liability
 
Dr. Capital Account Cr.
Decrease in Capital Increase in Capital
 
Dr. Revenue Account Cr.
Decrease in Gains and Incomes Increase in Gains and
Incomes
 
Dr. Losses or Expenses account Cr.
Increase in the Losses and Expenses Decrease in the Losses and
Expenses
 
Accounting
Process
Journal -
• The book in which all the business transactions are entered
systematically / chronologically for the first time is termed as a
Journal.
Ledger posting
Ledger is a book in which various accounts are opened.
The process of transferring the information in Journal to ledger is
called Posting of Entries.
Posting from the journal or book is done periodically, weekly or
fortnightly or monthly as per the convenience of the business.

Guiding Rules:
• The debit side of the journal entry is posted to the debit side of
the account
• The credit side of the journal entry is posted on the credit side
of the account
Accounting Process
Trial Balance
•  A statement showing the debit and credit balances is called a Trial
Balance.
• The total of debits and credits should agree to each other in a Trial
Balance.
• An agreement indicates a reasonable arithmetical accuracy of the
Accounts Debit Credit
accounting
Capital a/c   67000
work.
M/s Wal-Mart & sons 12000  
Cargill Coal co   7850
Brace bridge Mills ltd 6000  
Purchases 34690  
Sales   10200
Diesel a/c   400
Stationary 500  
Wages 250  
Rent 1000  
Salaries 1500  
Drawings 2000  
Cash in hand 1750  
Cash at bank 25760  
 
Total 85450 85450
Accounting Process
Balance Sheet

•A Balance Sheet is a statement prepared with a view to measure th

exact financial position of a business on a particular date.

Need for a Balance Sheet :

• To assess the financial position

• To list Assets and Liabilities of a firm on a specific date
• To help management to ascertain funds from operations

 
Accounting Methods
It's important to understand the difference between cash and accrual accounting
— and the difference it makes when computing the bottom line. ( Cash Vs Accrual).

•For accounting purposes, the best method, regardless of the type of business (except
possibly that of a doctor) is the accrual-based accounting method. Cash-based accounting
can distort the true operations of your business, and incorrectly reflect income.
•Cash-based accounting recognizes income when money is received. Accrual-based
accounting recognizes income when goods are shipped or services are rendered. Under the
cash method, an expense is recognized when it's paid. Under the accrual method, an
expense is recognized when the business is obligated to pay it.

Examples:-
If in a given period you collect little or no receivables and you pay lots of bills, under the
cash-accounting method, you have expense without income — you've lost money. On the
other hand, if you collect a lot of money and don't pay your bills, you have big income.
That's a major distortion of what actually occurred.
Accrual-based accounting doesn't care whether you've collected or paid your bills.
Income (received or not) is matched to an expense (paid or not), resulting in a proper
match of revenue, with the expense generated to produce the revenue. This provides a
truer picture of operations.
Thank You