Basics of Accounting

1
What is Accounting?
Business Multitude of business
Entity transactions on a daily
basis

Accounting, the "language of business", measures the results of an

organization's economic activities and conveys this information to a variety of
Users, including investors, creditors, management, and regulators.

Accounting

Recording Classifying Summarizing Reporting Analyzing

2
Types of Accounting
Financial Accounting Management Accounting
MOTIVE: To generate Financial Statements for MOTIVE: information to Management for making
Owners, Investors and Banks (Mostly External users) business decisions
• For this, Record the transactions of a company as per • Here, presentation does not matter
Standards • For Internal Users only
• Mostly for External Users

Some Other Types

Cost Accounting: Branch of accounting in which the cost of products and activities are ascertained and controlled
3
Tax Accounting: It’s all in the name!
 Fundamental
Accounting Terms

4
Fundamental Accounting Terms
Assets and Liabilities

• Economic resources from which the entity • Financial obligation of entity to outsiders
expects to generate benefits in the future • Likely to result in an outflow of economic
• Normally owned by the entity resources from the entity in the future
• Can be Tangible or Intangible E.g.: Creditors, Bank Loans, etc.
E.g.: Cash, Debtors, Machinery, Inventory, etc.

5
Fundamental Accounting Terms
Assets

Current Non-Current
● These are assets which generally stay in the ● These are assets which generally stay in the
business for a short period of time (less than 1 business for more than 1 year
year) and can be converted into cash easily ● The full value of these assets will not be
● Likely to be converted into cash or cash realized within 1 year
equivalents within a time frame of 1 year ● E.g., Land and Building, Plant and Machinery,
● E.g., Cash, Debtors, Inventory, etc. Long Term Investments, etc.

Liabilities

Current Non-Current
● Liabilities which are likely to become due for ● Liabilities which are likely to become due for
payment within a short period of time (less than payment after a period of 1 year
1 year) ● E.g., Long Term Loans
● E.g., Creditors, Outstanding expenses
6
Fundamental Accounting Terms
Capital (Equity)

• Money invested by the business owner /

entrepreneur / investors from their own pockets
(+) accumulated profits from the business
• Capital can be introduced at the start of business,
or anytime during its life
• From the perspective of the business, Equity is a
permanent liability
• The owners don’t expect capital to be repaid, but
to bear returns in the form of business growth

7
Fundamental Accounting Terms
Income and Expenses

• Earnings from all activities of the business • Expenses are incurred in the process of
• Main component of income is “Revenue from generating revenue
Operations” - earnings from the prime revenue • Activities leading to expense: Manufacturing,
generating activities Selling & distribution, general administration, etc.
• Also includes other incidental earnings like E.g.: Salaries & wages, Cost of Raw material,
rent / interest received Interest expense

8
Quiz Time!
Classify the following:

1. Land and Building worth of Rs. 20 million.

A B C

Asset Liability Equity

D E

Revenue Expenses

9
Quiz Time!
Classify the following:

1. Land and Building worth of Rs. 20 million.

A B C

Asset Liability Equity

D E

Revenue Expenses

10
Quiz Time!
Classify the following:

2. Electricity Bills paid Rs. 6 million.

A B C

Asset Liability Equity

D E

Revenue Expenses

11
Quiz Time!
Classify the following:

2. Electricity Bills paid Rs. 6 million.

A B C

Asset Liability Equity

D E

Revenue Expenses

12
Quiz Time!
Classify the following:

3. Inventory worth of Rs. 15 million

A B C

Asset Liability Equity

D E

Revenue Expenses

13
Quiz Time!
Classify the following:

3. Inventory worth of Rs. 15 million

A B C

Asset Liability Equity

D E

Revenue Expenses

14
Quiz Time!
Classify the following:

4. Credit Sales worth of Rs. 60 million and cash sales worth of Rs. 10 million

A B C

Asset Liability Equity

D E

Revenue Expenses

15
Quiz Time!
Classify the following:

4. Credit Sales worth of Rs. 60 million and cash sales worth of Rs. 10 million

A B C

Asset Liability Equity

D E

Revenue Expenses

16
Quiz Time!
Classify the following:

5. Receivables worth of Rs. 25 million

A B C

Asset Liability Equity

D E

Revenue Expenses

17
Quiz Time!
Classify the following:

5. Receivables worth of Rs. 25 million

A B C

Asset Liability Equity

D E

Revenue Expenses

18
Quiz Time!
Classify the following:

6. Working capital loan of Rs. 50 million

A B C

Asset Liability Equity

D E

Revenue Expenses

19
Quiz Time!
Classify the following:

6. Working capital loan of Rs. 50 million

A B C

Asset Liability Equity

D E

Revenue Expenses

20
Quiz Time!
Classify the following:

7. Raw Material Consumed Rs. 40 million.

A B C

Asset Liability Equity

D E

Revenue Expenses

21
Quiz Time!
Classify the following:

7. Raw Material Consumed Rs. 40 million.

A B C

Asset Liability Equity

D E

Revenue Expenses

22
Quiz Time!
Classify the following:

8. Amount payable to suppliers Rs. 20 million.

A B C

Asset Liability Equity

D E

Revenue Expenses

23
Quiz Time!
Classify the following:

8. Amount payable to suppliers Rs. 20 million.

A B C

Asset Liability Equity

D E

Revenue Expenses

24
Quiz Time!
Classify the following:

9. Repairs and Maintenance Rs. 3 million.

A B C

Asset Liability Equity

D E

Revenue Expenses

25
Quiz Time!
Classify the following:

9. Repairs and Maintenance Rs. 3 million.

A B C

Asset Liability Equity

D E

Revenue Expenses

26
Quiz Time!
Classify the following:

10. Interest paid on working capital loan Rs. 4 million.

A B C

Asset Liability Equity

D E

Revenue Expenses

27
Quiz Time!
Classify the following:

10. Interest paid on working capital loan Rs. 4 million.

A B C

Asset Liability Equity

D E

Revenue Expenses

28
Accounting Concepts

29
Accounting concepts (1 of 2)
1. Entity concept – Business enterprise is separate from its owner
2. Money Measurement – Only those transactions and events which can be measured in terms
of money are recorded
3. Historical Cost – The value of an asset on the balance sheet is recorded at its original cost
when acquired by the company
4. Accrual – Transactions are recorded when they occur and not when cash is paid or received
5. Matching – All expenses incurred to earn the revenue for a period must be accounted for in
the same period

30
Accounting concepts (2 of 2)
6. Periodicity – The periodicity assumption states that an organization can report its financial
results within certain designated periods of time
7. Going Concern – Assumption that a business firm would continue to carry out its operations
indefinitely
8. Conservatism – Income should not be recorded until realized but all probable losses
should be provided for.
9. Uniformity & Consistency – accounting policies and practices followed by enterprises are
uniform and are consistent over the period of time
10. Materiality concept – Accounting should focus on material facts. Efforts should not be wasted
in recording and presenting facts, which are immaterial

31
Quiz Time!
1. A manufacturer of electronic goods follows First-in-first-out (FIFO) method for valuation of
inventory. The company introduced a new product and the Accountant opted for FIFO for finished
goods valuation. Accountant followed:

A B
Money measurement
Accrual Concept
concept

C D

Entity Concept Consistency Concept

32
Quiz Time!
1. A manufacturer of electronic goods follows First-in-first-out (FIFO) method for valuation of
inventory. The company introduced a new product and the Accountant opted for FIFO for finished
goods valuation. Accountant followed:

A B
Money measurement
Accrual Concept
concept

C D

Entity Concept Consistency Concept

33
Quiz Time!
2. 300 Kgs of cotton waste was purchased for Machine Shop and workers use the same to clean
their hands and machines. Accountant charged this as expenses for the period. The concept used
here is:

A B
Money measurement
Materiality Concept
concept

C D

Accrual Concept Entity Concept

34
Quiz Time!
2. 300 Kgs of cotton waste was purchased for Machine Shop and workers use the same to clean
their hands and machines. Accountant charged this as expenses for the period. The concept used
here is:

A B
Money measurement
Materiality Concept
concept

C D

Accrual Concept Entity Concept

35
Quiz Time!
3. A recent national-level HR survey shows the company has improved its ranking from 10th
position to 2nd position. The Accountant has not considered this development in accounting. The
reason is:

A B
Money measurement
Entity Concept
concept

C D

Accrual Concept Consistency Concept

36
Quiz Time!
3. A recent national-level HR survey shows the company has improved its ranking from 10th
position to 2nd position. The Accountant has not considered this development in accounting. The
reason is:

A B
Money measurement
Entity Concept
concept

C D

Accrual Concept Consistency Concept

37
Quiz Time!
4. A restaurant supplied Rs. 800 worth of meal to the owner's family; Accountant shows this as
Receivables from owner’s family. The concept used here is:

A B
Money measurement
Entity Concept
concept

C D

Accrual Concept Consistency Concept

38
Quiz Time!
4. A restaurant supplied Rs. 800 worth of meal to the owner's family; Accountant shows this as
Receivables from owner’s family. The concept used here is:

A B
Money measurement
Entity Concept
concept

C D

Accrual Concept Consistency Concept

39
Quiz Time!
5. Credit sales of Rs. 100 lakhs with a credit period of 30 days is recorded as sales; the concept
used here is:

A B
Money measurement
Entity Concept
concept

C D

Accrual Concept Consistency Concept

40
Quiz Time!
5. Credit sales of Rs. 100 lakhs with a credit period of 30 days is recorded as sales; the concept
used here is:

A B
Money measurement
Entity Concept
concept

C D

Accrual Concept Consistency Concept

41
Quiz Time!
6. Gold Jewelry maker has an inventory of raw gold which costed Rs. 30 lakhs. The current market
value of the gold is Rs. 38 lakhs but the accountant continued to show the value of gold as Rs. 30
lakhs. The concept used here is:

A B
Conservatism
Accrual Concept
Concept

C D
Going Concern
Matching Concept
Concept

42
Quiz Time!
6. Gold Jewelry maker has an inventory of raw gold which costed Rs. 30 lakhs. The current market
value of the gold is Rs. 38 lakhs but the accountant continued to show the value of gold as Rs. 30
lakhs. The concept used here is:

A B
Conservatism
Accrual Concept
Concept

C D
Going Concern
Matching Concept
Concept

43
Quiz Time!
7. A company allows it’s agents a commission of 5% for products sold during the month of March
(to be paid out only in April). The Accountant of the company shows this as an expense in March
using provision account. The concept used here is:

A B
Conservatism
Materiality Concept
Concept

C D
Going Concern
Matching Concept
Concept

44
Quiz Time!
7. A company allows it’s agents a commission of 5% for products sold during the month of March
(to be paid out only in April). The Accountant of the company shows this as an expense in March
using provision account. The concept used here is:

A B
Conservatism
Accrual Concept
Concept

C D
Going Concern
Matching Concept
Concept

45
Quiz Time!
8. Telecom Spectrum Fee which gives right to use spectrum for the next 20 years is paid by a
telecom operator; the accountant distributes the payment equally over 20 year period. The concept
used here is:

A B
Conservatism
Matching Concept
Concept

C D
Going Concern Historical Cost
Concept Concept

46
Quiz Time!
8. Telecom Spectrum Fee which gives right to use spectrum for the next 20 years is paid by a
telecom operator; the accountant distributes the payment equally over 20 year period. The concept
used here is:

A B
Conservatism
Matching Concept
Concept

C D
Going Concern Historical Cost
Concept Concept

47
Other Accounting
Rules / Concepts

48
Capital v/s Revenue
The concept of capital and revenue is related with the nature of transaction.

The nature of a transaction is determined based on the time period over which the transaction will
have its impact.

Capital Nature Revenue Nature

Long term impact, spanning over Short term impact, within a year
years, generally larger amounts

Machinery / assets purchased is a Rent, salaries paid, etc. are revenue

capital transaction transaction

49
Cash v/s Mercantile system
Cash System Mercantile System AKA Accrual
Record actual receipts or payments Record when things are due (Periodicity)
Profit = Cash Bank balance Profit ≠ Cash Bank balance in most cases

The method of accounting for most small business Method of accounting followed by all structured
owners businesses

The following concepts of Accounting don’t apply: All the accounting concepts discussed earlier apply
● Accrual
● Periodicity
● Matching
● Historical cost
● Materiality

50
Dual Aspect Concept
Debit effect
Every transaction has a dual or two-fold effect
Credit effect

• At least two accounts will be involved in each transaction

Assets = Liabilities + Capital

Any transaction that you think of in a business, can technically be passed
through the above equation using the golden rules of accounting.
Let's take an example of 3 transactions - I start a company with 10,000. I
purchase goods with 2,000 on credit and building worth 8,000.
Here, the accounting equation will be as follows:
Assets = Liabilities + Capital (Equity)
Cash (10,000) = Capital (10,000)
Inventory (2,000) + Cash (2,000) + Building (8,000) = Capital (10,000) +
51
Creditor (2,000)
Thank You

52