ACCOUNTING

ACCOUNTING
Accounting is the language of business.
The affairs and the results of the
business are communicated to others
through accounting information, which
has to be systematically recorded and
presented.

Accounting - Definition
Accounting can be defined as the
process of identifying, measuring,
recording and communicating the
economic events of an organization to
the interested users of the
information.

Characteristics of Accounting

Economic events
Identification, measuring, recording
and communication
Organization
Interested users of information

Economic Events
An economic event has been defined
as a happening of consequence to a
business entity. Economic events are
classified into
External types
Internal types.

Economic Events

Continue

An external event which involves the

transfer or exchange of something of
value between two or more entities.

Economic Events

Continue

Sale of goods to customers.

Payment of monthly rent to the

landlord.
Purchase of raw materials by an
enterprise from some other business
enterprise.
Rendering of services to customers,
etc.

Economic Events

Continue

An internal event is an economic event

that

occurs

entirely

within

one

enterprise.
Eg

Supply

equipment
to the

of

raw

materials

or

by the stores department

manufacturing department.

Identification
It means determining what to record,
i.e. to identify recordable events. It
involves observing activities and
selecting those events that are
considered to be evidence of economic
activity.

Identification

continue

The value of human resources,

changes in managerial policies or
changes in personnel are important
but none of these items is recorded in
financial accounts. However, when a
company makes a cash sale or
purchase, even if the item is small, it is
recorded in the books of account.

Measurement
It

means

quantification,

including

estimates of business transactions into

financial terms, i.e. rupees and paise.
If an event cannot be quantified in
monetary terms, it is not considered
for recording in financial accounts.

Recording
Once

the

economic

events

are

identified and measured in financial

terms,

they

are

recorded,

i.e.

chronological diary of these measured

events is kept in an orderly and
systematic manner.

Communication
The economic events are identified,
measured
and
recorded
is
communicated in some form to
management and others for internal
and external uses. The information is
communicated
through
the
preparation
and
distribution
of
accounting reports. The most common
reports are in the form of financial

Organization
It can be a business entity or a nonbusiness entity, depending upon the
profit or non-profit motive.

Users of Accounting Information

Different categories of users need
different

kinds

of

information

for

making decisions. These users can be

divided into :
Internal Users; and
External Users.

Internal Users
These are the persons who manage
the business, i.e. management at the
top, middle, and lower levels. Their
requirements

of

information

are

different because they make different

types of decisions.

Internal Users

continue

The top level is more concerned with

planning;
the
middle
level
is
concerned equally with planning and
control; and the lower level is
concerned more with controlling
operations. Information is supplied on
different aspects, e.g. cash resources,
sales estimates, results of operations,
financial position, etc.

External Users
All persons other than internal users
come in the group of external users.
External users can be divided into two
groups:
those having direct interest; and
those having indirect interest
in a business organization.

External Users

continue

The main sources of information for

external users are annual reports of
business organizations, which state
the financial position and performance
and
give
the
auditors
report,
directors report and other information.

External Users

continue

Investors and creditors are the

external users having direct interest.
Tax authorities, regulatory agencies,
customers,
labour
unions,
trade
associations,
stock
exchanges,
investors, etc are indirectly interested
in the companys financial strength, its
ability to meet short-term and longterm obligations, its future earning

ASSETS
These are economic resources of an
enterprise that can be usefully
expressed in monetary terms. Assets
are things of value used by the
business in its operations.
Fixed Assets
Current Assets

ASSETS

continue

Fixed Assets are assets held on a

long-term basis.
e.g. Land, Building, Machinery, Plant,
Furniture and Fixtures, etc.

ASSETS

continue

Current Assets are assets held on a

short-term basis.
e.g. Debtors, Bills receivable,
Stock(Inventory), Cash and Bank
balances, etc.

LIABILITIES
These are obligations or debts that the
enterprise must pay in money or
services at some time in the future.
Long-term liabilities
Short-term liabilities

LIABILITIES

continue..

Long-term liabilities are those that are

usually payable after a period of one
year.
e.g. A term loan from a financial institution,
debentures (bonds) issued by a company.

LIABILITIES

continue..

Short-term liabilities are obligations

that are payable within a period of one
year.
e.g. Creditors, bills payable, overdraft
from

a bank for a short period.

CAPITAL
Investment by the owner for use in the
firm is known as capital. Owners
equity is the ownership claim on total
assets. It is equal to total assets minus
total liabilities.

REVENUES
These are the amounts the business
earns

by

selling

its

products

or

providing services to customers. Other

titles and sources of revenue common
to many businesses are: sales, fees,
commission,

interest,

royalties, rent received, etc.

dividends,

EXPENSES
These are costs incurred by a business
in the process of earning revenue.
Generally, expenses are measured by
the cost of assets consumed or
services used during an accounting
period. The usual titles of expenses
are:
depreciation,
rent,
wages,
salaries, interest, costs of heat, light
and water, telephone, etc.

PURCHASES
Purchases are total amount of goods
procured by a business on credit and
for cash, for use or sale. In a trading
concern, purchases are made of
merchandise for resale with or without
processing.
In a manufacturing concern, raw
materials are purchased, processed
further into finished goods and then
sold. Purchases may be cash purchase

SALES
Sales are total revenues from goods or
services

sold

or

provided

to

customers. Sales may be cash sales or

credit sales.

STOCK
Stock (Inventory) is a measure of
something on hand goods, spares
and other items in a business.
It is called stock on hand.

STOCK: continue
In a trading concern, the stock on
hand is the amount of goods which
have not been sold on the date on
which the balance sheet is prepared.
This is also called closing stock.

STOCK

continue

In a manufacturing concern, closing

stock comprises raw materials, semifinished goods and finished goods on
hand on the closing date.
Similarly, opening stock is the amount
of stock at the beginning of the
accounting year.

DEBTORS
Debtors are persons and/or other entities
who owe to an enterprise an amount for
receiving goods and services on credit.
The total amount standing against such
persons and/or entities on the closing date,
is shown in the Balance Sheet as Sundry
Debtors on the asset side.

CREDITORS
Creditors are persons and/or other entities
who have to be paid by an enterprise an
amount for providing the enterprise goods
and services on credit.
The total amount standing to the favour of
such persons and/or entities on the closing
date, is shown in the Balance Sheet as
Sundry Creditors on the liability side.

ACCOUNTING PRINCIPLES
Accounting principles can be subdivided into
twocategories:
Accounting Concepts; and
Accounting Conventions.

ACCOUNTING PRINCIPLES
Accounting Concepts
Accounting Conventions
The term concept is used to connote
accounting
postulates,
that
is
necessary assumptions and conditions
upon which accounting is based. The
term convention is used to signify
customs and traditions as a guide to
the
presentation
of
accounting

ACCOUNTING PRINCIPLES
Accounting Concepts

Business Entity Concept

Money Measurement Concept

Cost Concept

Going Concern Concept

Dual Aspect Concept

Realization Concept

Accounting Period Concept

ACCOUNTING PRINCIPLES
Accounting Conventions

Convention of Consistency

Convention of Disclosure

Convention of Conservation

ACCOUNTING PRINCIPLES
Accounting Concepts
The term concept is used to connote
accounting
postulates,
that
is
necessary assumptions and conditions
upon which accounting is based.

Business Entity Concept

Business is treated as a separate
entity or unit apart from its owner and
others. All the transactions of the
business are recorded in the books of
business from the point of view of the
business as an entity and even the
owner is treated as a creditor to the
extent of his/her capital.

Money Measurement Concept

In accounting, we record only those
transactions which are expressed in
terms of money. In other words, a fact
which

can

not

be

expressed

in

monetary terms, is not recorded in the

books of accounts.

Cost Concept
Transactions are entered in the books
of accounts at the amount actually
involved.
Suppose
a
company
purchases a car for Rs.1,50,000/- the
real value of which is Rs.2,00,000/-,
the purchase will be recorded as
Rs.1,50,000/- and not any more. This
is one of the most important concept
and it prevents arbitrary values being

Going Concern Concept

It is persuaded that the business will
exists for a long time and transactions
are recorded from this point of view.

Dual Aspect Concept

Each transaction has two aspects, that
is, the receiving benefit by one party
and the giving benefit by the other.
This

principle

accountancy.

is

the

core

of

Dual Aspect Concept continue

For example, the proprietor of a
business starts his business with Cash
Rs.1,00,000/-,
Machinery
of
Rs.50,000/and
Building
of
Rs.30,000/-, then this fact is recorded
at two places. That is Assets account
(Cash, Machinery & Building) and
Capital accounts. The capital of the
business is equal to the assets of the

Dual Aspect Concept continue

Thus, the dual aspect
expressed as under

Capital + Liabilities = Assets

or
Capital = Assets Liabilities

can

be

Realization Concept
Accounting is a historical record of
transactions.
happened.

It
It

records
does

not

what

has

anticipate

events. This is of great important in

preventing
inflating

business

their

profits

firms
by

from

recording

Accounting Period Concept

Strictly speaking, the net income can
be measured by comparing the assets
of the business existing at the time of
its liquidation. But as the life of the
business is assumed to be infinite, the
measurement of income according to
the above concept is not possible. So a
twelve month period is normally
adopted for this purpose. This time

ACCOUNTING PRINCIPLES
Accounting Conventions
The term convention is used to
signify customs and traditions as a
guide

to

the

presentation

accounting statements.

of

Convention of Consistency
In order to enable the management to
draw important conclusions regarding
the working of the company over a few
years, it is essential that accounting
practices
and
methods
remain
unchanged from one accounting
period to another. The comparison of
one accounting period with that of
another is possible only when the

Convention of Disclosure
This principle implies that accounts
must be honestly prepared and all
material information must be disclosed
therein. The contents of Balance Sheet
and Profit and Loss Account are
prescribed by law. These are designed
to make disclosure of all material facts
compulsory.

Convention of Conservation
Financial statements are always drawn
up on rather a conservative basis. That
is, showing a position better than what
it is, not permitted. It is also not proper
to show a position worse than what it
is. In other words, secret reserves are
not permitted.

FUNCTIONS OF
ACCOUNTING
Keeping systematic records

Protecting
business

properties

Communicating the results

Meeting legal requirements

of

the

Keeping systematic records

The first function of accounting is to
keep a systematic record of financial
transactions, to post them to the
ledger

accounts

and

prepare final statements.

ultimately

Protecting properties of the

business
The second important function is to
protect the property of the business.
The system accounting is designed in
such a way that it protects its assets
from an unjustified and unwarranted
use.

Meeting legal requirements

The fourth and the last function of
accounting

is

to

meet

the

legal

requirements under the Companies

Act, Income Tax Act, Sales Tax Act and
so on.

THE ACCOUNTING CYCLE

Recording transactions in subsidiary
books.
Classifying data by posting from
subsidiary books to the accounts.
Closing the books and preparation of
final accounts.

SYSTEMS OF ACCOUNING
Cash System
Single Entry System
Double Entry System

Cash System
This system takes into account only
cash receipts and payments on the
assumption that there are no credit
transactions. Even if there are any,
they will not be recorded. This system
may be suitable for charitable
institutions like schools, colleges,
social clubs, etc.

Single Entry System

As the name itself implies, it deals with
only one aspect of transaction. This
system recognizes cash and personal
items of the transactions and it
ignores the impersonal items. So it is
incomplete,
inaccurate
and
unscientific.

Double Entry System

This is the most scientific system that
recognizes both the aspects of each
transaction and also records each
aspect. This system takes into account
every business transaction in its
double aspect, i.e., receiving benefit
by one party and giving the like
benefit by another. So it records the
two-fold aspect of every business

Double Entry System continue

Example: When A purchases a car, he
receives the benefit in the form of a
car and gives the benefit in the form of
money. Similarly, the car seller
receives the benefit in the form of
money and gives the benefit in the
form of a car.

Double Entry System continue

Definition
The process by which the dual aspects
of business transactions are recorded
is known as the double entry bookkeeping. It is a complete book-keeping
in the sense that it records all the two
aspects, debit and credit in each
business transaction, in equal value.

CLASSIFICATION OF ACCOUNTS
Every business deal with other Person,
possesses Assets, pay Expenses and
receive Income.
So from the above, we can see every
business has to keep
An account for each person
An account for each asset and
An account for each expense or income.

CLASSIFICATION OF ACCOUNTS
Accounts in the names of persons are
known as Personal Accounts
Accounts in the names of assets are
known as Real Accounts
Accounts in respect of expenses and
incomes
are
known
as
Nominal
Accounts

CLASSIFICATION OF ACCOUNTS
ACCOUNTS
PERSONAL
ACCOUNTS

REAL
ACCOUNTS

IMPERSONAL
ACCOUNTS

NOMINAL
ACCOUNTS

PERSONAL ACCOUNTS
Accounts in the name of persons are known
as personal accounts.
Eg: Babu A/C,
Babu & Co. A/C,
Outstanding Salaries A/C, etc.

REAL ACCOUNTS
These are accounts of assets or properties.
Assets may be tangible or intangible. Real
accounts are impersonal which are tangible
or intangible in nature.
Eg:- Cash a/c, Building a/c, etc are Real
Accounts related to things which we
can feel, see and touch.
Goodwill a/c, Patent a/c, etc Real
Accounts which are of intangible in nature.

NOMINAL ACCOUNTS
These accounts are impersonal, but invisible
and intangible. Nominal accounts are
related to those things which we can feel,
but can not see and touch. All expenses
and losses and all incomes and gains fall
in this category.
Eg:- Salaries A/C, Rent A/C, Wages A/C,
Interest
Received
A/C,
Commission
Received A/C, Discount A/C, etc.

DEBIT AND CREDIT

Each accounts have two sides the left side
and the right side. In accounting, the left
side of an account is called the Debit Side
and the right side of an account is called the
Credit Side. The entries made on the left
side of an account is called a Debit Entry
and the entries made on the right side of an
account is called a Credit Entry.

RULES FOR DEBIT AND CREDIT

Personal
Account

Debit the Receiver

Credit the Giver
Debit what comes in

Real Accounts

Nominal
Accounts

Credit what goes

out
Debit all Expenses
and Losses
Credit all Incomes
and Gains

Steps for finding the debit and credit aspects

of a particular transaction
Find out the two accounts involved in the
transaction.
Check whether it belongs to Personal,
Real or Nominal account.
Apply the debit and credit rules for the
two accounts.

Exercise
Purchased a Building for Rs.20,000/-.
Paid Cash Rs.1,000/- to Satheesh.
Paid Salary Rs.1000/-.
Received Commission Rs.250/-.
Sold goods for Cash Rs.3500/-.

Subsidiary Books
General Journal
Special Journals
Purchase Book
Sales Book
Purchase Return Book
Sales Return Book
Bills Receivable Book
Bills Payable Book
Cash Book
Petty Cash Book

Journal
Journal is the prime or original book of entry
in which all transactions are recorded in the
form of entries. Journalising is an act of
recording or entering transactions in a
Journal in the order of date.
Date

Particulars

LF

Debit
Amount

Credit
Amount

Journal Entry
Jan 1, 1981 Prakash Started a business Rs.
15,000/Date

Particulars

1981
Jan 1

Cash a/c
Dr.
To Prakashs Capital
a/c
(Being cash invetsed to
business)

LF

Debit
Amount

Credit
Amount

15,000
15,000