Basic Accounts Pres 1

8/7/2019 Basic Accounts Pres 1

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Basics of Financial Accounting


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Father of Accounting

Luca Pacioli (Italy)

Developed the system of Accounting

1490s

Concepts still used


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Definition

The American Institute of PublicAccountants defines accounting asfollows:

Accounting can be defined as the artof recording, classifying andsummarizing in a significant mannerand in terms of money, transactions

and events which are, in part, at leastof a financial character andinterpreting the results thereof.


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Accounts Record . . .

What we own

What we owe

What weve paid

What weve received

What we are owedWhat we have been paid


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Persons interested in Accounting

Disclosures

Proprietors Managers

Creditors, Bankers & other FinancialInstitutions Prospective investors Government Employees

Income Tax Department Researchers Citizens


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The Need for Accounting

What he owns? What he owes? Whether he has earned a profit or

suffered a loss in running thebusiness?

What is his financial position, i.e.,

whether he will be in a position tomeet all his commitments in the nearfuture?


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Objectives of Financial Accounting

To keep systematic record

To protect business properties

To ascertain the profit or loss

To ascertain the financial

position of the business


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Accounting Concepts

Separate Entity Concept

In accounting, business is

considered separate entity from theproprietor.

Going Concern Concept

In this concept it is assumed that a

business will continue for a longtime to come. There is neither theintention nor the necessity toliquidate the business in theforeseeable future.


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Accounting Concepts

Money Measurement Concept

According to this concept,

accounting records onlymonetary transactions. Eventsand transactions which cannot

be expressed in money cannotbe recorded in the accountingbooks.


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Accounting Concepts

Cost Concept

According to this concept, alltransactions are entered inthe books of accounts at theamount actually incurred


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Accounting Concepts

Dual Aspect Concept

This is the basic concept ofaccounting. According to thisconcept, every business transactionhas dual effect. One is the debit

aspect and the other is the creditaspect.


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Accounting Concepts

Accounting Period Concept

The accounting period concept indicatesthat the profitability of a business is to bemeasured periodically. This period iscalled the accounting period. It normallyconsists of 12 months. For Income Taxpurposes the Financial Year i.e. 1st April

to 31st March is taken as the AccountingYear.


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Accounting Concepts

Periodic Matching of Cost.&Revenue Concept

This concept is based onaccounting period concept. Inorder to ascertain the profit madeby a business during a period, it is

necessary that revenues of theperiod should be matched with thecosts of that period.


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Accounting Concepts

Revenue Realisation Concept

This concept states that revenue shouldbe recognized the moment it accrues. It

is not necessary that the actualpayment has been realized.

Objectivity Concept

According to this concept accountingmust be carried out on an objective andfactual basis.


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Accounting Conventions

Convention of Conservatism

According to this convention anticipateno profits but provide for all losses.

Convention of Full Disclosure

This convention states that all significantinformation should be disclosed in thefinancial statements.


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Convention of Consistency

As per this convention accounting

practices should remain unchangedfrom one period to another. This isnecessary for the purposes ofcomparison.


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Convention ofMateriality

According to this convention theaccountant should attach importance to

material details and ignore insignificantdetails.

Convention of Timeliness

To be useful to the end users theaccounting information should beprovided timely.


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Convention of Industry Practice

While recording and presenting

accounting information the practiceprevalent in the particular industryshould be kept in mind.


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Double-Entry Accounting

Every transaction has two parts that must balance!


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Double Entry System

There are two aspects of every

business transaction.To have acomplete record of it, both these

aspects must be recorded in thebooks of accounts, i.e., there mustbe one entry for recording the debitaspect and another entry forrecording the credit aspect.


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Accounting Equation

This recording of business transactions inits two fold aspect has given rise to theterm Double Entry Book-Keeping. In

the double entry system the dual aspectconcept is completely followed whilerecording transactions. The system ofdouble entry book-keeping can be very

well explained by the Accounting Equationgiven below:

Assets = Equities


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Assets

The properties owned by abusiness are called assets.

The rights to the propertiesare called equities. Equitiesmay be the rights of the

creditors and the rights ofthe owners.


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Liabilities, Equities

The equity of the creditorsrepresents debts of the business

and are called liabilities.The equityof the owners is called capital or

owners equity. Thus

Assets = Liabilities + Capital

OR

Assets Liabilities = Capital


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Accounting Equation denotesthat every debit has an equal

credit.

For every debit there mustbe an equal and oppositecredit.


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Types of Accounts and the Rules of

Debit & Credit

Personal Accounts Personal accounts are the accounts

ofpersons with whom the business

deals. The persons may be natural

persons who are the creation ofGod. For eg. Mohans A/c, Ritas A/cetc.

Artificial persons like companies,banks, cooperative societies, clubsetc.


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Rule forpersonal accounts

Debit the receiver

Credit the giver


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Real Accounts

Real A/cs are the accounts of

assets and liabilities. Assets arethe resources owned by thebusiness while liabilities are whatthe business owes.

Eg. Cash, Building, Furniture,Goodwill, Bank Overdraft, Plant &Machinery etc.


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Rule forreal accounts

Debit what comes in

Credit what goes out


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Nominal Accounts

Nominal A/cs include the A/cs of all

expenses, losses, incomes andgains.

Eg. Rent, Wages, Salaries, Interestreceived, Insurance charges, Audit

fees, Legal charges, Telephoneexpenses etc.


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Rule forreal accounts

Debit all expenses and losses

Credit all incomes and gains


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Basic Terms

Capital Expenditure

Revenue Expenditure

Capital Revenue

Expense

Purchase Stock


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Basic Terms

Debtors

Creditors

Trade Debtors Trade creditors

Bills Receivable

Bills Payable

Opening Stock

Closing Stock


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Basic Terms

Depreciation

Purchases Returns / Return

outwards Sales Returns / Return Inwards


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Thank You

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Basic Accounts Pres 1

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