Session 1

Session 1:Introduction to Accounting

Duration: 2 hours

Session Plan

Activity Location Materials Needed

Duration(minutes)

Introduction Classroom Presentation 10

Accounting Terms Classroom Presentation 20

Objectives of Accounting

Classroom Presentation 10

Business Types Classroom Presentation 20

Business Interactions Classroom Presentation 10

Business Structures Classroom Presentation 20

CYU Classroom Presentation 20

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Session Plan

Activity Location Materials Needed

Duration(minutes)

Summary Classroom Presentation 10

Total 120 min

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Session Objectives

By the end of this session, you will:

Understand common accounting terms.

Explain the basic objectives of accounting.

Explain the different types of businesses.

Describe the different types of business structures.

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Introduction: Scenario

Joginder Starts a Business

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Joginder is a young man who helps his father on the farm.

He dreams about starting his own business. He has saved Rs. 2,000 and decides to start a vegetable selling business.

He plans to buy vegetables from his village and transport them to the town on a cart. He thinks he will be able to sell the vegetables at a higher price than he bought them, by going house to house in the town.

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Joginder sets out to buy a cart and the vegetables.

His friend tells him about a carpenter in the next village who makes and sells carts. Joginder sets out to meet him and make a purchase.

He finds out that a cart is of Rs. 3,000. He pays Rs. 2000, takes the cart, and promises to pay the remaining Rs. 1000 within the next 3 days.

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When Joginder goes home, he shows the cart to his brother, who agrees to give him Rs. 2000, to pay the remainder on the cart and buy vegetables. Joginder’s brother is interested in this business, and decides to become a partner.

The next morning, Joginder goes to the village vegetable seller, Hari, and explains his plan. Hari takes Rs. 1,000 from Joginder, and promises to keep vegetables for him to collect every morning on his way to the town.

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Accounting Terms

Character Accounting Term

Meaning

Joginder Owner/ Proprietor A person who owns the business.

Joginder’s brother

Investor Person who invests money in a business. This may be a person other than the owner.

Carpenter Creditor A person or company to whom a firm owes money.

Hari Debtor A person or company who owes money to the firm.

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Accounting Terms

Items/ Money Accounting Term

Meaning

Cart, costing Rs. 3000

Asset Resources owned or controlled by the business. These resources are expected to provide benefits to the business in the future. Benefits can be money, material or equipment.

Rs. 4,000 paid by Joginder and his brother

Owner’s Equity

The amount contributed by the owner of the business, to start the business.

Rs. 1,000 owed to the Carpenter

Liability Something that the business currently owes (has to give) to another party.

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Terms Joginder’s Business

By selling vegetables every day, Joginder will earn money.

To be able to sell the vegetables in the town, he will have to spend money in buying from the village wholesaler.

On most days, he will sell the vegetables at a higher price than he bought them.

Sometimes, for any reason, he may have to sell the vegetables for a lower price than he bought them.

Accounting Terms

Let us understand Joginder’s business through Accounting Terms

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Terms Joginder’s Business

Income By selling vegetables every day, Joginder will earn money.

Expenditure To be able to sell the vegetables in the town, he will have to spend money in buying from the village wholesaler.

Profit On most days, he will sell the vegetables at a higher price than he bought them.

Loss Sometimes, for any reason, he may have to sell the vegetables for a lower price than he bought them.

Accounting Terms

Let us understand Joginder’s business through Accounting Terms

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Terms Definitions

Income Total money earned by a company.

Profit Income made or money earned/gained through the business. It happens when the the amount made by selling a product is more than the amount spent to make it.

Loss Money lost through the business. It happens when the amount by which the cost of a product is more than the price at which it is sold.

Expenditure The money spent on making the goods and services. E.g. salary, purchase of goods, purchase of machinery, purchase of furniture, etc. are examples of expenditure.

Accounting Terms

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Accounting Terms: Scenario

Soon Joginder’s vegetable business is doing very well. He starts supplying to homes as well as restaurants. He has some regular customers, who do not pay every time they take vegetables, but instead, they pay on a monthly basis.

Joginder starts keeping track of customers and how much they owe him. He starts maintaining a book where he writes down who owes him money, and to whom he owes money. He starts giving receipts to customers that show what they bought, and how much they paid.

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Terms Definitions

Financial Transactions The simple give and take of money.

Receipts Formal written proof that something of value has been received.

Payments The money that is to be given out in exchange of the goods/services provided.

Accounting Terms

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Objectives of Accounting: Scenario

Joginder and his brother have so much business now that they think they should expand to two more carts and some more people to help them supply the vegetables to their customers.

They want to calculate their profit to see how much more they can spend on the business.

How will they find out if they have made a profit?

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Objectives of Accounting

Maintaining Records Helps to maintain a proper record of all financialtransactions in a ‘book of accounts’.Helps in knowing who needs to give you money and from whom you need to take money.

Financial Position Helps to find the financial position of the business in the form of its assets and liabilities at the end of every accounting period. The document that tells us this is known as Balance Sheet.

Profitability Trend Has the business earned profits or suffered losses?Helps in getting bank loans.Helps in getting investors.

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Business Types

Business Types

Profit

Sole Proprietorship Partnership

Non-profit

NGOs

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Business Types

Terms Definitions

Profit Primary goal is making money (a profit).

Examples: Retail companies, hotels and restaurants, manufacturing companies etc.

Non-Profit Focuses on a goal such as helping the community. Is concerned with money only as much as it is necessary to keep the organisation operating.

Examples: Charitable hospitals, Old age homes etc.

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Business Types

Business Types

Profit

Sole Proprietorship

Partnership

Corporatio

n

Limited Liability Co

mpany

Non-profit

NGOs

Apart from Sole Proprietorship & Partnership, there are two other types of businesses. These are Corporation and Limited Liability Company.

Business Interactions: Scenario

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Business EntityJoginder +

Brother

CustomersThose who bought vegetables

from Joginder

Vendors/Suppliers Those from whom Joginder

bought vegetables

Sources of EquityJoginder and his brother, who

invested capital


A complex real-world business has more entities. Let us see which are these entities.

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Real-World Business Entity

Customers who buy products

VendorsSuppliers of Materials

Sources of EquityMore than one individual

is ownerInvestors/Shareholders

Employees who work in the business

Sources of Loan CapitalCreditors (e.g. Bank)

Government that collects taxes

Business Structures

You learned about Partnership and Sole Proprietorship in simple terms. This is a business classification based on number of owners.

In the real world because a business interacts with many entities, the business structures are defined on the basis of other rules. These are:

Separate Legal Entity (Customers, Vendors, Creditors, Government)

Liability (Creditors) Income Tax (Government)

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Business Structures

Separate Legal Entity means how a company interacts with the people outside who have interests in the company’s business. (Customers, Vendors, Creditors, Government).

Number of owners means how many people own the business and have a share in the profit of the business. In small businesses, it may be one or two owners, but in large businesses, there are shareholders who are owners.

Liability means the company’s liability towards its creditors, i.e. those to whom the company owes some money.

Income Tax means what the business pays to the government.

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Business Structures

Sole Proprietorship

Partnership Corporation Limited Liability Company (LLC)

Separate Legal Entity

No No Yes Yes

Number. of Owners

One Two or more One or more One or more

LiabilityUnlimited

personal liability

Unlimited personal liability

Limited liability

Limited liability

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Business Structures

Sole Proprietorship


Income Tax Individual owner

Individual partner

Double Taxation (corporation and stockholders)

Can elect to be taxed as a corporation, partnership or sole proprietorship

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Sole Proprietorship and Partnership: All financial transactions and communication is assumed to be from the owner/partners.

Corporations and Limited Liability Company: All financial transactions and communication is assumed to be from the company as a whole and not from any individual. For example, if you receive a letter from a limited company, which is signed by the Managing Director of the company, it is assumed that the letter is sent by the company and not by the individual whose signature it has.

Business Structures

Sole Proprietorship Partnership Corporation Limited Liability Company (LLC)

Separate Legal Entity

No No Yes Yes

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Sole Proprietorship and Partnership: Do not need any registration with any Government agency. However, various licenses are applicable to do business e.g. Service Tax, Value Added Tax.

Corporations and Limited Liability Company: Need to register with a government agency.

Business Structures

Sole Proprietorship


Number. of Owners

One Two or more One or more One or more

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Sole Proprietorship and Partnership: These businesses will have to sell even their personal assets to pay off their creditors.

Corporations and Limited Liability Company: Only the company assets will be sold to pay off the creditors.

Business Structures

Sole Proprietorship


Liability Unlimited personal liability

Unlimited personal liability

Limited liability Limited liability

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Business Structures

Sole Proprietorship


Income Tax Individual owner

Individual partner

Double Taxation (corporation and stockholders)

Can decide to be taxed as a corporation, partnership or sole proprietorship

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Business Structures

Sole Proprietorship: Income Tax paid by an individual owner.

Partnership: Income Tax paid by all the partners.

Corporations: Income Tax paid by the company and shareholders.

Limited Liability Company: Can decide whether all partners are to be taxed or whether an individual owner takes responsibility for paying tax.

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Business Structures: Examples

Sole Proprietorship

Partnership Corporation LLC

Example

Computer Repair ShopsMobile Repair Shops

Rastogi Brothers

Tata Consultancy Services

Family Group LLC India

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Check Your Understanding

CHECK YOUR UNDERSTANDING

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Check your Understanding

Match the following terms with the correct definitions.

Term Definition

Owner’s Equity/Capital

Resources owned or controlled by the business.

Assets Something that the business currently owes (has to give) to another party.

Liabilities The amount contributed by the owner of the business, to start the business.

Sole Proprietorship

Businesses that are owned by two or more people.

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Check your Understanding

Match the following terms with the correct definitions.

Term Definition

Partnership Businesses that are owned by a single person.

Debtor A person or company to whom a firm owes money.

Creditor A person or company who owes money to the firm.

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Check your Understanding (Scenario)

Read the following situation and answer the questions that follow.

Mr. Ramesh started a computer coaching center. He is running the center from one of the rooms in his house. He bought 4 computer tables using his own money. Then he took a loan from the bank to buy computers. He has four students now all of whom have paid fees. He earns INR 30,000 per month. He has to pay INR 7,000 as the EMI to the bank, on a monthly basis.

Mr. Suresh is offering Mr. Ramesh his back yard to be used as the administrative office of the coaching center. In return, Mr. Ramesh will provide Mr. Suresh, a share in the profit.

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Check your Understanding (Question)

Who is the owner of the business?

a) Mr. Ramesh

b) Mr. Suresh

c) Bank

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Check your Understanding (Answer)

Who is the owner of the business?

a) Mr. Ramesh

b) Mr. Suresh

c) Bank

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Who is the investor in the business?

a) Mr. Ramesh

b) Mr. Suresh

c) Bank

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Who is the investor in the business?

a) Mr. Ramesh

b) Mr. Suresh

c) Bank

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Who are the debtors in the business?

a) Mr. Suresh

b) Bank

c) Students

d) None

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Who are the debtors in the business?

a) Mr. Suresh

b) Bank

c) Students

d) None

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Which are the assets in the business?

a) Computer Tables

b) Computers

c) Mr. Suresh’s Backyard

d) All of the Above

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Which are the assets in the business?

a) Computer Tables

b) Computers

c) Mr. Suresh’s Backyard

d) All of the Above

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Which is NOT a liability in the business?

a) Computer Tables

b) Students’ Fees

c) Loan for Computers

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Which is NOT a liability in the business?

a) Computer Tables

b) Students’ Fees

c) Loan for Computers

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Summary

Accounting is advantageous to not only the business management but also to external parties.

The objectives of accounting are the following: Maintaining records, and finding out the financial position of the business and its profitability trend.

Different users of accounts have different use for the same accounting information and they go through it for personal interests.

There are two types of businesses, profit and non-profit.

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Summary

A for-profit business structure may be any one of the following: Sole Proprietorship, Partnership, Corporation or a Limited Liability Company.

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Thank You!

Session 1

Education

Transcript of Session 1