INTRODUCTION TO ACCOUNTING

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ACCOUNTING WHY FINANCIAL ACCOUNTING

Accounting communicates the results of business operation to various parties who are interested in business.

It helps users to form rational and sound judgement and take appropriate decisions.

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ACCOUNTING

Accounting is the language of business. It reports the performance of business to interested parties.

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ACCOUNTING ACCOUNTING

According to American Institute of Certified Public Accountants (AICPA)

Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions, and events, which are, in part at least, of a financial character, and interpreting the results thereof.

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ACCOUNTING ACCOUNTING

Recording, classifying & summarizing of business transactions, preparation of financial reports and analysis and interpretation of these reports.

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ACCOUNTING ACCOUNTING PROCESS

1. Recording - Journal 2. Classifying - Ledger
3. Summarizing - Trial Balance, Preparation of P&L A/c & B/S

5. Communicating User (who will take decisions)

4. Analysis & Interpretation of Financial Statements Ratio Analysis

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ACCOUNTING LANGUAGE

Based on accounting accounting standards.

conventions,

concepts

and

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ACCOUNTING BUSINESS

Sole proprietorship Partnership LLP Company

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Entities

Sole Partnership Proprietorship M/s ABC & Sons ABC & Co.

LLP

Company

Examples

ABC LLP

ABC Limited

No. of Shareholders

Minimum: 2
One Person Maximum: 20

Minimum: 2
Max.: No Limit Designated Partner Limited Compulsory

Minimum: 7
Max.: No Limit Board of Directors Limited Compulsory

Management Control Liability Legal Registration Flexibility

Proprietor Unlimited No Provision Maximum

Partners Unlimited Voluntary

Max. - Depends on Max. - Depends Comparatively IMT Nagpur - 2012-14 Partners on Partners Less

ACCOUNTING REPORT THE PERFORMANCE

Statement of Profit and Loss (Income Statement) Balance Sheet Cash Flow Statement Schedules Note to Accounts Tax Returns Filing with Regulators (SEBI, Stock Exchange, RBI)

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ACCOUNTING INTERESTED PARTIES OR USERS

Interested Parties or Users

Internal User

External User

Owners Employees Managers

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Creditors Investors Customers Govt. Researchers

ACCOUNTING TRANSACTION An economic event. In terms of business, event performed to earn profit.

Eg.

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ACCOUNTING

Assets

Fixed Assets

Current Assets

Investments

Plant, Machinery, Land, Building

Cash, Bank balance, Debtors, Stock

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ACCOUNTING

Assets

Tangible Assets

Intangible Assets

Plant, Machinery, Land, Building, Cash, Bank balance, Raw material, Finished Goods
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Goodwill, Intellectual Property Rights (Patent, Copyright, Trade mark)

ACCOUNTING

Liabilities

On the basis of time

Long Term Liability

Short Term Liability or Current Liability

Loans from Banks, Debentures

Trade Creditors, Short Term Loans from Banks, Overdraft, working capital loans
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ACCOUNTING

Liabilities

On the basis of source

Internal Liability Or Own Capital

External Liability Or Loan Capital

Share Capital, Reserve & Surplus

Loans from Banks & FI, Debentures, Public Deposits

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ACCOUNTING CAPITAL SOLE PROPRIETORS CAPITAL PARTNERS CAPITAL CAMPANYS CAPITAL

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ACCOUNTING
Companys Capital

Equity Share Capital

Preference Capital

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ACCOUNTING REVENUE Revenue from sale of goods & services Revenue from other sources

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ACCOUNTING EXPENDITURE Capital Expenditure Revenue Expenditure Eg. Buying of an asset is a capital expenditure but charging depreciation against profit is a revenue expenditure.

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ACCOUNTING EXPENDITURE DEFERRED REVENUE EXPENDITURE A heavy expenditure of revenue nature incurred for receiving benefits over a number of years is classified as deferred revenue expenditure. Eg. Prepaid Insurance Premium (3 years) Heavy Advertisement expenses Repairs Expenses
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ACCOUNTING
Accounting Principles

Accounting Concepts Business Entity Concepts Going Concern concept Accounting Period Concept Money Measurement Concept Dual Aspect Concept Cost Concept Matching Concept Realization Concept Accrual Concept

Accounting Conventions Consistency Materiality Conservatism

Accounting Standards (32)

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ACCOUNTING Business Entity Concept

A business concern is separate & distinct from its owners.

Draws the line between business transactions & personal transactions. Business & businessman (owner) are two separate entities.

Eg. Capital, Drawing

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ACCOUNTING Going Concern Concept

The enterprise is normally viewed as a going concern that is continuing in operation for the foreseeable future.
A business entity has a continuity of life and is going to last indefinitely in future. 1. Valuation of FA on historical / original cost. 2. Charging of depreciation over the useful life of the asset. 3. Prepaid expenses, deferred revenue expenditure.
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ACCOUNTING Accounting Period Concept / Periodicity Concept There is a need to split the life of the business into annual intervals known as Accounting Period. This concept requires that a P&L A/c & a B/S should be prepared at regular intervals to ascertain information about the business unit.

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ACCOUNTING Money Measurement Concept Only those transactions which can be expressed in terms of money can be recorded. Sales (Rs. 5000), Purchases (Rs. 10000),
Assets (Rs. 50000).

Events or transactions, if cannot be expressed in terms of money, do not find any place in the books of accounts. Quality
of Products, dedicated staff, price policy, better working conditions.

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ACCOUNTING Dual aspect Concept The claims against the assets of a business creditors & owners. unit are by

So, at any point of time, the total assets of a business are equal to its total liabilities. ASSETS = CAPITAL + LIABILITY

Every time a transaction takes place, there is always a two sided effect.
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ACCOUNTING Concept Concept / Historical Cost Concept Historical Cost = Cost at the time of acquisition. An assets is ordinarily recorded at its acquisition cost and this cost becomes the basis for subsequent accounting for the asset.

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ACCOUNTING Matching Concept Expenses for an accounting period should be matched against related incomes, rather than recognizing when cash is paid. In order to deduce the correct profit, it is necessary that the revenue of the period should be matched with the expenses of the same period.

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ACCOUNTING Realization Concept / Revenue Recognition Concept Recognize revenue when a transaction rendering services or sale is effected, be it a cash sale or credit sale. This implies that revenue realization does not necessarily mean that revenue must realize in cash. Revenue is considered as being earned on the date when the property in goods passes to the buyer and he becomes legally liable to pay.

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ACCOUNTING Accrual Concept The accrual concept is an accounting system which recognizes revenues and expenses as they are earned or incurred, respectively, without regard to the date of receipt or payment.

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THANK YOU

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