1

By
Prof. Harvinder S. Chawla


Accounting was born before writing or
numbers existed, some 10,000 years ago in
Mesopotamia later know as Persia (Iran and
Iraq). This area contains the Tigris river
valley, fertile area with a large population and
active trading being done between towns and
cities up and down the river valley.

And what happens next will directly lead to
the invention of both writing and number
systems.

Before shipping their goods, a merchant would take
one token for each item in the shipment, and encase
the tokens in a ball of clay, called a "BOLLAE"
(pronounced "bowl-eye") - meaning ball. This ball
would be dried in the sun, given to the boatman, and
then broken by the buyer on the other end of the
transaction. The buyer would match the tokens with
the items, to verify that everything sent was
accounted for. This is the function of protection of
assets, and is a major function of all modern
accounting systems. It was important 10,000 years
ago and is just as important now.
Written accounting records are some of the oldest
writings that have been excavated across the world.
These early records were simple single-entry listings of
wages paid, temple assets, taxes and tributes to the
king or Pharaoh.




Picture in the Tomb of Chnemhotep, pharaoh of Egypt
dated 1950 BC.

Minute care is not only taken in the case of large
amounts, but even the smallest quantities of corn or
dates are conscientiously entered." In ancient Egypt,
the accountants literally counted food, beer, clothing
and everything else. Ancient Egyptians were paid in
kind as the concept of money was not invented till
then.
Marble tablet: Account of Disbursements of the
Athenian State c. 418-415 BC
By the time Christopher Columbus was trying
to sail west, a new form of accounting was in
use by merchants in Venice .
Luca Pacioli set down in writing for the first
time a description of the double-entry system
of accounting, which we still use today in the
same form. Although he didn't actually invent
the system he is called "The Father Of
Accounting" for his contributions and for
documenting the system in his fifth book on
mathematics Summa de Arithmetica,
Geometria, Proportioni et Proportionalita
(Everything About Arithmetic, Geometry and
Proportion).
6
By
Prof. Harvinder S. Chawla


Why should managers and other decision-
makers know accounting?
If Finance is the language of business, then
Accounting is its grammar.
Accounting is an information system
Accounting provides information for
making decisions
Accounting and economic decisions
Are the
companys share
good for medium
to long term
investment
horizon?
Investor
Can the borrower
repay its
obligation on
time & what
should be the
collateral?
Lender
How is our
company
performing As
compared to our
competitors? Can
we improve?
Manager
Assess whether
the employer can
meet the future
obligations i.e.
Bonus, Salary.etc?
Employee &
Trade Unions
Can the company
pay on time for
purchases?
Can the borrower
pay interest on
time?
Suppliers &
Trade
Financiers
The supplier will
be able to provide
spare parts?
Can supplier
meets warranty
obligations?
Customers
Is the company
evading income
tax, excise duty
and other
government
levies?
Government
& Regulatory
Authorities
Is the company
exploiting its
customers,
labour, natural
resources,
suppliers, etc?
The Public
Accounting entity
Business is distinct from owner
Going concern
Business is a continuing enterprise
Periodicity
Business activities divided into periods
Money measurement
Money is a stable measurement unit
Accrual Concept
Record business transaction when they
occur not when the cash is received
Importance of GAAP
What is GAAP?
Institutions that influence GAAP
Government
Accounting profession
Securities regulators
Other regulators
International organizations
FORMS OF
BUSINESS
ORGANIZATION
TYPICAL SIZE
DECISION MAKING
GOVT.
REGULATION
SUITABILITY
SOLE
PROPRIETORSHIP
Single
Owner
Completely
Flexible
None
Small Business
PARTNERSHIP
Few Individuals
(Min 2 - Max20)
Largely Flexible but
Partners may disagree
Virtually None
Small to Medium
FORMS OF
BUSINESS
ORGANIZATION
TYPICAL SIZE
DECISION
MAKING
GOVT.
REGULATION
SUITABILITY
LIMITED COMPANY
(Private)
Few Individuals
(Min 2 Max50)
Largely Flexible
but Directors may
disagree
Companies Act
(applies but to very
less extent)
Small to Medium
(often due to legal
restriction
Permit, Licence,
Loan, etc.)
LIMITED CO.
PUBLIC (Not listed)
Min 7 to Unlimited
Shareholders
Very Rigid
(Shareholders
approval needed at
every stage)
Companied Act
(applies to full extent
Filing of
Documents,
Disclosure, etc.)
Medium to Larger
LIMITED CO.
PUBLIC (Listed)
Min 7 to Unlimited
Shareholders
Very Rigid (Shareholders
approval needed at every
stage)
Companied Act & SEBI Act
(applies to full extent Filing
of Documents, Disclosure,
etc.)
Large to Very Large
Business (especially
ones which need huge
Capital Investment)
15
By
Prof. Harvinder S. Chawla


Measurement: Past & Current Performance

Forecasting: Future Financial Position

Decision Making: Relevant information to
users

Comparison & Evaluation: Targets vs. Actual

Control: Identify Weakness & offer Feedback

Government Regulation & Taxation
Profit and loss account
Statement of financial performance
Revenues; Expenses (Profitability)
Balance sheet
Statement of financial position
Assets; Liabilities; Equity (Solvency)
Cash flow statement
Statement of cash receipts and cash
payments
Activities: Operating;Investing;Financing
(Changes in Financial Position)
Sources of Funds = Uses of Funds

Equities = Asset

Capital+ RevenuesExpensesDrawingsDividends
Can be rewritten as (Assets + Expenses + Drawings +
Dividends = Liabilities + Capital + Revenues
Probable future economic benefits (Cash or
something that can generate cash for
business)
Assets = what a business owns
Examples
Cash, Cash at Bank, Bills Receivables, Prepaid
Expenses, Debtors or Account Receivable,
Stock (of Raw Material, Work in Progress,
Finished Goods, etc.)
Land, Buildings, Plant & Machinery, Patents,
Copyrights, Loose Tools, Goodwill, etc.
Probable future sacrifices of economic
benefits
Liabilities = what a business owes
(Contractual, statutory, or constructive)
Examples
Bank Overdraft, Outstanding Expenses,
Bills Payable, Creditors on accounts, Loan
short term as well as long term,
Debentures, etc.
Equity represent the claims of those who
supplied or invested the money to start the
business.
Difference between Asset Liabilities.
Equity is the residual interest in the asset of the
business after deducting all its liabilities.
Example
Money supplied by the Proprietor for business or
seed money (less withdrawals)
Reserve & surplus of profit (accumulated profit)
Increase in one Asset Decrease in another Asset
Increase in one Liability Decrease in another Liability
Increase in one item of
Proprietor's Equity
Decrease in one item of
Proprietor's Equity
Increase in Proprietor's Equity Decrease in Liability
Increase in Liability Decrease in Proprietor's Equity
Decrease in Asset Decrease in Proprietor's Equity
Increase in Asset Increase in Proprietor's Equity
Increase in Asset Increase in Liability
Decrease in Asset Decrease in Liability
The account is the basic building block of any accounting
system. An accounting system classifies transactions into
meaningful categories to prepare financial statements &
reports.
Accounts facilitates easy & quick retrieval of companys
financial data. An account is used to record increase &
decrease in these item (assets, liabilities, capital,
revenue, drawings, dividends & expenses) resulting from
business transactions.
No matter whether a company uses either a manual or
electronic accounting system, it is essential to have a
proper system of classification of transaction into various
accounts.


The T account





We need to record each transaction in two accounts so that the
accounting equation is always in balance. Double Entry System
records every transaction with equal debits & credits. As a result,
the total of all Debits must equal total of all Credits




Credit = Right Debit = Left
Debits = Credits
The terms Debit (Dr.) & Credit (Cr.) are used to describe the left hand side
& right hand side of an account.
To debit means to make an entry in the left hand side of an account & to
credit means to make an entry on the right hand side.



The term debit & credit has no other meaning in accounting.
All accounts show entries recording increase & decrease. In some
accounts increase are recorded on the left side & decrease on right side
whereas in other accounts the reverse is true. It means debits & credits
by themselves do not indicate increase & decrease unless reference is
made to a specific account to determine the debits & credits represent
increases & decreases.
(Any type of Account)
Debit Credit
Always the left side Always the right side



Required
Effect
Assets,
Expenses,
Drawings,
Dividends
Liabilities,
Equity,
Revenues


Debit

Credit


Credit

Debit


Asset Accounts
Debit Side Credit Side
Shows Increases Shows Decreases
Normal Balance - Debit
Expenses Account
Debit Side Credit Side
Shows Increases Shows Decreases
Normal Balance - Debit
Liabilities Account
Debit Side Credit Side
Shows Decreases Shows Increases
Normal Balance - Credit
Owners' Equity Account
Debit Side Credit Side
Shows Decreases Shows Increases
Normal Balance - Credit
Revenue Account
Debit Side Credit Side
Shows Decreases Shows Increase
Normal Balance - Credit
Drawings Account
Debit Side Credit Side
Shows Increases Shows Decreases
Normal Balance - Debit
The accounts maintained by the business organization
can be classified into three types.
Personal Account: It deals with accounts of individuals
like Creditors, Debtors, Bank etc. It give you an idea
about the balance due to these individuals or due
from them on a particular date.
Real Account: It relates to assets of the firm but not
debts. Eg: Machinery, Land, Buildings, Fixed Deposits
Goodwill etc. This account shows the worth of an
asset on a particular date.
Nominal Account: It consists of different types of
expenses or losses and income or profit. The account
shows the amount of income earned or expenses
incurred for a particular period.
PERSONAL ACCOUNT Debit the receiver,
Credit the giver.
REAL ACCOUNT Debit what comes in, Credit
what goes out.
NOMINAL ACCOUNT Debit all expenses &
losses, Credit all incomes & gains.


Required
Effect
Assets,
Expenses,
Drawings,
Dividends
Liabilities,
Equity,
Revenues


Debit

Credit


Credit

Debit


Sr. No Title of Account
1 BUILDING
2 STOCK
3 SALES
4 BANK DEPOSIT
5 RENT
6 CASH
7 DEBTORS
8 LOAN
9 DRAWINGS
10 FURNITURE
Equation Approach Traditional Approach
ASSET
ASSET
REVENUE
ASSET
EXPENSES
ASSET
ASSET
LIABILITY
DRAWINGS
ASSET
REAL
REAL
NOMINAL
PERSONAL
NOMINAL
REAL
PERSONAL
PERSONAL
PERSONAL
REAL
The Journal is a chronological record of
transaction entered into by the business. It is
called the Book of Original entry or primary
book because we record all the business
transaction first in this book.

The process of recording transaction in Journal
is called Journalizing.

The procedure for recording transactions in the
journal is as follows:
Enter the year, month & date of the transaction
on the Date Column
Write the account titles under the Description
Column Enter the account to debit on the first
line. Enter the account to credit under the
debited account & indent it to set the account
apart from the debited account. If there are
several accounts enter them one after another.
JOURNAL
Date Description Post. Ref Debit (Dr.) Credit (Cr.)
(1) (2) (3) (4) (5)
NARRATION (6)
Enter the amount of the debit in the Debit
Column alongside the account to debit & the
amount of the credit in the Credit Column
alongside the account to credit.
Write a brief explanation of the transaction
The Post. Ref. (Posting Reference) is left blank
at the time of making the journal entry.

After recording transaction in the Journals, all
entries are classified & grouped into set of
accounts. Transferring information from Journal
to Ledger is called Posting.
A ledger account has two sides debit side &
credit side. Each of this sides has four
columns: Date, Particulars, Journal Folio,
Amount.

Dr. ACCOUNT NAME Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
1/6/10 To Vijays A\c 1,000 10/6/10 By Machinery A\c 500
Separate account is opened in ledger book for each
account & entries from ledger posted to respective
account accordingly.
It is a practice to use words TO & BY while posting
debit & credit entries respectively.
To ascertain the balance, total both the sides and find
out the difference.
Cr. > Dr. The account has a credit balance.
Dr. > Cr. The account has a debit balance.
Dr. CASH ACCOUNT Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
1/6/10 To Vijays A\c 1,000 10/6/10 By Machinery A\c 500
31/6/10 By Balance 500
1,000 1,000
1/7/10 To Balance b\d 500