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Basics of Accounting

Overview of Hedge Funds

August 2010

Mar-2010

Basics of Accounting

Definition of Accounting

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Accounting has been defined by the American Institute of Certified

Public Accountants, as 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

Basics of Accounting

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Groups of Accounts
Liabilities
Assets
Income
Expenditure
Owners Capital
Each of the groups has several sub-groups and every such sub-group
either has accounts or sub-groups as its sub-units, forming a tree
structure.

Basics of Accounting

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Debits and Credits

All amounts recorded in the books of account are placed either to the
debit or credit of an account. For any transaction, which account(s)
should be debited and which should be credited is determined by the
following Golden rules:
DEBIT what comes in, CREDIT what goes out
DEBIT the receiver of benefit, CREDIT the giver of benefit
DEBIT all expenses and losses, CREDIT all incomes and gains

Basics of Accounting

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Other Topics
Capital and Revenue Expenditure - Capital Expenditure is that expenditure
which results in the acquisition of an asset. Items of expenditure whose benefit
expires within the year or expenditure incurred for maintaining the business or
keeping the assets in good working condition are referred to as Revenue
Expenditure.
Financial Statements - At the end of the reporting period which is generally
one year the accounting transactions for the entire period are summarised
into a few statements. The major Financial Statements are:
1. Balance Sheet: Statement of Assets and Liabilities as on a particular date,
indicating the financial position of an entity at a given point of time.
2. Profit and Loss Account: Statement of Income and Expenditure for the
reporting period, indicating the financial performance of the entity during
the reporting period.
Users of Financial Statements: Management, Shareholders, Investors,
Lenders, Government

Basics of Accounting

Concepts of Accounting

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To ensure uniformity in preparation of accounts across entities, the following

concepts are applied when recording accounting transactions:
1)Business Entity Concept: The business for which accounts are
maintained is treated as an entity distinct from its owners and managers.
2)Money Measurement Concept: All transactions affecting the business
are stated in money terms and recorded in the Books of Account.
3)Dual Aspect Concept: Every transaction has two aspects a debit and
a credit and the sum of all debits will equal the sum of all credits.
4)Cost Concept: Transactions are recorded at the actual cost.
5)Going Concern Concept: At the time of recording the transactions, it is
assumed that the entity will continue to remain in business for as long as
can be foreseen.

Basics of Accounting

Concepts of Accounting (contd..)

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6)Accrual Concept: Income is recorded when goods are supplied or a

service is rendered, even though the money may be received later;
expenditure is recorded when goods are procured or a service is
availed, even though the money may be paid later.
7)Realisation Concept: Transactions are recorded only when they
occur and not in anticipation of their occurrence.
8)Matching Concept: Income and expenses for a period are
correlated to ensure that the accounts project an accurate picture.

Basics of Accounting

Conventions of Accounting

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To make the information contained in financial statements clear and

meaningful, they are drawn up according to the following
conventions:
1)Consistency: Accounting practices should remain the same from
year to year.
2)Disclosure: All information which is essential for fully
understanding the financial statements should be disclosed in
addition to the information required to be disclosed by law.
3)Conservatism: Financial statements should be drawn up on a
conservative basis i.e. anticipated income should not be recorded
whereas likely losses should be provided for.

Basics of Accounting

Process of Accounting

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After each transaction is done, the process to account for this

transaction can be depicted with the help of the below steps:
1.Post the transaction in the ledger (The Journal Entry)
2.Generate the Trial Balance (List of balances in all the accounts as of
the end of the specified period)
3.Compilation of Profit & Loss Account
4.Preparation of Balance Sheet

Basics of Accounting

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Screenshots Income Statement

Basics of Accounting

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Screenshots Balance Sheet

Basics of Accounting

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