Career Point University

School of
Commerce &
Management
 Acknowledgement
I would like to express my special thanks of gratitude to my
teacher (Pragya Bhargav Maam (my mentor); Assistant
professor at career point university ) who gave me the
golden opportunity to do this wonderful project on the topic
(Basic accounting terms),which also helped me in doing a
lot of Research and I came to know about so many new
things I am really thankful to them.
Secondly I would also like to thank my parents who helped
me a lot in finalizing this project within the limited time
frame.
Content:
Define accounting
Basic accounting terms
Accounting principles
Accounting standard
Accounting process
Double entry system
 Meaning of accounting:
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.
Here, we came to know that accounting is:-
Art of recording, classifying and summarizing
Of basically financial nature transaction
Or in terms of money only
 Characteristics of accounting:
Accounting is art as well as science:- because as
a art it keeps record of all financial transaction
and as a science it an organised body of
knowledge which is based on certain specified
principles.
Recording of financial nature transaction only:-
if a businessman purchases 500 chairs and 50
tables in 20,000, here value comes in terms of
money; so it will be recorded in the books.
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Classification of financial nature transaction (journal)

Summarization of financial nature transaction (ledger)
Interpretation of the result (by preparing trading and
P&L a/c, balance sheet)
Communicating (communicate with the users about the
financial position and performance of the business)
 Objectives of accounting:
To keep systematic record of business transaction
To calculate profit or loss
To know the exact reasons leading to net profit or net
loss
To ascertain the financial position of the business
To ascertain the progress of business from year to year
To prevent and detect the errors and frauds
To provide information to various parties (owners,
investors, banks, creditors, employees, government
authorities etc.)
 Functions of accounting:
Maintaining complete and systematic records of
business transaction
Communicating the financial results to various parties
Protecting the assets of business
Providing assistance to management in making
planning, decision-making and controlling
Trusteeship
Compliance of legal needs
 Advantages of accounting:
Help to management in planning, controlling and
decision-making
It provide a complete and systematic record of all
transaction
It provide information regarding profit & loss
Helps in assessment of tax liability
Helps in prevention and detection of errors and frauds
Help in raising loans
Helps as a evidence in legal matters
 Limitations of accounting:
Influenced by personal judgements
It is based on concept and conventions
It gives incomplete information because actual
only knows when the business close down
It based on historical costs
It is affected by window dressing
It is unsuitable for forecasting because it only
record past events
 Accounting cycle:

Transaction Journal Ledger

Trading, Profit &

Trial
Loss a/c and
Balance
Balance Sheet
 Book-keeping, Accounting,
Accountancy
Book-Keeping :- Book-Keeping is an art of recording the
monetary transaction in the books of accounts.
i. It is routine and clerical in nature and can be
performed by person who have limited knowledge of
accounting.
ii. At present, this function is done by computers.
iii. Here, only the recording of transaction and
classification of transaction.
 Contnue
Accounting :- it starts where book-keeping
ends.
It includes :-
a. Summarizing the classified transaction
b. Analyzing and interpreting the summarized
results.
Continue.
It refers to a systematic knowledge of
accounting concerned with the principles and
techniques which are applied in accounting.
It tells us how to prepare the books of
accounts, how to summarize the accounting
information and how to communicated it to
the interested parties.
 Basic accounting terms
i). Business Transaction :- It is an activity or event that
can be measured in terms of money and which affects
the financial position or operation of business entity.
ii). Event :- An event is the consequences or result of a
transaction.
iii). Account :- In accounting we keep a separate record
of each individual, asset, liability, expense or income.
The place where such a record maintained is termed as
an Account.
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iv). Capital :- It refers the amount invested by the
proprietor or owner in a business enterprise. It also
known as owners equity or net worth or net assets.
Capital = Assets + Liabilities

v). Drawing :- Any cash or value of goods withdrawn by

the owner for personal use or any private payment
made out of business are called drawings.
vi). Liability :- It refers to the amount which the firm
owes to outsider.
Liabilities = Assets - Capital
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Liabilities are of two types :-
a). Internal liability : All amount which a business entity
has to pay to the proprietor or owners are internal
liabilities such as interest on capital and accumulated
profits.
b). External liability : All amounts which a business
entity has to pay outsiders are called as external liability
such as creditors, bank overdraft, loans etc.
c). Non-Current liability : These liability which fall due
for payment in a relatively long period (for more than
one year) such as long term loans and debentures etc.
Continue.
d). Current liability : These liability which fall due for payment in
a relatively short period (within one year) such as bank overdraft,
bills payable, creditors, outstanding expenses and short term
loans etc.
vii). Assets :- Anything which will enable a business enterprise to
get cash or a benefit in future is an asset. Such as cash & bank
balances, stock, furniture, machinery, land & building, bill
receivable, money owing by debtors etc.
Assets are divided into
a). Non-Current assets : It refer to those assets which are held for
continued use in the business for the purpose of producing
goods or services and are not meant for re-sale. It also known as
fixed assets.
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Fixed assets are of two types
o Tangible Assets : Those assets which can be seen or touched.
E.g. land & building, plant & machinery, computer, motor
vehicle, furniture, cash etc.
o Intangible assets : Those assets which cannot be seen or felt.
E.g. goodwill, trademarks, patents etc.
b). Current assets : Those assets which are meant for sale or
which are convert into cash within one year. Such as debtor, bills
receivables etc. It is also known as floating or circulating assets
c). Fictitious or nominal assets : These are the assets which
cannot be realised in cash or no further benefit can be derived
from these assets. Such as advertisement expenses etc.
Continue.
viii). Capital Receipt & Revenue Receipt :- Capital receipts are the
income generated from the non-operating sources, which are
having a long-term effect. (for e.g. amount received from sal e
of investments etc.). Revenue receipts are the major source of
income of the enterprise, without which a business may not
survive for a long time. (for e.g. interest and dividend received
on investments).
ix). Expenditure :- any type of payment for the receipt of a
benefit is called expenditure.
x). Capital, Revenue & Deferred revenue expenditure :-
Capital expenditure any expenditure which is incurred in
acquiring or increasing the value of a fixed assets . Such as
purchase of fixed assets.
Continue.
Revenue Expenditure any expenditure, the full benefit of which is receives
during one accounting period. Such as profit.
Deferred revenue expenditure :- there are certain expenditures which are
revenue in nature but the benefit of which is likely to be derived over a 3 to 7
years.
xi). Expenses :- expenses is the cost incurred in producing and selling the
goods & services.
xii). Income :- surplus of revenue over expenses.
Income = Revenue - Expenses
xii). Profit :- it is the excess of total revenues over total expenses of a business
enterprise for an accounting period.
xiii). Gain :- it is a monetary benefit, profit or advantage resulting from events
or transactions which are incidental to business such as sale of fixed assets,
winning a court case etc.
xiv). Loss :- when total expenses exceeds the total revenues it termed as loss.
Continue.
xv). Purchases :- the term purchases used only for purchases of
goods in which the business deals.
xvi). Purchase return :- when purchase goods are returned to
suppliers are termed as purchase return or return outward.
xvii). Sales :- sales means transfer of ownership of goods or
services to customers for a price.
xviii). Sales return :- some customers might return the goods sold
to them, this term as sales return or return inward.
xix). Stock/Inventory :- the term stock includes the value of
those goods which are lying unsold at the end of accounting
period.
There are two types of Stock :- Opening stock (goods remain at
the beginning of accounting period.); Closing stock (goods
remains at the end of accounting period.)
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Types of stock :-
Stock of raw material
Stock of work-in-progress
Stock of finished goods
xx). Trade receivables :- it refers to the amount receivable on
account of sale of goods or services rendered by the company in
the normal course of business.
Trade receivable includes
Debtors :- it represents those persons or firms to whom goods
have been sold or services rendered on credit and payment has
not been received from them.
Bills receivables :- a bill of exchange becomes bill receivable for
the person who draws it (drawer) and get it back, after its
acceptance from the drawee.
Continue.
xxi). Trade payables :- trade payables is the amount payable on
account of goods purchased or services taken in the normal
course of business.
Trade payables includes
Creditors :- the term creditors represents those persons or firms
from whom goods have been purchased or service procured on
credit and payment has not been made to them.
Bills payables :- a bill of exchange becomes bills payable for the
person who accepts it (drawee) and returns it to the drawer.
xxii). Goods :- it includes all those things which are purchased
for resale or for producing goods for sale.
xxiii). Cost :- all the expenses incurred at the time of production
is called cost.
Continue.
xxiv). Vouchers :- it is a document which provides the
authorisation to pay and on the basis of which the business
transaction are, first of all, recorded in the books of accounts.
xxv). Discount :- it is a rebate or allowance given by the seller to
the buyer.
It is of two types
Trade discount :- when discount is allowed by a seller to its
customer at a fixed percentage on the list or catalogue price of
the goods. It is not recorded in the books as it is deducted in
invoice.
Cash discount :- when discount is allowed to the customer for
making prompt payment. It is always recorded in the books.
Continue.
xxvi). Entry :- when a transaction or events recorded in
the books of accounts, it is called entry.
xxvii). Insolvent :- a person or an enterprise which is
not in a position to pay its debts.
xxviii). Solvent :- a person or an enterprise which is in a
position to pay its debts.
xxix). Bad debts :- it is the amount that has become
irrecoverable from a debtor.
xxx). Stores :- the term used to denote materials held by
an enterprise for the purpose of consumption in the
business and not for resale. Such as lubricants etc.
 Accounting principles
Business Entity Concepts: According to these concepts, a
business is treated as separate Entity distinct from its owner.
This means that in accounting the business and owner must
be treated separately. Thus, when one person invests amount
in to the business, it will be deemed to the liability of the
business. The concept of separate entity is applicable to all
form of business.
Going concern concepts: According to this, it is assumed
that business will exist for a long time. There is no intention t
o liquidate the business in the immediate future.
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Money measurement concepts: Accounting records only
those transactions which are expressed in monetary terms.
Transactions which cannot be expressed in money do not find
place in the books of accounts.
Cost Concepts: According to this concept, all transactions
are recorded in the books of accounts at actual price involved.
Dual aspect Concepts: according to this concept, every
transaction has two aspects. These two aspects are receiving
aspect and giving aspect. These two aspects have to be
recorded. The basis of this principle is that for every debit,
there is an equal and corresponding credit.
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Realization Concept: According to this principle revenue is said to be
realized when goods or services are sold to be a customer. It emphasizes
the fact that the mere receipt of an order for goods or services cannot be
taken for the realization of revenue. So advanced payment received from a
customer cannot be considered as revenue earned.
Matching Concept: According to this concept, cost of a business of a
particular period is compared with the revenue of that period in order to
ascertain net profit or net loss.
Accounting period Concept: According to this assumption, the life of a
business is divided in to different periods for preparing financial
statements. Generally business concern adopt twelve months period for
measuring the income of the concern. This time interval is known as
accounting period.
 Accounting conventions
Accounting conventions are the customs and traditions which
guide the accountant while preparing accounting statements.
Some of the accounting conventions are:-
(1) Convention of consistency: - This convention follows that
the basis followed in several accounting periods should be
consistent. This means the methods adopted in one accounting
year should not be changed in another year. Then only
comparison of results is possible.
(2) Convention of conservatism: - This is a convention of
playing safe, which is followed while preparing the financial
statements. The idea of this convention is to consider all possible
losses and to ignore all probable profits.
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(3) Convention of Materiality: - Materiality means relevance or
importance or significance. It is generally accepted in the
accounting circle that the accounting statements and records
must reveal all material facts.
(4) Convention of full disclosure: - The accounting convention
of full disclosure implies that accounts must be honestly prepared
and all material information must be disclosed therein.
 Accounting standards
Accounting standards are considered as a guide for
maintaining and preparing accounts. They are the
rules that ensure uniformity of preparation,
presentation and reporting of accounting
information. Accounting standards may be defined as
the accounting principles and rules which are to be
followed for various accounting treatments while
preparing financial statements on uniform basis and
which will reveal the same meaning to all the
interested groups.
Need for accounting standards (Objects
of Accounting standards):
The need for accounting standards arises from limitations of
financial statements. The need for accounting standards arises
due to the following reasons.
1. To communicate uniform results to external users as well as
internal users for decision making.
2. To serve as a tools for information systems catering the needs
of management, owners ,
creditors , Government etc.
3. To facilitate inter firm, intra firm comparison.
4. To make the financial statement more reliable comparable and
understandable
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i. As1: Disclosure of accounting policies
ii. As2: Valuation of inventories
iii. As3: Cash flow statements
iv. As4: Contingencies and events occurring after the B/S date
v. As5: Prior period and extra ordinary items and change in
accounting policies
vi. As6: Depreciation accounting
vii. As7: Accounting for construction contracts
viii. As8: Accounting for research and development
ix. As9: Revenue recognition
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As10: Accounting for fixed assets
As11: Accounting for effects of changes in foreign exchange
rates
As12: Accounting for govt. grants
As13: Accounting for investments
As14: Accounting for amalgamation
As15; Accounting for retirement benefits in the financial
statements of employers
As16: Borrowing cost
As17: Segment reporting
As18: Related party disclosures
Continue.
As19: Leases
As20: Earning per share
As21: Consolidated financial statement
As22: Taxes on income
As23: Accounting for investment in associates in consolidated
financial statement
As24: Discontinuing operations
As25: Interim financial reporting
As26: Intangible assets
As27: Financial reporting of interest in joint ventures
As28: Impairment of assets.
Continue.
As29: Provisions, contingent liabilities and contingent assets
As30: Financial instruments-recognition and measurements
As31: Financial instruments-presentation
As32: Financial instruments disclosure
 1. Collecting
and
analysing
documents

6.Preparing 2. Posting
of financial in journal
statements

Accounting
process

5.
Adjustment 3. Ledger
entries accounts

4. Trial
balance
 Double Entry System
The double entry system seeks to record every
transaction in money or moneys worth in its
double aspect The receipt of a benefit by one
account and the surrender of a like benefit by
another accounts, the former entry being to the
debit of the account receiving and the latter to
the credit of that account surrendering.
Principles of Double Entry System
Every business transaction affects two accounts.
Recording of both personal and impersonal aspects.
Recording is made according to certain specified
rules.
Preparation of trial balance.
 Classification of accounts
Personal account the accounts which relates to an individual,
firm, company or an institution.
This is divided into :
i). Natural personal accounts (such as Mohan, Ram, Shyam etc.)
ii). Artificial personal accounts (such as Bank, drawings, firms
etc.)
iii). Representative personal accounts (salaries Outstanding A/c
etc.)
Real account the accounts of all those things whose value
can be measured in terms of money and which are the
properties of the business are termed as real account. Such as
cash A/c, furniture a/c, machinery a/c etc.
 Continue
This is divided into :-
i). Tangible real account (which are seen or felt. such as
land a/c, building a/c etc.)
ii). Intangible real account (which cannot be seen but
felt. Such as goodwill, patent rights etc.)
Nominal account these accounts include the
accounts of all expenses & income. Such as salary,
rent, bad debts, interest received etc.
Advantage of Double entry system
It is a scientific system which include all rules for
recording the transactions.
It helps the management in decision making.
It is suitable for all types of businessman.
There is a complete record of each transaction.
Disadvantage of double entry system
A number of books are maintain so the system
is quite expensive.
It is very time consuming.
Only arithmetical accuracy is checked by
preparing trial balance.
 Rules for recording transaction
For personal accounts
Debit - the receiver & Credit - the giver
For real accounts
Debit - what comes in & Credit - what goes
out
For nominal accounts
Debit all expenses and losses & Credit all
income and gains