Basics of accounting Presentation Transcript

1. Introduction to accounting, journal, ledger, trial balance

2.Definitions 1. Recording, classifying, summarising
transactions and interpreting the results thereof.

business

3.It is an information system whose purpose is to identify , collect,

measure and communicate information about economic units to those
with an interest in the units financial affairs. To permit judgment and
decisions by users of the information.
4. Systematic record of business transactions. Protecting the property of
the business. Communicating results to the interested parties. Compliance
with legal requirements.
5. Evidence in court. Settlement of taxation liability. Comparative study.
Sale of business. Assistance to various parties.
6. Records only monetary transactions. Effect of price level changes not
considered. Historical in nature. Personal bias of Accountant affects the
accounting statements.
7. Generally Accepted Accounting Principles In order to make the
accounting work uniform and comparable, a set of Guidelines called as
the GAAP have been developed by professional bodies. ICWAI :Institute of cost & work Accountants of India. ICAI :- Institute of Charted
Accountants of India. AICPA :- American Institute of Certified Public
Accountants.
8. Capital :- It means the amount (in terms of money or assets having
money value) which the proprietor has invested in the firm or can claim
from the firm. For the firm Capital is a liability towards the owner. It is so
because the owner is treated to be separate from the business.
9. Liabilities :- If an amount is due to be paid to any other person or
institution other than the owner it is called as a liability. Liabilities can be
classified into following: i) Long-term liabilities : These are those

liabilities which are payable after a long term, (generally more than one
year). Example; Long-term loans, debentures etc. ii) Current liabilities :
These are those liabilities which are payable in near future ,(generally
within one year). Example; creditors, bank overdrafts, bills payable, shortterm loans, etc.
10. Assets :- Any physical thing or right owned that has a money value is
an asset. In other words, an asset is that expenditure which results in
acquiring of some property or benefit of a lasting nature. Assets can be
classified as: i) Fixed Assets : Fixed assets are those assets which are
purchased for the purpose of operating the business and not for resale.
E.g. land, building, machinery, furniture, etc. ii) Current Asset : Current
assets are those assets of the business which are kept for short term for
converting into cash. E.g. debtors, bills receivables, bank balance, etc.
11. Debtors :- A person who owes money to the firm, generally on
account of credit sale of goods is called a debtor. For e.g. When goods are
sold to a person on credit that person pays the price in future. He is called
a debtor because he owes the amount to the firm.
12. Receivables :- The term receivables is used for the amount that is
receivable by the firm, other than the amount due from the debtors.
Creditors :- A person to whom the firm owes money is called a creditor.
For e.g. Mr. M is creditor of the firm when goods are purchased on credit
from him.
13. Payables :- The term payables is used for the amount payable by the
firm, other than the amount due to creditors. Drawings :- It is the amount
of money or the value of goods which the proprietor takes for his
domestic or personal use. Revenue :- It means the amount which, as a
result of operations, is added to the capital. Revenue is an inflow of
assets which results in an increase in owners equity. E.g. sale of goods,
rent income.
14. Expense :- It is the amount spent in order to produce and sell the
goods and services which produce the revenue. Expenses is the cost of
the use of things or services for the purpose of generating revenue. E.g.
payment of salary, wages, rent, etc. Income :- It is the profit earned during

a period of time. In other words, the difference between revenue and

expense is called income.
15. Gross Profit :- Gross profit is the difference between sales revenue or
the proceeds of goods sold and services rendered over its direct cost. Net
Profit :- Net Profit is the profit made after allowing for all expenses. In
case, expenses are more than revenue, it is Net Loss. Cost of goods sold :It is the direct cost of the goods or services sold.
16. Expenditure :- Expenditure is the amount spent or liability incurred
for the value received. Expenditure may be classified into: i) Revenue
Expenditure : It is the amount that is incurred in current activities to
purchase goods and services which are consumed during the period. ii)
Capital Expenditure : It is the amount that is incurred in purchasing assets
which will give benefit extending over a number of accounting periods.
17. Discount :- When customers are allowed any type of reduction in the
prices of goods by the businessman, that is called discount. Gain :- It is a
term used to describe profit of an irregular nature, e.g. capital gains.
18. Cash Transaction :- Transactions involving immediate receipt or
payment of cash. Credit Transaction :- Transactions in which the
receipt/payment of cash is postponed to a future date is called as a credit
transaction.
19. Net worth :- It means assets minus outside liabilities. Profits of a
business increase net worth where as losses reduce the net worth of a
business. Turn over :- It means total trading income from cash sales and
credit sales. Voucher :- Any written document in support of a business
transaction is called a voucher. It is an objective evidence in support of a
transaction.
20. Basis of Accounting a) Cash Basis b) Accrual / Mercantile Basis
21. Cash Basis :- Under this basis, actual cash receipts & actual cash
payments are recorded. Credit transactions are not recorded until the cash
is actually received or paid. Limitation : Does not show actual profits nor
does it show the financial position of a firm.

 22. Mercantile or Accrual Basis :- In the accrual basis of accounting, the

income, whether received or not, but has been earned or accrued during
the period forms part of the total income of that period. Similarly, if the
firm has taken benefit of a particular service, but has not paid within that
period, the expenses will relate to the period in which the service has been
utilised.
23. Accounting concepts 1. Entity 2. Money measurement 6. Accruals 4.
Cost 3. Going-concern 5. Ralisation 7. Matching 8. Periodicity 9.
Consistency 10. Conservatisme
24. The affairs of the business are distinct from the personal affairs of its
owner. The business is an independent ENTITY. Accounting concepts 1.
Entity 2. money measurement 6. Accruals 4. Cost 3. Going-concern 5.
realization 7. Matching 8. Periodicity 9. Consistency 10. conservatism
25. Records are kept in monetary terms, and only matters capable of being
expressed in monetary terms are reflected in the books. Accounting
concepts 1. Entity 2. money measurement 6. Accruals 4. Cost 3. Goingconcern 5. realization 7. Matching 8. Periodicity 9. Consistency 10.
conservatism
26. The business is assumed to have a continuing and indefinite life. The
business IS NOT on the verge of extinction. Accounting concepts 1.
Entity 2. money measurement 6. Accruals 4. Cost 3. Going-concern 5.
realization 7. Matching 8. Periodicity 9. Consistency 10. conservatism
27. Accountants compute the value of an asset by reference to its
acquisition cost, AND NOT by reference to its expected future benefits.
Accounting concepts 1. Entity 2. money measurement 6. Accruals 4. Cost
3. Going-concern 5. realization 7. Matching 8. Periodicity 9. Consistency
10. conservatism
28. Any change in the value of an asset may only be recognized at the
moment the firm REALIZES it, or disposes of that asset. Accounting
concepts 1. Entity 2. money measurement 6. Accruals 4. Cost 3. Goingconcern 5. ralisation 7. Matching 8. Periodicity 9. Consistency 10.
conservatism

 29. The recognition of an expense (or revenue) and the related liability (or
asset) results from an accounting EVENT , and is not necessarily signaled
by a cash transaction. SFAC #1: Accrual accounting attempts to record the
financial effects on an enterprise of transactions and other events and
circumstances that have cash consequences for the enterprise in the
periods in which these transactions, etc occur rather than only in the
periods when cash is received or paid. Accounting concepts 1. Entity 2.
money measurement 6. Accruals 4. Cost 3. Going-concern 5. realization
7. Matching 8. Periodicity 9. Consistency 10. conservatism
30. Expenses should be recognized in the same accounting period during
which the firm has recognized the associated revenues. Revenues and
expenses resulting from the same transactions (or events, circumstances,
etc) should be recognized simultaneously. Accounting concepts 1.
Entity 2. money measurement 6. Accruals 4. Cost 3. Going-concern 5.
realization 7. Matching 8. Periodicity 9. Consistency 10. conservatism
31. Accounting reports must be prepared for fixed, and relatively short,
periods of time. Accounting concepts 1. Entity 2. money measurement 6.
Accruals 4. Cost 3. Going-concern 5. realization 7. Matching 8.
Periodicity 9. Consistency 10. conservatism
32. Like transactions should be treated the same way in consecutive
periods. Accounting concepts 1. Entity 2. money measurement 6. Accruals
4. Cost 3. Going-concern 5. realization 7. Matching 8. Periodicity 9.
Consistency 10. conservatism
33. (1) The accountant should not anticipate profit, and should provide for
all possible losses; (2) Faced with several methods of valuing an asset, the
accountant should choose that which leads to the lesser value. Accounting
concepts 1. Entity 2. money measurement 6. Accruals 4. Cost 3. Goingconcern 5. realization 7. Matching 8. Periodicity 9. Consistency 10.
Conservatisme
34. Business Transactions :- Any event which involves exchange of
money or moneys worth between the firm and any other person is known
as a Business Transaction. In other words any event which affects the
business and involves money is a Business Transaction.

 35. ILLUSTRATIONS :- a) Capital introduced into the business by the

proprietor [BT] b) Sending of price list [NBT] c) Purchase of goods for
cash [BT] d) Receiving of a price list [NBT] e) Purchase of goods on
credit [BT] f) Placing of an order [NBT] g) Sale of goods on credit [BT]
h) Receipt of an order [NBT]
36. Accounting Equation The equation is based on the principle that
accounting deals with property & rights to property & the sum of the
properties owned is equal to the sum of the rights to the properties. The
properties owned by a business are called assets & the rights to properties
are known as liabilities or equities of the business. Assets = Liabilities +
Capital
37. The Double-Entry System The double-entry book-keeping system is
based on the principle that for every business transaction that takes place
two entries must be made in the accounts: a debit entry, showing goods or
value coming into the business, & a corresponding credit entry, showing
goods or value going out of the business.
38. Rules of the Double Entry System 1) Personal Account :- These
accounts record a business dealings with persons or firm. The person
receiving something is given debit and the person giving something is
given credit.
39. 2) Real Account :- These are the accounts of assets. Assets entering
the business is given debit and assets leaving the business is given credit.
40. 3) Nominal Account :- These accounts deal with expenses, incomes,
profits and losses. Accounts of expenses and losses are debited and
accounts of incomes and gains are credited.
41. Debit Receiver Personal Account Credit Giver Debit What comes in
Real Account Credit What goes out Debit Expenses & Losses Nominal
Account Credit Incomes & Gains
42. Advantages of Double Entry System a) Complete record of the
financial transactions is maintained. b) It gives accurate information of
amount due to & due by the business unit at any time. c) It is helpful in
preventing frauds & errors. d) Arithmetical accuracy of the account books

can be tested. e) It is helpful in preparing profit & loss account and

Balance sheet of a firm.
43. Accounting Cycle a) Recording :- First, all transactions should be
recorded in the Journal or Books of original entry known as subsidiary
books. b) Classifying :- All entries in the Journal should be posted to the
appropriate ledger accounts to find out at a glance the total effect of all
such transactions in a particular account.
44. c) Summarising :- Last stage is to prepare the trial balance and final
accounts with a view to ascertaining the profit or loss made during a
trading period and the financial position of the business on a particular
date.
45. Journal Journal means a daily record of business transactions. Journal
is a book of original entry because transaction is first written in the
Journal from which it is posted to the ledger.
46. The ruling of the journal is as follows:- Journal Date Particular LF
Debit Rs [Dr] Credit Rs [Cr] Year Month Date Name of account to be
debited. To, Name of account to be credited. [Narration]
47. L.F :- It stands for Ledger Folio which means page of the ledger. This
column is used to record the page numbers on which the various accounts
appear in the ledger.
48. Trade Discount :- It is a deduction allowed by the manufacturer to the
wholesaler or retailer on the gross value or list price of goods to enable
the buyer to sell the goods further (at list price) and yet make a profit for
himself. Trade discount is not recorded in any account as it is deducted in
the invoice itself from the gross value of goods.
49. Cash Discount :- It is allowed by the creditor to the debtor as an
incentive to the latter to make an early payment. Cash discount is
calculated on net value of goods, after deducting trade discount. Cash
discount being a nominal account, it is debited with the loss on discount
allowed and credited with the gain on discount received.

 50. Example 1 Sale of food & drink as meals in a restaurant amounted

to Rs. 1,500 cash. In this case the sales account would be credited with the
value of the food & drink leaving the restaurant as meals, and the cash
account would be debited with Rs. 1,500 cash coming into the business
from the sale.
51. Example 2 A hotelier sent a cheque for Rs. 20,000 as payment of her
electricity bill. In this case the bank account would be credited with Rs.
20,000 going out of the business and electricity account would be debited
with Rs. 20,000 being the cost of the electricity used in the business.
52. Debit Increase in asset accounts Increase in expense accounts
Decrease in liability accounts Decrease in equity accounts Decrease in
revenue accounts Credit Decrease in asset accounts Decrease in expense
accounts Increase in liability accounts Increase in equity accounts
Increase in revenue accounts
53. LEDGER A ledger account may be defined as a summary statement of
all the transactions relating to a person, asset, expense or income which
have taken place during a given period of time and shows their net effect.
54. Ledger Format Date Particular F Amount Date Particular F Amount
To, Name of credit A/c Rs By, Name of debit A/c Rs
55. Each account in the ledger is divided into two equal parts by a vertical
line. The left hand side of the account is known as debit side and the right
hand side is called credit side. F stands for folio (page number) of the
journal or subsidiary book.
56. Ledger Posting of Journal Every transaction is first recorded in the
journal in the form of a journal entry. From the journal it is transferred to
the concerned accounts in the ledger. This process of transferring the
transaction from the journal to the ledger is known as Posting .
57. Balancing of Accounts Various accounts in the ledger are balanced
with a view to preparing the final accounts. 1) Take the totals of the two
sides of the account concerned. 2) Ascertain the difference between the
totals of two sides.

 58. 3) Enter the difference in the amount column of the side showing less
total writing against the difference in the particular column To, balance
c / d [ c/d means carried down] on the debit side of the account and By,
Balance c/d on the credit side of the account. In this way, the totals of
two sides will agree.
59. 4) The balance is brought forward at the beginning of the next period.
If To, Balance C/d is written on the debit side before balancing, it is
brought forward on the credit side and By, Balance b/d [b/d means
brought down] is written against the balance in the particulars column and
vice versa.
60. An account is said to have a debit balance if the total of its debit side
is more than the total of its credit side. On the other hand, an account is
considered to have a credit balance if the total of its credit side is more
than the total of its debit side.
61. 1] Journalise the following transactions & post them to ledger. 2008
Jan 1. Started business with cash Rs. 1,00,000 2. Cash paid into bank Rs.
40,000 3. Purchased goods Rs. 6,000 7. Cash sales Rs. 10,000 9. Goods
sold to Mr. Raj Rs. 15,000 12. Purchased goods from Mr. Nanda Rs.
20,000 19. Returned goods to Mr. Nanda Rs. 2,500 25. Received from Mr.
Raj Rs. 15,000 27. Paid Mr. Nanda Rs. 17,500 by cheque.
62. Trial Balance Trial Balance is a list of balances extracted from the
ledger accounts at the end of an accounting period. Since the balances in
ledger accounts are effects of double entries, the total of debit balances
should be equal to total of credit balances.
63. Uses of Trial Balances 1) It is the basis of preparation of Final
Accounts. 2) It helps in verifying the arithmetical accuracy of ledger
accounts. The two sides of the trial balance will not tally if a mistakes has
taken place in the following. a) Posting b) Totaling c) Balancing.
64. Nature of Balances: In the normal circumstances, i) All assets
accounts & also dues from persons will show debit balances. ii) All
liabilities accounts will show credit balances. iii) All expenses account
will show debit balances. iv) All income accounts will show credit
balances.

 65. Sl No Particulars LF Debit Balance Rs Credit Balance Rs

66. Errors Revealed by the Trial Balance :- 1) Incorrect balances of the
cash book. 2) Incorrect totals in purchases, purchase returns, allowances
or sales day books. 3) Entries posted to the wrong side of an account. 4)
Omission of a debit or a credit in posting from the journals to the ledger.
5) Incorrect figures posted from a journal to the ledger account. 6)
Discounts transferred incorrectly.
67. Procedures for locating Errors in the Trial Balance a) Check the cash
balance in the cash book against the actual cash in hand. b) Check and
reconcile the bank balance in the cash book against the balance in the
bank statement. c) Prove the purchases and purchases returns figures
against the purchases control account.
68. Errors not revealed by the Trial Balance :- 1) Errors of omission : This
type of errors occurs when an accounting document, e.g. an invoice or a
credit note, is lost or mislaid, the result being that there is no debit or
credit entry in either the book of first entry or the ledger account.
69. 2) Errors of original entry : This type of error occurs when an amount
on an invoice, e.g. Rs. 600, is entered wrongly in the book of first entry,
e.g. Rs. 666, and then is posted wrongly to the ledger account, as Rs. 666.
As there has been a debit entry and a credit entry for the same amount, the
totals of the trial balance will still be in agreement.
70. 3) Errors of principle : This type of error occurs when a transaction
has a debit entry and a credit entry but the item is posted in principle to
the wrong classification of account. E.g. Motor expenses of Rs. 300 has
been debited to motor vehicles account.
71. 4) Errors of commission : When a wrong amount is entered either in
the subsidiary books or in the ledger accounts or when amount is posted
on the wrong side, it is a case of errors of commission. For example, if
fuel costs are incorrectly debited to the postage account (both expense
accounts). This will not affect the totals.
72. 5) Compensating errors : An example of this type of errors is where
the wages account has been over-added by Rs. 5,000 & by coincidence

the sales account has been over added by Rs. 5,000. So an error on debit
side is compensated by an error on the credit side.
73. 6) Errors of duplication : An example of this type of error is when the
same invoice is entered into the purchases day book twice and posted
from there to the ledger account twice.
74. The Suspense Account :- When trial balance does not tally , the
difference is put into a newly opened account named suspense account
and the trial balance is thus made to tally. In case , the debit side exceeds
the credit side the difference is put on the credit side of suspense account .
Likewise , if the credit side of the trial balance exceeds the debit side , the
difference is put on the debit side of suspense account.