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Fundamentals of Accounting

by CA Ashish Gupta

LUCA PACIOLI:
Developer of Accounting (in 1494)
Oldest Accounting : Stewardship Accounting
Accounting ( A Layman Introduction)
Noting Down the transactions of a business
entity.
Reasons:

To memorize the business

To keep an evidence

Transactions:

Anything in financial terms.


(measurable in Money)
Accounting is done for a specific business entity.
Definition
Accounting is an art of Recording,
Classifying & Summarizing the
transactions & events of a business which
are of financial character & interpretation
of the results there of.

Analysis of Definition
Accounting is an Art :
a. It needs special knowledge of Accounting
concepts, rules
b. Recording is done in a special way by passing a
journal entry
c. Accounting is a special language of business.

Note: Accounting can also be regarded a


Science & a Management

ACCOUNTING- A
CYCLE/PROCESS

Identifying the financial transaction

Measuring the money value of the transactions

Recording the transactions

Classification of the recorded transactions

Summarizing the entire period transactions.

Interpretation /Analyses of the results.

Communicating the results to the interested users of


business/accounts.

Identifying / Measuring:
It includes maintaining the Vouchers
(a Documentary evidence) by the business

Vouchers

A source document / evidence maintained by a firm immediately after a


transaction is occurred.
From the vouchers, a journal entry is passed.
Cash memo, Invoice, Debit/Credit note : examples of vouchers

Transactions/Events

Transactions : Any expense, income, purchases,


sales in money terms
( Salaries paid, purchases/sales of goods)

Events : The outcome/result or a consequence of


a transaction(s) is called as an event.
(Closing Stock, Gross or Net Profit or Loss)

TRANSACTIONS AS WELL AS AN
EVENT

When transactions also resent into an outcome.

Examples:
a. Bad debts :
- Transaction :An expense/loss for the firm,
- Event : Results in reduction of debtors.
b. Purchase of asset in credit :
- Transaction : Purchases of asset,
- Event : Results in creation of a Liability

Recording

An initial record/ noting of the business transactions


(by passing Journal Entries)

Done in a book called Journal ( A Primary book)

Recording the entries is known as Journalizing.

Entries are passed in a Chronological Sequence

Classification
For ascertaining the informations relating to a
specific account, it is necessary to compile all the
entries related to that account in a separate ledger
Account.

It is done in a Principal book called Ledger .

Writing of Journalized transactions into Ledger is


called as Posting

Book Keeping

Recording & Classifying :Daily routine


activities.

A clerical activity maintained by Junior staff.

The accounting starts when the book


keeping ends.

Summarizing

After the daily book keeping, it is summarized at


the period end.
Firstly all the expenses ,incomes, assets &
liabilities are compiled in a
List of all accounts called Trial Balance

Maintained to verify the arithmetical accuracy of the


transactions entered in book keeping.

Financial Statements

Trial Balance is Further segregated in two parts:

Trading, Profit & Loss Account


(Expenses, losses, Incomes & gains)

Income Statement (Net Profit/loss)

Balance Sheet
(Assets & Liabilities)

Position Statement

Provides Result
Determines
Financial Position

Accounting cycle

Interpretation

Analysis of the accounting results &


position of the business.
to the various business users.

Interpretation tools like Ratio Analysis,


Cash Flow statements , Comparative &
Common size Statements can be used.

Communication

Accounting is a financial reporting to be done to


both Internal & External users.

Communication of Accounting is done by

a.

providing all the users an annual report.

b.

By arranging a meeting for the members (like


Annual General Meeting)