Basics of Accounting

By
Mr. Abhaya Kumar Muduli

Introduction

Accounting ?

Important terminology

Capital (Equity Capital and debt capital)

Assets
Liabilities
Drawings
Cost (Expired Cost and unexpired cost)
Expenses
Loss
Income/Gain

Revenue
Inflows or other enhancements of assets of an entity
or settlements of its liabilities ( or a combination of
both) from delivering or producing goods, rendering
services, or other activities that constitute the
entitys on going major or central operation.
Revenue result in increase in owners equity but not all
increase in owners equity arise from revenues.
Ex- Investment by shareholders causes equity to rise,
but it is not revenue
All increase in assets are not revenues
Ex- purchase of office supplies on credit increases
assets and liabilities but does not result in revenue

Expenses
Out flows or other using up assets or incurrence
of liabilities (or combination of both) from
delivering or producing goods, rendering services,
or other activities that constitute the entitys on
going major or central operation.
Expenses result in decreases in owners equity
along with either decreases in assets or increases
in liabilities. But not all decreases in equity or
increases in liabilities results from expenses
Ex- dividends or withdrawals by owner cause
equity to fall, but they are not expenses.

Gains
Gains are increases in equity from
peripheral or incidental transactions
and events
Ex- Gain on sale of Investment
Ex- Gain on sale of used equipment

Business & Capital

A factor of production
Finance
Equity (Risk) capital- residual claim on
profit and return of capital
Debt Capital

Firm and capital

A liability business entity concept
Owners: risk- right to manage and own
Debt: right to protect investmentsubject to credit risk default in
interest payment and return of capital
Free capital: creditors, advance from
customer

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Business and organization

Sole Proprietorship

Partnership

Company

Owner

Sole proprietor

Partners

Shareholders

Number of
Owners/
Shareholders
Management
Control

One Person

Minimum: 2 Maximum: Minimum: 2/7

10/20
Maximum: 200/No
Limit
Partners
Board of Directors

Proprietor

Liability
Unlimited
Legal Registration No Provision

Unlimited
Voluntary

Limited
Compulsory

Flexibility
Source of Equity
Funds

Depends on Partners
Partners bring in the
funds

Comparatively Less
Shareholders bring
in the funds

Maximum
Proprietor Brings in
the funds

Cont..

Debtor
Creditor
Discount
Trade discount Vs. cash discount

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Accounting Equation

Equity = Assets - Liabilities

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Effect of transaction
on
Accounting Equation
a.

Mr.
Surendra
Kumar
starts
a
merchandising business named as Surendra
Enterprise(SE), on January 1, 2011 with
investment of Rs. 1,00,000 in Cash. He
approaches a bank for loan of Rs 1,00,000.
The bank Agrees to the proposal and lends
Rs 100000 to the firm.
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Cont..
b. SE purchases goods (stock in trade) for Rs
50,000.
c. SE paid Rs. 1000 towards cartage to bring the
goods to the place of business (known as carriage
in ward)
d. SE paid Rs. 3000 towards wages.
e. SE sold the goods costing Rs. 30,000 for Rs.
60,000.
f. Rs 20,000 cash was stolen from SE . There is no
insurance covering for such losses.

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THE END
THANK YOU

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