Accounting

AN INFORMATION SYSTEM
COMMUNICATES FINANCIAL INFORMATION TO THE
USERS THROUGH:

• IDENTIFYING
• RECORDING –CLASSIFYING ,SUMMARIZING,
ANALYZING AND INTERPRETING
• COMMUNICATING
 Book keeping & Accounting

Book keeping
Recording of economic events only
Accounting
Entire process of Identifying, Recording and
Communicating
 Users of accounting
Information
Internal Users
Marketing manager, production supervisor, company officers,
Director (Finance)
External Users
Creditors(suppliers, banks), investors, Govt&tax authorities,
regulators(RBI, SEBI..), Customers, Trade Unions
 Financial Accounting

Branch of accounting that provides financial information

to external users
 Accounting Assumptions
Basic assumptions providing the foundation for the accounting process

Separate/Economic Entity concept

Going concern concept
Money measurement concept
Cost concept
Dual aspect concept
Accounting period concept
Realisation concept
Accrual Concept
 Forms of Business

Sole proprietorship – owned by one person (Eg. Beauty

salons, auto repair shop, shops etc.)
Partnership – owned by two or more persons, based on the
agreement(lawyers, doctors, architects, Cas etc.)
Corporation (Company) – organized a s a separate legal entity
under law, ownership divided into transferable shares
 Accounting Equation

Assets = Liabilities + Owners Equity

Assets
Resources owned by the business
Liabilities
Debts and obligations of the business
Owners Equity
Ownership claim/ amount owed to the owner
Accounting Equation
Revenue
Anything that increases owners equity, resulting from
business activities (sale of goods/service, rent from property,
interest …), actual/expected CIFs (receipts)
Expense
Anything that decreases owners equity, resulting from
business activities (rent paid, repairs, electricity…),
actual/expected COFs(payments)
 Accounting Equation
How do you decide to record/not to record the transaction – identifying
transactions to be recorded
Criterion – Is the financial position (assets, liabilities and stockholders
equity) of the business changed?
If yes, record, If no, Don’t record
Example:
Neal Invested Rs. 15000 cash in the business
Softbyte purchases a computer equipment for cash Rs.7000
Softbyte purchases computer accessories from Acme supply company on
credit Rs.1600
Identifying Process
Transaction analysis using accounting equation
 Accounting Conventions

Customs or traditions which guide the accountant while

preparing the accounting statements

Convention of Conservatism
Convention of Full Disclosure
Convention of Consistency
Convention of Materiality
 Systems of Accounting

Two systems of accounting

Cash system
Accounting entries are made only when cash is paid or received, no entry
when cash payment or receipt is due
Mercantile/accrual system
Accounting entries are made when cash payment or receipt is due
Recording Process
Journal
Ledger
Trial balance
 Double Entry System

This system recognises that every transaction have a two–fold effect –

Dual aspect concept

Assets = Liabilities + Owners Equity

Eg. Mr. A introduced Rs. 10,000 as Capital in the business

Capital 10,000
Cash 10,000
 Debit and Credit

Indicates the side of the account where an item is recorded –

direction signal only
An account has two sides
When an amount is entered on the left-hand side of an account,
it means debit, and the account is said to be debited
When an amount is entered on the right-hand side of an
account, it means credit, and the account is said to be credited
 Rules of Debit and Credit
Modern Approach

Increase in assets and decrease in liabilities/Equity - Debit

Decrease in assets and increase in liabilities/Equity - Credit

Decrease in revenue and increase in Expenses - Debit

Increase in revenue and decrease in Expenses - Credit

 Journalising

Process of recording all daily transactions of

business in chronological order

Journal is a book in which transactions are recorded

for the first time
Journal is a book of original entry
 Format of Journal

Date Account Titles and Explanation LF (Ref) Debit Credit

 Format of Journal

Date Account Titles and Explanation LF (Ref) Debit Credit

2006 Salaries …………………………………………….. 10,000

Jan 1 Cash………………………………………………….. 10,000
Journal entries
Simple entry – one debit , one credit
Compound entry – more than one debit or credit
 Ledger

A book containing various accounts

A set of accounts

Process of transferring debit and credit items of the

journal to their respective accounts in the ledger is
called posting
 Account

Individual accounting record, of increases/decreases in a

specific asset, liability or stockholder’s equity item
Example cash account, accounts payable, accounts
receivables, sales salaries
The Account

 Record of increases and decreases

Account in a specific asset, liability, equity,
revenue, or expense item.
 Debit = “Left”
 Credit = “Right”

An account can be Account Name

illustrated in a T- Debit / Dr. Credit / Cr.
account form.

LO 1 Explain what an account is and how it helps in the recording process.

 Debits and Credits

If Debit amounts are greater than Credit amounts, the

account will have a debit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction #1 $10,000 $3,000 Transaction #2

Transaction #3 8,000

Balance $15,000

LO 2 Define debits and credits and explain their use

in recording business transactions.
 Debits and Credits

If Debit amounts are less than Credit amounts, the

account will have a credit balance.

Account Name
Debit / Dr. Credit / Cr.

Transaction #1 $10,000 $3,000 Transaction #2

8,000 Transaction #3

Balance $1,000

LO 2 Define debits and credits and explain their use

in recording business transactions.
Debits and Credits

Assets  Assets - Debits should exceed

Debit / Dr. Credit / Cr.
credits.

 Liabilities – Credits should

Normal Balance
exceed debits.
Chapter

 Normal balance is on the

3-23

increase side.
Liabilities
Debit / Dr. Credit / Cr.

Normal Balance

Chapter
3-24

LO 2 Define debits and credits and explain their use

in recording business transactions.
 Debits and Credits

Owner’s Equity  Owner’s investments and

Debit / Dr. Credit / Cr.
revenues increase owner’s equity
(credit).
Normal Balance
 Owner’s drawings and expenses
Chapter
3-25
decrease owner’s equity (debit).

Owner’s Capital Owner’s Drawing Helpful Hint Because

Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. revenues increase owner’s
equity, a revenue account
has the same debit/credit
rules as the Owner’s
Normal Balance Normal Balance
Capital account. Expenses
have the opposite effect.
Chapter Chapter
3-25 3-23

LO 2
Debits and Credits

Revenue  The purpose of earning revenues

Debit / Dr. Credit / Cr.
is to benefit the owner(s).

 The effect of debits and credits on

Normal Balance
revenue accounts is the same as
Chapter
3-26
their effect on Owner’s Capital.

 Expenses have the opposite

Expense
Debit / Dr. Credit / Cr.
effect: expenses decrease owner’s
equity.

Normal Balance

Chapter
3-27

LO 2 Define debits and credits and explain their use

in recording business transactions.
 Debits/Credits Rules
Liabilities
Debit / Dr. Credit / Cr.
Normal Normal
Balance Balance
Debit Credit Normal Balance

Assets Chapter
3-24

Owner’s Equity
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-23

Expense Chapter
3-25
Revenue
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.

Normal Balance
Normal Balance

Chapter
3-27 Chapter
3-26

LO 2
 Debits/Credits Rules

Balance Sheet Income Statement

Asset = Liability + Equity Revenue - Expense

Debit

Credit

LO 2 Define debits and credits and explain their use

in recording business transactions.
Preparation of Ledger
 Trial Balance
Statement containing various ledger balances on a particular date

Objects of preparing Trial Balance

Checking the arithmetical accuracy of the accounting entries

Forms the basis for preparing financial statements

Gives the summary of ledgers

Format of Trial Balance

Particulars Debit Credit

Amount amount
Preparation of Trial Balance

Assets ,Expenses and Losses – Debit Side

Liabilities, incomes and gains – Credit side
Goods Account:
Opening stock, purchase, Sales return – debit side
Sales, Purchase return – Credit side
 Accounting Standards

Written policy documents issued by expert accounting body or

Government or other regulatory body covering the aspects of
recognition, measurement, treatment, presentation and
disclosure of accounting transactions in the financial statements
Accounting Standards
Generally Accepted Accounting Principles (GAAP)
Standards that are generally accepted and universally practiced in accounting profession
Indicates how to report economic events

IASB ( International Accounting Standard Board)

An independent, private-sector body that develops and approves International Accounting Standards.
The IASB operates under the oversight of the International Accounting Standards Committee
Foundation (IASCF). The IASB was formed in 2001
Standards and Interpretations issued by IASB- International Financial Reporting Standards (IFRS)
ICAI (Institute of Charted Accountants of India)
Develops and approves Indian Accounting standards through ASB(Accounting Standard Board)
Function of Accounting Standards
Standardise diverse accounting policies with a view to eliminate, to the maximum possible
extent:
◦ The non-comparability of financial statements and thereby improving the reliability of finaanial
statements
◦ To provide a set of standard accounting policies, valuation norms, and disclosure requirements