FUNDAMENTAL OF

ACCOUNTING

COURSE OUTLINE

PURPOSE AND NATURE OF ACCOUNTING,

VARIOUS AREAS OF ACCOUNTING, FORM OF BUSINESS, G A A P, USERS OF ACCOUNTING, BUSINESS TRANSACTION, ACCOUNTING EQUATION,

COURSE OUTLINE

CHANGING IN FINANCIAL POSITION, DOUBLE ENTRY SYSTEM, JOURNAL, LEDGER, TRIAL BALANCE, ACCOUNTING CYCLE, MEASURING BUSSINESS INCOME

COURSE OUTLINE

ADJUSTMENT PROCESS, COMPLETION OF ACCOUNTING CYCLE, WORK SHEET, FINANCIAL STATEMENTS, ACCOUNTING FOR MERCHANDISES, BANK RECONCILIATION STATEMENT, DEPRECIATION METHODS,

COURSE OUTLINE

INVENTORIES ACCOUNTING METHODS, CASH FLOW STATEMENTS AND THEIR

CLASSIFICATION, etc.

ACCOUNTING BASIC

TERMONOLOGIES

ACCOUNTING: ACCOUNTING IS SPECIALISED

INFORMATION SYSTEM THAT PROVIDES ECONOMIC INFORMATION TO THE DIFFERENT GROUPS OF PEOPLE

BRANCHES OF ACCOUNTING

FINANCIAL ACCOUNTING

accounting is an art of recording’classifing and summarizing in terms of money' transaction and event of financial character and interpreting the results to different users

COST ACCOUNTING:is to ascertain the cost of product and help the management in the control of cost

MANAGEMENT ACCOUNTING: Which provides necessary

information to the management for discharging its functions. it enable the management to take decision and control activities

ACCOUNTING

FINANCIAL COST MANAGEMENT

BOOK-KEEPING:recording of business transaction in a systematic way

BUSINESS:any activity undertaken for the purpose of earning profit.

PROPRIETOR:the owner of concern, invest capital, time and attention, bear loss n enjoy profit.

CAPITAL:any thing n amount invest by the owner.

TRANSACTION

ANY DEALING BETWEEN TWO PERSON OR THINGS.

IT MAY BE FOR CASH IT MAY BE ON CREDIT

• DRAWINGS:good n cash taken away by the owner.

GOOD/MERCHANDIZ:all thing in which business deals

PURCHASES:Any thing purchase for re

sale purpose. ASSETS:

all the things own or possessed by the biz.

LIABILITIES:any debts due by biz.

SALES:goods are sold for profit.

RETURNS:if return by customer its sales return and if return to seller/supplier its purchases reutrn

REVENUE:Any income

generating by biz.• DISCOUNT:Any reduction in

price.• TRADE DISCOUNT:Any concession in

listed/printed price,at the spot.

CASH DISCOUNT:Deduction allowed by

the creditor to the debtor for prompt payment.

ALLOWANCE:Any reduction in price

due to defect.

DEBTORS:from whom the biz

receive. CREDITOR:To whom the biz pay. EXPENDITURE/COST:Any assets acquired. EXPENCES:Used/enjoyed benefit of

expenditure

STOCK/INVENTORY:Unsold goods. ACCOUNT:Brief record of

transaction; about person or things.

EQUITY:Part, share or

investment

ACCOUNTING CYCLETRANSACTION

JOURNAL

LEDGER

TRIAL BALANCE

PROFIT/LOSS STATMENT

BALANCE SHEET

GROUPSOF

ACCOUNTING USERS

OWNERMANAGEMENT

LABOUR/EMPLOYEECREDITORSSUPPLIER

CUSTOMERGOVERNMENT

G A A P

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(GAAP)

ACCOUNTING CONCEPTS:

• BIZNESS ENTITY • GOING CONCERN• MONEY

MEASUREMENT• COST• DUAL ASPECT• ACCOUNTING

PERIOD• MATCHING• REALISATION

ACCOUNTING CONVENTIONS:

DISCLOSURE MATERIALITY CONSISTENCY CONSERVATISM

ACCOUNTING CONCEPTS

BUSINESS ENTITY CONCEPT Business and business man/owner both are

separate entities accounting deals and concerned with only business, financial matters. in short we done our work of accounting with business point of view.

GOING CONCERN CONCEPT It shows that the business will exist for a long

time to come.

MONEY MEASUREMENT CONCEPT Accounting records only those transaction

which can be expressed in terms of money. transaction or event which can not be expressed in money do not place in books of accounts.

(HISTORICAL)COST CONCEPT recording of an assets at there purchasing

price.

ACCOUNTING PERIOD CONCEPT The life of the business is divided into equal

segments, for studying the results after each segments.

The time/duration of business period is twelve(12)months or a year.

Matching concept

Compare business expense of a particular period with its relevant period’s revenue.

Match the expenses with revenue

REALISATION CONCEPT

Record the revenue at the time of delivering of product to the customer.

DUAL ASPECT CONCEPT

Every transaction has two aspect. One what benefit business is receiving and

other what benefit business is giving.

ACCOUNTING CONVENTIONS

CONVENTION OF DISCLOSURE Disclose all the significant information. All the material information is clearly

show/disclose, which are in the interest of its users.

CONVENTION OF MATERIALITY Relevant importance of an item or event. Simply, expensive transaction have place as

well as relatively important one.

CONVENTION OF CONSISTENCY The accounting practice remain unchanged

from one year to another.

CONVENTION OF CONSERVATISM

CAUTION APPROACH POLICY OF “PLAY SAFE” IGNORE ANTICIPATED PROFIT AND

ACCOUNT FOR ALL POSSIBLE LOSSES

BASIS OF ACCOUNTING

CASH BASIS OF ACCOUNTING

Its a system in which entries/recording are made only when cash/cheque is received or paid.

ACCRUALS BASIS OF ACCOUNTING:

It’s a system in which entries are made when they occur.

FINANCIAL REPORTING PROCESS

Provide information for; Decision making Sources and resources Financial performance In and out flow of cash

KIND OF FINANCIAL STATMENTS BALANCE SHEET INCOME STATEMENT CASH FLOW STATEMENT CHANGE IN EQUITY STATEMENTS NOTES

Most businesses prepare the following financial statements to report accounting information:

1. Income Statement2. Balance Sheet3. Statement of Cash Flows4. Statement of Stockholders’ Equity5. Statement of Retained Earnings

Overview of Financial StatementsOverview of Financial Statements

A Balance Sheet (Statement of Financial Condition) identifies a company’s assets and claims to those assets by creditors and

owners at a specific date.(A = L + SE) (a snapshot)

Overview of Financial StatementsOverview of Financial Statements

Company XYZZBalance Sheet

At December 31, 2006AssetsCurrent assets:

Cash $ 12,600Accounts receivable 9,600Merchandise inventory 22,000Supplies 800Prepaid rent 1,000

Total current assets $ 46,000Long-term (Fixed) Assets:Property and equipment, at cost 300,000

Less Accumulated depreciation (60,000)Total Long-term (Fixed) Assets $240,000Total assets $286,000

ContinuedContinued

Liabilities and Stockholders’ EquityCurrent liabilities:

Accounts payable $ 8,500Unearned revenue 3,800Interest payable 700Notes payable, current portion 4,000

Total current liabilities $ 17,000Long-term liabilities:Notes payable, long-term 80,000Total liabilities $ 97,000Stockholders’ equity:

Common stock 150,000Retained earnings 39,000

Total stockholders’ equity $189,000Total liabilities and stockholders’ equity $286,000

BALANCE SHEET A lists of ASSETS,

LIABILITY and OWNER’S EQUITY of bizness as of a specific date,usually at the close of the last day of a month or year.

Any properties & possessions of the business.

CURRENT ASSETS:whose benefits are for/in one year.e.g.cash,bank,A/R,B/R,N/R,STOCK etc.

FIXED ASSETS:whose benefits are for more than one year.e.g. plant,machinery,furniture,fixture,fittings,vehicles,building,land etc.

KINDS OF FIXED ASSETS

TANGIBLE ASSETS:THOSE WHICH HAVE

PHYSICAL EXISTENCE,PROOF WITH FIVE SENCES.

INTANGIBLE ASSETS:

THOSE WHICH HAVE NO PHYSICAL EXISTANCE,e.g.goodwill,patents,right,trademark,copy right etc.

LIABILITIES

Any debts and obligation of the business.

CURRENT LIABILITIES:

FOR ONE YEAR;e.g.credit,B/P,N/P,creditors,b.o.d etc.

FIXED LIABILITIES:FOR MORE THAN ONE

YEAR.e.g.loan,mortgage,capital.etc.

INCOME STATMENT

A summary of the REVENUE and EXPENSES of a biz. For a specific period of time,such a month or a year.

The Income Statement (Statement of Earnings) reports revenues and expenses for an accounting period

as a means of determining how well a company has performed in

generating profits for its owners.

Overview of Financial StatementsOverview of Financial Statements

Company XYZZIncome Statement

For the Year Ended December 31, 2006Sales revenue $700,500Cost of goods sold (450,200)Gross profit 250,300

Depreciation Expense (60,000) Selling, general, & administrative exp. (90,300) Operating income 100,000

Interest expense (5,000)Pretax income 95,000Income taxes (40% tax rate) (38,000)Net income $ 57,000Earnings per shareAverage number of common shares 4,000

$ 14.25

STATEMENT OF CASH FLOW A summary of CASH RECIEPT and CASH

PAYMENTS,i.e.operating,investing and financing activities.of business for specific date,month or a year.

STATEMENT OF OWNER’S EQUITY A summary of the changes in owner's equity

of a biz. That have occurred during a specific period of time,month or a year.

NOTES

ANY DETAIL OR EXPLATION OF ANY ACCOUNT OR ITEMS ARE DENOTED WITH NUMBERS IN ANNUAL REPORT,IT IS QUALITATIVE DATA.

Assets = LiabilitiesStock-

holders’ Equity

+

The Financial Obligations or Debts of a Business

The Basic Accounting EquationThe Basic Accounting Equation

Economic Resources Owned by a Business

Owners’ Claims on the Assets of a Business

ACCOUNTING EQUATION

Like balance sheet but in form of equation. RESOURCES = SOURCES ASSETS = EQUTIES(LIABILITIES) ASSETS = LIABILITIES + CAPITAL

A = L + O

DIFFERENT PROCEDURE FOR ACCOUNTING EQUATION A = L + O L = A - O O = A - L EXPESES ARE ALWAYS LESS IN

OWNER’S EQUITY REVENUE ARE ALAYS ADD IN OWNER’S

EQUITY

Single Entry Book-Keeping In single entry book keeping system, as is clear from the name,

only one aspect of the transaction is recorded. This actually is not a system but is a procedure by which small

business concerns, like retailers and small shopkeepers, keep record of their sale / income.

In this system there are usually two to three registers “Khata”. In one register cash received from customers is recorded whereas the other one is a person-wise record of goods sold on credit “Udhar Khata”. There may or may not be a register of suppliers to whom money is payable.

Which means that only one aspect of transaction i.e. either cash receipt or the fact that money is receivable from someone is recorded.

Double Entry Book-Keeping The concept of double entry is based on the fact that every

transaction has two aspects i.e. receiving a benefit and giving a benefit.

The accounting system that records both the aspects of transaction in the same books of accounts is called double entry system.

The account that receives the benefit is debited and the account that provides the benefit is credited.

‘Debit’ and ‘Credit’ are denoted by ‘Dr’ and ‘Cr’ respectively. The ultimate result of the system is that for every Debit (Dr) there

is an equal Credit (Cr).

HISTORY OF Dr. AND Cr. Debit and credit are formal bookkeeping and

accounting terms that have opposite meanings and come from Latin. Debit comes from debere, which means "to owe". The Latin debitum means "debt". Credit comes from the Latin word credere, which means "to believe".

It is more common to use the terms in the plural, Debits and Credits.

DEBIT is abbreviated as Dr., while credit is abbreviated as Cr

Debit and Credit But we can develop an understanding as to what does

these terms stand for.DEBIT It signifies the receiving of benefit. In simple words

it is the left hand side.CREDIT It signifies the providing of a benefit. In simple

words it is the right hand side.Debit and Credit will be explained in details and with examples in our future discussions.

Basic Principle of Double EntryWe can devise the basic principle of double

entry book-keeping from our discussion to this point.

“Every Debit has a Credit” which means that “All Debits are always equal to All Credits”.

Account

An accounting system keeps separate record of each item like assets, liabilities, etc. For example a separate record is kept for cash that shows increase and decrease in it.

This record that summarizes movement in an individual item is called an Account.

Classification of Accounts We have to date studied following classification of

accounts: Assets, Liabilities, Income, Expenses

Expenses can be further divided into capital and revenue expenses.

We have already studied about these classifications in different lectures but to refresh your memory we will gather them at one place.

Assets, LiabilitiesASSETS Assets are the properties and possessions of the

business.LIABILITIES Liabilities are the debts and obligations of the

business. Liability is the obligation of the business to provide a

benefit or asset on a future date.

Asset is a right to receive and liability an obligation to pay, therefore these are opposite to each other.

Rules of Debit and Credit

Any account that obtains a benefit is Debit.OR

Anything that will provide benefit to the business is Debit.

Both these statements may look different but in fact if we consider that whenever an account benefits as a result of a transaction it will have to return that benefit to the business then both the statements will look like different sides of the same picture.

Rules of Debit and Credit

For creditAny account that provides a benefit is Credit.

ORAnything to which the business has a responsibility to return a benefit in future is Credit.

As explained in the case of Debit, whenever an account provides benefit to the business the business will have a responsibility to return that benefit at some time in future and so it is Credit.

Rules of Debit & Credit for Assets Similarly we have established that whenever a business transfers a value / benefit to an account and as a result creates some thing that will provide future benefit; the ‘thing’ is termed as Asset. When an asset is created or purchased, value /

benefit is transferred to that account so it is Debitedi. Increase in Asset is Debit

if the asset is sold, which is termed as disposing off, Therefore, the asset account is debit

ii. Decrease in Asset is Credit

Rules of Debit & Credit for Liabilities

When a liability is created the benefit is provided to business by that account so it is Credited

iii. Increase in Liability is Credit When the business returns the benefit or repays

the liability, the liability account benefits form the business so it is Debited

iv.Decrease in Liability is Debit

Rules of Debit & Credit for Expenses

the benefit from expenses is for a short run. Therefore Expenditure is just like Asset but for

a short run. Now we can lay down our rule for Expenditure:

i. Increase in Expenditure is Debit Reversing the above situation if return any item that

we had purchased we will receive cash in return. Cash account will receive benefit from that Expenditure account. Therefore Expenditure account will be credited

ii. Decrease in Expenditure is Credit

Rules of Debit and Credit for Income/Capital Income accounts are exactly opposite to

expense accounts just as liabilities are opposite to that of assets.

Therefore using the same principle we can draw our rules of Debit and Credit for Income

iii. Increase in Income is Creditiv.Decrease in Income is Debit

NORMAL BALANCES

DEBIT FOR ASSETS AND EXPENSES

CREDIT FOR INCOME,CAPITAL AND LIABILITY