Introduction to AccountingBASIC CONCEPTS

Ayesha Khalil

It is the art of identifying, classifying, recording, summarizing and interpreting the business transaction of financial nature.

Accounting

Difference between Accountancy, Accounting & Accounts.

oAccountancy:- o It is the art and science of studying the accounting

and accounts of a business.

oAccounting:- o It is the art of identifying, classifying, recording,

summarizing and interpreting the business transaction of financial nature.

oAccounts:- oThis involves recording of transaction pertaining to

one person or thing under one head.

Book-keeping involves two steps:

book-keeping

Book-keeping is a proper and systematic keeping of books of accounts.

Book keeping

Identifying Recording

What is Accounting cycle?

identifying,

classifying

recording

summarizing

financial statements

.

Accounting cycle

.

Accounting concepts

oBusiness Entity Concept:-oBusiness is different from Business Owner

oGoing Concern Concept:-oBusiness continues over a period of time

oMatching Concept:-oClassification of transactions into income ,expense etc.

and matching them

oMoney Measurement:-oAll transactions in terms of money.

oHistorical concept:- oCost or market price whichever is less

journal

ledger

Trial balance

Financial statements

Source

documents

Terminologies of Accounting

oDebtors:- o It represents the group of persons or

parties to whom the goods have been sold on credit by the company. They owe to the company.

oCreditor:- o It represents the group of persons or

parties from whom the goods have been purchased on credit by the company. The company owes to them.

oProprietor:- oThe owner of the business is known

as the proprietor.

BusinessA set-up designed with a view to earn profits in called business.

Cont.oDrawings: o Amount or goods taken out or

withdrawn by the proprietor for personal use is called drawings.

o Sales: o Goods sold by the company

whether on cash basis or credit basis, they are in total called as sales.

o Purchases: o Goods bought by the company on

cash basis or credit basis, they are in total called as purchases.

oBad Debts:o The debtors who defaults in making

the payment for goods taken by him on credit are called as bad debts.

oEntry:o It is the systematic recording of the

business transaction in the books of accounts.

oAccounting Year: o Books of accounts are closed annually.

Every company records the transactions pertaining to one year of its working for the evaluation. The choice of accounting period (12 months) depends upon the company.

Fixed Assets

Liquid Assets

Intangible Assets

Floating Assets

Fictitious Assets

AssetsThe valuable things owned by the business is known as assets. They help in generating profits and can be expressed in terms of money.

ASSET•

When you start business you convert your money or borrowed money into business assets.

o It refers to financial resources available for use. If the source of cash is owner. For accounting purpose, it is called Capital or Equity.

First asset of a business is cash.CAPITAL

wealth in the form of money or other assets owned by a person or organization or available for a purpose such as starting a company or investing

capital

When money is put

into a business activity its

name will be capital

When capital

is converted

into business

activity, it is

converted

into assets.

Types of Assets• ASSET• Asset is every conversion of money which helps to earn lawful profit.

Assets Long Term Assets/Fixed Assets .Current Assets .Other Assets tangible Assets. Intangible Assets.• • LONG TERM ASSETS/FIXED ASSET• Such assets which life is

long.• Such assets are not consumed in a period of a year.• Land , building , plant and machinery are fixed assets.• Such assets can not easily be converted into cash.

• • 23. CURRENT ASSETS• The life of such assets is not more than a year.• Such asset can easily be converted into cash.• Cash, Account receivable , inventory, marketable securities.

• • 24. ACCOUNTS RECEIVABLE• Account receivable are also called debtors.• Suppose you have sold some goods on credit in November.• Money will be received after three months.• Your accounts are closed in December.• Such receivable money is called account

AssetsInventoryo Business raw material placed in the business where houseThe

goods produced in a factory are also placed in the where house. All material purchased and goods produced and placed in where house and named as inventory.• Work-in- process is also included in Inventory.

Marketable securitieso Usually business buys shares, debentures of other companies or

bonds issued by Govt. for earning profit.• Such shares , debentures or bonds are marketable and can be sold at any time.

cont.Receivableo if it is receivable from more

persons, it is called accounts receivable.

Prepaid expenseso Advance income tax paid.•

Advance sale tax paid. Payment made to a contractor but services yet to be acquired.

Other assets•o Patent.• Trade marks.•

Goodwill.

oPatents• o Rights for exclusive use of your

invention.• Right for using your new recipe.• It requires registration from registrar of patents.

oTrade mark•o It is name of your product. It is symbol

used on your product. It is any sign used by you for marketing your product.• It requires registration from registrar Trade Mark.

o Good will• o Good will is reputation of your

business which you earn over the years.• When you buy some reputed business, you pay goodwill.

Tangible assets The assets which can be touched. Land, building, cash, etc.Intangible assets Such assets can not be touché Goodwill Patent Trademarks

• .

capital.

It is the part of the wealth which is used for further production and thus capital consists of all current & fixed liabilities

Fixed

capital

• The amount invested in acquiring the fixed assets

Floating

capital

• The amount invested in buying assets with the intention of sales

Working capit

al

• The part of the capital available for meeting day-to day working of the business is known as working capital

Liabilities: These are the obligations or debts to be paid by the company in the future which can be measured in the terms of money. It is the proprietor’s and creditors claim against the assets of the business

Types of liabilities

Liability towards the

creditors

Creditors for goods

Creditors for loans

Creditors for expenses

Liability towards the

owner

• Goods: Items or articles purchased for sale by the business or for use in the manufacturing of certain other goods as raw material are called as goods.

• Purchase returns or Return outwards: When purchased goods are returned on account of any damage or they are not as per the specifications given at the time of placing order, these are termed as purchase return.

• Sales Returns or Returns Inwards: When the goods sold on credit are returned to the company on account of any damage or they are not as per the specifications given at the time of placing order, these are termed as purchase return.

• Stock: The unsold goods remaining on a particular date or during a particular period, is called stock. The stock in the beginning of the accounting year is called Opening Stock. The stock at the end of the accounting period is known as Closing Stock.

• Discount given to the customer on the invoice price in order to induce the buyer to purchase in large quantity. Trade discount is not recorded in Journal.

Trade Discount

• Discount given to the customer on the amount to be paid, in order to invoke prompt. Cash discount is not recorded in Journal.

Cash Discount

Transaction: Exchange or dealing of goods, money or services in the business is called transaction. Transactions can be cash or credit

Transactions can be cash or credit.Discount: Any concession or allowance granted to a customer is called as Discount.

.oInsolvent or Bankrupt:- o A businessman who is unable to pay his creditors and an order

has been issued by the court against him to sell-off his property in order to discharge his liabilities.

oDebit:- o An entry made in the debit column of the journal or account is

called as Debit.

oCredit:- o An entry made in the credit column of the journal or account is

called as Credit.

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