Jayanthi Iyer
AccountingNot a rocket technologyAs simple as adding and subtracting
What is Accounting?Language of business – serve as a
means of communication of matters relating to various aspects of business operations.
Accounting provides information
Forms of Business OrganizationSole proprietorshipPartnershipCompany
Private CompanyPublic Company- not listedPublic company – ListedLimited Liability Partnership
Users of accounting information
Owners and shareholdersManagersEmployeesProspective InvestorsLendersSecurity Analysts and advisersSuppliersCustomersGovernment and regulatory agencies
Information SystemInputsProcessesOutputsUsers
Financial StatementsBalance sheet – Which shows the
financial status of a company at a particular instant in time. It summarizes the resources of an enterprise [assets] and claims against these resources [liabilities]. Reveals what a company owns and what it owes.
Financial StatementsProfit and Loss Account [Income
Statement] This reports the results of the operation of an enterprise during the accounting period. Measures the economic performance of a company.
Financial StatementsStatement of cash flows – Outlines
where a company gets its cash and how it spends that cash.
Financial and Management Accounting
Financial Accounting – Consolidated information for external users
Management Accounting – Detailed information for internal users
Tax reporting – Separate statement according to tax laws
Accounting Concepts Separate Entity Concept Business is
distinct and separate from its owners.
Going Concern ConceptBusiness will continue for a fairly
long time or goes on for ever
Periodicity or Accounting PeriodLife of the business is divided into
artificial time periods for studying the results usually a year.
Money MeasurementAccounting records only monetary
transactions. Events or transactions which cannot be expressed in terms of money will have no place in accounting statements.
Cost concept All transactions are recorded at their
monetary cost of acquisition.
Dual Aspect ConceptEvery transaction has a dual effect.
At any given time economic resources belonging to a business is equal to the claims against those resources.
Dual AspectEconomic resources = Claims.
AssetsAssets are resources owned by the
enterprise from which future economic benefits are expected to flow to the enterprise.
What the enterprise ownsEconomic benefit- higher cash inflow
or lower cash outflow
ClaimsWho has the rights to the assets?
Who has the claim on the assets?
ClaimsOwner’s EquityLiability
LiabilitiesLiabilities are present obligations of
the enterprise to outsiders What the enterprise owes to others.The settlement of Liability is
expected to result in an outflow of economic resources.
Owners’ EquityEquity represents the owners’ claim
on the assets.Owner’s Equity is the residual
interest in the assets of the enterprise after deducting all its liabilities.
Accounting EquationEconomic resources = Claims.
Assets = Liabilities + Owner’s Equity.
Business ActivitiesService OrganizationMerchandising OrganizationManufacturing Organization
Balance sheet of Wonder Homes Services as on 1/4/2012LiabilitiesSanath Equity
100000
100000
Assets Cash 100000
100000
Balance sheet as on 2/4/2012Liabilities and
EquityOwner’s Equity 100000Loan Creditors
50000
150000
Assets Cash 150000
150000
Balance sheet as on 5/4/2012Liabilities and EquityOwner’s Equity 100000Loan Creditors 50000
150000
Assets Cash 10000Office Equipment 140000
150000
Balance sheet as on 8/4/2012Liabilities and EquityOwner’s Equity 100000Loan Creditors 50000Accounts Payable 20000
170000
Assets Cash 10000Office Equipment 140000Office furniture 20000
170000
Balance sheet as on 9/4/2012Liabilities and EquityOwner’s Equity 96000Loan Creditors 50000Accounts Payable 20000
166000
Assets Cash 6000Office Equipment 140000Office furniture 20000
166000
Balance sheet as on 11/4/2012Liabilities and
EquityOwner's equity
116000Loan Creditors
50000Accounts Payable
20000
186000
Assets Cash
26000Office Equipment
140000Office furniture
20000
186000
Balance sheet as on 15/4/2012Liabilities and
EquityOwner's equity
126000Loan Creditors
50000Accounts Payable
20000
196000
Assets Cash
36000Office Equipment
140000Office furniture
20000
196000
Balance sheet as on 18/4/2012Liabilities and
EquityOwner's equity
126000Loan Creditors
50000Accounts Payable
10000
186000
Assets Cash
26000Office Equipment
140000Office furniture
20000
186000
Balance sheet as on 24/4/2012Liabilities and
EquityOwner's equity
141000Loan Creditors
50000Accounts Payable
10000
201000
Assets Cash
26000Office Equipment
140000Office furniture
20000Accounts Receivable
15000
201000
Balance sheet as on 28/4/2012Liabilities and
EquityOwner's equity
128000Loan Creditors
50000Accounts Payable
10000
188000
Assets Cash
13000Office Equipment
140000Office furniture
20000Accounts Receivable
15000
188000
Balance sheet as on 30/4/2012Liabilities and
EquityOwner's equity
126000Loan Creditors
50000Accounts Payable
10000
186000
Assets Cash
11000Office Equipment
140000Office furniture
20000Accounts Receivable
15000
186000
Income Statement for the month of April 2012
RevenuesIncome from Consulting 45000 ExpensesAdvertisement 4000Salary 5000Rent 8000Total expenses 17000Net Profit 28000
Balance sheet as on 30/4/2012Liabilities and
EquityOwner's equity
124000Loan Creditors
50000Accounts Payable
10000
184000
Assets Cash
11000Office Equipment
138000Office furniture
20000Accounts Receivable
15000
184000
Income StatementRevenuesIncome from Consulting 45000 ExpensesAdvertisement 4000Salary 5000Rent 8000Depreciation 2000Total expenses 19000Net Profit
26000
Income StatementRevenuesIncome from Consulting 45000 ExpensesAdvertisement 4000Salary 5000Rent 8000Electricity exp 500Depreciation 2000Total expenses 19500Net Profit 25500
Balance sheet as on 30/4/2012Liabilities and
EquityOwner's equity
123500Loan Creditors
50000Accounts Payable
10000Electricity payable
500
184000
Assets Cash
11000Office Equipment
138000Office furniture
20000Accounts
Receivable15000
184000
Revenues Revenues are amounts earned from
customers for goods sold or services rendered.
Revenues result in assets coming into business for performing work/services.
Revenues increase Owner’s equity
ExpensesExpenses are costs of earning revenues.Sacrificies made to earn revenues.Expenses decrease Owner’s equity
Owners’ Equity Capital contributions/investments by the
owner(s)Withdrawals/ DividendRevenuesExpenses
Net Income or Net ProfitNet profit = Revenues – Expenses.
Retained EarningsDividends decrease Owner’s equity Retained Earnings = Net Profit – DividendRetained Earnings= Revenues-Expenses-Dividend
Owners’ EquityRetained Profits increases Owner’s
equityRevenues increase Owner’s equity,
expenses decrease Owner’s equity, dividends decrease Owner’s equity.
Withdrawal by the owner equity decreases owner’s equity and fresh capital brought in increases the same.
Other ConceptsMatching Concept – Expenses should be
recorded in the same accounting period in which the revenues were earned as a result of the expenses.
Realization Concept – States that the amount that is reasonably certain to be realized- that is , the customers are reasonably certain to pay should be recognized as revenue.
ConventionsConsistency – Accounting practices to remain
unchanged from period to period; necessary for the purpose of comparison; does not mean inflexibility.
Conservatism – Anticipate no profits but provide for all possible losses.
Full Disclosure – Accounting reports should be honestly prepared and sufficiently disclose information which is of material interest to the users.
Materiality – Attach importance to material details and ignore insignificant details.