AC Module 1

Introduction to Accounting
- Thangjam Ravichandra Asst. Professor IASMS
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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The Need for Accounting

Managers, investors, and other internal groups want the answers to two important questions: How well did the organization perform?
Where does the organization stand?

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Accountants answer these questions with three major financial statements: Income statement Statement of cash flows
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 15 - 3
Balance sheet

A transaction is any event that affects the financial position of an organization and requires recording.
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Accounting
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Objectives of Accounting
To ascertain whether the business operations have been profitable or not To ascertain the financial position of the business To generate information
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Functions of Accounting
1. Systematic record of business transactions 2. Protecting the property of the business 3. Communicating results to interested parties 4. Compliance with legal requirement
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Who uses accounting information ?

Owners Managers Investors (including potential)
Analysts on their behalf Creditors (including potential) Government (tax assessment) Regulators Customers Employees Public & Research Scholar
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Branches of Accounting
Financial Accounting
Cost Accounting
Management Accounting
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CLASSIFICATION OF ACCOUNTS
ACCOUNTS
PERSONAL ACCOUNTS
IMPERSONAL ACCOUNTS
REAL ACCOUNTS
NOMINAL ACCOUNTS
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PERSONAL ACCOUNTS
Accounts in the name of persons are known as personal accounts.
Eg: Babu A/C, Babu & Co. A/C, Outstanding Salaries A/C, etc.
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REAL ACCOUNTS
These are accounts of assets or properties. Assets may be tangible or intangible. Real accounts are impersonal which are tangible or intangible in nature.
Eg:- Cash a/c, Building a/c, etc are Real Accounts related to things which we can feel, see and touch. Goodwill a/c, Patent a/c, etc Real Accounts which are of intangible in nature.
NOMINAL ACCOUNTS
These accounts are impersonal, but invisible and intangible. Nominal accounts are related to those things which we can feel, but can not see and touch. All expenses and losses and all incomes and gains fall in this category.
Eg:- Salaries A/C, Rent A/C, Wages A/C, Interest Received A/C, Commission Received A/C, Discount A/C, etc.
Lets Start Then.. Huh?

1. Drawings A/c 2. Bank A/c 3. Cash A/c 4. Discount A/c 5. Patent A/c 6. Goodwill A/c 7. Salaries A/c 8. Capital A/c 9. Machinery A/c 10.Purchases A/c : Personal : Personal : Real : Nominal : Real : Real : Nominal : Personal : Real : Real
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RULES FOR DEBIT AND CREDIT

Personal Account Debit the Receiver
Credit the Giver Debit what comes in Real Accounts Credit what goes out Debit all Expenses and Losses
Nominal Accounts
Credit all Incomes and Gains

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Steps for finding the debit and credit aspects of a particular transaction
Find out the two accounts involved in the
transaction. Check whether it belongs to Personal, Real or Nominal account. Apply the debit and credit rules for the two accounts.
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Exercise
Started Business with Rs 50,000 Purchased Furniture for Rs 1000 from Pankaj Goods purchased for cash Rs 20,000 Goods sold to Ram for Rs 5000 on credit Paid salaries to staff Rs 1800 Goods worth Rs 500 returned by Ram Rs 1000 Commission received
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Accounting Equation
Assets are economic resources that are expected to benefit future activities of the organization. Liabilities are the entitys economic obligations to nonowners. Owners equity is the excess of the assets over the liabilities.
Double Entry Accounting Equation

Initial investment by owners: $100,000 cash
Acquisition of inventory: $75,000 cash

Acquisition of inventory on open account: $35,000 Merchandise costing $100,000 was sold on open account for $120,000.
Balancing of Accounting Equation

Assets = Stockholders Liabilities + equity
1) 2)
Cash Cash Inventory 3) Inventory 4a) Receivable 4b) Cost Subtotal
+100,000 75,000 + 75,000 + 35,000 + 35,000 +120,000 100,000 +155,000 + 35,000
+100,000
+120,000 100,000 +120,000
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Exercise
Cash collections of accounts receivable: $15,000
Cash payments of accounts payable: $20,000

On March 1, paid $3,000 cash for store rent for March, April, and May. Rent is $1,000 per month.
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King Hardware Transactions

Assets = Stockholders Liabilities + equity
5) 6) 7)
Cash Receivable Cash Cash Prepaid
Total Totals (1-4)
+ 15,000 15,000 20,000 20,000 3,000 + 3,000 20,000 20,000 +155,000 + 35,000 134,000
+120,000
134,000
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Revenues and Expenses

Revenues are increases in ownership claims arising from the delivery of goods or services. Expenses are decreases in ownership claims arising from delivering goods or services or using up assets.
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The Analytical Power of the Balance Sheet Equation

The balance sheet equation can highlight the link between the income statement and balance sheet. Assets (A) = Liabilities (L) + Stockholders equity (SE)
A = L + Paid-in capital + Retained income

A = L + Paid-in capital + Revenue Expenses
Accounting Concepts
Business Entity Concept Money Measurement Concept
Cost Concept
Going Concern Concept Dual Aspect Concept Realization Concept Accounting Period Concept Matching Objective Evidence Accrual
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Accounting Conventions
Convention of Consistency Convention of Disclosure
Convention of Conservation
Convention of Materiality
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Fundamental Accounting Assumptions

Going Concern Consistency Accrual Disclosure of Accounting Policies as per AS1 :
All significant accounting policies The disclosure should form part of the financial statement Any change in the accounting policies which has material effect should be disclosed If the fundamental accounting assumptions viz, Going concern, Consistency and Accrual are followed in financial statement, specific disclosure is not required. Otherwise, the fact should be disclosed.
Recording Business Transactions
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Steps in The Accounting Cycle
Analyze source documents.
Journalize transactions in the general journal.
Post entries to the accounts in the general ledger.
Prepare a trial balance.
Prepare financial statements.

Recording Transactions
All transactions are recorded in the General Journal.
Each transaction always affects at least two different accounts. One account has a debit effect. The second account has a credit effect. This methodology was named double entry accounting by whom? - Luco Pacioli (1494)
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General Journal Page

GENERAL JOURNAL
Page:
Date
Description
PR
Debit
Credit
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Journal Entries
Example 1
On January 1, 19X7, Caldwell Company borrows $10,000 from the bank.

Prepare the appropriate general journal entry for the above transaction.
Journal Entries
Solution 1
Two accounts are affected:

Cash is increased by $10,000. Notes Payable is increased by $10,000.
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Journal Entries
Solution 1

Date
JOURNAL Cash isGENERAL increased by $10,000. Page: Notes Payable is increased byDebit $10,000. Description PR Credit
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Journal Entries
Solution 1

Date
JOURNAL Cash isGENERAL increased by $10,000. Page: Notes Payable is increased byDebit $10,000. Description PR Credit
1-Jan
Cash Notes Payable to record loan from bank
100 201
10,000 10,000
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Journal Entries
Solution 1
Typically, accounts are numbered. The account numbers are used as references posting to theare affected: Twofor accounts JOURNAL General Ledger. on CashMore isGENERAL increased by $10,000. Page: accountNotes numbers will come Payable is increased byDebit $10,000. Date Description PR Credit later. 1-Jan Cash 100 10,000
Notes Payable to record loan from bank 201 10,000
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Journal Entries
Example 2
On January 15, 19X7, Caldwell Company purchases a truck for $19,500 cash. Prepare the appropriate journal entry for the above transaction.
Journal Entries
Solution 2

Trucks is increased by $19,500. Cash is decreased by $19,500.
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Journal Entries
Solution 2

Date
GENERAL JOURNAL Trucks is increased by $19,500. Page: Cash is decreased by $19,500. Description PR Debit
1
Credit
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Journal Entries
Solution 2

Date
GENERAL JOURNAL Trucks is increased by $19,500. Page: Cash is decreased by $19,500. Description PR Debit
1
Credit
15-Jan
Trucks Cash to record purchase of truck
150 100
19,500 19,500
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Journal Entries
Example 3
On January 20, 19X7, Caldwell Co. pays the $400 electric bill for January. Prepare the appropriate journal entry for the above transaction.
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Journal Entries
Solution 3

Utility Expense is increased by $400. Cash is decreased by $400.
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Journal Entries
Solution 3

Date
GENERAL JOURNAL Utility Expense is increased by $400. Page: Cash is decreased PR by $400. Description Debit Credit
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Journal Entries
Solution 3

Date
GENERAL JOURNAL Utility Expense is increased by $400. Page: Cash is decreased PR by $400. Description Debit Credit
20-Jan
Utility Expense Cash to record payment of January electric bill
511 100
400 400
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Posting to the GL
Example
GENERAL JOURNAL
Page:
1 Credit
Date
Description
PR
Debit
1-Jan Cash Notes Payable to record loan from bank
10,000 10,000
Start with the journal entry from the General Journal.

Posting to the GL
Example
Date
Next, find the appropriate page Page:in the General Description Ledger for Cash.PR Debit
10,000
GENERAL JOURNAL
1 Credit
1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: CASH
Date Description PR
10,000
ACCOUNT No.
Debit Credit
100
Balance
Beginning Balance
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Posting to the GL
Example
GENERAL JOURNAL Post the account reference number. Page: Date Description PR Debit Credit 1
Date Description PR
100
10,000 10,000
ACCOUNT No.
Debit Credit
100
Balance
Beginning Balance
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Posting to the GL
Example
GENERAL JOURNAL
Page:
1 Credit
Date
Description
PR
Debit
Date Description PR
100
10,000 10,000
ACCOUNT No.
Debit Credit
100
Balance
Beginning Balance 1-Jan Loan
G1
0 10,000
Post the transaction info to the GL.

Posting to the GL
Example
GENERAL JOURNAL
Page:
1 Credit
Date
Description
PR
Debit
Date Description PR
100
10,000 10,000
ACCOUNT No.
Debit Credit
100
Balance
G1
0 10,000
0 10,000
Update the General Ledger balance.

Posting to the GL
Example
Date
Next, find the Notes PayablePage: page in the General Ledger. Description PR Debit
100 10,000
GENERAL JOURNAL
1 Credit
1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: Notes Payable
Date Description PR
10,000
ACCOUNT No.
Debit Credit
201
Balance
Beginning Balance
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Posting to the GL
Example
GENERAL JOURNAL Post the account reference number. Page: Date Description PR Debit Credit 1
Date Description PR
100 201
10,000 10,000
ACCOUNT No.
Debit Credit
201
Balance
Beginning Balance
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Posting to the GL
Example
GENERAL JOURNAL
Page:
1 Credit
Date
Description
PR
Debit
Date Description PR
100 201
10,000 10,000
ACCOUNT No.
Debit Credit
201
Balance
G1
0 10,000
Post the transaction info to the GL.

Posting to the GL
Example
GENERAL JOURNAL
Page:
1 Credit
Date
Description
PR
Debit
Date Description PR
100 201
10,000 10,000
ACCOUNT No.
Debit Credit
201
Balance
G1
0 10,000
0 10,000

Posting to the GL
Example
Examine the next journal entry.
Date Description
GENERAL JOURNAL
Page:
PR
Debit
Credit
15-Jan Trucks Cash to record purchase of truck ACCOUNT NAME: CASH

Date Description PR
9,500 9,500
ACCOUNT No.
Debit Credit
100
Balance
Beginning Balance 1-Jan Loan from bank
G1
0 10,000
0 10,000
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Posting to the GL
Example
Record the account reference.
Date Description
GENERAL JOURNAL
Page:
PR
Debit
Credit

Date Description PR
9,500 100 9,500
ACCOUNT No.
Debit Credit
100
Balance
Beginning Balance 1-Jan Loan from bank
G1
0 10,000
0 10,000
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Posting to the GL
Example
GENERAL JOURNAL
Page:
Date
Description
PR
Debit
Credit

Date Description PR
9,500 100 9,500
ACCOUNT No.
Debit Credit
100
Balance
Beginning Balance 1-Jan Loan from bank 15-Jan Purchase of truck
G1 G3
0 10,000 9,500
0 10,000
Post the entry to the GL.

Posting to the GL
Example
GENERAL JOURNAL
Page:
Date
Description
PR
Debit
Credit

Date Description PR
9,500 100 9,500
ACCOUNT No.
Debit Credit
100
Balance
Beginning Balance 1-Jan Loan from bank 15-Jan Purchase of truck
G1 G3
0 10,000 9,500
0 10,000 500

Illustrations Journal, Ledger and Trial Balance

Page 33-44
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Assignments ( for internals)

1. GAAP and Accounting Environment 2. Role of Accounting in Capital Markets and Corporate Governance 3. Frauds done by Accountant with a Case
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Introduction to Accounting

- Thangjam Ravichandra Asst. Professor IASMS

The Need for Accounting

Where does the organization stand?

The Need for Accounting

The Need for Accounting

Who uses accounting information ?

Lets Start Then.. Huh?

RULES FOR DEBIT AND CREDIT

Credit all Incomes and Gains

Double Entry Accounting Equation

Acquisition of inventory: $75,000 cash

Balancing of Accounting Equation

Cash Cash Inventory 3) Inventory 4a) Receivable 4b) Cost Subtotal

+100,000 75,000 + 75,000 + 35,000 + 35,000 +120,000 100,000 +155,000 + 35,000

+120,000 100,000 +120,000

Cash payments of accounts payable: $20,000

King Hardware Transactions

Cash Receivable Cash Cash Prepaid

Total Totals (1-4)

Revenues and Expenses

The Analytical Power of the Balance Sheet Equation

A = L + Paid-in capital + Retained income

Fundamental Accounting Assumptions

Recording Business Transactions

Steps in The Accounting Cycle

Analyze source documents.

Journalize transactions in the general journal.

Post entries to the accounts in the general ledger.

Prepare a trial balance.

Prepare financial statements.

General Journal Page

On January 1, 19X7, Caldwell Company borrows $10,000 from the bank.

Two accounts are affected:

Two accounts are affected:

Two accounts are affected:

Cash Notes Payable to record loan from bank

Two accounts are affected:

Two accounts are affected:

Two accounts are affected:

Trucks Cash to record purchase of truck

Two accounts are affected:

Two accounts are affected:

Two accounts are affected:

Utility Expense Cash to record payment of January electric bill

1-Jan Cash Notes Payable to record loan from bank

Start with the journal entry from the General Journal.

Beginning Balance 1-Jan Loan

Post the transaction info to the GL.

Beginning Balance 1-Jan Loan

Update the General Ledger balance.

Beginning Balance 1-Jan Loan

Post the transaction info to the GL.

Beginning Balance 1-Jan Loan

Update the General Ledger balance.

15-Jan Trucks Cash to record purchase of truck ACCOUNT NAME: CASH

Beginning Balance 1-Jan Loan from bank

15-Jan Trucks Cash to record purchase of truck ACCOUNT NAME: CASH

9,500 100 9,500

Beginning Balance 1-Jan Loan from bank

15-Jan Trucks Cash to record purchase of truck ACCOUNT NAME: CASH

9,500 100 9,500

Beginning Balance 1-Jan Loan from bank 15-Jan Purchase of truck