Accounting - Introduction

!!! Greetings!!!
Welcome
Subject Financial Accounting

Topic Code FA-01
Chapter Accounting - Introduction
By
R Narayanaswamy
M Com, MBA, M Phil, CPFA & AFP (Investments)
Knowledge Initiator
Introduction - Preface
Why people do business?

To make money or in formal terms, to make Profits
So, what is the meaning of the term Profits?
Profits = Revenues - Expenses
Can you remember all the transactions done by all the
employees at different locations?
So, what is the relevance of Accounting?

Accounting - Definition
Accounting is an art of
recording, classifying and
summarizing in a significant
manner and in terms of
money, transactions and
events which are, in part, at
least, of a financial character
and interpreting the results
there of.
Functions of accounting
Identifying the financial
transactions and the
accounts involved in it.
Recording the identified
financial transactions in the
books of accounts as per the
said rules
Classifying the
transactions under
various heads
Presenting the
classified data in
understandable and
useful manner.
To make meaningful
judgement about the
financial condition and
profitability of the
business.
Accounting - Definition
Accounting is an art of
recording, classifying and
summarizing in a significant
manner and in terms of
money, transactions and
events which are, in part, at
least, of a financial character
and interpreting the results
there of.
Tools
Tools
Accounting Equation
Tools
Journal
Tools
Ledger
Tools
Trial Balance, Income

Statement and Balance
Sheet
Tools
Horizontal Analysis,
Vertical Analysis, Common
size statements, Ratio
analysis and Cash flow
analysis
Groups interested in accounting information
Owners
Managers
Security Analysts
Lenders
Creditors
Employees
Government
Customers
Competitors
Research Groups
Groups interested
As owners in accounting information
have invested
money, they need to know
the performance
Owners
Managers
Security Analysts
Lenders
Creditors
Employees
Government
Customers
Competitors
Research Groups
Groups interested
As managers in accounting information
drive the
organization, they need to
know the performance so
Owners
as to improve further
Managers
Security Analysts
Lenders
Creditors
Employees
Government
Customers
Competitors
Research Groups
Analysts need to Owners
suggest investments
Managers
to their clients
Security Analysts
Lenders
Creditors
Employees
Government
Customers
Competitors
Research Groups
Groups interested in
As they lend money to
accounting information
the business, need to be
interested whether they
Owners
will get the principal and Managers
interest back on time Security Analysts
Lenders
Creditors
Employees
Government
Customers
Competitors
Research Groups
The need for Owners
creditors to know is Managers
more or less similar Security Analysts
to lenders, but for a
Lenders
shorter time frame
Creditors
Employees
Government
Customers
Competitors
Research Groups
Owners
Employees need to Managers
know the accounting
Security Analysts
data, so that they can
know what to expect Lenders
from the organization Creditors
Employees
Government
Customers
Competitors
Research Groups
Owners
Managers
Government need to
Security Analysts
know so that they can
regulate the business Lenders
and also collect taxes Creditors
for the profits made Employees
Government
Customers
Competitors
Research Groups
Owners
Managers
Security Analysts
Lenders
Customers need to
Creditors
know, so that they
can decide on the Employees
long term association Government
Customers
Competitors
Research Groups
Owners
Managers
Security Analysts
Lenders
Competitors need to Creditors
know the accounting Employees
data so as to Government
understand their Customers
market position
Competitors
Research Groups
Owners
Managers
Security Analysts
Lenders
Creditors
The primary purpose of Employees
research groups is to Government
understand the
fundamental issues and Customers
develop detailed Competitors
knowledge
Research Groups
Accounting branches
Financial Cost
Accounting Accounting
Management
Accounting
Accounting branches
Financial accounting
To know the profit or loss and the
financial position of an organization.
Accounting branches
Cost accounting
To ascertain the cost
Accounting branches
Cost accounting
To ascertain the cost
Management accounting
To provide the management with
information taken from financial and
cost accounting, so as to facilitate
decision making
Understanding Business Organization
Manufacturing Merchandising
Organization Organization
Service
Organization
Business Organizations can be
Business organisations bring together
materials, technology, people and
money in order to satisfy the
customers needs and make profit
out of it.
Business Organisations can be
Business organisations bring
together materials, technology,
people and money in order to
satisfy the customers needs and
make profit out of it.
Manufacturing Organisations
they convert inputs into outputs
by applying processes. Product
has form and substance and the
goods are physically delivered.
materials, technology, people and
money in order to satisfy the customers
needs and make profit out of it.
Manufacturing Organisations they
convert inputs into outputs by applying
processes. Product has form and
substance and the goods are physically
delivered.
Merchandising (Trading) Organisations
the organisation just buys and sells the
products without adding any significant
value
materials, technology, people and money in
order to satisfy the customers needs and
make profit out of it.
Manufacturing Organisations they convert
inputs into outputs by applying processes.
Product has form and substance and the
goods are physically delivered.
Merchandising (Trading) Organisations the
organisation just buys and sells the products
without adding any significant value
Service Organisations the organisation gives
services, which is not tangible, to the clients.
The recipient can enjoy the service but not
transfer the same to another person.
GAAP
Generally Accepted Accounting Principles
It is a set of conventions, rules and
procedures, which define accepted
accounting practice
GAAP
accounting practice
Why general acceptance is required?
GAAP
accounting practice
So that, meaningful comparisons between
the firms past financial history and
financial information of other enterprises
can be done
GAAP
accounting practice
So that, meaningful comparisons between
the firms past financial history and
financial information of other enterprises
can be done
So let us learn the concepts and
conventions now.
Accounting concepts - assumptions
Entity concept
Dual aspect concept
Going concern concept
Accounting period concept
Objectivity concept
Money measurement concept
Cost concept
Matching concept
Revenue recognition concept
Accrual concept
Accounting concepts
Owner is different from
business. They are two
- assumptions
different entities
Entity concept
Dual aspect concept
Objectivity concept
Money measurement
concept
Cost concept
Matching concept
Accrual concept
Accounting
There are twoconcepts
aspects
in every transaction.
- assumptions
For every give, there
Entity concept
is a take
Dual aspect concept
Objectivity concept
Money measurement
concept
Cost concept
Matching concept
Accrual concept
We assume that the Entity concept
business will be going Dual aspect concept
on for ever
Objectivity concept
Money measurement
concept
Cost concept
Matching concept
Accrual concept
There is a time period
over which we need Entity concept
to do the assessment
Dual aspect concept
or performance
evaluation Going concern concept
Objectivity concept
Money measurement
concept
Cost concept
Matching concept
Accrual concept
Entity concept
Every transaction Dual aspect concept
should have a true Going concern concept
and fair proof Accounting period concept
Objectivity concept
Money measurement
concept
Cost concept
Matching concept
Accrual concept
Entity concept
Only those Dual aspect concept
transactions that can Going concern concept
be measured by
money will be Accounting period concept
recorded in Objectivity concept
accounting Money measurement
concept
Cost concept
Matching concept
Accrual concept
Entity concept
The transactions are Dual aspect concept
recorded at the original Going concern concept
cost at which it was Accounting period concept
incurred and it remains
Objectivity concept
the same in the data,
even when the market Money measurement
value differs concept
Cost concept
Matching concept
Accrual concept
Entity concept
Dual aspect concept
The income and expenses Objectivity concept
of the business should be
matched or compared for
Money measurement
the same time period, so concept
as to calculate the profits. Cost concept
Matching concept
Accrual concept
Entity concept
Dual aspect concept
The revenue should Accounting period concept
be recognised when Objectivity concept
the ownership passes Money measurement
on. Ownership is concept
assumed to pass on
when the physical
Cost concept
delivery takes place Matching concept
Accrual concept
Revenue Recognition An Example
June 1 A prospective client walks in for an enquiry
June 5 He places a huge order
June 8 You deliver
June 10 He gives you cash
When will you recognise this as a transaction?

Entity concept
Dual aspect concept
In accrual system of
accounting, we dont Objectivity concept
wait for the cash to Money measurement
come in or go out. If concept
business is eligible to Cost concept
receive or responsible Matching concept
to pay, it is recorded in
the accounting books Revenue recognition concept
Accrual concept
Accounting conventions - practices
Convention of materiality
Convention of
consistency
Convention of
conservatism
Convention of disclosure
Accounting conventions
Data is recorded
separately if it is material
- practices
enough, otherwise it can
be clubbed or combined
and recorded as a Convention of
common data
materiality
Convention of
consistency
Convention of
conservatism
Convention of
disclosure
In accounting, there are
areas where multiple ways
of calculations are
available. If we choose
one method, it should be Convention of
consistently followed
period after period
materiality
Convention of
consistency
Convention of
conservatism
Convention of
disclosure
It says, provide Convention of

for all possible materiality
losses, but not Convention of
for possible consistency
gains
Convention of
conservatism
Convention of
disclosure
Convention of Conservatism - Example
April 1- You sell goods worth Rs 10,000 to a person
living in your own street for a month credit.
April 1 to 15 you keep seeing him everyday.
April 16 to 23 You dont see him
April 24 checks with his neighbour, to know that he
has vacated his house without any information to
anyone
What will be your state of mind?
Will you call it as loss or probable loss?
Convention of
materiality
Disclose all the Convention of
transactions, consistency
never hide any. Convention of
conservatism
Convention of
disclosure
Types of business entities
Sole Proprietor ship

Partnership
Company - Private
Limited
Company Public
Limited
Limited Liability
Partnership
Types of business entities Sole Proprietor Ship
Members Only one Sole Proprietor

Management Control - Capital and Profits / Losses
fully taken by one owner
Liability is unlimited
Legal Registration No provision
Flexibility - Maximum
Types of business entities - Partnership
Members Minimum Two and Maximum
Hundred
Management Control - Capital and Profits / Losses
equally shared by all partners, unless otherwise
agreed upon
Liability is Joint and Several
Legal Registration Under Indian Partnership Act
Flexibility Depends on the partners
Types of business entities Private Limited company
Members Minimum Two and Maximum Two

Hundred
Management Control Capital is contributed as an
agreed amount by the share holders which may not
be same
Liability is limited to the extent of unpaid part of the
capital by share holders.
Legal Registration Under Indian Companies Act
Flexibility Comparatively less
Ownership cannot be traded outside
Types of business entities Public Limited Company
Members Minimum Seven and Maximum
Unlimited
Management Control Capital is contributed as an
agreed amount by the share holders which may not
be same
capital by share holders.
Legal Registration Under Indian Companies Act
Flexibility Comparatively less
Ownership can be traded outside
Types of business entities Limited Liability Partnership
Members Minimum Two and Maximum
Unlimited
Ideal for professional services
Management Control Capital and Profits / Losses
equally shared by all partners, unless otherwise
agreed upon. Partners can be individuals or
Corporates
capital by partners, except in case of fraud
Legal Registration Under Limited Liability
Partnership Act
Flexibility Depends upon the partners
Accounting equation
Assets = Liabilities + Owners equity

Accounting equation
What the
business
owns
Accounting equation
What the
business
Owes to
others
Accounting equation
What the
business
Owes to
owners
Accounting equation

Rs 100 cr Rs 40 cr Rs 60 cr
Accounting equation

Assets = Liabilities + Capital Drawings
Accounting equation

The amount invested by

the owners
Accounting equation

The amount drawn by

the owners out of the
capital invested by them
Accounting equation

Assets = Liabilities + Capital Drawings + Profit
Accounting equation

Excess of
Income over
expenses. It
belongs to
owners
Accounting equation

Assets = Liabilities + Capital Drawings + Income -
Expenses
Accounting equation

Expenses
Assets = Liabilities + Capital Drawings + Income
Expenses - Dividends
Accounting equation

The amount given to
owners as a share in
the profits
Expenses
Assets = Liabilities + Capital Drawings + Income
Expenses - Dividends
Format of an Account
Account Name
Debit side Credit side

Traditional classification of Accounts
Accounts representing
all real things in life
which we can really
see, feel, touch, etc.
All accounts
representing
expenses, losses,
incomes and gains
Alternatively, modern classification of accounts
What the
business
owns
What the
business owes to
outsiders
What the
business owes to
its owners
An increase in
assets resulting
from selling of
goods or providing
services
A decrease in assets
resulting from
selling of goods or
providing services
Owners account can be
Capital Drawings
Dividends
The amount
invested by
the owners
Capital Drawings
Dividends
The amount
drawn by the
owners
Capital Drawings
Dividends
The amount
Capital taken by the
Drawings
owners from the
profits of the
business
Dividends
Goods a/c can be
Purchases Sales
Goods
Purchases
Sales Returns
Returns
Money can be spent for
Goods (Resale)
Expenses
Assets (Usage)
(Consumption)
Drawings
Accounting Equation
Resources
What are an organizations resources called?

Accounting Equation
Resources = Sources
Assets
Cost of What are the

resources used sources of the
in the business assets?
Accounting Equation
Resources = Sources
Liabilities
Assets
Owners
Equity
Cost of Resources
resources used supplied by
in the business creditors and
owners
Business Transactions
a. Ram Charan deposits Rs 25,000 in a bank

account for Soft Corner.
ASSETS LIABILITIES
= OWNERS EQUITY
a. Ram Charan deposits Rs 25,000 in a bank

account for Soft Corner.
ASSETS LIABILITIES
Cash
25,000 = OWNERS EQUITY
a. Ram Charan commences Soft Corner by

investing Rs 25,000.
ASSETS LIABILITIES
Cash
Ram Charan, Capital

25,000
b. Soft Corner buys land for Rs 20,000.
ASSETS LIABILITIES
= OWNERS EQUITY
ASSETS LIABILITIES
Cash
(20,000)
= OWNERS EQUITY
ASSETS LIABILITIES
Cash
(20,000)
= OWNERS EQUITY
Land
20,000
c. Soft Corner buys supplies for Rs 1,350, agreeing to

pay the supplier in the near future.
ASSETS LIABILITIES
= OWNERS EQUITY

ASSETS LIABILITIES
Supplies

ASSETS LIABILITIES
Accounts Payable
1,350
Supplies
d. Soft Corner earns fees of Rs 7,500, receiving Cash &

Bank.
ASSETS LIABILITIES
= OWNERS EQUITY

Bank.
ASSETS LIABILITIES
Cash

Bank.
ASSETS LIABILITIES
Cash
Fees Earned 7,500

e. Soft Corner paid: wages, Rs 2,125; rent, Rs 800;

utilities, Rs 450; and miscellaneous, Rs 275.
ASSETS LIABILITIES
= OWNERS EQUITY
e. Soft Corner paid: wages, Rs 2,125; rent, Rs 800;

utilities, Rs 450; and miscellaneous, Rs 275.
ASSETS LIABILITIES
Cash
(3,650) = OWNERS EQUITY
e. Soft Corner paid: wages, Rs2,125; rent, Rs800;

utilities, Rs450; and miscellaneous, Rs275.
ASSETS LIABILITIES
Cash
Expenses
(3,650)
f. Soft Corner pays Rs950 to creditors on account.
ASSETS LIABILITIES
= OWNERS EQUITY
ASSETS LIABILITIES
Cash
(950) = OWNERS EQUITY
ASSETS LIABILITIES
Accounts Payable
(950)
Cash
g. At the end of the month, the cost of supplies on

hand is Rs550.
ASSETS LIABILITIES
= OWNERS EQUITY

hand is Rs550.
ASSETS LIABILITIES
Supplies

hand is Rs550.
ASSETS LIABILITIES
Supplies
Supplies Expense
(800)
h. Ram Charan withdraws Rs2,000 in Cash & Bank.
ASSETS LIABILITIES
= OWNERS EQUITY
ASSETS LIABILITIES
Cash
ASSETS LIABILITIES
Cash
Ram Charan, Drawing

(2,000)
Transaction Summary
ASSETS LIABILITIES
Cash 5,900 OWNERS EQUITY

Supplies 550 =
Land 20,000
Transaction Summary
ASSETS LIABILITIES
Accts. Payable400
Supplies 550 =
Land 20,000
Transaction Summary
ASSETS LIABILITIES
Accts. Payable 400
Supplies 550 = R. Charan, Capital 25,000
Land 20,000 R. Charan, Drawing (2,000)
Fees Earned 7,500
Wages Expense (2,125)
Rent Expense (800)
Supplies Expense (800)
Utilities Expense (450)
Misc. Expense (275)
Financial Statements
Income Statement
Statement of Owners Equity
Balance Sheet
Cash Flow Statement
Soft Corner
Income Statement
For the Month Ended November 30, 2002
Fees earned Rs7,500

Operating expenses:
Wages expense Rs2,125
Rent expense 800
Supplies expense 800
Utilities expense 450
Miscellaneous expense 275
Total operating expenses 4,450
Net income Rs3,050
Soft Corner
Income Statement
Fees earned Rs7,500

Operating expenses:
Rent expense 800
Net income Rs3,050
Soft Corner
Income Statement
Fees earned Rs7,500

Operating expenses:
Rent expense 800
Net income Rs3,050
Soft Corner
Income Statement
Fees earned Rs7,500

Operating expenses:
Rent expense 800
Net income Rs3,050
Soft Corner
Ram Charan, capital, November 1, 2002 Rs 0

Investment on November 1, 2002 Rs25,000
Net income for November 3,050
Rs28,050
Less withdrawals 2,000
Increase in owners equity 26,050
Ram Charan, capital, November 30, 2002 Rs26,050
Soft Corner

Rs28,050
Soft Corner

Rs28,050
Soft Corner

Rs28,050
Soft Corner

Rs28,050
Soft Corner
Balance Sheet
November 30, 2002
Assets
Cash Rs5,900
Supplies 550
Land 20,000
Total assets Rs26,450
Liabilities
Accounts payable Rs 400
Owners Equity
Ram Charan, capital 26,050
Total liabilities and
owners equity Rs26,450
Soft Corner
Balance Sheet
November 30, 2002
Assets
Cash Rs5,900
Supplies 550
Land 20,000
Liabilities
Owners Equity
Soft Corner
Balance Sheet
November 30, 2002
Assets
Cash Rs5,900
Supplies 550
Land 20,000
Liabilities
Owners Equity
Soft Corner
Balance Sheet
November 30, 2002
Assets
Cash Rs5,900
Supplies 550
Land 20,000
Liabilities
Owners Equity
Soft Corner
Statement of Cash Flows
Cash flows from operating activities:
Cash received from customers Rs 7,500
Deduct Cash payments for expenses
and payments to creditors 4,600
Net Cash flow from operating activities Rs 2,900
Cash flows from investing activities:
Cash payments for acquisition of land (20,000)
Cash flows from financing activities:
Cash received as owners investment Rs25,000
Deduct Cash withdrawal by owner 2,000
Net Cash flow from financing activities 23,000
Net Cash flow and Nov. 30, 2002
Cash balance Rs5,900
Happy Learning
Thank You

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!!! Greetings!!!

Subject Financial Accounting

Why people do business?

So, what is the relevance of Accounting?

Trial Balance, Income

When will you recognise this as a transaction?

It says, provide Convention of

Sole Proprietor ship

Members Only one Sole Proprietor

Members Minimum Two and Maximum Two

Assets = Liabilities + Owners equity

Assets = Liabilities + Owners equity

Assets = Liabilities + Owners equity

Assets = Liabilities + Owners equity

Assets = Liabilities + Owners equity

Assets = Liabilities + Owners equity

Assets = Liabilities + Owners equity

The amount invested by

Assets = Liabilities + Owners equity

The amount drawn by

Assets = Liabilities + Owners equity

Assets = Liabilities + Owners equity

Assets = Liabilities + Owners equity

Assets = Liabilities + Owners equity

Assets = Liabilities + Owners equity

Debit side Credit side

What are an organizations resources called?

Cost of What are the

a. Ram Charan deposits Rs 25,000 in a bank

a. Ram Charan deposits Rs 25,000 in a bank

a. Ram Charan commences Soft Corner by

Ram Charan, Capital

b. Soft Corner buys land for Rs 20,000.

b. Soft Corner buys land for Rs 20,000.

b. Soft Corner buys land for Rs 20,000.

c. Soft Corner buys supplies for Rs 1,350, agreeing to

c. Soft Corner buys supplies for Rs 1,350, agreeing to

c. Soft Corner buys supplies for Rs 1,350, agreeing to

d. Soft Corner earns fees of Rs 7,500, receiving Cash &

d. Soft Corner earns fees of Rs 7,500, receiving Cash &

d. Soft Corner earns fees of Rs 7,500, receiving Cash &

Fees Earned 7,500

e. Soft Corner paid: wages, Rs 2,125; rent, Rs 800;

e. Soft Corner paid: wages, Rs 2,125; rent, Rs 800;

e. Soft Corner paid: wages, Rs2,125; rent, Rs800;

f. Soft Corner pays Rs950 to creditors on account.

f. Soft Corner pays Rs950 to creditors on account.

f. Soft Corner pays Rs950 to creditors on account.

g. At the end of the month, the cost of supplies on

g. At the end of the month, the cost of supplies on

g. At the end of the month, the cost of supplies on

h. Ram Charan withdraws Rs2,000 in Cash & Bank.

h. Ram Charan withdraws Rs2,000 in Cash & Bank.

h. Ram Charan withdraws Rs2,000 in Cash & Bank.

Ram Charan, Drawing

Cash 5,900 OWNERS EQUITY

Fees earned Rs7,500

Fees earned Rs7,500

Fees earned Rs7,500

Fees earned Rs7,500

Ram Charan, capital, November 1, 2002 Rs 0

Ram Charan, capital, November 1, 2002 Rs 0

Ram Charan, capital, November 1, 2002 Rs 0