AMITY GLOBAL

BUSINESS SCHOOL Noida

• Accounting - a process of identifying,

recording, summarizing, and reporting
economic information to decision makers in
the form of financial statements
• Financial accounting - focuses on the specific
needs of decision makers external to the
organization, such as stockholders, suppliers,
banks, and government agencies
AMITY GLOBAL
BUSINESS SCHOOL Noida
The Nature of Accounting
• The accounting system is a series of steps
performed to analyze, record, quantify,
accumulate, summarize, classify, report, and
interpret economic events and their effects
on an organization and to prepare the
financial statements.
AMITY GLOBAL
BUSINESS SCHOOL Noida
The Nature of Accounting
• Accounting systems are designed to meet
the needs of the decisions makers who
use the financial information.
• Every business has some sort of
accounting system.
– These accounting systems may be very
complex or very simple, but the real value of
any accounting system lies in the information
that the system provides.
 Accounting
AMITY GLOBAL as an Aid to
BUSINESS SCHOOL Noida
Decision Making
• Accounting information is useful to anyone
who makes decisions that have economic
results.
• Managers want to know if a new product will be
profitable.
• Owners want to know which employees are productive.
• Investors want to know if a company is a good
investment.
• Creditors want to know if they should extend credit,
how much to extend, and for how long.
• Government regulators want to know if financial
statements conform to requirements.
 Accounting
AMITY GLOBAL
BUSINESS SCHOOL
as an Aid to Noida
Decision Making
• Fundamental relationships in the decision-
making process:

Accountant’s
Financial
Event analysis & Users
Statements
recording
 Financial
AMITY GLOBAL
BUSINESS SCHOOL
and Management Noida
Accounting
• The major distinction between financial
and management accounting is the users
of the information.
– Financial accounting serves external users.
– Management accounting serves internal
users, such as top executives, management,
and administrators within
organizations.
 Financial
AMITY GLOBAL
BUSINESS SCHOOL
and Management Noida
Accounting
The primary questions about an
organization’s success that decision makers
want to know are:

What is the financial picture of the

organization on a given day?

How well did the organization do during a

given period?
 Financial
AMITY GLOBAL
BUSINESS SCHOOL
and Management Noida
Accounting
Accountants answer these primary questions
with three major financial statements.
• Balance Sheet - financial picture on a given
day
• Income Statement - performance over a
given period
• Statement of Cash Flows - performance over
a given period
 Financial
AMITY GLOBAL
BUSINESS SCHOOL
and Management Noida
Accounting
• Annual report - a document prepared by
management and distributed to current
and potential investors to inform them
about the company’s past performance
and future prospects.
– The annual report is one of the most common
sources of financial information used by
investors and managers.
 Financial
AMITY GLOBAL
BUSINESS SCHOOL
and Management Noida
Accounting
• The annual report usually includes:
– a letter from corporate management
– a discussion and analysis of recent economic
events by management
– footnotes that explain many elements of the
financial statements in more detail
– the report of the independent auditors
– a statement of management’s responsibility for
preparation of the financial statements
– other corporate information
AMITY GLOBAL
BUSINESS SCHOOL Noida
The Balance Sheet
• What are the different sections of the
Balance Sheet?
AMITY GLOBAL
BUSINESS SCHOOLBalance Sheet Noida

The balance sheet (also called statement of

financial position or statement of financial
condition) is a snapshot of the financial
status of an organization at a point in time.
AMITY GLOBAL
Balance Sheet
BUSINESS SCHOOL Noida

Assets are economic resources that

are expected to benefit future
activities of the organization.

Liabilities are the entity’s economic

obligations to others.

Owners’ equity is the excess

of the assets over the liabilities.
AMITY GLOBAL
Balance Sheet
BUSINESS SCHOOL Noida

The owners’ equity of a corporation

is called shareholders’ equity.

Shareholders’ equity

Paid-in Retained
capital earnings
AMITY GLOBAL
BUSINESS SCHOOL Noida
The Balance Sheet
Sections of the balance sheet:
• Assets - resources of the firm that are expected
to increase or cause future cash flows
(everything the firm owns)
• Liabilities - obligations of the firm to outsiders or
claims against its assets by outsiders (debts of
the firm)
• Owners’ Equity - the residual interest in, or
remaining claims against, the firm’s assets after
deducting liabilities (rights of the owners)
AMITY GLOBAL
BUSINESS SCHOOL Noida
The Balance Sheet
The balance sheet equation:

Assets = Liabilities + Owners’

Equity
or
Owners’ Equity = Assets -
Liabilities
AMITY GLOBAL Four Basic Financial Statements
BUSINESS SCHOOL Noida

• Balance Sheet
– Assets = Liabilities + Equity

• Income Statement (also called Statement of

Operations, Earnings Statement, Profit/Loss (or P&L) Statement
– Revenues - Expenses = Net income (or Net Earnings)
• Statement of Changes in Stockholders’
Equity
– Beginning of period total equity + Stock issued + Net
income - Dividends = End of period total equity
• Statement of Cash Flows
1- 17
– Cash inflow - Cash outflow = Net cash flow
AMITY GLOBAL Users of Accounting Information
BUSINESS SCHOOL Noida

Different categories of users need different

kinds of information for making decisions.
These users can be divided into :

•Internal Users; and

•External Users.
AMITY GLOBAL
BUSINESS SCHOOL Internal Users Noida

These are the persons who manage the

business, i.e. management at the top,
middle, and lower levels. Their requirements
of information are different because they
make different types of decisions.
AMITY GLOBAL
Internal Users
BUSINESS SCHOOL continue… Noida

The top level is more concerned with

planning; the middle level is concerned
equally with planning and control; and the
lower level is concerned more with
controlling operations. Information is
supplied on different aspects, e.g. cash
resources, sales estimates, results of
operations, financial position, etc.
AMITY GLOBAL
External Users
BUSINESS SCHOOL Noida

All persons other than internal users come

in the group of external users. External
users can be divided into two groups:
 those having direct interest; and
 those having indirect interest
in a business organization.
AMITY GLOBAL
External Users
BUSINESS SCHOOL continue… Noida

The main sources of information for external

users are annual reports of business
organizations, which state the financial
position and performance and give the
auditor’s report, director’s report and other
information.
AMITY GLOBAL
External Users
BUSINESS SCHOOL continue… Noida

Investors and creditors are the external

users having direct interest. Tax authorities,
regulatory agencies, customers, labour
unions, trade associations, stock exchanges,
investors, etc are indirectly interested in the
company’s financial strength, its ability to
meet short-term and long-term obligations,
its future earning power, etc for making
various decisions.
AMITY GLOBAL
BUSINESS SCHOOL ASSETS Noida

These are economic resources of an

enterprise that can be usefully expressed in
monetary terms. Assets are things of value
used by the business in its operations.
 Fixed Assets
 Current Assets
AMITY GLOBAL
ASSETS
BUSINESS SCHOOL continue… Noida

 Fixed Assets are assets held on a long-

term basis.
e.g. Land, Building, Machinery, Plant,
Furniture and Fixtures, etc.
AMITY GLOBAL
ASSETS
BUSINESS SCHOOL continue… Noida

 Current Assets are assets held on a

short-term basis.
e.g. Debtors, Bills receivable,
Stock(Inventory), Cash and Bank
balances, etc.
AMITY GLOBAL
BUSINESS SCHOOLLIABILITIES Noida

These are obligations or debts that the

enterprise must pay in money or services at
some time in the future.

• Long-term liabilities

• Short-term liabilities
AMITY GLOBAL
LIABILITIES
BUSINESS SCHOOL continue.. Noida

 Long-term liabilities are those that are

usually payable after a period of one year.

e.g. A term loan from a financial institution,

debentures (bonds) issued by a company.
AMITY GLOBAL
LIABILITIES
BUSINESS SCHOOL continue.. Noida

 Short-term liabilities are obligations that

are payable within a period of one year.

e.g. Creditors, bills payable, overdraft from

a bank for a short period.
AMITY GLOBAL
BUSINESS SCHOOL CAPITAL Noida

Investment by the owner for use in the firm

is known as capital. Owner’s equity is the
ownership claim on total assets. It is equal
to total assets minus total liabilities.
AMITY GLOBAL
BUSINESS SCHOOLREVENUES Noida

These are the amounts the business earns

by selling its products or providing services
to customers. Other titles and sources of
revenue common to many businesses are:
sales, fees, commission, interest, dividends,
royalties, rent received, etc.
AMITY GLOBAL
EXPENSES
BUSINESS SCHOOL Noida

These are costs incurred by a business in

the process of earning revenue. Generally,
expenses are measured by the cost of
assets consumed or services used during an
accounting period. The usual titles of
expenses are: depreciation, rent, wages,
salaries, interest, costs of heat, light and
water, telephone, etc.
AMITY GLOBAL
PURCHASES
BUSINESS SCHOOL Noida

Purchases are total amount of goods

procured by a business on credit and for
cash, for use or sale. In a trading concern,
purchases are made of merchandise for
resale with or without processing.
In a manufacturing concern, raw materials
are purchased, processed further into
finished goods and then sold. Purchases
may be cash purchase or credit purchase.
AMITY GLOBAL
BUSINESS SCHOOL SALES Noida

Sales are total revenues from goods or

services sold or provided to customers.
Sales may be cash sales or credit sales.
AMITY GLOBAL
BUSINESS SCHOOL STOCK Noida

Stock (Inventory) is a measure of

something on hand – goods, spares and
other items – in a business.

It is called stock on hand.

AMITY GLOBAL
STOCK: continue…
BUSINESS SCHOOL Noida

In a trading concern, the stock on hand is

the amount of goods which have not been
sold on the date on which the balance sheet
is prepared. This is also called closing
stock.
AMITY GLOBAL
STOCK
BUSINESS SCHOOL continue… Noida

In a manufacturing concern, closing stock

comprises raw materials, semi-finished
goods and finished goods on hand on the
closing date.

Similarly, opening stock is the amount of

stock at the beginning of the accounting
year.
AMITY GLOBAL
BUSINESS SCHOOL DEBTORS Noida

Debtors are persons and/or other entities who

owe to an enterprise an amount for receiving
goods and services on credit.

The total amount standing against such persons

and/or entities on the closing date, is shown in the
Balance Sheet as Sundry Debtors on the asset
side.
AMITY GLOBAL
CREDITORS
BUSINESS SCHOOL Noida

Creditors are persons and/or other entities who

have to be paid by an enterprise an amount for
providing the enterprise goods and services on
credit.

The total amount standing to the favour of such

persons and/or entities on the closing date, is
shown in the Balance Sheet as Sundry Creditors
on the liability side.
AMITY GLOBAL
ACCOUNTING PRINCIPLESNoida
BUSINESS SCHOOL

Accounting principles can be subdivided into

two categories:

 Accounting Concepts; and

 Accounting Conventions.
AMITY GLOBAL
ACCOUNTING PRINCIPLESNoida
BUSINESS SCHOOL

Accounting principles can be subdivided into

two categories:

 Accounting Concepts; and

 Accounting Conventions.
AMITY GLOBAL
ACCOUNTING PRINCIPLESNoida
BUSINESS SCHOOL

 Accounting Concepts
 Accounting Conventions
The term ‘concept’ is used to connote
accounting postulates, that is necessary
assumptions and conditions upon which
accounting is based. The term ‘convention’
is used to signify customs and traditions as
a guide to the presentation of accounting
statements.
AMITY GLOBAL
ACCOUNTING PRINCIPLESNoida
BUSINESS SCHOOL

Accounting Concepts
• Business Entity Concept
• Money Measurement Concept
• Cost Concept
• Going Concern Concept
• Dual Aspect Concept
• Realization Concept
• Accounting Period Concept
AMITY GLOBAL
ACCOUNTING PRINCIPLESNoida
BUSINESS SCHOOL

Accounting Conventions
• Convention of Consistency
• Convention of Disclosure
• Convention of Conservation
AMITY GLOBAL
ACCOUNTING PRINCIPLESNoida
BUSINESS SCHOOL

Accounting Concepts
The term ‘concept’ is used to connote
accounting postulates, that is necessary
assumptions and conditions upon which
accounting is based.
AMITY GLOBAL
Business Entity Concept
BUSINESS SCHOOL Noida

Business is treated as a separate entity or

unit apart from its owner and others. All the
transactions of the business are recorded in
the books of business from the point of view
of the business as an entity and even the
owner is treated as a creditor to the extent
of his/her capital.
AMITY GLOBAL
Money Measurement ConceptNoida
BUSINESS SCHOOL

In accounting, we record only those

transactions which are expressed in terms
of money. In other words, a fact which can
not be expressed in monetary terms, is not
recorded in the books of accounts.
AMITY GLOBAL
Cost Concept
BUSINESS SCHOOL Noida

Transactions are entered in the books of

accounts at the amount actually involved.
Suppose a company purchases a car for
Rs.1,50,000/- the real value of which is
Rs.2,00,000/-, the purchase will be recorded
as Rs.1,50,000/- and not any more. This is
one of the most important concept and it
prevents arbitrary values being put on
transactions.
AMITY GLOBAL
Going Concern Concept
BUSINESS SCHOOL Noida

It is persuaded that the business will exists

for a long time and transactions are
recorded from this point of view.
AMITY GLOBAL
Dual Aspect Concept
BUSINESS SCHOOL Noida

Each transaction has two aspects, that is,

the receiving benefit by one party and the
giving benefit by the other. This principle is
the core of accountancy.
AMITY GLOBAL
Dual Aspect Concept continue…
BUSINESS SCHOOL Noida

For example, the proprietor of a business

starts his business with Cash Rs.1,00,000/-,
Machinery of Rs.50,000/- and Building of
Rs.30,000/-, then this fact is recorded at
two places. That is Assets account (Cash,
Machinery & Building) and Capital accounts.
The capital of the business is equal to the
assets of the business.
AMITY GLOBAL
Dual Aspect Concept continue…
BUSINESS SCHOOL Noida

Thus, the dual aspect can be expressed as

under

Capital + Liabilities = Assets

or
Capital = Assets – Liabilities
AMITY GLOBAL
Realization Concept
BUSINESS SCHOOL Noida

Accounting is a historical record of

transactions. It records what has happened.
It does not anticipate events. This is of
great important in preventing business firms
from inflating their profits by recording sales
and income that are likely to accrue.
AMITY GLOBAL
Accounting Period Concept
BUSINESS SCHOOL Noida

Strictly speaking, the net income can be

measured by comparing the assets of the
business existing at the time of its
liquidation. But as the life of the business is
assumed to be infinite, the measurement of
income according to the above concept is
not possible. So a twelve month period is
normally adopted for this purpose. This time
interval is called accounting period.
AMITY GLOBAL
ACCOUNTING PRINCIPLESNoida
BUSINESS SCHOOL

Accounting Conventions

The term ‘convention’ is used to signify

customs and traditions as a guide to the
presentation of accounting statements.
AMITY GLOBAL
Convention of Consistency
BUSINESS SCHOOL Noida

In order to enable the management to draw

important conclusions regarding the working
of the company over a few years, it is
essential that accounting practices and
methods remain unchanged from one
accounting period to another. The
comparison of one accounting period with
that of another is possible only when the
convention of consistency is followed.
AMITY GLOBAL
Convention of Disclosure
BUSINESS SCHOOL Noida

This principle implies that accounts must be

honestly prepared and all material
information must be disclosed therein. The
contents of Balance Sheet and Profit and
Loss Account are prescribed by law. These
are designed to make disclosure of all
material facts compulsory.
AMITY GLOBAL
Convention of Conservation Noida
BUSINESS SCHOOL

Financial statements are always drawn up

on rather a conservative basis. That is,
showing a position better than what it is,
not permitted. It is also not proper to show
a position worse than what it is. In other
words, secret reserves are not permitted.
AMITY GLOBAL
FUNCTIONS OF
BUSINESS SCHOOL Noida

ACCOUNTING
• Keeping systematic records
• Protecting properties of the business
• Communicating the results
• Meeting legal requirements
AMITY GLOBAL
Keeping systematic records
BUSINESS SCHOOL Noida

The first function of accounting is to keep a

systematic record of financial transactions,
to post them to the ledger accounts and
ultimately prepare final statements.
AMITY GLOBAL
Protecting
BUSINESS SCHOOL properties of the Noida

business

The second important function is to protect

the property of the business. The system
accounting is designed in such a way that it
protects its assets from an unjustified and
unwarranted use.
AMITY GLOBAL
Meeting legal requirements
BUSINESS SCHOOL Noida

The fourth and the last function of

accounting is to meet the legal
requirements under the Companies Act,
Income Tax Act, Sales Tax Act and so on.
AMITY GLOBAL
THE ACCOUNTING CYCLENoida
BUSINESS SCHOOL

Recording transactions in subsidiary books.

Classifying data by posting from subsidiary
books to the accounts.
Closing the books and preparation of final
accounts.
AMITY GLOBAL
CLASSIFICATION
BUSINESS SCHOOL OF ACCOUNTS
Noida

• Accounts in the names of persons are known as

“Personal Accounts”
• Accounts in the names of assets are known as
“Real Accounts”
• Accounts in respect of expenses and incomes
are known as “Nominal Accounts”
AMITY GLOBAL
CLASSIFICATION
BUSINESS SCHOOL OF ACCOUNTS
Noida

ACCOUNTS

PERSONAL IMPERSONAL
ACCOUNTS ACCOUNTS

REAL NOMINAL
ACCOUNTS ACCOUNTS
AMITY GLOBAL
BUSINESSPERSONAL
SCHOOL ACCOUNTS Noida

Accounts in the name of persons are known as

personal accounts.
Eg: Babu A/C,
Babu & Co. A/C,
Outstanding Salaries A/C, etc.
AMITY GLOBAL
REAL
BUSINESS SCHOOL ACCOUNTS Noida

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.
AMITY GLOBAL
NOMINAL
BUSINESS SCHOOL ACCOUNTS Noida

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.
AMITY GLOBAL
DEBIT
BUSINESS SCHOOL AND CREDIT Noida

Each accounts have two sides – the left side and

the right side. In accounting, the left side of an
account is called the “Debit Side” and the right
side of an account is called the “Credit Side”. The
entries made on the left side of an account is
called a “Debit Entry” and the entries made on the
right side of an account is called a “Credit Entry”.