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DEFINITION OF ACCOUNTING

The systematic recording, reporting, and analysis of financial transactions of a business.

The person in charge of accounting is known as an accountant, and this individual istypically required to follow a set of rules and regulations, such as the Generally

Accepted Accounting Principles.

Accounting allows a company to analyze the financial performance of the business,and look at statistics such as net profit.

PURPOSE OF ACCOUNTING

The purpose of account ing is to accumulate and report on financial information aboutthe performance, financial position, and cash flows of a business. This information isthen used to reach decisions about how to manage the business, or invest in it, or lendmoney to it.This information is accumulated in accounting records with

accounting transactions, which are recorded either through such standardizedbusiness transactions as customer invoicing or supplierinvoices, or through morespecialized transactions, known as journal entries.Once this financial information hasbeen stored in the accounting records, it is usually compiled into financial statements,which include the following documents:- INOME STATEMENT –BALANCE SHEET –STATEMENT OF CASH FLOWS

–STATEMENT OF RETAINED EARNINGS

Nature of Accounting

We know Accounting is the systematic recording of financial transactions andpresentation of the related information of the appropriate persons. The basic featuresof accounting are as follows:1. Accounting is a process: A process refers to the method of performing any specific

job step by step according to the objectives, or target. Accounting is identified as aprocess as it performs the specific task of collecting, processing and communicatingfinancial information. In doing so, it follows some definite steps like collection of datarecording, classification summarization, finalization and reporting.2. Accounting is an art: Accounting is an art of recording, classifying, summarizingand finalizing the financial data. The word ‘art’ refers to the way of performing

something. It is a behavioral knowledge involving certain creativity and skill that mayhelp us to attain some specific objectives. Accounting is a systematic methodconsisting of definite techniques and its proper application requires applied skill andexpertise. So, by nature accounting is an art.3. Accounting is means and not an end: Accounting finds out the financial resultsand position of an entity and the same time, it communicates this information to itsusers. The users then take their own decisions on the basis of such information. So, itcan be said that mere keeping of accounts can be the primary objective of any personor entity. On the other hand, the main objective may be identified as taking decisions

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on the basis of financial information supplied by accounting. Thus, accounting itself isnot an objective, it helps attaining a specific objective. So it is said the accounting is ‘ameans to an end’ and it is not ‘an end in itself.’ 4. Accounting deals with financial information and transactions; Accountingrecords the financial transactions and date after classifying the same and finalizes theirresult for a definite period for conveying them to their users. So, from starting to theend, at every stage, accounting deals with financial information. Only financial

information is its subject matter. It does not deal with non-monetary information of non-financial aspect.5. Accounting is an information system: Accounting is recognized and characterizedas a storehouse of information. As a service function, it collects processes andcommunicates financial information of any entity. This discipline of knowledge hasbeen evolved out to meet the need of financial information required by differentinterested groups.

What are the important functions of accounting.

Record Keeping Function:The primary function of accounting is to keep a systematicrecord of financial transaction - journalisation, posting and preparation of finalstatements. The purpose of this function is toreport regularly to the interested partiesby means of financial statements.Protect Business Property:The second function of accounting is to protect theproperty of business from unjustified and unwanted use. The accountant thus has todesign such a system of accounting which protect its assets from an unjustified andunwanted use.Legal Requirement Function:The third function of accounting is to devise such a

system as will meet the legal requirements. Under the provision of law, a business manhas to file various statements e.g.,income tax returns, returns for sales tax purpose etc. Accounting system aims at fulfilling the requirements of law. Accounting is a base, withthe help of which various returns, documents, statements etc., are prepared.Communicating the Results: Accounting is the language of business. Varioustransactions are communicated through accounting. There are many parties -owners, creditors, government, employees etc, who are interested in knowing theresults of the firm. The fourth function of accounting is to communicate the results tointerested parties. The accounting shows a real and true position of the firm of thebusiness.

Scope of Accounting: Accounting has got a very wide scope and area of application. Its use is not confined tothe business world alone, but spread over in all the spheres of the society and in allprofessions. Now-a-days, in any social institution or professional activity, whether thatis profit earning or not, financial transactions must take place. So there arises the needfor recording and summarizing these transactions when they occur and the necessityof finding out the net result of the same after the expiry of a certain fixed period.



Besides, the is also the need for interpretation and communication of those informationto the appropriate persons. Only accounting use can help overcome these problems.In the modern world, accounting system is practiced no only in all the businessinstitutions but also in many non-trading institutions like Schools, Colleges, Hospitals,Charitable Trust Clubs, Co-operative Society etc.and also Government and Local Self-Government in the form of Municipality, Panchayat.The professional persons likeMedical practitioners, practicing Lawyers, Chartered Accountants etc.also adopt some

suitable types of accounting methods. As a matter of fact, accounting methods areused by all who are involved in a series of financial transactions.The scope of accounting as it was in earlier days has undergone lots of changes inrecent times. As accounting is a dynamic subject, its scope and area of operation havebeen always increasing keeping pace with the changes in socio-economic changes. Asa result of continuous research in this field the new areas of application of accountingprinciples and policies are emerged. National accounting, human resources accountingand social Accounting are examples of the new areas of application of accountingsystems.

MAIN OBJECTIVES OF ACCOUNTING:

To keep systematic records: Accounting is done to keep a systematic record of financial transactions. In theabsence of accounting there would have been terrific burden on human memory whichin most cases would have been impossible to bear.

To protect business properties: Accounting provides protection to business properties from unjustified and

unwarranted us. This is possible on account of accounting supplying the information tothe manager or the proprietor.

To ascertain the operational profit or loss: Accounting helps is ascertaining the net profit earned or loss suffered on account of carrying the business. This is done by keeping a proper record of revenues andexpenses of a particular period. The profit and loss account is prepared at the end of aperiod and if the amount of revenue for the period is more than the expenditureincurred in earning that revenue, there is said to be a profit. In case the expenditure

exceeds the revenue, there is said to be a loss.

To ascertain the financial position of business:The profit and loss account gives the amount of profit or loss made by the businessduring a particular period. However, it is not enough. The businessman must knowabout his financial position i.e., where he stands; what he owes and what he owns?This objective is served by the balance sheet or position statement.

To facilitate rational decision making:



Accounting these days has taken upon itself the task of collection, analysis andreporting of information at the required points of time to the required levels of authorityin order to facilitate rational decision making.

BRANCHES OF ACCOUNTING

1.Book-Keeping: Primary recording of the day-to-day transactions of any business

unit and their subsequent posting into the Ledger Accounts are the functions of thispart of accounting. As this part of the job of the Accountant is only keeping the proper records, it is therefore termed as Book-Keeping.

2.Accounting: To prepare the Trial Balance and thereby to check the arithmeticalaccuracy of the books and records, to prepare the Revenue statements of Profit or Loss Accounts, to prepare the statement of Affairs or Balance Sheets, or , in other words, to prepare the Final Accounts and also to make plans and programmes for smooth running of this part of Accounting procedures and to act accordingly are, inshort, the functions of the Accountant. This of his work is generally termed asaccounting.

3.Cost Accounting: In any manufacturing concern, it is necessary to keep the recordsof daily stocks in hand, their issues and receipts, payment of wages, calculatedregarding overhead charges, fixing the sale-price of the products, to prepare thebudget and thereby to help in cost control etc.

These functions are the functions of the Cost Accountant.

4. Management Accounting: The present-day Management is very much dependenton the Accountant in all the levels of managerial activities. By furnishing regular reportsregarding various necessary information required daily by the management, the

Accountant very ably helps in their work. Cost Control, Quality Control, BudgetaryControl, Planning etc.are therefore, the functions of the Management Accountant.

5. Decision Accounting: This means that part of the functions of the Accountant bywhich he prepares and presents necessary information to the Management for makingdecisions. This function is one which has developed a great during the recent years.

As and when there arises a particular problem in any business unit, the accounting

personnel are thereupon called to present the necessary information in all possibledetails and in a most appropriate manner. Decision Accounting is thus, a part of theManagerial Accounting.

6.Household Accounting: With the development of the Socialistic Pattern of economyand the emergence of the Welfare States, the present-days Governments in all thecountries in the World are becoming more and more interested in collecting taxes notonly form the corporate bodies of form the employed persons but also from the self-employed men and professional personalities. These types of persons are now



required to maintain their professional accounts Household Income and Expenditure Accounts separately.

7. Government Accounting: Government Accounting is quite different fromCommercial Accounting. This is because in Welfare States is present day World, anyGovernment has to collect taxes, compute National Income, fix the Gross NationalProduct Target, ascertain the Balance of Payments position etc.governments,

therefore have their own system of Accounting which is called Government Accounting.

8. Auditing: Whether the Books of Accounting have been maintained correctly or nothas to be proved.

For this purpose, the Accounts are to be checked by some qualified persons from theBook of Prime entry up to the Final Accounts every year. This is also necessary for thebenefit of the share-holders as well as for the Government which will collect taxes onthe basis of the Published Accounts.

Users of accounting information

Internal users (Primary Users) of accounting information include the following:Management: for analyzing the organization's performance and position and takingappropriate measures to improve the company results.Employees: for assessing company's profitability and its consequence on their futureremuneration and job security.Owners: for analyzing the viability and profitability of their investment and determining

any future course of action. Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements.External users (Secondary Users) of accounting information include the following:Creditors: for determining the credit worthiness of the organization. Terms of creditare set by creditors according to the assessment of their customers' financial health.Creditors include suppliers as well as lenders of finance such as banks.Tax Authourities: for determining the credibility of the tax returns filed on behalf of thecompany.

Investors: for analyzing the feasibility of investing in the company. Investors want tomake sure they can earn a reasonable return on their investment before they commitany financial resources to the company.Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term.Regulatory Authorities: for ensuring that the company's disclosure of accountinginformation is in accordance with the rules and regulations set in order to protect theinterests of the stakeholders who rely on such information in forming their decisions.



External users are communicated accounting information usually in the form of financial statements. The purpose of financial statements is to cater for the needs of such diverse users of accounting information in order to assist them in making soundfinancial decisions.

BASIC PROFESSIONAL VALUES AND ETHICS

According to the code, a professional accountant shall comply with the followingfundamentalprinciples:

(a) Integrity – to be straightforward and honest in all professional and businessrelationships.

(b) Objectivity – to not allow bias, conflict of interest or undue influence of others to

override professional or business judgments.

(c) Professional Competence and Due Care – to maintain professional knowledgeand skill at the level required to ensure that a client or employer receives competentprofessional services based on current developments in practice, legislation andtechniques and act diligently and in accordance with applicable technical andprofessional standards.

(d) Confidentiality – to respect the confidentiality of information acquired as a result ofprofessional and business relationships and, therefore, not disclose any such

information to third parties without proper and specific authority, unless there is a legalor professional right or duty to disclose, nor use the information for the personaladvantage of the professional accountant or third parties.

(e) Professional Behavior – to comply with relevant laws and regulations and avoidany action that discredits the profession.

Basic forms of ownership / organizations and their activities Although forms of business ownership vary by jurisdiction, there are several common

forms: Sole proprietorship: A sole proprietorship is a business owned by one person. The

owner may operate on his or her own or may employ others. The owner of thebusiness has total and unlimited personal liability of the debts incurred by thebusiness.

Partnership: A partnership is a form of business in which two or more peopleoperate for the common goal of making profit. Each partner has total and unlimitedpersonal liability of the debts incurred by the partnership. There are three typical

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classifications of partnerships: general partnerships, limited partnerships, and limitedliability partnerships.

Corporation: A business corporation is a for-profit, limited liability entity that has aseparate legal personality from its members. A corporation is owned by multipleshareholders and is overseen by a board of directors, which hires the business'smanagerial staff.

Cooperative: Often referred to as a "co-op business" or "co-op", a cooperative is a

for-profit, limited liability entity that differs from a corporation in that it has members,as opposed to shareholders, who share decision-making authority. Cooperatives aretypically classified as either consumer cooperatives or worker cooperatives.Cooperatives are fundamental to the ideology of economic democracy.

Guidelines on Basic Accounting Principles and Concepts

GAAP is the framework, rules and guidelines of the financial accounting professionwith a purpose of standardizing the accounting concepts, principles and procedures.Here are the basic accounting principles and concepts under this framework:1. Business Entity

A business is considered a separate entity from the owner(s) and should be treatedseparately. Any personal transactions of its owner should not be recorded in thebusiness accounting book, vice versa. Unless the owner’s personal transactioninvolves adding and/or withdrawing resources from the business.2. Going Concern It assumes that an entity will continue to operate indefinitely. In this basis, assets arerecorded based on their original cost and not on market value. Assets are assumed tobe used for an indefinite period of time and not intended to be sold immediately.

3. Monetary UnitThe business financial transactions recorded and reported should be in monetary unit,such as US Dollar, Canadian Dollar, Euro, etc. Thus, any non-financial or non-monetary information that cannot be measured in a monetary unit are not recorded inthe accounting books, but instead, a memorandum will be used.4. Historical Cost

All business resources acquired should be valued and recorded based on the actualcash equivalent or original cost of acquisition, not the prevailing market value or futurevalue. Exception to the rule is when the business is in the process of closure and

liquidation.5. Matching This principle requires that revenue recorded, in a given accounting period, shouldhave an equivalent expense recorded, in order to show the true profit of the business.6. Accounting PeriodThis principle entails a business to complete the whole accounting process of abusiness over a specific operating time period. It may be monthly, quarterly or annually. For annual accounting period, it may follow a Calendar or Fiscal Year.



7. Conservatism This principle states that given two options in the valuation of business transactions,the amount recorded should be the lower rather than the higher value.8. Consistency This principle ensures consistency in the accounting procedures used by the businessentity from one accounting period to the next. It allows fair comparison of financialinformation between two accounting periods.

9. Materiality Ideally, business transactions that may affect the decision of a user of financialinformation are considered important or material, thus, must be reported properly. Thisprinciple allows errors or violations of accounting valuation involving immaterial andsmall amount of recorded business transaction.10. Objectivity This principle requires recorded business transactions should have some form of impartial supporting evidence or documentation. Also, it entails that bookkeeping andfinancial recording should be performed with independence, that’s free of bias and

prejudice.11. Accrual This principle requires that revenue should be recorded in the period it is earned,regardless of the time the cash is received. The same is true for expense. Expenseshould be recognized and recorded at the time it is incurred, regardless of the time thatcash is paid.There are three major elements of accounting: Assets, Liabilities, and Capital . Theseterms are used widely so it is necessary that we take a look at each element.

Also, it is important to know what they are before we try to understand how they relateto each other in the accounting equation and in the accounting cycle.

ACCOUNTING ELEMENTS OR VALUES

The term "account" is used often in this tutorial. Thus, we need to define it before weproceed. In accounting, an account is a storage unit used to collect and storeinformation of similar nature. For example, "Cash".Cash is an account that stores all transactions that involve cash receipts and cashpayments. All cash receipts are recorded as increase in Cash and all cashdisbursements are recorded as deductions to the same account.

Another example, "Building". Suppose a company acquires a building and pays incash. That transaction would be recorded in the "Building" account for the acquisitionof the building and in the "Cash" account for the payment in cash.Assets

Assets refer to resources owned and controlled by the entity as a result of pasttransactions and events and from which future economic benefits are expected to flowto the entity. In simple terms, assets are properties or rights owned by the businessThey may be classified as current or non-current.



A. Current assets – Assets are considered current if they are held for the purpose ofbeing traded, expected to be realized or consumed within twelve months after the endof the period or its normal operating cycle (whichever is longer), or if it is cash.Examples of current asset accounts are:

. Cash – bills, coins, funds for current purposes, checks, cash in bank2. Receivables – Accounts Receivable (receivable from customers), Notes Receivable

(receivables supported by promissory notes), Rent Receivable, Interest Receivable,

Due from Employees (or Advances to Employees), and others• Allowance for Doubtful Accounts – This is a valuation account which represents theestimated uncollectible amount of accounts receivable. It is considered a contra-asset account and is presented as a deduction to the related asset, accountsreceivable. Doubtful accounts are discussed in detail in another lesson.

3. Inventories – assets held for sale in the ordinary course of business4. Prepaid expenses – expenses paid in advance, such as, Prepaid Rent, Prepaid

Insurance, Prepaid Advertising, and Office SuppliesB. Non-current assets – Assets that do not meet the criteria to be classified ascurrent. Hence, they are long-term in nature – useful for a period longer that 12 monthsor the company's normal operating cycle. Examples of non-current asset accountsinclude:

. Long-term investments – investments for long-term purposes such as investment instocks, bonds, and properties; and funds set up for long-term purposes

2. Land – land area owned for business operations (not for sale) 3. Building – such as office building, a factory, warehouse, or store4. Equipment – Machinery, Furniture and Fixtures (shelves, tables, chairs, etc.), Office

Equipment, Computer Equipment, Delivery Equipment, and others

• Accumulated Depreciation – This is a valuation account which represents thecumulative depreciation expense. It is considered a contra-asset account and ispresented as a deduction to the related assets, building and equipment. Depreciationis discussed in detail in another lesson.

5. Intangibles – long-term assets with no physical substance, such as goodwill,trademark, copyright, etc.

6. Other non-current assetsLiabilitiesLiabilities are economic obligations or payables of the business. They represent claims

by other parties (aside from the owners) against the assets of a company. Companyassets come from 2 major sources – borrowings from lenders or creditors, andcontributions by the owners. The first refers to liabilities.Like assets, liabilities may be classified as either current or non-current.A. Current liabilities – A liability is considered current if it is due within 12 monthsafter the end of the balance sheet date, or its normal operating cycle. In other words,they are to be paid next year counted from the end of the current period.If the company's normal operating cycle is longer than 12 months, a liability isconsidered current if it is due within the operating cycle.



Current liabilities include:. Trade and other payables – such as Accounts Payable, Notes Payable, Interest

Payable, Rent Payable, Accrued Expenses, etc.2. Current provisions – estimated short-term liabilities that are probable and can be

measured reliably3. Short-term borrowings – financing arrangements, credit arrangements or loans that are

short-term in nature

4. Current-portion of a long-term liability – the portion of a long-term borrowing that iscurrently due (for example, in long-term loans that are to be paid in annualinstallments, the portion to be paid next year is considered a current liability)

5. Current tax liabilities – taxes for the period and currently payableB. Non-current liabilities – Liabilities are considered non-current if they are notcurrently payable, i.e. they are not due within the next 12 months after the end of theaccounting period or the company's normal operating cycle, whichever is shorter.In other words, non-current liabilities are those that do not meet the criteria to beconsidered current. Hah! Make sense? Non-current liabilities include:

. Long-term notes, bonds, and mortgage payables;2. Deferred tax liabilities; and3. Other long-term obligations

Capital Also known as net assets or equity , capital refers to what is left to the owners after alliabilities are settled. Simply stated, capital is equal to total assets minus total liabilitiesCapital is affected by the following:

. Initial and additional contributions of owner/s (investments),2. Withdrawals made by owner/s (dividends for corporations),3. Income, and

4. Expenses.Owner contributions and income increase capital. Withdrawals (or dividends) andexpenses decrease it.The terms used to refer to a company's capital portion varies according to the form ofownership. In a sole proprietorship business, the capital is often called Owner's Equityor Owner's Capital; in partnerships, it is called Partners' Equity or Partners' Capital;andin corporations, Stockholders' Equity .In addition to the three elements mentioned above, there are two items that are alsoconsidered as key elements in accounting. They are income and expense

Nonetheless, these items are ultimately included as part of capital.IncomeIncome refers to an increase in economic benefit during the accounting period in theform of inflow or increase in asset or decrease in liability that result in increase inequity, other than contribution from owners.Income encompasses revenues and gains.Revenues refer to the amounts earned from the company’s ordinary course ofbusiness such as professional fees or service revenue for service companiesandsales for merchandising and manufacturing concerns.



Gains come from other activities, such as gain in selling old equipment, gain on sale ofshort-term investments, and other gains.Income is measured every period and is ultimately included in the capital account.Examples of income accounts are: Service Revenue, Professional Fees, Rent IncomeCommission Income, Interest Income, Royalty Income, and Sales.ExpenseExpenses are decreases in economic benefit during the accounting period in the form

of an outflow or decrease in asset or increase in liability that result in decrease inequity, other than distribution to owners.Expenses include ordinary expenses such as Cost of Sales, Advertising ExpenseRent Expense, Salaries Expense, Income Tax, Repairs Expense, etc.; and lossessuchas Loss from Fire, Typhoon Loss, and Loss from Theft. Like income, expenses arealso measured every period and then closed as part of capital.Net income refers to all income minus all expenses.Conclusion

And we've come to the end of this lesson. We have covered all the elements of

accounting. For a recap: assets are properties owned by the business; liabilities areobligations to other parties; and, capital refers to the portion of the assets available tothe owners of the business. DEFINITION OF ACCOUNTING


The person in charge of accounting is known as an accountant, and this individual istypically required to follow a set of rules and regulations, such as the GenerallyAccepted Accounting Principles.



The purpose of account ing is to accumulate and report on financial information aboutthe performance, financial position, and cash flows of a business. This information isthen used to reach decisions about how to manage the business, or invest in it, or lendmoney to it.This information is accumulated in accounting records withaccounting transactions, which are recorded either through such standardized

business transactions as customer invoicing or supplierinvoices, or through morespecialized transactions, known as journal entries.Once this financial information hasbeen stored in the accounting records, it is usually compiled into financial statements,which include the following documents:- INOME STATEMENT –BALANCE SHEET –STATEMENT OF CASH FLOWS






















































job step by step according to the objectives, or target. Accounting is identified as aprocess as it performs the specific task of collecting, processing and communicatingfinancial information. In doing so, it follows some definite steps like collection of data

recording, classification summarization, finalization and reporting.2. Accounting is an art: Accounting is an art of recording, classifying, summarizingand finalizing the financial data. The word ‘art’ refers to the way of performingsomething. It is a behavioral knowledge involving certain creativity and skill that mayhelp us to attain some specific objectives. Accounting is a systematic methodconsisting of definite techniques and its proper application requires applied skill andexpertise. So, by nature accounting is an art.3. Accounting is means and not an end: Accounting finds out the financial resultsand position of an entity and the same time, it communicates this information to its

users. The users then take their own decisions on the basis of such information. So, itcan be said that mere keeping of accounts can be the primary objective of any personor entity. On the other hand, the main objective may be identified as taking decisionson the basis of financial information supplied by accounting. Thus, accounting itself isnot an objective, it helps attaining a specific objective. So it is said the accounting is ‘ameans to an end’ and it is not ‘an end in itself.’ 4. Accounting deals with financial information and transactions; Accountingrecords the financial transactions and date after classifying the same and finalizes theirresult for a definite period for conveying them to their users. So, from starting to theend, at every stage, accounting deals with financial information. Only financial

information is its subject matter. It does not deal with non-monetary information of non-financial aspect.5. Accounting is an information system: Accounting is recognized and characterizedas a storehouse of information. As a service function, it collects processes andcommunicates financial information of any entity. This discipline of knowledge hasbeen evolved out to meet the need of financial information required by differentinterested groups.

What are the important functions of accounting.

Record Keeping Function:The primary function of accounting is to keep a systematicrecord of financial transaction - journalisation, posting and preparation of finalstatements. The purpose of this function is toreport regularly to the interested partiesby means of financial statements.Protect Business Property:The second function of accounting is to protect theproperty of business from unjustified and unwanted use. The accountant thus has todesign such a system of accounting which protect its assets from an unjustified andunwanted use.



Legal Requirement Function:The third function of accounting is to devise such asystem as will meet the legal requirements. Under the provision of law, a business manhas to file various statements e.g.,income tax returns, returns for sales tax purpose etc.

Accounting system aims at fulfilling the requirements of law. Accounting is a base, withthe help of which various returns, documents, statements etc., are prepared.Communicating the Results: Accounting is the language of business. Varioustransactions are communicated through accounting. There are many parties -

owners, creditors, government, employees etc, who are interested in knowing theresults of the firm. The fourth function of accounting is to communicate the results tointerested parties. The accounting shows a real and true position of the firm of thebusiness.

Scope of Accounting: Accounting has got a very wide scope and area of application. Its use is not confined tothe business world alone, but spread over in all the spheres of the society and in allprofessions. Now-a-days, in any social institution or professional activity, whether thatis profit earning or not, financial transactions must take place. So there arises the needfor recording and summarizing these transactions when they occur and the necessityof finding out the net result of the same after the expiry of a certain fixed period.Besides, the is also the need for interpretation and communication of those informationto the appropriate persons. Only accounting use can help overcome these problems.In the modern world, accounting system is practiced no only in all the businessinstitutions but also in many non-trading institutions like Schools, Colleges, Hospitals,Charitable Trust Clubs, Co-operative Society etc.and also Government and Local Self-Government in the form of Municipality, Panchayat.The professional persons like

Medical practitioners, practicing Lawyers, Chartered Accountants etc.also adopt somesuitable types of accounting methods. As a matter of fact, accounting methods areused by all who are involved in a series of financial transactions.The scope of accounting as it was in earlier days has undergone lots of changes inrecent times. As accounting is a dynamic subject, its scope and area of operation havebeen always increasing keeping pace with the changes in socio-economic changes. Asa result of continuous research in this field the new areas of application of accountingprinciples and policies are emerged. National accounting, human resources accountingand social Accounting are examples of the new areas of application of accountingsystems.



To protect business properties:







5. Decision Accounting: This means that part of the functions of the Accountant by

which he prepares and presents necessary information to the Management for makingdecisions. This function is one which has developed a great during the recent years.

As and when there arises a particular problem in any business unit, the accountingpersonnel are thereupon called to present the necessary information in all possibledetails and in a most appropriate manner. Decision Accounting is thus, a part of theManagerial Accounting.

6.Household Accounting: With the development of the Socialistic Pattern of economyand the emergence of the Welfare States, the present-days Governments in all thecountries in the World are becoming more and more interested in collecting taxes notonly form the corporate bodies of form the employed persons but also from the self-employed men and professional personalities. These types of persons are nowrequired to maintain their professional accounts Household Income and Expenditure

Accounts separately.






Internal users (Primary Users) of accounting information include the following:Management: for analyzing the organization's performance and position and takingappropriate measures to improve the company results.Employees: for assessing company's profitability and its consequence on their futureremuneration and job security.



Owners: for analyzing the viability and profitability of their investment and determiningany future course of action.

Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements.External users (Secondary Users) of accounting information include the following:Creditors: for determining the credit worthiness of the organization. Terms of creditare set by creditors according to the assessment of their customers' financial health.

Creditors include suppliers as well as lenders of finance such as banks.Tax Authourities: for determining the credibility of the tax returns filed on behalf of thecompany.Investors: for analyzing the feasibility of investing in the company. Investors want tomake sure they can earn a reasonable return on their investment before they commitany financial resources to the company.Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term.Regulatory Authorities: for ensuring that the company's disclosure of accounting

information is in accordance with the rules and regulations set in order to protect theinterests of the stakeholders who rely on such information in forming their decisions.External users are communicated accounting information usually in the form of financial statements. The purpose of financial statements is to cater for the needs of such diverse users of accounting information in order to assist them in making soundfinancial decisions.




(b) Objectivity – to not allow bias, conflict of interest or undue influence of others tooverride professional or business judgments.


(d) Confidentiality – to respect the confidentiality of information acquired as a result ofprofessional and business relationships and, therefore, not disclose any such



















information to third parties without proper and specific authority, unless there is a legalor professional right or duty to disclose, nor use the information for the personaladvantage of the professional accountant or third parties.


Basic forms of ownership / organizations and their activities Although forms of business ownership vary by jurisdiction, there are several commonforms: Sole proprietorship: A sole proprietorship is a business owned by one person. The


Partnership: A partnership is a form of business in which two or more peopleoperate for the common goal of making profit. Each partner has total and unlimited

personal liability of the debts incurred by the partnership. There are three typicalclassifications of partnerships: general partnerships, limited partnerships, and limitedliability partnerships.


Cooperative: Often referred to as a "co-op business" or "co-op", a cooperative is afor-profit, limited liability entity that differs from a corporation in that it has members,as opposed to shareholders, who share decision-making authority. Cooperatives aretypically classified as either consumer cooperatives or worker cooperatives.Cooperatives are fundamental to the ideology of economic democracy.



A business is considered a separate entity from the owner(s) and should be treatedseparately. Any personal transactions of its owner should not be recorded in thebusiness accounting book, vice versa. Unless the owner’s personal transactioninvolves adding and/or withdrawing resources from the business.2. Going Concern It assumes that an entity will continue to operate indefinitely. In this basis, assets arerecorded based on their original cost and not on market value. Assets are assumed tobe used for an indefinite period of time and not intended to be sold immediately.







3. Monetary UnitThe business financial transactions recorded and reported should be in monetary unit,such as US Dollar, Canadian Dollar, Euro, etc. Thus, any non-financial or non-monetary information that cannot be measured in a monetary unit are not recorded inthe accounting books, but instead, a memorandum will be used.4. Historical Cost

All business resources acquired should be valued and recorded based on the actual

cash equivalent or original cost of acquisition, not the prevailing market value or futurevalue. Exception to the rule is when the business is in the process of closure andliquidation.5. Matching This principle requires that revenue recorded, in a given accounting period, shouldhave an equivalent expense recorded, in order to show the true profit of the business.6. Accounting PeriodThis principle entails a business to complete the whole accounting process of abusiness over a specific operating time period. It may be monthly, quarterly or

annually. For annual accounting period, it may follow a Calendar or Fiscal Year.7. Conservatism This principle states that given two options in the valuation of business transactions,the amount recorded should be the lower rather than the higher value.8. Consistency This principle ensures consistency in the accounting procedures used by the businessentity from one accounting period to the next. It allows fair comparison of financialinformation between two accounting periods.9. Materiality Ideally, business transactions that may affect the decision of a user of financial

information are considered important or material, thus, must be reported properly. Thisprinciple allows errors or violations of accounting valuation involving immaterial andsmall amount of recorded business transaction.10. Objectivity This principle requires recorded business transactions should have some form of impartial supporting evidence or documentation. Also, it entails that bookkeeping andfinancial recording should be performed with independence, that’s free of bias andprejudice.11. Accrual

This principle requires that revenue should be recorded in the period it is earned,regardless of the time the cash is received. The same is true for expense. Expenseshould be recognized and recorded at the time it is incurred, regardless of the time thatcash is paid.There are three major elements of accounting: Assets, Liabilities, and Capital . Theseterms are used widely so it is necessary that we take a look at each element.





The term "account" is used often in this tutorial. Thus, we need to define it before weproceed. In accounting, an account is a storage unit used to collect and storeinformation of similar nature. For example, "Cash".Cash is an account that stores all transactions that involve cash receipts and cash

payments. All cash receipts are recorded as increase in Cash and all cashdisbursements are recorded as deductions to the same account. Another example, "Building". Suppose a company acquires a building and pays incash. That transaction would be recorded in the "Building" account for the acquisitionof the building and in the "Cash" account for the payment in cash.Assets

Assets refer to resources owned and controlled by the entity as a result of pasttransactions and events and from which future economic benefits are expected to flowto the entity. In simple terms, assets are properties or rights owned by the businessThey may be classified as current or non-current.

A. Current assets – Assets are considered current if they are held for the purpose ofbeing traded, expected to be realized or consumed within twelve months after the endof the period or its normal operating cycle (whichever is longer), or if it is cash.Examples of current asset accounts are:

5. Cash – bills, coins, funds for current purposes, checks, cash in bank6. Receivables – Accounts Receivable (receivable from customers), Notes Receivable

(receivables supported by promissory notes), Rent Receivable, Interest Receivable,Due from Employees (or Advances to Employees), and others• Allowance for Doubtful Accounts – This is a valuation account which represents the

estimated uncollectible amount of accounts receivable. It is considered a contra-asset account and is presented as a deduction to the related asset, accountsreceivable. Doubtful accounts are discussed in detail in another lesson.


Insurance, Prepaid Advertising, and Office SuppliesB. Non-current assets – Assets that do not meet the criteria to be classified ascurrent. Hence, they are long-term in nature – useful for a period longer that 12 monthsor the company's normal operating cycle. Examples of non-current asset accounts

include:7. Long-term investments – investments for long-term purposes such as investment in

stocks, bonds, and properties; and funds set up for long-term purposes8. Land – land area owned for business operations (not for sale) 9. Building – such as office building, a factory, warehouse, or store0. Equipment – Machinery, Furniture and Fixtures (shelves, tables, chairs, etc.),

Office Equipment, Computer Equipment, Delivery Equipment, and others• Accumulated Depreciation – This is a valuation account which represents thecumulative depreciation expense. It is considered a contra-asset account and is



presented as a deduction to the related assets, building and equipment. Depreciationis discussed in detail in another lesson.

1. Intangibles – long-term assets with no physical substance, such as goodwilltrademark, copyright, etc.

2. Other non-current assetsLiabilities

Liabilities are economic obligations or payables of the business. They represent claimsby other parties (aside from the owners) against the assets of a company. Companyassets come from 2 major sources – borrowings from lenders or creditors, andcontributions by the owners. The first refers to liabilities.Like assets, liabilities may be classified as either current or non-current.A. Current liabilities – A liability is considered current if it is due within 12 monthsafter the end of the balance sheet date, or its normal operating cycle. In other words,they are to be paid next year counted from the end of the current period.If the company's normal operating cycle is longer than 12 months, a liability isconsidered current if it is due within the operating cycle.Current liabilities include:

6. Trade and other payables – such as Accounts Payable, Notes Payable, InterestPayable, Rent Payable, Accrued Expenses, etc.

7. Current provisions – estimated short-term liabilities that are probable and can bemeasured reliably

8. Short-term borrowings – financing arrangements, credit arrangements or loans that areshort-term in nature

9. Current-portion of a long-term liability – the portion of a long-term borrowing that iscurrently due (for example, in long-term loans that are to be paid in annua

installments, the portion to be paid next year is considered a current liability)0. Current tax liabilities – taxes for the period and currently payable

B. Non-current liabilities – Liabilities are considered non-current if they are notcurrently payable, i.e. they are not due within the next 12 months after the end of theaccounting period or the company's normal operating cycle, whichever is shorter.In other words, non-current liabilities are those that do not meet the criteria to beconsidered current. Hah! Make sense? Non-current liabilities include:

4. Long-term notes, bonds, and mortgage payables;5. Deferred tax liabilities; and6. Other long-term obligations


5. Initial and additional contributions of owner/s (investments),6. Withdrawals made by owner/s (dividends for corporations),7. Income, and8. Expenses.



Owner contributions and income increase capital. Withdrawals (or dividends) andexpenses decrease it.The terms used to refer to a company's capital portion varies according to the form ofownership. In a sole proprietorship business, the capital is often called Owner's Equityor Owner's Capital; in partnerships, it is called Partners' Equity or Partners' Capital;andin corporations, Stockholders' Equity .In addition to the three elements mentioned above, there are two items that are also

considered as key elements in accounting. They are income and expenseNonetheless, these items are ultimately included as part of capital.IncomeIncome refers to an increase in economic benefit during the accounting period in theform of inflow or increase in asset or decrease in liability that result in increase inequity, other than contribution from owners.Income encompasses revenues and gains.Revenues refer to the amounts earned from the company’s ordinary course ofbusiness such as professional fees or service revenue for service companies

andsales for merchandising and manufacturing concerns.Gains come from other activities, such as gain in selling old equipment, gain on sale ofshort-term investments, and other gains.Income is measured every period and is ultimately included in the capital account.Examples of income accounts are: Service Revenue, Professional Fees, Rent Income,Commission Income, Interest Income, Royalty Income, and Sales.ExpenseExpenses are decreases in economic benefit during the accounting period in the formof an outflow or decrease in asset or increase in liability that result in decrease inequity, other than distribution to owners.

Expenses include ordinary expenses such as Cost of Sales, Advertising ExpenseRent Expense, Salaries Expense, Income Tax, Repairs Expense, etc.; and lossessuchas Loss from Fire, Typhoon Loss, and Loss from Theft. Like income, expenses arealso measured every period and then closed as part of capital.Net income refers to all income minus all expenses.Conclusion

And we've come to the end of this lesson. We have covered all the elements ofaccounting. For a recap: assets are properties owned by the business; liabilities areobligations to other parties; and, capital refers to the portion of the assets available to

the owners of the business.DEFINITION OF ACCOUNTING

































The purpose of account ing is to accumulate and report on financial information aboutthe performance, financial position, and cash flows of a business. This information isthen used to reach decisions about how to manage the business, or invest in it, or lend

money to it.This information is accumulated in accounting records withaccounting transactions, which are recorded either through such standardizedbusiness transactions as customer invoicing or supplierinvoices, or through morespecialized transactions, known as journal entries.Once this financial information hasbeen stored in the accounting records, it is usually compiled into financial statements,which include the following documents:- INOME STATEMENT –BALANCE SHEET –STATEMENT OF CASH FLOWS


Nature of AccountingWe know Accounting is the systematic recording of financial transactions andpresentation of the related information of the appropriate persons. The basic featuresof accounting are as follows:1. Accounting is a process: A process refers to the method of performing any specific

job step by step according to the objectives, or target. Accounting is identified as aprocess as it performs the specific task of collecting, processing and communicatingfinancial information. In doing so, it follows some definite steps like collection of datarecording, classification summarization, finalization and reporting.2. Accounting is an art: Accounting is an art of recording, classifying, summarizing

and finalizing the financial data. The word ‘art’ refers to the way of performingsomething. It is a behavioral knowledge involving certain creativity and skill that mayhelp us to attain some specific objectives. Accounting is a systematic methodconsisting of definite techniques and its proper application requires applied skill andexpertise. So, by nature accounting is an art.3. Accounting is means and not an end: Accounting finds out the financial resultsand position of an entity and the same time, it communicates this information to itsusers. The users then take their own decisions on the basis of such information. So, itcan be said that mere keeping of accounts can be the primary objective of any person

or entity. On the other hand, the main objective may be identified as taking decisionson the basis of financial information supplied by accounting. Thus, accounting itself isnot an objective, it helps attaining a specific objective. So it is said the accounting is ‘ameans to an end’ and it is not ‘an end in itself.’ 4. Accounting deals with financial information and transactions; Accountingrecords the financial transactions and date after classifying the same and finalizes theirresult for a definite period for conveying them to their users. So, from starting to theend, at every stage, accounting deals with financial information. Only financialinformation is its subject matter. It does not deal with non-monetary information of non-

























financial aspect.5. Accounting is an information system: Accounting is recognized and characterizedas a storehouse of information. As a service function, it collects processes andcommunicates financial information of any entity. This discipline of knowledge hasbeen evolved out to meet the need of financial information required by differentinterested groups.

What are the important functions of accounting.Record Keeping Function:The primary function of accounting is to keep a systematicrecord of financial transaction - journalisation, posting and preparation of finalstatements. The purpose of this function is toreport regularly to the interested partiesby means of financial statements.Protect Business Property:The second function of accounting is to protect theproperty of business from unjustified and unwanted use. The accountant thus has todesign such a system of accounting which protect its assets from an unjustified andunwanted use.

Legal Requirement Function:The third function of accounting is to devise such asystem as will meet the legal requirements. Under the provision of law, a business manhas to file various statements e.g.,income tax returns, returns for sales tax purpose etc.

Accounting system aims at fulfilling the requirements of law. Accounting is a base, withthe help of which various returns, documents, statements etc., are prepared.Communicating the Results: Accounting is the language of business. Varioustransactions are communicated through accounting. There are many parties -owners, creditors, government, employees etc, who are interested in knowing theresults of the firm. The fourth function of accounting is to communicate the results to

interested parties. The accounting shows a real and true position of the firm of thebusiness.

Scope of Accounting: Accounting has got a very wide scope and area of application. Its use is not confined tothe business world alone, but spread over in all the spheres of the society and in allprofessions. Now-a-days, in any social institution or professional activity, whether thatis profit earning or not, financial transactions must take place. So there arises the needfor recording and summarizing these transactions when they occur and the necessity

of finding out the net result of the same after the expiry of a certain fixed period.Besides, the is also the need for interpretation and communication of those informationto the appropriate persons. Only accounting use can help overcome these problems.In the modern world, accounting system is practiced no only in all the businessinstitutions but also in many non-trading institutions like Schools, Colleges, Hospitals,Charitable Trust Clubs, Co-operative Society etc.and also Government and Local Self-Government in the form of Municipality, Panchayat.The professional persons likeMedical practitioners, practicing Lawyers, Chartered Accountants etc.also adopt somesuitable types of accounting methods. As a matter of fact, accounting methods are



used by all who are involved in a series of financial transactions.The scope of accounting as it was in earlier days has undergone lots of changes inrecent times. As accounting is a dynamic subject, its scope and area of operation havebeen always increasing keeping pace with the changes in socio-economic changes. Asa result of continuous research in this field the new areas of application of accountingprinciples and policies are emerged. National accounting, human resources accountingand social Accounting are examples of the new areas of application of accounting

systems.



To protect business properties: Accounting provides protection to business properties from unjustified andunwarranted us. This is possible on account of accounting supplying the information tothe manager or the proprietor.

To ascertain the operational profit or loss: Accounting helps is ascertaining the net profit earned or loss suffered on account of carrying the business. This is done by keeping a proper record of revenues andexpenses of a particular period. The profit and loss account is prepared at the end of aperiod and if the amount of revenue for the period is more than the expenditure

incurred in earning that revenue, there is said to be a profit. In case the expenditureexceeds the revenue, there is said to be a loss.


To facilitate rational decision making: Accounting these days has taken upon itself the task of collection, analysis andreporting of information at the required points of time to the required levels of authorityin order to facilitate rational decision making.


1.Book-Keeping: Primary recording of the day-to-day transactions of any businessunit and their subsequent posting into the Ledger Accounts are the functions of this



part of accounting. As this part of the job of the Accountant is only keeping the proper records, it is therefore termed as Book-Keeping.

2.Accounting: To prepare the Trial Balance and thereby to check the arithmeticalaccuracy of the books and records, to prepare the Revenue statements of Profit or Loss Accounts, to prepare the statement of Affairs or Balance Sheets, or , in other words, to prepare the Final Accounts and also to make plans and programmes for

smooth running of this part of Accounting procedures and to act accordingly are, inshort, the functions of the Accountant. This of his work is generally termed asaccounting.





5. Decision Accounting: This means that part of the functions of the Accountant bywhich he prepares and presents necessary information to the Management for making

decisions. This function is one which has developed a great during the recent years. As and when there arises a particular problem in any business unit, the accountingpersonnel are thereupon called to present the necessary information in all possibledetails and in a most appropriate manner. Decision Accounting is thus, a part of theManagerial Accounting.

6.Household Accounting: With the development of the Socialistic Pattern of economyand the emergence of the Welfare States, the present-days Governments in all thecountries in the World are becoming more and more interested in collecting taxes notonly form the corporate bodies of form the employed persons but also from the self-

employed men and professional personalities. These types of persons are nowrequired to maintain their professional accounts Household Income and Expenditure







For this purpose, the Accounts are to be checked by some qualified persons from the

Book of Prime entry up to the Final Accounts every year. This is also necessary for thebenefit of the share-holders as well as for the Government which will collect taxes onthe basis of the Published Accounts.


Internal users (Primary Users) of accounting information include the following:Management: for analyzing the organization's performance and position and takingappropriate measures to improve the company results.

Employees: for assessing company's profitability and its consequence on their futureremuneration and job security.Owners: for analyzing the viability and profitability of their investment and determiningany future course of action.

Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements.External users (Secondary Users) of accounting information include the following:Creditors: for determining the credit worthiness of the organization. Terms of creditare set by creditors according to the assessment of their customers' financial health.Creditors include suppliers as well as lenders of finance such as banks.

Tax Authourities: for determining the credibility of the tax returns filed on behalf of thecompany.Investors: for analyzing the feasibility of investing in the company. Investors want tomake sure they can earn a reasonable return on their investment before they commitany financial resources to the company.Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term.Regulatory Authorities: for ensuring that the company's disclosure of accountinginformation is in accordance with the rules and regulations set in order to protect the

interests of the stakeholders who rely on such information in forming their decisions.External users are communicated accounting information usually in the form of financial statements. The purpose of financial statements is to cater for the needs of such diverse users of accounting information in order to assist them in making soundfinancial decisions.








(d) Confidentiality – to respect the confidentiality of information acquired as a result ofprofessional and business relationships and, therefore, not disclose any suchinformation to third parties without proper and specific authority, unless there is a legalor professional right or duty to disclose, nor use the information for the personaladvantage of the professional accountant or third parties.







Cooperative: Often referred to as a "co-op business" or "co-op", a cooperative is afor-profit, limited liability entity that differs from a corporation in that it has members,as opposed to shareholders, who share decision-making authority. Cooperatives are























typically classified as either consumer cooperatives or worker cooperatives.Cooperatives are fundamental to the ideology of economic democracy.


GAAP is the framework, rules and guidelines of the financial accounting professionwith a purpose of standardizing the accounting concepts, principles and procedures.

Here are the basic accounting principles and concepts under this framework:1. Business Entity

A business is considered a separate entity from the owner(s) and should be treatedseparately. Any personal transactions of its owner should not be recorded in thebusiness accounting book, vice versa. Unless the owner’s personal transactioninvolves adding and/or withdrawing resources from the business.2. Going Concern It assumes that an entity will continue to operate indefinitely. In this basis, assets arerecorded based on their original cost and not on market value. Assets are assumed tobe used for an indefinite period of time and not intended to be sold immediately.3. Monetary UnitThe business financial transactions recorded and reported should be in monetary unit,such as US Dollar, Canadian Dollar, Euro, etc. Thus, any non-financial or non-monetary information that cannot be measured in a monetary unit are not recorded inthe accounting books, but instead, a memorandum will be used.4. Historical Cost

All business resources acquired should be valued and recorded based on the actualcash equivalent or original cost of acquisition, not the prevailing market value or futurevalue. Exception to the rule is when the business is in the process of closure and

liquidation.5. Matching This principle requires that revenue recorded, in a given accounting period, shouldhave an equivalent expense recorded, in order to show the true profit of the business.6. Accounting PeriodThis principle entails a business to complete the whole accounting process of abusiness over a specific operating time period. It may be monthly, quarterly or annually. For annual accounting period, it may follow a Calendar or Fiscal Year.7. Conservatism

This principle states that given two options in the valuation of business transactions,the amount recorded should be the lower rather than the higher value.8. Consistency This principle ensures consistency in the accounting procedures used by the businessentity from one accounting period to the next. It allows fair comparison of financialinformation between two accounting periods.9. Materiality Ideally, business transactions that may affect the decision of a user of financialinformation are considered important or material, thus, must be reported properly. This



principle allows errors or violations of accounting valuation involving immaterial andsmall amount of recorded business transaction.10. Objectivity This principle requires recorded business transactions should have some form of impartial supporting evidence or documentation. Also, it entails that bookkeeping andfinancial recording should be performed with independence, that’s free of bias andprejudice.

11. Accrual This principle requires that revenue should be recorded in the period it is earned,regardless of the time the cash is received. The same is true for expense. Expenseshould be recognized and recorded at the time it is incurred, regardless of the time thatcash is paid.There are three major elements of accounting: Assets, Liabilities, and Capital . Theseterms are used widely so it is necessary that we take a look at each element.





Assets refer to resources owned and controlled by the entity as a result of pasttransactions and events and from which future economic benefits are expected to flowto the entity. In simple terms, assets are properties or rights owned by the businessThey may be classified as current or non-current.A. Current assets – Assets are considered current if they are held for the purpose ofbeing traded, expected to be realized or consumed within twelve months after the end

of the period or its normal operating cycle (whichever is longer), or if it is cash.Examples of current asset accounts are:

9. Cash – bills, coins, funds for current purposes, checks, cash in bank0. Receivables – Accounts Receivable (receivable from customers), Notes

Receivable (receivables supported by promissory notes), Rent Receivable, InterestReceivable, Due from Employees (or Advances to Employees), and others• Allowance for Doubtful Accounts – This is a valuation account which represents theestimated uncollectible amount of accounts receivable. It is considered a contra-



asset account and is presented as a deduction to the related asset, accountsreceivable. Doubtful accounts are discussed in detail in another lesson.


Insurance, Prepaid Advertising, and Office SuppliesB. Non-current assets – Assets that do not meet the criteria to be classified as

current. Hence, they are long-term in nature – useful for a period longer that 12 monthsor the company's normal operating cycle. Examples of non-current asset accountsinclude:

3. Long-term investments – investments for long-term purposes such as investmentin stocks, bonds, and properties; and funds set up for long-term purposes

4. Land – land area owned for business operations (not for sale) 5. Building – such as office building, a factory, warehouse, or store6. Equipment – Machinery, Furniture and Fixtures (shelves, tables, chairs, etc.),

Office Equipment, Computer Equipment, Delivery Equipment, and others• Accumulated Depreciation – This is a valuation account which represents thecumulative depreciation expense. It is considered a contra-asset account and ispresented as a deduction to the related assets, building and equipment. Depreciationis discussed in detail in another lesson.


8. Other non-current assetsLiabilitiesLiabilities are economic obligations or payables of the business. They represent claimsby other parties (aside from the owners) against the assets of a company. Companyassets come from 2 major sources – borrowings from lenders or creditors, andcontributions by the owners. The first refers to liabilities.Like assets, liabilities may be classified as either current or non-current.A. Current liabilities – A liability is considered current if it is due within 12 monthsafter the end of the balance sheet date, or its normal operating cycle. In other words,they are to be paid next year counted from the end of the current period.If the company's normal operating cycle is longer than 12 months, a liability isconsidered current if it is due within the operating cycle.Current liabilities include:



3. Short-term borrowings – financing arrangements, credit arrangements or loansthat are short-term in nature

4. Current-portion of a long-term liability – the portion of a long-term borrowing thatis currently due (for example, in long-term loans that are to be paid in annuainstallments, the portion to be paid next year is considered a current liability)




7. Long-term notes, bonds, and mortgage payables;

8. Deferred tax liabilities; and9. Other long-term obligations


9. Initial and additional contributions of owner/s (investments),0. Withdrawals made by owner/s (dividends for corporations),1. Income, and

2. Expenses.Owner contributions and income increase capital. Withdrawals (or dividends) andexpenses decrease it.The terms used to refer to a company's capital portion varies according to the form ofownership. In a sole proprietorship business, the capital is often called Owner's Equityor Owner's Capital; in partnerships, it is called Partners' Equity or Partners' Capital;andin corporations, Stockholders' Equity .In addition to the three elements mentioned above, there are two items that are alsoconsidered as key elements in accounting. They are income and expenseNonetheless, these items are ultimately included as part of capital.

IncomeIncome refers to an increase in economic benefit during the accounting period in theform of inflow or increase in asset or decrease in liability that result in increase inequity, other than contribution from owners.Income encompasses revenues and gains.Revenues refer to the amounts earned from the company’s ordinary course ofbusiness such as professional fees or service revenue for service companiesandsales for merchandising and manufacturing concerns.Gains come from other activities, such as gain in selling old equipment, gain on sale of

short-term investments, and other gains.Income is measured every period and is ultimately included in the capital account.Examples of income accounts are: Service Revenue, Professional Fees, Rent Income,Commission Income, Interest Income, Royalty Income, and Sales.ExpenseExpenses are decreases in economic benefit during the accounting period in the formof an outflow or decrease in asset or increase in liability that result in decrease inequity, other than distribution to owners.



Expenses include ordinary expenses such as Cost of Sales, Advertising ExpenseRent Expense, Salaries Expense, Income Tax, Repairs Expense, etc.; and lossessuchas Loss from Fire, Typhoon Loss, and Loss from Theft. Like income, expenses arealso measured every period and then closed as part of capital.Net income refers to all income minus all expenses.Conclusion

And we've come to the end of this lesson. We have covered all the elements of

accounting. For a recap: assets are properties owned by the business; liabilities areobligations to other parties; and, capital refers to the portion of the assets available tothe owners of the business.DEFINITION OF ACCOUNTING





The purpose of account ing is to accumulate and report on financial information aboutthe performance, financial position, and cash flows of a business. This information isthen used to reach decisions about how to manage the business, or invest in it, or lendmoney to it.This information is accumulated in accounting records withaccounting transactions, which are recorded either through such standardizedbusiness transactions as customer invoicing or supplierinvoices, or through morespecialized transactions, known as journal entries.Once this financial information hasbeen stored in the accounting records, it is usually compiled into financial statements,which include the following documents:- INOME STATEMENT –BALANCE SHEET –STATEMENT OF CASH FLOWS























































and finalizing the financial data. The word ‘art’ refers to the way of performingsomething. It is a behavioral knowledge involving certain creativity and skill that mayhelp us to attain some specific objectives. Accounting is a systematic methodconsisting of definite techniques and its proper application requires applied skill andexpertise. So, by nature accounting is an art.3. Accounting is means and not an end: Accounting finds out the financial resultsand position of an entity and the same time, it communicates this information to its

users. The users then take their own decisions on the basis of such information. So, itcan be said that mere keeping of accounts can be the primary objective of any personor entity. On the other hand, the main objective may be identified as taking decisionson the basis of financial information supplied by accounting. Thus, accounting itself isnot an objective, it helps attaining a specific objective. So it is said the accounting is ‘ameans to an end’ and it is not ‘an end in itself.’ 4. Accounting deals with financial information and transactions; Accountingrecords the financial transactions and date after classifying the same and finalizes theirresult for a definite period for conveying them to their users. So, from starting to the

end, at every stage, accounting deals with financial information. Only financialinformation is its subject matter. It does not deal with non-monetary information of non-financial aspect.5. Accounting is an information system: Accounting is recognized and characterizedas a storehouse of information. As a service function, it collects processes andcommunicates financial information of any entity. This discipline of knowledge hasbeen evolved out to meet the need of financial information required by differentinterested groups.

What are the important functions of accounting.Record Keeping Function:The primary function of accounting is to keep a systematicrecord of financial transaction - journalisation, posting and preparation of finalstatements. The purpose of this function is toreport regularly to the interested partiesby means of financial statements.Protect Business Property:The second function of accounting is to protect theproperty of business from unjustified and unwanted use. The accountant thus has todesign such a system of accounting which protect its assets from an unjustified andunwanted use.Legal Requirement Function:The third function of accounting is to devise such a

system as will meet the legal requirements. Under the provision of law, a business manhas to file various statements e.g.,income tax returns, returns for sales tax purpose etc.

Accounting system aims at fulfilling the requirements of law. Accounting is a base, withthe help of which various returns, documents, statements etc., are prepared.Communicating the Results: Accounting is the language of business. Varioustransactions are communicated through accounting. There are many parties -owners, creditors, government, employees etc, who are interested in knowing theresults of the firm. The fourth function of accounting is to communicate the results to



interested parties. The accounting shows a real and true position of the firm of thebusiness.

Scope of Accounting: Accounting has got a very wide scope and area of application. Its use is not confined tothe business world alone, but spread over in all the spheres of the society and in all

professions. Now-a-days, in any social institution or professional activity, whether thatis profit earning or not, financial transactions must take place. So there arises the needfor recording and summarizing these transactions when they occur and the necessityof finding out the net result of the same after the expiry of a certain fixed period.Besides, the is also the need for interpretation and communication of those informationto the appropriate persons. Only accounting use can help overcome these problems.In the modern world, accounting system is practiced no only in all the businessinstitutions but also in many non-trading institutions like Schools, Colleges, Hospitals,Charitable Trust Clubs, Co-operative Society etc.and also Government and Local Self-Government in the form of Municipality, Panchayat.The professional persons likeMedical practitioners, practicing Lawyers, Chartered Accountants etc.also adopt somesuitable types of accounting methods. As a matter of fact, accounting methods areused by all who are involved in a series of financial transactions.The scope of accounting as it was in earlier days has undergone lots of changes inrecent times. As accounting is a dynamic subject, its scope and area of operation havebeen always increasing keeping pace with the changes in socio-economic changes. Asa result of continuous research in this field the new areas of application of accountingprinciples and policies are emerged. National accounting, human resources accountingand social Accounting are examples of the new areas of application of accounting

systems.



To protect business properties: Accounting provides protection to business properties from unjustified andunwarranted us. This is possible on account of accounting supplying the information tothe manager or the proprietor.

To ascertain the operational profit or loss: Accounting helps is ascertaining the net profit earned or loss suffered on account of carrying the business. This is done by keeping a proper record of revenues andexpenses of a particular period. The profit and loss account is prepared at the end of aperiod and if the amount of revenue for the period is more than the expenditure



incurred in earning that revenue, there is said to be a profit. In case the expenditureexceeds the revenue, there is said to be a loss.

To ascertain the financial position of business:The profit and loss account gives the amount of profit or loss made by the businessduring a particular period. However, it is not enough. The businessman must knowabout his financial position i.e., where he stands; what he owes and what he owns?

This objective is served by the balance sheet or position statement.

To facilitate rational decision making: Accounting these days has taken upon itself the task of collection, analysis andreporting of information at the required points of time to the required levels of authorityin order to facilitate rational decision making.


1.Book-Keeping: Primary recording of the day-to-day transactions of any businessunit and their subsequent posting into the Ledger Accounts are the functions of thispart of accounting. As this part of the job of the Accountant is only keeping the proper records, it is therefore termed as Book-Keeping.

2.Accounting: To prepare the Trial Balance and thereby to check the arithmeticalaccuracy of the books and records, to prepare the Revenue statements of Profit or Loss Accounts, to prepare the statement of Affairs or Balance Sheets, or , in other words, to prepare the Final Accounts and also to make plans and programmes for smooth running of this part of Accounting procedures and to act accordingly are, in

short, the functions of the Accountant. This of his work is generally termed asaccounting.









6.Household Accounting: With the development of the Socialistic Pattern of economyand the emergence of the Welfare States, the present-days Governments in all the

countries in the World are becoming more and more interested in collecting taxes notonly form the corporate bodies of form the employed persons but also from the self-employed men and professional personalities. These types of persons are nowrequired to maintain their professional accounts Household Income and Expenditure


7. Government Accounting: Government Accounting is quite different fromCommercial Accounting. This is because in Welfare States is present day World, anyGovernment has to collect taxes, compute National Income, fix the Gross NationalProduct Target, ascertain the Balance of Payments position etc.governments,therefore have their own system of Accounting which is called Government

Accounting.


For this purpose, the Accounts are to be checked by some qualified persons from theBook of Prime entry up to the Final Accounts every year. This is also necessary for thebenefit of the share-holders as well as for the Government which will collect taxes on

the basis of the Published Accounts.


Internal users (Primary Users) of accounting information include the following:Management: for analyzing the organization's performance and position and takingappropriate measures to improve the company results.Employees: for assessing company's profitability and its consequence on their futureremuneration and job security.Owners: for analyzing the viability and profitability of their investment and determiningany future course of action.

Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements.External users (Secondary Users) of accounting information include the following:Creditors: for determining the credit worthiness of the organization. Terms of creditare set by creditors according to the assessment of their customers' financial health.Creditors include suppliers as well as lenders of finance such as banks.Tax Authourities: for determining the credibility of the tax returns filed on behalf of thecompany.



Investors: for analyzing the feasibility of investing in the company. Investors want tomake sure they can earn a reasonable return on their investment before they commitany financial resources to the company.Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term.Regulatory Authorities: for ensuring that the company's disclosure of accountinginformation is in accordance with the rules and regulations set in order to protect the

interests of the stakeholders who rely on such information in forming their decisions.External users are communicated accounting information usually in the form of financial statements. The purpose of financial statements is to cater for the needs of such diverse users of accounting information in order to assist them in making soundfinancial decisions.






(d) Confidentiality – to respect the confidentiality of information acquired as a result ofprofessional and business relationships and, therefore, not disclose any suchinformation to third parties without proper and specific authority, unless there is a legal

or professional right or duty to disclose, nor use the information for the personaladvantage of the professional accountant or third parties.


Basic forms of ownership / organizations and their activities Although forms of business ownership vary by jurisdiction, there are several commonforms:























Sole proprietorship: A sole proprietorship is a business owned by one person. Theowner may operate on his or her own or may employ others. The owner of thebusiness has total and unlimited personal liability of the debts incurred by thebusiness.




Cooperative: Often referred to as a "co-op business" or "co-op", a cooperative is afor-profit, limited liability entity that differs from a corporation in that it has members,as opposed to shareholders, who share decision-making authority. Cooperatives are

typically classified as either consumer cooperatives or worker cooperatives.Cooperatives are fundamental to the ideology of economic democracy.



A business is considered a separate entity from the owner(s) and should be treated

separately. Any personal transactions of its owner should not be recorded in thebusiness accounting book, vice versa. Unless the owner’s personal transactioninvolves adding and/or withdrawing resources from the business.2. Going Concern It assumes that an entity will continue to operate indefinitely. In this basis, assets arerecorded based on their original cost and not on market value. Assets are assumed tobe used for an indefinite period of time and not intended to be sold immediately.3. Monetary UnitThe business financial transactions recorded and reported should be in monetary unit,

such as US Dollar, Canadian Dollar, Euro, etc. Thus, any non-financial or non-monetary information that cannot be measured in a monetary unit are not recorded inthe accounting books, but instead, a memorandum will be used.4. Historical Cost

All business resources acquired should be valued and recorded based on the actualcash equivalent or original cost of acquisition, not the prevailing market value or futurevalue. Exception to the rule is when the business is in the process of closure andliquidation.



5. Matching This principle requires that revenue recorded, in a given accounting period, shouldhave an equivalent expense recorded, in order to show the true profit of the business.6. Accounting PeriodThis principle entails a business to complete the whole accounting process of abusiness over a specific operating time period. It may be monthly, quarterly or annually. For annual accounting period, it may follow a Calendar or Fiscal Year.

7. Conservatism This principle states that given two options in the valuation of business transactions,the amount recorded should be the lower rather than the higher value.8. Consistency This principle ensures consistency in the accounting procedures used by the businessentity from one accounting period to the next. It allows fair comparison of financialinformation between two accounting periods.9. Materiality Ideally, business transactions that may affect the decision of a user of financial

information are considered important or material, thus, must be reported properly. Thisprinciple allows errors or violations of accounting valuation involving immaterial andsmall amount of recorded business transaction.10. Objectivity This principle requires recorded business transactions should have some form of impartial supporting evidence or documentation. Also, it entails that bookkeeping andfinancial recording should be performed with independence, that’s free of bias andprejudice.11. Accrual This principle requires that revenue should be recorded in the period it is earned,

regardless of the time the cash is received. The same is true for expense. Expenseshould be recognized and recorded at the time it is incurred, regardless of the time thatcash is paid.There are three major elements of accounting: Assets, Liabilities, and Capital . Theseterms are used widely so it is necessary that we take a look at each element.







Assets refer to resources owned and controlled by the entity as a result of pasttransactions and events and from which future economic benefits are expected to flowto the entity. In simple terms, assets are properties or rights owned by the business

They may be classified as current or non-current.A. Current assets – Assets are considered current if they are held for the purpose ofbeing traded, expected to be realized or consumed within twelve months after the endof the period or its normal operating cycle (whichever is longer), or if it is cash.Examples of current asset accounts are:

3. Cash – bills, coins, funds for current purposes, checks, cash in bank4. Receivables – Accounts Receivable (receivable from customers), Notes

Receivable (receivables supported by promissory notes), Rent Receivable, InterestReceivable, Due from Employees (or Advances to Employees), and others

• Allowance for Doubtful Accounts – This is a valuation account which represents theestimated uncollectible amount of accounts receivable. It is considered a contra-asset account and is presented as a deduction to the related asset, accountsreceivable. Doubtful accounts are discussed in detail in another lesson.


Insurance, Prepaid Advertising, and Office SuppliesB. Non-current assets – Assets that do not meet the criteria to be classified ascurrent. Hence, they are long-term in nature – useful for a period longer that 12 months

or the company's normal operating cycle. Examples of non-current asset accountsinclude:


20. Land – land area owned for business operations (not for sale) 21. Building – such as office building, a factory, warehouse, or store22. Equipment – Machinery, Furniture and Fixtures (shelves, tables, chairs, etc.),



24. Other non-current assetsLiabilitiesLiabilities are economic obligations or payables of the business. They represent claimsby other parties (aside from the owners) against the assets of a company. Company



assets come from 2 major sources – borrowings from lenders or creditors, andcontributions by the owners. The first refers to liabilities.Like assets, liabilities may be classified as either current or non-current.A. Current liabilities – A liability is considered current if it is due within 12 monthsafter the end of the balance sheet date, or its normal operating cycle. In other words,they are to be paid next year counted from the end of the current period.If the company's normal operating cycle is longer than 12 months, a liability is

considered current if it is due within the operating cycle.Current liabilities include:



8. Short-term borrowings – financing arrangements, credit arrangements or loansthat are short-term in nature

9. Current-portion of a long-term liability – the portion of a long-term borrowing that

is currently due (for example, in long-term loans that are to be paid in annuainstallments, the portion to be paid next year is considered a current liability)


0. Long-term notes, bonds, and mortgage payables;1. Deferred tax liabilities; and

2. Other long-term obligationsCapital

Also known as net assets or equity , capital refers to what is left to the owners after alliabilities are settled. Simply stated, capital is equal to total assets minus total liabilitiesCapital is affected by the following:

3. Initial and additional contributions of owner/s (investments),4. Withdrawals made by owner/s (dividends for corporations),5. Income, and6. Expenses.

Owner contributions and income increase capital. Withdrawals (or dividends) andexpenses decrease it.The terms used to refer to a company's capital portion varies according to the form ofownership. In a sole proprietorship business, the capital is often called Owner's Equityor Owner's Capital; in partnerships, it is called Partners' Equity or Partners' Capital;andin corporations, Stockholders' Equity .In addition to the three elements mentioned above, there are two items that are alsoconsidered as key elements in accounting. They are income and expenseNonetheless, these items are ultimately included as part of capital.



IncomeIncome refers to an increase in economic benefit during the accounting period in theform of inflow or increase in asset or decrease in liability that result in increase inequity, other than contribution from owners.Income encompasses revenues and gains.Revenues refer to the amounts earned from the company’s ordinary course ofbusiness such as professional fees or service revenue for service companies

andsales for merchandising and manufacturing concerns.Gains come from other activities, such as gain in selling old equipment, gain on sale ofshort-term investments, and other gains.Income is measured every period and is ultimately included in the capital account.Examples of income accounts are: Service Revenue, Professional Fees, Rent Income,Commission Income, Interest Income, Royalty Income, and Sales.ExpenseExpenses are decreases in economic benefit during the accounting period in the formof an outflow or decrease in asset or increase in liability that result in decrease in

equity, other than distribution to owners.Expenses include ordinary expenses such as Cost of Sales, Advertising ExpenseRent Expense, Salaries Expense, Income Tax, Repairs Expense, etc.; and lossessuchas Loss from Fire, Typhoon Loss, and Loss from Theft. Like income, expenses arealso measured every period and then closed as part of capital.Net income refers to all income minus all expenses.Conclusion

And we've come to the end of this lesson. We have covered all the elements of accounting. For a recap: assets are properties owned by the business; liabilities areobligations to other parties; and, capital refers to the portion of the assets available to

the owners of the business. DEFINITION OF ACCOUNTING





The purpose of account ing is to accumulate and report on financial information aboutthe performance, financial position, and cash flows of a business. This information isthen used to reach decisions about how to manage the business, or invest in it, or lendmoney to it.This information is accumulated in accounting records withaccounting transactions, which are recorded either through such standardizedbusiness transactions as customer invoicing or supplierinvoices, or through more

















































specialized transactions, known as journal entries.Once this financial information hasbeen stored in the accounting records, it is usually compiled into financial statements,which include the following documents:- INOME STATEMENT –BALANCE SHEET –STATEMENT OF CASH FLOWS


Nature of AccountingWe know Accounting is the systematic recording of financial transactions andpresentation of the related information of the appropriate persons. The basic featuresof accounting are as follows:1. Accounting is a process: A process refers to the method of performing any specific


and finalizing the financial data. The word ‘art’ refers to the way of performingsomething. It is a behavioral knowledge involving certain creativity and skill that mayhelp us to attain some specific objectives. Accounting is a systematic methodconsisting of definite techniques and its proper application requires applied skill andexpertise. So, by nature accounting is an art.3. Accounting is means and not an end: Accounting finds out the financial resultsand position of an entity and the same time, it communicates this information to itsusers. The users then take their own decisions on the basis of such information. So, itcan be said that mere keeping of accounts can be the primary objective of any personor entity. On the other hand, the main objective may be identified as taking decisionson the basis of financial information supplied by accounting. Thus, accounting itself isnot an objective, it helps attaining a specific objective. So it is said the accounting is ‘ameans to an end’ and it is not ‘an end in itself.’ 4. Accounting deals with financial information and transactions; Accountingrecords the financial transactions and date after classifying the same and finalizes theirresult for a definite period for conveying them to their users. So, from starting to theend, at every stage, accounting deals with financial information. Only financialinformation is its subject matter. It does not deal with non-monetary information of non-financial aspect.

5. Accounting is an information system: Accounting is recognized and characterizedas a storehouse of information. As a service function, it collects processes andcommunicates financial information of any entity. This discipline of knowledge hasbeen evolved out to meet the need of financial information required by differentinterested groups.

What are the important functions of accounting.Record Keeping Function:The primary function of accounting is to keep a systematicrecord of financial transaction - journalisation, posting and preparation of final





statements. The purpose of this function is toreport regularly to the interested partiesby means of financial statements.Protect Business Property:The second function of accounting is to protect theproperty of business from unjustified and unwanted use. The accountant thus has todesign such a system of accounting which protect its assets from an unjustified andunwanted use.Legal Requirement Function:The third function of accounting is to devise such a

system as will meet the legal requirements. Under the provision of law, a business manhas to file various statements e.g.,income tax returns, returns for sales tax purpose etc.

Accounting system aims at fulfilling the requirements of law. Accounting is a base, withthe help of which various returns, documents, statements etc., are prepared.Communicating the Results: Accounting is the language of business. Varioustransactions are communicated through accounting. There are many parties -owners, creditors, government, employees etc, who are interested in knowing theresults of the firm. The fourth function of accounting is to communicate the results tointerested parties. The accounting shows a real and true position of the firm of the

business.

Scope of Accounting: Accounting has got a very wide scope and area of application. Its use is not confined tothe business world alone, but spread over in all the spheres of the society and in allprofessions. Now-a-days, in any social institution or professional activity, whether thatis profit earning or not, financial transactions must take place. So there arises the needfor recording and summarizing these transactions when they occur and the necessityof finding out the net result of the same after the expiry of a certain fixed period.

Besides, the is also the need for interpretation and communication of those informationto the appropriate persons. Only accounting use can help overcome these problems.In the modern world, accounting system is practiced no only in all the businessinstitutions but also in many non-trading institutions like Schools, Colleges, Hospitals,Charitable Trust Clubs, Co-operative Society etc.and also Government and Local Self-Government in the form of Municipality, Panchayat.The professional persons likeMedical practitioners, practicing Lawyers, Chartered Accountants etc.also adopt somesuitable types of accounting methods. As a matter of fact, accounting methods areused by all who are involved in a series of financial transactions.The scope of accounting as it was in earlier days has undergone lots of changes inrecent times. As accounting is a dynamic subject, its scope and area of operation havebeen always increasing keeping pace with the changes in socio-economic changes. Asa result of continuous research in this field the new areas of application of accountingprinciples and policies are emerged. National accounting, human resources accountingand social Accounting are examples of the new areas of application of accountingsystems.





To protect business properties: Accounting provides protection to business properties from unjustified and

unwarranted us. This is possible on account of accounting supplying the information tothe manager or the proprietor.

To ascertain the operational profit or loss: Accounting helps is ascertaining the net profit earned or loss suffered on account of carrying the business. This is done by keeping a proper record of revenues andexpenses of a particular period. The profit and loss account is prepared at the end of aperiod and if the amount of revenue for the period is more than the expenditureincurred in earning that revenue, there is said to be a profit. In case the expenditure

exceeds the revenue, there is said to be a loss.


To facilitate rational decision making: Accounting these days has taken upon itself the task of collection, analysis and

reporting of information at the required points of time to the required levels of authorityin order to facilitate rational decision making.


1.Book-Keeping: Primary recording of the day-to-day transactions of any businessunit and their subsequent posting into the Ledger Accounts are the functions of thispart of accounting. As this part of the job of the Accountant is only keeping the proper records, it is therefore termed as Book-Keeping.

2.Accounting: To prepare the Trial Balance and thereby to check the arithmeticalaccuracy of the books and records, to prepare the Revenue statements of Profit or Loss Accounts, to prepare the statement of Affairs or Balance Sheets, or , in other words, to prepare the Final Accounts and also to make plans and programmes for smooth running of this part of Accounting procedures and to act accordingly are, inshort, the functions of the Accountant. This of his work is generally termed asaccounting.









6.Household Accounting: With the development of the Socialistic Pattern of economyand the emergence of the Welfare States, the present-days Governments in all thecountries in the World are becoming more and more interested in collecting taxes notonly form the corporate bodies of form the employed persons but also from the self-employed men and professional personalities. These types of persons are now

required to maintain their professional accounts Household Income and Expenditure Accounts separately.

7. Government Accounting: Government Accounting is quite different fromCommercial Accounting. This is because in Welfare States is present day World, anyGovernment has to collect taxes, compute National Income, fix the Gross NationalProduct Target, ascertain the Balance of Payments position etc.governments,therefore have their own system of Accounting which is called Government

Accounting.






Internal users (Primary Users) of accounting information include the following:Management: for analyzing the organization's performance and position and takingappropriate measures to improve the company results.Employees: for assessing company's profitability and its consequence on their futureremuneration and job security.Owners: for analyzing the viability and profitability of their investment and determiningany future course of action.

Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements.External users (Secondary Users) of accounting information include the following:Creditors: for determining the credit worthiness of the organization. Terms of creditare set by creditors according to the assessment of their customers' financial health.Creditors include suppliers as well as lenders of finance such as banks.Tax Authourities: for determining the credibility of the tax returns filed on behalf of thecompany.Investors: for analyzing the feasibility of investing in the company. Investors want to

make sure they can earn a reasonable return on their investment before they commitany financial resources to the company.Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term.Regulatory Authorities: for ensuring that the company's disclosure of accountinginformation is in accordance with the rules and regulations set in order to protect theinterests of the stakeholders who rely on such information in forming their decisions.External users are communicated accounting information usually in the form of financial statements. The purpose of financial statements is to cater for the needs of such diverse users of accounting information in order to assist them in making sound

financial decisions.





(c) Professional Competence and Due Care – to maintain professional knowledgeand skill at the level required to ensure that a client or employer receives competentprofessional services based on current developments in practice, legislation and















techniques and act diligently and in accordance with applicable technical andprofessional standards.

(d) Confidentiality – to respect the confidentiality of information acquired as a result ofprofessional and business relationships and, therefore, not disclose any suchinformation to third parties without proper and specific authority, unless there is a legalor professional right or duty to disclose, nor use the information for the personal

advantage of the professional accountant or third parties.




Partnership: A partnership is a form of business in which two or more peopleoperate for the common goal of making profit. Each partner has total and unlimitedpersonal liability of the debts incurred by the partnership. There are three typicalclassifications of partnerships: general partnerships, limited partnerships, and limitedliability partnerships.


Cooperative: Often referred to as a "co-op business" or "co-op", a cooperative is afor-profit, limited liability entity that differs from a corporation in that it has members,as opposed to shareholders, who share decision-making authority. Cooperatives aretypically classified as either consumer cooperatives or worker cooperatives.Cooperatives are fundamental to the ideology of economic democracy.



A business is considered a separate entity from the owner(s) and should be treatedseparately. Any personal transactions of its owner should not be recorded in thebusiness accounting book, vice versa. Unless the owner’s personal transactioninvolves adding and/or withdrawing resources from the business.











2. Going Concern It assumes that an entity will continue to operate indefinitely. In this basis, assets arerecorded based on their original cost and not on market value. Assets are assumed tobe used for an indefinite period of time and not intended to be sold immediately.3. Monetary UnitThe business financial transactions recorded and reported should be in monetary unit,such as US Dollar, Canadian Dollar, Euro, etc. Thus, any non-financial or non-

monetary information that cannot be measured in a monetary unit are not recorded inthe accounting books, but instead, a memorandum will be used.4. Historical Cost

All business resources acquired should be valued and recorded based on the actualcash equivalent or original cost of acquisition, not the prevailing market value or futurevalue. Exception to the rule is when the business is in the process of closure andliquidation.5. Matching This principle requires that revenue recorded, in a given accounting period, should

have an equivalent expense recorded, in order to show the true profit of the business.6. Accounting PeriodThis principle entails a business to complete the whole accounting process of abusiness over a specific operating time period. It may be monthly, quarterly or annually. For annual accounting period, it may follow a Calendar or Fiscal Year.7. Conservatism This principle states that given two options in the valuation of business transactions,the amount recorded should be the lower rather than the higher value.8. Consistency This principle ensures consistency in the accounting procedures used by the business

entity from one accounting period to the next. It allows fair comparison of financialinformation between two accounting periods.9. Materiality Ideally, business transactions that may affect the decision of a user of financialinformation are considered important or material, thus, must be reported properly. Thisprinciple allows errors or violations of accounting valuation involving immaterial andsmall amount of recorded business transaction.10. Objectivity This principle requires recorded business transactions should have some form of

impartial supporting evidence or documentation. Also, it entails that bookkeeping andfinancial recording should be performed with independence, that’s free of bias andprejudice.11. Accrual This principle requires that revenue should be recorded in the period it is earned,regardless of the time the cash is received. The same is true for expense. Expenseshould be recognized and recorded at the time it is incurred, regardless of the time thatcash is paid.



There are three major elements of accounting: Assets, Liabilities, and Capital . Theseterms are used widely so it is necessary that we take a look at each element.




Another example, "Building". Suppose a company acquires a building and pays incash. That transaction would be recorded in the "Building" account for the acquisitionof the building and in the "Cash" account for the payment in cash.

Assets Assets refer to resources owned and controlled by the entity as a result of pasttransactions and events and from which future economic benefits are expected to flowto the entity. In simple terms, assets are properties or rights owned by the businessThey may be classified as current or non-current.A. Current assets – Assets are considered current if they are held for the purpose ofbeing traded, expected to be realized or consumed within twelve months after the endof the period or its normal operating cycle (whichever is longer), or if it is cash.Examples of current asset accounts are:

7. Cash – bills, coins, funds for current purposes, checks, cash in bank8. Receivables – Accounts Receivable (receivable from customers), NotesReceivable (receivables supported by promissory notes), Rent Receivable, InterestReceivable, Due from Employees (or Advances to Employees), and others• Allowance for Doubtful Accounts – This is a valuation account which represents theestimated uncollectible amount of accounts receivable. It is considered a contra-asset account and is presented as a deduction to the related asset, accountsreceivable. Doubtful accounts are discussed in detail in another lesson.

9. Inventories – assets held for sale in the ordinary course of business

20. Prepaid expenses – expenses paid in advance, such as, Prepaid Rent, PrepaidInsurance, Prepaid Advertising, and Office SuppliesB. Non-current assets – Assets that do not meet the criteria to be classified ascurrent. Hence, they are long-term in nature – useful for a period longer that 12 monthsor the company's normal operating cycle. Examples of non-current asset accountsinclude:


26. Land – land area owned for business operations (not for sale)



27. Building – such as office building, a factory, warehouse, or store28. Equipment – Machinery, Furniture and Fixtures (shelves, tables, chairs, etc.),



30. Other non-current assetsLiabilitiesLiabilities are economic obligations or payables of the business. They represent claimsby other parties (aside from the owners) against the assets of a company. Companyassets come from 2 major sources – borrowings from lenders or creditors, andcontributions by the owners. The first refers to liabilities.Like assets, liabilities may be classified as either current or non-current.A. Current liabilities – A liability is considered current if it is due within 12 monthsafter the end of the balance sheet date, or its normal operating cycle. In other words,they are to be paid next year counted from the end of the current period.If the company's normal operating cycle is longer than 12 months, a liability isconsidered current if it is due within the operating cycle.Current liabilities include:


22. Current provisions – estimated short-term liabilities that are probable and can be

measured reliably23. Short-term borrowings – financing arrangements, credit arrangements or loans

that are short-term in nature24. Current-portion of a long-term liability – the portion of a long-term borrowing that

is currently due (for example, in long-term loans that are to be paid in annuainstallments, the portion to be paid next year is considered a current liability)


3. Long-term notes, bonds, and mortgage payables;4. Deferred tax liabilities; and5. Other long-term obligations




7. Initial and additional contributions of owner/s (investments),8. Withdrawals made by owner/s (dividends for corporations),9. Income, and

20. Expenses.Owner contributions and income increase capital. Withdrawals (or dividends) andexpenses decrease it.The terms used to refer to a company's capital portion varies according to the form of

ownership. In a sole proprietorship business, the capital is often called Owner's Equityor Owner's Capital; in partnerships, it is called Partners' Equity or Partners' Capital;andin corporations, Stockholders' Equity .In addition to the three elements mentioned above, there are two items that are alsoconsidered as key elements in accounting. They are income and expenseNonetheless, these items are ultimately included as part of capital.IncomeIncome refers to an increase in economic benefit during the accounting period in theform of inflow or increase in asset or decrease in liability that result in increase in

equity, other than contribution from owners.Income encompasses revenues and gains.Revenues refer to the amounts earned from the company’s ordinary course ofbusiness such as professional fees or service revenue for service companiesandsales for merchandising and manufacturing concerns.Gains come from other activities, such as gain in selling old equipment, gain on sale ofshort-term investments, and other gains.Income is measured every period and is ultimately included in the capital account.Examples of income accounts are: Service Revenue, Professional Fees, Rent Income,Commission Income, Interest Income, Royalty Income, and Sales.

ExpenseExpenses are decreases in economic benefit during the accounting period in the formof an outflow or decrease in asset or increase in liability that result in decrease inequity, other than distribution to owners.Expenses include ordinary expenses such as Cost of Sales, Advertising ExpenseRent Expense, Salaries Expense, Income Tax, Repairs Expense, etc.; and lossessuchas Loss from Fire, Typhoon Loss, and Loss from Theft. Like income, expenses arealso measured every period and then closed as part of capital.Net income refers to all income minus all expenses.

Conclusion And we've come to the end of this lesson. We have covered all the elements ofaccounting. For a recap: assets are properties owned by the business; liabilities areobligations to other parties; and, capital refers to the portion of the assets available to

f

Documents

Accounting x 4