Fin Acct MBA

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Introduction to AccountancyIntroduction to Accountancy

Definition :Definition :

Accounting is an art of recording,Accounting is an art of recording,classifying and summarising in aclassifying and summarising in a

significant manner and in terms of money,significant manner and in terms of money,

transactions & events which are of atransactions & events which are of a

financial character, and interpreting thefinancial character, and interpreting theresults thereof.results thereof.


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Objectives of AccountancyO

bjectives of Accountancy

To keep systematic recordTo keep systematic record

To ascertain the result of operationsTo ascertain the result of operations

To ascertain the financial position ofTo ascertain the financial position of

businessbusiness

To protect business propertiesTo protect business properties

To facilitate rational decision makingTo facilitate rational decision making


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Accounting ConceptsAccountin

g Concepts

Entity concept Business isEntity concept Business is

Dual aspect conceptDual aspect concept

Going concern conceptGoing concern concept

Money measurement conceptMoney measurement concept

Cost conceptCost concept

Accounting period conceptAccounting period concept

Accrual conceptAccrual concept Matching conceptMatching concept


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g Concepts

Entity conceptE

ntity concept

Business is treated as a separate entity from theBusiness is treated as a separate entity from theproprietorproprietor

Thus, if a proprietor invests Rs 1,00,000 in theThus, if a proprietor invests Rs 1,00,000 in the

business, it is deemed that the proprietor has givenbusiness, it is deemed that the proprietor has given

Rs 1,00,000 to the business & it has to ultimatelyRs 1,00,000 to the business & it has to ultimately

repay it to the proprietor.repay it to the proprietor.


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g Concepts

Dual Aspect conceptDual As

pect concept

There are two aspects to every transactionThere are two aspects to every transaction

Eg. If X starts business with cash Rs 1,00,000,Eg. If X starts business with cash Rs 1,00,000,

the business gets asset (cash) & on the otherthe business gets asset (cash) & on the other

hand business owes Rs 1,00,000 to him as hishand business owes Rs 1,00,000 to him as hiscapital.capital.


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Accounting ConceptsAccounting Concepts

Money measurement conceptMoney measurement concept

Everything is recorded in terms of moneyEverything is recorded in terms of money

Purchase & sale of goods, payment ofPurchase & sale of goods, payment of

expenses are accounted for. Death of anexpenses are accounted for. Death of an

executive, resignation of a manager etc.executive, resignation of a manager etc.cannot be expressed in terms of money.cannot be expressed in terms of money.


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Cost conceptCost concept

This concept does not recognise theThis concept does not recognise therealisable value or the real worth of an assetrealisable value or the real worth of an asset

An asset is recorded at the price paid toAn asset is recorded at the price paid to

acquire it.acquire it.


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Accounting period conceptAccounting period concept

It is the interval of time at the end of which theIt is the interval of time at the end of which theincome statement & financial position statement areincome statement & financial position statement are

prepared to know the resultsprepared to know the results

Normal accounting period is 12 months.Normal accounting period is 12 months.

Studying the financial position after a very longStudying the financial position after a very long

period would not help in taking corrective stepsperiod would not help in taking corrective steps


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Accrual conceptAccrual concept

Revenues & expenses are identified with specificRevenues & expenses are identified with specificperiods of timeperiods of time

Revenues & expenses of a particular accountingRevenues & expenses of a particular accounting

period are recorded whether they are actuallyperiod are recorded whether they are actually

received/paid in cash or notreceived/paid in cash or not


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Matching conceptMatching concept

It is necessary to match revenues of the periodIt is necessary to match revenues of the periodwith the expenses of that periodwith the expenses of that period

A comparison between the two helps inA comparison between the two helps in

measuring the profit earned by the business or themeasuring the profit earned by the business or theloss incurredloss incurred


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Accounting ConventionsAccounting Conventions

Convention of Disclosure- AccountingConvention of Disclosure- Accounting

reports should disclose full & fairreports should disclose full & fair

information to the proprietors, creditors,information to the proprietors, creditors,

investors & othersinvestors & others

Convention of Materiality- AccountantConvention of Materiality- Accountant

should attach importance to materialshould attach importance to material

details & ignore insignificant detailsdetails & ignore insignificant details


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Accounting ConventionsAccounting Conventions

Convention of Consistency-The companyConvention of Consistency-The company

must follow one method of accounting yearmust follow one method of accounting year

after year to enable comparison of oneafter year to enable comparison of one

accounting period with anotheraccounting period with another

Convention of Conservatism-AllConvention of Conservatism-All

prospective losses are to be taken intoprospective losses are to be taken into

consideration but not all prospective profitsconsideration but not all prospective profits

i.e. Anticipate no profits but provide for alli.e. Anticipate no profits but provide for allpossible lossespossible losses


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Review of conceptsReview of concepts

Asset- It is an economic resource that isAsset- It is an economic resource that isexpected to give benefit in the futureexpected to give benefit in the future

Capital- It is the owners equity i.e. the amountCapital- It is the owners equity i.e. the amount

invested by the proprietor in his businessinvested by the proprietor in his business

Depreciation- It is the reduction in the bookDepreciation- It is the reduction in the book

value of fixed assets due to their use in businessvalue of fixed assets due to their use in business

Liability- It is an economic obligation payable toLiability- It is an economic obligation payable to

the outsidersthe outsiders


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Review of conceptsReview of concepts

Owners Equity- It is the claim of anOwners Equity- It is the claim of an

owner of a businessowner of a business


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Double Entry systemDouble Entry system --

PrinciplesPrinciples1.1. Every transaction effects two accountsEvery transaction effects two accounts

2.2. One account is the receiver of the benefit &One account is the receiver of the benefit &

the other is the giver of the benefitthe other is the giver of the benefit

3.3. For each transaction one account isFor each transaction one account is

debited & the other account is crediteddebited & the other account is credited

4.4. Amount of benefit received by one accountAmount of benefit received by one accountis equal to amount givenis equal to amount given


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Classification of AccountsClassification of Accounts

Personal A/cPersonal A/c

Real A/cReal A/c Nominal A/cNominal A/c

Valuation A/cValuation A/c


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Personal A/c- These are accounts of individuals,Personal A/c- These are accounts of individuals,

firms, companies, bankers, associations with whomfirms, companies, bankers, associations with whombusinessman dealsbusinessman deals

Real A/c- These are the accounts of properties,Real A/c- These are the accounts of properties,assets or possessions of the businessmanassets or possessions of the businessman

Nominal A/c- These are accounts of expenses orNominal A/c- These are accounts of expenses orlosses & gains or incomeslosses & gains or incomes

Valuation A/c- These are accounts which areValuation A/c- These are accounts which areconcerned with valuation of assets viz. provisionconcerned with valuation of assets viz. provisionfor depreciation, prov for doubtful debts etc.for depreciation, prov for doubtful debts etc.


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Personal A/cPersonal A/c

Types of personal A/c

NaturalPersonal

A/c

ArtificialPersonal A/c

Groups/

RepresentativePersonal

A/c


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Real A/cReal A/c

Types of Real A/c

TangibleReal

A/c

Intangible RealA/c


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Golden rules of AccountingGolden rules of Accounting

Real A/c : Dr what comes in & Cr what goes outReal A/c : Dr what comes in & Cr what goes out

Personal A/c : Dr the receiver & Cr the giverPersonal A/c : Dr the receiver & Cr the giver

Nominal A/c : Dr expenses & losses & CrNominal A/c : Dr expenses & losses & Cr

Incomes & GainsIncomes & Gains

Valuation A/c : Dr the A/c when it is to beValuation A/c : Dr the A/c when it is to bereduced & Cr the A/c when it is to be increasedreduced & Cr the A/c when it is to be increased


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Accounting EquationAccounting Equation ::

Assets = Liabilities + Owners EquityAssets = Liabilities + Owners Equity

The rules of Dr & CrThe rules of Dr & Cr::

vii)vii) Dr increase in assets, Cr decrease in assetsDr increase in assets, Cr decrease in assets

viii)viii) Dr decrease in liabilities, Cr increase inDr decrease in liabilities, Cr increase inliabilitiesliabilities

ix)ix) Dr decrease in Owners equity, Cr increase inDr decrease in Owners equity, Cr increase inOwners equityOwners equity


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JournalJournal

A journal is a book of primary entry. First all theA journal is a book of primary entry. First all thetransactions are recorded in the journal &transactions are recorded in the journal &

subsequently they are posted in ledger.subsequently they are posted in ledger.

A ledger is the principal book of accounts. It is aA ledger is the principal book of accounts. It is agroup of accounts; it contains an account for eachgroup of accounts; it contains an account for each

asset, liability, revenue & expense A/casset, liability, revenue & expense A/c

While transferring the transaction from journal toWhile transferring the transaction from journal toledger, the transactions are classified. For eachledger, the transactions are classified. For each

person, head of expenditure, income, asset etc.person, head of expenditure, income, asset etc.

separate accounts are opened in the ledger.separate accounts are opened in the ledger.


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Posting processPosting process ::

On debit side : Write the name of the credited a/c inOn debit side : Write the name of the credited a/c in

the journal after the word To.the journal after the word To. On the credit side : Write the name of the debited a/cOn the credit side : Write the name of the debited a/c

in the journal after the word By.in the journal after the word By.

All the transactions relating to a particular a/c shouldAll the transactions relating to a particular a/c should

be recorded in the a/c already opened. No new a/c ofbe recorded in the a/c already opened. No new a/c ofthe same name should be opened in the ledgerthe same name should be opened in the ledger

At the end of a certain period, the a/cs are balancedAt the end of a certain period, the a/cs are balanced

If the debit side is heavier the difference will appearIf the debit side is heavier the difference will appearon the credit side as, By balance c/d in theon the credit side as, By balance c/d in the

particulars column & if the credit side is heavier, theparticulars column & if the credit side is heavier, thedifference will appear on the debit side as , Todifference will appear on the debit side as , Tobalance c/dbalance c/d


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Purpose of balancing ledger a/cs:Purpose of balancing ledger a/cs:

Personal a/cs are balanced to know whether aPersonal a/cs are balanced to know whether aperson is a debtor or a creditor. A debitperson is a debtor or a creditor. A debitbalance indicates that the person is ourbalance indicates that the person is ourdebtor & a credit balance indicates that thedebtor & a credit balance indicates that the

person is our creditor .person is our creditor . A debit balance of a real a/c means an assetA debit balance of a real a/c means an asset

& a credit balance means liability& a credit balance means liability

Debit balance of a nominal a/c meansDebit balance of a nominal a/c means

expense & a credit balance representsexpense & a credit balance representsincomeincome

Documents

Fin Acct MBA