Definition of Accounting:

Accounting is an information system which identifies, records and communicates

financial information to interested users.

American Institute of Certified Public Accountants “Accounting is an art of recording,

classifying, and summarizing in a significant manner and in terms of money transactions
and events which in part, at least of a financial character, and interpreting the results
thereof.“

American Accounting Association “The process of identifying, measuring, and

communicating economic information to permit informed judgments and decisions by
users of the information.

Thus, accounting is not merely concerned with recording, classifying or summarizing the
transactions but also an important tool for providing appropriate information to users for
decision making.

Objectives of Accounting:
As an information system, the basic objective of accounting is to provide useful
information to the interested group of users, both external and internal. The necessary
information, particularly in case of external users, is provided in the form of financial
statements, viz., profit and loss account and balance sheet. Besides these, the
management is provided with additional information from time to time from the
accounting records of business. The primary objectives of accounting include the
following:

Maintaining Accounting Records: Accounting maintains systematic record of the

business relating to financial transactions, assets and liabilities. In the modern business
organisations, due to increase in the volume of operations, it is always preferred to have
written accounting records of the day.

Ascertainment of Profit or Loss: By preparing the income Statement which is also

known as Profit and Loss Account, a business firm can calculate the profit earned or loss
suffered during a particular period of time. For this, the business expenses are matched
with the revenues during a particular accounting period. Thus accounting helps the
business firm to find out the result of operations (profit or loss) by maintaining a
systematic record of incomes and expenses.

Ascertainment of Financial Position: With the help of the Balance Sheet which is also
known as the Position Statement, accounting evaluates the financial strength and
weakness of a business firm. The Balance Sheet comprises of the resources (assets) and
the sources of financing those resources. The business may be interested to know what it
owns, what are the dues to outsiders and also the position of the capital employed. With
the help of systematic records of assets, liabilities and capital a Balance Sheet can be
prepared and the financial position of the business can be ascertained.

Communication of Information: The accounting information generated by the

accounting process is communicated in the form of reports, statements, graphs and charts
to the users who need it in different decision situations. After preparation of necessary
books of accounts and the position statement, accounting communicates those
information to the appropriate users. The users can make use of the accounting
information as per their requirements.

Advantages of Accounting:
Replacing Memory: Business transactions are innumerable, varied and complex, as such
it is quite impossible to memorize each and every transaction. Accounting records these
transactions in writing and thus it is not necessary that the businessman should memorise
all the transactions.

Assisting the Performance of Business: Accounting keeps proper and systematic record
of all business transactions. Income statements are prepared with these records and we
are able to know the profit earned and the loss suffered by the business. Trading Account
is prepared to find out gross profit or loss of the enterprise. Net profit or net loss can be
known by preparing Profit and Loss Account.

Assessing the Financial Status of the Business: Financial position of the business is
displayed through position statement i.e., Balance Sheet of the business. The statement is
prepared at the end of the accounting year and reflects the true position of assets and
liabilities of the business on particular date.

Documentary Evidence: Accounting records can also be used as an evidence in the

court of substantiate the claim of the business. These records are based on documentary
proof. Every entry is supported by authentic vouches. That is why, the court accepts these
records as evidence.

Assisting in Realisation of Debts: In ‘Accounts’ we prepare personal ledger accounts of

all the parties. The personal account shows the exact amount due from the debtors. We
can send the debtors their statement of accounts and thus enable them to verify entries
and also to make early payment of the amount due. The account can also be used to prove
the claim of the business against the debtors in the court.

Facilitating the Sale of Business: The position statement of the business shows the
value of assets and liabilities of the business. We can calculate the ‘Net Worth’ of the
business on the basis of these statements. Accounting facilitates in the calculation of the
consideration for which the business should be sold.

Preventing and Detecting Frauds: The proper accounting system and effective
arrangement of internal check prevents leakage of goods and cash. In case, cheating takes
place, theft or embezzlement is made and fraud is committed, accounting helps in
detection of these losses and also fixes responsibility for it. Proper accounting prevents
employees from committing fraud.

Helpful to Management: Accounting is useful to the management in various ways. It

enables the management to assess the achievements of its performance. Actual
performance can be compared with the desired performance or with the performance of
previous years. The weaknesses of the business can be identified and corrective measures
can be applied to remove them.
Various profitability, sales and liquidity ratios can be calculated, the actual performance
can be evaluated and effective line of action can be decided for the future. Funds flow
statement can also be prepared to understand the additional funds earned during the year
and their application.

Branches of accounting:
The technological advancement and industrial and economical development have
resulted in the evolution of various types or branches of accounting over time. Some
popular types or branches of accounting are briefly discussed below:
1. Financial accounting: Financial accounting is concerned with the preparation of
periodic financial reports by using historical data of a business enterprise. The basic
purpose of these reports is to provide useful and timely information about an
entity’s financial position and its operating results to owners, managers, investors,
creditors and government agencies etc. Financial position refers to the resources and
obligations of a business at any given point of time and operating results means the net
profit earned or net loss incurred by a business enterprise during a particular period of
time.
There are certain rules known as “generally accepted accounting principles (GAAP)” that
each business enterprise must follow while preparing its financial reports to ensure that
the financial information published by it is useful, reliable and comparable with other
companies.
Financial accounting is also termed as the “general purpose accounting” because the
information generated by it is published for the use of everyone connected with the
business enterprise.
2. Management accounting: Management accounting uses historical as well as
estimated data to generate useful reports and information to be used by internal
management for decision making purpose. Unlike financial accounting, the information
generated by management accounting is not published for external parties but is used by
managers to perform their core functions such as evaluation of various products and
departments in terms of profitability, selection of the best available alternatives and
making other business decisions to achieve organizational goals. As the reports generated
by management accounting are not used by any external party, the business enterprises
don’t need to take care of GAAP.
3. Cost accounting: The cost accounting is concerned with categorizing, tracing and
collecting manufacturing costs of a business enterprise. The cost data collected so is used
by management in planning and control. A well established cost accounting system is
essential for every business enterprise to have a proper control over costs.
4. Tax accounting: Tax accounting deals with the tax related matters of a business
enterprise. It includes computation of taxable income and presentation of financial or
other information to tax authorities required by tax laws and regulations of a country.
The reports and information generated by financial accounting system satisfy the needs of
external parties to great extent. However, the rules and methods followed by a company
for preparing its financial accounting reports may slightly differ from those required by
tax laws. The work of a tax accountant is to adjust the net operating results and rearrange
the information generated by financial accounting to conform with the tax reporting
requirements of a country. Besides it, tax accountants also help companies minimize their
tax obligations. Because of these functions, tax accountants need to have an updated
knowledge about tax laws and regulations.
Tax accounting is also important for managers because taxes usually have a significant
impact on the expected outcomes of proposed decisions.
5. Project accounting: Project accounting is a component of overall project
management. It is a specially designed accounting system that prepares financial reports
at appropriate intervals of time to track the financial progress of a project. These reports
provide vital information to project managers in performing their project management
function. The use of project accounting is very common among companies involved in
construction contracts.
6. Not-for-profit accounting: Not-for-profit accounting fulfills the accounting needs of
not-for-profit organizations (also known as non-trading concerns). It is concerned with
recording events, preparing reports, and planning operations of not-for-profit
organizations such as charities, churches, educational institutions, hospitals, government
agencies and clubs etc. The basic accounting principles and concepts used while applying
not-for-profit accounting are the same as used in regular or general purpose financial
accounting.
7. International accounting: Intentional accounting deals with the issues and
complications involved in doing trade in world or international markets. Many companies
have expanded their business internationally. Such companies need to employ
accountants who possess detailed knowledge about accounting. Custom and taxation laws
applicable in different countries.
8. Government accounting: Government accounting is concerned with the allocation
and utilization of government budgets. It ensures that the central or state government
funds released for various purposes are being utilized efficiently. The proper record
keeping makes the audit of completed projects possible.
9. Social accounting: Social accounting is concerned with analyzing and evaluating
organizational impact on society and its environment. It measures the social costs and
benefits of various organizational activities. For example, accountants in this area might
analyze and evaluate the use of federal and state land or the use of welfare funds in a
large city. Other accountants might analyze and evaluate the environmental impact of
acid rain.
10. Forensic accounting: Forensic accounting deals with legal issues faced by business
enterprises. Accountants in this area use their knowledge, skills and techniques to deal
with legal matters such as dispute resolution, claim settlement, fraud investigation, court
and litigation cases etc.
11. Fiduciary accounting: Fiduciary accounting refers to the management of financial
records by a person to whom the custody and management of some property has been
entrusted for the benefit of another person. Estate accounting, trust accounting, and
receivership are some examples of fiduciary accounting.
12. Auditing: The term auditing generally refers to review, examination, verification,
evaluation or inspection of historical data, records or events belonging to an entity. The
person who performs the work of audit is known as auditor. In accounting and business,
there are two types of auditing – external auditing and internal auditing.
External auditing refers to the independent examination of an entity’s financial
statements and other accounting records that an entity publishes for the use of various
stakeholders. The auditor gives his opinion about the fairness of all accounting
information examined by him. An important element of “fairness” is the compliance of
financial statements with the generally accepted accounting principles (GAAP).

Q. “Accounting is an information system.”- Justify the

statement. (Note yourself)
Q. Why Accounting is called the language of business?

Many famous writers of Accounting of the world have regarded Accounting as the
language of business.

Man expresses his feelings through language in written and verbal form, similarly,
various information of the business organization are expressed and presented through
accounting statements. In language, efforts are made to express a particular feeling using
words one after another. Similarly, in accounting, financial transactions are recorded in
books of accounts and there from preparing financial statements various financial
information are communicated to concerned persons.

Accounting furnishes all information about past events, current activities and future
possibilities of a business. Recording and analyzing past and present financial events.
Accounting presents and communicates various information in the form of statements
and reports to the interested parties like owners, employees, management, investors,
buyers, sellers etc.

From these accounts, statements, and reports, parties concerned can evaluate their
success-failure, financial solvency/insolvency etc. Of course, having sound command
over accounting language one can understand this information. These financial
statements are meaningless to those who do not have knowledge of accounting, in the
same way as a newspaper is a bundle of papers to an illiterate person. So, Accounting
functions like a language. One may think it is not apt to compare Accounting with
language but actually, it is not so. Shorthand is a language but the persons who are
ignorant of it cannot understand this symbolic language. Similarly, it is not illogical to
term accounting as a language of business. It is meaningless to those who are ignorant of
this discipline. No language in the world is universal. Similarly, accounting language also
is not understandable to all.

With the changes in society and human life languages are changing. Similarly with the
advancement and complexity of business accounting language is changing gradually.
Therefore, it is apt to say, Accounting is the language of business.

Q. What are the Qualitative Characteristics of Accounting

Information?
The demand for accounting information by investors, lenders, creditors, etc., creates
fundamental qualitative characteristics that are desirable in accounting information. There
are six qualitative characteristics of accounting information. Two of the six qualitative
characteristics are fundamental (must have), while the remaining four qualitative
characteristics are enhancing (nice to have).

Fundamental (Primary) Qualitative Characteristics

Qualitative characteristics of accounting information that must be present for information
to be useful in making decisions:
  Relevance
 Representational faithfulness
Enhancing (Secondary) Qualitative Characteristics
Qualitative characteristics of accounting information that impact how useful the
information is:
 Verifiability
 Timeliness
 Understandability
 Comparability
We will look at each qualitative characteristic in more detail below.
Relevance: Relevance refers to how helpful the information is for financial decision-
making processes. For accounting information to be relevant, it must possess:
 Confirmatory value – Provides information about past events
 Predictive value – Provides predictive power regarding possible future events
Therefore, accounting information is relevant if it can provide helpful information about
past events and help in predicting future events or in taking action to deal with possible
future events. For example, a company experiencing a strong quarter and presenting these
improved results to creditors is relevant to the creditors’ decision-making process to
extend or enlarge credit available to the company.
Representational Faithfulness: Representational faithfulness, also known as reliability,
is the extent to which information accurately reflects a company’s resources, obligatory
claims, transactions, etc. To help, think of a pictorial depiction of something in real life –
how accurately does the picture represent what you see in real life? For accounting
information to possess representational faithfulness, it must be:
 Complete – Financial statements should not exclude any transaction.
 Neutral – The degree to which information is free from bias. Note that there are
subjectivity and estimation involved in financial statements, therefore information
cannot be truly “neutral.” However, if a company polled 1,000 accountants and
took the average of their answers, that would be considered neutral and free from
bias.
 Free from error – The degree to which information is free from errors.
Verifiability: Verifiability is the extent to which information is reproducible given the
same data and assumptions. For example, if a company owns equipment worth
Tk.100000 and told an accountant the purchase cost, salvage value, depreciation method,
and useful life, the accountant should be able to reproduce the same result. If they cannot,
the information is considered not verifiable.
Timeliness: Timeliness is how quickly information is available to users of accounting
information. The less timely (thus resulting in older information), the less useful
information is for decision-making. Timeliness matters for accounting information
because it competes with other information. For example, if a company issues its
financial statements a year after its accounting period, users of financial statements would
find it difficult to determine how well the company is doing in the present.
Understandability: Understandability is the degree to which information is easily
understood. In today’s society, corporate annual reports are in excess of 100 pages, with
significant qualitative information. Information that is understandable to the average user
of financial statements is highly desirable. It is common for poorly performing companies
to use a lot of jargon and difficult phrasing in its annual report in an attempt to disguise
the underperformance.
Comparability: Comparability is the degree to which accounting standards and policies
are consistently applied from one period to another. Financial statements that are
comparable, with consistent accounting standards and policies applied throughout each
accounting period, enable users to draw insightful conclusions about the trends and
performance of the company over time. In addition, comparability also refers to the
ability to easily compare a company’s financial statements with those of other companies.
The qualitative characteristics of accounting information are important because they
make it easier for both company management and investors to utilize a company’s
financial statements to make well-informed decisions.

Generally Accepted Accounting Principles - GAAP

Definition: Generally accepted accounting principles (GAAP) are the common set of
accounting principles, standards and procedures that companies use to compile their
financial statements. These include the standards, conventions, and rules that accountants
follow in recording and summarizing and in the preparation of financial statements.
GAAP are a combination of authoritative standards (set by policy boards) and simply the
commonly accepted ways of recording and reporting accounting information.

Accounting Concepts and Conventions

Accounting concepts and conventions evolved as a result of information needed by the

users of accounting information which became conflicting over time because of different
methodology or procedure used in its preparation. It was thereby adopted to ensure that
accounting information is presented accurately and consistently.
Accounting concepts and conventions could be defined as ground or laid down rules of
accounting that should be followed in preparation of all accounts and financial
statements. There are different kinds of accounting concepts and conventions.
The concepts include:

i. GOING CONCERN CONCEPT: Giving the fact that a business entity is solvent and
viable this concept assumes the notion that the business unit will have a perpetual
existence and will not be sold or liquidated. It supports the use of historical cost concept
in measuring assets such as; supplies, equipment etc. that will be used in operation of a
business. Without the Going concern concept accounts will be drawn up on a winding up
basis.

ii. ENTITY CONCEPT: This concept states that every business unit not withstanding its
legal existence is treated a separate entity from the body or bodies that owe it, this
implies that its existence is distinct from its owner(s).It records and reflects the financial
activity of the specific business organization and not of its owner(s) or employees. It is
also important because it ensures that a company and its owner(s) can contract and sue
each other in case of any misunderstanding arising in the future.

iii. MATCHING OR ACCURAL CONCEPT: This concept states that in an accounting

period the earned income and the incurred cost which earned the income should be
properly matched and reported for the period. This concept is also universally accepted in
manufacturing, trading organization. Points to considered when matching:

 Outstanding expenses though not paid for in cash are shown in the profit and loss
accounts.
 Prepaid expenses are not shown in profit and loss accounts
 Income receivable should be added in the revenue
 Income receivable in advance should be deducted from revenue.
Accrual concept attempt to correctly match all the accounting expenses (cost) to income
(revenue) to the time it occurs at that accounting period. It also enables all revenue and
expenditure of an accounting period to be recognized. It helps specify the profit of the
organization in the accounting period.

iv. REALISATION CONCEPT: Realization concept encourages the periodic recognition

of revenue as soon as it can be measured and the value of the assets is reasonably certain.
It encourages the recognition of transaction and profit arising from them at the point of
sale or transfer of ownership. In realization the revenue are realized in three basis:
 Basis of cash
 Basis of sale
 Basis of production.

v. HISTORICAL COST CONCEPT: This concept implies that all assets acquired,
service rendered or received, expenses incurred etc. should be recorded in the books at
the price at which it was acquired (its cost price). The cost is distinct from its value and
the record does not signify the value. It also holds that cost is the most reliable and
verifiable value at which a goods is or services should be initially recognized. It allows
the record of all transaction no matter how minute it may be before it might or might not
be subjected to depreciation.

vi. DUAL ASPECT CONCEPT: This concept ensures that transaction are recorded in
books at least in two accounts, if one account is debited it’s also credited with the same
amount in a different account. The recording system is also known as double entry
system. Assets = Liabilities + Equity

vii. MONEY MEASUREMENT CONCEPT: This concept states that an item should not
be recorded unless it can be quantified in monetary terms in other words it specifies that
accountants should not record facts that are not expressed in money terms. This concept
could be said to be efficient because money enables various things of diverse nature to be
added together and dealt with.

PERIODICITY CONCEPT: The periodicity concept of accounting states that the life of
the entity is unlimited so for better comparison its life should be divided into some
artificial time period. This concept derives from the going-concern concept. Periodicity
enables users of the reports to make comparisons of information between definite periods
and amongst companies in the same industry (as a basis for decision-making). A 12-
month period (one year) is the usual reporting period. Businesses also report summarized
financial information on an interim basis: half-yearly, quarterly or even monthly. This is
the concept called periodicity, time- period assumption or simply accounting period. The
time period is usually identified in the financial statements.

Some important Accounting conventions have been mentioned below:

i. CONSISTENCY: It states that accounting method used in one accounting period

should be the same as the method used for events or transactions which are materially
similar in other period (i.e. accounting practices should remain unchanged from period to
period ). This also involves treatment of transaction and valuation method. Consistency is
also advisable so that the comparison of accounting figures over time is meaningful.
Consistency also states that if a change becomes necessary, the change and its effect
should be clearly stated. As stated by D.VICTOR consistency in accounting is an
important assumption that facilitates comparability for information users. It also
encourages reliability and fair presentation.

ii. MATERIALITY: According to AMERICAN ACCOUNITNG ASSOCIATION, an

item should be regarded as material if there is reason to believe that knowledge of it
would influence decision of informed investors. An item is also considered material if its
omission or misstatement could distort the financial statement such that it influences the
economic decision of users taken on the basis of financial statement. It helps prevent
records to be unnecessarily being over burden with minute details.

iii. PRUDENCE OR CONSERVATISM: This is an accounting practice that emphasizes

great care in the anticipation of possible gains while possible losses are efficiently
provided for. Prudence requires an accountant to attempt to ensure that the degree of
success is not overstated. It also makes provision for possible bad and doubtful debts out
of current year’s profit. A strict application of prudence convention would ensure that
profits and assets of the firm are not overstated.

iv. OBJECTIVITY: This convention states that the financial statement should be made on
verifiable evidence. It gives proof of a transaction in an objective manner in contrast to
subjectivity or dependence on the verifiable opinion of the accountant preparing the
financial statement.

v. DISCLOSURE: It states that information relating to the economic affairs of the

enterprise which are of material interest should be clearly disclosed to the readers. It
discloses sufficient information which is of material in trust to owners, present and
potential creditors and investors.

Similarities and Differences between accounting and

bookkeeping:

Bookkeeping and accounting are both essential business functions required for all
businesses. Bookkeeping is responsible for the recording of financial transactions.
Accounting is responsible for interpreting, classifying, analyzing, reporting and
summarizing financial data. The biggest difference between accounting and bookkeeping
is that accounting involves interpreting and analyzing data and bookkeeping does not.

Similarities: Bookkeeping and accounting can appear to be the same profession to the
untrained eye. Both bookkeepers and accountants work with financial data. To enter
either profession, one must have basic accounting knowledge. Bookkeepers in smaller
companies often handle more of the accounting process than simply recording
transactions. They also classify and generate reports using the financial transactions.
They may not have the education required to handle these tasks, but this is possible
because most accounting software automates reports and memorizes transactions making
transaction classification easier. Sometimes, an accountant records the financial
transactions for a company, handling the bookkeeping portion of the accounting process.

Comparison Chart:

Basis for Bookkeeping Accounting

Comparison
Meaning Bookkeeping is an activity of Accounting is an orderly recording
recording the financial and reporting of the financial
transactions of the company in a affairs of an organization for a
systematic manner. particular period.
What is it? It is the subset of accounting. It is regarded as the language of
business.
Scope It has limited scope and is It has wider scope as compared to
concerned with the recording of book-keeping.
business transactions
On the basis of bookkeeping Decisions can be taken on the basis
Decision records, decisions cannot be of accounting records.
Making taken.
Preparation Not done in the bookkeeping Part of Accounting Process
of Financial process
Statements
Tools Journal and Ledgers Journal, Ledgers, Balance Sheet,
Profit & Loss Account and Cash
Flow Statement
Level of work It is restricted to low level of
work. Clerical work is involved in It is concerned with low level,
it. medium level and even top level
management. Low level clerks
prepare the accounts, medium level
report it and top level interpret it.

Financial Bookkeeping does not reflect the

Position financial position of an Accounting clearly shows the
organization. financial position of the entity.

Designation The task of Bookkeeping is The task of Accounting is

performed by a bookkeeper. performed by the accountant.
Mutual Book-keeping is only the art of
dependence recording transactions, so it has to Accounting is based upon
depend upon accounting which bookkeeping which is its initial and
makes it more meaningful and vital part. It depends upon
purposeful bookkeeping.

Level of work It is restricted to low level of

work. Clerical work is involved in It is concerned with low level,
it. medium level and even top level
management. Low level clerks
prepare the accounts, medium level
report it and top level interpret it.
 Revenue Expenditure:

Definition and Explanation:

All the expenditures which are incurred in the day to day conduct and administration of a
business and the effect-of which is completely exhausted within the current accounting
year are known as "revenue expenditures". These expenditures are recurring by nature i.e.
which are incurred for meeting day today requirements of a business and the effect of
these expenditures is always short-lived i.e. the benefit thereof is enjoyed by the business
within the current accounting year. These expenditures are also known as "expenses or
expired costs." e.g. Purchase of goods, salaries paid, postages, rent, traveling expenses,
stationery purchased, wages paid on goods purchased etc.

This expenditure is incurred on items or services which are useful to the business but are
used up in less than one year and, therefore, only temporarily increase the profit-making
capacity of the business.

Revenue expenditure also includes the expenditure incurred for the purchase of raw
material and stores required for manufacturing saleable goods and the expenditure
incurred to maintain the- fixed assets in proper working conditions i.e. repair of
machinery, building, furniture etc.

Examples:

Following are the examples of revenue expenditure.

 Wages paid to factory workers.

 Oil to lubricate machines.
 Power required to run machine or motor.
 Expenditure incurred in the ordinary conduct and administration of business, i.e.
rent, , carriage on saleable goods, salaries, wages manufacturing expenses,
commission, legal expenses, insurance, advertisement, free samples, postage,
printing charges etc.
 Repair and maintenance expenses incurred on fixed assets.
 Cost of saleable goods.
  Depreciation of fixed assets used in the business.
 Interest on borrowed money.
 Freight, cartage, transportation, insurance paid on saleable goods.
 Petrol consumed in motor vehicles.
 Service charges to motor vehicles.
 Bad debts.

Capital Expenditure

Definition and Explanation:

An expenditure which results in the acquisition of permanent asset which is intended lo

be permanently used in the business for the purpose of earning revenue, is known as
capital expenditure. These expenditures are 'non-recurring' by nature. Assets acquired by
incurring these expenditures are utilized by the business for a long time and thereby they
earn revenue. For example, money spent on the purchase of building, machinery,
furniture etc. Take the case of machinery-machinery is permanently used for, producing
goods and profit is earned by selling those goods. This is not an expenditure for one
accounting period, machinery has long life and its benefit will be enjoyed over a long
period of time. By long period of time we mean a period exceeding one accounting
period.

Moreover, any expenditure which is incurred for the purpose of increasing profit earning
capacity or reducing cost of production is a capital expenditure. Sometimes the
expenditure even not resulting in the increase of profit earning capacity but acquires an
asset comparatively permanent in nature will also be a capital expenditure.

It should be remembered that when an asset is purchased, all amounts spent up to the
point till the asset is ready for use should be treated as capital expenditure. Examples are:
(a): A machinery was purchased for $50,000 from Dhaka. We paid carriage $1,000 to
bring the machinery Dhaka to Chittagong. Then we paid wages $1,000 for its installation
in the factory. For all these expenditures, we should debit machinery account instead of
debiting carriage A/c and wages A/c. (b) Fees paid to a lawyer for drawing up the
purchase deed of land, (c): Interest paid on loans raised to acquire a fixed asset etc.

More Examples:
  Purchase of furniture, motor vehicles, electric motors, office equipment, loose
tools and other tangible assets.
 Cost of acquiring intangible assets like goodwill, patents, copy rights, trade
marks, patterns and designs etc.
 Addition or extension of assets.
 Money spent on installation and erection of plant and machinery and other fixed
assets.
 Wages paid for the construction of building.
 Structural improvements or alterations in fixed assets resulting in an increase in
their useful life or profit earning capacity.
 Cost of issue of shares and debentures (certain expenditures are incurred by the
companies when share and debentures are issued).
 Legal expenses on raising loans for the purchase of fixed assets.
 Interest on loan and capital during the construction period.
 Expenditures incurred for the development of mines and plantations etc.
 Money spent to bring a second-hand asset into working condition.
 Cost of replacing factory building from an old place to a new arid better site.
 Premium given for a lease.

The difference between capital expenditures and revenue expenditures:

a) Capital expenditures are for fixed assets, which are expected to be productive
assets for a long period of time. Revenue expenditures are for costs that are
related to specific revenue transactions or operating periods, such as the cost of
goods sold or repairs and maintenance expense. Thus, the differences between
these two types of expenditures are as follows:
b) Timing. Capital expenditures are charged to expense gradually via depreciation,
and over a long period of time. Revenue expenditures are charged to expense in
the current period, or shortly thereafter.
c) Consumption. A capital expenditure is assumed to be consumed over the useful
life of the related fixed asset. A revenue expenditure is assumed to be consumed
within a very short period of time.
d) Size. A more questionable difference is that capital expenditures tend to involve
larger monetary amounts than revenue expenditures. This is because an
expenditure is only classified as a capital expenditure if it exceeds a certain
threshold value; if not, it is automatically designated as a revenue expenditure.
 However, certain quite large expenditures can still be classified as revenue
expenditures, as long they are directly associated with sale transactions or are
period costs.
e) Capital expenditure generates future economic benefits, but the Revenue
expenditure generates benefit for the current year only.
f) The major difference between the two is that the Capital expenditure is a one-time
investment of money. On the contrary, revenue expenditure occurs frequently.
g) Capital expenditure is shown in the Balance Sheet, in asset side, and in the
Income Statement (depreciation), but Revenue Expenditure is shown only in the
Income Statement.
h) Capital Expenditure is capitalized as opposed to Revenue Expenditure, which is
not capitalized.
i) Capital Expenditure is a long term expenditure. Conversely, Revenue Expenditure
is a short term expenditure.
j) Capital Expenditure attempts to improve the earning capacity of the entity. On the
contrary, revenue expenditure aims at maintaining the earning capacity of the
company.
k) Capital expenditure is not matched with the capital receipts. Unlike revenue
expenditure, which is matched with the revenue receipts.

Cash Basis Accounting & Accrual Basis Accounting:

Under the cash basis of accounting actual cash receipts and actual cash payments are
recorded. Credit transactions are not recorded at all and are ignored till the cash is
actually received or paid. Income is merely the difference between the cash receipts and
cash payments. The Receipts and Payments Account prepared in case of non-trading
concerns such as a charitable institution, a club, a school, a college etc. and professional
men like lawyer, doctor, a chartered accountant etc. can be cited as the best example of
cash basic of accounting.

Accrual-basis accounting combines two important accounting principles: the matching

principle and the revenue recognition principle. Under these principles, revenue is
recognized when it is earned, and expenses are reflected in the period that best matches
the revenue they help create. Accrual basis of accounting rejects the circumstances of
receipt or payment of cash as criteria for associating either income or expense with a
period.
 Accounting Cycle
Definition: The accounting cycle is holistic process of completing a company’s
accounting tasks. It provides a clear guide for the recording, analysis, and fina l reporting
of a business’s financial activities. The accounting cycle is used comprehensively
through one full reporting period. Accounting cycle periods will vary by reporting
needs. Most companies seek to analyze their performance on a monthly basis, though
some may focus more heavily on quarterly or annual results.

Steps in the Accounting Cycle:

Transactions: Financial transactions start the process. If there were no financial
transactions, there would be nothing to keep track of. Transactions may include a debt
payoff, any purchases or acquisition of assets, sales revenue, or any expenses incurred.

Journal Entries: Journal entries are the second step in the accounting cycle and are used
to record all business transactions and events in the accounting system. As transactions
occur throughout the accounting period, journal entries are recorded to show how the
transaction changed in the accounting equation. For example, when the company spends
cash to purchase a new vehicle, the cash account is decreased or credited and the vehicle
account is increased or debited. In debiting one or more accounts and crediting one or
more accounts, the debits and credits must always balance.

Posting to the General Ledger (GL): The journal entries are then posted to the general
ledger where a summary of all transactions to individual accounts can be seen.

Trial Balance: At the end of the accounting period (which may be quarterly, monthly, or
yearly, depending on the company), a total balance is calculated for all the ledger
accounts. The purpose of this step is to ensure that the total credit balance and total debit
balance are equal. This stage can catch a lot of mistakes if those numbers do not match
up.

Worksheet: Analyzing a worksheet and identifying adjusting entries make up the sixth
step in the cycle. A worksheet is created and used to ensure that debits and credits are
equal. If there are discrepancies then adjustments will need to be made. In addition to
identifying any errors, adjusting entries may be needed for revenue and expense
matching when using accrual accounting.

Adjusting Entries: At the end of the company’s accounting period, adjusting entries
must be posted to accounts for accruals and deferrals. Adjusting entries are most
commonly used in accordance with the matching principle to match revenue and
expenses in the period in which they occur.

Financial Statements: Preparing financial statements including the, income statement,

owners’ equity statement, balance sheet and statement of cash flows; is the most
important step in the accounting cycle because it represents the purpose of financial
accounting. In other words, the concept financial reporting and the process of
the accounting cycle are focused on providing users with useful information in the form
of financial statements. These statements are the end product of the accounting system in
any company. Basically, preparing these statements is what financial accounting is all
about.

Closing: The revenue and expense accounts are closed and zeroed out for the next
accounting cycle. This is because revenue and expense accounts are income statement
accounts, which show performance for a specific period. Balance sheet accounts are not
closed because they show the company’s financial position at a certain point in time.

Transaction

Definition: A transaction is a business event that has a monetary impact on an entity's

financial statements and is recorded as an entry in its accounting records. It is an event
that makes a change in the asset, liability, or owners’ equity account. Transactions are
recorded first in journal and then posted to a ledger.

Examples of transactions are as follows:

 Paying a supplier for services rendered or goods delivered.

 Paying a seller with cash and a note in order to obtain ownership of a property
formerly owned by the seller.
 Paying an employee for hours worked.
 Receiving payment from a customer in exchange for goods or services delivered.

Double Entry System

Definition: The double entry system of accounting or bookkeeping means that every
business transaction will involve two accounts (or more). For example, when a company
borrows money from its bank, the company's Cash account will increase and its liability
account Loans Payable will increase. If a company pays Tk. 200 for an advertisement, its
Cash account will decrease and its account Advertising Expense will increase.

Double entry also allows for the accounting equation (assets = liabilities + owner's
equity) to always be in balance. In our example involving Advertising Expense, the
accounting equation remained in balance because expenses cause owner's equity to
decrease. In that example, the asset Cash decreased and the owner's capital account
within owner's equity also decreased.

A third aspect of double entry is that the amounts entered into the general ledger accounts
as debits must be equal to the amounts entered as credits.
Characteristics or Fundamental Principles: The double-entry system is a scientific,
self-sufficient, and reliable system of accounting. Following some widely accepted
characteristics or principles, the account is kept under this system. As a result, on one
side, the arithmetical accuracy of the transaction is ensured, and on the other side,
ascertainment of the financial position of the business is easily possible. Characteristics
of the double-entry system are stated below;

 Two parties: Every transaction involves two parties – debit and credit. According
to the main principles of this system, every debit of some amount creates
corresponding credit, or every credit creates the corresponding debit for the same
amount.
 Giver and receiver: Every transaction must have one giver and one receiver.
 Exchange of equal amount: The amount of money of a transaction the party gives
is equal to the amount the party receives.
 Separate entity: Under this system, business is treated as a separate entity from the
owner. Here the business is considered as a separate entity.
 Dual aspects: Every transaction is divided into two aspects. The left side of the
transaction debit and the right side is credit.
 Results: Under double entry system totality of debit is equal to the totality of
credit. In its ascertainment of the result is easy.
 Complete accounting system: Double entry system is a scientific and complete
accounting system.

Through this system, the account is kept completely, and no party is ignored. Every
transaction must possess these characteristics. If there is an exception to this, complete
information will not be available in the books of accounting. As a result, the main
objective of accounting will be frustrated.

Account

An account refers to assets, liabilities, income, expenses, and equity, as represented by

individual ledger pages, to which changes in value are chronologically recorded with
debit and credit entries. These entries, referred to as postings, become part of a book of
final entry or ledger. It is a record in an accounting system that tracks the financial
activities of a specific asset, liability, equity, revenue, or expense. These records increase
and decrease as the business events occur throughout the accounting period. Each
individual account is stored in the general ledger and used to prepare the financial
statements at the end of an accounting period. Examples of common financial accounts
are cash, accounts receivable, mortgages, loans, PP&E, common stock, sales, services,
wages, and payroll. A chart of accounts provides a listing of all financial accounts used
by particular business, organization, or government agency.
Types: There are five main types of accounts used in modern accounting system. Each of
these are represented in the expanded accounting equation. Assets = Liabilities +
Owner’s Equity + Revenues – Expenses.

Assets are resources that the company can use to generate revenues in current and future
years. Asset accounts have a debit balance and are always presented on the balance sheet
first. Assets are divided into tangible and intangible. Examples of tangible assets
include desktop computers, laptops, cars, cash, equipment, buildings and more. Your
trademark, logo, copyrights and other non-physical items are considered intangible
assets.
Liabilities represent the debt obligations that the company owes to creditors. This can
include bank debt as well as notes from owners. Liability accounts have a credit balance
and appear below assets on the balance sheet. These can be loans, unpaid utility bills,
bank overdrafts, car loans, mortgages and more.
The equity account defines how much business is currently worth. It's the residual
interest in your company's assets after deducting liabilities. Common stock, dividends
and retained earnings are all examples of equity. After recording these transactions,
accountant will make a balance sheet. This information will provide a snapshot of what
business owns and owes. It reflects your company's financial position and offers
valuable insights into its overall performance.

Revenue or income, one of the primary types of accounts in accounting, includes the
money company earns from selling goods and services. This term is also used to
denote dividends and interest resulting from marketable securities.

Expense accounts, on the other hand, represent the resources used to generate income.
These items have a debit balance and lower total equity. Any product or service that
your company purchases to generate income or manufacture goods is also considered
an expense. This may include advertising costs, utilities, rent, salaries and others.
Some expenses are deductible and help reduce your taxable income.

Accounting equation
The fundamental accounting equation, also called the balance sheet equation, represents
the relationship between the assets, liabilities, and owner's equity of a person or business.
It is the foundation for the double-entry bookkeeping system. For each transaction, the
total debits equal the total credits. It can be expressed as furthermore:
A=L+P/OE/E
A=L+(C-D+NP-NL)

A=L+C-D+ (I-E)
A+D+E=L+C+I

A=ASSET
L=LIABILITIES
P=EQUITY/PROPRIETORSHIP

C=CAPITAL

D= DRAWINGS
NP= NET PROFIT

NL= NET LOSS

I= INCOME

E= EXPENSE
In a corporation, capital represents the stockholders' equity. Since every business
transaction affects at least two of a company's accounts, the accounting equation will
always be "in balance", meaning the left side of its balance sheet should always equal the
right side. Thus, the accounting formula essentially shows that what the firm owns (its
assets) is purchased by either what it owes (its liabilities) or by what its owners invest (its
shareholders' equity or capital); note that the profits earned by the company, is ultimately
owned by its owners.
The formula can be rewritten:

Assets - Liabilities = (Shareholders' or Owners' Equity)

Now it shows owners' equity is equal to property (assets) minus debts (liabilities). Since
in a corporation owners are shareholders, owner's equity is called shareholders' equity.
Every accounting transaction affects at least one element of the equation, but always
balances

DEBIT CREDIT ANALYSIS:

ADE: Increase - Debit, Decrease - Credit

LCI: Decrease - Debit, Increase - Credit

Accounting Cycle
Definition: The accounting cycle is a basic, eight-step process for completing a
company’s bookkeeping tasks. It provides a clear guide for the recording, analysis, and
final reporting of a business’s financial activities. The accounting cycle is used
comprehensively through one full reporting period. Thus, staying organized throughout
the process’s time frame can be a key element that helps to maintain overall efficiency.
Accounting cycle periods will vary by reporting needs. Most companies seek to analyze
their performance on a monthly basis, though some may focus more heavily
on quarterly or annual results.

Steps in the Accounting Cycle:

Transactions: Financial transactions start the process. If there were no financial
transactions, there would be nothing to keep track of. Transactions may include a debt
payoff, any purchases or acquisition of assets, sales revenue, or any expenses incurred.

Journal Entries: Journal entries are the second step in the accounting cycle and are used
to record all business transactions and events in the accounting system. As business
events occur throughout the accounting period, journal entries are recorded in the general
journal to show how the event changed in the accounting equation. For example, when
the company spends cash to purchase a new vehicle, the cash account is decreased or
credited and the vehicle account is increased or debited. In debiting one or more accounts
and crediting one or more accounts, the debits and credits must always balance.
 Posting to the General Ledger (GL): The journal entries are then posted to the general
ledger where a summary of all transactions to individual accounts can be seen.

Trial Balance: At the end of the accounting period (which may be quarterly, monthly, or
yearly, depending on the company), a total balance is calculated for all the ldger
accounts. The purpose of this step is to ensure that the total credit balance and total debit
balance are equal. This stage can catch a lot of mistakes if those numbers do not match
up.

Worksheet: Analyzing a worksheet and identifying adjusting entries make up the fifth
step in the cycle. A worksheet is created and used to ensure that debits and credits are
equal. If there are discrepancies then adjustments will need to be made. In addition to
identifying any errors, adjusting entries may be needed for revenue and expense
matching when using accrual accounting.

Adjusting Entries: At the end of the company’s accounting period, adjusting entries
must be posted to accounts for accruals and deferrals. Adjusting entries are most
commonly used in accordance with the matching principle to match revenue and
expenses in the period in which they occur.

Financial Statements: Preparing financial statements including the, income statement,

owners equity statement, balance sheet and statement of cash flows; is the most important
step in the accounting cycle because it represents the purpose of financial accounting. In
other words, the concept financial reporting and the process of the accounting cycle are
focused on providing users with useful information in the form of financial statements.
These statements are the end product of the accounting system in any company.
Basically, preparing these statements is what financial accounting is all about.

Closing: The revenue and expense accounts are closed and zeroed out for the next
accounting cycle. This is because revenue and expense accounts are income statement
accounts, which show performance for a specific period. Balance sheet accounts are not
closed because they show the company’s financial position at a certain point in time.