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Basic Concepts in
Accounting
MEANING & DEFINITIONS of BOOK KEEPING

• Book Keeping means keeping a

written record of business
transactions in a set of books.
• Book Keeping is the art of
recording business dealings in a
set of books ----- J R Batliboi
• Book Keeping is the science and
art of correctly recording in the
books of accounts all those
business transactions that result
in the transfer of money or
money’s worth ----- R N Carter
NEED OF BOOK KEEPING
• To have permanent record of all the
business transactions
• To know names of customers &
suppliers
• To know net profit & net loss,
assets & liabilities of the business
• To have important information for
legal & tax matters
OBJECTIVES OF BOOK KEEPING
• To have date-wise record
• To have account-wise record
• To calculate & know yearly profit
or loss
• To know year-end financial
position
• To analyse, interpret &
communicate the accounting
information
Is it a Science or an Art ?
Accounting is both –
Science and art
Science Art
• Definite principles & • Practical application
assumptions • Depending on day to day affairs
• Universal application
• Systematic method
• Rules & Equation
PERSONS INTERESTED IN ACCOUNTING

• OWNER
• EMPLOYEES
• LENDERS
• CUSTOMERS
• SUPPLIERS
• GOVERNMENT
• SOCIETY
• SHAREHOLDERS
• RESEARCHERS
• PROSPECTIVE INVESTORS
FINANCIAL ACCOUNTING
• Financial Accounting is the
process of summarising
financial data, which is taken
from an organisation’s
accounting records and
publishing it in the form of
annual or quarterly reports, for
the benefit of people outside
the organisation

• It is also concerned with

activities involving strategic
planning, control, decision
making, problem solving,
performance measurement &
evaluation, co-ordinating,
directing, auditing, tax
planning, cost & management
accounting, MIS & so on.
Role of Financial Accounting

• Generates key documents like

Manufacturing A/c, Trading A/c,
Profit & Loss A/c & Balance
Sheet

• Records financial transactions

showing both inflow & outflow
of money from sale, purchase,
payments & receipts etc

• Empowers the managers & aids

them in managing more
efficiently by preparing
standard information which
includes monthly MIS reports
tracing the costs and profits
against budgets, sales &
investigations of the cost.
Accounting Terminology
• TRANSACTION – Exchange
between two parties. It involves
“Give & Take”

• CASH TRANSACTION – Goods

or services are exchanged for cash

• CREDIT TRANSACTION –
Goods or services are exchanged
for cash receivable or payable at
future
• GOODS – things, articles or commodities
exchanged in a business transaction

• SERVICES – Service means the work

done for money. They do not involve any
article or commodity

• PROFIT – Excess of Income over

expenditure

• LOSS – Excess of Expenses over Income

• INCOME – Amount earned by sale of

goods & services
• EXPENSES – Amount paid for
goods & services used in the
business
• ASSETS – Properties owned by the
business like Building, Plant,
Machinery, Computers, Motor Cars,
Furniture & Fixtures etc.
• LIABILITIES – Loans borrowed
from banks, relatives, friends etc.
which must be paid back in future
are called liabilities
• CONTINGENT LIABILITY –
Future liability. It may or may not
become an actual liability. It is not
recorded in the books, but is shown
by way of a note in the balance
sheet
• CAPITAL – Money put in the business
by the owner. It also includes goods or
assets brought in the business by the
owner

• DRAWINGS – If the owner withdraws

any money, goods or assets from the
business for his own use, such
withdrawals are called as drawings.
Such drawings reduce the amount of
capital of the owner

• NET WORTH – Difference between

total assets and total outside liabilities.
Net Worth = Assets - Liabilities
• DEBTOR – A debtor buys
goods & services from us
and promises to pay the price
to us on an agreed date in
future. Debtor is a person
who owes money to
business.
• CREDITOR – A creditor
sells goods & services to us
and agrees to receive the
price in future. Creditor is a
person to whom we owe
money.
• EXPENDITURE – Payment
made by a business to obtain
some benefit i.e. assets,
goods or services
• CAPITAL EXPENDITURE –
Expenditure for obtaining an
asset is known as capital
expenditure. It is an
expenditure having future
benefits. It is an expenditure
with long term use (more than 1
year)
• REVENUE EXPENDITURE
– Expenditure on obtaining
goods and services is known as
revenue expenditure. It is an
expenditure for running the
business. It is an expenditure
with short term use (1 year or
less than 1 year)
• DEFERRED REVENUE EXPENDITURE – To defer
means to postpone. It is that expenditure which is carried
forward as it will be of benefit over subsequent period
e.g. heavy advertisement expenditure to launch a new
product. The proportionate cost related to current year is
taken as expense. The balance cost is carried forward and
written off in next year.

• ACCOUNTING YEAR – Period of 12 months normally

starting in April & ending in March of next year.
Normally profit is found out for an accounting year.
• Account – An account is a summarized record of
transaction relating to certain person, kind, income or
expenditure. It is separately prepared record of the certain
transactions
• Asset – Assets are the properties of every type (movable or
immovable) owned by a person or an organization
• Casting – Casting means totalling of books of accounts.
• Bad Debt – Bad debts are those debts which are not
recoverable and written off from the debtors account. It is
a loss for the organization
• Discount – It is a concession or allowance given by the
receiver of benefit to giver of the benefit. It is generally
given by seller to buyer
• Entry – The entry refers to the recording of business
transaction in the books of account
• Narration – It is a brief explanation of a journal entry
written exactly after every journal entry starting with the
word “being”
• Posting – Transactions recorded in journal are further
transferred to ledger accounts. The process of recording
the transactions from journal to ledger is called as posting
• Purchases – Goods brought for direct resale or further
manufacturing and resale is called as purchase. Thus
buying, the commodities for trading or business purpose
are termed as purchases.
• Revenue – Revenue refers to the amount generated by the
organisation from its business activities. Generally it is the
amount collected through making sales efforts
• Sales – When an organisation makes sale of goods (which
it purchased for resale) then it directly termed as sale.
• Solvent – A person or an organisation is said to be solvent
when its assets are equal to or more than its liabilities
• Stock – Stock refers to the amount of (value of ) unsold
goods lying with the businessman on any particular date
• Accounts Payable - Money owed to the suppliers of business
presented as liability on the company’s balance sheet.
• Accounts Receivable - A promise of cash receipts from
customers (debtors) to whom the firm has made sales, or for
whom certain services are provided by the business
• Accounting - The system of measuring, recording,
summarizing, interpreting, and communicating business’
financial data.
• Accounting Equation - It is the most basic tool of accounting,
understood as Capital (owner’s equity) + Liabilities = Assets
• Balance Sheet - Data presenting the company’s assets,
liability, and owner’s equity as on a specific date (usually
year end).
• Corporation – Legal entity or an artificial person as per the
law
• Capital – Owners equity in the business
• Entity - An organization or a section of an organization
established to undertake accounting activities
• Expense - All the costs incurred to generate the revenues.
• Financial Statements - Business documents that provide
financial data about an entity to the persons and
organizations outside the business. These include
Income Statement, Statement of Owner’s Equity, and
Balance Sheet.
• GAAP - These are accounting guidelines formulated by the
Financial Accounting Standards Board. They regulate the
way businesses report their financial statements to the public.
• Income Statement - A statement in the form of a list of an
entity’s revenues, expenses, and net income or net loss for a
particular period.
• Liability - An economic obligation payable to an individual
or a firm outside the business.
• Note Payable - A liability recorded as a written
promise to make a future payment.
• Note Receivable - An asset recorded by
another party as a written promise that entitles
the business to receive cash in the future.
• Owner’s Equity - The claim of an owner of a
business over the business’ assets. It is also
called the capital.
• Proprietorship - A business with a single owner
• Revenue - Increase in the owner’s equity,
earned by the sale of goods and/ or services to
the business’ customers
TYPES OF ACCOUNTS

• PERSONAL ACCOUNTS – Accounts of

all persons like Dena Bank a/c, Garware
Institute A/c, Mumbai University A/c,
Sachin Tendulkar A/c etc.

• REAL ACCOUNTS – Accounts of all

properties & assets like CASH Account,
Plant & Machinery A/c, Building A/C etc.

• NOMINAL ACCOUNTS – Accounts of all

expenses & losses and Incomes & gains like
Telephone charges a/c, Interest Recd A/C,
Electricity charges a/c, Salary account etc.
GOLDEN RULES
PERSONAL ACCOUNT
DEBIT - THE RECEIVER
CREDIT – THE GIVER

REAL ACCOUNT
DEBIT – WHAT COMES IN
CREDIT – WHAT GOES OUT

NOMINAL ACCOUNT
DEBIT – ALL EXPENSES & LOSSES
CREDIT – ALL INCOMES & GAINS
Rules Simplified
BUSINESS
BRANCHES OF ACCOUNTING

• FINANCIAL ACCOUNTING

• COST ACCOUNTING

• MANAGEMENT/MANAGERIAL ACCOUNTING

• AUDITING

• TAXATION
FINANCIAL ACCOUNTING

• Original Form of Accounting

• Confined to Preparation of
Financial Statements
• Objective is to Calculate Profit /
Loss made during the year & to
exhibit Financial Position of the
Business
COST ACCOUNTING
• Function of cost accounting
is to ascertain the cost of the
product and to help the
management in the control
of cost
• Costing is a technique of
ascertaining cost of a
particular product or service
Example of Marginal Costing
Units 100 Units 101 Units 99 Units
Produced
Total Cost Rs.200 Rs.202 Rs.198

Cost Per Rs.2 Rs.2 Rs.2

Unit
With the increase or decrease in the
volume the cost is increased or decreased
by Rs.2 respectively. Thus Rs.2 will be
called as marginal cost
Features of Marginal Costing

• Elements of cost are differentiated between fixed costs &

variable costs
• Only the variable or marginal cost is considered while calculating
product cost
• Stock of F/G & WIP are valued at variable cost
• Contribution is the difference between sales & marginal cost
• Fixed cost do not find place in the product cost
• It is a technique of cost recording and cost reporting
• Profitability of various products is determined in terms of
marginal contribution
Marginal Costing

Sales (S) xx

Less Variable Cost (V) xx

Contribution © xx

Less Fixed Cost (F) xx

Profit (P) xx
MANAGEMENT ACCOUNTING
• It is an accounting for
management
• Provides information to the
management
• It is reproduction of financial
accounts in such a way as will
enable the management to take
decisions & control various
activities
METHODS / DEVICES USED IN ANALYSIS OF
FINANCIAL STATEMENTS
• Comparative Financial Statements
• Common Size/Measurement Statements
• Trend Percentages
• Accounting Ratios
• Statement of Changes in Working Capital
• Funds Flow Statements
• Cash Flow Statements
• Specialized Analysis
FORMATS
Working Capital Cycle
Classification of Activities
As per AS-3 the cash flow statement should report cash flows during the
period classified by
• OPERATING ACTIVITIES
• INVESTING ACTIVITIES
• FINANCING ACTIVITIES
AUDITING
• Examination of books, accounts,
vouchers and other records by a
practicing Chartered Accountant
appointed for the purpose
• Reporting to the members /
management whether the B/S &
P/L A/c as on particular date
shows true & fair view of the
state of affairs of the business
Techniques of Auditing

1. Inspection – Examination of records, documents and tangible assets

2. Observation – witnessing the process or procedure performed by other
3. Enquiry – seeking/asking right information from right person
4. Confirmation – consist of response to an enquiry
5. Computation – checking the arithmetical accuracy of the transactions
6. Analytical Review – studying ratios and trends and investigating the unusual fluctuations
7. Routine Check – checking totals, carry forwards, postings in to ledgers, balancing etc.
8. Test Check – selecting the representative (particular) transactions of each class and checking them
in detail rather than checking all the transactions.
9. In depth Auditing – involves verification of the transaction at all stages from its origin to
conclusion
TAXATION
• Computation of Taxable
Income & Tax Payable
thereon
• Reconciliation between
accounting profit &
taxable profit
• Statutory compliance
Accounting Conventions
• Consistency
• Materiality
• Disclosure
• Conservatism
Consistency
• Means following the same accounting policies consistently without initiating
frequent changes
• Comparison of business results of one period with the other is possible only
when accounting policies are followed consistently.
• E.g. Depreciation
Materiality
• An item should be regarded as material, if there is a reason to believe that
knowledge of it would influence the decision of the informed investor
• Significant & important information should be properly reported
Disclosure
• Full disclosure of all the material facts with the true and fair view
• It does not mean disclosure of each and everything
• It simply means providing information of significance to the relevant
users
Conservatism
• It refers to policy of playing safe
• All the probable losses are taken in to consideration but not the probable gains
• E.g. making provision for doubtful debts, discount on debtors, valuation of stock
at cost or market price whichever is less etc.
Accounting Concepts
ACCOUNTING CONCEPTS
Elephant, Monkey, Cat, Goat, Parrot & Ant Playing Match for Victory

Verifiable
Evidence Entity
Money
Measurement
Matching

Cost
Prudence

Accrual Going
Concern
Periodicity
ACCOUNTING CONCEPTS EXPLAINED
• The Entity Concept – A business is an artificial entity distinct &
separate from its owner. For accounting purposes a business & its
owner are two separate persons
• Money Measurement Concept – For accounting purposes each
transaction & event must be expressible in monetary terms.
• The Cost Concept - Assets such as Land, Buildings, Plant & Machinery
etc. and obligations such as Loans, Public Deposits etc. should be
recorded at historical cost (acquisition)
• The Going Concern Concept – It is assumed that the business
organization would continue its operations for a long time
• Periodicity Concept – The results of operations of
entity are measured periodically i.e. in each
accounting period. Calendar Year – January to
December
Fiscal Year – April to March
As per Income Tax Act, Accounting Period should
always be starting from April - March
• Accrual Concept – Incomes & Expenses should be
recognized as and when they are earned and
incurred, irrespective of whether the money is
received or paid in connection thereof. E.g. Rent paid
for 15 months in advance on January 2009. In this
case Rent for 3 months should be recognized in FY
08-09 & Rent for 12 months should be recognized in
FY 09-10
• Concept of Prudence – It states that anticipate no profits but provide
for all possible losses. Prudence is the inclusion of a degree of caution
in the judgment of estimates. Expected losses should be accounted
for but not anticipated gains
• Matching Concept – Revenue earned in an accounting
year is matched with all the expenses incurred during
the same period to generate that revenue. Matching
concept suggest that to find out the profitability, the
expenses incurred to generate revenue are to be
matched against that revenue

• Verifiable Evidence – All accounting transactions

should be evidenced and supported by the
documents. Such supporting documents provide the
basis for making accounting entries and for making
verification by the auditor later on.
 ACCOUNTING SEQUENCE

Preparation Transaction
Of Financial / Event
Statements
Trading A/C, Preparation
Profit & Loss A/C, Of Vouchers
Balance Sheet etc.

Recording in
Preparation Primary Books
Of JOURNAL
Trial Balance Postings in
Secondary
Books
LEDGER
 Received Testing Fees of Rs.45000/- Including GST @18% but after TDS @2%

Tax Invoice (Issued by business)

Particulars Amt Actual Amt

Basic Fees for Testing 100 39,474

add SGST @9% 9 3,553
add CGST @9% 9 3,553
Total 118 46,579

Payment made by the customer after following deductions

Gross Amount Payable 118 46,579

Less Deductions (based on basic price)
TDS as per Income Tax Act @2% 2 789
TDS as per SGST Act @1% 1 395
TDS as per CGST Act @1% 1 395

Net Amount Payable 114 45,000

45000 → 114 (45000*100/114)=46579

? ← 100
RECORDING IN PRIMARY BOOK
• All the events are recorded in primary book called “JOURNAL” in a
double entry system of book keeping.
• Format of JOURNAL is as follows

Dr. / Vr. Dr. Cr.

Sr.No. Date Particulars Cr. No. L/F Amt Amt.

1 24.04.2009 Plant & Machinery A/C Dr. 1 12 500

To Cash Cr. 1 14 500

(Being Purchase of
Machinery for cash from Mr.
Sam)
SECONDARY BOOKS - LEDGER
DR. Plant & Machinery Account CR.
Date Particulars JF Amount Date Particulars JF Amount
24.04.09 To Cash 500 30.04.09 By Balance 500

500 500

DR. Cash Account CR.

Date Particulars JF Amount Date Particulars JF Amount
30.04.09 To Balance 500 24.04.09 By P&M 500

500 500
TRIAL BALANCE
• It is a list of various accounts showing their balances
(either DR. or CR.) as on particular date. Based on
such TB financial statements are prepared.

Trial Balance as on 31.03.2009

Sr.No. Name of the Account Dr. Bal. Cr.Bal.

1 Plant & Machinery 500

2 Cash 500

Total 500 500

Trading Account
TRADING A/C for the year ended 31.03.2009

Dr. Cr.

Particulars (Trading Exp) Amount Particulars (Trading Income) Amount

To Opening Stock xx By Sales xx

To Purchases xx By Closing Stock xx

To Wages xx

To Gross Profit c/d xx

xxx xxx
Profit & Loss Account
PROFIT & LOSS A/C for the year ended 31.03.2009

Dr. Cr.

Particulars (Expenses) Amount Particulars (Incomes) Amount

To Salary xx By Gross Profit b/d xx

To Printing & Station xx By Commission Recd xx

To Telephone xx By Discount Recd xx

To Advertisement xx By Interest Recd xx

To Electricity xx By Remuneration Recd xx

To Postage xx By Profit on Sale of Asset xx

To Fax Exp xx

To Net Profit c/d xx

xxx xxx
DEPRECIATION
• Reduction in the value of the fixed assets
• Decrease in the value of the asset due to its use
• Gradual & permanent decrease in the value of an asset from any
cause whatsoever
FEATURES OF DEPRECIATION
• Decrease in value
• Permanent decrease
• Gradual decrease
• Reasons of decrease (use of the asset, passing of time, new inventions
etc)
METHODS OF DEPRECIAION
• SLM – Straight Line Method / Fixed Installment Method. Amount of
depreciation remains same every year till the asset value gets
exhausted
• Formula used is (Total Cost – Scrap Value) / No. of years of useful life
• WDV/RBM – Written Down Value / Reducing Balance Method –
Amount of depreciation is not fixed but depends upon the opening
WDV. It is also known as Diminishing Balance Method
• Formula used is (Opening WDV * % age of Depreciation)
MAJOR ADJUSTMENTS
• Purchase of Asset (Dr…Asset & Cr… Cash)
• Sale of Asset (Dr…Cash & Cr… Asset)
• Charge of Depreciation (Dr… Deprn & Cr. Asset)
• Transfer of Depreciation to P/L A/c (Dr.. P/L A/c &
Cr. Deprn A/c)
• Calculation of profit / loss on sale of asset
 MAJOR ADJUSTMENTS

Purchase of Asset Sale of Asset

Asset A/c……Dr Cash/Bank A/c….Dr
To Cash A/c To Asset A/c

Transfer of Depreciation
to Profit & Loss A/c
Charge of Depreciation
Profit/Loss A/c…..Dr
Depreciation A/c…Dr
To Depreciation A/c
To Asset A/c
SUBSIDIARY BOOKS
Subsidiary Books are nothing but the sub-
divisions of the Journal.

Transactions are recorded first in the concerned

subsidiary book and then posted in the ledger.
TRANSACTIONS & SUBSIDIARY BOOKS

1. CASH BOOK - Receipts & Payments of Cash

2. PURCHASE BOOK – Credit Purchases
3. SALES BOOK – Credit Sales
4. SALES RETURNS BOOK – Sales Return
5. PURCHASE RETURNS BOOK – Purchase Return
6. JOURNAL PROPER – Other Transactions
 TYPES OF CASH BOOKS
1. SIMPLE CASH BOOK – Recording only cash
transactions

2. DOUBLE CASH BOOK – Recording both cash and

discount transactions

3. TRIPLE CASH BOOK – Recording cash, discount and

bank transactions

4. PETTY CASH BOOK – Recording petty cash

transactions
CASH BOOK

• It records cash receipts & payments

• Cash book is a journal as well as ledger
• Cash Book has 3 columns namely Cash, Bank &
Discount
• Cash Book has two sides
• LEFT SIDE / DEBIT SIDE – shows cash & bank receipts
& discounts allowed
• RIGHT SIDE / CREDIT SIDE – shows cash & bank
payments & discounts received