Accounting
AN INFORMATION SYSTEM
COMMUNICATES FINANCIAL INFORMATION TO THE
USERS THROUGH:
• IDENTIFYING
• RECORDING –CLASSIFYING ,SUMMARIZING,
ANALYZING AND INTERPRETING
• COMMUNICATING
Book keeping & Accounting
Book keeping
Recording of economic events only
Accounting
Entire process of Identifying, Recording and
Communicating
Users of accounting
Information
Internal Users
Marketing manager, production supervisor, company officers,
Director (Finance)
External Users
Creditors(suppliers, banks), investors, Govt&tax authorities,
regulators(RBI, SEBI..), Customers, Trade Unions
Financial Accounting
Branch of accounting that provides financial information
to external users
Accounting Assumptions
Basic assumptions providing the foundation for the accounting process
Separate/Economic Entity concept
Going concern concept
Money measurement concept
Cost concept
Dual aspect concept
Accounting period concept
Realisation concept
Accrual Concept
Forms of Business
Sole proprietorship – owned by one person (Eg. Beauty
salons, auto repair shop, shops etc.)
Partnership – owned by two or more persons, based on the
agreement(lawyers, doctors, architects, Cas etc.)
Corporation (Company) – organized a s a separate legal entity
under law, ownership divided into transferable shares
Accounting Equation
Assets = Liabilities + Owners Equity
Assets
Resources owned by the business
Liabilities
Debts and obligations of the business
Owners Equity
Ownership claim/ amount owed to the owner
Accounting Equation
Revenue
Anything that increases owners equity, resulting from
business activities (sale of goods/service, rent from property,
interest …), actual/expected CIFs (receipts)
Expense
Anything that decreases owners equity, resulting from
business activities (rent paid, repairs, electricity…),
actual/expected COFs(payments)
Accounting Equation
How do you decide to record/not to record the transaction – identifying
transactions to be recorded
Criterion – Is the financial position (assets, liabilities and stockholders
equity) of the business changed?
If yes, record, If no, Don’t record
Example:
Neal Invested Rs. 15000 cash in the business
Softbyte purchases a computer equipment for cash Rs.7000
Softbyte purchases computer accessories from Acme supply company on
credit Rs.1600
Identifying Process
Transaction analysis using accounting equation
Accounting Conventions
Customs or traditions which guide the accountant while
preparing the accounting statements
Convention of Conservatism
Convention of Full Disclosure
Convention of Consistency
Convention of Materiality
Systems of Accounting
Two systems of accounting
Cash system
Accounting entries are made only when cash is paid or received, no entry
when cash payment or receipt is due
Mercantile/accrual system
Accounting entries are made when cash payment or receipt is due
Recording Process
Journal
Ledger
Trial balance
Double Entry System
This system recognises that every transaction have a two–fold effect –
Dual aspect concept
Assets = Liabilities + Owners Equity
Eg. Mr. A introduced Rs. 10,000 as Capital in the business
Capital 10,000
Cash 10,000
Debit and Credit
Indicates the side of the account where an item is recorded –
direction signal only
An account has two sides
When an amount is entered on the left-hand side of an account,
it means debit, and the account is said to be debited
When an amount is entered on the right-hand side of an
account, it means credit, and the account is said to be credited
Rules of Debit and Credit
Modern Approach
Increase in assets and decrease in liabilities/Equity - Debit
Decrease in assets and increase in liabilities/Equity - Credit
Decrease in revenue and increase in Expenses - Debit
Increase in revenue and decrease in Expenses - Credit
Journalising
Process of recording all daily transactions of
business in chronological order
Journal is a book in which transactions are recorded
for the first time
Journal is a book of original entry
Format of Journal
Date Account Titles and Explanation LF (Ref) Debit Credit
Format of Journal
Date Account Titles and Explanation LF (Ref) Debit Credit
2006 Salaries …………………………………………….. 10,000
Jan 1 Cash………………………………………………….. 10,000
Journal entries
Simple entry – one debit , one credit
Compound entry – more than one debit or credit
Ledger
A book containing various accounts
A set of accounts
Process of transferring debit and credit items of the
journal to their respective accounts in the ledger is
called posting
Account
Individual accounting record, of increases/decreases in a
specific asset, liability or stockholder’s equity item
Example cash account, accounts payable, accounts
receivables, sales salaries
The Account
Record of increases and decreases
Account in a specific asset, liability, equity,
revenue, or expense item.
Debit = “Left”
Credit = “Right”
An account can be Account Name
illustrated in a T- Debit / Dr. Credit / Cr.
account form.
LO 1 Explain what an account is and how it helps in the recording process.
Debits and Credits
If Debit amounts are greater than Credit amounts, the
account will have a debit balance.
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2
Transaction #3 8,000
Balance $15,000
LO 2 Define debits and credits and explain their use
in recording business transactions.
Debits and Credits
If Debit amounts are less than Credit amounts, the
account will have a credit balance.
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2
8,000 Transaction #3
Balance $1,000
LO 2 Define debits and credits and explain their use
in recording business transactions.
Debits and Credits
Assets Assets - Debits should exceed
Debit / Dr. Credit / Cr.
credits.
Liabilities – Credits should
Normal Balance
exceed debits.
Chapter
Normal balance is on the
3-23
increase side.
Liabilities
Debit / Dr. Credit / Cr.
Normal Balance
Chapter
3-24
LO 2 Define debits and credits and explain their use
in recording business transactions.
Debits and Credits
Owner’s Equity Owner’s investments and
Debit / Dr. Credit / Cr.
revenues increase owner’s equity
(credit).
Normal Balance
Owner’s drawings and expenses
Chapter
3-25
decrease owner’s equity (debit).
Owner’s Capital Owner’s Drawing Helpful Hint Because
Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. revenues increase owner’s
equity, a revenue account
has the same debit/credit
rules as the Owner’s
Normal Balance Normal Balance
Capital account. Expenses
have the opposite effect.
Chapter Chapter
3-25 3-23
LO 2
Debits and Credits
Revenue The purpose of earning revenues
Debit / Dr. Credit / Cr.
is to benefit the owner(s).
The effect of debits and credits on
Normal Balance
revenue accounts is the same as
Chapter
3-26
their effect on Owner’s Capital.
Expenses have the opposite
Expense
Debit / Dr. Credit / Cr.
effect: expenses decrease owner’s
equity.
Normal Balance
Chapter
3-27
LO 2 Define debits and credits and explain their use
in recording business transactions.
Debits/Credits Rules
Liabilities
Debit / Dr. Credit / Cr.
Normal Normal
Balance Balance
Debit Credit Normal Balance
Assets Chapter
3-24
Owner’s Equity
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-23
Expense Chapter
3-25
Revenue
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-27 Chapter
3-26
LO 2
Debits/Credits Rules
Balance Sheet Income Statement
Asset = Liability + Equity Revenue - Expense
Debit
Credit
LO 2 Define debits and credits and explain their use
in recording business transactions.
Preparation of Ledger
Trial Balance
Statement containing various ledger balances on a particular date
Objects of preparing Trial Balance
Checking the arithmetical accuracy of the accounting entries
Forms the basis for preparing financial statements
Gives the summary of ledgers
Format of Trial Balance
Particulars Debit Credit
Amount amount
Preparation of Trial Balance
Assets ,Expenses and Losses – Debit Side
Liabilities, incomes and gains – Credit side
Goods Account:
Opening stock, purchase, Sales return – debit side
Sales, Purchase return – Credit side
Accounting Standards
Written policy documents issued by expert accounting body or
Government or other regulatory body covering the aspects of
recognition, measurement, treatment, presentation and
disclosure of accounting transactions in the financial statements
Accounting Standards
Generally Accepted Accounting Principles (GAAP)
Standards that are generally accepted and universally practiced in accounting profession
Indicates how to report economic events
IASB ( International Accounting Standard Board)
An independent, private-sector body that develops and approves International Accounting Standards.
The IASB operates under the oversight of the International Accounting Standards Committee
Foundation (IASCF). The IASB was formed in 2001
Standards and Interpretations issued by IASB- International Financial Reporting Standards (IFRS)
ICAI (Institute of Charted Accountants of India)
Develops and approves Indian Accounting standards through ASB(Accounting Standard Board)
Function of Accounting Standards
Standardise diverse accounting policies with a view to eliminate, to the maximum possible
extent:
◦ The non-comparability of financial statements and thereby improving the reliability of finaanial
statements
◦ To provide a set of standard accounting policies, valuation norms, and disclosure requirements
