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Basics of Accounting

Dr.V.RAMANUJAM,M.F.C.,M.B.A.,M.Phil.,Ph.D

Assistant Professor of

Management


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What is Accounting?

Identifying a business transaction

Preparation of Business Documents.

Recording of the transaction in the book of

first entry (Journal) Sales or Purchase Module

Relevance with the banking operations

Posting in the ledger

Preparation of Trial Balance

Preparation of Profit and Loss Account andBalance Sheet


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Accountinghas 3 main activities

1. Identifying

select events that are evidence of economicactivity

2. Recording provide a chronological diary of measured

events in an orderly & systematic manner

3. Communicating

preparation &distribution of accountingreports and financial statements; as well asanalyzing and interpreting data


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Important terms in accounting

Debtors

Creditors

Assets Liabilities

Income

Expenses

Account


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Who uses Accounting info?

Internal

managers, production supervisors, financialdirectors, & company officers; usually referred

to as Managerial Accounting External

investors, creditors, government, regulatoryagencies, customers, etc.; usually referred to

as Financial Accounting


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Process of Accounting

Types of business transactions

Cash and credit

Double Entry Principle in Accountancy

Debit and credit effect

Basic Categories of Accounts

Personal, Real and Nominal


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Golden Rules in Accounting

To identify the effect of a transaction ona account there are rules:For Personal Account:Debit: the receiver

Credit: the giver

-For Real Account:

Debit: what comes in

Credit: what goes out

-For Nominal Account:

Debit: all expenses and losse

Credit: all incomes and gains


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Accounting principles

Accounting concepts

Business entity concept

Accounting period concept

Going concern concept Money measurement concept

Cost concept

Revenue match concept

Realization concept

Rupee value concept

Accounting conventions

Conventions of conservatism (playing safe)

Conventions of consistency (unchanged practicies)

Conventions of fulldisclosure (as per law eg: satyam)


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Basic Accounting Equation

Assets = Liabilities + Owners Equity


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Introduction to Accounting 10

Element structures

Assets

Current assets

Cash

Cash on handBank accounts

Accounts receivable

Accounts receivable customer 1

Accounts receivable customer 2

InventoryRaw materials

Work in process

Finished goods

Product 1

Product 2


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Element structures

Assets

Current assets

Long-term assets

Buildings

x buildings

y buildings

a building

c building

Vehicles

Cars

Trucks

Truck 1

Truck 2


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Element structures

Liabilities

Current liabilities

Accounts payable

Accrued liabilities

Long-term liabilities

Bank loans

Loan from RBC

Loan from Scotiabank

Notes payable

Bonds payable


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Element structures

Owners equity

Capital stock (direct investment)

Retained earnings (indirect investment)

Revenue

Expenses

(Dividends)

Although revenue and expenses are not sub-pieces of Retained earnings the way Current

assets are a sub-piece of Total assets, for thepurposes of understanding how they fit in to theequation, this representation is helpful.


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Element structures

The balance sheet is a permanent statement

Its accounts accumulate information from the entitysbeginning.

The amounts presented on the balance sheet are

aggregated from the entitys beginning to the balancesheet date.

The income statement is a temporary statement

Its accounts are temporary accounts

They accumulate information for a period and then are

reset to zero to begin tracking information for the nextperiod.

The amounts presented on the income statement areaggregated from the beginning of the period to the end of theperiod only.


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Journal Entries

GOING BACK TO THE FUNDAMENTAL ACCOUNTING EQUATION:

Assets =Assets = Liabilities +Liabilities + Owners EquityOwners Equity

Assets

Current assets

Long-term assets

Liabilities

Current liabilities

Long-term liabilities

Direct investment

Capital stock

Indirect investment

Dividends (debit)

Retained earnings

Revenue (credit)

Expense (debit)


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Financial Statements

Income Statement

Statement of Retained Earnings

Balance Sheet

Statement of Cash Flows


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Financial Statements

There are 4 statements in a standard set offinancial statements

1. Balance Sheet The what do we have? statement Shows what the entity owns and owes (the difference

being the owners residual interest)2. Income Statement

The what did we do? statement Shows the activity the entity undertook in its normal

course of operations.

3. Statement of Retained Earnings Shows the changes in Retained earnings in the year

Often shown at the bottom of the Income Statement

4. Statement of Cash Flows Shows the sources and uses of cash in the year

Information is derived from the B/S andI/S and other


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Income Statement

Presents revenue and expensescontributing to Net Income (Loss) for aperiod of time

Statement dated For the Month (Year)Ended .


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Statement of Retained Earnings

Summarizes changes in Retained Earningsthrough Income, Loss, & Dividends

Also stated for a period of time


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Balance Sheet

Reports Assets, Liabilities, & StockholdersEquity on a Specific Date


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The RecordingProcess

.


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Basic Recording

____________________

Debits | Credits

|

Always this way for all accounts

Debits always equal credits

if you debit something, you have to credit

something else called the double entry system


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Trial Balance

List of accounts and balances at a giventime

Proves mathematical equality ofdebits &

credits

Also used to uncover errors in journalizingand posting

Useful in preparing financial statements


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Fundamental concepts

Accounting has two main divisions:

Financial accounting

Primarily prepared for users external to the

company. Revenues, earnings, assets, etc.

Management accounting

Primarily for internal purposes

Costing, budgeting, net present value, etc.


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There are several ways that cash gets into acompany:

Investment by owners

Investment by creditors (loans)

Payments from customers.

Repayment of amounts loaned to other

entities. Return on investments (interest anddividend)

Proceeds from selling assets.


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These can be organized into three categories:

Operations

Payments from customers

Refunds from suppliers

Financing

Investment by owners

Investment by creditors (loans)

Investing

Return on investments (interest anddividend)

Proceeds from selling assets

Repayment of amounts loaned to other entities


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Similarly, money going out of an entity can becategorized:

Operations

Payments to suppliers

Refunds to customers

Financing

Payment ofdividends or capital to owners

Repayment of creditors

Investing

Purchase of assets

Amounts invested in other entities (debt or equity)


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The Accounting Cycle

1. Transaction or event occurs

2. Recorded in the Journal using a Journal Entry.

3. Journal is posted to Ledger

4. Ledger accounts are totalled.

5. Financial statements are prepared.

It is important to note that the decision-making ofaccounting occurs at step 2 Journal entry.

Steps 3 5 are mechanical exercises.

Therefore, the decisions made when making the journalentry (i.e. translating to accounting language) are veryimportant as they determine what will ultimately bepresented on the financial statements.

contd on next slide


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Accounting Equation

Fundamental Accounting Equation:

Assets = Liabilities + Owners EquityAssets = Liabilities + Owners Equity This equation is always in balance

In order for this equation to remain in balance, double-entry bookkeeping is employed.

That is, the recording of every transaction or event musthave at least two parts

Either an equal impact (increase or decrease) to bothsides of the equation or equal and opposite impact toone side.

The recording of every transaction must keep this equationin balance