Prepared by: AARZOO VHORA

 Accounting is the process of recording financial

transactions pertaining to a business.

 Accounting is the art of recording, classifying

and summarizing in significant manner and in
terms of money, transactions and events which
are, in part, at least of a financial character and
interpreting the results thereof.
 Financial accounting is a specialized branch of
accounting that keeps track of a company's
financial transactions.

 Financial accounting (or financial accountancy)

is the field of accounting concerned with the
summary, analysis and reporting of financial
transactions related to a business.
 Financial accounting refers to collecting,
summarizing and presentation of the financial
information resulting from business
transactions. It reports the operating profit and
the value of the business to the stakeholders.
 In other words, financial accounting is used for
reporting financial transactions to the
stakeholders in a format that is acceptable and
adaptable by all businesses.
The term ‘concept’ is used to connote
accounting postulates, that is
necessary assumptions and conditions
upon which accounting is based.

These are the theories on how and

why certain categories of transactions
should be treated in a particular
manner.
• The business and its owner(s)
are two separate entities
The Books Of Accounts
are prepared from the
point of view of the
business

Hence…
Drawings (Asset)
 For Example:
A Car purchased by the owner for
personal use is not Recorded in the Books
Of Account Of the Business.
Non monetary transactions are not
recorded in accounting.

Innovativeness
Attitude Experience
skill Team work
Honesty Passion
 For Every Debit,
there is a Credit

Every transaction should

have a two- sided effect to
the extent of same
amount
 For Example:
Cash Sales Rs. 10,000

• Cash Account Rs. 10,000

Credit • Sales Account Rs. 10,000

 For Example:
Purchased From Ram goods worth Rs.
20,000 and discount received Rs. 2,000.

Debit • Purchases Account Rs. 20,000

• Ram’s Account Rs. 18,000

Credit • Discount Recd. Account 2,000
This Concept has resulted in

THE
ACCOUNTING
EQUATION
Historical
Cost Of

Market
Value Of
Profit is earned when goods
or services are provided
/transferred to customers.
Thus it is incorrect to record
profit when order is
received, or when the
customer pays for the goods.
 The matching principle ensures that
revenues and all their associated expenses
are recorded in the same accounting
period.

The matching principle is the basis on

which the accrual accounting method
of book- keeping is built.
 Salary paid in 2012-13 relating to 2011-12

Such salary is treated as Expenditure for

2011-12 under Outstanding Salaries Account,
not for the year 2012-13
 Accrual concept is the most fundamental
principle of accounting which requires
recording revenues when they are earned and
not when they are received in cash, and
recording expenses when they are incurred
and not when they are paid.
 The objectivity principle is the concept that
the financial statements of an organization be
based on solid evidence. The intent behind
this principle is to keep the management and
the accounting department of an entity from
producing financial statements that are
slanted by their opinions and biases.
Accounting Conventions are the
common practices which are
universally followed in recording
and presenting accounting information
of business. It helps in comparing
accounting data of different business or
of same units for different periods.
Anticipate No Profits
but
Provide for all Losses

Accountant should
always be on side of
safety.
•Making Provision for Bad and
Doubtful Debts
•Showing Depreciation on Fixed
Assets, but not appreciation
Financial Statements
and their notes
should present all
information that is
relevant and
material to the
user’s understanding
of the statements.
The accounting practices and
methods should remain consistent
from one accounting period
to
another.

Whatever accounting practice is

followed by the business enterprise,
should be followed on a consistent
basis from year to year.
 Year 2009-10 2010-11 2011-12

Method of • Straight • Written • Units of

Depreciation Line Down Measure
followed Method Value Method
Method
Only those transactions,
important facts and items are
shown which are useful and
material for the business. The
firm need not record
immaterial and insignificant
items.
Illustration:
Company XYZ Ltd. bought 6 months supplies of
stationary worth $600.

Question:
Should the Company spread the cost of this stationary
for 6 months by expensing off $100 per month to the
income statement?

Answer:
Based on this concept, as the amount is so small or
immaterial, it can be expensed off in the next month
instead of tediously expensing it in the next 6 months.
 Accounting Concepts Accounting Conventions

1. Accounting Concepts are 1. Accounting conventions are

established by law. guidelines based upon custom,
or usage or general agreement.
2. There is no role of personal 2. Accounting convention may
judgments or individual bias in play a crucial role in all the
the adoption of accounting accounting conventions.
concepts.
3. There is uniform adoption of 3. There is no adoption in case
accounting concepts in different of accounting conventions.
enterprises.
52
 Capital:
The amount of cash, goods or assets which is initially
invested by proprietor while commencing business is
called capital. It is invested to earn profits. In other
words, the excess of assets over liability is capital.
 Income:
That amount which increases the capital of the business
is called income. The excess of revenue over expenses is
also called income.
 Expenditure:
The amount which is paid for increasing profit earning
capacity of business is called expenditure. It is of long
period nature.
 Expenses:
The cost which business incurs for producing goods and
services or for using services is called expenses. These
include payments made for wages, salaries, freight,
advertisement, rent, insurance etc. In other words, we can
say that the cost of earning revenue is an expense.
 Assets:
All the resources of business having economic value are called assets. These
resources help the business to earn a profit and have future value. These are
important for running a business and are in the possession of businessman.
These are of two types: –
• Fixed assets:

The assets which are used by business for a long time are called fixed assets
or non-current assets. These are continued to be used by the business for a
period of more than one year. For example:- land ,building ,plant, machinery
,furniture ,vehicle etc.
• Current assets:

The assets which are used up in one year or easily get converted into cash in
one year are called current assets. For example:- raw material, finished
goods, debtors, cash balance and bank balance etc.
 Liabilities:
The amount which business owes to others is called its
liabilities. There is a certain amount which business is
under obligation to pay. There are two types of liabilities:
• Long-term liabilities:
Those liabilities which are usually payable after a period
of 1 year. Long-term loans from Financial Institutions,
debentures issued by companies etc.
• Short-term liabilities:
These are those which are payable within one year. For
example creditors, bank overdrafts etc.
 Accounts

Personal Real Nominal

Account Account Account
 Personal
Accounts

Natural Artificial Representative

Personal Personal Personal
Account Account Account
 Real Accounts

Tangible Real Intangible Real

Accounts Accounts
 Nominal
Accounts

Expenses Incomes
and and
Losses Gains
 In Personal Account: Debit the Receiver, Credit the
Giver

 In Real Account: Debit what comes in, Credit what

goes out

 In Nominal Account: Debit all Expenses and Losses,

Credit all Gains and Incomes