ACCOUNTING – I

Accounting Environment
Every business asks three key questions:
• How much money came in?
• Where did the money go?
• How much money is left?

Answer to each question can come only from the practice

known as accounting
 Evolution of Accounting
• People in all civilizations have maintained various types of
records of business activities
• The oldest known are clay tablet records of the payment of
wages in Babylonia around 600 B.C.
• Chanakya wrote the Arthashastra, the science of wealth
and welfare, during the latter half of the 4th century B.C.
• Chanakya emphasized on the importance of systematic
record keeping, periodic accounting, budgeting, and
independent auditing
 Evolution (Cont.)
• Luca Pacioli published the first book on double-entry book
keeping in 1494 which is still the fundamental system in
use by modern bookkeepers
• However, Indian merchants had long developed a system,
called bahi-khata, which predates Pacioli’s work by
centuries
• The expanded business operations initiated by the
industrial revolution required increasingly large amounts
of money
 Evolution through Expansion
• By the 16th century, the instrument of royal charter was
being deployed in a business context to raise capital for
mercantile trade and to create infrastructure for public
goods
• The 17th and 18th centuries witnessed a financial
revolution that brought "rapid growth to joint-stock
companies, banking, insurance, and the first active stock
market in Amsterdam
• The emergence of the stock market had a dramatic effect
on business
 Recent Developments
• Human Resource Accounting
• Environmental Accounting
• Carbon Accounting
• Social Accounting
• Forensic Accounting
 BRANCHES
OF
ACCOUNTING

Financial Cost
Accounting Accounting

Finding the profit / loss Cost ascertainment , and

Determining the financial position Cost control
 MANAGEMENT ACCOUNTING
“Management Accounting is the process of using the accounting
information for managerial decision-making.”

Internal in nature
PRIME BUSINESS ELEMENTS

Capital

Assets

Liabilities

Revenue

Expenses
 CAPITAL

Owners’ Contribution /
Shareholders’ Funds
 ASSETS

Non-Current Assets/
Current Assets
Fixed Assets

Land and Buildings Cash and Bank

Plant and Machinery Stock / Inventory
Furniture and Fixtures - Raw material
Investments - Work-in-Progress
Goodwill - Finished Goods
Accounts Receivable/Debtors
 LIABILITIES

Non-Current Liabilities/
Current
Long-Term
Liabilities
Liabilities

Loans from Banks & Financial Institutions Accounts Payable/

Creditors
Loans from Public Bank Overdraft
Short-term Loans
 Contingent Liabilities

- Liabilities that may or may not be incurred by a company

and which depend on the outcome of say a forthcoming
event e.g. a court case.
 REVENUE /
INCOME

Non- operating
Operating Income
Income

Sales and services Financial income

- Interest income
- Dividend income
Gain on sale of fixed assets
 EXPENSES

Non- operating
Operating Expenses
Expenses

Wages Financial Expenses

Salaries - Interest on Loan
Rent of office
Electricity
Selling &Distribution
 BASIS OF ACCOUNTING
• Cash Basis of Accounting

- Here, ‘Cash’ is the deciding factor.

Profit / Loss = Cash Sales – Cash Expenses

• Accrual or Mercantile Basis of Accounting

- Here, ‘Occurrence of Transaction’ is the deciding factor

Profit / Loss = Total Income earned – Total Expenses incurred

 Example
During 2007-08, Ram & Bros. had cash sales of Rs. 3,90,000 and credit sales of
Rs.1,60,000.Their expenses for the year were Rs. 2,70,000 out of which Rs. 80,000 is still
to be paid. Commission received in the current year, due of last year of Rs. 5,000. Interest
due on investments for the current year, Rs. 10,000.
Find out their Profit/Loss for 2007-08 as per: (i) Cash Basis of Accounting, (ii) Accrual
Basis of Accounting
1. Profit/Loss as per Cash Basis
Revenue (Cash Inflow or Cash Sales) Rs. 3,90,000
Add: Commission received 5,000
Less: Expenses (Cash Outflow) Rs. 1,90,000
(Rs. 2,70,000 – Rs. 80,000)
Profit Rs. 2,05,000
2. Profit/Loss as per Accrual Basis
Revenue (Total Sales) Rs. 5,50,000
+ Interest due on investments 10,000
Less: Total Expenses for the Year Rs. 2,70,000

Profit Rs. 2,90,000

 DOUBLE ENTRY SYSTEM OF
ACCOUNTING

• Double Entry System

Here, every transaction affects two heads – two accounts.

➢ Every transaction has two aspects.

Example
1. Issue of Shares Rs. 10,00,000

2. Purchase of Raw material on credit Rs. 10,000

3. Machine purchased for cash, Rs. 1,00,000

Solution
1. Share Capital A/c 10,00,000
Cash A/c 10,00,000

2. Purchases A/c 10,000

Creditors A/c 10,000

3. Machine A/c 1,00,000

Cash A/c 1,00,000
Question 1
1 - Business started with cash 8,000 and plant & machinery 3,000.
2 - Stock purchase for sale (cash purchase)= 3,000, credit purchase
= 5,000.
3 - Wages paid 1200 (including 200 relating to a future year).
4 - Salaries paid 200 but due 110.
5 - Sales made for cash 6000 & on credit 8000.
6 - Depreciation 10 percent on plant & machinery.
7 - Goods costing 2000 destroyed by fire.
8 - Payment made to creditors to the value of 2000 at 10 percent
discount.
1. Wages
2. Cash…
Wages A/c ___ Dr
To Cash A/c Personal A/c

Capital, Assets, Liabilities, Real A/c

Revenue, Expenses
Nominal A/c

Personal A/c Real A/c Nominal A/c

Dr. the receiver Dr. what comes in Dr. all expenses and losse
Cr. the giver Cr. what goes out Cr. all incomes and gains
Question 2
(i) Introduced Rs. 8,00,000 as cash and Rs. 50,000 by
stock.(ii)Purchased plant for Rs. 3,00,000 by paying Rs. 15,000 in
cash and balance at a later date. (iii) Deposited Rs. 6,00,000 into the
bank. (iv) Purchased office furniture for Rs. 1,00,000 and made
payment by cheque. (v) Purchased goods worth Rs. 80,000 for cash
and for Rs. 35,000 in credit. (vi) Goods amounting to Rs. 45,000
was sold for Rs. 60,000 on cash basis. (vii) Goods costing to Rs.
80,000 was sold for Rs. 1,25,000 on credit. (viii) Cheque issued to
the supplier of goods worth Rs. 35,000. (ix) Cheque received from
customer amounting to Rs. 75,000. (x) Withdrawn by owner for
personal use Rs. 25,000.
Question 3
(i) Business commenced with a capital of Rs. 6,00,000. (ii) Rs.
4,50,000 deposited in a bank account. (iii) Rs. 2,30,000 Plant and
Machinery Purchased by paying Rs. 30,000 cash immediately. (iv)
Purchased goods worth Rs. 40,000 for cash and Rs. 45,000 on
account. (v) Paid a cheque of Rs. 2, 00,000 to the supplier for Plant
and Machinery. (vi) Rs. 70,000 cash sales (of goods costing Rs.
50,000). (vii) Withdrawn by the proprietor Rs. 35,000 cash for
personal use. (viii) Insurance paid by cheque of Rs. 2,500. (ix)
Salary of Rs. 5,500 outstanding. (x) Furniture of Rs. 30,000
purchased in cash.