Accounting Concepts

and Procedures:
An Introduction

Chapter 1
coplete
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Accounting

Managers
Managers
Owners
Owners

Investors
Investors
Government
Government

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Categories of Business
Organizations
Sole
Sole Proprietorship
Proprietorship

Partnership
Partnership

Corporation
Corporation
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Types of Business
Organizations
Ownership

Business owned by one person.

Formation

Easy to form.
Owner could lose personal
assets to meet obligations
of business.
Ends with death of owner
or closing of business.

Liability
Closing

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Types of Business
Organizations
Ownership
Formation
Liability
Closing

Business owned by
more than one person.
Easy to form.
Partners could lose personal
assets to meet obligations
of partnership.
Ends with death of partner
or exit of a partner.
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Types of Business
Organizations
Ownership Business owned by stockholders.
Formation
Liability
Closing

More difficult to form.

Limited personal risk.
Stockholders loss is limited to
their investment in the company.
Can continue indefinitely.
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Classifying
Business Organizations
Service
Service businesses
businesses provide
provide services.
services.
Merchandise
Merchandise businesses
businesses sell
sell products.
products.
Manufacturing
Manufacturing businesses
businesses make
make products.
products.

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Definition of Accounting
Accounting
Accounting is
is the
the process
process that...
that...
analyzes,
analyzes,
records,
records,
classifies,
classifies,
summarizes,
summarizes,
reports,
reports, and...
and...
interprets
interprets financial
financial information.
information.

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The Accounting Information

System

Inputs

Processing

Outputs

Users

Business
Accounting
Financial
Investors,
transactions principles
statements
lenders,
and events
and procedures
and reports
managers

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Users of Accounting
Information
Investor
Lenders
Security Analysts and Adviser
Management
Employees and Trade Unions
Suppliers and Other Trade Creditors
Customers
Government and Regulatory Agencies
The Public
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Major Branches of Accounting

Financial Accounting
For external users
Historical information
Standardised format
Laws and conventions
Summarised
Income statement;
Balance sheet; Cash
flow statement;
Accounting policies

Management Accounting
For internal users
Future-oriented
Flexible format
Context-specific
More detailed
Product cost statement;
Standard costs; Budgets;
Variances; Performance
reports

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Chapter 1

Accounting Measurement

Accounting records the effect of economic

events
Internal events
External events: transactions
exchange (e.g., purchase of goods)
one-way transfer (e.g., donations, thefts)

Other external events

no exchange or transfer (e.g., floods,
earthquakes)
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Generally Accepted
Accounting Principles
(GAAP)
These
These are
are the
the procedures
procedures and
and guidelines
guidelines
that
that must
must be
be followed
followed during
during
the
the accounting
accounting process.
process.

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Institutions that Influence

Indian GAAP
Department of Company Affairs (DCA)
The Securities and Exchange Board of India (SEBI)
The Institute of Chartered Accountants of India
(ICAI)
The Income Tax Authorities
Reserve Bank of India (RBI)
Comptroller and Auditor General of India (CAG)
The International Accounting Standards Board
(IASB)
The International Federation of Accountants (IFAC)
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Preparing Financial
Statements
Shah Traders
Balance Sheet
September 30, 200x
Liabilities
Liabilities and
and Owners
Owners Equity
Equity
Assets
Assets
Accounts
700
Accounts Payable
Payable Rs.
Rs.
700 Cash
Rs.
Cash
Rs. 8,300
8,300
Owners
Owners Equity
Equity
Mr.
Mr. Shahs
Shahs Capital
Capital 13,000
13,000
Total
Rs.
Total
Rs. 13,700
13,700 Total
Rs.
Total
Rs. 13,700
13,700

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Balance Sheet Related

Concepts
Accounting Entity Concepts:
A business is treated as an accounting
entity which is distinct and separate from its
owners and from other firms.
Without the entity assumption, the personal
financial affairs of the owners and the
activities of other enterprises would be
mingled the transactions of the business,
and no meaningful financial information
about the business can be produced.
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 Going Concern Concept:

Unless there is substantial evidence to the
contrary, it is assumed that the business
is continuing enterprise, or a going
concern.
The assumption is based on the fact that
the majority business enterprise do
survive in spite of many business failures.
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 Monetary Unit Concept:

In financial accounting, a record is
made only of these facts that can be
expressed in monetary terms.
Because money provides common
denominator.

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 Cost Concepts:
For purpose of accounting all
transactions are recorded at their
monetary cost of acquisition.
i.e. the price paid for acquiring
the assets or for receiving the
services provided.
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 Conservatism Concept:
Anticipate no profit, and provide for
all possible losses.
i.e., provision for bad debts

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The Accounting Equation

Assets
Assets are
are the
the
items
items owned
owned by
by
the
the business.
business.

Equities
Equities are
are
the
the claims
claims
against
against the
the
assets.
assets.

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The Accounting Equation

Liabilities
Liabilities are
are
the
the creditors
creditors
equity.
equity.

Owners
Owners equity
equity
is
is the
the rights
rights
of
of ownership.
ownership.

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The Accounting Equation

Assets

Liabilities
=

Owners
Equity
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Assets . . . defined
Probable future economic benefits
obtained or controlled by a particular
entity as a result of past transactions
or events.
Or
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Types of Assets
Current Assets: Cash, Short-Term
Investments, Accounts Receivable,
Inventory, and Prepaid Expenses
Property, Plant & Equipment
Long-Term Investments
Intangible Assets
Other Assets
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Liabilities . . . defined
Generally . . . amounts by
businesses to third
parties.
TYPES
Current: Accounts Payable, Accrued Liabilities,
Notes Payable
Long-Term: Long-Term Notes Payable, Mortgages
Payable, Long-Term Accrued Liabilities
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Owners Equity

Residual interest of owners

Examples
Share capital
Share premium
Revenues
Expenses
Dividends
Retained profit

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The Accounting Equation

A.
A. August
August 28:
28: Shah
Shah invested
invested
Rs.7,000
Rs.7,000 in
in cash
cash and
and Rs.800
Rs.800 of
of office
office
equipment
equipment into
into the
the business.
business.
B.
B. August
August 29:
29: Shah
Shah buys
buys
office
office equipment
equipment for
for cash
cash Rs.900.
Rs.900.
C.
C. August
August 30:
30: Buys
Buys additional
additional
office
office equipment
equipment on
on account
account Rs.400.
Rs.400.
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The Accounting Equation

Assets

a)
a) Cash
Cash
a)
a) Equipment
Equipment
b)
b) Cash
Cash
Equipment
Equipment
Equipment
Equipment

+Rs.7,000
+Rs.7,000
++
800
800

900
900
++
900
900
++
400
400

Owners
+ Equity

Liabilities

+Rs.7,800
+Rs.7,800

++ 400
400

Rs.8,200 = RS. 8,200

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Shift in Assets

The
The makeup
makeup of
of the
the assets
assets has
has
changed,
changed, but
but the
the total
total of
of the
the
assets
assets remains
remains the
the same.
same.

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The Balance Sheet

The
The balance
balance sheet
sheet shows
shows the
the companys
companys
financial
financial position
position as
as of
of aa particular
particular date.
date.
Company
Company name
name
Name
Name of
of the
the statement
statement
Date
Date
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The Balance Sheet

Mr. Shah Traders
Balance Sheet
August 31, 200x
Liabilities
Liabilities and
and Owners
Owners Equity
Equity
Accounts
Accounts Payable
Payable Rs.
Rs. 400
400
Owners
Owners Equity
Equity
Mr.
7,800
Mr. Shahs
Shahs Capital
Capital
7,800
Total
Rs.8,200
Total
Rs.8,200

Assets
Assets
Cash
Rs.
Cash
Rs.6,100
6,100
Equipment
2,100
Equipment
2,100

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The Accounting
Equation Expanded
An
An expanded
expanded accounting
accounting equation
equation
includes
includes the
the following:
following:
Revenues
Revenues (cash,
(cash, accounts
accounts receivable)
receivable)
Expenses
Expenses
Withdrawals
Withdrawals

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The Accounting
Equation Expanded

Revenues
Revenues

Expenses
Expenses

Net
income
or
Net
income
or
=
Net
Net loss
loss

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The Accounting Equation

Expanded

Beginning
Beginning
capital
capital
PLUS
+
PLUS
Additional
Additional
investment
investment

Net
Net income
income

Withdrawals
Withdrawals

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The Accounting Equation

Expanded
D.
D. September
September 1-30:
1-30: Shah
Shah provided
provided
legal
legal services
services for
for cash,
cash, Rs.3,000.
Rs.3,000.
E.
E. September
September 1-30:
1-30: Provided
Provided legal
legal
services
services on
on account,
account, Rs.4,000.
Rs.4,000.
F.
F.September
September 1-30:
1-30: Received
Received Rs.700
Rs.700
cash
cash as
as partial
partial payment
payment from
from previous
previous
services
services performed
performed on
on account.
account.
G.
G. September
September 1-30
1-30 paid
paid salaries
salaries expense,
expense, Rs.600.
Rs.600.
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The Accounting Equation

Expanded
H.
H. September
September 1-30:
1-30: Paid
Paid rent
rent expense,
expense, Rs.700.
Rs.700.
I.I. September
September 1-30:
1-30: Incurred
Incurred advertising
advertising
expenses
expenses of
of Rs.300,
Rs.300, to
to be
be paid
paid next
next month.
month.
J.
J. September
September 1-30:
1-30: Shah
Shah
withdrew
withdrew Rs.200
Rs.200 for
for personal
personal use.
use.

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Preparing Financial
Statements
Mr. Shah Traders
Income Statement
For Month Ended September 30, 200x
Revenue:
Revenue:
Legal
Rs.7,000
Legal fees
fees
Rs.7,000
Operating
Operating expenses:
expenses:
Salaries
Rs.
Salaries expense
expense
Rs. 600
600
Rent
700
Rent expense
expense
700
Advertising
300
1,600
Advertising expense
expense
300
1,600
Net
Net income
income

Rs.5,400
Rs.5,400
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Preparing Financial
Statements
Shah Traders
Statement of Owners Equity
For Month Ended September 30, 200x
Shahs
Rs.
Shahs Capital,
Capital, Sept.
Sept. 1,
1, 200x
200x
Rs. 7,800
7,800
Net
Rs.
Net Income
Income for
for Sept.
Sept.
Rs. 5,400
5,400
Less
200
Less Withdrawals
Withdrawals for
for Sept.
Sept.
200
Increase
5,200
Increase in
in Capital
Capital
5,200
Shahs
Rs.
Shahs Capital,
Capital, Sept.
Sept. 30,
30, 200x
200x
Rs. 13,000
13,000

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Profit and Loss Statement

Related Concepts
Accounting Period Concepts:
Normally the profit & loss statement
or income statement is prepared for
a period of one year.

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 Realization Concept:
Realization concept revolves around the
determination of the point of time when revenues
are earned.
The concept followed is that revenue is realised
when goods and services produced by a business
enterprise are transferred to a customer either for
cash or some other asset or, for a promise to pay
cash or other assets in future.
Revenue is earned only when the goods are
transferred or when services are rendered.
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 Matching Expenses with Revenue:

This principles requires recording
expenses in the same accounting
period in which the revenue were
earned as a result of the expenses.

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 Accrual Concept:
Under this concept the transactions are
recorded as soon as they take place
irrespective of the timings of receipt or
payment of money thereto.
This concept is necessary to ensure that the
financial statements of any period reflect
effect of all relevant transactions that took
place in that period.
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