Presented By:

Mr. Suneel Kumar

 What is Accounting?

Accounting - a process of identifying, recording, summarizing, and

reporting economic information to decision makers in the form of financial
statements
“The language of business”
Financial accounting - focuses on the specific needs of decision makers
external to the organization, such as stockholders, suppliers, banks, and
government agencies
 The Nature of Accounting
The accounting system is a series of steps performed to
analyze, record, quantify, accumulate, summarize, classify,
report, and interpret economic events and their effects on an
organization and to prepare the financial statements.
The Nature of Accounting
Accounting systems are designed to meet the needs of
the decisions makers who use the financial
information.
Every business has some sort of accounting system.
These accounting systems may be very complex or very
simple, but the real value of any accounting system lies
in the information that the system provides.
Accounting as an Aid to Decision Making
Accounting information is useful to anyone
who makes decisions that have economic
results.
• Managers want to know if a new product will be profitable.
• Owners want to know which employees are productive.
• Investors want to know if a company is a good investment.
• Creditors want to know if they should extend credit, how much to
extend, and for how long.
• Government regulators want to know if financial statements
conform to requirements.
 Accounting as an Aid to Decision Making

Fundamental relationships in the decision-making

process:

Accountant’s
Financial
Event analysis & Users
Statements
recording
 Basic Functions of an Accounting System
1. Interpret 2. Classify
and record similar
business transactions
transactions. into useful 3. Summarize
reports. and
communicate
information to
decision
makers.
 Basic Functions of an Accounting System
1.Interpret and record
business transactions.

Payment

Car
 Bookkeeping
Bookkeeping is the recording of financial
transactions, and is part of the process of accounting in
business.
 The
accounting
process

Accounting
“links” decision
makers with Accounting
Economic
economic
activities information
activities  and
with the results of
their decisions.

Actions
(decisions) Decision
makers
 Types of Accounting

Financial Managerial
 Types of Accounting
The major distinction between financial and management
accounting is the users of the information.

Financial accounting serves external users. (creditors, investors,

suppliers, customers, governments, labor unions)

Management accounting serves internal users, such as top

executives, management, and administrators within
organizations.
 Financial Accounting

The primary questions about an organization’s success

that decision makers want to know are:

What is the financial picture of the organization on a

given day?

How well did the organization do during a given period?

 Financial Accounting

Accountants answer these primary questions with three

major financial statements.
Balance Sheet - financial picture on a given day

Income Statement - performance over a given period

Statement of Cash Flows - performance over a given

period
The Balance Sheet
What are the different sections of the
Balance Sheet?
 The Accounting Equation

Assets = Liabilities + Owner’s Equity

ASSETS = LIABILITIES
 Cash
 Inventory (creditors’ ownership of interest of
assets)
 Building
 Equipment +
 Furniture
 Supplies OWNER’S EQUITY
 Vehicle (investors’ ownership of interest of
assets)
 Balance Sheet

The balance sheet (also called statement of financial

position) is a snapshot of the financial status of an
organization at a point in time
 Four Basic Financial Statements
Balance Sheet
Assets = Liabilities + Equity

Income Statement (also called Statement of Operations, Earnings

Statement, Profit/Loss (or P&L) Statement
Revenues - Expenses = Net income (or Net Earnings)
Statement of Changes in Stockholders’ Equity
Beginning of period total equity + Stock issued + Net income
- Dividends = End of period total equity
Statement of Cash Flows
Cash inflow - Cash outflow = Net cash flow
Definition of assets by International Accounting Standard
Board (IFRS Framework):
“An asset is a resource controlled by the entity as a result of past
events and from which future economic benefits are expected to
flow to the enterprise”

An asset generally is something that the business owns and

holds the legal title to.
Types Of Assets

1.Current Assets

2.Fixed Assets  
Current Assets:

Current assets are expected to be consumed within one year,

and commonly include the following line items:
Cash and cash equivalents
Marketable securities
Prepaid expenses
Accounts receivable
Inventory
Non-current assets are also known as long-term assets, and are
expected to continue to be productive for a business for more
than one year. The line items usually included in this
classification are:
Tangible fixed assets
Intangible fixed assets
Goodwill
Definition of liabilities by International Accounting Standard
Board (IFRS Framework) F. 49(b):
“A liability is a present obligation of the enterprise arising from past
events, the settlement of which is expected to result in an outflow
from the enterprise of resources embodying economic benefits.”

•Long-term liabilities

•Short-term liabilities
Short-term/current liabilities

Liabilities which are normally due and payable within one year
are grouped as current liabilities. These liabilities are also
known as short-term liabilities as they become due within a
shorter period (say within 1 year).
Creditors
 salaries and wages payable
 gratuity or bonus payable
 interest payable
Long-term liabilities

Liabilities which are not immediately due but become due

after a year or more are classified as long-term liabilities.
Long term bank loans like term loans,
Debentures
 deferred tax liabilities
 mortgage liabilities(payable after 1 year)
 lease payments
 Investment by the owner for use in the firm is known as capital.

Owner’s equity is the ownership claim on total assets. It is

equal to total assets minus total liabilities.

These are the amounts the business earns by selling its products or
providing services to customers. Other titles and sources of
revenue common to many businesses are: sales, fees, commission,
interest, dividends, royalties, rent received, etc.
These are costs incurred by a business in the process of earning
revenue. Generally, expenses are measured by the cost of assets
consumed or services used during an accounting period. The usual
titles of expenses are: depreciation, rent, wages, salaries, interest,
costs of heat, light and water, telephone, etc.
Purchases are total amount of goods procured by a business on
credit and for cash, for use or sale. In a trading concern, purchases
are made of merchandise for resale with or without processing.
In a manufacturing concern, raw materials are purchased, processed
further into finished goods and then sold. Purchases may be cash
purchase or credit purchase.

Sales are total revenues from goods or services sold or provided

to customers. Sales may be cash sales or credit sales.
Stock (Inventory) is a measure of something on hand – goods,
spares and other items – in a business.

It is called stock on hand.

In a trading concern, the stock on hand is the amount of goods

which have not been sold on the date on which the balance sheet is
prepared. This is also called closing stock.
In a manufacturing concern, closing stock comprises raw materials,
semi-finished goods and finished goods on hand on the closing date.

Similarly, opening stock is the amount of stock at the beginning of

the accounting year.
Debtors are persons and/or other entities who owe to an enterprise
an amount for receiving goods and services on credit.

The total amount standing against such persons and/or entities on

the closing date, is shown in the Balance Sheet as Sundry Debtors
on the asset side.
Creditors are persons and/or other entities who have to be paid by
an enterprise an amount for providing the enterprise goods and
services on credit.

The total amount standing to the favour of such persons and/or

entities on the closing date, is shown in the Balance Sheet as Sundry
Creditors on the liability side.
Debits and Credits are the two fundamental aspects of
every financial transaction in the double-entry
bookkeeping system in which every debit transaction
must have a corresponding credit transaction(s) and
vice versa.
In financial accounting or bookkeeping,
“Dr” (Debit Record) means left side of a ledger account
“Cr” (Credit Record ) is the right side of a ledger account
To determine whether one must debit or credit a specific account, we
use the modern accounting equation approach which consists of five
accounting elements.
Five accounting elements:
◦ Asset
◦ Liability
◦ Equity
◦ Income/Revenue
◦ Expense
   Increase Decrease

An increase (+) to an Asset

Expense
Debit
Debit
Credit
Credit
asset or expense Liability Credit Debit

account is a debit (Dr). Equity / Capital Credit Debit

Income / Revenue Credit Debit

  Debit Credit

An increase (+) to a Asset + -

Expense + -
liability, equity or Liability - +

income/revenue Equity / Capital - +

account is a credit Income / Revenue - +

(Cr).
 Accounting Concepts
 Accounting Conventions
The term ‘concept’ is used to connote accounting postulates, that
is necessary assumptions and conditions upon which
accounting is based. The term ‘convention’ is used to signify
customs and traditions as a guide to the presentation of
accounting statements.
Accounting Concepts
• Business Entity Concept
• Money Measurement Concept
• Cost Concept
• Going Concern Concept
• Dual Aspect Concept
• Realization Concept
• Accounting Period Concept
Accounting Conventions
• Convention of Consistency
• Convention of Disclosure
• Convention of Conservation
Accounting Concepts
The term ‘concept’ is used to connote accounting postulates, that
is necessary assumptions and conditions upon which accounting
is based.
Business Entity Concept
Business is treated as a separate entity or unit apart from its
owner and others. All the transactions of the business are
recorded in the books of business from the point of view of the
business as an entity and even the owner is treated as a creditor
to the extent of his/her capital.

Money Measurement Concept

In accounting, we record only those transactions which are
expressed in terms of money. In other words, a fact which can not
be expressed in monetary terms, is not recorded in the books of
accounts.
Cost Concept
Transactions are entered in the books of accounts at the amount
actually involved. Suppose a company purchases a car for
Rs.1,50,000/- the real value of which is Rs.2,00,000/-, the purchase
will be recorded as Rs.1,50,000/- and not any more. This is one of
the most important concept and it prevents arbitrary values being
put on transactions.
Going Concern Concept
It is persuaded that the business will exists for a long time and
transactions are recorded from this point of view.
Dual Aspect Concept
Each transaction has two aspects, that is, the receiving benefit by one
party and the giving benefit by the other. This principle is the core of
For example, the proprietor of a business starts his business with
accountancy.
Cash Rs.1,00,000/-, Machinery of Rs.50,000/- and Building of
Rs.30,000/-, then this fact is recorded at two places. That is Assets
account (Cash, Machinery & Building) and Capital accounts. The
capital of the business is equal to the assets of the business.
Thus, the dual aspect can be expressed as under
 
Capital + Liabilities = Assets
or
Capital = Assets – Liabilities
 Realization Concept
Accounting is a historical record of transactions. It records what has
happened. It does not anticipate events. This is of great important in
preventing business firms from inflating their profits by recording
sales and income that are likely to accrue.
 Accounting Period Concept

Strictly speaking, the net income can be measured by comparing the

assets of the business existing at the time of its liquidation. But as
the life of the business is assumed to be infinite, the measurement
of income according to the above concept is not possible. So a
twelve month period is normally adopted for this purpose. This time
interval is called accounting period.
 ACCOUNTING PRINCIPLES

Accounting Conventions
The term ‘convention’ is used to signify customs and traditions
as a guide to the presentation of accounting statements.
 Convention of Consistency

In order to enable the management to draw important conclusions

regarding the working of the company over a few years, it is
essential that accounting practices and methods remain unchanged
from one accounting period to another. The comparison of one
accounting period with that of another is possible only when the
convention of consistency is followed.
 Convention of Disclosure
This principle implies that accounts must be honestly prepared and
all material information must be disclosed therein. The contents of
Balance Sheet and Profit and Loss Account are prescribed by law.
These are designed to make disclosure of all material facts
compulsory.
 Convention of Conservation

Financial statements are always drawn up on rather a conservative

basis. That is, showing a position better than what it is, not
permitted. It is also not proper to show a position worse than what
it is. In other words, secret reserves are not permitted.
THANK YOU