TERMINOLOGY

Capital (CAP)
Definition: A financial asset or the value of a financial asset, such as cash or
goods. Working capital is calculated by taking your current assets subtracted
from current liabilities—basically the money or assets an organization can
put to work.
Cash flow (CF)
Definition: The revenue or expense expected to be generated through
business activities (sales, manufacturing, etc.) over a period of time.
Credit (CR)
Definition: An accounting entry that may either decrease assets
or increase liabilities and equity on the company's balance sheet, depending
on the transaction. When using the double-entry accounting method  there
will be two recorded entries for every transaction: A credit and a debit.
Debit (DR)
Definition: An accounting entry where there is either an increase in assets
or a decrease in liabilities on a company's balance sheet.
TERMINOLOGY
Expenses (fixed, variable, accrued, operation) (FE, VE, AE, OE)
Definition: The fixed, variable, accrued or day-to-day costs that a
business may incur through its operations.
Fixed expenses: payments like rent that will happen in a regularly
scheduled cadence.
Variable expenses: expenses, like labor costs, that may change in a given
time period.
Accrued expense: an incurred expense that hasn’t been paid yet.
Operation expenses: business expenditures not directly associated with the
production of goods or services—for example, advertising costs, property
taxes or insurance expenditures. 
Equity and owner's equity (OE)
Definition: In the most general sense, equity is assets minus liabilities. An
owner’s equity is typically explained in terms of the percentage of stock a
person has ownership interest in the company. The owners of the stock are
known as shareholders.
ACCOUNTING BASICS
Terminology
Transaction :buying or selling something.
Accounts receivable (AR)
Definition: The amount of money owed by customers or clients to a business
after goods or services have been delivered and/or used.
Accounts payable (AP)
Definition: The amount of money a company owes creditors (suppliers, etc.) in
return for goods and/or services they have delivered.  
Assets (fixed and current) (FA, CA)
Definition: Current assets are those that will be converted to cash within one
year. Typically, this could be cash, inventory or accounts receivable. Fixed
assets are long-term and will likely provide benefits to a company for more than
one year, such as a real estate, land or major machinery.  
Balance sheet (BS)
Definition: A financial report that summarizes a company's assets (what it owns),
liabilities (what it owes) and owner or shareholder equity at a given time.
TERMINOLOGY
 Sales or Revenue
Revenue is the income that flows into an organization, and it is often used
almost synonymously with sales. In government and non profit organizations
it includes taxes and grants.
 Expenses
Refers to the other costs that are not matched with sales as part of the cost
of goods sold. They may be matched with a specific time, usually monthly,
quarterly, or annually or they may also be one-off payments. Expenses
include: staff wages, rent, utility bills, insurance, equipment, etc.
 Working Capital
This is the difference between current assets and current liabilities. An
organization without sufficient working capital cannot pay its debts as they
fall due. In this situation it may have to stop trading even if it is profitable.
 Business: An entity that caries out activities for profit earning

 Insolvency

Definition: A state where an individual or organization can no longer

meet financial obligations with lender(s) when their debts come due.
TERMINOLOGY
Liquidity
This is the ability to meet current obligations with cash or other assets that can be
quickly converted into cash in order to pay bills as they become due. In other
words the organization has enough cash or assets that will become cash so that it is
able to write checks without running out of money.
Debtor
A debtor is a person owing money to the business, for example a customer for
goods delivered.
Creditor
A creditor is a person to whom the business owes money, for example a supplier,
landlord, or utility organization.
Bad Debt
All reasonable means to collect a debt have been tried and have failed so the
amount owed is written off as a loss and becomes categorized as an expense on an
income statement. This results in net income being reduced
Depreciation
Assets have a certain length of time in which they operate efficiently, referred to
as 'an asset's useful life.' During this period the value of that asset depreciates due
to age, wear and tear, or obsolescence. The loss in value is recorded in accounts as
a non-cash expense, which reduces earnings whilst raising cash flow.
BRANCHES OF ACCOUNTING

 Financial accounting
 Management accounting
 Cost accounting
 FINANCIAL ACCOUNTING

Its focus is on reporting to external parties.

t measures and records business transactions.
It provides financial statements based on
generally accepted accounting principles.

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MANAGEMENT ACCOUNTING

It measures and reports financial and

nonfinancial information that helps
managers make decisions to fulfill the
goals of an organization.

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DEFINITION
 A process of identifying, recording, summarizing,
and reporting economic information to decision
makers in the form of financial statements.
 “The process of identifying, measuring, and
communicating economic information to permit
informed judgements and decisions by users of
the information.”
—American Accounting Association (AAA)
 “Accounting is an art of recording, classifying
and summarising in significant manner and in
terms of money transactions and events which are
of financial character and interpreting the results
thereof”.
—American Institute of Certified Public Accountants (AICPA)
PRIMARY FUNCTIONS OF
ACCOUNTING
 Recording data about business transactions- In the Egyptian era
they used a quill pen to record the data and stored it on papyrus
scrolls. Today we might use a bar code and scan data into a
computer system and store it on a magnetic disk. “Journal”.
 Classifying:
 Classification is concerned with the systematic analysis of
the recorded data, with a view to group transactions or
entries of one nature at one place. The work of classification
is done in the book termed as “Ledger”.
 Summarizing:
 This involves presenting the classified data in a manner
which is understandable and useful to the internal as well as
external end-users of accounting statements. This process
leads to the preparation of the following statements: (1)
Trial Balance, (2) Income statement (3) Balance sheet.
PRIMARY FUNCTIONS OF
ACCOUNTING
 Analysis and Interprets:
 This is the final function of accounting. The recorded financial
data is analyzed and interpreted in a manner that the end-
users can make a meaningful judgment about the financial
condition and profitability of the business operations. The data
is also used for preparing the future plan and framing of
policies for executing such plans.
 Communicate:
 The accounting information after being meaningfully analyzed
and interpreted has to be communicated in a proper form and
manner to the proper person. This is done through preparation
and distribution of accounting reports, which include besides
the usual income statement and the balance sheet, additional
information in the form of accounting ratios, graphs, diagrams,
funds flow statements etc.
OBJECTIVES OF ACCOUNTING
 To keep systematic records
 To protect business properties
 To ascertain profit and loss
 To ascertain financial position of business
 To facilitate decision making
USERS OF ACCOUNTING
INFORMATION
Internal users
1. Managers
2. Supervisors

3. Planners
4. Employees
External users
5. Shareholders

6. Lenders
7. Banks
8. Government
9. Customers

10. Competitors
11. Investors
ROLE OF ACCOUNTING

Good managers plan for the future.

They develop a budget.

A budget is a formal plan

stated in monetary terms.

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ROLE OF ACCOUNTING

Budgeting

Information systems design

Cost accounting

Internal auditing
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ROLE OF ACCOUNTANT
 The person who practice accounting is called
accountant
 Two categories of accountant

1)Accountant by practice
2)Accountant by employment
Maintenance of books
Auditing of accounts(verifying data for
accuracy and reliability)
 FINANCIAL ACCOUNTING

Its focus is on reporting to external parties.

It measures and records business transactions.
It provides financial statements based on
generally accepted accounting principles.

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ROLE OF ACCOUNTING

Consulting Assurance
services
including Tax
auditing accounting

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 ACCOUNTING:
PRINCIPLES AND CONCEPTS

Accountants follow professional guidelines.

The rules that govern accounting are called GAAP

(generally accepted accounting principles).

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GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND BASIC CONCEPTS

 Generally accepted accounting principles

(GAAP) - a term that applies to the broad
concepts or guidelines and detailed practices
in accounting, including all the conventions,
rules, and procedures that make up accepted
accounting practice at a given time

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 PRINCIPELS
 Accounting concepts
 Accounting conceptions

Accounting concepts
Are standards on which accounting is based
and are universally accepted developed by ICAI
Accounting conventions
Are policies and procedures followed by
business organizations which may or may not
be universally accepted
CONCEPTS

 Separate entity concept

 Going concern concept
 Money measurement concept
 Cost concept
 Dual aspect concept
 Accounting period concept
 Matching of cost and revenue concept
 Realisation concept
 Separate entity concept
Business and owner are separate from two
view points
Accounting
Legal(partnership and sole enterprise)
Capital is liability
Money drawn is withdrawal from capital
GOING CONCERN CONCEPT
 Business exist for long period of time
 Assets are not expenses but depreciation is
applied on them

Money measurement concept

Record only those transaction which are of
financial nature
COST CONCEPT
 Irrespective of market price the monetary
transactions are recorded at historical cost

DUAL ASPECT CONCEPT

 Every business transaction has two effects

 Total liabilities=total assets

 Ex money invested capital and asset for
business as well as liability
ACCOUNTING PERIOD CONCEPT
 The main objective of business is to ascertain
profit or loss to find financial position of
business the books are finalized after every
interval it is called accounting period
 1st April to 31st March
PERIODIC MATCHING OF COST
AND REVENUE CONCEPT
Revenues should be matched with the costs
REALISATION CONCEPT
 Revenue is realised when sales are made.
 When A place order to B for goods it is
realised as sales are made

ACCRUAL CONCEPT
The books should be incorporated with
expenses or revenue irrespective of cash
received or not
CONVENTIONS
 Conservatism
Anticipate for no profit but provide for all
losses reserves for bad debts reserves and
surplus
 Full disclosure fully and fairly reporting
 Consistency stock are valued for cost or
market price which ever less
 Materiality material for one purpose
immaterial for other purpose