Basics of Accounting HISTORY OF ACCOUNTING: ACCOUNTING IS AS OLD AS CIVILIZATION ITSELF. FROM THE ANCIENT RELIES OF BABYLON, IT CAN BE WELL PROVED THAT ACCOUNTING DID EXIST AS LONG AS 2600 B.C HOWEVER,IN MODERN FROM ACCOUNTING BASED ON THE PRINCIPLES OF DOUBLE ENTRY SYSTEM, WHICH CAME INTO EXISTENCE IN15TH CENTURY. FRA LUKA PACIOLO, A MATHEMATICIAN PUBLISHED A BOOK DE COMPUTICET SCRIPTURIES IN 1494 AT VENICE IN ITALY. THIS BOOK WAS TRANSLATED INTO ENGLISH IN 1543 IN THIS BOOK HE COVERED A BRIEF SECTION ON “BOOK-KEEPING” ORIGIN OF ACCOUNTING IN INDIA: THE ACCOUNTING ON MODERN LINES WAS INTRODUCED IN INDIA AFTER 1850 WITH THE FORMATION OF JOINT STOCK COMPANIES IN INDIA. Narasimha BOOK-KEEPING AND ACCOUNTING: According to Prof. G.A. Lee the accounting system has two stages. Book-Keeping: Book-Keeping involves the chronological recording of finance transactions in a set of books in a systematic manner. Accounting: Accounting is a concerned with the maintenance of accounts giving stress to the design of the system of records, the preparation of reports based on the recorded data and the interpretation at the reports. Definition of Accounting: “Accounting system is a means of collecting, summarising, analyzing and reporting in monetary terms, the information about the business.” “R.N.Anthony” BRANCHES OF ACCOUNTING: Financial accounting: The purpose of Accounting is to ascertain the financial results i.e., profit or loss in the operations during a specific period. It is also aimed at knowing the financial position, i.e., assets, liabilities and equity position at the end of the period. Cost Accounting: The purpose of cost accounting is to analyze the expenditure so as to ascertain the cost of various products manufactured by the firm and fix the prices. Management Accounting: The purpose of management accounting is to assist the management in taking rational policy decisions. Ex of such decisions, pricing decisions, capital expenditure decisions…….etc. The necessary accounting information about funds, costs, profits, etc. Inflation Accounting: It is concerned with the adjustment in the values of assets and profit in light of changes in the price level. This type of accounting is also necessary due to the assumption of stable monetary unit. Human Resource Accounting: It is a branch of accounting which seeks to report and emphasize the importance of human resources in a company’s earning process and total assets. USERS OF ACCOUNTING INFORMATION: The users of accounting can be divided in two broad groups: 1) Internal users and 2) External Users. 1) Internal Users: Managers: These are the persons who manage the business, i.e., management at the top, middle and lower levels. Accounting information also helps the managers in appraising the performance of subordinates. As such Accounting is termed as “ the eyes and ears of management”. External Users: Investors : Those who are interested in buying the shares of a company are naturally interested in the financial statements to know how safe the investment already made is and how safe the proposed investment will be. Creditors: Lenders are interested to know whether their loan, principal and interest, will be paid when due. Workers: In our country, workers are entitled to payment of bonus which depends the size of profit earned. Hence, they would like to be satisfied that the bonus being paid to them is correct. Customers: They are also concerned with the stability and profitability of the enterprise. Government: Government all over the world are using financial statements for compiling statistics concerning business which, in turn, helps in compiling national accounts. ACCOUNTING PRINCIPLES Classification of Accounting Principles: Accounting Principles can be broadly classified into two categories . A) Accounting Concepts. B) Accounting Conventions. Accounting Principles Accounting Concepts Conventions Business entity concept Dual Aspect Concept Going Concern Concept Consistency Money Measurement Concept Conservation Objective Evidence Concept Cost Concept Accounting Period Concept Accrual Concept Matching Cost Concept Historical Record Concept Accounting 1) Disclosure 2) Materiality 3) 4) DOUBLE ENTRY SYSTEM Introduction : Double entry system is a scientific way of presenting accounts. As such all the Business concerns feel it convenient to prepare the accounts under double entry system. Under dual aspect concept the accountant deals with the two aspects of business transaction i.e., 1) Receiving Aspect and 2) Giving Aspect. Receiving aspect is known as ‘Debit Aspect’ and giving aspect is known as ‘Credit Aspect’. CLASSIFICATION OF ASSETS Assets: The Valuable things owned by the business are known as assets. These are the properties owned by the business. Classification of Assets Fixed Assets Liquid Assets Fictitious Assets Intangible Assets Wasting Assets Fixed Assets: These assets are acquired for long-term use in the business. They are not ment for resale. Land, Building, plant and machinery, vehicles and furniture etc., are some of the examples of fixed assets. Liquid Assets : These assets also known as circulating, fluctuating or current assets. These assets can be converted into cash as early as possible. Current assets are cash, bank balance, debtors, stock, investments. Fictitious assets: Fictitious assets are those assets, which do not have physical form. They do not have any real value. The examples of these assets are loss on issue of shares, preliminary expenses etc. Intangible Assets: Intangible Assets are those having no physical existence. Goodwill, Patents, Trademarks, are the examples. Wasting Assets: Wasting Assets are those assets which are consumed through being worked or used. Mines are the examples of wasting assets. TYPES OF CAPITAL: Capital: It is the part of wealth which is used for further production and thus capital consists of all current assets and fixed assets. Cash in Hand, Cash at bank, Building, Plant and Machinery, furniture etc., are the capital of the business. Capital is classified as “Fixed capital and Working capital”. 1) Fixed capital: The amount of invested in acquiring fixed assets is called fixed capital. Plant and machinery, vehicles, furniture and building etc., are some of the examples for fixed capital. 2) Working Capital: The part of capital available with the firm for day-to-day working of the business is known as working capital. Working capital can also be expressed as under. Working Capital=Current Assets-Current Liabilities Working Capital=Current Assets-Current Liabilities. TYPES OF LIABILITIES Liabilities: Liabilities are the obligations or debts payable by the enterprise in future in the form of money or goods. Liabilities can be classified as fixed, current and contingent liabilities. Fixed Liabilities: These liabilities are payable generally, after a long period. Capital, loans, debentures, mortgage etc., are its examples. Current Liabilities: Liabilities payable with in a year are termed as current liabilities. The value of these liabilities goes on changing. Creditors, bills payable, and outstanding expenses etc., are current liabilities. Contingent Liabilities: These are not the real liabilities. Future events can only decide whether it is really liability or not. TYPES OF TRANSACTION Transaction: Any sale or purchase of goods or services is called the transaction. Transaction are of three types. 1)Cash Transaction: Cash transaction is one where cash receipts are payment is involved in the exchange. 2) Credit Transaction: Credit Transaction will not have cash, either received or paid, for something given or received, respectively. Credit transactions give rise to debtor and creditor relationship. 3) Non-cash Transaction: It is a transaction where the question of receipt or payment of cash does not arise at all EX: Depreciation, return of goods etc. CLASSIFICATION OF ACCOUNTS Personal Accounts: Personal Accounts also includes accounts in the names of firms, companies or institutions such as Malini & sons account, Nagarjuna finance limited account, Andhra Bank Account etc. Debit the receiver & Credit the giver Real Accounts: Accounts relating to properties or assets are known as ‘ Real Accounts’. Every business needs assets such as machinery, furniture etc., for running its activities. A separate account is maintained for each asset owned by the Business. Debit what comes in Credit what goes out Nominal accounts: Accounts relating to expenses, losses and incomes and gains are known as ‘ Nominal Accounts’ Examples of Nominal Account Wages, salaries, commission, interest received accounts. Debit all expenses and losses credit all incomes and gains JOURNAL Introduction: The word is “Journal” is derived from the Latin word ‘Journ’ which means a day. Therefore, journal means a day book where in day-to-day business transactions are recorded in chronological order. Ledger: As stated above, all transactions, irrespective of their nature, are recorded in the journal in a chronological order. After a certain period, if we want to know whether a particular account is showing a debit or credit balance it becomes very difficult, so the ledger is designed to accommodate the various accounts maintained by a trader. Sub-division of ledger: The impersonal ledger, on the other hand, contains all real and nominal accounts. Credit ledger: All accounts of credits will be found in this book. It can also be called ‘Suppliers Ledger’ Debtors ledger: All accounts of debtors will be found in this book. It can also be called ‘Customers Ledger’. General ledger: It contains all accounts other than debtors and creditors. Accounts of owner’s expenses, incomes, capital, drawings, etc., will be found in this book. It may also be called ‘Impersonal Ledger’. Private ledger: Sometimes, the capital account and drawings account of the proprietor may be separately maintained in another ledger called private ledger. Journal Ledger Journal is the book of first or original entry. The Ledger is the book of second entry In the preparation of final accounts journal is not useful. In the preparation of trail balance and final accounts ledger is a must. Transaction in the journal will be recorded immediately. Depending upon his conveniences the trader records the transactions in the ledger. Journal may not reveal whether one customer is a debtor or creditor. Ledger, however, will reveal whether one person is a debtor or creditor to the business. TRIAL BALANCE The first step in preparation of Final Accounts is the preparation of Trial Balance. In the double entry system of book keeping, there will be credit for every debit and there will not be any debit without credit. The trail balance generally does not include stock in hand at the end of the period. All adjustments required to be done at the end of the period, including closing stock, are generally given under the trail balance. definition A trial balance is a list of all the balances standing on the Ledger accounts and cash Book of a concern at any given data. “Spicer and Pegler” Particulars In trial balance Reason Capital Credit Loan Opening stock Debit Asset Purchases Debit Expenses Sales Credit Gain Return inwards Debit Loss Return outwards Credit Gain Wages Debit Expenses Freight Debit Expenses Transport expenses Debit Expenses Royalties on production Debit Expenses Gas, fuel Debit Expenses Discount received Credit Revenue Discount allowed Debit Loss Bad debts Debit Loss Bad debts reserve Credit Gain Commission received Credit Revenue Repairs Debit Expenses Rent Debit Expense Salaries Debit Expense Loan taken Credit Loan Interest received Credit Revenue Interest allowed Debit Expenses Insurance Debit Expenses Carriage out words Debit Expenses Advertisements Debit Expenses Petty expenses Debit Expenses Trade expenses Debit Expenses Petty receipts Credit Revenue Income tax Debit Drawings Office expenses Debit Expenses Customs duty Debit Expenses Sales tax Debit Expenses Provisions for discount on debtors Credit Liability Provisions for discount on creditors Debit Asset Debtors Debit Asset Creditors Credit Liability Goodwill Debit Asset Plant, machinery Debit Asset Land, building Debit Asset Furniture, fittings Debit Asset Investments Debit Asset Cash in hand Debit Asset Cash at bank Debit Asset Reserve fund Credit Liability Loans and advances Debit Asset Horses, cars Debit Asset Excise duty Debit Expenses General reserve Credit Liability Provision for depreciation Credit Liability Bills receivable Debit Asset Bills payable Credit Liability Depreciation Debit Loss Bank overdraft Credit Liability Outstanding salaries Credit Liability Prepaid insurance Debit Asset Bad debts reserve Credit Revenue Patents & trademarks Debit Asset Prepaid rent (received) Credit Liability Motor vehicle Debit Asset Outstanding rent Credit Liability FINAL ACCOUNTS Introduction: The trail balance marks a definite stage in the preparation of accounts. It indicates the all the transactions for a particular period have been duly entered in the book, properly posted and balanced. The agreement of trail balance proves two things: that 1) The record has been made of both the aspects of each transaction; and 2) The book are arithmetically accurate. final accounts Trading & Profit & Loss A/C Balance Sheet TRADING ACCOUNT, PROFIT & LOSS ACCOUNT The first step in the preparation of final accounts is the preparation of the trading account. The main purpose of preparing a Trading Account is two-fold : 1) to ascertain gross profit and loss as a result of buying and selling of goods; and 2) to enable management to make a comparison of gross profit or gross loss of the current year with that of previous years. The Businessman is always interested in knowing his net income or net profit. Net profit represents the excess of gross profit plus other revenue incomes over sales expense including sales costs and other expenses. The debit side of P&L a/c shows the expenses and the credit side the incomes. If the total of the credit side is more, it will be net profit. And if the debit side happens to be more, it would be net loss. BALANCE SHEET This forms the second part of the Final Accounts. It is prepared after the trading and profit and loss accounts have been complied and closed . A Balance Sheet may be described as a statement of the financial position of a concern at a given date. The financial position of a concern is revealed by its assets on a given date and its liabilities on that date. Excess of assets over liabilities represents Capital. Such excess may be taken as an indicator of the financial soundness of a concern.
