Account
- 1. CHAPTER 1: THE BASIC CONCEPTS
- 2. TOPICS
- 3. Introduction Basic functions of accounting Important concepts The basic accounting equation Accounting system History of accounting Accounting Concepts Conventions
- 4. Golden rules Steps in accounting cycle
- 5. ACCOUNTING IS DEFINED AS THE ART OF RECORDING, CLASSIFYING AND SUMMARIZING TRANSACTIONS IN MONETARY TERMS (IN MONEY TERMS) FOR THE PREPARATION OF FINANCIAL STATEMENTS JOURNAL PAYMENT Vision Enterprises Financial Statement at December 31, 1997 Assets Cash Account Receivable Land Total Assets Liability Account Payable Notes Payable Total Liability Stockholder’s Equity Contributed Capital Retained Earnings Total Stockholder’sEquity $4,456 $5,714 $ 981 --------- $11,151 ====== $3,830 $ 416 --------- $4,246 ====== $2,365 $ 367 --------- $2,732 ====== Vision Enterprises Financial Statement at December 31, 1997 Assets Cash Account Receivable Land Total Assets Liability Account Payable Notes Payable Total Liability Stockholder’s Equity Contributed Capital Retained Earnings Total Stockholder’sEquity $4,456 $5,714 $ 981 --------- $11,151 ====== $3,830 $ 416 --------- $4,246 ====== $2,365 $ 367 --------- $2,732 ====== Vision Enterprises Financial Statement at December 31, 1997 Assets Cash Account Receivable Land Total Assets Liability Account Payable Notes Payable Total Liability Stockholder’s Equity Contributed Capital Retained Earnings Total Stockholder’sEquity $4,456 $5,714 $ 981 --------- $11,151 ====== $3,830 $ 416 --------- $4,246 ====== $2,365 $ 367 --------- $2,732 ====== ? What is Accounting
- 6. ACCOUNTING IS DEFINED AS THE ART OF RECORDING, CLASSIFYING AND SUMMARIZING TRANSACTIONS IN MONETARY TERMS (IN MONEY TERMS) FOR THE PREPARATION OF FINANCIAL STATEMENTS • Recording refers to creating Journal entry for every financial transaction with Debit and Credit amounts. • Classifying refers to Classifying each of the Debit / Credit Transaction to Capital or Revenue and Asset, Liability, Revenue or Expense • Summarizing refers to Grouping the Transactions of Asset, Liability, Revenue and Expenses • preparing the Financial Statements which are Trading, Profit and Loss Account and Balance Sheet • Note:- Trial Balance is not a Financial Statement. It is only a summary of all Debit and Credit Transactions.
- 7. Functions of accounting • The efficient and effective collection and storage of data concerning an organization’s financial activities, including getting the transaction data from source documents, recording the transactions in journals, and posting data from journals to ledgers. • To supply information useful for making decisions, including producing managerial reports and financial statements. • To make sure controls are in place to accurately record and process data.
- 8. Accounting terminology Person Transaction Cash transaction Credit transaction Income Expense Debit – he owes Credit – he trust Supplier Stock Customers Creditors Debtors Drawings Assets – Fixed and Current Tangible and Intangible Assets Liabilities – long term and current Capital
- 9. • Anything tangible or intangible that is capable of being owned or controlled to produce value and that can be converted into cash • Example building, plant and machinery ,cash etc
- 10. • Amount Payable to providers of goods and Services (Creditors) and Providers of Capital (Owners) • common examples of liabilities include loans payable, bonds payable, interest payable, wages payable, and income taxes payable. HOME LOAN
- 11. Stockholders’ Equity Stock Certificate 1- • Owners’ claim to the business resources
- 12. • Revenue is the income that a company receives from its normal business activities, usually from the sale of goods and services to customers. • Revenue may refer to business income in general, or it may refer to the amount, in a monetary unit, • Amount earned out of the Sale Proceeds and the amount earned on Investments • Examples of revenue accounts include: Sales, Service Revenues, Fees Earned, Interest Revenue, Interest Income.
- 13. A financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. PROFIT= TOTAL REVENUE – TOTAL EXPENSES
- 14. • a loss is a decrease in net income that is outside the normal operations of the business. • Losses can result from a number of activities such as; sale of an asset for less than its carrying amount, the write-down of assets, or a loss from lawsuits. • Total Expenses >Total Revenue =Loss
- 15. • FIXED ASSETS: Amount Invested in Long Term Assets which is not intended to be sold within a Year • They are long-term, tangible assets such as land, equipment, buildings, furniture and vehicles
- 16. • CURRENT ASSETS: Amount invested in Short Term Assets which is intended and rotated to earn Revenue • They are the general inventory of a company, including cash, accounts receivable, insurance claims, investments, and intangible or non-physical items.
- 17. CREDITORS: Person who provide Money or Goods on Credit to the Business (Supplier)
- 18. DEBTORS: Goods or Money Provided / sold on Credit by the Business (Customers)
- 19. ACCOUTING EQUATION The equation that is the foundation of double entry accounting. The accounting equation displays that all assets are either financed by borrowing money or paying with the money of the company's shareholders. Thus, the accounting equation is: Assets = Liabilities + Shareholder Equity.
- 20. Revenues, Expenses and Net Income Revenues – Expenses = Net Income **Revenue is the income that a company receives from its normal business activities **Expense is the Amount incurred or expended to earn the revenue.
- 21. ACCOUNTING CONCEPTS. Business Entity. Dual Aspect. Money Measurement. Going concern. Cost Concept. Matching Cost & Revenue Concept. Realisation Concept. Accounting period Concept.
- 23. Classification of accounts. Personal account – Individuals, firms, limited companies, Local authorities, local authorities, association Real Account –Properties, assets Nominal Account – expenses – losses & income – gains.
- 24. GOLDEN RULES OF ACCOUNTING. Personal Account Debit “the Receiver” Credit “the Giver” Examples: 1. Cash paid to Alex 2. Cash received by peter.
- 25. Real Account Debit “What comes in” Credit “What goes out” Examples: 1. Land purchase. 2. Goods sold to Ramesh.
- 26. Nominal Account. Debit “All the expenses & losses” Credit “All Income & gains” Examples: 1. Interest received. 2. Salary account.
- 28. Journal It records all daily transactions of a business into the order in which they occur. A journal may be defined as a book containing a chronological record of transactions Book of original records Process of recording is known as journalizing
- 29. Ledger The General Ledger The general ledger provides up-to-date balances for each account, including accounts payable and receivable. In a computerized system, electronic files are still referred to as a ledger, or the ledger accounts. Managers use ledgers to obtain summarized information. general ledger A permanent record organized by account number.
- 30. Posting. Posting is the process by which random transactions become organized in a manner according to accounts. posting The process of transferring information from the journal to individual general ledger accounts.
- 31. Accounting Cycle Accounting cycle is a step-by-step process of recording, classification and summarization of economic transactions of a business. It generates useful financial information in the form of financial statements including income statement, balance sheet, cash flow statement and statement of changes in equity. The time period principle requires that a business should prepare its financial statements on periodic basis. Therefore accounting cycle is followed once during each accounting period. Accounting Cycle starts from the recording of individual transactions and ends on the preparation of financial statements and closing entries.
- 33. Major Steps in Accounting Cycle Following are the major steps involved in the accounting cycle. We will use a simple example problem to explain each step. 1.Analyzing and recording transactions via journal entries 2.Posting journal entries to ledger accounts 3.Preparing unadjusted trial balance 4.Preparing adjusting entries at the end of the period 5.Preparing adjusted trial balance 6.Preparing financial statements 7.Closing temporary accounts via closing entries 8.Preparing post-closing trial balance
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