Introduction to accounting (Part 1)
- 1. Introduction to accounting (part 1) prepared By Sowndarya shree A.S
- 2. Introduction: Business entities and other organizations carry on activities which involve exchange of money or money’s worth or economic resources. The volume of these activities are large in number it is necessary that these are recorded for the purpose of taking important decisions as to whether the activities are viable, gainful and are to be continued or not. Information regarding interested users such as the government, investors, customers, employees and researchers.
- 3. Meaning: Accounting is the systematic process of identifying, measuring, recording, classifying, summarizing, interpreting and communicating to the users.
- 4. Definition: Accounting as “the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information”. -American Accounting Association
- 6. Accounting equation : ASSET = LIABILITY + CAPITAL
- 7. Basic accounting terms Asset Liability Capital Invoice Sales Purchase Stock / Inventory Sales return / Return inward Purchase return / Return outward Drawings Debtors Creditors Bad debts Income Expenses Voucher Depreciation Appreciation Fixed asset Current asset Bills payable Bills receivable Transaction Cash transaction Credit transaction Accounting year Financial year
- 8. TYPES OF ASSET: 1. Current asset: A current asset is a company's cash and its other assets that are expected to be converted to cash within one year of the date appearing in the heading of the company's balance sheet.
- 9. 2. Fixed asset: Assets which are purchased for long-term use and are not likely to be converted quickly into cash, such as land, buildings, and equipment.
- 10. 3. Tangible asset & Intangible asset: Which can be seen, touch, felt Which cannot be seen, touch, felt
- 11. Liability: State of being legally responsible for something. The sum of amount which is payable by the business to the outsider or supplier. Example: Siva is going to start a business but he did not have a sufficient funds. So, he lends some money from his friends. The amount is called liability of the business.
- 12. List of liability: 1. Bills payable / Acceptance/ Accounts payable 2. Outstanding 3. Sundry Creditors (suppliers) 4. Bank overdraft 5. General reserve 6. Reserve fund
- 14. Depreciation: Decrease in the value of fixed asset Appreciation: Increase in the value of fixed asset.
- 15. Transaction: A transaction is a business event that has a monetary impact on an entity's financial statements, and is recorded as an entry in its accounting records. Examples of transactions are as follows: Paying a supplier for services rendered or goods delivered. Paying an employee for hours worked.
- 16. Ways of making transaction 1. Cash transaction: A cash transaction is the immediate payment of cash for the purchase of an asset. 2. Credit transaction: ‘Buying on credit’ means receiving goods or services straight away and paying for them later. Similarly for ‘selling on credit’: goods or services are sold to a customer, who will pay for them later.
- 17. Bad debts: A bad debt is a sum of money that has been lent but is not likely to be repaid.
- 18. 1. Identifying the transaction and journalizing 2. Posting to ledger accounts 3. Preparing trial balance 4. Preparing financial statements (A) Trading account (B) Profit and loss account or Income statement (C) Balance sheet or position statement Accounting cycle:
- 19. 1. Identifying the transaction and journalizing: •All the monetary transactions are recorded in the books of original entry called journals. •Recording the transactions in the journal is called journalizing. •Entries are made in the journals on the basis of source documents in the chronological order, i.e., the order of occurrence of the transactions.
- 20. 2. Posting and balancing: Transferring the entries from the journal to the ledger is called posting. Ledger, entries are made in each account after classifying them under common heads. Finding the difference between the total of the debit column and credit column of all the ledger accounts is called balancing.
- 21. 3. Preparation of trial balance: On the basis of ledger balances the financial statements are prepared.
- 22. 4. Trading account: All the direct revenues and direct expenses are transferred to trading account. The balance in the trading account is the gross profit or gross loss.
- 23. 5. Preparation of profit and loss account: •All the indirect revenues and indirect expenses along with gross profit or gross loss are transferred to profit and loss account. • The balance in the profit and loss account is the net profit or net loss
- 24. 6. Preparation of balance sheet: •A statement showing the balances of assets and liabilities namely balance sheet is prepared. •It is prepared on a particular date, normally, on the last day of the accounting period. •The closing balances of an accounting year are taken as the opening balances for the next accounting year .
- 25. Objectives of accounting: (I) To keep a systematic record of financial transactions and events (ii) To ascertain the profit or loss of the business enterprise (iii) To ascertain the financial position or status of the enterprise (iv) To provide information to various stakeholders for their requirements (v) To protect the properties of an enterprise and