ACCOUNTING:

Accounting, or accountancy, is the measurement, processing and communication of

financial information about economic entities. Accounting, which has been called the
"language of business",measures the results of an organization's economic activities and
conveys this information to a variety of users including investors, creditors, management,
and regulators. Practitioners of accounting are known as accountants. The terms
accounting and financial reporting are often used as synonyms.
MEANING OF ACCOUNTING

"The art of recording , classifying and summarizing , in a significant
manner and in terms of money , transaction and events which are, in
part at least, of financial character, and interpreting the result thereof."
The three important aspects of accounts have been highlighted by the
above definition.
1. Account as an Art & science.
2. Accounting is done for Business transaction.
3. Accounting is a system.
OBJECTIVES OF ACCOUNTING

Record business activities in a systematic manner.
Evaluate the performance of the business in terms of profit.
no! the financial position of the business.
"ontrol business activities effectively.
#rovide information to various sta$e holders in the business.
BASIC TERMS IN ACCOUNTING


Entity% Entity has a definite individual e&istence. Business Entity is an
identifiable business enterprise such as 'uper Ba(aar) etc.
Transaction% Transaction is an event involving some value bet!een
t!o or more entities
Assets% Assets are economic resources of an enterprise that can be
e&pressed in monetary terms.
*+i&ed Assets* are assets held on a long term basis such as land)
buildings) etc.
*"urrent Assets* are assets held on a short term basis such as
debtors) bills receivables) etc.
#rofit% #rofit is the e&cess of the revenues of a period over its related
e&penses during an accounting year. #rofit increases the investment
of the o!ners.
,ain% ,ain is a profit that arises from events or transactions !hich
are incidental to business such as sale of fi&ed assets) !inning a
court case) appreciation in the value of an asset.
-oss% The e&cess of e&penses of a period over its related revenues is
termed as -oss.
.iscount% .iscount is the deduction in the price of goods on sale.
/oucher% The documentary evidence in support of a transaction is
$no!n as /oucher.
,oods% ,oods refer to the products !hich a business unit produces
and sells) or by and sells.
.ra!ings% 0ithdra!al of money and1 or goods by the o!ner from
the business for personal use is $no!n as dra!ings. .ra!ings reduce
the investment of o!ners.
#urchases% #urchases are a total amount of goods procured by
business on credit and cash) for use or sale.
'toc$% 'toc$ 2inventory3 is a measure of something on hand 4 goods)
spares and other items in a business. 5t is called 6'toc$ in hand.6
.ebtors% .ebtor6s persons and 1 or other entities !ho o!e enterprise
money) having bought goods and services on credit.
"reditors% "reditors are persons and 1 or other entities !ho have to
be paid by an enterprise for providing goods and services on credit.
ACCOUNTING ASSUMPTIONS


1. 7oney measurement concept% Every accounting transaction is
ma8or in terms of money.
2. .ual entity concept% As per this concept an accountant assume
that business & businessman are t!o different entities.
3. ,oing4concern concept% According to this assumption !hile doing
the accounting it is assumed that business !ill continue for fairly
longer period of time.
9. "ost concept% This concept is applicable only for fi&ed assets
accounting purpose it states that !hile computing the cost of fi&ed
assets all the incidental e&penditure for the ac:uisition of the
assets should be added in cost fi&ed assets.
;. .ual4aspect concept% This is the fundamental accounting
assumption !hich state that every transaction has too folds effect
positive or negative in accounts it is dr. & cr.
<. #eriodicity concept% Every accounting is divided in smaller periods
as per this concept.
=. "ost attach concept% 0hile computing the revenue earned by the
organi(ation all the incidental e&penditures re:uired to earn such
a revenue should be accounted for as per this concept .
>. Accrual concept% As per this concept revenue or e&penditure
should be accounted for only on the basis of the certainty of that
revenue receives or e&penditure paid actual payment or receipts is
irrelevant.
?. -egal aspect concept% 0hen there is a conflict bet!een la!s &
accounting account should follo! la! procedures first.
ACCOUNTING CYCLE


MEANING OF ACCOUNTING OR LEDGER


7eaning of *Account* or *-edger*
A ledger is the summery of all the transactions relating to any person) thing) an
assets or liability.
ACCOUNTING PROCESS

T@E E5,@T 'TE#' A+ T@E A""ABCT5C, "D"-E
As a boo$$eeper) you complete your !or$ by completing the tas$s of the accounting cycle.
5tEs called a cycle because the accounting !or$flo! is circular% entering transactions)
manipulating the transactions through the accounting cycle) closing the boo$s at the end of
the accounting period) and then starting the entire cycle again for the ne&t accounting
period.
The accounting cycle has eight basic steps) !hich you can see in the follo!ing illustration.
These steps are described in the list belo!.
MEANING OF TRANSACTION

A Transaction is an event or happening that changes an organi(ation6s
financial position and 1or its earning.
RB-E' +AR .ETER75C5C, "A'@ AR "RE.5T TRAC'A"T5AC
1. "ash #urchase) cash sales and all Transaction !here the !ord 6paid6
is mentioned are to be treated as cash transaction. +or E&ample%
salary #aid) goods sold for cash etc.
2. 0hen a personal name or the name of a firm is mentioned in the
transaction) it !ill be treated as credit transaction. +or E&ample)
,oods 'old to F for Rs.;GG14.
3. 0hen both cash and personal name are mentioned in the transaction)
it !ill be treated as the cash transaction. +or E&ample) ,oods 'old to
D for cash Rs. 1GGG14.
1. Transactions
+inancial transactions start the process. Transactions can include the sale or return of a
product) the purchase of supplies for business activities) or any other financial activity
that involves the e&change of the companyEs assets) the establishment or payoff of a
debt) or the deposit from or payout of money to the companyEs o!ners.
2. Hournal entries
The transaction is listed in the appropriate 8ournal) maintaining the 8ournalEs
chronological order of transactions. The 8ournal is also $no!n as the Iboo$ of original
entryJ and is the first place a transaction is listed.
3. #osting
The transactions are posted to the account that it impacts. These accounts are part of
the ,eneral -edger) !here you can find a summary of all the businessEs accounts.
9. Trial balance
At the end of the accounting period 2!hich may be a month) :uarter) or year depending
on a businessEs practices3) you calculate a trial balance.
;. 0or$sheet
Bnfortunately) many times your first calculation of the trial balance sho!s that the
boo$s arenEt in balance. 5f thatEs the case) you loo$ for errors and ma$e corrections
called adjustments, !hich are trac$ed on a !or$sheet.
Ad8ustments are also made to account for the depreciation of assets and to ad8ust for
one4time payments 2such as insurance3 that should be allocated on a monthly basis to
more accurately match monthly e&penses !ith monthly revenues. After you ma$e and
record ad8ustments) you ta$e another trial balance to be sure the accounts are in
balance.
<. Ad8usting 8ournal entries
Dou post any corrections needed to the affected accounts once your trial balance sho!s
the accounts !ill be balanced once the ad8ustments needed are made to the accounts.
Dou donEt need to ma$e ad8usting entries until the trial balance process is completed
and all needed corrections and ad8ustments have been identified.
=. +inancial statements
Dou prepare the balance sheet and income statement using the corrected account
balances.
>. "losing the boo$s
Dou close the boo$s for the revenue and e&pense accounts and begin the entire cycle
again !ith (ero balances in those accounts.
As a businessperson) you !ant to be able to gauge your profit or loss on month by month)
:uarter by :uarter) and year by year bases. To do that) Revenue and E&pense accounts
must start !ith a (ero balance at the beginning of each accounting period. 5n contrast) you
carry over Asset) -iability) and E:uity account balances from cycle to cycle.
A""ABCT5C, "D"-E
.E+5C5T5AC A+ 6A""ABCT5C, "D"-E6
The name given to the collective process of recording and processing the accounting events
of a company. The series of steps begin !hen a transaction occurs and end !ith its
inclusion in the financial statements. The nine steps of the accounting cycle are%
1. "ollecting and analy(ing data from transactions and events.
2. #utting transactions into the general 8ournal.
3. #osting entries to the general ledger.
9. #reparing an unad8usted trial balance.
;. Ad8usting entries appropriately.
<. #reparing an ad8usted trial balance.
=. Argani(ing the accounts into the financial statements.
>. "losing the boo$s.
?. #reparing a post4closing trial balance to chec$ the accounts.
Also $no!n as *boo$$eeping cycle*.
'ACCO!T"!# C$C%&'
The accounting cycle is a methodical set of rules to ensure the accuracy and conformity of
financial statements. "omputeri(ed accounting systems have helped to greatly reduce
mathematical errors in the accounting process) but the uniform process of the accounting
cycle also helps reduce mista$es.
"-A''5+5"AT5AC A+ A""ABCT'
An account is a summary of relevant transaction and events at one place under a particular
head. 5t records the amount of the transactions and also depicts their effect and direction.
"lassification of accounting is broadly divided into t!o heads%

"lassification according to Traditional approach
"lassification according to accounting e:uation

"-A''5+5"AT5AC A+ A""ABCT' A""AR.5C, TA TRA.5T5ACA- A##RAA"@%
1. #ersonal Account% Account related to individual) ban$s) firm) companies) etc. are
$no!n as personal account. The personal accounts are related to natural person)
artificial persons and representative person. 5t may be classified into three
categories%
Catural #ersonal Account% Account of individuals 2natural person3 such as
'araEs A1c is $no!n as natural personal account.
Artificial #ersonal Account% Accounts of firms) companies) ban$s) are artificial
accounts. +or e&amples) Tata ,roups A1c) "oca "ola "orporation ban$ A1c.
Representative Account% The account related to outstanding e&penses) prepaid
e&penses) income received in advance) accrued income is representative personal
accounts. +or e&amples) Rent outstanding) insurance #repaid) 5nterest due but not
paid) etc.
2. Real Account% Real Account is related to tangible or intangible assets. Tangible
assets are one !hich can be touch and seen such as building) plant) cash etc.
5ntangible assets are related to intangible ob8ects !hich neither be touched or seen.
+or e&ample) good!ill) trademar$s) etc.
3. Cominal Account% The account related to income) e&pense) losses) and gains are
classified as nominal accounts. +or e&amples) !age accounts) salaries account) etc.
"-A''5+5"AT5AC A+ A""ABCT A""AR.5C, TA A""ABCT5C, EKBAT5AC' %
T@ERE ARE +5/E TD#E' A+ A""ABCT'%
1. Assets A1c% 5t relates to tangible or intangible assets. E&. #lant A1c
2. -iabilities A1c% These accounts represent the final obligation of the enterprise
to!ards outsides. E&. Trade creditors) bills payable
3. "apital A1c% These accounts relates to o!ners of an enterprise. E&. "apital A1c)
.ra!ings A1c
9. Revenue A1c% These accounts relate to amount earned by the enterprise by
rendering goods and services. E&. 'ales A1c) .iscount received A1c
;. E&pense A1c% These accounts relate to the amount loss or incurred in the process of
earning revenue. E&. #urchase A1c) -oss by Theft A1c.