Accounting Basics

Jaikumar Laxminarayan
17 August 2006

Misys Retail Banking

Agenda

• An exercise
• Accounting?
• Mirroring economic evolution
• Programming Standards in Accounting –
Debit & Credit
• Debit/Credit vs. Plus/Minus
• TB, P&L, B/S – some jargon!
• How does it look for the Bank?

Misys Retail Banking

An Exercise

• What do you
generally spend
money on?
• Are some names
getting repeated?
• Can we club them
together?
• Some more
examples?

Misys Retail Banking

Accounting?

• The difficulty with definitions is that they are

difficult to define and definitely difficult to
remember…. Really a mouthful!
• Simply stated…Accounting means…
– Recording events and transactions in financial terms
– Summarizing and analyzing them
– Interpreting the results of the analysis to determine
the health of the company.

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Mirroring Economic Evolution

Barter Paper Single Many

System Money Owner Owners

Complex

What do Asset,
Simple Liability,
I own, or
What did I owe? Did Reserves..
Fair spend on. I gain or Attractive
Exchange
No
Did I lose? ?
Accounting gain?
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Some Concepts
(Models of software development)

• Business Entity
– Business has own identity separate from owner.
• Going Concern
– Business lives on even when owners change.
• Dual Aspect
– Every transaction has two opposing aspects.
• Accrual
– Income and expenditure booked even without cash flow.

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Some Conventions
(Syntax and Semantics)
• Consistency
– In the way accounts are depicted year after
year.
• Yesterday’s asset is today’s expense – Library
Books.
• Disclosure
– Seeking transparency in accounting.
• Enron Experience
• Conservatism
– Depict harsh reality.
• Barings Bank fiasco.

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Programming Standards in
Accounting – Debit and Credit

Account
Types Debit Rules Credit Rules

Personal Account Debit the Credit the

(Individuals) Receiver Giver
Real Account Debit what Credit what
(Asset & Liability) comes in goes out
Nominal Account Debit all Credit all
(Income or Gain Expense or Incomes and
Expense or Loss) Losses Gains
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Debit and Credit
Vs Plus and Minus
If Debit is a minus (decrease),
is Credit a plus (increase)?
Rule For Debit Credit

Personal A/c for increase to For decrease to

receiver giver
Asset for increase for decrease

Liability for decrease for increase

Income/Gain for decrease for increase

Expense/Loss for increase for decrease

Why Me? I am not an Accountant??

Misys Retail Banking
TB, P&L, B/S – some jargon!

• TB – Trial Balance
– Omission & Commission errors – one side only
• P&L – Profit and Loss
– The real reason why we are in business
– Is Income > Expense, or vice-versa?
• B/S – Balance Sheet
– How do my assets and liabilities balance?
– Are we looking attractive to investors?
– Will we survive in the future and grow?

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Complete the exercise…

• Provisions
• Now the TB
• Next the P&L
• Finally the B/S

Misys Retail Banking

Misys Retail Banking