Unit 1

ACCOUNTING
Accounting - The systematic recording, reporting, and analysis of financial transactions of a
business. Accounting allows a company to analyze the financial performance of the business,
and look at statistics such as net profit.

Balance Sheet
Balance Sheet - A quantitative summary of a company's financial condition at a specific point in
time, including assets, liabilities and net worth.
The first part of a balance sheet shows all the productive assets a company owns, and the second
part shows all the financing methods (such as liabilities and shareholders' equity).
Asset - Any item of economic value owned by an individual or corporation, especially that
which could be converted to cash. Examples are cash, securities, accounts receivable, inventory,
office equipment, real estate, a car, and other property.
On a balance sheet, assets are equal to the sum of liabilities, common stock, preferred stock, and
retained earnings.
From an accounting perspective, assets are divided into the following categories:
 current assets (cash and other liquid items),
 long-term assets (real estate, plant, equipment),
 prepaid and deferred assets (expenditures for future costs such as insurance, rent,
interest), and
 intangible assets (trademarks, patents, copyrights, goodwill).
Liability - An obligation that legally binds a company to settle a debt. When one is liable for a
debt, they are responsible for paying the debt. A liability is recorded on the balance sheet and can
include accounts payable, taxes, wages, accrued expenses, and deferred revenues. Current
liabilities are debts payable within one year, while long-term liabilities are debts payable over a
longer period.
Shareholders' Equity - An ownership interest in a corporation in the form of common stock or
preferred stock. It is calculated by taking the total assets minus total liabilities; here also called
shareholder's equity or net worth or book value.

Income Statement
Income Statement - An accounting of sales, expenses, and net profit for a given period. an
income statement depicts what happened over a month, quarter, or year. It is based on a
fundamental accounting equation (Income = Revenue - Expenses) and shows the rate at which
the owners equity is changing for better or worse.
Revenue - The total amount of money received by the company for goods sold or services
provided during a certain time period. It also includes all net sales, exchange of assets; interest
and any other increase in owner's equity and is calculated before any expenses are subtracted.

Expense - Any cost of doing business resulting from revenue-generating activities.

Cash Flow Statement

Cash Flow Statement - A summary of the actual or anticipated incomings and outgoings
of cash in a firm over an accounting period (month, quarter, year).
It answers the questions:
 Where the money came (will come) from?
 Where it went (will go)?
Cash flow statements assess the amount, timing, and predictability of cash-inflows and cash-
outflows, and are used as the basis for budgeting and business-planning.
The accounting data is presented usually in three main sections:
1. Operating-activities (sales of goods or services),
2. Investing-activities (sale or purchase of an asset, for example), and
3. Financing-activities (borrowings, or sale of common stock, for example).

Together, these sections show the overall (net) change in the firm's cash-flow for the period the
statement is prepared.

Accounting Methods
Accounting Method - A process used by a business to report income and expenses. Companies
must choose between two methods acceptable to the IRS, cash accounting or accrual accounting.

Cash Basis Accounting - An accepted form of accounting that records all revenues and
expenditures at the time when payments are actually received or sent. This straightforward
method of accounting is appropriate for small or newer businesses that conduct business on a
cash basis or that don't carry inventories.
Accrual Basis Accounting - An accepted form of accounting that reports income when earned
and expenses when incurred. Under the accrual method, companies do have some discretion as to
when income and expenses are recognized, but there are rules governing the recognition. In
addition, companies are required to make prudent estimates against revenues that are recorded
but may not be received, called a bad debt expense.

Other Accounting Concepts

Accounts Payable - Money which a company owes to vendors for products and services
purchased on credit. This item appears on the company's balance sheet as a current liability,
since the expectation is that the liability will be fulfilled in less than a year. When accounts
payable are paid off, it represents a negative cash flow for the company.
Accounts Receivable - Money which is owed to a company by a customer for products and
services provided on credit. This is often treated as a current asset on a balance sheet. A specific
sale is generally only treated as an account receivable after the customer is sent an invoice.

Type of accounting:-
 Financial accounting. This field is concerned with the aggregation of financial
information into external reports. Financial accounting requires detailed knowledge of
the accounting framework used by the reader of a company's financial statements, such as
Generally Accepted Accounting Principles (GAAP) or International Financial Reporting
Standards (IFRS). Or, if a company is publicly-held, it requires a knowledge of the
standards issued by the government entity responsible for public company reporting in a
specific country (such as the Securities and Exchange Commission in the United States).
There are several career tracks involved in financial accounting.  There is a specialty in
external reporting, which usually involves a detailed knowledge of accounting standards.
There is also the controller track, which requires a combined knowledge of financial and
management accounting.
 Public accounting. This field investigates the financial statements and supporting
accounting systems of client companies, to provide assurance that the financial
statements assembled by clients fairly present their financial results and position. This
field requires excellent knowledge of the relevant accounting framework, as well as an
inquiring personality that can delve into client systems as needed. The career track here is
to progress through various audit staff positions to become an audit partner.
 Government accounting. This field uses a unique accounting framework to create and
manage funds, from which cash is disbursed to pay for a number of expenditures related
to the provision of services by a government entity. Government accounting requires
such a different skill set that accountants tend to specialize within this area for their entire
careers.
 Forensic accounting. This field involves the reconstruction of financial information when
a complete set of financial records is not available. This skill set can be used to
reconstruct the records of a destroyed business, to reconstruct fraudulent records, to
convert cash-basis accounting records to accrual basis, and so forth. This career tends to
attract auditors. It is usually a consulting position, since few businesses require the
 services of a full-time forensic accountant. Those in this field are more likely to be
involved in the insurance industry, legal support, or within a specialty practice of an audit
firm.
 Management accounting. This field is concerned with the process of accumulating
accounting information for internal operational reporting. It includes such areas as cost
accounting and target costing. A career track in this area can eventually lead to the
controller position, or can diverge into a number of specialty positions, such as cost
accountant, billing clerk, payables clerk, and payroll clerk.
 Tax accounting. This field is concerned with the proper compliance with tax regulations,
tax filings, and tax planning to reduce a company's tax burden in the future. There are
multiple tax specialties, tracking toward the tax manager position.
 Internal auditing. This field is concerned with the examination of a company's systems
and transactions to spot control weaknesses, fraud, waste, and mismanagement, and the
reporting of these findings to management. The career track progresses from various
internal auditor positions to the manager of internal audit. There are specialties available,
such as the information systems auditor and the environmental auditor.

Scopes Of Accounting:-
1.  Business:-Accounting is widely applicable in the business sector. Today, in the modern
world, most of the people are engaged in business sector and all businessmen follow Generally
Accepted Accounting Principle (GAAP) to find out profit, loss and financial position of business
firm.
2. Government organizations:-Though, Government organizations do not follow Generally
Accepted Accounting Principle (GAAP), its keep systematic records of all transactions in order
to find the position of public fund.
3. Non-Government organizations:-Non-government and service organizations such as NGOS,
INGOs, Red Cross Society, SOS etc which plays a vital role in the development of nation also
uses accounting. The accounting system used in these organizations are called fund accounting.
4. Individuals:-Individuals also perform economic activities to earn their livelihood. They also
perform some form of accounting to draw financial information for making personal economic
decision.

Basic Accounting Concepts:-

 Accruals concept. Revenues are recognized when earned, and expenses are recognized
when assets are consumed. This concept means that a business may recognize sales,
profits and losses in amounts that vary from what would be recognized based on the cash
received from customers or when cash is paid to suppliers and employees. Auditors will
 only certify the financial statements of a business that have been prepared under the
accruals concept.
 Conservatism concept. Revenues are only recognized when there is a reasonable certainty
that they will be realized, whereas expenses are recognized sooner, when there is a
reasonable possibility that they will be incurred. This concept tends to result in more
conservative financial statements.
 Consistency concept. Once a business chooses to use a specific accounting method, it
should continue using it on a go-forward basis. By doing so, the financial statements
prepared in multiple periods can be reliably compared.
 Economic entity concept. The transactions of a business are to be kept separate from
those of its owners. By doing so, there is no intermingling of personal and business
transactions in a company's financial statements.
 Going concern concept. Financial statements are prepared on the assumption that the
business will remain in operation in future periods. Under this assumption, revenue and
expense recognition may be deferred to a future period, when the company is still
operating. Otherwise, all expense recognition in particular would be accelerated into the
current period.
 Matching concept. The expenses related to revenue should be recognized in the same
period in which the revenue was recognized. By doing this, there is no deferral of
expense recognition into later reporting periods, so that someone viewing a company's
financial statements can be assured that all aspects of a transaction have been recorded at
the same time.
 Materiality concept. Transactions should be recorded when not doing so might alter the
decisions made by a reader of a company's financial statements. This tends to result in
relatively small-size transactions being recorded, so that the financial statements
comprehensively represent the financial results, financial position, and cash flows of a
business.

Users of Accounting Information - Internal & External

Accounting information helps users to make better financial decisions. Users of financial
information may be both internal and external to the organization.
Internal users (Primary Users) of accounting information include the following:
 Management: for analyzing the organization's performance and position and taking
appropriate measures to improve the company results.
 Employees: for assessing company's profitability and its consequence on their future
remuneration and job security.
  Owners: for analyzing the viability and profitability of their investment and determining
any future course of action.
Accounting information is presented to internal users usually in the form of management
accounts, budgets, forecasts and financial statements.
External users (Secondary Users) of accounting information include the following:
 Creditors: for determining the credit worthiness of the organization. Terms of credit are
set by creditors according to the assessment of their customers' financial health. Creditors
include suppliers as well as lenders of finance such as banks.
 Tax Authourities: for determining the credibility of the tax returns filed on behalf of the
company.
 Investors: for analyzing the feasibility of investing in the company. Investors want to
make sure they can earn a reasonable return on their investment before they commit any
financial resources to the company.
 Customers: for assessing the financial position of its suppliers which is necessary for
them to maintain a stable source of supply in the long term.
 Regulatory Authorities: for ensuring that the company's disclosure of accounting
information is in accordance with the rules and regulations set in order to protect the
interests of the stakeholders who rely on such information in forming their decisions.

Double Entry System

The double entry system of accounting or bookkeeping means that every business transaction
will involve two accounts (or more). For example, when a company borrows money from its
bank, the company's Cash account will increase and its liability account Loans Payable will
increase. If a company pays $200 for an advertisement, its Cash account will decrease and its
account Advertising Expense will increase.
Double entry also allows for the accounting equation (assets = liabilities + owner's equity) to
always be in balance. In our example involving Advertising Expense, the accounting equation
remained in balance because expenses cause owner's equity to decrease. In that example, the
asset Cash decreased and the owner's capital account within owner's equity also decreased.
A third aspect of double entry is that the amounts entered into the general ledger accounts as
debits must be equal to the amounts entered as credits.

What is the journal and ledger?

Journals and ledgers are where business transactions are recorded in an accounting system. In
essence, detail-level information for individual transactions is stored in one of several
possible journals, while the information in the journals is then summarized and transferred (or
posted) to a ledger.
Subsidiary Books: Types and Advantages
Meaning and Types of Subsidiary Books:
Subsidiary Books are those books of original entry in which transactions of similar nature are
recorded at one place and in chronological order. In a big concern, recording of all transactions
in one Journal and posting them into various ledger accounts will be very difficult and involve a
lot of clerical work.
This is avoided by sub-dividing the journal into various subsidiary journals or books. The
subdivisions of journal into various subsidiary journals for recording transactions of similar
nature are called as ‘Subsidiary Books.’
The different subsidiary books and their purpose are shown below:
1. Purchases Day Book – for recording credit purchase of goods only. Cash purchase or assets
purchased on credit are not entered in this book.
2. Sales Day Book – for recording credit sales of goods only. Assets sold or cash sales are not
recorded in this book.
3. Purchases Returns Book – for recording the goods returned to the suppliers when purchased
on credit.
4. Sales Returns Books – for recording goods returned by the customers when sold on credit.
5. Bills Receivable Book – for recording the bills received [Bills Receivables] from customers
for credit sales.
6. Bills Payables Book – for recording the acceptances [Bills Payables] given to the suppliers for
credit purchases.
7. Cash Book – for all receipts and payments of cash.
8. Journal Proper – for recording any transaction which could not be recorded in the above-
mentioned subsidiary books. For example, assets purchased or sold on credit and opening entry
etc., are entered in this book.

Advantages of Subsidiary Books:

The following are the advantages of Subsidiary books or Special journal:
1. Saving of Clerical Labour: Subsidiary books effect considerable saving of clerical labour in
postings and narration. Transactions of any one class such as credit purchases, credit sales, cash
transactions etc., are recorded through separate subsidiary journals and there is no need for
giving narration.
For example, by recording the transactions in the Purchase Day book 50% of the labour in
postings is saved. The periodical total of this book is to be debited to the Purchases a/c. Only the
personal accounts of the suppliers are to be credited.
2. Division of Clerical Work: As separate journals are used for recording the transactions of
each particular type, the division of clerical labour amongst several office clerks becomes
possible. This makes speedy record of day-to-day transactions practicable.
3. Minimizes Frauds: These books make possible the introduction of internal check system
under which the system of rotation of writing up books can be adopted. This helps minimizing
errors and detecting frauds.
4. Facilitates Further Reference: As transactions of similar nature are grouped together in a
separate book, the further reference to any particular item is considerably facilitated.