POST GRADUATE DIPLOMA IN BUSINESS ADMINISTRATION

UNIT 1
INTRODUCTION TO ACCOUNTING

BY
SUKU THOMAS SAMUEL
DEPARTMENT OF MANAGEMENT
 ACCOUNTING - HISTORY
• Evolution traced 7,000 yeas back to Mesopotamia civilization.
• In India, Chanakya wrote ‘Arthashasthra’ with details of books of account.
• Roman Empire developed account audit systems.
• Luca Pacioli, Italian mathematician is considered as Father of Accounting.
• 18 century, industrial revolution brought needs for accounting system.
 ACCOUNTS – DEFINITION
Accounts is the art & science of recording, classifying and summarizing
transactions in a business
• Art – Presentation matters in accounts
• Science – Has definite laws & principles

Why does a business need accounting?

− Systematic record of transactions.
− Determine profitability based on incomes and expenses.
− Determine financial position in terms of assets and liabilities.
ACCOUNTING – BRANCHES OF ACCOUNTING

Financial Accounting
• Deals with preparing books of Accounts
• Chartered Accountant

Cost Accounting
• Study of cost & methods to reduce them
• Cost Accountant

Management Accounting
• Analyzing account information to take meaningful business decisions
• Management Accountant
RELATIONSHIP BETWEEN BRANCHES
 ACCOUNTING EQUATION
• Basic principle of accounting.
• Foundation of double-entry system of accounting.
• Forms the fundamental element of the balance sheet.

Total Assets = Capital + Total Liabilities

For a company, it can be rewritten as:

Total Assets = Share holders' equity + Total Liabilities
ACCOUNTING EQUATION
 ACCOUNTING EQUATION – ASSETS
• Total resources owned by a company used for carrying out its activity and
could be converted into cash.
Total Assets = Fixed Assets + Current Assets
• Fixed Assets:
– Assets that are used for long term use.
– Cannot be converted into cash quickly.
– Example: Land, Machinery etc.
• Current Assets:
– Assets that are consumed within a short period of time.
– Can be converted to cash quickly.
– Example: Stock, Debtors etc.
 ACCOUNTING EQUATION – CAPITAL
• Total of all the resources of the business used for carrying out its activities.

Shareholders Equity = Share Capital + Retained Earnings

• Share Capital:
– Resources contributed in return of the ownership of business.

• Retained Earnings:
– Portion of the profit kept aside for reinvestment into business.
 ACCOUNTING EQUATION – TOTAL LIABILITIES
• Total of all the obligations of the business.

Total Liabilities = Long Term Liabilities + Current Liabilities

• Long term Liabilities :
– Obligations of a company that are due more than one year in the future.
– Obligation amount is higher.
– Example: Debenture, Loan etc.
• Current Liabilities:
– Short-term liabilities of a business which are expected to be settled
within 12 months.
– Example: Bank overdraft, short term loan etc.
 USERS OF ACCOUNTING INFORMATION

• Located within an organization

Internal Users • Have access to extensive information
• Employees, directors, top management etc.

• Located outside an organization

External Users • Have access to limited information
• E.g. Government, creditors etc.
 ACCOUNTING SYSTEMS
Single Entry System
Considers only one effect of the transaction
Unscientific system of accounting
Incomplete system of accounting
Used by small traders and firms
Does need a qualified, dedicated resource
Double Entry System
Considers both effects of the transactions
Scientific system of accounting
Complete system of accounting
Used by large firms
Need a qualified and dedicated resources
 ACCOUNTING PROCESS
The systematic process of Recording, Classifying and Summarizing
transactions in a business

Recording Summarizing
• Ledgers
• Journals • Final Accounts

Transaction Classifying
 SUMMARIZING OF TRANSACTIONS
• Helps to know the net outcome of all transactions
• Reveals profitability and financial position

Ledgers Trial Balance Trading Account Profit & Loss Balance

account Sheet

Summary of all ledgers

in a business
Gross Profit Net Profit • Financial
Position
• Assets &
• Income Statement of a firm
Liabilities
• Profit Position of a firm
 ACCOUNTING PRINCIPLES
• Need a uniform & standardized system of accounting.
• Can be used for comparison of performance and value.
• Evolved based on certain concepts, convention, and tradition.
• Accepted as a principle if:
a. Objective
b. Usable In Practical Situations
c. Reliable
d. Feasible
e. Comprehensible
• Can be divided into two – Accounting concepts & Accounting
Conventions.
 ACCOUNTING CONCEPTS
• Basic assumptions.
• Provides the appropriate framework to treat transactions of a
business.
• Used by the accountant while preparing books of accounts.
• Helps in preparation of books of accounts – Journals & Ledgers.
• Helps in recording and maintain transactions of a business.
 ACCOUNTING CONCEPTS
Business Entity Concept
• Assumes that business has a distinct and separate entity from its owners.
• For accounting, the business and its owners are to be treated as two
separate entities.
Money Measurement Concept
• Transactions which can be expressed in terms of money are to be
recorded in the book of accounts.
Going Concern Concept
• Assumes that a business firm would continue to carry out its operations
indefinitely.
• Basis for showing the value of assets in the balance sheet.
 ACCOUNTING CONCEPTS
Accounting Period Concept
• Business must follow a foxed and definite time frame for maintaining
books of accounts.
• Financial year is aligned with accounting period of firms.
• The Companies Act 2013 and the Income Tax Act require that the income
statements should be prepared annually.
Cost Concept
• All assets are recorded in the book of accounts at their purchase price.
 ACCOUNTING CONCEPTS
Dual Aspect Concept
• Foundation or basic principle of accounting.
• Every transaction has a dual or two-fold effect and both should be
accounted.
Revenue Recognition Concept
• Revenue should be included in the accounting records only when it is
realized.
Matching Concept
• Expenses incurred in an accounting period should be matched with
revenues during that period
 ACCOUNTING CONVENTIONS
• Best practices given to the accountant.
• Used for preparing final accounts of a firm.

Convention of Full Disclosure

• Requires that all material and relevant facts concerning financial
performance of an enterprise must be fully and completely
disclosed in the financial statements.
 ACCOUNTING CONVENTIONS
Convention of Consistency
• Accounting policies and practices followed by enterprises are
uniform and are consistent over the period of time.

Convention of Materiality
• Efforts should not be wasted in recording and presenting facts,
which are immaterial in financial statements.
 ACCOUNTING CONVENTIONS
Convention of Conservatism
• Deliberate attempt to underestimate the profit or loss should
be discouraged.
• Anticipate not profit, provide for all losses.
INTERNATIONAL FINANCIAL REPORTING STANDARDS

• Issued by the IFRS Foundation and the International Accounting

Standards Board (IASB).
• Provide a common global language for business affairs.
• Business affairs and accounts of companies are understandable
and comparable across international boundaries.
• ICAI has announced that IFRS will be mandatory in India for
financial statements for the periods beginning on or after 1 April
2016 in a phased manner.
PREPARATION OF TRIAL BALANCE
 PREPARATION OF TRIAL BALANCE
• Prerequisite for final accounts preparation.
• Summary of all the ledgers in a business.
• Reflects the balancing figures of all the legers in a business.
• Prepared at the end of the financial year.
• Total of debit balances must be equal to credit balances.
 FORMAT OF TRIAL BALANCE
Particulars Debit (Rs.) Credit (Rs.)
Item 1 *** -
Item 2 - ***
Item 3 *** -
(Asset, Expenses) (Liabilities, Income)
TOTAL ***** *****
PREPARATION OF INCOME STATEMENT
& TRADING ACCOUNT
 PREPARATION OF INCOME STATEMENT
• Combination of Trading account + Profit and Loss account
• Called as income statement as it shows the income or profit of
the firm
• Trading account is prepared to calculate the Gross Profit.
• Profit and Loss account is prepared to calculate the Net Profit.
 PREPARATION OF TRADING ACCOUNT
• First statement as a part of final accounts.
• Prepared to determine the Gross Profit of a firm.
• Considers only direct expenses of the firm.
• Determine the profit earned or loss sustained during the
accounting period
 FORMAT OF TRADING ACCOUNT
In the books of (Name of Company)
Final Accounts
Trading Account as on 31 March ****
Particulars Amt Amt Particulars Amt Amt
To opening stock *** By sales **
To purchase ** Less: Sales return ** ***
Less: Purchase return ** *** By closing stock ***
DIRECT EXPENSES
To wages ***
To carriage inwards ***
To power ***
To - - - ***
To - - - ***
To gross profit c/d (Bal fig) *** By gross loss c/d (Bal fig) ***
TOTAL ***** TOTAL *****
 PREPARATION OF P/L ACCOUNT
• P/L Account is prepared post the preparation of trading account.
• Prepared to estimate the net profit of the firm.
• Trading account and profit and loss account together are called as
income statement.
 FORMAT OF P/L ACCOUNT
In the books of (Name of Company)
Final Accounts
Profit and Loss Account as on 31 March ****
Particulars Amt Amt Particulars Amt Amt
To gross loss b/d *** By gross profit b/d ***
INDIRECT EXPENSES INDIRECT INCOMES
To carriage outwards *** By commission received ***
To commission paid *** By interest received ***
To salary ** By - - - ***
Less: salary prepaid ** *** By - - - ***
To rent **
Add: Rent OS ** ***
To - - - ***
To - - - ***
To net profit c/d (Bal fig) *** By net loss c/d (Bal fig) ***
TOTAL ***** TOTAL *****
 PREPARATION OF BALANCE SHEET
• Last statement prepared for Final Accounts.
• Provides the financial position of the firm.
• Prepared with assets and liabilities of the firm.
• Validation of accounting equation.
 In the books of (Name of Company)
Final Accounts
Balance Sheet as on 31 March ****
Particulars Amt Amt Particulars Amt Amt
CAPITAL FIXED ASSETS
Capital *** Land ***
Add: Additional capital ** Machinery ***
Add: Interest on capital ** -
Add: Net profit ** INVESTMENTS
Less: Drawings ** Bank deposits ***
Less: Interest on drawings ** ****
LONG TERM LIABILITIES
Debentures ***
Loans ***
SHORT TERM LIABILITIES CURRENT ASSETS
Bank OD *** Bills receivable ***
Bills payable *** Debtors ***
Creditors *** Cash ***
- *** -
- *** -
- ***
TOTAL ***** TOTAL ****
PREPARATION OF TRADING ACCOUNT
QUESTION 1
 TRADING ACCOUNT – QUESTION 1
Prepare a trading account of M/s Prime Products from the
following particulars pertaining to the year 2019-2020:
Particulars Amount
Opening stock 50,000
Purchases 1,10,000
Return inwards 5,000
Sales 3,00,000
Return outwards 7,000
Factory rent 30,000
Wages 40,000
PREPARATION OF FINAL ACCOUNTS
QUESTION 2