Accounting- When a company makes money, it has to keep track of where that money came from and where it

goes. There are 2 types of accounting-

1) Accrual Accounting- A method of accounting that records transactions when they happen, not when the money
is received or paid.
2) Cash Basis Accounting- A method of accounting that records transactions when the money is received or paid,
not when they happen.
Equity- The difference between your assets and liabilities.
Income Statement- It shows how much money the company made and how much it spent.
General Ledger-When the company buys or sells something, or pays or gets paid, it has to make two marks in its
special book called the general ledger.
Balance Sheet-It shows how much a company has, how much it owes, and how much is left for the owner of the
company.
Operating Expenses- The costs of running your business, not including the cost of goods sold.
Accounting/Explicit Costs-These Costs take care of all payments and charges that the firm makes to suppliers of
different productive factors. These costs are included in the cost of production. It involves cash payments that the
firm makes.

Economic/Implicit Costs- The normal return on the money that the businessman invests in his own business The
salary is not paid to the entrepreneur but could have been earned if the services would have been sold elsewhere.
A reward for all factors owned by the businessman and used in his own business. It includes the accounting costs
and also takes into account the amount of money the businessman could have earned with his resources if he
would not start the business.

Opportunity Costs- are the costs of missed opportunities. They are about sacrificed opportunities and the books of
accounts do not record them.

Direct/Traceable Costs– Costs that are easily identifiable and traceable to a particular product, operation, or plant.
For example, manufacturing costs are direct costs since they can be related to either a product line or territory or
customer class, etc. Ensure that you know the purpose of the cost calculation before determining if a cost is direct
or indirect.

Indirect/Non-Traceable Costs– costs that are not easily identifiable or traceable to specific goods, services,
operations, etc. These costs bear some functional relationship to production and may vary with the output. For
example, costs related to electric power and the common costs incurred for the general operation of the business
benefitting all products.

Fixed/Constant Costs- They are not a function of the output. That is, they do not vary with the output up to a
certain extent. They require a fixed expenditure of funds regardless of the output. For example, rent, property
taxes, interest on loans, etc. However, note that fixed costs can vary with the size of the plant and are usually a of
capacity. Therefore, we can conclude that fixed costs do not vary with the output volume within a capacity level.
Variable costs- are cost concepts that are a function of the output in the production period. Variable costs vary
directly with the output. Some examples of variable costs are the cost of raw materials, wages, etc.

Types of Costs Concepts-

 Nature of Expense-
1) Outlay Costs-The authentic payments undergone by an entrepreneur in employing input are known as outlay
costs. It includes costs on payments of fuel, rent, electricity, etc.
2) Concept of Opportunity Cost- It is the value of the next best thing you give up whenever a decision is made by
you.
 Traceability-
1) Direct Costs-A cost that is related to the production method of a good or service. It is the opposite of an indirect
cost. These costs are related to a certain product or process. They are also known as traceable costs as they could
be traced to a specific activity. It is the opposite of an indirect cost.
2) Indirect Costs- Indirect costs are expenses that could not be traced back to a single cost object or cost source.
They are also known as untraceable costs. However, they are extremely important as they affect total profitability.

 Treatment-
1) Accounting Costs- These are direct costs. They are also known as hard costs. The entrepreneur pays the cash
directly for obtaining resources for production. It includes the cost of prices that are paid for the machines and raw
materials, electricity bills, etc. These costs are treated as expenses.
2) Economic Costs- It is the combination of gains and losses of the products. This cost is mainly used by economists
to compare one with another.

 Purpose-
1) Incremental Cost- These are the changes in future costs that will occur as a result after a decision is made.
2) Sunk Costs-Sunk costs are the costs that cannot be recovered after sustaining. It includes the amount spent on
conducting research and advertising.

 Players-
Private cost implies the cost that is sustained when an individual produces or consumes something. The business
person spends his/ her own private or business interests. The social cost is the cost to an entire society that results
from a news event or a change in policies.
 Variability-
As the term predicts, fixed costs don't change in the volume of output. These costs are constant even with an
increase or decrease in the volume of services/ goods produced or sold. Variable costs, in simple words, are a cost
that varies according to the outcome of the output. Higher production costs higher expenses and lower production
costs lower expenses. If the production is more, the business will pay more, and vice versa.

Revenue Recognition Principle- Revenue should be recognized when it is earned, according to the revenue
recognition principle. This principle is a feature of accrual accounting, which means that when you create an
invoice for products or services for a customer, the amount of that invoice is recorded as revenue at that time,
rather than when the money is received from the customer.
Basis of Accounting System-
1) Cash basis- Under the cash basis of accounting, actual cash receipts and actual cash payments are recorded. On
this basis, revenue is recognized when cash is received and expenses are recognized when cash is paid. e.g. (i) Any
income received, (ii) Any expense paid. Such a method of accounting is usually followed by professionals such as
Doctors, Lawyers, Chartered Accountants (CA), and Not for Profit Organisations.
2) Accrual or Mercantile basis- Under the accrual basis of accounting, the revenue whether received or not, has
been earned or accrued during the accounting period, and expenses incurred whether paid or not are recorded. In
other words, revenue is recognized when it is earned or accrued and expenses are recognized when these are
incurred. e.g. (i) Any income earned whether received or not, (ii) Any expense incurred whether paid or not.

Components of Financial Statements-

The complete set of financial statements includes the following statements:
1. Balance sheet
2. Statement of Profit and Loss
3. Cash flow statement
4. Note to Accounts & other explanatory material that are an integral part of financial statements.
It Doesn’t include the following:
1. Board of Directors’ report
2. Statement of Chairman
3. Management analysis, etc.
Users of Financial Statements-
1. Investors
2. Employees
3. Lenders
4. Suppliers and Creditors
5. Customers
6. Government
7. Public

Limitations of Financial Statements-

1. Shows overall performance: Financial accounting provides information about profit, loss, cost, etc., of the
collective activities of the business as a whole. It does not furnish costing data classified in terms of
departments, products, processes, sales territories, etc.
2. Historical in Nature: Financial accounting is historical since the data are summarised only at the end of the
accounting period. There is no system of computing day-to-day costs or pre–determined costs.
3. No performance appraisal: In Financial accounting, there is no system of developing norms and standards to
appraise the efficiency in the use of materials, labour, and other costs by comparing actual performance with
what should have been accomplished during a given period of time.
4. No material control system: Generally, there is no proper system of control over materials which may result in
losses in the form of obsolescence, deterioration, excessive scrap, misappropriation, etc.
5. No Labour cost control: In financial accounting, there is no system of recording a loss of labour time, i.e., idle
time. Labour cost is not recorded by jobs, processes or departments, and as such it offers no system of
incentives that may be easily used to compensate workers for their above–standard performance.
6. No proper classification of costs: In financial accounting, costs are not classified into direct and indirect, fixed
and variable, and controllable and uncontrollable costs. These classifications have a utility of their own.
7. No analysis of losses: Financial accounting does not fully analyze the losses due to idle time, idle plant
capacity, inefficient labour, sub-standard materials, etc. Thus, the exact causes of losses are not known.
8. Inadequate information about price fixation: Costs are not available as an aid in determining prices of
products, services, or production orders.
9. No cost comparison: Comparison is the foundation of modern management control. But financial accounting
does not provide data for the comparison of costs of different periods, different jobs or departments, sales
territories, etc.
10. Fails to supply useful data to management: Financial accounting fails to supply useful data to management
for taking various decisions like the replacement of labour by machines, the introduction of new products,
make or buy, selection of the most profitable mix, etc.

Basic Accounting Concepts- These are broad working rules of accounting operations and are referred to as the
fundamental principles or basic assumptions underlying the theory and practice of financial accounting. Basic
accounting concepts are a set of general rules that can be utilized as a guide while dealing with accounting issues.
There should be no biases in accounting data.
Business Entity Concept- This concept assumes that a company is a separate and distinct entity from its owners. As
a result, the firm and its owners must be recognized as two independent organizations for accounting purposes.
Money Measurement Concept- Only those transactions and events in an organization that can be expressed in
terms of money should be documented in the books of accounts, according to the idea of money measurement.
Furthermore, transaction records must be stored in monetary units rather than physical units.
Accounting Period Concept- The accounting period Is the period of time at the conclusion of which an enterprise’s
financial statements are created to determine whether it has made profits or losses during that as well as the exact
status of its assets and liabilities at the conclusion of that period.
Cost Concept- The cost concept states that all transactions must be documented in the books of accounts at their
actual cost, which includes the cost of acquisition, shipping, installation and getting the asset suitable for use.
Dual Aspect Concept- This concept states that every transaction has a dual effect, the accounting records must
reflect this in order to accurately indicate the transfer of funds. Every transaction has a twofold effect, which is
described in the form of an accounting equation. this concept also states that, Assets = Liabilities
Matching Concept- The matching concept is an accounting technique in which a company’s revenue and
corresponding costs are recorded in the same accounting period. Firms record their ‘revenues’ as well as
‘expenses’ that brought them in.

Consistency Concept- The term ‘consistency’ refers to the requirement that accounting systems must be
implemented consistently in the future. For similar scenarios, the same tactics and procedures must be employed.
It suggests that a company must not change its accounting policy unless there are compelling reasons to do so.
Conservatism Concept- Under the conservatism principle if there is uncertainty about incurring a loss, you should
tend toward recording the loss. whereas if there is uncertainty about recording a gain, you should not record the
gain.

Principle of Materiality- The concept of materiality in accounting relates to the idea that all material elements
should be appropriately recorded in the financial statements. Material elements are those whose inclusion or
absence causes major changes in the decision-making process for business information users.

Principle of Objectivity- The objectivity principle states that an organization’s financial statements should be based
on reliable evidence. The goal of this principle is to prevent add entity’s management and accounting department
from presenting financial statements that are skewed by their personal beliefs and biases.

Full Disclosure Principle- The full disclosure principle argues that in public company filings, all relevant and
necessary information for comprehending a firm’s financial statements must be published.

Going Concerned- It is the basic assumption that a business is a going concern and will continue its operations in
the future. The going concern concept influences accounting practices in relation to the valuation of assets and
liabilities, depreciation of fixed assets, treatment of outstanding and prepaid expenses, and accrued and unearned
revenues. For example, assets are generally valued at historical cost. Any increase or decrease in the value of
assets in a short period is ignored.

Realization- Income is recorded only when it is realized i.e. either it is received or earned. Revenues are recorded
only when sales are affected or services are rendered. Sales revenues are considered as recognized when sales are
affected during the accounting period irrespective of the fact whether cash is received or not.
Accrual- Income is recorded when it accrues(earned) and expenses are recorded when they accrue (become
payable). All expenses and revenues related to the accounting period are to be considered irrespective of the fact
the revenues are received in cash or not or whether expenses are paid in cash or not.

Capital- The total amount invested into the business by the owner is called capital.
Excess of assets over liabilities is also called as capital. The equation for this is
Capital = Assets – Liabilities
Capital is a liability of the business as this amount is payable by the business enterprise to the owner at the time of
closure of the business.

Drawings- The amount of cash or value of goods, assets, etc., withdrawn from the
business by the owner for personal use called drawings.
E.g.: A proprietor pays the college fees of his son, or pays for his medical expenses, mobile bills etc, from the
business.

Debtor- A person who has to pay the business for getting goods and services on credit is known as the debtor. A
debtor is a person who owes money to the business.
Creditor- A person to whom the business has to pay for getting goods or services on credit is known as a creditor. A
creditor is a person to whom the business owes money.
Bad Debts- An irrecoverable amount from a debtor is known as a "Bad Debt. It is a revenue loss to the business.

Expenditure- An amount spent by the business for any consideration received by the business is called
expenditure. The types-
1) Capital Expenditure- This expenditure is incurred to acquire a fixed asset or to increase the value of the fixed
asset. It gives the benefit for a long period of time and it is non-recurring in nature.
E.g.: Purchase of Machinery, an extension of the building, purchase of a computer, etc.
2) Revenue Expenditure- Revenue expenditure is an expenditure from which no future benefit is expected but
having immediate or short-term benefit may be less than one year. It does not increase the profit-earning capacity
of an organization. These are normal day-to-day operating expenses of a business organization and appear on the
debit side of Trading A/c or Profit and Loss A/c.
E.g.: Rent paid, Salary paid, Wages paid, etc.
3) Deferred Revenue Expenditure- An expenditure that is basically revenue in nature but the benefit of which is
not exhausted within one year is called a Deferred Revenue Expenditure. Such expenditure is written off over a
number of years. The such written-off amount is shown on the debit side of profit and loss a/c and the unwritten
amount is shown on the asset side of the Balance Sheet.
E.g.: Heavy expenditure on advertising, heavy legal expenses.

Discount- A discount is a concession or allowance given by the seller to the purchaser. There are two types of
discounts.
1) Trade Discount- It is an allowance given on the catalog price or list price of goods. This discount is allowed at the
time of purchase/sale of goods. The value of goods purchased/sold recorded is net value payable i.e after
deduction of the amount of trade discount allowed. If goods of ` 1000/- are sold at 5% trade discount, the value of
goods that will be recorded will be ` 950/- both by the purchaser and the seller and not ` 1000/-. Hence, trade
discount does not appear in the books of
accounts separately.
2) Cash Discount- It is the amount deducted from the final amount due at the time of receipt. It is the concession
given for encouraging prompt payment. It is given either for the spot payment or for payment within a specific
period. A cash discount is calculated after deducting a trade discount, since it is a loss to the seller and gain to the
buyer, cash discount appears in the books of accounts.
Solvent- If a person’s assets are more than his liabilities, or equal to his liabilities, he is called a solvent person. A
solvent person is financially sound and is in a position to pay off all his debts. E.g.: A person’s total assets have
been calculated to ` 50,00,000/- and his total debts were 30,00,000/- since his position is sound he is able to pay
off his debts therefore he is called Solvent.

Insolvent- A person whose liabilities are more than his assets is an insolvent person. Such a person’s liabilities are
more than his assets. E.g.: A person’s total assets or property have been calculated to ` 20,00,000/- and his total
debts were ` 50,00,000/- and if he is not in a position to get any amount from any sources and if the court is so
satisfied then he will be declared as an insolvent person.
Trading Concern- A business concern established with the object of earning profit by selling goods is known as a
Trading concern. It is also called a commercial organization or profit-making organization.

Not for Profit Concern- It is an organization not established for making a profit but for rendering services to
society. An organization may be formed for promoting a useful object like art, science, sports, culture, charity,
profession, etc. E.g Schools, Hospitals, Sports clubs, etc.

Goodwill- It is described as the aggregate of those intangible attributes of a business that contributes to its
superior earning capacity over a normal return on investment. It may arise from such attributes as favourable
locations, the ability, and skill of its employees and management, quality of its products and services, customer
satisfaction, etc.
• Goodwill is the reputation of a business expressed in terms of money.
• Goodwill is an intangible asset

Transactions- The exchange of goods and services between two persons or parties for money or money ‘s worth is
known as Transactions.
1) Monetary Transactions- The transaction which involves an exchange of money or money’s worth directly or
indirectly is called a monetary transaction. Only monetary transactions are recorded in the books of accounts.
a) Cash Transactions: A business transaction in which cash is paid or received immediately is known as a cash
transaction. e.g- Purchase of goods for cash at ` 15,000/- and Payment of salary at ` 5,000/-
b) Credit Transactions: A credit transaction is one in which cash is not paid or received immediately at the time of a
transaction but is paid or received at a later date. e.g- Goods sold on credit to Mr. Aman at ` 8,000/- and Sold
machinery to Mr. Amar Singh on credit at ` 20,000/-
2) Non-Monetary Transactions:
A transaction that does not involve an exchange of money or money’s worth directly or indirectly is called a Non-
monetary transaction. An exchange of one thing against another thing is called a Barter transaction.
1) Entry: Recording of a business transaction in the proper form or method in the
books of accounts are called an entry.
2) Narration: A brief explanation of the business transaction for which an entry is
passed is called narration. It is always given in a bracket below the journal
entry and it usually starts with the word "Being" or "For".
3) Goods: The term ‘goods’ refers to merchandise, commodities, articles, or things in
which a trader trades. These are purchased or manufactured for the purpose of sale
and to earn profit. e.g- i) Medicines are goods for the chemist.
ii) Vegetables are goods for the vegetable vendor.
iii) Parts like tyres, engine gearbox, cables are produced by a vehicle manufacturer
like Bajaj Auto, Hero Motors.
Financial Accounting Cost Accounting

It provides information about the business in a general It provides information to the management for proper
way. i.e Profit and Loss Account, Balance Sheet of the planning, operation, control, and decision-making.
business to owners and other outside partners.

It classifies, records, and analyses the transactions in a It records the expenditure in an objective manner, i.e
subjective manner, i.e according to the nature of the according to the purpose for which the costs are
expense. incurred.

It lays emphasis on the recording aspect without It provides a detailed system of control for materials,
attaching any importance to control. labor, and overhead costs with the help of standard
costing and budgetary control.

It reports operating results and financial position It gives information through cost reports to management
usually at the end of the year. as and when desired.

Financial Accounts are accounts of the whole business. Cost Accounting is only a part of the financial accounts
They are independent in nature. and discloses the profit or loss of each product, job, or
service.

Financial Accounts record all the commercial Cost Accounting relates to transactions connected with
transactions of the business and include all expenses the Manufacturing of goods and services, which means
i.e., Manufacturing, Office, Selling, etc. expenses that enter into production.

Financial Accounts are concerned with external Cost Accounts are concerned with internal transactions,
transactions i.e. transactions between business which do not involve any cash payment or receipt.
concerns and third parties.

Only transactions which can be measured in monetary Non-Monetary information likes No .of Units / Hours etc
terms are recorded. are used.

Financial Accounting deals with actual figures and facts Cost Accounting deals with partly facts and figures and
only. partly estimates / standards.

Financial Accounting do not provide information on Cost Accounts provide valuable information on the
efficiencies of various workers/ Plant & Machinery. efficiencies of employees and Plant & Machinery.

Stocks are valued at Cost or Market price whichever is Stocks are valued at Cost only.
lower.

Financial Accounting is a positive science as it is subject Cost Accounting is not only positive science but also
to legal rigidity with regarding to preparation of normative because it includes techniques of budgetary
financial statements. control and standard costing.

These accounts are kept in such away to meet the Generally Cost Accounts are kept voluntarily to meet the
requirements of Companies Act 2013 as per Sec 128 & requirements of the management, only in some
Income Tax Act, 1961 Sec 44AA. industries Cost Accounting records are kept as per the
Companies Act.