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Chapter 1

Basic Understanding of Accounting

Transactions & Events

Transaction is used to mean A business,

Performance of an act, an Agreement.

Event is used to mean A happening, as a

consequence of transaction, a result.

Accounting Meaning
According to American Institute of Certified Public Accountants in 1961 Accounting is an art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least, of financial character and interpreting the result thereof. According to American Accounting Association, The process of Identifying, Measuring & Communicating economic information to permit informed judgments and decisions by the users oof accounts.
It is different from book keeping

Book Keeping
It is an activity, complementary to the accounting process which is concerned with the recording of financial data relating to business operation in specific manner.

Objectives of Accounting
Means of recording the monetary transactions and events Earnings of the company, achieved by preparing Profit & Loss

A/c Identify the obligations (Liabilities) & resources (Asset) of the organization, by preparing Balance Sheet It is required to maintain statutorily by certain government & regulatory body Required by management for taking financial decisions Investors and certain lenders also require the preparation of financial statements

Economic & Non economic Transactions

Those transactions in which money is exchanged or

such things or services are exchanged which can be measured in terms of money are called economic transactions E.g.. If we invite a friend for a dinner, it is not an economic transaction, because the cost of dinner is not to be recovered from the friend

Cash & Credit Transactions

A transaction in which there is a receipt or

payment of cash is a cash transaction. Cash or bank balance is affected by such a transaction In credit transaction, there is no receipt or payment of cash immediately, but it is postponed to some future date.

How to determine Cash & Credit transaction?

If the word cash or cheque is mentioned in the

transaction, it is treated as a cash transaction. E.g. Sold goods for cash Rs.720
It the transaction does not mention the word cash

but contains only the name of a person, it is a credit transaction. E.g. Sold goods to Mr. A

How to determine Cash & Credit transaction?

When the transaction does not indicate cash or credit,

and does not mention the name of any person, then it must be cash transaction. E.g. Sold goods Rs.720
If in a transaction, the name of any person is

mentioned and also cash receipt or payment is indicated, then it is a cash transaction. E.g. Sold goods for cash Rs.720 to Mr. A

Classify the transaction as cash or credit

1. Sold furniture to Sita for cash Rs.5000 2. Bought goods from Mohan Rs.3000 3. Sold goods Rs.2000 4. Paid for railway freight Rs.100 5. Expenses incurred on running the cattle camp

during the draught period Rs.6000 6. A gift of Rs. 10000 given to daughter on her birthday

Classify the transaction as cash or credit

7. Purchased stationery from Dinesh Stationery

Mart Rs.300 8. Purchased cupboard from Chintan Furniture Mart by cheque Rs.3000 9. Sold goods to Pulin Rs.10000 and cheque for half of the amount was received 10. Paid to Dhruvi for shop rent Rs1000

Accounting Process
Identification of Transaction Preparation of Business Documents (Voucher) Recording of Transactions (Journal) Posting to respective Accounts (Ledger, Subsidiary Books, Journal Proper) Preparation of Trial Balance Passing of Adjusting Entries Preparation of Financial Statements Balance Sheet

Profit & Loss A/c

The Anatomy of Business

Assets Fixed assets Current assets Investments Liabilities Long term liabilities Current liabilities Financial position Income Expenses Financial Performance

Users of Financial Statements

Internal Users
Management Group
BOD Partners Managers Officers

External Users
Public Group
Governmental Agencies Employees Customers Others Like academicians, researchers, analysts.

Financial Group
Investors Lenders Suppliers

Branches of Accounting
Financial Accounting Cost Accounting Management Accounting