Basics Of Accounting

MBA(HRD)
DELHI SCHOOL OF ECONOMICS
DEPARTMENT OF COMMERCE
UNIVERSITY OF DELHI
 Definitions

1. Recording, classifying, summarising business

transactions and interpreting the results thereof.

2. It is an information system whose purpose is to identify,

collect, measure and communicate information about
economic units to those with an interest in the units
financial affairs. To permit judgment and decisions by users
of the information.
 Systematic record of business transactions.

 Protecting the property of the business.

 Communicating results to the interested parties.

 Compliance with legal requirements.

 Evidence in court.

 Settlement of taxation liability.

 Comparative study.

 Sale of business.

 Assistance to various parties.

 Records only monetary transactions.

 Effect of price level changes not considered.

 Historical in nature.
 Personal bias of Accountant affects the
accounting statements.
Generally Accepted Accounting Principles:In order to make
the accounting work uniform and comparable, a set of Guidelines
called as the “GAAP” have been developed by professional
bodies.
ICWAI:- Institute of cost & work Accountants of
India.

ICAI:- Institute of Charted Accountants of India.

AICPA:- American Institute of Certified Public Accountants.

Capital:- It means the amount (in terms of money or
assets having money value) which the proprietor has
invested in the firm or can claim from the firm. For the
firm Capital is a liability towards the owner. It is so
because the owner is treated to be separate from the
business.
Debtors:-A person who owes money to the firm,
generally on account of credit sale of goods is called a
debtor. For e.g. When goods are sold to a person on credit
that person pays the price in future. He is called a debtor
because he owes the amount to the firm.
Liabilities:-If an amount is due to be paid to any other person
or institution other than the owner it is called as a liability.

Liabilities can be classified into following:

i) Long-term liabilities: These are those liabilities which are
payable after a long term, (generally more than one year).
Example; Long-term loans, debentures etc.
ii)Current liabilities: These are those liabilities which are
payable in near future ,(generally within one year).
Example; creditors, bank overdrafts, bills payable, short-
term loans, etc.
Assets:-
Any physical thing or right owned that has a money
value is an asset. In other words, an asset is that
expenditure which results in acquiring of some property
or benefit of a lasting nature.
Assets can be classified as:
i) Fixed Assets: Fixed assets are those assets which are
purchased for the purpose of operating the business and
not for resale. E.g. land, building, machinery, furniture,
etc.
ii) Current Asset: Current assets are those assets of the
business which are kept for short term for converting into
cash. E.g. debtors, bills receivables, bank balance, etc.
Receivables:-The term receivables is used for the amount
that is receivable by the firm, other than the amount due
from the debtors.

Creditors:- A person to whom the firm owes money is

called a creditor. For e.g. Mr. M is creditor of the firm when
goods are purchased on credit from him.

Expense:-It is the amount spent in order to produce and sell

the goods and services which produce the revenue. “Expenses
is the cost of the use of things or services for the purpose of
generating revenue”. E.g. payment of salary, wages, rent, etc.
Income:-It is the profit earned during a period of time. In
other words, the difference between revenue and expense is
called income.
Payables:- The term payables is used for the amount
payable by the firm, other than the amount due to
creditors.

Drawings:- It is the amount of money or the value of

goods which the proprietor takes for his domestic or
personal use.

Revenue:-It means the amount which, as a result of

operations, is added to the capital. “Revenue is an inflow
of assets which results in an increase in owner’s equity.
E.g. sale of goods, rent income.
Gross Profit:-Gross profit is the difference between sales
revenue or the proceeds of goods sold and services rendered
over its direct cost.
Net Profit:-Net Profit is the profit made after allowing for all
expenses. In case, expenses are more than revenue, it is Net
Loss.
Cost of goods sold:-It is the direct cost of the goods or
services sold.

Discount:-When customers are allowed any type of reduction

in the prices of goods by the businessman, that is called
discount.

Gain:-It is a term used to describe profit of an irregular

nature, e.g. capital gains.
Expenditure:- Expenditure is the amount spent or liability
incurred for the value received. Expenditure may be
classified into:
i) Revenue Expenditure: It is the amount that is incurred in
current activities to purchase goods and services which are
consumed during the period.

ii)Capital Expenditure: It is the amount that is incurred in

purchasing assets which will give benefit extending over a
number of accounting periods.
Net worth:-It means assets minus outside liabilities. Profits of
a business increase net worth where as losses reduce the net
worth of a business.

Turn over:-It means total trading income from cash sales and
credit sales.

Voucher:-Any written document in support of a business

transaction is called a voucher. It is an objective evidence in
support of a transaction.
Cash Transaction:-Transactions involving immediate receipt
or payment of cash.
Credit Transaction:-Transactions in which the
receipt/payment of cash is postponed to a future date is called
as a credit transaction.
 Accounting Equation
The equation is based on the principle that accounting
deals with property & rights to property & the sum of the
properties owned is equal to the sum of the rights to the
properties. The properties owned by a business are called
assets & the rights to properties are known as liabilities
or equities of the business.

Assets = Liabilities + Capital