Introduction to

Accounting
Chapter 1

1
Coverage
• Meaning of Financial Accounting
• Evolution of Accounting
• Distinction between various Accounting
• Basic Concepts of Accounting
• Conventions of Accounting
• Stages of preparation of Financial Statements
• Users of Accounting Information
• Advantages of Accounting
• Generally Accepted Accounting Principles

2
Meaning of Financial Accounting
• recording of ALL FINANCIAL transactions and
information of an entity in a systematic way to ensure
- Completeness of records
- Correctness of records

• Bookkeeping provides information for preparation of Financial

Statements

3
Evolution of Accounting

 Barter and trade system

 New age accounting started since currency usage

 Luca Pacioli revamped the structure and developed

debits and credits
 Creation of corporations transformed book keeping to
accounting system
 First financials were developed by US corporations

4
Various types of Accounting
• Financial accounting 
• giving true and a fair view of the financial position
• to various parties

• Management Accounting
• both qualitative and quantitative information
• to the managers
• assist in decision making

• Cost Accounting
• costing information
• to the Management
• for taking pricing decisions

5
Basic Accounting Principles
• Set of rules for recording financial information
• Personal – persons, entities, organizations
• Real – money, assets, resources
• Nominal – other than above two i.e., expenses, income
• Every transaction or event has two aspects
• Debit – generally means plus
• Credit – generally means minus

6
Types of Account

Account Type Meaning Examples

Represents persons or Contractor A/c, Vendor A/c,

Personal
organizations Company A/c

Real Represents assets Furniture A/c, Cash A/c

Salary A/c, Grants Received

Nominal Expenses and Income
A/c, Scheme Expenditure A/c

7
Personal, Real & Nominal
1. Purchases Account

2. Bank Account
3. Share Capital Account
4. Printing Account

5. Debtors Account

6. Land Account

7. Advance Received Account

8. Prepaid Expenses Account

9. Profit Account

10. College Fee Account

8
Assets, Liabilities & Equity
Assets: are the goods and properties which the organization owns as well
as claims against outsiders which the organization has not yet collected.

Equity: is generally defined as ownership in the organization after all

liabilities are paid off. In government organizations, equity is denoted by
fund balance or General fund balance

Liabilities: represent the obligation of the organization towards outsiders

and their settlement is expected to result in an outflow of assets.

Accounting equation
Assets = Liabilities + Equity

9
 Exercises
• Which of the following items would not fall under the definition of an
asset?
• Land
• Machinery
• Owner's Equity
• Cash

• Which one of the following items would fall under the definition of a
liability?
• Loan Received
• Statutory Dues
• Unpaid Salaries
• All the above

10
 Exercises
3. Which of the following statements are true?
• If liabilities are greater than an entity's assets, it is in bad financial position.
• If liabilities are greater than an owner's equity, it is in good financial position.
• If assets are greater than an owner's equity, it is in bad financial position.
• a&b

4. An Organization has the following items:

- Owners equity Rs 6,00,000
- External Liabilities Rs14,00,000
What is the value of the assets in this business?
• 14,00,000
• 8,00,000
• 6,00,000
• 20,00,000

11
 Exercises
5. An Entity has the following items:
- Vehicles Rs 6,00,000 - Creditors Rs 50,000
- Debtors Rs 1,20,000 - Cash Rs 30,000
- Owners equity Rs 10,00,000 - Loan Rs 5,00,000

What is the value of the land?

• 20,00,000
• 8,00,000
• 6,00,000
• None of the above

12
Conventions of Accounting
Reporting Entity: entity separate from owners

Going Concern: assumption that organization will run forever

Periodicity: activities segregated for artificial periods viz., yearly quarterly,

monthly

Money Measurement: all activities are measured in terms of money

13
Books maintained
Journal
Records accounting transactions chronologically
All transactions are recorded through journal entries
Journal entry should be balanced i.e., debit amount = credit amount

General Ledger
 It is a complete set of accounts of an organization
 It classifies transactions
 Based on these ledgers Financial Statements are prepared

Cash Book
 All receipts and expenditure transactions are recorded here
 On receipt of monies an entry on the debit side of Cash Book is made
 On payment of monies an entry on the credit side of Cash Book is made

14
 Statements Prepared
1. Trial Balance
2. Statement of Income & Expenditure
3. Balance Sheet
4. Cash Flow Statement

15
 Exercises
6. Prepare Statement of Income & Expenditure from the following
information:
- Revenue from Services Rs. 15,00,000
- Salary Expenses Rs. 7,50,000
- Rent expenses Rs. 1,20,000
- Bank interest received Rs. 15,000
- Admin Expenses Rs. 10,000
- Staff Welfare Rs. 5,500

Also analyse the performance of the entity based on the Statement of

Income & Expenses

16
17
 Exercises
7. Prepare a Balance Sheet from the following information:
- Share Capital Rs 1,00,000 - Creditors Rs 1,50,000
- Loan taken Rs 2,00,000 - Cash Rs 30,000
- Bank Rs 2,50,000 -Trade Receivables Rs 1,70,000

18
Principles of Accounting
Materiality: report only material transactions

Historical Cost: cost of acquisition of asset shall be reported and not

market price

Matching Concept: cost incurred should be towards generation of revenue

Consistency: uniformity in recording/reporting of transactions

Conservatism Principle: Be pessimistic in revenue and optimistic in

expenses

Substance over form: economic substance over their legal form

19
Users of Accounting Information
• Businesses

• Government

• Competitors

• Employees

• Agencies

• Investors

20
Advantages of Accounting
• Complete & Systematic Record

• Valuation of Business

• Evidence in court of law

• Decision making

• Compliance of Law

21
Generally Accepted Accounting Principles
• Collection of commonly followed accounting principles

• Ensure uniformity

• To enable comparison

• Includes Accounting Standards & Policies

• Also includes Laws and Rules

22
23