COURSE OBJECTIVE:

To impart the ability to understand and use accounting

data to make business decisions.
Understand the basic principles of accounting,
accounting standards, concepts and conventions
Proficiency in basic techniques and different methods
of accounting.
Analyze balance sheets and its application in modern
day business
 MODULE -1

Introduction to accounting, journal,

ledger, trial balance

 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(Generally Accepted Accounting Principles)” have been developed by
professional bodies. The purpose of GAAP is to ensure that financial reporting is 
transparent and consistent from one organization to another
 ICWAI:- Institute of cost & work Accountants of India.
 ICAI:- Institute of Charted Accountants of India.
 AICPA:- American Institute of Certified Public Accountants.
 IFRS :-Many countries around the world have adopted the International
Financial Reporting Standards (IFRS). IFRS is designed to provide a global
framework for how public companies prepare and disclose their financial
statements. 
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.
 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.
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.
 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.
 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. The amount
generated from sale of goods or services, or any other use of capital
or assets, associated with the main operations of an organization
before any costs or expenses are deducted.
 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.
 Gross Profit:-
Gross profit is the revenue left over after
you deduct the costs of making a product or providing a
service.
Gross profit = Revenue - Cost of producing product or service
Net Profit:-
Net Profit is the profit made after allowing for
all cost and taxes. In case, expenses are more than revenue,
it is Net Loss.
Net profit = sales revenue − total costs
Cost of goods sold:-
It is the direct cost of the goods or
services sold.
 Expenditure:-
Expenditure is the amount spent on 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.
 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.
 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.
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.
Accounting concepts
1. Business Entity concept
2. Money measurement
3. Going-concern
4. Cost
5. Réalisation
6. Accruals
7. Matching
8. Periodicity
9. Consistency
10. Conservatisme
• Accounting concepts The affairs of the
business are distinct from
1. Entity the personal affairs of
2. money measurement its owner. The business is
an independent ENTITY.
3. Going-concern
4. Cost
5. realization
6. Accruals
7. Matching
8. Periodicity
9. Consistency
10. conservatism
• Accounting concepts
Records are kept in
1. Entity monetary terms, and only
2. money measurement matters capable of being
expressed in monetary
3. Going-concern terms are reflected in the
4. Cost books.

5. realization
6. Accruals
7. Matching
8. Periodicity
9. Consistency
10. conservatism
• Accounting concepts
1. Entity
2. money measurement The business is assumed to
have a continuing and
3. Going-concern indefinite life. The
4. Cost business IS NOT on the
verge of extinction.
5. realization
6. Accruals
7. Matching
8. Periodicity
9. Consistency
10. conservatism
• Accounting concepts
1. Entity
2. money measurement
Accountants compute the
3. Going-concern value of an asset by
4. Cost reference to its
acquisition cost, AND NOT
5. realization by reference to its
6. Accruals expected future benefits.

7. Matching
8. Periodicity
9. Consistency
10. conservatism
• Accounting concepts
1. Entity
2. money measurement
3. Going-concern
4. Cost Any change in the value of
an asset may only be
5. réalisation recognized at the moment
6. Accruals the firm REALIZES it, or
disposes of that asset.
7. Matching
8. Periodicity
9. Consistency
10. conservatism
 SFAC #1: Accrual
accounting attempts to
• Accounting concepts record the financial
1. Entity effects on an enterprise
of transactions and other
2. money measurement events and circumstances
3. Going-concern The
thatrecognition
have cash of an
expense (or revenue)
consequences for the and
4. Cost the related in
enterprise liability
the periods
(or asset)
in which results from
these
5. realization
an accounting EVENT,
transactions, and
etc… occur
6. Accruals is not necessarily
rather than only in the
signaled by a cash
periods when cash is
7. Matching transaction.
received or paid.
8. Periodicity
9. Consistency
10. conservatism
• Accounting concepts
1. Entity
2. money measurement
3. Going-concern
4. Cost
Expenses and
Revenues should be
expenses
5. realization recognizedfrom
in the
resulting thesame
same
6. Accruals accounting period
transactions during
(or events,
which the firm etc…)
circumstances, has
7. Matching recognized
should the associated
be recognized
8. Periodicity revenues.
simultaneously.
9. Consistency
10. conservatism
• Accounting concepts
1. Entity
2. money measurement
3. Going-concern
4. Cost
5. realization
6. Accruals
7. Matching Accounting reports must be
8. Periodicity prepared for fixed, and
relatively short, periods
9. Consistency of time.
10. conservatism
• Accounting concepts
1. Entity
2. money measurement
3. Going-concern
4. Cost
5. realization
6. Accruals
7. Matching
8. Periodicity Like transactions should
be treated the same way in
9. Consistency consecutive periods.
10. conservatism
Business Transactions:-

Any event which involves

exchange of money or money’s worth between the firm and
any other person is known as a Business Transaction.

In other words any event which affects the

business and involves money is a Business 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

 The Double-Entry System
The double-entry book-keeping system is based on the
principle that for every business transaction that takes place
two entries must be made in the accounts: a debit entry,
showing goods or value coming into the business, & a
corresponding credit entry, showing goods or value going
out of the business.
Rules of the Double Entry System

1) Personal Account:-

These accounts record a business dealings with

persons or firm.

The person receiving something is given debit

and the person giving something is given credit.
2) Real Account:-

These are the accounts of assets. Assets

entering the business is given debit and assets leaving the
business is given credit.
3) Nominal Account:-

These accounts deal with expenses, incomes,

profits and losses. Accounts of expenses and losses are
debited and accounts of incomes and gains are credited.
 Debit Receiver
Personal Account
Credit Giver

Debit What comes in

Real Account
Credit What goes out

Debit Expenses & Losses

Nominal Account
Credit Incomes & Gains
Advantages of Double Entry System

a) Complete record of the financial transactions is maintained.

b) It gives accurate information of amount due to & due by the

business unit at any time.

c) It is helpful in preventing frauds & errors.

d) Arithmetical accuracy of the account books can be tested.

e) It is helpful in preparing profit & loss account and Balance

sheet of a firm.
Accounting Cycle

a) Recording:-

First, all transactions should be recorded in

the Journal or Books of original entry known as subsidiary
books.

b) Classifying:-

All entries in the Journal should be posted to

the appropriate ledger accounts to find out at a glance the
total effect of all such transactions in a particular account.
c) Summarising:-

Last stage is to prepare the trial balance

and final accounts with a view to ascertaining the profit or
loss made during a trading period and the financial position
of the business on a particular date.