Introduction to Basic

Accounting
Dr. C. Vijendra
M.Com, MBA, NISM (MFS&D) PhD
 When we write accounts

 When we have a business

 What is business?
 Business means to become busy with economic and non-economic activity.
 Economic activity means an activity which involves money
 Non-economic activity means an activity which does not involve in money.
Business- Economic
activity
Service based business
Why you want to start a business?
Some Big Companies
Some Big Service Based Companies
 Non Economic Activity

 The non-economic activity are performed to get satisfaction, welfare

of others not for earning money.
 Example: Doing social service like helping old age people, under
privileged children, teaching adults during evening hours in rural
areas, etc.
 Some business jargons
 Purchases
 Loan
 Loss
 Capital  Cash
 Retained earnings
 Purchases

1. Cash 2. Credit
Purchases Purchases
 Cash Purchases

Cash is paid on purchase of goods/ services

Credit Purchases

Payment is made after some time after

purchasing the goods/ service i.e. on credit
basis
 Sales

Cash Sales Credit Sales

Credit Purchases
 In case of credit
purchases the
names of suppliers
should be entered
Purchases the books
 In case of credit sales,
then the name of the
client/ customer should
be written in the books
Sole Trader/proprietor
Some big business by sole trader/proprietor
 Sole trader

 Simplest way of formation and inexpensive

 Legally responsible for aspects of business
 Takes decision regarding starting, running and employing people
 Easy to form
 Advantages of Sole trader
 Boss
 Low start up cost
 Easy winding up
 Dis advantages

 Unlimited Capital
 Lack of professional skills & knowledge
 Limited shelf life
Partnership Business
 Partnership business
 Two or more persons come together
 Common objective
 Contribute money
 Partnership deed
Partnership Deed

Agreement
between
partners
 Partnership deed
 Business of the firm
 Duration of partnership
 Profit/loss sharing ratios
 Salary & Commission
 Duties and Obligations
 Types of Partners

Partner by Partner by holding

Working Partner
Estoppel out

Sleeping Partner Limited Partner Sub Partner

Nominal Partner Secret Partner Partner in profit

 1. Working Partner
A Working Partner is one who contributes capital to the
business and takes active part in its management. Hence, he
is called active partner.
 2. Sleeping Partner
A Sleeping Partner is one who contributes only capital to the
business, but does not take part in its management. He is also
called dormant partner or financing partner.
 3. Nominal Partner
A Nominal Partner does not contribute capital. Neither does he
take active part in the management. His contribution in a
partnership is limited to allowing the other partners to make use
of his name.
 4. Partner by Estoppel
Partner by Estoppel is not a partner of the firm but by his words
and conduct he leads the outsiders to believe that he is also a
partner of the firm. Usually this arises, when the outgoing
partner fails to give notice about his retirement
 5. Limited Partner
The liability of a minor admitted for the benefits of
partnership is limited to the extent of his capital contribution.
 6. Secret Partner
A Secret Partner is actually a partner of the firm. But he does
not hold out to the public as a partner of the firm but keeps
his existence as secret. His liability is also unlimited.
 7. Partner by Holding Out
Though a Partner by Holding Out is not a partner, he
knowingly permits himself to be a partner of the firm by his
activities.
 8. Sub – Partner
A Sub-Partner has no direct contact with the firm. He is only
next to a partner.
 9. Partner in Profit
A Partner in Profit becomes a partner whenever the firm
earns profit. His liability is also unlimited.
 NGOs
 A non-governmental organization (NGO)is a group of people
from different countries acting together, but not connected
with the government of any country.
 Usually non-governmental organizations are non-profit -
that is, they are trying to do something other than make
money for the people who run them.
 How does NGOs work
 Non Governmental Organizations, or NGOs, as they are
called in common parlance, are organizations which are
involved in carrying out a wide range of activities for the
benefit of underprivileged people and the society at large.
 NGOs take up and execute projects to promote welfare of
the community they work with
 Why do we need NGOs
 NGOs enable citizens to work together voluntarily to promote
social values and civic goals, which are important to them.
 They promote local initiative and problem solving. ... – NGOs
reflect the diversity of society itself.
 They also help the society by empowering citizens and
promoting change at the “grass roots”.
 Examples of NGOs
Many large international NGOs, such as Amnesty
International, the International Federation of Red Cross and
Red Crescent Societies, Oxfam International, CARE, Save
the Children, and the World Wildlife Fund, are transnational
federations of national groups
 Cooperative Societies
 A co-operative society is a voluntary association of individuals having
common needs who join hands for the achievement of common economic
interest.
 Its aim is to serve the interest of the poorer sections of society through the
principle of self-help and mutual help.
 Nobody joins a cooperative society to earn profit.
Features of Cooperative Societies

 Voluntary Association
 Separate Legal Entity
 Service motive
 Distribution of Surplus
 Types of Cooperative Societies

National Cooperative Land Development Banks Federation Limited,

National Federation of State Cooperative Banks Limited,
National Cooperative Union of India Limited
National Agricultural Cooperative Marketing Federation of India Limited
National Cooperative Consumer’s Federation of India Limited
National Federation of Cooperative Sugar Factories Limited
National Federation of Industrial Cooperative Limited
National Cooperative Housing Federation Limited
Indian Farmer’s Fertilizer Cooperative Limited
All India Federation of Cooperative Spinning Mills Limited
 Franchise
 A franchise is the right or license granted by a company
(franchisor) to an individual (franchisee) to market and/or
trade products and services in a specific area or territory.
 This is when a franchisor gives a franchisee permission to
sell a product using their logo, trademark and brand name.
 Examples of Franchises

Mc Donald’s
Burger King
Pizza Hut
Sub way
 Licensing

 A business arrangement in which one company gives another company

permission to manufacture its product for a specified payment.
 There are few faster or more profitable ways to grow your business
than by licensing patents, trademarks, copyrights, designs, and other
intellectual property to others.
 Licensing in Business

 In a licence agreement, the business owner, the Licensor ,

grants a Licensee the right to use the licensor's brand name
and/or other intellectual property rights (such as copyrights).
 Take software and database technology, for example, which
are invariably exploited through licensing
 Examples of licensing
Coco cola
Pepsi
Micro soft
 Joint Venture (JV)
 A joint venture involves two or more businesses pooling
their resources and expertise to achieve a particular goal
 The risks and rewards of the enterprise are also shared.
 How does a JV works
 A joint venture (JV) is a commercial enterprise in which two or
more organizations combine their resources to gain a tactical
and strategic edge in the market.
 Depending on a company's goals and the industry often enter
into a joint venture to pursue specific projects.
 Ownership split may differ.
 JV example in India
1. HAL has JVs with Rosoboronexport, Aviazapchast and Mikoyan-Gurevich
(MiG) of Russia, British Aerospace and Rolls Royce Holdings Ltd of UK,
Elbit Systems, Israel, Merlin-Hawk and Edgewood Ventures of the USA,
Snecma of France
2. Vistara is the brand name of Tata SIA Airlines Ltd, a JV between India’s
corporate giant Tata Sons and Singapore Airlines (SIA).
3. ICICI Prudential Life Insurance Company Ltd: is a joint venture
between ICICI Bank and UK-based Prudential Corporation Holdings Limited.
 JVs across the globe
Molson Coors and SABMiller.
BMW and Brilliance Auto Group.
Microsoft and General Electric. (Caradigm, health care unit)
The Walt Disney Company, News Corporation, Comcast's NBC
Universal and Providence Equity Partners. (Hulu, streaming
platform )
Verily and GlaxoSmithKline.( Galvani, bio electronic medicine)
Boeing and Lockheed Martin. (ULA, Aero space company)
 Public Sector
 The sectors in which government owns most of the assets
and provides all the services are called as public sectors.
 Governments raise money through taxes and other ways to
meet expenses on the services rendered by it.
 Railways or post office is an example of the public sector.
 Private Sector
 The private sector is the part of a country's economic
system that is run by individuals and companies, rather
than the government
 An industry or business may start out in one sector and
move to the other
 The act of turning a publicly-run enterprise over to private
citizens is known as privatization.
 Examples of Private Sectors
Examples include: Sole proprietorships: Plumbers,
technicians, contractors, developers and designers.
Partnerships: Legal, accounting, tax and dentistry. Privately
owned corporations: Hospitality, leisure, retail and food
Meaning of Accounting
 House Wife
 Student
 Business
The Accounting Process
 Identification of transaction-1

Cash transaction Non Cash transaction Credit transaction

Preparation of Business Document- Step2
Preparation of Business Document- Step2
Recording transaction in Journal- Step 3
Ledger Posting - Step 4
 Preparing of un-adjusted Trial Balance – Step 5

Unadjusted trial balance is the list of the general ledgers accounts balance (both
balance sheet’s items and income statement’s items) for the specific accounting period
before making any adjustment.
 What are adjustment entries

Entries which are given outside the trial balance are called adjustment entries, to record those entries a proper
treatment is required according to the double entry system.

Here it is to be remembered that all adjustments given outside the Trial Balance are posted at two places.

Adjustment is generally done for those items which are omitted or entered with the wrong amount and/or
recorded under wrong heads.
 Reasons for recording adjustment entries

1. Through these adjustment entries we come to know the actual figure of profit or loss.

2. Because of these adjusting entries we can assess the true financial position of an organization based on
accrual basis of accounting

3. These adjustment entries enable us to records the omitted entries and help in rectifying all those
errors.
4. These adjusting entries help in providing depreciation and making different provisions, such as Bad Debts
and Depreciation.
 Preparation of Adjusted Trial Balance Step-7

Once all adjustments are made to the unadjusted trial balance, we will have the adjusted trial
balance.
And this is the main reason that makes these two statements different.

Trial Balance should ultimately tally

Format of Trial Balance
 Financial Statement Step-8

Financial Statment

Trading Account Profit & Loss Account Balance Sheet

Double Entry System of Accounting

Luca Piccioli introduced the use of journals and

ledgers in accounting systems and warned that
the accountant must not sleep until the debits
are equaled to credits.
 Started his accounting profession in Calicut and shifted to
Bombay

K S. Aiyar a pioneer of Indian Accountancy and of the

Accountancy profession, was first and last, a dedicated
educationist. His professional practice kept growing first as
sole proprietor and then with partners
Shri Kalyan Subramani Aiyar
 Creation of financial information

I. Recording II. Classifying III. Summarizing

 Recording

D. Value at which it is to be recorded

C. How to Record

B. When to be Recorded

A. What to be
Recorded
 A. What to be recorded?
 Events and transactions which effect the business
 Money is common unit of measurement
 Distinction should be made between owner’s and transaction
 B. When to Record
 Occurrence of the subject transaction
 Sale of goods- When transaction is completed
 C. How to Record

 Double Entry Book-Keeping System

 D. Value at which it is to be recorded
 All the ingredients of the financial statements are to be
assigned appropriate values- Monetary Value
 Money is the scale of measurement in accounting and we can
measure only those transactions which can be translated into
monetary terms
 Value refers to the benefit derived from objects and different
valuation bases such as historical cost, current cost, realizable
value and present value are used in accounting.
1. Historic Cost: Amount paid or payment to acquire a benefit.
Example: Asset are recorded at cash paid or fair value at the
time of acquisition. Liabilities are recorded at the amount of
value received in exchange for the obligation
2. Current cost: Is the present cost of a product, asset, etc.
3. Realizable value: It is a value at which a asset can be
realized. Ex: Asset purchased for Rs.100000 and sold for
Rs.80000. Rs.80000 is a realizable value
4. Present Value: The value in the present of a sum of money, in
contrast to some future value it will have when it has been
invested at compound interest.
 III. Summarizing
 After recording and classification phases are completed, they are
summarized for reporting
Example Trading account, Profit and Loss account , Balance sheet
Notes to the accounts and other incidental statements and
explanatory material which is identified as a part of financial
statement
Use of Financial Statement- Decision Making

Comparative Statement

Ratio Analysis

Fund Flow Statement –

between two Balance Sheets

Cash Flow Statement- CIFs

& COFs
 Classification of Accounting

Accounting

Financial Management
Cost Accounting
Accounting Accounting
 Accounting and Financial Analysis
Financial Analysis is usually carried out to study the financial
position of the company from the point of view of:
 Share holders
 Debenture holders
 Banks in case of working capital
 Financial institutions
 Statutory Agencies (ROC, SEBI, IT, etc)
 Others (Mergers, Acquisitions, etc)
 Objectives of Accounting

1. To record monetary transaction and events

2. To ascertain earnings of the company

3. To maintain statutory records

4. To take financial decisions

5. To present financial statement to certain lenders

 Users of Financial Statement

1. Management Group: BOD, Partners, Managers, Officers

2. Financial Group: Investors, Lenders, Suppliers
3. Public Group: Govt. Agencies, Employees, Customers
4. Others: Academicians, Researchers, Analyst, etc.
 True and Fair View of Accounts

 Since each user of accounts may have different focus in viewing the financial
statements, it is necessary that accounting statement are not biased in favor of
one interest group
 Therefore, the accountant should ensure ‘true and fair’ picture of the affair
 Prone to error, there would be the probability that accounts presented are indeed
less than true and fair
 Double Entry System of Accounting

 Earlier organization used single entry- Which recognized cash

transaction
 Now, both cash and credit transaction is maintained on accrual basis
 Which means cost is duly accounted whether paid or not during the
year.
 Generally Accepted Accounting Principles (GAAP)

 Accounting professional has developed standards that are developed that

are accepted globally for many years.
 Financial statement consist of Trading account, P&L A/c, Balance sheet,
Statement of equity and Cash Flow Statement
 Users of financial statements are shareholders, debenture holders,
creditors, banks, customers, Government department, etc.
 Set up by Financial Accounting Standard Board (FASB), Securities
Exchange Commission (SEC) and International Accounting Standard
Board.
RAJU’S PANIPURI SHOP
 Accounting Concepts
1. Business Entity concept: Business and proprietor are two distinct
entities.
2. Money Measurement Concept: Recording, classification and
summarization of business transaction requires a common unit of
measurement- Money. Ex: Death of the owner.
3. Going Concern concept: It is assumed that the business shall
have long life and continue to exist until it is dissolved. That is
why the assets are recorded at original price and depreciated on
the basis of expected life.
4. Dual Aspect: Every financial transaction involves a two fold
aspect (a) the yielding of a benefit, and (b) the giving of the
benefit. Ex: Asset purchased or there should be a debtor and a
creditor
 Accounting Concepts
5. Realization: The realization principle is the concept that revenue can
only be recognized once the underlying goods or services associated with
the revenue have been delivered or rendered, respectively. Thus, revenue
can only be recognized after it has been earned.
6. Cost concept: Assets are recorded in the books at the price paid to
acquire it and cost is the basis for all subsequent accounting for the asset
7. Accounting period: It is necessary to keep accounts in such a way that
the results are known at frequent intervals. Ex: 12 months
8. Matching Concept: Matching the revenues earned during an
accounting period with the cost associated with the period to ascertain
the result of business concern. It is the basis for finding accurate profit for
a period
 Accounting Conventions
Accounting conventions are guidelines/protocols used to help companies
determine how to record certain business transactions that have not yet been fully
addressed by accounting standards.
1. Conservatism: The anticipated profits should be ignored but all the anticipated
losses should be considered into the books of accounts. The essence of this
principle is to anticipate no profit and provide for all possible losses. This
means all prospective losses are taken into consideration, however doubtful
income are ignored.
2. Consistency: This convention of consistency facilitates company financial
performance of an entity from one accounting period to another, which is
possible when the accounting principles followed by one entity are consistently
applied over the years. Ex: Change in depreciation, valuation of stocks.
 Accounting Conventions
3. Disclosure: A part of legal requirements, full disclosure of all
significant information should be made in the financial statement.
Ex: Basis of valuation of fixed assets, investment, stock should be
clearly stated. The accounting statement should be honestly
prepared.
4. Materiality: This principle requires the disclosure of significant
information, exclusion of which would influence the decision.
Unimportant and insignificant information are either left out or
merged with other items. Ex: Misc.Expenses
 Double Entry Book Keeping System
 Luca Piccioli, an Italian merchant, first articulated the double entry
system in 1494 A.D.
 After Industrial revolution this double entry system spread to
Europe and other countries including Asia
 Meaning of Double Entry
There are numerous transactions which are recorded in a business
concern
Each transaction reveals two important aspects
1. One aspect is receiving aspect or what comes in or expenses or
losses aspect termed as “Debit”
2. The other aspect is giving aspect or what goes out or income or
gain aspect termed as “Credit”
Therefore the double entry system involves the recording of both the
aspects of a transaction i.e. Debit and Credit
The fundamental rule under Double Entry Book Keeping System is
that “for every debit there should be corresponding value of credit”
 Features

1. Every business transaction affects two accounts

2. Each transaction has two aspect i.e. debit and credit
3. It is based on accounting assumptions, concepts and principles
4. It helps in preparing trial balance which is a test of arithmetical
accuracy in accounting
5. Finally it helps in preparation of final accounts which with the help
of trial balance
 Advantages
1. Complete record of transaction
2. Scientific system: Helps to attain objective of accounting
3. A check on the accuracy of accounts: Preparation of balance sheet
4. Prevent fraud and errors
5. Ascertainment of profit or loss
6. Ascertain the financial position
7. Full details for control
8. Comparative study
9. Helps in decision making