CHAPTER 1: THE

BASIC
CONCEPTS
TOPIC
S
 Introduction
 Basic
functions of
accounting
 Important concepts
 Thebasic accounting
equation
 Accounting system
 History of accounting
 Accounting Concepts
 Conventions
 Golden rules
 Steps in accounting cycle
 What is
Accounting
JOURNAL Vision Enterprises
Financial Statement
at December 31, 1997
Vision Enterprises
Assets Financial Statement
Cash at December 31, 1997
$4,456 Vision Enterprises
Account Receivable
Assets Financial Statement
$5,714
Land Cash at December$ 31, 981
T $4,456 1997 ---------
otal AssetsAccount Receivable $11,151 $5,714
Li Land Assets ====== $ 981 $4,456
ability --------- $5,714

PAYMENT T
Accountotal Payable
Assets
NotesTPayable Cash
ability
Account
$3,830$11,151 $ 981
$ 416======---------
--------- $11,151
otal Liability
Account Payable
Receivable $4,246 $3,830======
St otes Land
Payable ====== $
Cockholder’s
Li 416 Equity $2,365 $3,830
ontributed Total
Capital $ 367 --------- $ 416
E Retained
T Earnings
otal Assets
Liability ---------$4,246 ---------
qoutailN tyStockholder’s $2,732======
$4,246
ockholder’s
LiabilityEquity ====== $2,365======
Account
T ontributed Payable
Capital
Stockholder’s Equity $ 367 $2,365
TE Retained Notes Payable
Earnings --------- $ 367
Contributed Capital
St qoutailRetained
tyStockholder’s
Earnings $2,732 ---------
C Total Liability ======$2,732
TEqoutailtyStockholder’s
======

?
ACCOUNTING IS DEFINED AS THE ART
RECORDING, CLASSIFYING
OF AND SUMMARIZING
TRANSACTIONS IN MONETARY TERMS (IN MONEY
TERMS) FOR THE PREPARATION OF FINANCIAL
STATEMENTS
ACCOUNTING IS DEFINED AS THE ART OF RECORDING, CLASSIFYING AND
SUMMARIZING TRANSACTIONS IN MONETARY TERMS (IN MONEY TERMS)
FOR THE PREPARATION OF FINANCIAL STATEMENTS

• Recording refers to creating Journal entry for every financial transaction with Debit and Credit
amounts.

• Classifying refers to Classifying each of the Debit / Credit Transaction to Capital or Revenue and
Asset, Liability, Revenue or Expense

• Summarizing refers to Grouping the Transactions of Asset, Liability, Revenue and Expenses

• preparing the Financial Statements which are Trading, Profit and Loss Account and Balance Sheet

• Note:- Trial Balance is not a Financial Statement. It is only a summary of all Debit and Credit Transactions.
 Functions of accounting
• The efficient and effective collection and storage of data
concerning an organization’s financial activities, including
getting the transaction data from source documents, recording
the transactions in journals, and posting data from journals to
ledgers.
• To supply information useful for making decisions, including
producing managerial reports and financial statements.
• To make sure controls are in place to accurately record and
process data.
Accounting terminology
 Person  Customers
 Transaction  Creditors
 Cash transaction  Debtors
 Credit transaction  Drawings
 Income  Assets – Fixed and
 Expense Current
 Tangible and Intangible
 Debit – he owes
Assets
 Credit – he trust
 Liabilities – long term
 Supplier and current
 Stock  Capital
• Anything tangible or intangible that is capable of being owned
or controlled to produce value and that can be converted
into cash
• Example building, plant and machinery ,cash etc
• Amount Payable to providers of goods and Services (Creditors) and
Providers of Capital (Owners)
• common examples of liabilities include loans payable, bonds
payable, interest payable, wages payable, and income taxes payable.

HOM
E
 Owner's Equity
• Owner's claim to the business
resources

Stock Certificate

1-
• Revenue is the income that a company receives from its
normal business activities, usually from the sale of goods and
services to customers.
• Revenue may refer to business income in general, or it may
refer to the amount, in a monetary unit,
• Amount earned out of the Sale Proceeds and the
amount earned on Investments
• Examples of revenue accounts include: Sales, Service
Revenues, Fees Earned, Interest Revenue, Interest Income.
A financial benefit that is realized when the amount of revenue
gained from a business activity exceeds the expenses, costs and
taxes needed to sustain the activity. PROFIT= TOTAL
REVENUE – TOTAL EXPENSES
• a loss is a decrease in net income that is outside the normal operations
of the business.
• Losses can result from a number of activities such as; sale of an asset
for less than its carrying amount, the write-down of assets, or a loss
from lawsuits.
• Total Expenses >Total Revenue =Loss
• FIXED ASSETS: Amount Invested in Long Term Assets
which is not intended to be sold within a Year
• They are long-term, tangible assets such as land,
equipment, buildings, furniture and vehicles
• CURRENT ASSETS: Amount invested in Short Term Assets which
is intended and rotated to earn Revenue
• They are the general inventory of a company, including cash,
accounts receivable, insurance claims, investments, and intangible or
non-physical items.
CREDITORS: Person who provide Money or Goods on
Credit to the Business (Supplier)
DEBTORS: Goods or
Money Provided / sold
on Credit by the
Business (Customers)
ACCOUTING
EQUATION



The equation that is the foundation of double entry accounting.
The accounting equation displays that all assets are either financed by
borrowing money or paying with the money of the company's shareholders.
 Thus, the accounting equation is:
Assets = Liabilities + Shareholder Equity.
Revenues, Expenses and Net Income

Revenues – Expenses = Net Income

**Revenue is the income that a company receives from its

normal business activities
**Expense is the Amount incurred or expended to earn the
revenue.
ACCOUNTING

Bu
C
Dual sine
O
Aspect. ss EPT

Going concern.
S.
Money Measurement.

En
N C
 Cost Concept.
tity .
 Matching Cost & Revenue Concept.
 Realisation Concept.
 Accounting period Concept.
CONVENTIONS

Conservatis m.
.
Consistency.
Materiality.
Disclosure.
Classification of
accounts.
 Personal account – Individuals, firms,
limited companies, Local authorities, local
authorities, association
 Real Account –Properties, assets

 Nominal Account – expenses – losses &

income – gains.
 GOLDEN RULES OF
ACCOUNTING.
 Personal Account
 Debit “the Receiver”
Credit “the Giver”
Examples:
1. Cash paid to Alex
2. Cash received by
peter.
 Real Account
 Debit “What comes in”
 Credit “What goes out”
Examples:
1. Land purchase.
2. Goods sold to Ramesh.
 Nominal Account.
 Debit “All the expenses & losses”
 Credit “All Income & gains”
Examples:
1. Interest received.
2. Salary account.
Journal
 It records all daily transactions of a business into the order in which they occur.
 A journal may be defined as a book containing a chronological
record of transactions
 Book of original records
 Process of recording is known as journalizing
 Ledger
The General Ledger

In a computerized system, electronic files are still

The general ledger referred to as a ledger, or the ledger accounts.
provides up-to-date
balances for each account,
including accounts payable
and receivable. Managers use ledgers to obtain summarized
information.

general ledger
A permanent record organized by account number.
 Posting.

Posting is the process by which posting

random transactions become
organized in a manner according
to accounts.
Accounting Cycle
Accounting cycle is a step-by-step process of recording,
classification and summarization of economic transactions
of a business. It generates useful financial
information in the form of financial statements including
income statement, balance sheet, cash flow statement and
statement of changes in equity.
The time period principle requires that a business should
prepare its financial statements on periodic basis. Therefore
accounting cycle is followed once during each
accounting period. Accounting Cycle starts from the
recording of individual transactions and ends on the
preparation of financial statements and closing entries.
 1) Identify 2) Analyze
a) What acco unts?
•
1

b) ln:ierease or
dc)ecreas,e?
1

Amou1nt $?

Steps in the d) Debit or credit? 1

3) Record
5) Prepare*
Accounting
I

Account Debit .Credit

-rial
4/8 Accts Receivable 100
Balance 100

Cycle
Cash

I
Consult Revenue
Accounts Receiva!pl
Inventory Cons.
Etc. - Rev.
- - - J •
50
10 10
Accts Payable
Etc. E
4) Post 0 0
Total
Major Steps in Accounting Cycle
Following are the major steps involved in the accounting cycle. We
will use a simple example problem to explain each step.

1.Analyzing and recording transactions via journal

entries 2.Posting journal entries to ledger accounts
3. Preparing unadjusted trial balance
4.Preparing adjusting entries at the end of the period
5.Preparing adjusted trial balance
6. Preparing financial statements
7.Closing temporary accounts via closing
entries 8.Preparing post-closing trial balance
THANK
YOU