Background and Meaning

Business is all about money

Branches of Accounting
Process of communicating social and environmental impacts of business actions
FINANCIAL ACCOUNTING

Post mortem of Business transactions

SOCIAL ACCOUNTING

ACCOUNTING

COST ACCOUNTING

Accounting for Management

MANAGEMENT ACCOUNTING

Cost estimation, Cost control

Financial Accounting Basic Principles

PRINCIPLES

CONCEPTS

CONVENTIONS

Concepts
It means basic rules and regulations. Different Concepts
Business and owners are separate
Business = artificial legal entity

- Business Entity

- Going Concern - Dual Aspect

Business has a long indefinite life

Every thing of business has two equal sides/ two equal fold impact

- Accounting Period

Standard period of 12 months at the end of which evaluation will be done

- Matching

Expenses are recognized in the same accounting period when the related revenue is recognized.

- Money Measurement

Accounts only deal with items to which a monetary value can be attributed.

- Cost

An asset is entered into the accounting records at the price paid to acquire it.

- Accrual

The idea that income and expense items must be included in financial statements as they are earned or incurred

Revenue recognized only when it is realizable or earned or realized

- Revenue Recognition

Conventions
It means basic assumptions.

- Disclosure

To inform both current and potential investors of the accounting strategies and methods used when developing periodic corporate Be consistent = no change in method unless forced Play safe Relating to the importance/ significance of an amount, transaction or discrepancy.

- Consistency - Conservatism - Materiality

MCQs
The immediate recognition of loss is supported

by the underlying principle of:

- Matching - Consistency - Judgment - Conservatism

 The determination of the expenses for an

accounting period is based largely on the application in which principle?

- Cost - Consistency - Matching - Time period

 Assigning revenues to the accounting period in

which the goods were delivered or the services performed and expenses to the accounting period in which they were used to produce revenues is known as the:
- Accounting period - Continuity assumption - Matching rule - Revenue recognition

 Generally accepted accounting principles:

- Define accounting practice at a point in time - Are similar in nature to the principles of chemistry or physics - Are rarely changed - Are not affected by changes in the way business operate

Account
Personal - Accounts of individuals and

artificial persons. E.g. Mr. A , B , C , ABC Ltd. Z Ltd. etc. Impersonal - Accounts of Others i.e. those who are not individuals and artificial persons. Further classified into two types. - Real - Nominal

 Real and Nominal Account

Real Tangible Real Account: Account of assets that can be seen, touched i.e. which are real. Eg: Cash, Furniture, Car, Mobile, Machinery etc. Intangible Real Account: Account of assets that cannot be seen and touched. Eg: Trade Mark, Goodwill etc. Nominal Accounts of things that can only be felt, imagined but cannot be seen or touched. Eg: Wages, Salary, Electricity charges, Telephone charges etc.

Question
Classify the following into Personal, Real and Nominal

Account: - Stationery Account - Cash Account - Goodwill Account - Capital Account - Freight Account - Rent Account - Interest Account - Account of Govind, a customer - Bank Loan Account - Depreciation

Three Golden Rules for Debit and Credit

PERSONAL

Debit The Receiver

Credit The Giver

Example
Received cash Rs.500 from Mr. A

- Mr. A, a Personal account - A is the giver of the money - So As account will be credited.

REAL

Debit What comes in

Credit What goes out

Contd: the same example

Received cash Rs.500 from Mr. A - Cash is coming into the business - Cash will be debited applying the rule.

NOMINAL

Debit All Expenses and Losses

Credit All Incomes and Gains

Example
Received cash from Mr. A as Commission

- Here commission is a nominal account - In the given transaction Commission is Income - Applying the rule commission will be credited.

Business transactions
In order to record the business transactions we

follow certain steps: - Identify the nature of transaction i.e. Cash or Credit - If it is a Cash transaction, then one account getting affected is Cash or Bank (Cheque) - Next question WHY? - If no answer to the previous question then next question WHOM?

- In case of Credit Transaction, one account getting affected is Personal account. - Next question WHY - Example Purchased Furniture from Furniturewala and Sons Rs.20000 - Credit Transaction as no money is coming in or going out - So Furniturewala and Sons Account getting affected - WHY = Purchase of Furniture - Second account getting affected is Furniture

Question
Point out the accounts which will be debited

and credited for each one of the following transactions. 1. Cash received from X 2. Cash paid to Y 3. Credit sale to Z 4. Salary paid to clerk by means of cheque. 5. Payment of cash to Landlord for Rent.