Chapter-1

Introduction to accounting
Fahad Elikkotil
Akmhss kottoor
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Meaning of accounting
It is the systematic process of identifying,recording, classifying,
summarising, interpreting and communicating financial information to
users.

Definition of Accounting
According to the American Institute of Certified public Accountants (AICPA)
“Accounting is an art of recording, classifying and summarizing in a significant manner
and in terms of money, transactions and events which are, in part, at least, of a financial
character and interpreting the result thereof.
 •Accounting is the language of business
•Father of Accounting-Luca Pacioli
Nature of accounting

1.Economic event

•Consists of transactions and which are measurable in monetary terms.

a. Internal event

Transaction between inside the organization

b.External event
Transaction between an outsider and organization
2. Identification
Identify events which are to be recorded

Considered financial character and relate to the organization.

3.Recording

Transactions recorded in books of account in monetary terms and in a

Chronological order(date wise).
4.classifying
It means grouping transactions of similar nature into one place.
5.Summarizing
•Presentation of classified data into understandable way and useful to
users
•It includes preparation of trading, profit and loss account, balance sheet
6. Organization
•An entity stands for performing business activities
•Profit or not for profit.
• It can be a sole proprietorship, partnership, company etc.
7. Interested users of information External users
•Creditors
Internal users •Suppliers
•Owners •Tax authority
•Stock exchange
•Shareholders
•Business analyst
•Employees •Bank
•Management •Investors etc
•Government
 Branches of accounting

1.Financial Accounting – Find out profit and loss

•Keeping a systematic record of business transactions.
•Relates to past period.
•Transactions entered after its happening
2. Cost Accounting – Find out cost of product
• Ascertain the cost of product or service.
•Helps in the fixation of the price of the products.

3. Management Accounting – For decision making

•Provide information to management for decision making.
•Use information from Financial accounting and Cost Accounting.
 Qualitative Characteristics of Accounting Information

1. Reliability
•Accounting information faithfully represents the facts.
•Verifiable - free from errors

.
2. Relevance
•The information must be available in time.
•Information should be accurate and complete.
 3. Understandability
•The accounting information must be easily understandable
by all users.

4. Comparability
Accounting information must be comparable
•one period to another and
•between different firms
 Objectives of Accounting
1. Maintenance of business records
• Systematic record of all financial transactions in the books of
accounts.
2. Calculation of profit and loss of business
•Compare income with expenses
Profit = Income – expense
Loss = Expense - Income
3.T o f i n d financial position of a business
•Find financial position of the business.
•By preparing a statement called balance sheet

4. Providing accounting information to users

•Accounting information generated in the form of reports , statements,
charts, graphs, etc
 Basic Terms In Accounting
1.Entity
•A reality in the world
•Individual existence
2.Business entity Specifically identifiable business unit.
3.Transactions
All economic events in a business are called transactions
examples
•Purchased goods
• Received cash,
•Paid to creditors,

Cash transaction OR Credit transaction

4.Assets •Assets are properties or things of value owned by the business
•Resources owned by business for generating profit

Examples
•Building •Machinery
•Furniture •Computers
•Land •vehicles

Classification of assets
Assets
A. Fixed assets/Non current assets B.Current assets

a) Tangible assets
b) Intangible assets
c) Wasting assets
d) Fictitious assets
A. Fixed assets/Non current assets
•The assets which is intended to be used for long period (above one year).
•Used for normal operations

E g: Machinery, Land, Building , Furniture etc.

a) Tangible Assets:
These are assets having definite shape and physical existence.

b) Intangible Assets:
Assets having no physical existence but are represented by
rights in certain things.

Eg: Goodwill, Trademark, Patent, Copyright etc.

c. Wasting assets
•Extracted from Nature
•Value reduced when using
•Limited life

E.g:Natural resources like gas, oil (oil well), timber, mines,quarry, etc.
B.Current Assets
Assets which can be converted into cash within a short period.

Examples
Bank/ Cash at bank Bills receivables

Stock/ Inventory Debtors

 5.Liabilities
•Obligations or debts payable by business in future

Examples
•Capital
•Bank loan,
•Creditors etc

Types of liabilities
a. Long term/Non current Liabilities
b . Short Term / Current Liabilities
a. Long term/Non current Liabilities
Obligations payable after a period of One year

Examples
•Long term loans ,
•Debentures etc
b . Short Term / Current Liabilities
Obligations payable within one year

Examples
•Creditors,
•Bank overdraft,
•bills payable ,
•short term loans
•Outstanding Expenses
•Tax Payable etc
 Examples
1.Fixed assets/non a. Long term/Non current Liabilities
current assets
•Land and building
•Furniture •Capital
•Machinery •Long term bank loan,
•Vehicles •Debentures
•Computer
•software
2.Current assets 2.currentLiabilities
•Cash/ Cash in hand •Creditors,
•Bank/ Cash at bank •Bank overdraft,
•Stock/ Inventory •bills payable ,
•short term loans
•Bills receivables
•Tax Payable
•Debtors
6.Capital
Amount invested in the business by its owners.

•Capital is an obligation of the business

•Generally termed as owner’s equity or net worth

7.Sales
Total revenue earned from goods sold or services to customers

Cash sales or Credit sales

8.Revenues Also called income
Amount earned by selling products or through other means
Other revenues
• Commission received
Sales / Sales revenue
• Interest received
• Dividend received
• Rent received
9.Expenses
The amounts spent for earning revenue
•Depreciation,
•Rent,
•Wages,
•Salaries,
•Interest,
•cost of light and water,
•Telephone, etc.
 Revenue/ income - Expenses = Profit

Expenses
- Revenue/ income = Loss

10.Profit
The excess of revenue over its related expenses during an accounting
period.

•Profit increases the amount of capital.

Profit = Revenue - Expenses

It represents increase in owner’s equity(owner’s investment)

11.Loss It is the excess of expenses over revenue.

Loss = Expenses - Revenue

It decreases the amount capital

•It also includes money or money’s worth lost without earning benefits
Example
•Cash or goods lost by theft or a fire .
•Loss on sale of fixed assets etc
12.Gain
A profit that arises from events or transactions which are incidental to
business.
13.Voucher(source document)
The documentary evidence in support of a transaction .
E .g: Cash Memo, Invoice, Receipt, Etc.

14.Goods
Products in which business trades

The items that are purchased for use in the business are
not called goods.
15.Drawings
Withdrawal of money or goods by the owner from the business for
personal use
Drawings reduces the amount of capital.

16.Purchases
The amount of goods purchased by a business both
for cash and credit and are meant for sale.

Purchase return
Return of goods already purchased to suppliers are called
purchase return.
 Transaction Recording
Purchased goods Purchases

Purchased machinery Machinery

17.Stock(Inventory) Value of unsold goods
• Goods lying with a business for sale on any given date.
a. Closing Stock
The amount of stock at the end of the accounting period
b.Opening Stock

The amount of stock at the beginning of the accounting period

18.Debtor Debtor is a person who owes money to the business

Sundry debtors
The total amounts of debtors are collectively known as sundry debtors.
Sundry debtors-asset
19.Creditor Creditor is a person to whom the business owes money

Sundry creditors
The amounts due to various parties are collectively known as sundry creditors.

Sundry creditors-liability
20.Discount
Deduction in the price of the goods sold

A. Trade discount
Deduction at the time of selling goods
Not record in the books of account
B.Cash discount
Reduction allowed by the creditor to the debtor, usually on
making prompt payment.
it record in the books of account
•Cash discount is a
•Loss to the creditor
•Gain to the debtor.
 1.Trade discount Given for increase sales

2.Cash discount Given for Early payment

21.Expenditure
Spending money or incurring a liability for some benefit, service or
property received is called expenditure

Examples
•Purchase of goods,
•Purchase of machinery,
•Payment of rent,
•Payment of salary
•Purchase of furniture,etc.
 Expenditure

Revenue Capital
Expenditure Expenditure

a. Revenue expenditure /Expense

•Expenditure incurred to earn revenue of the current period
•Small amount
•Repetitive nature
•Benefit----one year
Examples :
• Purchase of goods,
• Salaries paid
• Tax paid
• Rent paid
b. Capital expenditure
•Expenditure incurred for the purpose of acquiring a fixed asset
•Huge amount
•Not repetitive nature
•Benefit---more than one years

Examples :
• Purchase of buildings
• Office equipment
• Purchase of furniture
• Machinery
• Vehicles

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