BASICCONCEPTS of ACCOUNTING

BUSINESS:
Any human economic activity directed towards producing wealth through buying and selling
of goods or rendering services for a price.
TYPES OF BUSINESS:
There are three types of business
1. Trading (such as food seller, automobile dealers)
2. Manufacturing(such as automobile manufactures, fan industries, sugar mills)
3. Servicing(dry cleaners, airlines beauty salons)
ACCOUNTING:
It is an art of recording, classifying, summarising and interpreting the results into financial
statements of a business concern in monetary (financial) terms.
BRANCHES OF ACCOUNTING:
1. Financial accounting(it determines financial position of business on a particular time)
2. Cost accounting(it determines the cost of goods manufactured or produced by the
business)
3. Managerial accounting(it communicates the relevant information periodically to the
management of the business to enable it to take suitable decisions)
TRANSACTION:
Exchange of goods and services between two parties is called as transaction.
Transaction must effect the financial position of a business concern.
ASSETS:
Assets are those properties which are necessary to run a business
There are two types of assets; tangible and in-tangible.
TANGIBLE ASSETS:
Tangible assets are those properties and possessions of business which have physical
existence.
CURRENT OR SHORT TERM ASSET:
Cash, stock, debtors/accounts receivable etc.
FIXED OR LONG TERM ASSETS:
Land, plant, machinery, building, furniture etc.
IN-TANGIBLE ASSETS:
In-tangible assets are those properties and possessions of business which have no physical
existence such as goodwill, trademarks, copyrights etc.
LIABILITIES:
Liabilities are those which are paid by business man to outside party on certain days.
CURRENT OR SHORT LIABILITIES:
Those liabilities which are due within one year of accounting period e.g. Salaries, rent utility
bills etc.
LONG TERM LIABILITIES:
Those liabilities which are due after one year of accounting period e.g. Bank loan etc.
CAPITAL/ OWNER'S EQUITY:
Investment (initial) made by the owners into the business are called capital. These are in the
form of cash or a kind or both.
DRAWINGS:
Amounts withdrawn from the business by the owner for private use are called drawings.

ACCOUNTING EQUATION:
Assets=liabilities+ owners equity (capital)
GOODS/ MERCHANDISE:
It refers to something which has been purchased by a trader for resale purposes or anything
which has been manufactured for selling purposes.
SALES:
Goods sold to generate revenues are called sales
CASH SALE:
Goods are sold and cash receive on the spot
CREDIT SALE:
Goods are sold but cash will be received in future.
SALE RETURNED:
Goods are returned to seller due to defect and are not up to the mark quality or quantity.
SALES DISCOUNT:
The concession given by the seller to the customer on the sale of goods is known as sales
discount
DEBTORS (ACCOUNT RECEIVABLE):
The person to whom credit sales are made is called debtors. These are the asset of the
business.
PURCHASES
The thing which remains unsold is called stock/inventory.
CASH PURCHASES:
Goods are purchase and cash paid against its delivery
CREDIT PURCHASES:
Goods are purchase and payment will make in future.
PURCHASE RETURNED:
Goods are returned to supplier of goods due to defect and are not up to the mark quality or
quantity.
PURCHASE DISCOUNT:
The concession given by the supplier to the buyer on the purchases of goods is known as
purchases discount
CREDITOR (ACCOUNT PAYABLE):
Creditors are the person or suppliers from whom goods have been purchased on credit basis
and to whom the money is to be paid in future.
REVENUES/ TURNOVER:
Earnings of the business are called revenues. These may be in form of sales or income
EXPENSES:
Expenses are the costs of the goods and services used up in the process of obtaining revenue.
CAPITAL EXPENDITURES:
An expenditure which results in the acquisition of permanent asset which is intended to be
permanently used in business for the purpose of earning revenue is known as capital
expenditure and it lasts longer than one year.
REVENUE EXPENDITURES:
All the expenditure which is incurred in the day to day conduct and administration of a
business and the effect of which is completely exhausted within the current accounting year
are known as revenue expenditures
SALARY AND WAGES:

In financial terms, the salary and wages you pay to your employees for the work they do.
Other, nonfinancial forms of compensation can also be offered to attract and retain staff.
Or
Wages and salaries are defined as "the total remuneration, in cash or in kind, payable to all
persons counted on the payroll (including home workers), in return for work done during the
accounting period" regardless of whether it is paid on the basis of working time, output or
piecework and whether it is paid regularly or monthly.
COMMISSION:
A commission is a fee paid to a salesperson in exchange for his or her services in facilitating
or completing a sale transaction. The commission may be structured as a flat fee, or as a
percentage of the revenue, gross margin, or profit generated by the sale.
INTEREST:
Payment in exchange for the use of money over time. You can earn interest by lending your
money to a bank. In addition, you pay interest when you borrow money from a bank. The rate
of payment can either be fixed or variable throughout the life of the loan or deposit.
ACCOUNT:
Account is a summarized record of all the transactions relating to every person, everything or
property and every type of service.
ACCOUNTING CYCLE:
JOURNAL ENTRIES:
A daily record of transaction.
LEDGER:
Book of final entry where accounts lie.
TRAIL BALANCE:
It is a statement of all the ledger account balances prepared at the end of particular period to
verify the accuracy of the entries made in books of accounts.
PROFIT/INCOME:
Excess of revenue over expenses for an accounting period. I.e.
Profit=revenue-expenses
LOSS:
Excess of expense over revenue
BALANCE SHEET:
To ascertain the financial position of the business. It is a statement of assets, capital and
liabilities.
TYPES OF ACCOUNTS AND DEBIT CREDIT RULES:
PERSONAL ACCOUNT:
Personal accounts are the accounts of persons, firms, concerns and institutions which the
businessmen deal.
Principles: Debit the receiver
Credit the giver
REAL ACCOUNT:
These are the accounts of things, materials, assets & properties. It has physical existence
which can be seen & touch.
Ex. Cash, Sale, Purchase, Furniture, Investment etc.
Principles: Debit what comes in
Credit what goes out
NOMINAL ACCOUNT:
Nominal account is the account of services received (expenses and Losses) and services given
(income and gain)
Ex. Salary, Rent, Wages, Stationery etc.
Principles: Debit all expense/losses
Credit all income/ gains
DEAL nature DR

DEBTORS
EXPENSES
ASSETS
LOSSES
DR
INCREASE
Cr
decrease
CLI Cr Nature
CAPITAL
CREDITORS
LIABILITIES
INCOME/PROFIT
CR
INCREASE
DR
decrease
DEPRECIATION:
Decrease in the value of the asset.
PEACHTREE ACCOUNTING:

Peachtree Accounting is a powerful accounting software program for small- and medium-sized businesses
and owned by The Sage Group's software division. The Peachtree accounting system is a computerized
accounting system that allows users to post entries to journals, ledgers, and subsidiary ledgers all at once it
will generate balance sheets, income statements, statements of retained earnings, and cash flow statements.
It will print and keep track of invoices (both sent and the invoice numbers of those received), it will print
collections letters. It also keeps track of vendors, customers, and employees. It maintains vendor info, like
contact people, phone numbers, addresses, and purchase history. It can be used to keep track of customers
and certain customer attributes, as well as purchase and payment history, and it will also keep a list of
employees, employee information (addresses, phone numbers, social security numbers, and tax withholding
info. It will prepare and print payroll checks (it deducts the taxes and stuff for you). It has several different
formats of any printable document (purchase orders, sales invoices, paychecks, regular checks for payments,
etc.
Journalize the following transactions:
1.
Commenced business with cash Rs.10, 000.
2.
Deposit into bank Rs. 15,000
3.
Bought office furniture Rs.3,000
4.
Soled goods for cash Rs.2,500
5.
Purchased goods form Mr X on credit Rs.2,000
6.
Soled goods to Mr Y on credit Rs.3,000
7.
Received cash form Mr Y on account Rs.2,000
8.
Paid cash to Mr X Rs. 1,000
9.
Received commission Rs. 50
10. Received interest on bank deposit Rs. 100
11. Paid into bank Rs. 1,000
12. Paid for advertisement Rs.500
13. Purchased goods for cash Rs. 800
14. Sold goods for cash Rs. 1,500
15. Paid salary Rs. 500
Sl.N
Type of
Ledger
Group
o
account
Cr. Capital
Capital
Persona
account
l
1
Dr. Cash
Cash in hand Real
Cr. Cash
Cash in hand Real
2
Dr. Bank
Bank
Real
account
3
Dr. Office
Fixed asset
Real

Principles

Amount

Giver

10,000

Comes in
Goes out

10,000
15,000

Comes in

15,000

Comes in

3,000

furniture
Cr. Cash
Dr. Cash
Cr. Sales
Cr. X

Dr. purchase
Dr. Y

7
8
9

10

11

12

13

14

Cr. Sales
Cr. Y
Dr. cash
Dr. X
Cr. Cash
Cr. commission
Dr. cash
Cr. Interest on
bank deposit
Dr. Bank
Cr. Cash
Dr. Bank
Dr.
Advertisement
Cr. Cash
Cr. Cash
Dr. purchase
Cr cash
Dr. cash
Cr. Sales

Dr. salary
15
Cr. Cash

Cash in hand
Cash in hand
Sales
account
Sundry
creditor
Purchase
account
Sundry
debtors
Sales
account

Real
Real

Goes out
Comes in

3,000
2,500

Real

Goes out

2,500

Persona
l

Giver

2,000

Real

Comes in

2,000

Persona
l

Receiver

3,000

Real

Goes out

3,000

Cash in hand

Real

Cash in hand
Indirect
income
Cash in hand
Indirect
income
Bank
account
Cash in hand
Bank
account
Indirect
expenses
Cash in hand
Cash in hand
Purchase
account
Cash in hand
Sales
account

Real
Nomina
l
Real
Nomina
l

Giver
Comes in
Receiver
Goes out
Credit all
income
Comes in
Credit all
income

2,000
2,000
1,000
1,000

Real

Comes in

100

Real

Goes out

1,000

Real

Comes in

1,000

Nomina
l
Real
Real

Debit all
expenses
Goes out
Goes out

Real

Comes in

800

Real

Comes in

1,500

Real

Goes out

1,500

Indirect
expense
Cash in hand

Nomina
l
Real

Debit all
expenses
Goes out

50
50
100

500
500
800

500
500

RECEIPTS:
It is a document issued by the receiver of cash to the giver of cash acknowledging the cash
received voucher.
QUOTATION:
Dependent upon usage, is a. a statement of the current market price of a security or
commodity
Or
An offer to sell goods at a stated price and under specified conditions.

SALES ORDER:
Companies generate sales order documentation as a means of recording customer purchases.
Sales orders may be generated electronically on a computer, or in writing at the time a
customer places an order. Companies retain copies of these orders, and send a hard copy to
the client, along with the goods ordered. In a construction or manufacturing company, the
sales order may be transformed into a work order. The sales order tracks the company's sales
transactions with a client.
SALESINVOICE:
A sales invoice is a document requesting payment for goods sold or services rendered. The
document usually specifies the quantity and nature of the goods or services involved the date
and the invoice number.
PURCHASE ORDER:
A buyer-generated document that authorizes a purchase transaction. When accepted by
the seller, it becomes a contract binding on both parties.
A purchase order sets forth the descriptions, quantities, prices, discounts, payment terms,
date of performance or shipment, other associated terms and conditions, and identifies a
specific
seller.
Also called order
CREDIT TERMS:
The terms of an invoice refer to the time period in which the customer should pay what he
owes. Some companies opt to offer their customers a discount for paying their invoice in a
specified time period. The terms are described in this format: 2/10, Net 30. This example
indicates that the seller is offering the customer a 2 percent discount if the invoice is paid
within 10 days; if the bill is not paid in that time period; the balance is due within 30 days with
no 2 percent discount.