Basics of

Accounting
HISTORY OF ACCOUNTING:
ACCOUNTING IS AS OLD AS CIVILIZATION ITSELF. FROM
THE ANCIENT RELIES OF BABYLON, IT CAN BE WELL PROVED THAT ACCOUNTING DID
EXIST AS LONG AS 2600 B.C HOWEVER,IN MODERN FROM ACCOUNTING BASED ON
THE PRINCIPLES OF DOUBLE ENTRY SYSTEM, WHICH CAME INTO EXISTENCE IN15TH
CENTURY. FRA LUKA PACIOLO, A MATHEMATICIAN PUBLISHED A BOOK DE
COMPUTICET SCRIPTURIES IN 1494 AT VENICE IN ITALY. THIS BOOK WAS
TRANSLATED INTO ENGLISH IN 1543 IN THIS BOOK HE COVERED A BRIEF SECTION ON
“BOOK-KEEPING”
ORIGIN OF ACCOUNTING IN INDIA:
THE ACCOUNTING ON MODERN LINES WAS INTRODUCED IN INDIA
AFTER 1850 WITH THE FORMATION OF JOINT STOCK COMPANIES IN INDIA.
Narasimha
BOOK-KEEPING AND ACCOUNTING:
According to Prof. G.A. Lee the accounting system has two
stages.
Book-Keeping:
Book-Keeping involves the chronological recording of
finance transactions in a set of books in a systematic manner.
Accounting:
Accounting is a concerned with the maintenance of accounts
giving stress to the design of the system of records, the preparation of
reports based on the recorded data and the interpretation at the reports.
Definition of Accounting:
“Accounting system is a means of collecting, summarising,
analyzing and reporting in monetary terms, the information about the
business.”
“R.N.Anthony”
BRANCHES OF ACCOUNTING:
Financial accounting:
The purpose of Accounting is to ascertain the financial
results i.e., profit or loss in the operations during a specific period.
It is also aimed at knowing the financial position, i.e., assets,
liabilities and equity position at the end of the period.
Cost Accounting:
The purpose of cost accounting is to analyze the
expenditure so as to ascertain the cost of various products
manufactured by the firm and fix the prices.
Management Accounting:
The purpose of management accounting is to
assist the management in taking rational policy decisions. Ex of
such decisions, pricing decisions, capital expenditure
decisions…….etc. The necessary accounting information about
funds, costs, profits, etc.
Inflation Accounting:
It is concerned with the adjustment in the values
of assets and profit in light of changes in the price level. This
type of accounting is also necessary due to the assumption
of stable monetary unit.
Human Resource Accounting:
It is a branch of accounting which seeks to report
and emphasize the importance of human resources in a
company’s earning process and total assets.
USERS OF ACCOUNTING INFORMATION:
The users of accounting can be divided in two broad groups:
1) Internal users and
2) External Users.
1) Internal Users:
Managers:
These are the persons who manage the
business, i.e., management at the top, middle and lower
levels.
Accounting information also helps the managers in
appraising the performance of subordinates. As such
Accounting is termed as “ the eyes and ears of
management”.
External Users:
Investors :
Those who are interested in buying the shares of a
company are naturally interested in the financial statements to know
how safe the investment already made is and how safe the proposed
investment will be.
Creditors:
Lenders are interested to know whether their loan, principal
and interest, will be paid when due.
Workers:
In our country, workers are entitled to payment of bonus
which depends the size of profit earned. Hence, they would like to be
satisfied that the bonus being paid to them is correct.
Customers:
They are also concerned with the stability and profitability
of the enterprise.
Government:
Government all over the world are using financial
statements for compiling statistics concerning business which, in
turn, helps in compiling national accounts.
ACCOUNTING
PRINCIPLES
Classification of Accounting Principles:
Accounting Principles can be broadly classified into two categories . A)
Accounting Concepts. B) Accounting Conventions.
Accounting Principles

Accounting Concepts Accounting

Conventions
Business entity concept 1) Disclosure
Dual Aspect Concept 2) Materiality
Going Concern Concept 3)
Consistency
Money Measurement Concept 4)
Conservation
Objective Evidence Concept
Cost Concept
Accounting Period Concept
Accrual Concept
Matching Cost Concept
Historical Record Concept
DOUBLE ENTRY SYSTEM
Introduction :
Double entry system is a scientific way of presenting
accounts. As such all the Business concerns feel it convenient to
prepare the accounts under double entry system.
Under dual aspect concept the accountant deals with the two
aspects of business transaction i.e.,
1) Receiving Aspect and
2) Giving Aspect.
Receiving aspect is known as ‘Debit Aspect’ and giving aspect
is known as ‘Credit Aspect’.
CLASSIFICATION OF ASSETS
Assets:
The Valuable things owned by the business are known as assets.
These are the properties owned by the business.

Classification of Assets

Fixed Assets Liquid Assets Fictitious Assets Intangible Assets Wasting

Assets

Fixed Assets:
These assets are acquired for long-term use in the business.
They are not ment for resale. Land, Building, plant and machinery,
vehicles and furniture etc., are some of the examples of fixed assets.
Liquid Assets :
These assets also known as circulating, fluctuating or current
assets. These assets can be converted into cash as early as possible.
Current assets are cash, bank balance, debtors, stock, investments.
Fictitious assets:
Fictitious assets are those assets, which do not have physical
form. They do not have any real value. The examples of these assets are
loss on issue of shares, preliminary expenses etc.
Intangible Assets:
Intangible Assets are those having no physical existence.
Goodwill, Patents, Trademarks, are the examples.
Wasting Assets:
Wasting Assets are those assets which are consumed through being
worked or used. Mines are the examples of wasting assets.
TYPES OF CAPITAL:
Capital:
It is the part of wealth which is used for further production and thus
capital consists of all current assets and fixed assets. Cash in Hand, Cash
at bank, Building, Plant and Machinery, furniture etc., are the capital of the
business. Capital is classified as “Fixed capital and Working capital”.
1) Fixed capital:
The amount of invested in acquiring fixed assets is called fixed
capital. Plant and machinery, vehicles, furniture and building etc., are some
of the examples for fixed capital.
2) Working Capital:
The part of capital available with the firm for day-to-day working of
the business is known as working capital. Working capital can also be
expressed as under.
Working Capital=Current
Working Assets-Current
Capital=Current Liabilities
Assets-Current Liabilities.
TYPES OF LIABILITIES
Liabilities:
Liabilities are the obligations or debts payable by the enterprise in
future in the form of money or goods. Liabilities can be classified as fixed,
current and contingent liabilities.
Fixed Liabilities:
These liabilities are payable generally, after a long period. Capital,
loans, debentures, mortgage etc., are its examples.
Current Liabilities:
Liabilities payable with in a year are termed as current liabilities.
The value of these liabilities goes on changing. Creditors, bills payable, and
outstanding expenses etc., are current liabilities.
Contingent Liabilities:
These are not the real liabilities. Future events can only decide
whether it is really liability or not.
TYPES OF TRANSACTION
Transaction:
Any sale or purchase of goods or services is called the transaction.
Transaction are of three types.
1)Cash Transaction:
Cash transaction is one where cash receipts are payment is involved in
the exchange.
2) Credit Transaction:
Credit Transaction will not have cash, either received or paid, for
something given or received, respectively. Credit transactions give rise to
debtor and creditor relationship.
3) Non-cash Transaction:
It is a transaction where the question of receipt or payment of cash
does not arise at all EX: Depreciation, return of goods etc.
 CLASSIFICATION OF ACCOUNTS
Personal Accounts:
Personal Accounts also includes accounts in the names of firms, companies
or institutions such as Malini & sons account, Nagarjuna finance limited account,
Andhra Bank Account etc.
Debit the receiver & Credit the giver
Real Accounts:
Accounts relating to properties or assets are known as ‘ Real Accounts’. Every
business needs assets such as machinery, furniture etc., for running its activities. A
separate account is maintained for each asset owned by the Business.
Debit what comes in Credit what goes out
Nominal accounts:
Accounts relating to expenses, losses and incomes and gains are known
as ‘ Nominal Accounts’ Examples of Nominal Account Wages, salaries, commission,
interest received accounts.
Debit all expenses and losses credit all incomes and gains
 JOURNAL
Introduction:
The word is “Journal” is derived from the Latin word ‘Journ’ which means a
day. Therefore, journal means a day book where in day-to-day business
transactions are recorded in chronological order.
Ledger:
As stated above, all transactions, irrespective of their nature, are recorded in the
journal in a chronological order. After a certain period, if we want to know whether
a particular account is showing a debit or credit balance it becomes very difficult,
so the ledger is designed to accommodate the various accounts maintained by a
trader.
Sub-division of ledger:
The impersonal ledger, on the other hand, contains all real and nominal accounts.
Credit ledger:
All accounts of credits will be found in this book. It can also be called
‘Suppliers Ledger’
Debtors ledger:
All accounts of debtors will be found in this book. It can also be called ‘Customers
Ledger’.
General ledger:
It contains all accounts other than debtors and creditors. Accounts of
owner’s expenses, incomes, capital, drawings, etc., will be found in this book. It
may also be called ‘Impersonal Ledger’.
Private ledger:
Sometimes, the capital account and drawings account of the proprietor may be
separately maintained in another ledger called private ledger.

Journal
Journal is the book of first or original
entry.
In the preparation of final accounts
journal is not useful.
Transaction in the journal will be
recorded immediately.
Journal may not reveal whether one
customer is a debtor or creditor.
Ledger
The Ledger is the book of second entry
In the preparation of trail balance and
final accounts ledger is a must.
Depending upon his conveniences the
trader records the transactions in the
ledger.
Ledger, however, will reveal whether one
person is a debtor or creditor to the
business.
 TRIAL BALANCE
The first step in preparation of Final Accounts is the preparation of
Trial Balance. In the double entry system of book keeping, there will be
credit for every debit and there will not be any debit without credit. The
trail balance generally does not include stock in hand at the end of the
period. All adjustments required to be done at the end of the period,
including closing stock, are generally given under the trail balance.
definition
A trial balance is a list of all the balances standing on the Ledger
accounts and cash Book of a concern at any given data.
“Spicer and Pegler”
Particulars In trial balance Reason
Capital Credit Loan
Opening stock Debit Asset
Purchases Debit Expenses
Sales Credit Gain
Return inwards Debit Loss
Return outwards Credit Gain
Wages Debit Expenses
Freight Debit Expenses
Transport expenses Debit Expenses
Royalties on production Debit Expenses
Gas, fuel Debit Expenses
Discount received Credit Revenue
Discount allowed Debit Loss
Bad debts Debit Loss
Bad debts reserve Credit Gain
Commission received Credit Revenue
Repairs Debit Expenses
Rent Debit Expense
Salaries Debit Expense
Loan taken Credit Loan
Interest received Credit Revenue
Interest allowed Debit Expenses
Insurance Debit Expenses
Carriage out words Debit Expenses
Advertisements Debit Expenses
Petty expenses Debit Expenses
Trade expenses Debit Expenses
Petty receipts Credit Revenue
Income tax Debit Drawings
Office expenses Debit Expenses
Customs duty Debit Expenses
Sales tax Debit Expenses
Provisions for discount on Credit Liability
debtors
Provisions for discount on Debit Asset
creditors
Debtors Debit Asset
Creditors Credit Liability
Goodwill Debit Asset
Plant, machinery Debit Asset
Land, building Debit Asset
Furniture, fittings Debit Asset
Investments Debit Asset
Cash in hand Debit Asset
Cash at bank Debit Asset
Reserve fund Credit Liability
Loans and advances Debit Asset
Horses, cars Debit Asset
Excise duty Debit Expenses
General reserve Credit Liability
Provision for depreciation Credit Liability
Bills receivable Debit Asset
Bills payable Credit Liability
Depreciation Debit Loss
Bank overdraft Credit Liability

Outstanding salaries Credit Liability

Prepaid insurance Debit Asset

Bad debts reserve Credit Revenue

Patents & trademarks Debit Asset

Prepaid rent (received) Credit Liability

Motor vehicle Debit Asset

Outstanding rent Credit Liability

 FINAL ACCOUNTS
Introduction:
The trail balance marks a definite stage in the preparation of
accounts. It indicates the all the transactions for a particular period have
been duly entered in the book, properly posted and balanced. The
agreement of trail balance proves two things: that
1) The record has been made of both the aspects of each transaction;
and
2) The book are arithmetically accurate.

final accounts

Trading & Profit & Loss A/C Balance Sheet

TRADING ACCOUNT, PROFIT & LOSS ACCOUNT

The first step in the preparation of final accounts is

the preparation of the trading account. The main purpose of preparing a
Trading Account is two-fold :
1) to ascertain gross profit and loss as a result of buying and selling of
goods; and
2) to enable management to make a comparison of gross profit or gross
loss of the current year with that of previous years.

The Businessman is always interested in knowing his net

income or net profit. Net profit represents the excess of gross profit plus
other revenue incomes over sales expense including sales costs and
other expenses. The debit side of P&L a/c shows the expenses and the
credit side the incomes. If the total of the credit side is more, it will be net
profit. And if the debit side happens to be more, it would be net loss.
BALANCE SHEET
This forms the second part of the Final Accounts. It
is prepared after the trading and profit and loss
accounts have been complied and closed . A
Balance Sheet may be described as a statement of
the financial position of a concern at a given date.
The financial position of a concern is revealed by its
assets on a given date and its liabilities on that
date. Excess of assets over liabilities represents
Capital. Such excess may be taken as an indicator
of the financial soundness of a concern.