Introduction to Accountancy

Definition :

“ Accounting is an art of recording,

classifying and summarising in a
significant manner and in terms of money,
transactions & events which are of a
financial character, and interpreting the
results thereof.”
 Objectives of Accountancy
 To keep systematic record

 To ascertain the result of operations

 To ascertain the financial position of

business

To protect business properties

To facilitate rational decision making

 Accounting Concepts –

 Entity concept – Business is

 Dual aspect concept
 Going concern concept
 Money measurement concept
 Cost concept
 Accounting period concept
 Accrual concept
 Matching concept
 Accounting Concepts –
Entity concept

 Business is treated as a separate entity from the

proprietor

 Thus, if a proprietor invests Rs 1,00,000 in the

business, it is deemed that the proprietor has given
Rs 1,00,000 to the business & it has to ultimately
repay it to the proprietor.
 Accounting Concepts –

Dual Aspect concept

 There are two aspects to every transaction

 Eg. If X starts business with cash Rs 1,00,000,

the business gets asset (cash) & on the other
hand business owes Rs 1,00,000 to him as his
capital.
 Accounting Concepts –

Going concern concept

 It is assumed that the business will

continue for a fairly long time unless it is
liquidated

 Thus, the assets are not valued at their sale

value
 Accounting Concepts –

Money measurement concept

 Everything is recorded in terms of money

 Purchase & sale of goods, payment of

expenses are accounted for. Death of an
executive, resignation of a manager etc.
cannot be expressed in terms of money.
 Accounting Concepts –

Cost concept

 This concept does not recognise the

realisable value or the real worth of an asset

 An asset is recorded at the price paid to

acquire it.
 Accounting Concepts –
Accounting period concept

 It is the interval of time at the end of which the

income statement & financial position statement are
prepared to know the results

 Normal accounting period is 12 months.

 Studying the financial position after a very long

period would not help in taking corrective steps
 Accounting Concepts –
Accrual concept

 Revenues & expenses are identified with specific

periods of time

 Revenues & expenses of a particular accounting

period are recorded whether they are actually
received/paid in cash or not
 Accounting Concepts –

Matching concept

 It is necessary to match revenues of the period

with the expenses of that period

 A comparison between the two helps in

measuring the profit earned by the business or the
loss incurred
 Accounting Conventions

 Convention of Disclosure- Accounting

reports should disclose full & fair
information to the proprietors, creditors,
investors & others

 Convention of Materiality- Accountant

should attach importance to material
details & ignore insignificant details
 Accounting Conventions

 Convention of Consistency-The company

must follow one method of accounting year
after year to enable comparison of one
accounting period with another

 Convention of Conservatism-All
prospective losses are to be taken into
consideration but not all prospective profits
i.e. Anticipate no profits but provide for all
possible losses
 Review of concepts
 Asset- It is an economic resource that is
expected to give benefit in the future

 Capital- It is the owner’s equity i.e. the amount

invested by the proprietor in his business

 Depreciation- It is the reduction in the book

value of fixed assets due to their use in business

 Liability- It is an economic obligation payable to

the outsiders
 Review of concepts

 Owner’s Equity- It is the claim of an

owner of a business
 Double Entry system -
Principles
1. Every transaction effects two accounts
2. One account is the receiver of the benefit &
the other is the giver of the benefit
3. For each transaction one account is
debited & the other account is credited
4. Amount of benefit received by one account
is equal to amount given
 Classification of Accounts

 Personal A/c
 Real A/c
 Nominal A/c
 Valuation A/c
 Classification of Accounts
 Personal A/c- These are accounts of individuals,
firms, companies, bankers, associations with whom
businessman deals

 Real A/c- These are the accounts of properties,

assets or possessions of the businessman

 Nominal A/c- These are accounts of expenses or

losses & gains or incomes

 Valuation A/c- These are accounts which are

concerned with valuation of assets viz. provision
for depreciation, prov for doubtful debts etc.
 Introduction to Accountancy
Classification of Accounts –
 Personal A/c

Types of personal A/c

Groups/
Natural Representative
Artificial
Personal Personal
Personal A/c
A/c A/c
 Introduction to Accountancy
Classification of Accounts –
 Real A/c

Types of Real A/c

Tangible Intangible Real

Real A/c
A/c
 Golden rules of Accounting
 Real A/c : Dr what comes in & Cr what goes out

 Personal A/c : Dr the receiver & Cr the giver

 Nominal A/c : Dr expenses & losses & Cr

Incomes & Gains

 Valuation A/c : Dr the A/c when it is to be

reduced & Cr the A/c when it is to be increased
 Accounting Equation :

Assets = Liabilities + Owners Equity

 The rules of Dr & Cr :

vii) Dr increase in assets, Cr decrease in assets

viii) Dr decrease in liabilities, Cr increase in
liabilities
ix) Dr decrease in Owners equity, Cr increase in
Owners equity
 Journal
 A journal is a book of primary entry. First all the
transactions are recorded in the journal &
subsequently they are posted in ledger.

 A ledger is the principal book of accounts. It is a

group of accounts; it contains an account for each
asset, liability, revenue & expense A/c

 While transferring the transaction from journal to

ledger, the transactions are classified. For each
person, head of expenditure, income, asset etc.
separate accounts are opened in the ledger.
 Posting process :
 On debit side : Write the name of the credited a/c in
the journal after the word “To”.
 On the credit side : Write the name of the debited a/c
in the journal after the word “By”.
 All the transactions relating to a particular a/c should
be recorded in the a/c already opened. No new a/c of
the same name should be opened in the ledger
 At the end of a certain period, the a/cs are balanced
 If the debit side is heavier the difference will appear
on the credit side as, “By balance c/d” in the
particulars column & if the credit side is heavier, the
difference will appear on the debit side as , “To
balance c/d”
 Purpose of balancing ledger a/cs:

 Personal a/cs are balanced to know whether a

person is a debtor or a creditor. A debit
balance indicates that the person is our
debtor & a credit balance indicates that the
person is our creditor .
 A debit balance of a real a/c means an asset
& a credit balance means liability
 Debit balance of a nominal a/c means
expense & a credit balance represents
income