MODULE 1
INTRODUCTION
TO
ACCOUNTING
Dr. Ritika Bhatia
What is a River?
What is a River?
River is a flow of water.
What is Accounts?
At one level, it can be said as tracking the
flow of money through a business.
How life starts in Accounts?
It starts with what is called a transaction.
Transaction is an exchange.
Exchange of money for a pen
Exchange of money for a doctor’s service.
Rules for Transaction
• Must be two sided
Rule 1
• Monetary Terms
Rule 2
Event
A transaction is one-off. Ex- Rent paid for a month, Purchase of
goods.
An Event is a result of number of transactions and it has to
appear in balance sheet.
Example- Profit for the year
Closing Stock- It is the result of number of purchases and sales.
What is Accounting?
Accounting is the art of recording, classifying and
summarizing in a significant manner and in terms of
money, transactions and events, which are of financial
character and interpreting the results thereof.”
-American Institute of Certified Public Accountants
Recording Classification
(cashbook) (Ledger)
Characteristics
Financial
Summarizing
Transaction (Trading A/c,
s P&L A/c,
B/S)
Interpretatio
n
ng
t i
un
c o
Ac
o f
io n
l ut
v o
E Accountancy
Accounting
Bookkeeping
Relationship between
Accountancy, Accounting and Bookkeeping
Accountancy
Accounting
Bookkeeping
Accounting System
People make Decisions
Business Transactions occur
Accountants prepare reports
to show the results of
business operations
Procedural Aspects of Accounting
Procedure of Accounting
Generating Financial Using the Financial
Information Information
Recording Analyse
Classifying Interpret
Summarizing Communicate
Important Terms In Accounting
Assets
Liabilities
Capital
Expenses
Revenue
Income (R-E)
Debtor
Creditor
Account
How does it all add up?
When you get When you
paid for a Income Expenses buy
Product or something….
service
Assets often Liabilities
Generate often
income generate
expenses
The value of The value of
anything Assets Liabilities anything
you own you borrow
Accounting Process
Identifying financial transactions or events
Communicating
to the users
Journal Recording
Analysis •Cashbook
And •Purchase book
Interpretation •Sales book
•Purchases return book
•Sales return book
•Bills payable book
Summarizing •Bills receivable book
•Trial balance
Classifying
•Trading and P&L A/c
(Posting into ledger)
•Balance Sheet
Accounting Cycle
Transaction
Final
Accounts Journal
Trading
And
Balance
P&LA/c Ledger
Sheet
Trial
Balance
Need of Accounting
■ What has happened to his investment?
■ What is the result of the business transactions?
■ What are the earnings and expenses?
■ How much amount is receivable from customers to whom
goods have been sold on credit?
■ How much amount is payable to suppliers on account of credit
purchases?
■ What are the nature and value of assets possessed by the
business concern?
■ What are the nature and value of liabilities of the business
concern?
Is a
Accounting System that Identifies
Records
Information
Relevant that is Communicates
Reliable
To help users make
Comparable better decisions
Users of Accounting Information
Internal External
Owners Creditors
Management Investors
Employees Government
Researchers
Foreigners
Users of Accounting Information
External
External users
users Internal
Internal users
users
make
make decisions
decisions make
make decisions
decisions
about
about the
the entity.
entity. for
for the
the entity.
entity.
Objectives of Accounting
to maintain accounting records.
to calculate the result of operations.
to ascertain the financial position.
to communicate the information to users.
Branches of Accounting
Financial
Accounting
Cost
Accounting
Management
Accounting
Accounting Principles (GAAP)
Rules of action or conduct adopted universally.
Rules which are followed in treating various items.
Generally accepted accounting principles.
Classification
Accounting Accounting
Concepts Conventions
Accounting Concepts
Money
Measurement
Accounting Concept
Period
Going Concept
Concern
Business Concept
Entity Accrual
Concept Realization Concept
Matching Concept
Cost Concept
Dual Concept
Aspect
Concept
Accounting Conventions
Outcome of accounting principles.
Guidelines or behavior.
Conventions
Full
Consistency Conservatism Materiality
Disclosure
ing
unt
cco
Single Entry
of A
ds
tho
Double Entry
Me
The
The Accounting
Accounting Equation
Equation
Assets = Liabilities + Owner’s Equity
(Outsider’s Equity)
The
The resources
resources
owned
owned byby aa
business
business
The
The Accounting
Accounting Equation
Equation
Assets = Liabilities + Owner’s Equity
The
The rights
rights of
of the
the
creditors,
creditors, which
which
represent
represent debts
debts ofof
the
the business
business
The
The Accounting
Accounting Equation
Equation
Assets = Liabilities + Owner’s Equity
The
The rights
rights of
of the
the
owners
owners