2. Topics Covered
o Meaning and Definition of Accounting
o Objectives and functions of Accounting
o Branches of Accounting
o Accounting Concepts
o Accounting Conventions
o Nature of Accounts
o Examples for Nature of Accounts
o Double Entry System
o Rules of Double Entry System
o Journal Entry
o Journal Entry - Examples
3. Meaning of Accounting
Accounting is concerned with recording of financial transactions,
summarising the transactions and communicating it to the users.
Definition of Accounting
Accounting may be defined as “A systematic recording of information
which involves analyzing, classifying, summarizing and interpreting business
transactions”.
Objectives and Functions of Accounting
Maintaining systematic records of transactions of records
Ascertaining Profit and loss
Ascertaining the financial position
Assisting the management
Communicating accounting information to the users
Preventing of frauds
4. Branches of Accounting
Financial Accounting
Journal
Subsidiary Books
Ledger
Trial Balance
Financial Accounts
Balance Sheet
Profit & Loss a/c
Cost Accounting
Cost Sheet
Material Cost
Labour Cost
Other Expense Cost
Reports
Standard Cost Report
Variance Report
Break Even Report
Marginal Cost Report
Price Determination
Management Accounting
Trend Analysis
Ratio Analysis
Fund Flow Statement Analysis
Cash Flow Statement Analysis
Reports
Budgetary Reports
Miscellaneous Reports
Interpretation
6. Business Entity Concept
• The business and its owner(s) are two separate existence entity
• Any private and personal assets, incomes and expenses of the owner(s) should not
be treated as the assets, incomes and expenses of the business.
• Ex: A director’s private car should not be included in the assets of the company
Money Measurement Concept
All the events and transactions are recorded in the terms of money
Does not take care of the effects of inflations because it assumes stable value for
measuring
Going Concern Concept
The business will continue in operational existence for the foreseeable future
Financial statements should be prepared on a going concern basis unless
management either intends to liquidate the enterprise or to cease trading, or has no
realisitic alternative but to do so
Ex: Fixed assets are recorded at historical cost
7. Dual Aspect Concept
Every transaction has two aspects – giving certain benefits and receiving certain
benefits
This concept is based on Double entry System
Periodicity Concept
In periodicity assumption, indefinite life of business is divided into parts. These parts
are known as accounting periods.
Periodicity assumption assumes that expenses & revenues are identified with a
specific account period usually a year.
Historical Cost Concept
Assets should be shown on the balance sheet at the cost of purchase price instead of
current value/NPV
Ex: The cost of fixed asset is recorded at the date of acquisition cost. The acquisition
cost includes all expenditure made to prepare the asset for its intended use. It
included the invoice price of the assets, freight charges, insurance or installation
costs.
8. Matching Concept
Expenses incurred for earning revenue recorded during a period should only be
taken into consideration
It necessitates adjustments to prepaid and outstanding expenses, unearned and
accrued income
Realisation Concept
Revenues should be recognised when the major economic activities have been
completed
Ex: Sales are recognised when the goods are sold and delivered to customers or
services are rendered
Accrual Concept
Revenue is recognised on its realisation
Cost is recognised when it is incurred and not when the payment is made
Objective Evidence Concept
Accounting must be based on objective evidence – every transaction should be
supported by verifiable document and free from biasness
9. Accounting Conventions
Conservatism
Consistency
Disclosure
Conservatism
All anticipated losses should be recorded but all anticipated gains should be ignored
It is a policy of ‘playing safe’
Provision is made for all losses even though the amount cannot be determined with
certainity
Consistency
Accounting policies should remain unchanged from one accounting period to another
Ex: “Valuing stock at cost or market price whichever is lower” should be followed
“year after year to get comparable results”
Changes are permitted only when the new method is considered better and can reflect
the true and fair view of the financial position of the company
10. Disclosure
Convention of full disclosure requires that all material and relevant facts concerning
financial statements should be fully disclosed
Full disclosure means that there should be full, fair and adequate disclosure of
accounting information
Nature of Accounts
Accounts
Personal Accounts
Natural
Person’s
Accounts
Artificial
Person’s
Accounts
Representative
Person’s
Accounts
Impersonal
Accounts
Real Accounts Nominal
Accounts
Tangible
Real
Accounts
Intangible
Real Accounts
11. Examples for Nature of Accounts
Nature of Accounts
Personal Account Real Account Nominal Account
Mohan Industries
Account
Capital Account
Salary Outstanding
Account
Unexpired Insurance
Account
Bank Overdraft
Bank Account
Drawings Account
Cash Account
Patent
Goodwill Account
Machinery Account
Stock Account
Purchases
Bills Receivable Account
Copyright
Discount Account
Salaries Account
Bad Debts Account
Reserve for discount on
creditors account
Reserve for discount on
debtors account
Sales Account
Purchases Account
12. Double Entry System
It is a method of arranging accounts in such a way that the dual aspect would be
expressed by a debit amount and an equal and offsetting credit amount
It is a system in which you enter both sides of a transaction. For every debit, there is
a credit. For every giver, there is a taker.
Rules for Double Entry System
Personal Accounts Real Accounts
CreditDebit
What Goes
Out
What Comes
in
Incomes and
Gains
Expenses and
Losses
CreditDebit
Nominal
Accounts
GiverReceiver
CreditDebit
13. Journal Entry
Journal is derived from the French word ‘Jour’ which means a day. Journal means
daily record. It is a book of original record where every transaction is recorded in the
first instance and then it is posted to the ledger. The form in which it is recorded is
called Journal entry and recording or entering a transaction in the journal is known as
journalising.
Examples for Journal Entry
Particulars Amount (Dr) Amount (Cr)
1.Capital Introduced
Cash a/c Dr
To Capital a/c
(Being capital brought into
the business)
XXX
XXX
14. Particulars Amount (Dr) Amount (Cr)
2. Cash Purchases
Purchases a/c
Dr
To Cash a/c
(Being goods purchased for
cash)
XXX
XXX
3.Puchases from X ltd
Purchases a/c Dr
To X ltd’s a/c
(Being credit purchases)
XXX
XXX
4.Amount deposited in bank
Bank a/c Dr
To cash a/c
(Being cash deposited into
bank)
XXX
XXX
15. Particulars Amount (Dr) Amount (Cr)
5. Goods sold to Y
Y’s a/c Dr
To sales a/c
(Being goods sold to y on
credit)
XXX
XXX
6.Goods sold for cash
Cash a/c Dr
To sales a/c
(Being goods sold for cash)
XXX
XXX
7. Assets purchase
Machinery a/c Dr
Furniture a/c Dr
Building a/c Dr
To cash a/c
(Being assets purchased for
cash)
XXX
XXX
XXX
XXX
16. Particulars Amount (Dr) Amount (Cr)
8.Payment of Stationery,
Rent and Salaries
Stationery a/c Dr
Rent a/c Dr
Salaries a/c Dr
To Cash a/c
(Being payment of
stationery, rent and salaries)
XXX
XXX
XXX
XXX
9. Cash withdrawn from
bank for Private use and for
Business use
Drawings a/c Dr
Cash a/c Dr
To Bank a/c
(Being Cash withdrawn
from bank for personal use
and for use in the business)
XXX
XXX
XXX
17. Particulars Amount (Dr) Amount (Cr)
10.Goods withdrawn by
proprietor and given as
charity
Drawings a/c Dr
Charity a/c Dr
To Purchases a/c
(Being goods withdrawn by
proprietor and given as
charity)
XXX
XXX
XXX
11. Goods lost by fire
Goods lost by fire a/c Dr
To Purchases a/c
(Being goods destroyed by
fire)
XXX
XXX
12.Shares bought
Investment in shares a/c Dr
To cash a/c
(Being shares purchased)
XXX
XXX
18. Particulars Amount (Dr) Amount (Cr)
13.Goods purchased and
discount received
Purchases a/c Dr
To Cash a/c
To Discount Received a/c
(Being goods purchased
and trade discount
received)
XXX
XXX
XXX
14.Goods sold and discount
allowed
Cash a/c Dr
Discount Allowed a/c Dr
To sales a/c
(Being goods sold and trade
discount allowed)
XXX
XXX
XXX
15.Paid rent by cheque
Rent a/c Dr
To Bank a/c
(Being rent paid by cheque)
XXX
XXX
19. Particulars Amount (Dr) Amount (Cr)
16.Depreciation allowed for
assets
Depreciation a/c Dr
To Machinery a/c
To Building a/c
To Furniture a/c
(Being depreciation
provided for assets)
XXX
XXX
XXX
XXX
17.Goods worth Rs.600
were Shop-soiled and sold
to M for Rs.300 only
M a/c Dr
Profit and Loss a/c Dr
To Sales a/c
(Being goods worth Rs.600
shop-soiled sold to M at a
loss of Rs.300)
300
300
600
