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Chapter 1: Basics of Accounting

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Certificate in Accounting Fundamentals

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Chapter 1: Basics of Accounting

Learning Objectives
After going through this chapter, you will be able to have an idea about:

Scope of Accounting
Accounting Assumptions, Concepts & Principles
Book-keeping
Double-Entry System

Certificate in Accounting Fundamentals

Chapter 1: Basics of Accounting

Topics Covered

Introduction
Accounting Process
Purpose for accounting
Who uses Accounting?
Essential accounting terms
Branches of Accounting
Users of Accounting
Accounting Assumptions, Concepts & Principles
Accounting Cycle
Book-keeping
Approaches of recording transactions Double Entry System
Classification of accounts under the double entry system
Classification of accounts according to accounting equation approach

Certificate in Accounting Fundamentals

Chapter 1: Basics of Accounting

Introduction

For any business or non-business activities of organizations (may it be
business organizations or not-for profit organizations) where there is
money and other economic resources involved, there has to be
accounting in place to keep a track of those resources.

Accounting is considered to be the language of a business.

Accounting is a system which collects and processes financial

information of a business. This information is reported to the users to
enable them to take appropriate decisions.

Certificate in Accounting Fundamentals

Chapter 1: Basics of Accounting

Accounting Process

American Institute of Certified Public Accountants (AICPA) defined

accounting as The art of recording, classifying, summarizing,
analyzing and interpreting the business transactions systematically
and communicating business results to interested users is
accounting.

Certificate in Accounting Fundamentals

Chapter 1: Basics of Accounting

Contd

Certificate in Accounting Fundamentals

Chapter 1: Basics of Accounting

Purpose for accounting

To have a systematic record

To determine the business results
To determine the financial position of a business
To represent the liquidity & solvency positions
To assist in decision-making
To comply with statutory requirements

Certificate in Accounting Fundamentals

Chapter 1: Basics of Accounting

Who uses Accounting?

Certificate in Accounting Fundamentals

Chapter 1: Basics of Accounting

Essential accounting terms

Transaction
Proprietor
Asset
Liabilities
Drawings
Purchases
Sales
stock
Revenue
Expense
Income
Voucher
Invoice
Receipt
Account
Certificate in Accounting Fundamentals

Chapter 1: Basics of Accounting

Branches of Accounting

Financial accounting refers to recording of business transactions in
the book of accounts in a manner where the operating results
pertaining to a particular period and the financial position as on a
particular date can be ascertained.

Cost accounting refers to ascertainment of cost of production for
various jobs performed by the firm.

Management accounting makes use of accounting data generated
by financial accounting and cost accounting in order to formulate
policies, take managerial decisions, and make investment decisions

Certificate in Accounting Fundamentals

Chapter 1: Basics of Accounting

Users of Accounting

Certificate in Accounting Fundamentals

Chapter 1: Basics of Accounting

Accounting Assumptions, Concepts & Principles

Certificate in Accounting Fundamentals

Chapter 1: Basics of Accounting

Accounting Cycle

Certificate in Accounting Fundamentals

Chapter 1: Basics of Accounting

Book-keeping

Book-keeping is defined as The art of keeping a permanent record of
business transactions in a systematic manner

Book-keeping is the initial step to accounting and it works as the basis
for accounting information.

While book-keeping is restricted to identifying and recording individual
financial transactions, accounting is concerned with classifying,
summarizing, interpreting and communicating the results

Certificate in Accounting Fundamentals

Chapter 1: Basics of Accounting

Approaches of recording transactions Double Entry System

Accounting Equation Approach: A transaction is an economic event

that affects an element of the accounting equation and must be
recorded. Accounting equation is used for recording and summarizing
transactions.
Assets= Liabilities + Owners Equity

Traditional Approach: In this model, business transactions are
formed on the basis of the existence of two aspects (debit and credit)
in each transaction. All the business transactions are recorded to the
book of accounts under the Double Entry System.

Certificate in Accounting Fundamentals

Chapter 1: Basics of Accounting

Classification of accounts under the double entry system

Certificate in Accounting Fundamentals

Chapter 1: Basics of Accounting

Classification of accounts according to accounting

equation approach
Types of Accounts

Meaning

Examples

Asset Account

Deals
with
tangible
intangible real assets

Liabilities Account

Deals
with
the
obligations of the
outsiders

Capital Account

Deals with the accounts of the

Capital a/c, Drawings a/c
owners of the company

Revenue Account

Deals with amount charged for Sales a/c, Royalty received a/c, interest
goods sold or services rendered received a/c, dividend received a/c
and other incomes

Expenses Account

Deals with the expenses

incurred in the process of Purchases a/c, Discount allowed a/c,
Interest paid a/c, Loss by fire a/c
earning revenue

and Land a/c, Building a/c, Plant & Machinery

a/c, Cash a/c etc..,

financial Long term Loans, Debentures, Bank

firm to Loans, Trade Creditors, Outstanding
expenses

Certificate in Accounting Fundamentals

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