Accounting:

Accounting is defined as "the art of recording, classifying and summarizing in terms of

money transactions and events of a financial character and interpreting the results
thereof."

There are two types of accounting:

 Financial Accounting
 Managerial Accounting
Financial accounting reports are prepared for the use of external parties such as
shareholders and creditors. Financial accounting is mandatory; that is, it must be
done. Various out side parties such as Securities and Exchange Commission (SEC) and
the tax authorities require periodic financial statements. Emphasis is on summaries of
financial consequences of past activities.

Financial Statements:
Financial statements can be referred to as representation of the financial status of a
company in a systematically documented form. There are different types of Financial
Statements:
 Income statements
 Balance Sheet
 Cash Flow Statement
Income Statement
Income statement (also referred to as profit and loss statement (P&L), revenue
statement, statement of financial performance) is a company's financial statement
that indicates how the revenue (money received from the sale of products and services
before expenses are taken out, also known as the "top line") is transformed into the
net income (the result after all revenues and expenses have been accounted for, also
known as Net Profit or the "bottom line"). It shows whether the company is making
money or losing money. It shows all the revenues and expenses of an organization. If
revenues exceed expenses, company is making money/ profits. And if expenses are in
excess, company is in loss in particular financial year.

Income statements help investors and creditors determine the past financial
performance of the enterprise, predict future performance, and assess the capability of
generating future cash flows through report of the income and expenses.

Amount Amount
Particulars
Dr (Rs.) Cr (Rs.)
Sales/ Revenues 230,000
less: Cost of Goods Sold (70,000)
Gross Profit 160,000
less: Operating Expenses:
Advertisement 5,000
Utilities 7,000
Rent 25,000
Depreciation 3,000
(40,000)
EBIT/ Operating Income 120,000
less: Interest (10,000)
Earning before Tax 110,000
less: Tax (10,000)
Net Profit 100,000
In business:
Revenue or turnover is income that a company receives from its normal business
activities, usually from the sale of goods and services to customers.

Cost of goods sold (COGS) refer to the inventory costs of those goods a business has sold
during a particular period.

Gross profit or sales profit is the difference between revenue and the cost of making a
product or providing a service

An operating expense is an ongoing cost for running a product, business, or system. In

includes all kind of costs necessary to run business operations.
Earnings before interest and taxes (EBIT), also called operating profit or operating income
is a measure of a firm's profit that excludes interest and income tax expenses. It is the
difference between gross profit and operating expenses.

Earning before tax/ taxable income refers to the base upon which an income tax system
imposes tax. Generally, it includes some or all items of income and is reduced by expenses
and other deductions.

Net income is calculated by taking revenues and adjusting for the cost of doing business,
depreciation, interest, taxes and other expenses. It is an important measure of how
profitable the company is over a period of time.

Balance Sheet:
A financial statement that summarizes a company's assets, liabilities and shareholders'
equity at a specific point in time. These three balance sheet segments give investors
an idea as to what the company owns and owes, as well as the amount invested by
the shareholders.
The balance sheet must follow the following formula:
Assets = Liabilities + Shareholders' Equity

Accounting Solutions Ltd. (ASL)

Balance Sheet
As on June 30, 2011

Assets Amount Liabilities and Amount

(Rs.) Owner’Equity (Rs.)
Currents Assets: Current Liabilities:
Cash in hand 45000 Bills Payable 3000
Cash at bank 54000 Sundry Creditors 24000
Sundry debtors 84000 Long-term Liabilities:
Stock 4500 Loan 76890

Fixed Assets: Owner’s Equity

Machinery 33000 Capital 135000
Furniture 9000 Add: Net Profit B/f 83610
Building 84000 218610
Less: Drawing (9000) 209610

313500 313500

Assets
In financial accounting, assets are economic resources. Anything tangible or intangible that
is capable of being owned or controlled to produce value and that is held to have positive
economic value is considered an asset.
Current Asset is an asset which can either be converted to cash or used to pay current
liabilities within 12 months. Typical current assets include cash, cash equivalents, short-
term investments, accounts receivable, inventory and the portion of prepaid expenses which
will be paid within a year.
Fixed assets, also known as a non-current asset or as property, plant, and equipment
(PP&E), is a term used in accounting for assets and property which cannot easily be
converted into cash.
Intangible assets are defined as identifiable non-monetary assets that cannot be seen,
touched or physically measured, and are created through time and effort, and are
identifiable as a separate asset.

In managerial accounting, reports are prepared for managers inside the organization.
Managerial accounting, on the other hand, is not mandatory. A company is completely
free to do as much or as little as it wishes. Emphasis is on decisions affecting the
future. Detailed segment reports about departments, products, customers, and
employees are prepared.