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FUNDAMENTAL

OF
ACCOUNTING
COURSE OUTLINE
PURPOSE AND NATURE OF
ACCOUNTING,
VARIOUS AREAS OF ACCOUNTING,
FORM OF BUSINESS,
G A A P,
USERS OF ACCOUNTING,
BUSINESS TRANSACTION,
ACCOUNTING EQUATION,
COURSE OUTLINE
CHANGING IN FINANCIAL POSITION,
DOUBLE ENTRY SYSTEM,
JOURNAL,
LEDGER,
TRIAL BALANCE,
ACCOUNTING CYCLE,
MEASURING BUSSINESS INCOME
COURSE OUTLINE
ADJUSTMENT PROCESS,
COMPLETION OF ACCOUNTING CYCLE,
WORK SHEET,
FINANCIAL STATEMENTS,
ACCOUNTING FOR MERCHANDISES,
BANK RECONCILIATION STATEMENT,
DEPRECIATION METHODS,
COURSE OUTLINE
INVENTORIES ACCOUNTING METHODS,
CASH FLOW STATEMENTS AND THEIR
CLASSIFICATION, etc.
ACCOUNTING
BASIC
TERMONOLOGIES
ACCOUNTING:
ACCOUNTING IS SPECIALISED
INFORMATION SYSTEM THAT PROVIDES
ECONOMIC INFORMATION TO THE
DIFFERENT GROUPS OF PEOPLE

BRANCHES OF ACCOUNTING


FINANCIAL
ACCOUNTING
accounting is an art of
recordingclassifing and
summarizing in terms of
money' transaction and
event of financial
character and interpreting
the results to different
users

COST ACCOUNTING:
is to ascertain the cost of
product and help the
management in the control
of cost

MANAGEMENT ACCOUNTING:
Which provides necessary
information to the management
for discharging its functions. it
enable the management to take
decision and control activities

ACCOUNTING
FINANCIAL COST
MANAGEMENT
BOOK-KEEPING:
recording of
business transaction
in a systematic way
BUSINESS:
any activity
undertaken for the
purpose of earning
profit.

PROPRIETOR:
the owner of concern,
invest capital, time
and attention, bear
loss n enjoy profit.
CAPITAL:
any thing n amount
invest by the owner.
TRANSACTION
ANY DEALING BETWEEN TWO PERSON
OR THINGS.
IT MAY BE FOR CASH
IT MAY BE ON CREDIT
DRAWINGS:
good n cash taken
away by the owner.
GOOD/MERCHANDIZ:
all thing in which
business deals
PURCHASES:
Any thing purchase for re
sale purpose.
ASSETS:
all the things own or
possessed by the biz.
LIABILITIES:
any debts due by biz.
SALES:
goods are sold for
profit.
RETURNS:
if return by customer
its sales return and if
return to
seller/supplier its
purchases reutrn
REVENUE:
Any income
generating by biz.
DISCOUNT:
Any reduction in
price.
TRADE DISCOUNT:
Any concession in
listed/printed
price,at the spot.
CASH DISCOUNT:
Deduction allowed by
the creditor to the
debtor for prompt
payment.
ALLOWANCE:
Any reduction in price
due to defect.

DEBTORS:
from whom the biz
receive.
CREDITOR:
To whom the biz pay.
EXPENDITURE/COST:
Any assets acquired.
EXPENCES:
Used/enjoyed benefit of
expenditure
STOCK/INVENTORY:
Unsold goods.
ACCOUNT:
Brief record of
transaction; about
person or things.
EQUITY:
Part, share or
investment
ACCOUNTING CYCLE
TRANSACTION
JOURNAL
LEDGER
TRIAL BALANCE
PROFIT/LOSS STATMENT
BALANCE SHEET
GROUPS
OF
ACCOUNTING
USERS
OWNER
MANAGEMENT
LABOUR/EMPLOYEE
CREDITORS
SUPPLIER
CUSTOMER
GOVERNMENT
G A A P
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES(GAAP)
ACCOUNTING
CONCEPTS:
BIZNESS ENTITY
GOING CONCERN
MONEY
MEASUREMENT
COST
DUAL ASPECT
ACCOUNTING
PERIOD
MATCHING
REALISATION
ACCOUNTING
CONVENTIONS:
DISCLOSURE
MATERIALITY
CONSISTENCY
CONSERVATISM
ACCOUNTING
CONCEPTS
BUSINESS ENTITY CONCEPT
Business and business man/owner both are
separate entities accounting deals and
concerned with only business, financial
matters. in short we done our work of
accounting with business point of view.
GOING CONCERN CONCEPT
It shows that the business will exist for a long
time to come.
MONEY MEASUREMENT
CONCEPT
Accounting records only those transaction
which can be expressed in terms of money.
transaction or event which can not be
expressed in money do not place in books of
accounts.
(HISTORICAL)COST CONCEPT
recording of an assets at there purchasing
price.
ACCOUNTING PERIOD CONCEPT
The life of the business is divided into equal
segments, for studying the results after each
segments.
The time/duration of business period is
twelve(12)months or a year.
Matching concept
Compare business expense of a particular
period with its relevant periods revenue.
Match the expenses with revenue

REALISATION CONCEPT
Record the revenue at the time of delivering
of product to the customer.
DUAL ASPECT CONCEPT
Every transaction has two aspect.
One what benefit business is receiving and
other what benefit business is giving.
ACCOUNTING
CONVENTIONS
CONVENTION OF DISCLOSURE
Disclose all the significant information.
All the material information is clearly
show/disclose, which are in the interest of its
users.
CONVENTION OF
MATERIALITY
Relevant importance of an item or event.
Simply, expensive transaction have place as
well as relatively important one.
CONVENTION OF CONSISTENCY
The accounting practice remain unchanged
from one year to another.
CONVENTION OF
CONSERVATISM
CAUTION APPROACH
POLICY OF PLAY SAFE
IGNORE ANTICIPATED PROFIT AND
ACCOUNT FOR ALL POSSIBLE LOSSES
BASIS OF ACCOUNTING
CASH BASIS OF
ACCOUNTING
Its a system in which
entries/recording are
made only when
cash/cheque is
received or paid.
ACCRUALS BASIS OF
ACCOUNTING:
Its a system in which
entries are made
when they occur.
FINANCIAL REPORTING
PROCESS
Provide information for;
Decision making
Sources and resources
Financial performance
In and out flow of cash

KIND OF FINANCIAL
STATMENTS
BALANCE SHEET
INCOME STATEMENT
CASH FLOW STATEMENT
CHANGE IN EQUITY STATEMENTS
NOTES
Most businesses prepare the following financial
statements to report accounting information:
1. Income Statement
2. Balance Sheet
3. Statement of Cash Flows
4. Statement of Stockholders Equity
5. Statement of Retained Earnings
Overview of Financial Statements
A Balance Sheet (Statement of
Financial Condition) identifies
a companys assets and claims
to those assets by creditors and
owners at a specific date.
(A = L + SE) (a snapshot)
Overview of Financial Statements
Company XYZZ
Balance Sheet
At December 31, 2006
Assets
Current assets:
Cash $ 12,600
Accounts receivable 9,600
Merchandise inventory 22,000
Supplies 800
Prepaid rent 1,000
Total current assets $ 46,000
Long-term (Fixed) Assets:
Property and equipment, at cost 300,000
Less Accumulated depreciation (60,000)
Total Long-term (Fixed) Assets $240,000
Total assets $286,000
Continued
Liabilities and Stockholders Equity
Current liabilities:
Accounts payable $ 8,500
Unearned revenue 3,800
Interest payable 700
Notes payable, current portion 4,000
Total current liabilities $ 17,000
Long-term liabilities:
Notes payable, long-term 80,000
Total liabilities $ 97,000
Stockholders equity:
Common stock 150,000
Retained earnings 39,000
Total stockholders equity $189,000
Total liabilities and stockholders equity $286,000
BALANCE SHEET
A lists of ASSETS,
LIABILITY and
OWNERS
EQUITY of bizness
as of a specific
date,usually at the
close of the last day of
a month or year.

Any properties & possessions
of the business.
CURRENT ASSETS:whose
benefits are for/in one
year.e.g.cash,bank,A/R,B/R,N/
R,STOCK etc.
FIXED ASSETS:whose
benefits are for more than one
year.e.g.
plant,machinery,furniture,fixture
,fittings,vehicles,building,land
etc.

KINDS OF FIXED ASSETS
TANGIBLE ASSETS:
THOSE WHICH HAVE
PHYSICAL
EXISTENCE,PROOF
WITH FIVE SENCES.
INTANGIBLE
ASSETS:
THOSE WHICH HAVE
NO PHYSICAL
EXISTANCE,e.g.good
will,patents,right,trad
emark,copy right etc.
LIABILITIES
Any debts and
obligation of the
business.
CURRENT
LIABILITIES:
FOR ONE
YEAR;e.g.credit,B/P,N
/P,creditors,b.o.d etc.
FIXED LIABILITIES:
FOR MORE THAN ONE
YEAR.e.g.loan,mortga
ge,capital.etc.
INCOME STATMENT
A summary of the REVENUE and
EXPENSES of a biz. For a specific period of
time,such a month or a year.
The I ncome Statement (Statement
of Earnings) reports revenues and
expenses for an accounting period
as a means of determining how well
a company has performed in
generating profits for its owners.
Overview of Financial Statements
Company XYZZ
Income Statement
For the Year Ended December 31, 2006
Sales revenue $700,500
Cost of goods sold (450,200)
Gross profit 250,300
Depreciation Expense (60,000)
Selling, general, & administrative exp. (90,300)
Operating income 100,000
Interest expense (5,000)
Pretax income 95,000
Income taxes (40% tax rate) (38,000)
Net income $ 57,000
Earnings per share
Average number of common shares 4,000
$ 14.25
STATEMENT OF CASH FLOW
A summary of CASH RECIEPT and CASH
PAYMENTS,i.e.operating,investing and
financing activities.of business for specific
date,month or a year.
STATEMENT OF OWNERS
EQUITY
A summary of the changes in owner's equity
of a biz. That have occurred during a specific
period of time,month or a year.
NOTES
ANY DETAIL OR EXPLATION OF ANY
ACCOUNT OR ITEMS ARE DENOTED
WITH NUMBERS IN ANNUAL REPORT,IT
IS QUALITATIVE DATA.
Assets
=
Liabilities
Stock-
holders
Equity
+
The Financial Obligations or
Debts of a Business
The Basic Accounting Equation
Economic Resources
Owned by a Business
Owners Claims on the
Assets of a Business
ACCOUNTING EQUATION
Like balance sheet but in form of equation.
RESOURCES = SOURCES
ASSETS = EQUTIES(LIABILITIES)
ASSETS = LIABILITIES + CAPITAL
A = L + O
DIFFERENT PROCEDURE FOR
ACCOUNTING EQUATION
A = L + O
L = A - O
O = A - L
EXPESES ARE ALWAYS LESS IN
OWNERS EQUITY
REVENUE ARE ALAYS ADD IN OWNERS
EQUITY
Single Entry Book-Keeping
In single entry book keeping system, as is clear from the name,
only one aspect of the transaction is recorded.
This actually is not a system but is a procedure by which small
business concerns, like retailers and small shopkeepers, keep
record of their sale / income.
In this system there are usually two to three registers Khata.
In one register cash received from customers is recorded whereas
the other one is a person-wise record of goods sold on credit
Udhar Khata. There may or may not be a register of suppliers to
whom money is payable.
Which means that only one aspect of transaction i.e. either cash
receipt or the fact that money is receivable from someone is
recorded.
Double Entry Book-Keeping
The concept of double entry is based on the fact that every
transaction has two aspects i.e. receiving a benefit and giving a
benefit.
The accounting system that records both the aspects of
transaction in the same books of accounts is called double
entry system.
The account that receives the benefit is debited and the account
that provides the benefit is credited.
Debit and Credit are denoted by Dr and Cr respectively.
The ultimate result of the system is that for every Debit (Dr) there
is an equal Credit (Cr).
HISTORY OF Dr. AND Cr.
Debit and credit are formal bookkeeping and
accounting terms that have opposite
meanings and come from Latin. Debit comes
from debere, which means "to owe". The Latin
debitum means "debt". Credit comes from the
Latin word credere, which means "to believe".
It is more common to use the terms in the
plural, Debits and Credits.
DEBIT is abbreviated as Dr., while credit is
abbreviated as Cr
Debit and Credit
But we can develop an understanding as to what does
these terms stand for.
DEBIT
It signifies the receiving of benefit. In simple words
it is the left hand side.
CREDIT
It signifies the providing of a benefit. In simple
words it is the right hand side.
Debit and Credit will be explained in details and with
examples in our future discussions.
Basic Principle of Double Entry
We can devise the basic principle of double
entry book-keeping from our discussion to this
point.
Every Debit has a Credit which means
that All Debits are always equal to All
Credits.
Account
An accounting system keeps separate record
of each item like assets, liabilities, etc. For
example a separate record is kept for cash
that shows increase and decrease in it.
This record that summarizes movement in
an individual item is called an Account.

Classification of Accounts
We have to date studied following classification of
accounts:
Assets,
Liabilities,
Income,
Expenses
Expenses can be further divided into capital and
revenue expenses.
We have already studied about these classifications
in different lectures but to refresh your memory we
will gather them at one place.
Assets, Liabilities
ASSETS
Assets are the properties and possessions of the
business.
LIABILITIES
Liabilities are the debts and obligations of the
business.
Liability is the obligation of the business to provide a
benefit or asset on a future date.

Asset is a right to receive and liability an obligation to
pay, therefore these are opposite to each other.
Rules of Debit and Credit
Any account that obtains a benefit is Debit.
OR
Anything that will provide benefit to the business is
Debit.
Both these statements may look different but in fact if
we consider that whenever an account benefits as a
result of a transaction it will have to return that benefit
to the business then both the statements will look like
different sides of the same picture.
Rules of Debit and Credit
For credit
Any account that provides a benefit is Credit.
OR
Anything to which the business has a responsibility to
return a benefit in future is Credit.
As explained in the case of Debit, whenever an
account provides benefit to the business the business
will have a responsibility to return that benefit at some
time in future and so it is Credit.
Rules of Debit & Credit for Assets
Similarly we have established that whenever a
business transfers a value / benefit to an account and
as a result creates some thing that will provide future
benefit; the thing is termed as Asset.
When an asset is created or purchased, value /
benefit is transferred to that account so it is Debited
i. Increase in Asset is Debit
if the asset is sold, which is termed as disposing off,
Therefore, the asset account is debit
ii. Decrease in Asset is Credit
Rules of Debit & Credit for Liabilities
When a liability is created the benefit is
provided to business by that account so it is
Credited
iii. Increase in Liability is Credit
When the business returns the benefit or repays
the liability, the liability account benefits form the
business so it is Debited
iv. Decrease in Liability is Debit
Rules of Debit & Credit for Expenses
the benefit from expenses is for a short run.
Therefore Expenditure is just like Asset but for
a short run.
Now we can lay down our rule for Expenditure:
i. Increase in Expenditure is Debit
Reversing the above situation if return any item that
we had purchased we will receive cash in return.
Cash account will receive benefit from that
Expenditure account. Therefore Expenditure
account will be credited
ii. Decrease in Expenditure is Credit
Rules of Debit and Credit for
Income/Capital
Income accounts are exactly opposite to
expense accounts just as liabilities are
opposite to that of assets.
Therefore using the same principle we can
draw our rules of Debit and Credit for Income
iii. Increase in Income is Credit
iv. Decrease in Income is Debit

NORMAL BALANCES
DEBIT FOR ASSETS AND
EXPENSES
CREDIT FOR INCOME,CAPITAL
AND LIABILITY