Basics of Accounting

Contents

• Introduction to Accounting
  • Meaning and importance
  • Functions of accounting
  • Accounting Cycle
  • Differences between Book-keeping, Accounting and Accountancy
  • Objectives of Accounting
• Sub-disciplines within Accounting
  • Financial accounting
  • Cost accounting
  • Management accounting
• Accounting as an Art and Science
• Advantages and Disadvantages
• Types of Accounting Information
• Basic Accounting Terms
• Accounting Principles
• Bases of Accounting
• Accounting Equation
• Rules of Debit and Credit
• Journal and Ledger
• Subsidiary Books and Cash Book
• Trial Balance and Rectification of Errors
• Financial Statement of Sole Proprietorship

Introduction to Accounting

• Businesses aim to earn profits, assess financial status annually.
• Accounting records transactions to provide financial clarity and aid decision-making.

Meaning of Accounting

• Definition: Process of identifying, recording, classifying, summarizing, interpreting, and communicating financial information.
• Functions:
  1. Identifying financial transactions.
  2. Recording systematically in journals.
  3. Classifying transactions into ledgers.
  4. Summarizing into reports like profit & loss, balance sheets.
  5. Analyzing financial strength.
  6. Interpreting results for decision-making.
  7. Communicating to stakeholders.

Accounting Cycle

• Holistic process from transaction recording to financial statement representation.
• Main stages:
  1. Transactions
  2. Journal Entries
  3. Posting to General Ledger
  4. Trial Balance
  5. Financial Statements

Book-keeping, Accounting, and Accountancy

• Book-keeping: Recording monetary transactions.
• Accounting: System for processing financial information beyond book-keeping.
• Accountancy: Systematic knowledge of accounting principles and techniques.

Objectives of Accounting

1. Systematic record of transactions to prevent omission and fraud.
2. Calculate profit/loss.
3. Ascertain financial position via balance sheet.
4. Provide information to stakeholders.

Sub-disciplines

• Financial Accounting: Records financial transactions and prepares financial reports.
• Cost Accounting: Analyzes costs for controlling expenditures.
• Management Accounting: Uses financial data for managerial decision-making.

Accounting as Art and Science

• Science: Systematic path with principles and standards.
• Art: Application of techniques and methods.

Advantages and Disadvantages of Accounting

• Advantages:
  • Protects assets.
  • Helps tax settlement.
  • Replaces memory with records.
  • Facilitates comparative studies and loans.
• Disadvantages:
  • Ignores qualitative elements.
  • Based on historical costs.
  • Not fully exact due to estimates.

Types of Accounting Information

• Profit Information: Income statements reflect profits or losses.
• Financial Position: Balance sheets show assets and liabilities.
• Cash Flow: Statements show cash inflow/outflow.

Basic Accounting Terms

• Capital: Investment by proprietor.
• Assets & Liabilities: Classification and examples.
• Transaction vs. Event: Transactions affect financial position; events result from transactions.

Accounting Principles

• GAAP: Framework for financial reporting.
• Key Concepts:
  • Separate Business Entity
  • Money Measurement
  • Dual Aspect
  • Going Concern
  • Historical Cost
  • Matching
  • Accrual

Bases of Accounting

• Cash Basis: Simpler but less accurate.
• Accrual Basis: Complete financial picture.

Accounting Equation

• Equation: Assets = Liabilities + Capital
• Changes reflect on account balances but equation holds.

Rules of Debit and Credit

• Classification of accounts: Personal, Real, Nominal.

Journal and Ledger

• Journal: Book of original entry, records transactions chronologically.
• Ledger: Compilation of account balances from journal entries.

Subsidiary Books

• Specialized journals for large businesses.
• Types: Purchase, Purchase Returns, Sales, Sales Returns.

Cash Book

• Records cash transactions; serves dual role as journal and ledger.

Trial Balance and Rectification of Errors

• Trial Balance: Checks arithmetical accuracy of ledger.
• Errors: Types and methods of rectification.

Financial Statement of Sole Proprietorship

• Components:
  • Trading Account
  • Profit and Loss Account
  • Balance Sheet
• Shows profitability and financial position at period end.