What is Accounting?
Accounting is a process of identifying, recording, summarizing and reporting economic information
to decision makers in the form of financial statements. Financial statements will be useful to
the following parties:
Suppliers
Customers
Employees
Banks
Suppliers of equipments, buildings and other assets
Lenders
Owners
Types of Accounts
There are basically three types of Accounts maintained for transactions :
Real Accounts
Personal Accounts
Nominal Accounts
Real Accounts
Real Accounts are Accounts relating to properties and assets, which are owned by the business
concern. Real accounts include tangible and intangible accounts. For example,
Land
Building
Goodwill
Purchases
Cash
Personal Accounts are Accounts which relate to persons. Personal Accounts include the following.
Suppliers
Customers
Lenders
Nominal accounts
Nominal Accounts are Accounts which relate to incomes and expenses and gains and losses of a
business concern. For example,
Salary Account
Dividend Account
Sales
Golden Rules of Accounting
Real Accounts – Debit What Comes in Credit What Goes out
Personal Accounts Debit The Receiver Credit The Giver
Nominal Accounts- Debit Expenses and Losses Credit Incomes and Gains
Golden Rules of Accounting
Real Accounts – Debit What Comes in Credit What Goes out
Personal Accounts Debit The Receiver Credit The Giver
Nominal Accounts- Debit Expenses and Losses Credit Incomes and Gains
Double Entry System of Book Keeping
As per Double Entry System of book-keeping, all the business transactions recorded in accounts
have two aspects – Debit aspect (receiving) and Credit aspect (giving). For example, when a
business acquires an asset (receiving) and pays cash (giving) for it. This accounting technique
records each transaction as debit and credit, where every debit has a corresponding credit and vice versa.
Features of Double Entry System of Book Keeping
The Double entry system of book keeping comprises of the following features :
Every business transaction affects two accounts
Each transaction has two aspects, i.e., debit and credit
Maintains a complete record of all business transactions
Helps to check the accuracy of the accounting transactions, by preparation of trial balance
Helps ascertaining profit earned or loss occured during a period, by preparation of Profit &
Loss Account
Helps ascertaining financial position of the concern at the end of each period, by preparation of Balance Sheet Helps timely decision making based on sufficient information
Minimises the possibilities of fraud due to its systematic and scientific recording of business transactions
Mode of Accounting
Accounting process begins with identifying and recording the transactions in the books of
accounts i.e., the first step in the Accounting Process is recording of transactions in the books of
accounts. Accounting identifies only those transactions and events which involves money and is
sorted based on various source documents.
The following are the most common source documents.
Cash Memo
Invoice or Bill
Vouchers
Receipt
Debit Note
Credit Note
Voucher
A voucher is a document in support of a business transaction, containing the details of such transaction.
Receipt
When a trader receives cash from a customer against goods sold by him, issues a receipt containing
the name of such customer, details of amount received with date.
Invoice or Bill
When a trader sells goods to a buyer, he prepares a sales invoice containing the details of name
and address of buyer, name of goods, amount and terms of payments and so on. Similarly, when
the trader purchases goods on credit receives a Invoice/bill from the supplier of such goods.
Journals and Ledgers
A journal is a record in which all business transactions are entered in a chronological order. A
record of a single business transaction is called a journal entry. Every journal entry is supported
by a voucher, evidencing the related transaction
Account
An account is a statement of transactions affecting any particular asset, liability, expense or
income.
Ledger
A Ledger is a book which contains all the accounts whether personal, real or nominal, which are entered in journal or subsidiary books.
Chart of Accounts
A chart of accounts is a list of all accounts used by an organisation. The chart of accounts also displays the categorisation and grouping of its accounts.
Posting
Posting is the process of transferring the entries recorded in the journal or subsidiary books to the respective accounts opened in the ledger i.e., grouping of all the transactions relating to a particular account to a single place.
Accounting Period
Generally, the financial statements are generated for a regular period such as a quarter or a year, for timely and accurate ascertainment of operating and financial position of the organisation.
Trial Balance
Trial balance is a statement which shows debit balances and credit balances of all Ledger
accounts. As per the rules of double entry system, every debit should have a corresponding credit, the total of the debit balances and credit balances should agree. A detailed trial balance has columns for Account name Debit balance Credit balance
Financial Statements
Financial statements are final result of accounting work done during the accounting period.
Financial statement serves a significant purpose to users of accounting information in knowing about the profitability and financial position of the organisation. Financial statements normally include Trading Profit and Loss Account Balance Sheet Trading Account Trading refers to buying and selling of goods. The trading account displays the transactions pertaining to buying and selling of goods.
The difference between the two sides of the Trading Account indicates either Gross Profit or Gross Loss. If the credit side total is in excess of the debit side total, the difference represents Gross Profit. On the other hand, if the total of the debit side is in excess of the credit side total, the difference represents Gross Loss. Such Gross Profit / Gross Loss is transferred to Profit & Loss
Account. The Gross Profit is expressed as :
Gross Profit = Net Sales – Cost of Sales
Profit and Loss Account
The profit and loss account helps to ascertain the net profit earned or net loss suffered during a particular period. after considering all other incomes and expenses incurred over a period. This helps the company to monitor and control the costs incurred and improve its efficiency. In other words, the profit and loss statement shows the performance of the company in terms of profits or losses over a specified period.
The Net Profit is expressed as :
Net Profit = (Gross Profit + Other Income) – (Selling and Administrative Expenses + Depreciation
+ Interest + Taxes + Other Expenses)
A key element of the Profit and Loss Account, and one that distinguishes it from a balance sheet, is that the amounts shown on the statement represent transactions over a period of time, whilethe items represented on the balance sheet show information as on a specific date.
All revenue and expense accounts are closed once the profit and loss account is prepared. The Revenue and Expenses accounts will not have an opening balance for the next accounting period.
Balance Sheet
The balance sheet is a statement that summarises the assets and liabilities of a business. The
excess of assets over liabilities is the net worth of a business. The balance sheet provides information
that helps in assessing
A company’s Long-term financial strength
A company’s Efficient day-to-day working capital management
A company’s Asset portfolio
A company’s Sustainable long-term performance
The balances of all the real, personal and nominal (capital in nature) accounts are transferred
from trial balance to balance sheet and grouped under the major heads of assets and liabilities.
from trial balance to balance sheet and grouped under the major heads of assets and liabilities.
The balance sheet is complete when the net profit/ loss is transferred from the Profit and Loss account.
Transactions
A transaction is a financial event that takes places in the course or furtherance of business and effects the financial position of the company. For example, when you deposit cash in the bank, your cash balance reduces and bank balance increases or when you sell goods for cash, your cash balance increases and your stock reduces.
Transactions can be classified as follows :
Receipts – cash or bank
Payments – cash or bank
Purchases
Sales
Recording Transactions
The important aspect of accounting is to record transactions promptly and correctly to ascertain
the financial status of a company as on a particular date.
Generally, the business transactions may be of the folowing nature :
Purchase of goods either as raw materials for processing or as finished goods for resale
Payment of expenses incurred towards business
Sale of goods or services
Receipts (in Cash or by Cheques)
Payments (in Cash or Cheques)
The Accounting information is useful to various interested parties, both internal and external viz.,
Suppliers, who supply goods and services for cash or on credit
Customers, who buy goods or services for cash or on credit
Employees, who provide services in exchange of salaries and wages.
Banks, with whom accounts are maintained
Suppliers of equipment, buildings and other assets needed to carry on the business.
Lenders from whom, you borrow money to finance your business
Owners, who hold a share in the capital of your business
Thanks
Accounting is a process of identifying, recording, summarizing and reporting economic information
to decision makers in the form of financial statements. Financial statements will be useful to
the following parties:
Suppliers
Customers
Employees
Banks
Suppliers of equipments, buildings and other assets
Lenders
Owners
Types of Accounts
There are basically three types of Accounts maintained for transactions :
Real Accounts
Personal Accounts
Nominal Accounts
Real Accounts
Real Accounts are Accounts relating to properties and assets, which are owned by the business
concern. Real accounts include tangible and intangible accounts. For example,
Land
Building
Goodwill
Purchases
Cash
Personal Accounts are Accounts which relate to persons. Personal Accounts include the following.
Suppliers
Customers
Lenders
Nominal accounts
Nominal Accounts are Accounts which relate to incomes and expenses and gains and losses of a
business concern. For example,
Salary Account
Dividend Account
Sales
Golden Rules of Accounting
Real Accounts – Debit What Comes in Credit What Goes out
Personal Accounts Debit The Receiver Credit The Giver
Nominal Accounts- Debit Expenses and Losses Credit Incomes and Gains
Golden Rules of Accounting
Real Accounts – Debit What Comes in Credit What Goes out
Personal Accounts Debit The Receiver Credit The Giver
Nominal Accounts- Debit Expenses and Losses Credit Incomes and Gains
Double Entry System of Book Keeping
As per Double Entry System of book-keeping, all the business transactions recorded in accounts
have two aspects – Debit aspect (receiving) and Credit aspect (giving). For example, when a
business acquires an asset (receiving) and pays cash (giving) for it. This accounting technique
records each transaction as debit and credit, where every debit has a corresponding credit and vice versa.
Features of Double Entry System of Book Keeping
The Double entry system of book keeping comprises of the following features :
Every business transaction affects two accounts
Each transaction has two aspects, i.e., debit and credit
Maintains a complete record of all business transactions
Helps to check the accuracy of the accounting transactions, by preparation of trial balance
Helps ascertaining profit earned or loss occured during a period, by preparation of Profit &
Loss Account
Helps ascertaining financial position of the concern at the end of each period, by preparation of Balance Sheet Helps timely decision making based on sufficient information
Minimises the possibilities of fraud due to its systematic and scientific recording of business transactions
Mode of Accounting
Accounting process begins with identifying and recording the transactions in the books of
accounts i.e., the first step in the Accounting Process is recording of transactions in the books of
accounts. Accounting identifies only those transactions and events which involves money and is
sorted based on various source documents.
The following are the most common source documents.
Cash Memo
Invoice or Bill
Vouchers
Receipt
Debit Note
Credit Note
Voucher
A voucher is a document in support of a business transaction, containing the details of such transaction.
Receipt
When a trader receives cash from a customer against goods sold by him, issues a receipt containing
the name of such customer, details of amount received with date.
Invoice or Bill
When a trader sells goods to a buyer, he prepares a sales invoice containing the details of name
and address of buyer, name of goods, amount and terms of payments and so on. Similarly, when
the trader purchases goods on credit receives a Invoice/bill from the supplier of such goods.
Journals and Ledgers
A journal is a record in which all business transactions are entered in a chronological order. A
record of a single business transaction is called a journal entry. Every journal entry is supported
by a voucher, evidencing the related transaction
Account
An account is a statement of transactions affecting any particular asset, liability, expense or
income.
Ledger
A Ledger is a book which contains all the accounts whether personal, real or nominal, which are entered in journal or subsidiary books.
Chart of Accounts
A chart of accounts is a list of all accounts used by an organisation. The chart of accounts also displays the categorisation and grouping of its accounts.
Posting
Posting is the process of transferring the entries recorded in the journal or subsidiary books to the respective accounts opened in the ledger i.e., grouping of all the transactions relating to a particular account to a single place.
Accounting Period
Generally, the financial statements are generated for a regular period such as a quarter or a year, for timely and accurate ascertainment of operating and financial position of the organisation.
Trial Balance
Trial balance is a statement which shows debit balances and credit balances of all Ledger
accounts. As per the rules of double entry system, every debit should have a corresponding credit, the total of the debit balances and credit balances should agree. A detailed trial balance has columns for Account name Debit balance Credit balance
Financial Statements
Financial statements are final result of accounting work done during the accounting period.
Financial statement serves a significant purpose to users of accounting information in knowing about the profitability and financial position of the organisation. Financial statements normally include Trading Profit and Loss Account Balance Sheet Trading Account Trading refers to buying and selling of goods. The trading account displays the transactions pertaining to buying and selling of goods.
The difference between the two sides of the Trading Account indicates either Gross Profit or Gross Loss. If the credit side total is in excess of the debit side total, the difference represents Gross Profit. On the other hand, if the total of the debit side is in excess of the credit side total, the difference represents Gross Loss. Such Gross Profit / Gross Loss is transferred to Profit & Loss
Account. The Gross Profit is expressed as :
Gross Profit = Net Sales – Cost of Sales
Profit and Loss Account
The profit and loss account helps to ascertain the net profit earned or net loss suffered during a particular period. after considering all other incomes and expenses incurred over a period. This helps the company to monitor and control the costs incurred and improve its efficiency. In other words, the profit and loss statement shows the performance of the company in terms of profits or losses over a specified period.
The Net Profit is expressed as :
Net Profit = (Gross Profit + Other Income) – (Selling and Administrative Expenses + Depreciation
+ Interest + Taxes + Other Expenses)
A key element of the Profit and Loss Account, and one that distinguishes it from a balance sheet, is that the amounts shown on the statement represent transactions over a period of time, whilethe items represented on the balance sheet show information as on a specific date.
All revenue and expense accounts are closed once the profit and loss account is prepared. The Revenue and Expenses accounts will not have an opening balance for the next accounting period.
Balance Sheet
The balance sheet is a statement that summarises the assets and liabilities of a business. The
excess of assets over liabilities is the net worth of a business. The balance sheet provides information
that helps in assessing
A company’s Long-term financial strength
A company’s Efficient day-to-day working capital management
A company’s Asset portfolio
A company’s Sustainable long-term performance
The balances of all the real, personal and nominal (capital in nature) accounts are transferred
from trial balance to balance sheet and grouped under the major heads of assets and liabilities.
from trial balance to balance sheet and grouped under the major heads of assets and liabilities.
The balance sheet is complete when the net profit/ loss is transferred from the Profit and Loss account.
Transactions
A transaction is a financial event that takes places in the course or furtherance of business and effects the financial position of the company. For example, when you deposit cash in the bank, your cash balance reduces and bank balance increases or when you sell goods for cash, your cash balance increases and your stock reduces.
Transactions can be classified as follows :
Receipts – cash or bank
Payments – cash or bank
Purchases
Sales
Recording Transactions
The important aspect of accounting is to record transactions promptly and correctly to ascertain
the financial status of a company as on a particular date.
Generally, the business transactions may be of the folowing nature :
Purchase of goods either as raw materials for processing or as finished goods for resale
Payment of expenses incurred towards business
Sale of goods or services
Receipts (in Cash or by Cheques)
Payments (in Cash or Cheques)
The Accounting information is useful to various interested parties, both internal and external viz.,
Suppliers, who supply goods and services for cash or on credit
Customers, who buy goods or services for cash or on credit
Employees, who provide services in exchange of salaries and wages.
Banks, with whom accounts are maintained
Suppliers of equipment, buildings and other assets needed to carry on the business.
Lenders from whom, you borrow money to finance your business
Owners, who hold a share in the capital of your business
Thanks
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