Accounting Cycle
Accounting Equation
Journal Entries (Modern Method)
By
Sowmya T S
History of Accounting
• As old as human civilization
• Important for Secular and Religious institution. Ex: In temples, at the end of the day the
temple administrator used to read out the list of receipts and payments.
• Accounting helps us to tell stories of human beings and organization
Business
Organizations
• People come together to
accomplish a set of
objectives for the
common benefit of all.
• Need accounting to carry
on their activities.
• Cash generating and
dispensing machines
Accounting in Business
• Main objective is to give information for decision-making
Activity
• 9 Roles (Users of accounting information)
• Each Student will be assigned one of the roles.
• Each student need to tell how accounting information is useful in
his/her decision-making in the given role.
• Preparation : 2-5 mins.
• Presentation : 1 min.
Test your
Understanding
Describe the business of the following
organizations:
a. Airbnb - Online Market place for lodging
& tourism activities
b. Paytm - Mobile payment and FS co.
c. Selco India - for profit social enterprise
d. The Lending Club - financial service
company
e. Healthcare Global – Health care orgn
f. Bombay Dyeing - Textile business
Accounting Concepts / Principles
• Accrual, - an accounting method where revenue or expenses are recorded when a transaction occurs
versus when payment is received or made.
• Going concern, - In accounting, a business is expected to continue for a fairly long time and carry out
its commitments and obligations.
• Historical cost, - The fixed assets of a business are recorded on the basis of their original cost in the
first year of accounting. Subsequently, these assets are recorded minus depreciation. No rise or fall in
market price is taken into account. The concept applies only to fixed assets.
• Money measurement, - a business should only record an accounting transaction if it can be expressed
in terms of money.
• Periodicity, - Each business chooses a specific time period to complete a cycle of the accounting
process—for example, monthly, quarterly, or annually—as per a fiscal or a calendar year.
• Prudence, - the practice of ensuring that the company is not overvalued, by preventing the income
and assets from being overstated in the company's reporting.
Accounting Concepts / Principles
• Conservatism, - recognizing expenses and liabilities as soon as possible when there is
uncertainty about the outcome, but to only recognize revenues and assets when they are
assured of being received.
• Neutrality, - financial statements must be free from errors or from other missions.
Financial statements cannot be prepared with the purpose to influence certain decisions,
i.e. they might be neutral.
• Comparability, - the level of standardization of accounting information that allows the
financial statements of multiple organizations to be compared to each other.
• Materiality - all items that are reasonably likely to impact investors' decision-making
must be recorded or reported in detail in a business's financial statements using GAAP
standards.
Accounting Equation
• This equation sets the foundation of
double-entry accounting, also known as
double-entry bookkeeping, and
highlights the structure of the balance
sheet. Double-entry accounting is a
system where every transaction affects
at least two accounts.
Accounting Equation:
TOTAL ASSETS = LIABILITIES + EQUITY
• Assets: resources that gives benefits to the owners. “Receivables”
Tangible: physical, can be seen and touched
Intangible: cannot be seen and touched
• Liability: an obligation that requires to be settled. Ex: Bonds, Trade payables (precise amounts),
income tax payable (to be estimated). “Payables”
• Equity: Net Assets. The difference between assets and its liabilities. “Residual”
The activities of a business result in Revenues & Expenses.
Revenues: amount charged to customers for providing good and services.
Expenses: cost of earning revenue.
Dividends: distribution to shareholders.
Profits, Revenues increases Equity
Losses, expenses, dividends, share buybacks decrease Equity
Numericals (2.1, 2.4, 2.6, 2.8)
Practice Session BDC 2.2: MoneyCare Company
Pg 71
CASE STUDY
• Ribbons & Bows Case
