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Introduction To Accounting

This document provides an introduction to accounting. It defines accounting as recording, classifying, and summarizing financial transactions and events. Accounting involves identifying monetary events, measuring them in currency, classifying transactions, and preparing financial statements like the income statement and balance sheet to report results to users. The accounting process involves bookkeeping, accounting, and accountancy, with accountancy being the systematic knowledge of accounting principles. Financial statements like the income statement, balance sheet, and statement of cash flows are prepared using the accounting cycle and methods.

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62 views25 pages

Introduction To Accounting

This document provides an introduction to accounting. It defines accounting as recording, classifying, and summarizing financial transactions and events. Accounting involves identifying monetary events, measuring them in currency, classifying transactions, and preparing financial statements like the income statement and balance sheet to report results to users. The accounting process involves bookkeeping, accounting, and accountancy, with accountancy being the systematic knowledge of accounting principles. Financial statements like the income statement, balance sheet, and statement of cash flows are prepared using the accounting cycle and methods.

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INTRODUCTION TO ACCOUNTING

Dr. Pinku Paul


Associate Professor (Accounting and Finance)
Management Development Institute Murshidabad
Accounting
• Accounting is called as the language of business.

• American Institute of certified Public Accountants(AICPA) defines


Accounting as:
• “the art of recording, classifying and summarizing in a significant manner
and it terms of money, transactions and events which are in part at least of a
financial character and interpreting the results thereof”.
• Modern definition of Accounting as per the Institute of Chartered
Accountants of India (ICAI):
• “ to provide quantitative information, primarily financial in nature, about economic
entities that is intended to be useful in making economic decisions.”
Accounting Process
Identify the monetary events
(Select economic events and transaction)

Measure these events in financial terms


(Quantify in currency units - Rupees)

Classify these events / transactions


(Record in ledger / principal book)

Summarize these events / transactions


(Prepare Profit & Loss account and Balance Sheet)

Report these events in financial statements to users


(Communicating to interested parties)
Book-keeping, Accounting and Accountancy

• Book-Keeping is a process of recording


financial transactions and events in a clear and Accountancy
systematic manner.
• Accounting is the art of recording, classifying Accounting
and summarizing in a significant manner and it
terms of money, transactions and events which Book-
are in part at least of a financial character and keeping
interpreting the results thereof.
• Accountancy is the systematic knowledge of
accounting.
Accounting Cycle
Step – 1
Identification and Measurement

Step – 5 Step – 2

Preparing Financial Statement Recording of transactions


in journal

Step – 4 Step – 3
Preparing of Trial Posting from
Balance Journal to Ledger
Branches of Accounting

• Financial Accounting
• Cost Accounting
• Management Accounting
Financial Accounting

• To maintain systematic records


• To ascertain the profit/loss and health of the business
• To provide information for decision making
Cost Accounting

• Classification and analysis of cost for cost management


• Helps in controlling the costs and providing necessary costing information
to management for decision making.
Management Accounting

• Covers the generation of accounting information for management


decisions.
Financial Statements

The summarized results of your business financial transactions over a


designated period of time.

They will show total income, expenses, cash balances, level of debt, and much
more.

But where does this information come from?


Accounts are the categories into which the effects of transactions are recorded, and from which
financial reports are created.

5 major account categories :

Income Statement Balance Sheet

Income Expenses Assets Liabilities Equity


Net worth /
Proceeds Costs of What you What you level of
from sales operation own owe investment

Operations Financial Position


METHODS OF RECORDING
• Accrual method of accounting
• Records revenue and expenses when they occur, not necessarily when cash changes
hands. This method reports revenues when they are earned (as opposed to when the
cash is received) and reports expenses when they occur (as opposed to when they are
paid).
• Cash method of accounting
• This method reports revenues when cash is received (as opposed to when the
revenues are earned) and reports expenses when they are paid (as opposed to when
they occur).
• Fundamental Accounting equation :
Resources of the business = Sources of the
business

Or, Assets = Equities

Or, Assets = Liabilities + Capital / owners’


equity
Or, Assets = Liabilities + Capital + Income -
Expenses
The Big Three
Balance Sheets
• How much debt do I have? How large are my assets? This sheet tells you the answer to these
questions.

Income Statement
• This is the financial sheet that tells you if your company is profitable or not.

The Statement of Cash Flows


• These answer the important managerial question “do I have enough cash to run my business”
The Income Statement
Income statement Financial record of a company’s revenues,
expenses, and profits over a period of time.

• Helps decision makers focus on overall revenues and the costs


involved in generating these revenues.

• Sometimes called a profit-and-loss, or P&L, statement.


Revenues in Income Statement

Gross sales - Sales returns= Net sales/Revenue from operations

Other Income
Expenses on Income Statement
• Cost of goods sold
• Net sales - Cost of goods sold
= Gross Margin
• Selling , general, and administrative expenses.
• Separate disclosure of:
• Research & development expenses.
• Interest expense.
The Balance Sheet

• Balance sheet Statement of a firm’s financial


position—what it owns and the claims against its
assets—at a particular point in time.
Assets - Resource with economic value that an
individual, corporation owns or controls with
the expectation that it will provide future benefit

Non-Current
Current Assets
Assets

Intangible Assets
Current Assets: The value of all assets that can reasonably expect to be
converted into cash within one year.
• Cash
• Marketable securities/ short Term Investments
• Inventory
• Accounts Receivables, etc.

Non-Current Assets/ Fixed Assets: Assets enable their owner for the long
term to carry on its operations. Any asset expected to last, or be in use for, more
than one year.
• Plant, Equipment, Machinery
• Building, Land
• Furniture and fixtures
• Electronics Devices-Computer, Printer, etc.
Liabilities: Legal financial debts or
obligations that arise during business
operations

Non-
Current Liabilities Current/Long
term Liabilities
Current Liabilities: Company's debts or obligations that are due within one year or
within a normal operating cycle.
• Account payables
• Short term loans
• Taxes payable
• Outstanding expenses, etc.

Long term Liabilities: Company's debts or obligations that are due more than one
year.
• Long term debts
• Bonds
• Debentures, etc.
Owners’ Equity
• Amount owners have invested in the entity.
• For a corporation:
• Shareholders’ or stockholders’ equity.
• Shares of stock evidence ownership interest.
Paid up/ Contributed Capital
Retained earnings: The net earnings after dividends are available for
reinvestment in the company's core business or to pay down its debt.
CASH FLOW STATEMENT / STATEMENT OF
CASH FLOW
• Shows the historical changes in Cash & CE
• Statement of cash receipts and payments that presents the
information on its sources and uses of cash during a
particular period.
• Operating, Investing & Financing activities
Thank You

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