Unit -1

Fundamentals
of Accounting
 Meaning of Accounting
• Accounting is the practice of maintaining precise records of the financial
dealings of the business. It consists of identifying business transactions,
recording them and summarizing the same in such a way that important
financial information can be communicated to the stakeholders of the
business.

• It is also called as ‘Language of Business.’

• Stakeholders refers to an individual or group who have an interest in the

business or an organization. They include Owners, Management,
Employees, Investors, Suppliers, Customers, Government authorities and
lending institutions.
Terminologies in Accounting
Accounting Term Meaning

Transaction A business event having a monetary impact on financial statements of a business.

(Includes cash and credit transactions) Ex: Sales in Cash to customers
Cash Transaction: Money is immediately received or paid in the form of cash
Credit Transaction: Money is paid later but the benefits are enjoyed immediately
Account Summarized record of transactions relating to a particular head at one place
Capital Amount invested by the proprietor or partner in the business. Represents a liability of the business
towards the proprietor or partner
Drawings Amount of cash or any asset withdrawn by the owner of the business for his personal or domestic
use
Liabilities Refers to the amount payable by the business to outsiders and to the proprietors. Includes Current
and Non-current Liabilities.
1. Current Liability: Liabilities which are payable within a year ex: bills payable, short-term loans
etc.
2. Non-Current Liabilities: Liabilities Payable after a long period (more than a year). Ex: Long
term loans
Asset Resource or Property having a monetary/economic value possessed by an individual or an entity
which is capable of producing some future economic benefit. Includes current assets, fixed assets
(includes tangible and intangible assets)
Expenses Costs a company incurs to generate revenue. Ex: Wages, Rent, Electricity Bill. Includes Prepaid expenses,
Outstanding expenses, Direct expense and Indirect Expense.
Revenue Money a company earns from sale of goods and services

Income Profit earned during a period of time.

Income =Revenue -Expense
Purchases Buying goods for resale purpose. Includes Cash and Credit Purchases.
1)Cash Purchases: Purchase of goods by paying cash
2)Credit Purchases: Purchase of goods on credit
Sales Sale of goods by the firm. Includes cash and credit sales.
1)Cash Sales: Goods are sold for cash
2)Credit Sales: Goods are sold on credit
Purchase Return Goods purchased may be returned due to any reason such as it may be defective or not as per the
specifications
Sales Return Goods sold which are returned by the purchaser is termed as Sales Returns

Stock Tangible asset held by the enterprise for the purpose of sale in the ordinary course of Business. Includes
opening stock (Stock in hand at the beginning of accounting year) and closing stock (Stock in hand at the end
of the accounting year)
Debtors A person who receives benefits from the business immediately but is obligated to pay for the same
in future. Ex: A buyer who buys goods on credit becomes a debtor for the business

Creditor A person who provides benefit without receiving immediate payment for the same and who will
claim the payment in future is called as Creditor. Ex: When business purchase goods on credit from
a supplier the suppliers becomes the creditor
Bills Payable Bills payable also called as accounts payable refers to the total amount the company is liable pay
and is shown under ‘Sundry Creditors’ in Balance sheet

Bills Receivable Amount that the company is entitled to receive from its customers for the goods and services sold on
credit and this is shown under ‘Sundry Debtors’ in Balance sheet

Voucher Evidence of a business transaction

Trade Discount and Cash Discount Trade Discount refers to the fixed discount given to the buyers to persuade them to make larger
orders. On the other hand cash discounts refers to the reduction in the price that the seller offers to
the buyer who pays the bill before the due date.
Depreciation Reduction in the value of the asset because of usage of passage of time and is associated with fixed
assets

Amortization Reduction in the value of intangible assets over its useful life

Bad Debt Amount which has become irrecoverable

Types of Accounts and Golden Rules of Accounting
 Concepts of Accounting
• Accrual Concept
-Requires income and expenses to be recorded when they become receivable or payable rather than when they are collected
or paid ex; A seller bills the buyer at the time of sale and treats the bill amount as revenue even though payment might be
received later.
• Dual Aspect Concept
-Every transaction has two aspects i.e debit and credit. Thus, every transaction should be recorded in such a way that its
effect is reflected in two places in business books of accounts.
• Full disclosure Concept
-Financial records should provide a true and fair view of the business financial position.
• Historical Cost Concept
-Assets to be recorded at the price paid during their purchase and not at their current market value.
• Matching Concept
-Revenue and cost incurred should belong to the same period and hence they need to be matched.
• Revenue Realization Concept
- Revenue is considered as the income earned on the date when it is received. Does not include unearned
revenue.
• Verifiable and Objective Evidence Concept
-All transactions needs to be supported with a documentary evidence
Ex:Sale of land should have an evidence of sale deed
Financial Statements
• Financial Statements refer to the reports prepared to evaluate the performance, financial health and liquidity position of the
business and they are prepared using the transactions accounted in books of account.
• Such statement are prepared annually after the closure of accounting period.
• They are used by internal users such as management, employees etc and External users such as Regulatory Authorities,
Banks, Investors etc.

Types of Financial statement include:

1)Trading account
2)Profit and Loss Account
3)Balance sheet
4)Cash Flow statement
Trading Account
• This account displays the transactions related to buying and selling of goods. It is prepared
to find out the gross profit(Credit side total is more than debit side total) or gross loss
(Debit side total is more than credit side total) of the business for a particular accounting
period.
• Such Gross profit or gross loss is transferred to Profit and Loss Account.

Formula: Gross Profit/ Loss=Net Sale –Cost of goods sold

Where,
Net Sales=Total sale(cash sale+credit sale)-Sales Returns
COGS=Opening stock +Net Purchase+Direct Expense-Closing Stock (where net purchase is
Purchases-Purchase Return-Purchase Discounts)
Profit and Loss Account
• Helps to ascertain the net profit earns or net loss incurred during a particular
period. This statement shows the performance of the company in terms of profit
or losses over a specified period.
• Summarizes the revenues, cost and expenses incurred by the business during the
year.

Net profit=(Gross profit+Other Income)-(Selling and Administration

Expenses+Depreciation+Interest+Taxes+Other Expenses)
 Balance Sheet
A financial statement that shows the details of assets, liabilities and owner’ equity of a firm at a
given point of time.
Computerized
Accounting –
Meaning

Computerized accounting
refers to the process of
carrying out accounting
functions or processes using
computers. It involves
recording and analyzing
financial transactions
electronically over
accounting software.
Components of Computerized
Accounting Software

• Preparation of Accounting Documents

Computers helps in preparing account documents
like cash memos, bills and invoices and prepares
accounting vouchers.
• Recording of Transaction
Computers help in recording day to day business
transaction and simplifies the process of recording
transaction.
• Preparation of trial balance and Financial
Statements
Post recording the transaction the data is
automatically transferred to ledger accounts and next
the Trading accounting, Profit and Loss account and
Balance sheet will be generated.
Why Computerized Accounting is needed?

Voluminous Transaction Speed and Accuracy

Computerized Accounting Software is capable of Computerized accounting stores ad processes
handling large number of transactions accounting transactions at a faster speed and is
highly accurate
Reduces Clerical Work

Computerized accounting software stores data electronically and this

can be retrieved as when as required. This helps in reducing cost of
maintaining large physical storage for accounting books and records.

Flexible and Instant Reporting

• Computerized accounting is capable of generating and printing instant
reports for any period or duration as and when required.
•

Security

• Highly Secured and Safe as only authorized users are permitted to access
accounting information
 BASIS FOR
MANUAL ACCOUNTING COMPUTERIZED ACCOUNTING
COMPARISON

Meaning Manual Accounting is a system of accounting that uses Computerized Accounting is an accounting system that
physical registers and account books, for keeping uses an accounting software, for recording financial
financial records. transactions electronically.

Recording Recording is possible through book of original entry. Data content is recorded in customized database.

Calculation All the calculation is performed manually. Only data input is required, the calculations are
performed by computer system.

Speed Slow Comparatively faster.

Backup Not possible Entries of transactions can be saved and backed up

Trial Balance Prepared when necessary. Instant trial balance is provided on daily basis.

Financial It is prepared at the end of the period, or quarter. It is provided at the click of button.
Statement
Recording of Business Transaction in Books of Original
Entry

Journal also termed as Books of Original Entry is a

day book or daily record wherein the transactions
are recorded in chronological order i.e. as and when
they occur. The act of recording a transaction in the
journal is called Journalizing.
Recording of Business Transaction in a Journal
A) Simple Journal Entry
A Journal entry where one account is debited and other account is credited.
Ex: As on 30th April 2017 sold goods to Akash Enterprises on credit at
Rs. 15000

Date Particular L.F Dr. Cr.

Apr 30 2017 Akash Enterprises A/c Dr 15000
To Sales A/c 15000
(Being goods sold to Akash on Credit)
B) Compound Journal Entry
A journal entry where more than one debit account, more than one credit account or more than one of the debit
or credit accounts are involved in the transactions on the same date relating to one particular account is termed
as compound entry
Ex.

Date Particulars LF Debit Credit

Apr 30,2017 Telephone Bill A/C Dr 10000
Stationary Expenses A/C Dr 10000
Travelling Expense A/C Dr 10000
To Cash A/c 30000
(Being expenses paid through cash)
Ledger

Referred to as books of secondary entry. It

is defined as books of final entry
containing all accounts of a business or all
the accounts of a particular type.
 SUBSIDIARY BOOKS AND CONTROL ACCOUNTS

• Subsidiary books are books of original entry that record transactions of similar nature,
such as sales, purchases, cash, etc.
• A control account is a general ledger account created to record the bulk transaction of the
same nature and then summarize the balance. It is transferred from the subsidiary account.
• Includes Cash book, Purchases Book, Purchase Return(Return Outwards) book, Sales
Book, Sales Returns(Return Inwards) book and Journal Proper .
• Cash Book- It is a book which records the receipts and payment of cash transaction.
• Purchase Book- It is a book which records all the credit purchases of goods of the
company. Does not include purchase of assets and cash purchase since cash
purchase will be entered in cash book
• Purchase Return Book- It is a book which records all the return of credit purchases
of goods of the company.
• Sales Book- It is a book which records all the credit sales of goods of the company.
• Sales Return Book- It is a book which records all the return of credit sales of goods
of the company.
• Bills Receivable Book- It is a book which records all the bills receivable.
• Bills Payable Book- It is a book which records all the bills payable.
• Journal Proper- All the transactions which are not recorded in the above books are
recorded here. Purchase of assets and other transaction which cannot be entered in
above books will be entered here.