LVC 01

INTRODUCTION TO ACCOUNTING
Agenda

• Meaning and Definition of Accounting

• Accounting Process
• Accounting Principles
• Accounting Concepts
• Accounting Conventions
Definition of Accounting

• Economic Events
• Identification, Measurement, Recording and Communication
• Organisation
• Interested Users of Information
Definition of Accounting

In 1941, The American Institute of Certified Public Accountants (AICPA) had defined
accounting as the art of recording, classifying, and summarising in a significant
manner and in terms of money, transactions and events which are, in part at least, of
financial character, and interpreting the results thereof’.

In 1966, the American Accounting Association (AAA) defined accounting as ‘the

process of identifying, measuring and communicating economic information to permit
informed judgments and decisions by users of information’.
Terminologies

• Entity • Gain
• Transaction • Loss
• Assets • Discount
• Liabilities • Voucher
• Capital • Goods
• Sales • Drawings
• Revenues • Purchases
• Expenses • Stock
• Expenditure • Debtors
• Profit • Creditors
 Entity
• Entity means a reality that has
a definite individual existence.
• Business entity means a
specifically identifiable
business enterprise like Super
Bazaar, Hire Jewellers, ITC
Limited, etc.
• An accounting system is always
devised for a specific business
entity (also called accounting
entity).
Transaction

• An event involving some

value between two or more
entities.
• It can be a purchase of
goods, receipt of money,
payment to a creditor,
incurring expenses, etc.
• It can be a cash
transaction or a credit
transaction.
Assets
• Assets are economic resources of an enterprise that can be
usefully expressed in monetary terms. Assets are items of
value used by the business in its operations.
• For example, Super Bazar owns a fleet of trucks, which is
used by it for delivering foodstuffs; the trucks, thus, provide
economic benefit to the enterprise.
• Assets can be broadly classified into two types: Current and
Non-current
 Liabilities
• Liabilities are obligations or debts that an enterprise has to pay at some
time in the future. They represent creditors’ claims on the firm’s assets.
• For example, purchases goods for ` 10,000 on credit for a month from Fast
Food Products on March 25, 2022. If the balance sheet of Super Bazaar is
prepared as at March 31, 2022, Fast Food Products will be shown as
creditors on the liabilities side of the balance sheet.
• Liabilities are classified as current and non-current
Capital
• Amount invested by the owner in the firm is known as capital. It
may be brought in the form of cash or assets by the owner for the
business entity capital is an obligation and a claim on the assets of
business.
• It is, therefore, shown as capital on the liabilities side of the
balance sheet.
Sales
• Sales are total revenues from goods or services
sold or provided to customers.
• Sales may be cash sales or credit sales.
 Revenues
• These are the amounts of the
business earned by selling
its products or providing
services to customers, called
sales revenue.
• Other items of revenue
common to many businesses
are: commission, interest,
dividends, royalities, rent
received, etc.
• Revenue is also called
income.
Expenses
• Costs incurred by a business in the process of earning revenue are
known as expenses.
• Generally, expenses are measured by the cost of assets consumed or
services used during an accounting period.
• The usual items of expenses are: depreciation, rent, wages,
salaries, interest, cost of heater, light and water, telephone, etc.
Expenditure
• Spending money or incurring a liability for some benefit, service or
property received is called expenditure.
• Purchase of goods, purchase of machinery, purchase of furniture, etc.
are examples of expenditure.
• If the benefit of expenditure is exhausted within a year, it is treated as
an expense (also called revenue expenditure).
• On the other hand, the benefit of an expenditure lasts for more than a
year, it is treated as an asset (also called capital expenditure) such as
purchase of machinery, furniture, etc.
Profit
• The excess of revenues of a period over its related
expenses during an accounting year is profit.
• Profit increases the investment of the owners
Gain
• A profit that arises from events or transactions which are
incidental to business such as sale of fixed assets,
winning a court case, appreciation in the value of an
asset.
Loss
• The excess of expenses of a period over its related
revenues its termed as loss.
• It decreases in owner’s equity.
• It also refers to money or money’s worth lost (or cost
incurred) without receiving any benefit in return, e.g., cash
or goods lost by theft or a fire accident, etc. It also includes
loss on sale of fixed assets.
Discount
• Discount is the deduction in the price of the goods sold. It is offered in
two ways.
• Offering a deduction of an agreed percentage of the list price at the time
of selling goods is one way of giving a discount. Such a discount is called
a ‘trade discount’.
• It is generally offered by manufacturers to wholesalers and by
wholesalers to retailers.
• After selling the goods on a credit basis the debtors may be given certain
deductions in the amount due in case if they pay the amount within the
stipulated period or earlier. This deduction is given at the time of
payment on the amount payable. Hence, it is called a cash discount.
Cash discount acts as an incentive that encourages prompt payment by
the debtors.
Voucher

• The documentary evidence in support of a transaction is

known as voucher.
• For example, if we buy goods for cash, we get cash memo, if
we buy on credit, we get an invoice; when we make a
payment we get a receipt and so on.
 Goods
• It refers to the products in which the business unit is
dealing, i.e. in terms of which it is buying and selling
or producting and selling.
• The items that are purchased for use in the business
are not called goods.
• For example, for a furniture dealer purchase of chairs
and tables is termed as goods, while for other it is
furniture and is treated as an asset.
Drawings
• Withdrawal of money and/or goods by the owner from
the business for personal use is known as drawings.
• Drawings reduces the investment of the owners.
Purchases
• Purchases are total amount of goods procured by a business on
credit and on cash, for use or sale.
• In a trading concern, purchases are made of merchandise for resale
with or without processing.
• In a manufacturing concern, raw materials are purchased,
processed further into finished goods and then sold.
• Purchases may be cash purchases or credit purchases.
Stock
• Stock (inventory) is a measure of something on hand-
goods, spares and other items in a business.
• It is called Stock in hand.
• In a trading concern, the stock on hand is the amount of
goods which are lying unsold as at the end of an accounting
period is called closing stock (ending inventory).
• In a manufacturing company, closing stock comprises raw
materials, semi-finished goods and finished goods on hand
on the closing date.
• Similarly, opening stock (beginning inventory) is the
amount of stock at the beginning of the accounting period.
Debtors
• Debtors are persons and/or other entities who owe to an
enterprise an amount for buying goods and services on
credit.
• The total amount standing against such persons and/or
entities on the closing date, is shown in the balance sheet
as sundry debtors on the asset side.
Creditors
• Creditors are persons and/or other who have to be paid by an
enterprise an amount for providing the enterprise goods and services
on credit.
• The total amount standing to the favour of such persons and/or
entities on the closing date, is shown in the Balance Sheet as sundry
creditors on the liabilities side.
Accounting Process
Accounting Principles

In order to maintain uniformity and consistency in accounting records, certain rules or

principles have been developed which are generally accepted by the accounting
profession. These rules are called by different names such as principles, concepts,
conventions, postulates, assumptions and modifying principles.
Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (GAAP) refers to the rules or guidelines

adopted for recording and reporting of business transactions, in order to bring
uniformity in the preparation and the presentation of financial statements. For
example, one of the important rule is to record all transactions on the basis of
historical cost, which is verifiable from the documents such as cash receipt for the
money paid. This brings in objectivity in the process of recording and makes the
accounting statements more acceptable to various users.
ACCOUNTING CONCEPTS

Accounting concepts define the assumptions on the basis of which financial

statements of a business entity are prepared.
Concepts are those basic assumptions and condition which form the basis upon which
the accountancy has been laid.
Business entity concept
• This concept assumes that, for accounting purposes, the business enterprise and
its owners are two separate independent entities. Thus, the business and personal
transactions of its owner are separate.
For example
• when the owner invests money in the business, it is recorded as a liability of the
business to the owner. Similarly, when the owner takes away from the business
cash/goods for his/her personal use, it is not treated as a business expense.
Money measurement concept
• This concept assumes that all business transactions must be in terms of money,
that is in the currency of a country. In our country, such transactions are in terms
of rupees. Thus, as per the money measurement concept, transactions which can
be expressed in terms of money are recorded in the books of accounts.
For example
• Sale of goods worth Rs.200000, Rent Paid Rs.10000 etc. are expressed in terms of
money, and so they are recorded in the books of accounts. But the transactions
which cannot be expressed in monetary terms are not recorded in the books of
accounts.

• For example, sincerity, and loyalty are not recorded in books of accounts because
these cannot be measured in terms of money although they do affect the profits
and losses of the business concern.
Going concern concept
• This concept states that a business firm will continue to carry on its activities for
an indefinite period of time. Simply stated, it means that every business entity has
continuity of life. Thus, it will not be dissolved in the near future. This is an
important assumption of accounting, as it provides a basis for showing the value
of assets in the balance sheet.
Accounting period concept
• All the transactions are recorded in the books of accounts on the assumption that
profits on these transactions are to be ascertained for a specified period. This is
known as accounting period concept. Thus, this concept requires that a balance
sheet and profit and loss account should be prepared at regular intervals. This is
necessary for different purposes like, calculation of profit, ascertaining financial
position, tax computation etc.
Accounting cost concept
• It states that all assets are recorded in the books of accounts at their purchase
price, which includes the cost of acquisition, transportation and installation and
not at their market price. It means that fixed assets like buildings, plant and
machinery, furniture, etc are recorded in the books of accounts at a price paid for
them.
Dual aspect concept
• The dual aspect is the foundation or basic principle of accounting. It provides the
very basis of recording business transactions in the books of accounts. This
concept assumes that every transaction has a dual effect, i.e. it affects two
accounts in their respective opposite sides. Therefore, the transaction should be
recorded at two places. It means, both aspects of the transaction must be
recorded in the books of accounts.

• Thus, the duality concept is commonly expressed in terms of a fundamental

accounting equation:

• Assets = Liabilities + Capital

Matching concept
• The matching concept states that the revenue and the expenses incurred to earn
the revenues must belong to the same accounting period. So once the revenue is
realised, the next step is to allocate it to the relevant accounting period. This can be
done with the help of the accrual concept If the revenue is more than the expenses,
it is called profit. If the expenses are more than the revenue it is called a loss. This is
what exactly has been done by applying the matching concept.
Realisation concept
• This concept states that revenue from any business transaction should be included
in the accounting records only when it is realised. The term realisation means the
creation of the legal right to receive money. Selling goods is realisation, receiving an
order is not. In other words, it can be said that: Revenue is said to have been
realised when cash has been received or the right to receive cash on the sale of
goods or services or both have been created.

• The concept of realisation states that revenue is realized at the time when goods or
services are actually delivered.
For Example
• A Jeweller received an order to supply gold ornaments worth Rs.500000. They
supplied ornaments worth Rs.200000 up to the year ending 31st March 2022 and
rest of the ornaments were supplied in May 2022. The revenue for the year 2022
for a Jeweller is Rs.200000. Mere getting an order is not considered as revenue
until the goods have been delivered.
Accrual concept
• The meaning of accrual is something that becomes due especially an amount of
money that is yet to be paid or received at the end of the accounting period. It
means that revenues are recognised when they become receivable. Though cash is
received or not received and the expenses are recognised when they become
payable though cash is paid or not paid. Both transactions will be recorded in the
accounting period to which they relate.
Example
• The accrual concept makes a distinction between the accrual receipt of cash and the
right to receive cash as regards revenue and actual payment of cash and obligation
to pay cash as regards expenses. The accrual concept under accounting assumes
that revenue is realised at the time of sale of goods or services irrespective of the
fact when the cash is received.
ACCOUNTING CONVENTIONS
• An accounting convention refers to common practices which are universally
followed in recording and presenting accounting information of the business
entity. Conventions denote customs or traditions or usages which are in use since
long. To be clear, these are nothing but unwritten laws. The accountants have to
adopt the usage or customs, which are used as a guide in the preparation of
accounting reports and statements. These conventions are also known as
doctrine.
ACCOUNTING CONVENTIONS
Convention of consistency
• The convention of consistency means that same accounting principles should be
used for preparing financial statements year after year. A meaningful conclusion
can be drawn from financial statements of the same enterprise when there is
comparison between them over a period of time. But this can be possible only
when accounting policies and practices followed by the enterprise are uniform
and consistent over a period of time. If different accounting procedures and
practices are used for preparing financial statements of different years, then the
result will not be comparable.
Convention of full disclosure
• The Convention of full disclosure requires that all material and relevant facts
concerning financial statements should be fully disclosed. Full disclosure means
that there should be full, fair and adequate disclosure of accounting information.
Adequate means a sufficient set of information to be disclosed. Fair indicates an
equitable treatment of users. Full refers to a complete and detailed presentation
of information. Thus, the convention of full disclosure suggests that every
financial statement should fully disclose all relevant information. Let us relate it to
the business.
 Contd..
• The business provides financial information to all interested parties like investors,
lenders, creditors, shareholders etc. The shareholder would like to know
profitability of the firm while the creditor would like to know the solvency of the
business. In the same way, other parties would be interested in the financial
information according to their requirements. This is possible if financial statement
discloses all relevant information in full, fair and adequate manner
Convention of materiality
• The convention of materiality states that, to make financial statements meaningful,
only material fact i.e. important and relevant information should be supplied to the
users of accounting information. The question that arises here is what is a material
fact. The materiality of a fact depends on its nature and the amount involved.
Material fact means the information of which will influence the decision of its user.
Convention of conservatism
• This convention is based on the principle that “Anticipate no profit, but provide
for all possible losses”. It provides guidance for recording transactions in the
books of accounts. It is based on the policy of playing safe in regard to showing
profit.

• The main objective of this convention is to show a minimum profit. Profit should
not be overstated. If profit shows more than actual, it may lead to the distribution
of dividends out of capital. This is not a fair policy and it will lead to a reduction in
the capital of the enterprise.
Contd…
• Thus, this convention clearly states that profit should not be recorded until it is
realised. But if the business anticipates any loss in the near future provision
should be made in the books of accounts for the same.

• For example, valuing the closing stock at cost or market price whichever is lower,
creating provision for doubtful debts, discount on debtors, writing off intangible
assets like goodwill, patent, etc. The convention of conservatism is a very useful
tool in the situation of uncertainty and doubts.
Summary

• ACCOUNTING MEANING AND DEFINITION

• ACCOUNTING PROCESS
• ACCOUNTING PRINCIPLES
• ACCOUNTING CONCEPTS
• ACCOUNTING CONVENTIONS
THANK YOU