Class Note 1: Basic Accounting
Introduction to Accounting
Definition: Accounting is the language of business. It involves recording,
classifying, and summarizing financial transactions.
Purpose:
o Provides information on a company’s financial performance.
o Indicates whether a company is making a profit or incurring losses.
o Offers data for planning, organizing, and controlling business
activities.
o Useful for personal investment and tax planning.
Users of Accounting Information: Both internal and external
stakeholders.
Basic Business Model Components
1. Liabilities: Obligations the company owes.
2. Assets: Resources owned by the company.
3. Capital: Owner's equity or investment in the business.
Types of Assets and Liabilities
Fixed Assets: Long-term resources used in business operations.
Current Assets: Short-term resources, also known as working capital.
Borrowings from Banks/FIs: Loans and other forms of borrowing.
Current Liabilities: Short-term obligations.
Financial Statements
1. Balance Sheet: Snapshot of the company’s financial position at a specific
point in time.
2. Profit and Loss Account: Shows the company’s revenue and expenses
over a period, determining profit or loss.
Business Cycle/Value Addition Cycle
1. Money Procurement & Inventory: Acquisition of resources.
2. Consumption & Work in Progress (WIP): Utilization and ongoing
production.
3. Delivery & Billing: Distribution and invoicing for goods/services.
4. Outstanding Collection: Collecting payments due.
5. Infrastructure and People: Investment in physical and human
resources.
6. Human Assets: Employees and their contributions.
7. Profit/Loss: Result of the business operations, contributing to reserves.
8. Reserves: Profits retained in the business for future growth.
9. Revenue: Income from business activities.
10.Costs: Expenses incurred in earning revenue.
Importance of Reserves
Profits build up reserves.
Reserves enable the acquisition of new assets without additional
borrowing.
Lecture Notes 3: Accounting Concepts and Convention
Introduction
Purpose of Accounting Information: To be meaningful for the user,
ensuring reliability and comparability.
Consistency in Principles and Policies: Essential for reliable
accounting transactions.
Regulatory Bodies:
o ICAI (The Institute of Chartered Accountants of India):
Standardizes accounting policies in India.
o IFRS (International Financial Reporting Standards).
Accounting Concepts and Conventions
1. Definitions:
o Accounting Concepts: Basic assumptions for recording business
transactions and preparing financial statements.
o Accounting Conventions: Common practices in recording and
presenting accounting information.
2. Key Accounting Concepts:
o Going Concern Concept: Assumes an entity will continue
operations for the foreseeable future.
o Consistency Concept: Same accounting principles, assumptions,
and methods should be used year after year.
o Accrual Concept: Recognizes transactions and events as they
occur, not when cash is received or paid.
o Business Entity Concept: Business is treated separately from its
owner for accounting purposes.
o Periodicity Concept: Divides the life of a business into equal
periods, known as accounting periods.
o Matching Concept: Revenue earned should match the expenses
incurred in earning it within the same accounting period.
o Money Measurement Concept: Only transactions measurable in
monetary terms are recorded in financial statements.
o Historical Cost Concept: Records all assets at their original cost
or purchase price, accounting for depreciation if any.
o Dual Aspect Concept (Double Entry Concept/Duality
Concept): Every transaction impacts the business in two equal and
opposite ways.
o Conservatism/Prudence: Anticipate no profit, but provide for all
possible losses.
o Full Disclosure Principle: Management must report all relevant
information about the company in financial statements.
o Materiality Principle: All material items must be reported in
financial statements; immaterial items can violate another
accounting principle if their impact is negligible.
Practical Applications
Going Concern: Financial statements are prepared with the assumption
that the business will not be liquidated in the near future.
Consistency: Ensures comparability of financial statements over different
periods.
Accrual Basis: Revenue and expenses are recognized when they occur,
leading to a more accurate representation of financial performance.
Business Entity: Personal transactions of the owner are kept separate
from the business transactions.
Periodicity: Facilitates periodic financial reporting and analysis.
Matching: Ensures accurate measurement of profit or loss for a period.
Money Measurement: Excludes non-quantifiable items like employee
skills, ensuring only verifiable transactions are recorded.
Historical Cost: Provides a stable basis for asset valuation.
Dual Aspect: Ensures the accounting equation (Assets = Liabilities +
Equity) always balances.
Conservatism: Protects against overstatement of financial position.
Full Disclosure: Provides stakeholders with comprehensive information
for decision-making.
Materiality: Focuses on significant items that affect users' decisions,
ignoring trivial details.
Conclusion
Understanding and applying these accounting concepts and conventions ensures
the preparation of reliable, comparable, and transparent financial statements.
This foundational knowledge is essential for both preparers and users of financial
information.
Lecture Notes: 4
1. Introduction to Accounting Terms
Understanding basic accounting terms is fundamental for managing financial
records and making informed business decisions. This lecture will cover essential
terms such as assets, liabilities, and types of accounts, as well as the accounting
process.
2. Assets
Definition: Assets are resources controlled by an entity due to past events, from
which future economic benefits are expected.
Classification of Assets:
Fixed Assets: Long-term assets used in the business, e.g., buildings, machinery.
Tangible Fixed Assets: Physical assets like land, buildings, machinery.
Intangible Fixed Assets: Non-physical assets like patents, trademarks.
Investments:
Long-term Investments: Held for more than one year.
Short-term Investments: Held for less than one year.
Current Assets: Assets used to fund day-to-day operations and pay ongoing
expenses,
e.g., cash, debtors, bills receivable, prepaid expenses.
Fictitious Assets: Not real assets but losses not written off, e.g., preliminary
expenses.
Contingent Assets: Assets whose existence and value depend on specific events,
e.g., compensation claims.
3. Liabilities
Definition: Liabilities are present obligations due to past events, and their
settlement is expected to result in an outflow of resources.
Classification of Liabilities:
Owner’s Fund: Capital invested by the owners.
Long Term Liabilities: Obligations due in more than one year, e.g., long-term
loans.
Current Liabilities: Obligations due within one year, e.g., creditors, bills payable,
outstanding expenses.
Provision: Money set aside for liabilities where the exact amount is uncertain,
e.g., provision for tax, proposed dividend.
Contingent Liabilities: Potential liabilities dependent on certain events, e.g.,
lawsuits. They are noted in the balance sheet footnotes.
4. Accounting Process
The accounting process involves a series of steps to record financial transactions
systematically.
Steps in the Accounting Process:
Source Document: Original records of transactions, e.g., invoices, receipts.
Journal: Recording of transactions in chronological order.
Ledger: Grouping of transactions by account.
Trial Balance: Listing of all ledger balances to check the accuracy of records.
Financial Statements: Preparation of:
Profit and Loss Account: Summary of income and expenses to determine profit or
loss.
Balance Sheet: Snapshot of the company’s financial position at a specific point in
time.
Cash Flow Statement: Summary of cash inflows and outflows.
6. Summary
Understanding and managing basic accounting terms and processes are crucial
for accurate financial reporting and business decision-making. These concepts
form the foundation for advanced accounting practices.
