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Chapter 1: Basics of Accounting
Learning Objectives After going through this chapter, you will be able to have an idea about:
Scope of Accounting Accounting Assumptions, Concepts & Principles Book-keeping Double-Entry System
Certificate in Accounting Fundamentals
Chapter 1: Basics of Accounting
Topics Covered
Introduction Accounting Process Purpose for accounting Who uses Accounting? Essential accounting terms Branches of Accounting Users of Accounting Accounting Assumptions, Concepts & Principles Accounting Cycle Book-keeping Approaches of recording transactions – Double Entry System Classification of accounts under the double entry system Classification of accounts according to accounting equation approach
Certificate in Accounting Fundamentals
Chapter 1: Basics of Accounting
Introduction For any business or non-business activities of organizations (may it be business organizations or not-for profit organizations) where there is money and other economic resources involved, there has to be accounting in place to keep a track of those resources.
Accounting is considered to be the language of a business.
Accounting is a system which collects and processes financial information of a business. This information is reported to the users to enable them to take appropriate decisions.
Certificate in Accounting Fundamentals
Chapter 1: Basics of Accounting
Accounting Process
American Institute of Certified Public Accountants (AICPA) defined accounting as “The art of recording, classifying, summarizing, analyzing and interpreting the business transactions systematically and communicating business results to interested users is accounting”.
Certificate in Accounting Fundamentals
Chapter 1: Basics of Accounting
Contd…
Certificate in Accounting Fundamentals
Chapter 1: Basics of Accounting
Purpose for accounting
To have a systematic record To determine the business results To determine the financial position of a business To represent the liquidity & solvency positions To assist in decision-making To comply with statutory requirements
Certificate in Accounting Fundamentals
Chapter 1: Basics of Accounting
Who uses Accounting?
Certificate in Accounting Fundamentals
Chapter 1: Basics of Accounting
Essential accounting terms
Transaction Proprietor Asset Liabilities Drawings Purchases Sales stock Revenue Expense Income Voucher Invoice Receipt Account Certificate in Accounting Fundamentals
Chapter 1: Basics of Accounting
Branches of Accounting Financial accounting refers to recording of business transactions in the book of accounts in a manner where the operating results pertaining to a particular period and the financial position as on a particular date can be ascertained. Cost accounting refers to ascertainment of cost of production for various jobs performed by the firm. Management accounting makes use of accounting data generated by financial accounting and cost accounting in order to formulate policies, take managerial decisions, and make investment decisions
Certificate in Accounting Fundamentals
Chapter 1: Basics of Accounting
Users of Accounting
Certificate in Accounting Fundamentals
Chapter 1: Basics of Accounting
Accounting Assumptions, Concepts & Principles
Certificate in Accounting Fundamentals
Chapter 1: Basics of Accounting
Accounting Cycle
Certificate in Accounting Fundamentals
Chapter 1: Basics of Accounting
Book-keeping Book-keeping is defined as “The art of keeping a permanent record of business transactions in a systematic manner” Book-keeping is the initial step to accounting and it works as the basis for accounting information. While book-keeping is restricted to identifying and recording individual financial transactions, accounting is concerned with classifying, summarizing, interpreting and communicating the results
Certificate in Accounting Fundamentals
Chapter 1: Basics of Accounting
Approaches of recording transactions – Double Entry System
Accounting Equation Approach: A transaction is an economic event that affects an element of the accounting equation and must be recorded. Accounting equation is used for recording and summarizing transactions. Assets= Liabilities + Owner’s Equity Traditional Approach: In this model, business transactions are formed on the basis of the existence of two aspects (debit and credit) in each transaction. All the business transactions are recorded to the book of accounts under the Double Entry System.
Certificate in Accounting Fundamentals
Chapter 1: Basics of Accounting
Classification of accounts under the double entry system
Certificate in Accounting Fundamentals
Chapter 1: Basics of Accounting
Classification of accounts according to accounting equation approach Types of Accounts
Meaning
Examples
Asset Account
Deals with tangible intangible real assets
Liabilities Account
Deals with the obligations of the outsiders
Capital Account
Deals with the accounts of the Capital a/c, Drawings a/c owners of the company
Revenue Account
Deals with amount charged for Sales a/c, Royalty received a/c, interest goods sold or services rendered received a/c, dividend received a/c and other incomes
Expenses Account
Deals with the expenses incurred in the process of Purchases a/c, Discount allowed a/c, Interest paid a/c, Loss by fire a/c earning revenue
and Land a/c, Building a/c, Plant & Machinery a/c, Cash a/c etc..,
financial Long term Loans, Debentures, Bank firm to Loans, Trade Creditors, Outstanding expenses
Certificate in Accounting Fundamentals
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