1. An Introduction to Accounting Courtesy: Dr Gagan Pareek

2. Dr Gagan Pareek alias Dr Harish Pareek M.Com, A.I.C.W.A, PhD
Area of Expertise : Accounting & Finance, Credit Risk Management
Strategic Management
Corporate Trainer & Key Resource Person : In the area of Finance and Strategy, Leadership, Team Building and Motivation
; Mobile:
Research: Awarded PhD degree on “Operation of NBFCs in India- a changing profile “ in the Dept of Commerce, Calcutta University.
Industry Exp: Having 12 years of experience in the area of accounting and finance, credit and risk analysis. Worked for companies like Kesoram Industries Ltd (B.K. Birla Group of Companies), UTI-ISL, Magma Fincorp Ltd. He has also been associated with academic research for the last 9 years.

3. Accounting
It enables a person to ascertain accurately and with little trouble as possible
The amount he has gained or lost in the business during a given period
The amount of his assets, liabilities and capital on any particular date.
How the amount he has gained or lost is made up.
What amount is owing to him by each of his customers or debtors.
What amount is owing by him to each of his creditors.
What is his liability for payment of taxes to Govt.
How his business stands in comparison to other similar business.

4. Accounting is a must…… for
Capital Maintenance
Productive Capital
Profitable Operations

5. Accounting World Events/Actions affecting the business
Rules /Management Decisions
Financial Statements

6. Events/Actions affecting the business
Accounting World
Financial Accounting translates events into financial statements
General
Accepted
Accounting
Principles
Events/Actions affecting the business
Rules /
Management Decisions
Selection of different alternatives rules on the basis of GAAP
Financial Statements

7. Users of Accounting Information
Investors
Government
Community
Board of Directors
Management
Employees
Analysts
Suppliers
Employees
Customers
Creditors

8. Double Entry
Double entry is the only system of book keeping by the employment of which all the objectives of accounting can be achieved.
It enable the businessmen to obtain the permanent record of his dealings with those with whom he transacts his business, and of the exact state of relationship with each of those individuals at any given date.
It further helps him to ascertain whether the result of his transactions has been profitable or otherwise, and what his exact financial position is at any time

9. Assets Probable future economic benefits What a business “owns”
Examples
Cash
Investments
Buildings
Plant and machinery
Patents and copyrights

10. Liabilities Probable future sacrifices of economic benefits
What a business “owes”
Contractual, statutory, or constructive
Examples
Loans payable
Warranty obligations
Pensions payable
Income tax payable

11. Equity Residual interest of owners Examples Share capital
Share premium
Revenues
Expenses
Dividends
Retained profit

12. Financial Statements Profit and loss account
Statement of financial performance
Balance sheet
Statement of financial position
Statement of cash flows
Statement of cash receipts and cash payments

13. Types of Account
Personal Account: These accounts record a traders dealings with other persons, firms or companies. A separate account is kept for each person, firm or company from whom goods have been purchased or to whom goods have been sold on credit, so that the amount owing to and by the trader can be readily ascertained at any time.

14. Real Account
These accounts record dealings in or with property, assets or possessions.
A separate account is kept for each class of property such as cash, stock in trade, plant &machinery, furniture etc, so that by recording therein particulars of each such assets received or given away, the trader can ascertain the value of each asset on hand on any particular date.

15. Nominal Account These accounts record a trader’s expenses or gains.
A separate account is opened for each head of expenditure or income, such as rent, salaries, wages, printing, stationery, cartage, interest, discount, commission etc, so that the trader can see the amount expended lost or gained under each heading.
Each such account is debited when an expense is incurred and is credited when there is any gain.

16. Rules of Debits and Credits: Golden Rule
Personal Accounts- Debit the receiver , and credit the giver
Real Accounts- Debit what comes in, and credit what goes out.
Nominal Accounts-Debit expenses and losses, and credit gains.

17. Ledger
The ledger is the chief books of accounts, and it is in this book that all the business transactions would ultimately find their place under their respective accounts in a duly classified form.
The process of transferring the transactions which have been previously recorded in the Journal into the appropriate accounts in the Ledger is called POSTING.
The debit aspects of the transactions as entered in the debit column of the Journal are posted to the debit side of the Ledger Accounts concerned, while the credit aspects are entered on the credit side.

18. Balancing of Account
The difference between the debit total and the credit total in any account is called the balance.
If the debit total is larger, the balance is a debit balance. This balance will be placed on the credit side to make the two side equal, and will be again brought down on the debit side, after closing the account.
If the credit total is heavier, the balance is a credit balance. This balance will be placed on the debit side to make the two sides equal, and will be again brought down on the credit side after closing the account.

19. Debit and Credit Entries
Receipts of cash are on the debit side.
Payments of cash are on the credit side.
The difference between the debit total and the credit total is called the balancing figure

20. Entries Types Opening Entries Transfer from one account to another
Rectification of errors
Adjustment Entries
Closing Entries

21. Accounting Concepts Entity Concept Dual Aspect Concept
Going Concern Concept
Periodicity Concept
Money Measurement Concept
Revenue Recognition Concept
Matching Concept
Accrual Concept

22. Entity Concept
The business is treated as a unit or entity apart from its owners, creditors and others.
The proprietor of an enterprise is always considered to be separate and distinct from the business which he controls.
The proprietor is treated as a creditor to the extent of his capital.

23. E.g. If there is purchase of goods- it involves two aspects:
Dual Aspect Concept
In each transaction there are two aspects to be recorded from the point of view of entity.
E.g. If there is purchase of goods- it involves two aspects:
One aspect is the receipt of goods
The other aspect is the immediate payment of cash(in case of cash purchase) or the acknowledgment of the debt to the supplier (in case of credit purchases).
The recognition of two aspects of every transactions is known as dual aspect

24. Going Concern Concept
This concept assumes the enterprise will continue to exist in the foreseeable future.
It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operation.

25. Accounting Period Concept
Time duration for which the income/loss is measured is called the accounting period .
Under the Companies Act, and Banking Regulation Act, financial statements are to be prepared for a twelve month period.

26. Money Measurement Concept
It underlines that the fact that in accounting, every worth recording event, happening or transactions is recorded in terms of money.

27. Cost Concept The underlying idea of cost concept is that:
Asset is recorded at the price paid to acquire it, that is, at cost, and
This cost is the basis for all subsequent accounting for that asset.
The cost concept also implies that if nothing has been paid for acquiring something then it would not be shown in the accounting books as an asset.

28. Revenue Recognition Concept
At what stage the revenue should be recognized and recorded.
If we take for instance of sale of goods, there are several stages
like the receipt of order from the customer,
the production of goods after the receipt of order
delivering the goods to the customer & invoicing
receipt of cash from the customer.
Usually, enterprise dispatch the goods to the customer and an invoice is simultaneously made out. At this stage sale is recorded.

29. Matching Concept
After the revenue recognition, all costs, which are applicable to the revenue of the period, should be charged against that revenue in order to determine the net income of the business.

30. Accrual Concept
Revenue recognition depends on its realisation and not on actual receipt, likewise costs are recognised when they are incurred and not when they are paid.
In relation to revenue, the amount should exclude amount relating to subsequent period and provide for revenue recognised but not received in cash.
In relation to costs, the accounts should provide for costs incurred but not paid and exclude costs paid for subsequent periods.

31. Objectivity Concept
All accounting must be based on objective evidence. The transaction records should be supported by verifiable documents.

32. Accounting Conventions 1
Accounting Conventions 1.Conservatism: “Anticipate no profit but provide for all possible losses”. In other words the policy of playing safe. The inventory is valued at “cost or market price which ever is less”. Similarly a provision is made for possible bad and doubtful debts out of current years profits.

33. 2.Full Disclosure: Accounting reports should disclose fully and fairly the information they purport to represent. They should be honestly prepared and sufficiently disclose information which is of material interest to shareholders, present and potential creditors and investors.

34. 3.Consistency :
Accounting practices should remain unchanged from one period to another. For example , if stock is valued at “cost or market price whichever is less”, this principle should be followed year after year.
Necessary for the purposes of comparison.
Does not forbid introduction of improved accounting techniques.
However, if adoption of such a technique results in inflating or deflating the figures of profit as compared to the previous years, a note to the effect should be given in the financial statements.

35. 4.Materiality:
Material details to be provided and ignore insufficient details.
This is because otherwise accounting will be unnecessarily overburdened with minute details.

36. Accounting Standards-setting Organization in Selected Countries
Country
Policy Setting Board
Australia
Australian Accounting Standards Board (AASB) sets GAAP
Canada
Canadian Accounting Standards Board (CASB) of the Canada Institute of Chartered Accountants (CICA) sets GAAP
India
Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) is the body entrusted with the work of preparing the standards.
U.K.
Accounting Standards Board (ASB) is comprised of nine members drawn from different user groups.
U.S.A.
Financial Accounting Standards Board (FASB) is the body solely in charge of issuing standards.

37. TRANSACTION (a)
Dr. X starts a Medical Health Care Unit, by investing Rs50,000 in his practice.

38. Dr. X invests Rs50,000 to start a Medical Health Unit
Cash Flows
Income Statement
Balance Sheet
Assets =
Liabilities
Equity
Cash = +
Capital
Invested
50,000
Financing 50,000

39. TRANSACTION (b)
Medical Health Care Unit , borrows Rs20,000 to finance the practice.

40. Receipt of Loan Assets = Liabilities + Equity Cash = Loan Capital Bal
Cash Flows
Income Statement
Balance Sheet
Assets =
Liabilities
Equity
Cash =
Loan
Capital
Bal
50,000
20, =
20,000
70, =
20,
Financing 20,000

41. TRANSACTION (c)
Medical Health Care Unit, bought Equipments worth Rs 10,000/=for practice.

42. Bought Equipments for Rs 10,000
Cash Flows
Income Statement
Balance Sheet
Assets =
Liabilities
Equity
Cash Equipment =
Loan
Capital
Balance
70,000
20,000
50,000
Equipments
-10, ,000
60, , =
20,
Equipments -10,000

43. TRANSACTION (d)
Family Health Care, received fees for providing services to patients.

44. Receipt of Fees Assets = Liabilities + Equity Cash + Equipment =
Cash Flows
Income Statement
Balance Sheet
Assets =
Liabilities
Equity
Cash + Equipment =
Loan
Capital+ Revenue
Balance
60, , =
20,
50,000
Fees
15, =
15,000
75, , =
50, ,000
Fees
Earned ,000
Fees(cash) 15,000

45. TRANSACTION (e)
Medical Health Care Unit paid wages, rent, electricity bills, interest and miscellaneous expenses.

46. Paid monthly expenses Assets = Liabilities + Equity
Cash Flows
Income Statement
Balance Sheet
Assets =
Liabilities
Equity
Cash + Equipments =
Loan
Capital + Revenue
Balance
, =
20,
50, ,000
Expenses
-9,000
66, , =
5, ,000
Wages ,000
Rent ,000
Electricity ,000
Interest
Misc
Total ,000
Operating -9,000

47. TRANSACTION (f) Family Health Care, paid a dividend to Dr. X.

48. Paid Dividend Assets = Liabilities + Equity Cash + Equipments = Loan +
Cash Flows
Income Statement
Balance Sheet
Assets =
Liabilities
Equity
Cash Equipments =
Loan
Capital + Revenue
Balance
66, , =
20,
50, ,000
Dividend
-2,000
- 2,000
64, , =
50, ,000
Financing –2,000

49. Integrated Financial Statement Framework
Cash Flows
Income Statement
Balance Sheet
Assets =
Liabilities
Equity
Cash + Equipment =
Loan
Capital + Revenue
Invested
50,000 +
Loan
20, =
20,000
Land
-10, ,000
Fees
15, =
15,000
Expenses
-9,000
9,000
Dividend
-2,000
Balance
64, , =
20,
50, ,000

50. The effect of Debits and Credits on an account are as follows
Debit and Credit Rules
The effect of Debits and Credits on an account are as follows
A = L + OE
ASSETS
Debit for Increase
Credit for Decrease
LIABILITIES
Debit for Decrease
Credit for Increase
EQUITIES
Debit for Decrease
Credit for Increase 13

51. Double Entry AccountingThe Equality of Debits and Credits
A = L + OE =
Debit balances
Credit balances
Every transaction is recorded by equal amounts of debits and credits. 13

52. The Account Left side of an account is the “Debit” side
An account is a summarized record of the transactions affecting one person, one kind of property or one class of gains or losses
Left side of an account is the “Debit” side
Right side of an account is the “Credit” side
Account
T- Form Account

53. Debits and Credits Double-entry accounting system
Each transaction must affect two or more accounts to keep the basic accounting equation in balance.
Recording done by debiting at least one account and crediting another.
DEBITS must equal CREDITS.

54. Debits and Credits Transaction #1 Rs10,000 Rs3,000 Transaction #2
If Debits are greater than Credits, the account will have a debit balance.
Transaction #1
Rs10,000
Rs3,000
Transaction #2
Transaction #3
8,000
Balance
Rs15,000

55. Debits and Credits Transaction #1 Rs10,000 Rs3,000 Transaction #2
If Debits are greater than Credits, the account will have a debit balance.
Transaction #1
Rs10,000
Rs3,000
Transaction #2
8,000
Transaction #3
Balance
Rs1,000

56. Debits and Credits Summary
Normal Balance Debit
Normal Balance Credit

57. Debits and Credits Summary
Balance Sheet Income Statement
Asset =
Liability +
Equity
Revenue -
Expense =
Debit
Credit

58. Debits and Credits Summary
Review Question
Debits:
increase both assets and liabilities.
decrease both assets and liabilities.
increase assets and decrease liabilities.
decrease assets and increase liabilities.

59. Debits and Credits Summary
Discussion Question
X, a beginning accounting student, believes debit balances are favorable and credit balances are unfavorable. Is X correct? Discuss.
X is incorrect. A debit balance only means that debits amounts exceed credit amounts in an account. Conversely, a credit balance only means that credit amounts are greater than debit amounts in an account. Thus, a debit or credit balance is neither favorable nor unfavorable.

60. Assets and Liabilities
Assets - Debits should exceed credits.
Liabilities – Credits should exceed debits.
The normal balance is on the increase side.

61. Owner’s Equity
Owner’s investments and revenues increase owner’s equity (credit).
Owner’s drawings and expenses decrease owner’s equity (debit).

62. Revenue and Expenses
The purpose of earning revenues is to benefit the owner(s).
The effect of debits and credits on revenue accounts is the same as their effect on Owner’s Capital.
Expenses have the opposite effect: expenses decrease owner’s equity.

63. Debits and Credits Summary
Review Question
Accounts that normally have debit balances are:
assets, expenses, and revenues.
assets, expenses, and owner’s capital.
assets, liabilities, and owner’s drawings.
assets, owner’s drawings, and expenses.

64. Journalizing Oct. 1 In the Books of X Journal
E2-4 (Facts) Presented below is information related to X Agency.
X begins business as a merchandiser with a cash investment of Rs15,000.
Oct. 1
In the Books of X
Journal

65. THE RECORDING PROCESS

66. The Recording Process The Account Steps in the Recording Process
The Trial Balance
Debits and credits
Expansion of basic equation
Locating errors
Recording of Journal Entries
Ledger Posting
Balancing of Accounts

67. The Journal Book of original entry (General Ledger).
Transactions recorded in chronological order.
Contributions to the recording process:
Discloses the complete effects of a transaction.
Provides a chronological record of transactions.
Helps to prevent or locate errors because the debit and credit amounts can be easily compared.

68. Journalizing Journalizing - Entering transaction data in the journal.
Presented below is information related to X Agency.
Oct. 1
X begins business as a merchandiser with a cash investment of Rs15,000. 3
Purchases office furniture for Rs1,900, on account from Soma. 6
Sold goods to Krishna; bills Krishna Rs3,200 . 27
Pays Rs700 on balance related to transaction of Oct. 3. 30
Pays the administrative assistant Rs2,500 salary for Oct.
Journalize the transactions

69. Journalizing Oct. 3 General Journal
Purchases office furniture for Rs1,900, on account from Soma.
General Journal

70. Journalizing Oct. 6 General Journal
Sold goods to Krishna; bills Krishna Rs3,200.
General Journal

71. Journalizing Oct. 27 General Journal
Pays Rs700 on balance related to transaction of Oct. 3.
General Journal

72. Journalizing Oct. 30 General Journal
Pays the administrative assistant Rs2,500 salary for Oct.
General Journal

73. Journalizing Simple Entry – Two accounts, one debit and one credit.
Compound Entry – Three or more accounts.
Example – On June 15,purchased equipment from UV Ltd for Rs15,000 by paying cash of Rs10,000 and the balance on account (to be paid within 30 days)
General Journal

74. The ledger
Ledger contains the entire group of accounts maintained by a company.
A general ledger contains all the asset, liability, owner’s equity, revenue, and expense accounts.
Chart of Accounts

75. Chart of Accounts
Accounts arranged in sequence in which they are presented in the financial statements.

76. Standard Form of Account
T-account form used in accounting textbooks.
In practice, the account forms used in ledgers are
much more structured.

77. Posting
Posting – the process of transferring amounts from the journal to the ledger accounts.
General Journal J1
101
General Ledger
Oct. 1
Capital A/C
15,000
15,000

78. Posting Review Question Posting: normally occurs before journalizing.
transfers ledger transaction data to the journal.
is an optional step in the recording process.
transfers journal entries to ledger accounts.

79. The Trial Balance
A list of accounts and their balances at a given time.
Purpose is to prove that debits equal credits.

80. Trial Balance Limitations of a Trial Balance
The trial balance may balance even when
a transaction is not journalized,
a correct journal entry is not posted,
a journal entry is posted twice,
incorrect accounts are used in journalizing or posting, or
offsetting errors are made in recording the amount of a transaction.

81. The Trial Balance Review Question A trial balance will not balance if:
a correct journal entry is posted twice.
the purchase of supplies on account is debited to Supplies and credited to Cash.
a Rs100 cash drawing by the owner is debited to Owner’s Drawing for Rs1,000 and credited to Cash for Rs100.
a Rs450 payment on account is debited to Accounts Payable for Rs45 and credited to Cash for Rs45.

82. Recording Process Case
X is confused about how accounting information flows through the accounting system. She believes the flow of information is as follows.
Debits and credits posted to the ledger.
Business transaction occurs.
Information entered in the journal.
Financial statements are prepared.
Trial balance is prepared.
Is X correct? If not, indicate to X the proper flow of the information.
No, X is not correct . The proper sequence is as follows :
( b ) Business transaction occurs.
( c ) Information entered in the journal.
( a ) Debits and credits are posted to the ledger.
( e ) Trial balance is prepared.
( d ) Financial statements are prepared.

83. Accounting Cycle

84. The Accounting Cycle
The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time.

85. Steps in Accounting Cycle
Analyze transactions
Record transactions in the journal
Post journal entries to the ledger accounts
Prepare a trial balance
Journalise and post adjusting entries and prepare adjusted trial balance
Prepare financial statements
Journalise and post closing entries: temporary accounts(transfer to profit and loss account)
Carry forward the balance sheet accounts to the next accounting period: permanent accounts

86. The Accounting Cycle
For a new business, begin by setting up ledger accounts.
For an established business, begin with account balances carried over from the previous period.

87. The Accounting Work Sheet
What is the work sheet?
A work sheet is a multi-columned document used by accountants to help move data from the trial balance to the financial statements.
It is an internal document.

88. Use the work sheet to complete the accounting cycle.

89. Recording the Adjusting Entries
The work sheet
identifies the accounts
that requires
adjustments.
Adjustment
of the accounts
requires
journalizing
and posting of the
adjustment entries.

90. Recording the Adjusting Entries
The adjusting entries are recorded in the journal when the accounts are adjusted on the work sheet.
Adjustment entries are posted just before the closing entries.

91. Close the revenue, expense, and withdrawal accounts.

92. Closing the Accounts
Closing of the accounts that prepares the accounts for recording transactions during the next period.

93. Closing the Accounts Closing Entries Revenues increase Owner’s Equity.
Expenses and Withdrawals
decrease
Owner’s Equity.

94. Closing the Accounts
Revenues and Expense accounts are closed to Income Summary.
Income Summary is closed to Capital.
Withdrawals are closed to Capital.
In a corporation, Dividends are closed to Retained Earnings.

95. Closing the Accounts Income Summary
A debit balance represents net loss.
A credit balance represents net income.

96. Postclosing Trial Balance
The accounting cycle ends with the post closing trial balance.
The post closing trial balance is dated as of the end of the period for which the statements have been prepared.

97. The Accounting Cycle Recording of Journal Entries Ledger Posting
and balancing of accounts
Preparing trial balance.
Year end Adjustment Entries.
Closing of accounts Preparing
adjusted trial balance.
Prepare financial statements.
Prepare after
closing trial balance.
Journalizing
and post closing entries. 3

98. Permanent Accounts What accounts never close? Assets Liabilities
Owner’s equity
Balances of permanent accounts carry over to the next period.

99. Classify assets and liabilities as current or long-term.

100. Current Assets
Current assets are cash, or will be converted to cash, in one year or within the normal business operating cycle.
What are some other examples?
short-term receivables
inventory
prepaid expenses

101. Current Liabilities
Current liabilities are debts or obligations due within one year or within the operating cycle.
What are some examples?
accounts and salary payables
short-term notes payable
unearned revenue

102. Long-term Assets and Liabilities
Long-term assets include all other assets.
property, equipment, and intangibles
Long-term liabilities are all other debts due in longer than one year or the entity’s operating cycle.

103. The Classified Balance Sheet
Debit side
Current assets
Long-term assets
Credit side
Current liabilities
Long-term liabilities
Listed in the order
of decreasing
liquidity
Listed in the order
of how soon they
must be paid

104. The Classified Balance Sheet
XYZ Ltd
March 31, 20XX
Assets Liabilities
Current assets: Current liabilities:
Cash ,000 Accounts payable ,000
Accounts receivable ,000 Salary payable ,000
Closing Stock ,500 Unearned revenue ,500
Total current assets 8, Total Current liabilities 6,500
Gross Block Owner’s equity
Equipment 15, Capital ,000
Less Accum. deprec. 7, ,000
Total liabilities and
Total assets 16,500 owner’s equity ,500

105. Transactions Effecting Balance Sheet
Possibility
Example
An increase in assets followed by an increase in liabilities and vice versa
Purchase of a machinery through bank loan
A decrease in assets followed by a decrease in liabilities and vice versa
Repayment of a bank loan
An increase in assets followed by an increase in equity and vice versa
Interest earned on the savings deposit increasing the net worth
A decrease in assets followed by a decrease in equity and vice versa
Theft of some personal possessions leads to decrease in owners equity
An increase in an asset followed by a decrease in another asset and vice versa
Purchase of car in cash
An increase in a liability followed by a decrease in another liability and vice versa
Payment to a creditor through bank loan

106. The following are typical accounts that are classified as assets, liabilities, and , equity accounts
Land
Building
Equipment
Vehicles
Inventory
Prepaid expenses
Accounts receivable
Cash
Mortgage payable
Unearned revenue
Taxes payable
Salaries payable
Accounts payable
Capital
Retained Earnings

107. A good general rule of thumb is that any account that has the word receivable in its title will be an asset, and any account that has the word payable in its title will be a liability. Any account that has the word expense in its title is likely to be classified as an expense on the Income Statement, except for the account Prepaid expenses, which is an asset. Any account with the word income or revenue in its title is classified as revenue on the Income Statement, except for the account Unearned revenue, which is a liability.

108. References:
1. Williams Haka Bettner Meigs , Financial & Managerial Accounting, 12th Edition, The McGraw Hill Companies , Inc,2002.
2. Prof. Ramachandran. N. & Prof. Kakani Ram Kumar , Financial Accounting for Management ,Tata McGraw Hill.
3. Prof. Mukherjee. A. & Prof Hanif. M, Modern Accountancy, 2nd Edition,, Tata McGraw Hill.
4. Duchac , Reeve, & Warren ,Financial Accounting, 2nd Edition,, Thomson South-Western, a part of The Thomson Corporation. Thomson.
5. Narayanaswamy. R, Financial Accounting: A Managerial Perspective 2nd Edition, Prentice Hall of India Pvt Ltd