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BASIC ACCOUNTINGCONCEPTS
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The Need for Accounting
Managers, investors, and other internal groupsManagers, investors, and other internal groups
want the answers to two important questions:want the answers to two important questions:
How well didHow well did
the organizationthe organization
perform?perform?
Where doesWhere does
the organizationthe organization
stand?stand?
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The Need for Accounting
Accountants answer these questionsAccountants answer these questions
with three major financial statements:with three major financial statements:
IncomeIncome
statementstatement
BalanceBalance
sheetsheet
Statement ofStatement of
cash flowscash flows
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The Need for Accounting
AAtransactiontransaction is any event that affects theis any event that affects the
financial position of an organizationfinancial position of an organization
and requires recording.and requires recording.
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DEFINITION OF ACCOUNTING
Accounting is the art of identifying, recording, classifying
and summarizing in a significant manner and in terms of
money transactions and events which are, in part at least
of a financial character and interpreting the result thereof.
It is often referred to as the language of business and, like any
other language, it has its own unique vocabulary and rules
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Some common terms in accountancy
Book-Keeping:-It means recording of business transactions
in the books of accounts in accordance with the principles
of accounting.
Account:- It is a statement of various dealings that occur
between a customer and the firm.
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Accounting Process
Recording of transaction (Journal entry)
Classification (Ledger Posting)
Summarizing (Trial balance)
Interpreting (Income &position statement)
Analysis of transactions
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ACCOUNTING EQUATION
OR
DUAL CONCEPT
Each Business transaction has a two fold effect and it is
referred to as dual aspect or duality of a transaction. Thedual aspect states that for each debit there is a credit
i.e. for every debit there is a credit.
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Double entry system
It is a common system of book-keeping whereby the two
aspects of every transaction i.e., It is based on the dual
aspectcon
cept. This method of writing every transa
ctionin two different accounts on opposite sides for equal
value is known as the double entry system of book
keeping. This is the most accurate, complete and
scientific system of accounting.
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ACCOUNTING EQUATION
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CLASSIFICATION OF ACCOUNTS:
Personal Account:- Natural Personal Account i.e. account of natural or
physical persons e.g. Rams A/c,
Sitas A/c etc.
Artificial Personal Accounts i.e. accounts of artificial orlegal person e.g. accounts offirms,companies,banks,government,schools and
colleges etc.
Representative personal accounts these accounts arecalled representative personal account as they representcertain person behind them e.g. outstanding expenses
acc
ount, income re
ceived a
ccount
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Real Account:
Real accounts are accounts of properties,assets orthings owned by a concern and with which the businessis carried on. Real or assets accounts may be-
1)Tangible Assets-assets such asgoods account,cash account,furniture account etc.
2)Intangible Assets- such asgoodwill account,patent account,copyrights etc.
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Nominal Account:
Nominal or fictitious accounts are accounts of theexpenses and loses and income and gains which aconcern earn in the course of its business-
1)income a
ccount-a
ccounts ofrevenue,income,gains etc
2)Expenses account-accounts ofloses such as bad debts ,discount
allowed.
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RULES OF DEBIT AND CREDIT
Personal Accounts:
Debit the receiver and credit the giver
Real Accounts:
Debit what comes in and Credit what goes out
Nominal Account:
Debit expenses and loses and Credit incomes
and gains
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Performa of journal
DATEDATE PARTICULARSPARTICULARS L.FL.F AMOUNTAMOUNT AMOUNTAMOUNT
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ADVANTAGES OF JOURNAL
Show all necessary information relating to a
transaction
Provide the explanation of the transaction
Date wise record of all the transaction can be
obtained
Help in locating and preventing the errors
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LIMITATIONS OF JOURNAL
Recording all the transaction in a journal
requires:
1)writing down name of account involved
2)individual posting of each accountdebited and credited
Does not provide information on prompt basis
Does not facilitate the internal check system
since the journal can be handled only by one
person
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ADVANTAGES
Transactions relating to a particular person, item or
heading of expenditure or income are grouped in the
concerned account at one place.
Ledger is the destination of all entries made in journal orsub-journals.
Ledger is the "store-house" of all information which
subsequently is used for preparing final accounts and
financial statements.
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Branches of Accounting
Financial Accounting:- It is concerned with recording
and processing the financial transactions which affect
the financial position of the business. It leads to the
preparation of income statement & position statement ofthe business.
Cost accounting is concerned with the recording,
classifying and appropriate allo
cation of expenditure forthe determination of the cost of products or services and
for the presentation of suitably arranged data for
purposes ofcontrol and guidance of the management.
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It is concerned with the collecting systematically andregularly all such information as will help management in
discharging its functions of planning, control, decision
making, etc. this is also named as accounting for
management.
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