Jayanthi Iyer

AccountingNot a rocket technologyAs simple as adding and subtracting

What is Accounting?Language of business – serve as a

means of communication of matters relating to various aspects of business operations.

Accounting provides information

Forms of Business OrganizationSole proprietorshipPartnershipCompany

Private CompanyPublic Company- not listedPublic company – ListedLimited Liability Partnership

Users of accounting information

Owners and shareholdersManagersEmployeesProspective InvestorsLendersSecurity Analysts and advisersSuppliersCustomersGovernment and regulatory agencies

Information SystemInputsProcessesOutputsUsers

Financial StatementsBalance sheet – Which shows the

financial status of a company at a particular instant in time. It summarizes the resources of an enterprise [assets] and claims against these resources [liabilities]. Reveals what a company owns and what it owes.

Financial StatementsProfit and Loss Account [Income

Statement] This reports the results of the operation of an enterprise during the accounting period. Measures the economic performance of a company.

Financial StatementsStatement of cash flows – Outlines

where a company gets its cash and how it spends that cash.

Financial and Management Accounting

Financial Accounting – Consolidated information for external users

Management Accounting – Detailed information for internal users

Tax reporting – Separate statement according to tax laws

Accounting Concepts Separate Entity Concept Business is

distinct and separate from its owners.

Going Concern ConceptBusiness will continue for a fairly

long time or goes on for ever

Periodicity or Accounting PeriodLife of the business is divided into

artificial time periods for studying the results usually a year.

Money MeasurementAccounting records only monetary

transactions. Events or transactions which cannot be expressed in terms of money will have no place in accounting statements.

Cost concept All transactions are recorded at their

monetary cost of acquisition.

Dual Aspect ConceptEvery transaction has a dual effect.

At any given time economic resources belonging to a business is equal to the claims against those resources.

Dual AspectEconomic resources = Claims.

AssetsAssets are resources owned by the

enterprise from which future economic benefits are expected to flow to the enterprise.

What the enterprise ownsEconomic benefit- higher cash inflow

or lower cash outflow

ClaimsWho has the rights to the assets?

Who has the claim on the assets?

ClaimsOwner’s EquityLiability

LiabilitiesLiabilities are present obligations of

the enterprise to outsiders What the enterprise owes to others.The settlement of Liability is

expected to result in an outflow of economic resources.

Owners’ EquityEquity represents the owners’ claim

on the assets.Owner’s Equity is the residual

interest in the assets of the enterprise after deducting all its liabilities.

Accounting EquationEconomic resources = Claims.

Assets = Liabilities + Owner’s Equity.

Business ActivitiesService OrganizationMerchandising OrganizationManufacturing Organization

Balance sheet of Wonder Homes Services as on 1/4/2012LiabilitiesSanath Equity

100000

100000

Assets Cash 100000

100000

Balance sheet as on 2/4/2012Liabilities and

EquityOwner’s Equity 100000Loan Creditors

50000

150000

Assets Cash 150000

150000

Balance sheet as on 5/4/2012Liabilities and EquityOwner’s Equity 100000Loan Creditors 50000

150000

Assets Cash 10000Office Equipment 140000

150000

Balance sheet as on 8/4/2012Liabilities and EquityOwner’s Equity 100000Loan Creditors 50000Accounts Payable 20000

170000

Assets Cash 10000Office Equipment 140000Office furniture 20000

170000

Balance sheet as on 9/4/2012Liabilities and EquityOwner’s Equity 96000Loan Creditors 50000Accounts Payable 20000

166000

Assets Cash 6000Office Equipment 140000Office furniture 20000

166000

Balance sheet as on 11/4/2012Liabilities and

EquityOwner's equity

116000Loan Creditors

50000Accounts Payable

20000

186000

Assets Cash

26000Office Equipment

140000Office furniture

20000

186000

Balance sheet as on 15/4/2012Liabilities and

EquityOwner's equity

126000Loan Creditors

50000Accounts Payable

20000

196000

Assets Cash

36000Office Equipment

140000Office furniture

20000

196000

Balance sheet as on 18/4/2012Liabilities and

EquityOwner's equity

126000Loan Creditors

50000Accounts Payable

10000

186000

Assets Cash

26000Office Equipment

140000Office furniture

20000

186000

Balance sheet as on 24/4/2012Liabilities and

EquityOwner's equity

141000Loan Creditors

50000Accounts Payable

10000

201000

Assets Cash

26000Office Equipment

140000Office furniture

20000Accounts Receivable

15000

201000

Balance sheet as on 28/4/2012Liabilities and

EquityOwner's equity

128000Loan Creditors

50000Accounts Payable

10000

188000

Assets Cash

13000Office Equipment

140000Office furniture

20000Accounts Receivable

15000

188000

Balance sheet as on 30/4/2012Liabilities and

EquityOwner's equity

126000Loan Creditors

50000Accounts Payable

10000

186000

Assets Cash

11000Office Equipment

140000Office furniture

20000Accounts Receivable

15000

186000

Income Statement for the month of April 2012

RevenuesIncome from Consulting 45000 ExpensesAdvertisement 4000Salary 5000Rent 8000Total expenses 17000Net Profit 28000

Balance sheet as on 30/4/2012Liabilities and

EquityOwner's equity

124000Loan Creditors

50000Accounts Payable

10000

184000

Assets Cash

11000Office Equipment

138000Office furniture

20000Accounts Receivable

15000

184000

Income StatementRevenuesIncome from Consulting 45000 ExpensesAdvertisement 4000Salary 5000Rent 8000Depreciation 2000Total expenses 19000Net Profit

26000

Income StatementRevenuesIncome from Consulting 45000 ExpensesAdvertisement 4000Salary 5000Rent 8000Electricity exp 500Depreciation 2000Total expenses 19500Net Profit 25500

Balance sheet as on 30/4/2012Liabilities and

EquityOwner's equity

123500Loan Creditors

50000Accounts Payable

10000Electricity payable

500

184000

Assets Cash

11000Office Equipment

138000Office furniture

20000Accounts

Receivable15000

184000

Revenues Revenues are amounts earned from

customers for goods sold or services rendered.

Revenues result in assets coming into business for performing work/services.

Revenues increase Owner’s equity

ExpensesExpenses are costs of earning revenues.Sacrificies made to earn revenues.Expenses decrease Owner’s equity

Owners’ Equity Capital contributions/investments by the

owner(s)Withdrawals/ DividendRevenuesExpenses

Net Income or Net ProfitNet profit = Revenues – Expenses.

Retained EarningsDividends decrease Owner’s equity Retained Earnings = Net Profit – DividendRetained Earnings= Revenues-Expenses-Dividend

Owners’ EquityRetained Profits increases Owner’s

equityRevenues increase Owner’s equity,

expenses decrease Owner’s equity, dividends decrease Owner’s equity.

Withdrawal by the owner equity decreases owner’s equity and fresh capital brought in increases the same.

Other ConceptsMatching Concept – Expenses should be

recorded in the same accounting period in which the revenues were earned as a result of the expenses.

Realization Concept – States that the amount that is reasonably certain to be realized- that is , the customers are reasonably certain to pay should be recognized as revenue.

ConventionsConsistency – Accounting practices to remain

unchanged from period to period; necessary for the purpose of comparison; does not mean inflexibility.

Conservatism – Anticipate no profits but provide for all possible losses.

Full Disclosure – Accounting reports should be honestly prepared and sufficiently disclose information which is of material interest to the users.

Materiality – Attach importance to material details and ignore insignificant details.