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Basic Understanding Of Accounting

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Basic understanding of accounting

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    Basic Understanding of Accounting 00000 000 oo
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    What is Accounting? 0000 0000 0000 000 oo e Accounting is the process of recording, classifying, analysing & interpreting the business transactions which can be measured in terms of money. e Thus, accounting keeps a permanent record of all business transactions.
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    What is Accounting? 0000 0000 0000 000 oo e Accounting helps in knowing the true financial position of the business. o Accounting provides all valid financial information to owners, banks, customers, government and other outside parties to make correct decisions.
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    Process of Accounting Business Transactions Journal Entries Ledger Accounts Trial Balance Final Accounts Profit & Loss "000 0000 0000 000 oo Trading Account Balance Sheet
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    Basic Terms of Accounting Assets: 0000 0000 0000 000 oo Assets are resources owned and controlled by the business enterprise. Eg: land, machinery, furniture, cash, bank balance, stock, etc Types of assets: Fixed Assets Current Assets O o Investments
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    Basic Terms , Fixed Assets: 0000 0000 0000 000 oo These are assets purchased for a long period i.e. more than 1 year. Eg: land, building, plant and machinery, vehicles, O furniture and office equipments, etc. These assets form the basic infrastructure of the O company. These assets are not held for sale. O
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    Basic Terms Current Assets "000 0000 0000 000 oo These assets are required to carry on the day to day business activities. o Inventories [raw material, work in progress & finished goods] Cash balance O Bank balance O Debtors o Receivables o
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    Basic Terms e Investments: 0000 0000 0000 000 oo When a business enterprise puts its surplus funds in shares or bonds of governments, it is known as investments. o Investments generate income in form of interest, dividends, etc. They generate gains or loss when sold.
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    Basic Terms o Liabilities: "000 0000 0000 000 oo Liabilities are obligations of the business enterprise, payable to outsiders & to owners of the business. O O Owner's capital Borrowings Creditors Payables
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    Basic Terms Types of liabilities; e Long term liabilities: Any liability payable after a period exceeding 1 year. Eg: owner's capital, bank loans for more than a O year 0000 0000 0000 000 oo
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    Basic Terms e Current Liabilities Any liability payable within a year or liabilities incurred in day to day course of business. Eg: creditors, payables, bank O.D or short term O credit, etc. 0000 0000 0000 000 oo
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    Balance Sheet "000 0000 0000 000 oo Amt Liabilities Owner's Capital Outside Liabilities Total liabilities Amt Assets Fixed Assets Current Assets Investments Total assets
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    Financial Position e Total Assets = Total Liabilities or 0000 0000 0000 000 oo Assets — Outside Liabilities = Owner's Capital o Financial position is said to be stronger if the assets are more than outside liabilities.
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    Basic Terms Income: "000 0000 0000 000 oo Business activities generate various types of revenues and incomes. Thus income is what the firms earns Eg: e Income from sales of goods, Fees from sale of services, o Interest and dividends on investments, Cash discounts, Rent received, Gain from sale of investment
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    Basic Terms , Expense: Many expenses are incurred in the course of business activities. "000 0000 0000 000 oo O O o Raw material purchased, Wages and salaries, Power and fuel, Office rent, Advertisement expense, Loss on sale of investments
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    Financial Performance 0000 0000 0000 000 oo e Excess of income over expenses is known as net profit. o Excess of expenses over income is known as net loss. e Every business strives to earn profits.
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    Financial Performance 0000 0000 0000 000 oo Net profit is added and net loss is deducted from owner's capital. Assets- Outside Liabilities = Owner's capital = Capital + Net Profit = Capital — Drawings + Income - Expenses
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    Accounting Process or Cycle 1 . ) Analysis of business transactions 2.) Documentation 3.) Recording 4.) Classifying 5.) Summarizing 6.) Bifurcating 0000 0000 0000 000 oo
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    Documentation & Recording Classifying Summarizing Bifurcating Trading Account Business Transactions Journal Entries Ledger Accounts Trial Balance Final Accounts Profit & Loss "000 0000 0000 000 oo Balance Sheet
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    What is an Account? 0000 0000 0000 000 oo e An account is a device to record business transactions. o There are various accounts prepared for each asset, liability, income and expenses. e An account has two sides:
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    Dr Particulars Amount Particulars "000 0000 0000 000 oo Cr Amount
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    What is an Account? 0000 0000 0000 000 oo e The left side of an account is known as debit (Dr). e The right side of an account is known as credit (Cr). In any account, on one side increase is recorded and on other side the decrease in the item is recorded.
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    Types of Accounts Nominal / temporary accounts The accounts related to all incomes and expenses. Eg: Interest A/c, Rent A/c, Salary A/c, Etc. Personal accounts "000 0000 0000 000 oo Accounts of natural persons like Mr. Ramesh, Mr. Suresh, etc. Accounts of legal persons like companies, banks, government, etc. These persons are generally the buyers, sellers, lenders, investors, etc. associated with the company. In short they are debtors or creditors.
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    Types of Accounts e Real / Permanent accounts "000 0000 0000 000 oo These are accounts of various assets and goods. Eg: Buildings A/c, Machinery A/c, debtors' A/c, purchase A/c, Sales A/c.
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    What is Debit and Credit? e Debit is the left hand side of an A/c. 0000 0000 0000 000 oo e Thus amounts written on the left side of an account are called debits. Credit is the right side of an A/c. o Thus amounts written on the right side of an account are called credits.
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    "000 0000 0000 Debit Balance & Credit Balance 000 oo Every A/c has a debit balance or a credit balance. , Debit Balance: An account has a debit balance when the total of debit side is more than the total of credit side. All assets and expenses have a debit balance. For assets and expenses, an increase is written on debit side and a decrease on credit side.
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    0000 0000 0000 Debit Balance & Credit Balance 000 oo Credit Balance When the total of credit side is more than the total O of debit side, it is known as a credit balance. All liabilities and incomes have a credit balance. O For liabilities and incomes, an increase is written O on credit side and decrease is written on debit side.
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    Rules of Debit and Credit 0000 0000 0000 000 oo e The system of accounting is a double entry system. e Under double entry system of accounting, every transaction has two effects — one debit and one credit. e This means for every business transaction one A/c is debited and one A/c is credited.
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    The 3 main rules e For nominal accounts expenses: Rule l: O i.e. incomes "000 0000 0000 000 oo and Debit al/ expenses and losses revenues, incomes & gains. credit al/
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    The 3 main rules e For personal accounts Rule 2: O Debit the receiver and credit the given "000 0000 0000 000 oo
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    The 3 main rules e For real accounts i.e. for assets and goods "000 0000 0000 000 oo O Rule 3: Debit what comes in and credit what goes out."
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    Method of debiting and crediting 0000 0000 0000 000 oo l. 2. 3. Determine accounts associated with the transaction. Determine the type of account (personal, real or nominal) Record the transaction using rules of debit and credit.

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