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Lesson 1: Basics of Accounting

Lesson Objectives
On completion of this lesson, you will be able to understand Principles and concepts of Accounting Double Entry System of Accounting Financial Statements

1.1 Introduction
Accounting is a process of identifying, recording, summarising and reporting economic information to decision makers in the form of financial statements. Financial statements will be useful to the following parties: Suppliers Customers Employees Banks Suppliers of equipments, buildings and other assets Lenders Owners

1.1.1 Types of Accounts
There are basically three types of Accounts maintained for transactions : Real Accounts Personal Accounts Nominal Accounts

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Basics of Accounting

Real Accounts Real Accounts are Accounts relating to properties and assets, which are owned by the business concern. Real accounts include tangible and intangible accounts. For example, Land Building Goodwill Purchases Cash Personal Accounts Personal Accounts are Accounts which relate to persons. Personal Accounts include the following. Suppliers Customers Lenders Nominal accounts Nominal Accounts are Accounts which relate to incomes and expenses and gains and losses of a business concern. For example, Salary Account Dividend Account Sales Accounts can be broadly classified under the following four groups. Assets Liabilities Income Expenses The above classification is the basis for generating various financial statements viz., Balance Sheet, Profit & Loss A/c and other MIS reports. The Assets and liabilities are taken to Balance sheet and the Income and Expenses accounts are posted to Profit and Loss Account.

1.1.2 Golden Rules of Accounting
Real Accounts Debit Credit What Comes in What Goes out Personal Accounts The Receiver The Giver Nominal Accounts Expenses and Losses Incomes and Gains

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Basics of Accounting

1.1.3 Accounting Principles, Concepts and Conventions
The Accounting Principles, concepts and conventions form the basis for how business transactions are recorded. A number of principles, concepts and conventions are developed to ensure that accounting information is presented accurately and consistently. Some of these concepts are briefly described in the following sections. Revenue Realisation According to Revenue Realisation concept, revenue is considered as the income earned on the date, when it is realised. As per this concept, unearned or unrealised revenue is not taken into account. This concept is vital for determining income pertaining to an accounting period. It reduces the possibilities of inflating incomes and profits. Matching Concept As per this concept, Matching of the revenues earned during an accounting period with the cost associated with the respective period to ascertain the result of the business concern is carried out. This concept serves as the basis for finding accurate profit for a period which can be distributed to the owners. Accrual Under Accrual method of accounting, the transactions are recorded when earned or incurred rather when collected or paid i.e., transactions are recorded on the basis of income earned or expense incurred irrespective of actual receipt or payment. For example, a seller bills the buyer at the time of sale and treats the bill amount as revenue, even though the payment may be received later.

The cash basis of accounting is a method wherein revenue is recognised when it is actually received, rather than when it is earned. Expenses are booked when they are actually paid, rather than when incurred. This method is usually not considered to be in conformity with accounting principles and is, therefore,...
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