BASICS OF ACCOUNTING

WHAT IS ACCOUNTING?
Accounting is simply an art of record keeping and finding out the results
thereof. Basically accounting is the record of the receipts and payments in a
systematic way and to find out the surplus. Also the financial position of the
business can be ascertained on a certain date through accounting.

WHAT IS EVENT AND TRANSACTION?

Event is an occurrence, happening, change or incident, which may or may not
bring any change in the financial position of the business. An event may or
may not be expressed in terms of money.

But, Transactions are those events which satisfy both the following condition :
a) It must be expressed in terms of money.

b) Bring changes in the financial position of an entity.

So the record of monetary transactions is known as accounting or we can say

“Accounting is the language of money”.
SOME IMPORTANT TERMINOLOGY OF
ACCOUNTING.
PROPRIETOR/OWNER: The person who invests money into the business
and bears the risk of the business is the proprietor. Suppose, you have started
a business with200000. So, you are the proprietor of the business.

CAPITAL: In simple words, capital means that amount or asset which is

invested in business by businessman or owner of business. When a person
starts any business or profession, he brings some money in cash and or some
other assets like building, furniture and machinery. Suppose,you have started
a business by investing50000. This amount is the capital of your business.

DRAWINGS: It refers to the act of withdrawing cash/asset from the business

by the owner for personal use.

ASSET: A piece of property or equipment purchased exclusively or primarily

for business use. Business assets span many categories, such as vehicles, real
estate, computers, office furniture and other fixtures. Assets are classified
into mainly two categories –

a) Fixed Asset: those assets which are acquired for long period for
carrying the business. Such assets are not meant for resale like Land
and Building, Machinery etc.

b) Current Asset: those assets which are held for short period and they
are meant for converting into cash. Examples of such assets are cash,
stocks of materials, bills receivable, debtors etc.
LIABILITY: A liability is a debt or obligation that a company is to pay. For
example, you have purchased a monitor of 5000 from Sudhir and promised to
pay the money after 7days. So you have a liability of 5000 towards Sudhir.
Liabilities are further divided into two parts –

a)Fixed Liability: Liabilities which are repayable after a long period of time,
are called fixed Liabilities. Debentures, loan on mortagage etc. are example of
fixed liabilities.

b)Current Liabilities: liabilities which are payable within a short period of

time (usually a year),are called current liabilities. Creditors for goods, Biils
payable, outstanding expenses etc. are examples of current liabilities.

DEBTOR: A debtor is a person or entity that owes money. For example, Tarun
has purchased goods valuing 50000 from you on credit. Here, Tarun will be
your debtor.

CREDITOR: A Creditor is a person that has lent money or extended credit to

another party. In the above example, you are the creditor of Tarun.

INCOME: Income is the sum of all the wages, salary, profits, interest
payments, rents and other forms of earnings received in a given period of
time. Income is a part of the revenue that increases the capital. It is the
balance between revenue and expired cost. For example, goods costing 1000
are sold for 1500 for cash. The receipt of 1500 is revenue but the net increase
in asset 500 is the income.
EXPENSES: Expense is the cost to generate income. For example payment of
rent, salaries, telephone charges etc. An expense is the cost of using of things
or services for the purpose of generating revenue. It is the money spent in
conducting business activities.

GOODS: The term „Goods‟ means things or commodities in which a trader

deals. In other words, goods are those things which are purchased for resale
or producing finished products which are meant to be sold. For example, for a
cloth merchant, cloth is a goods but furniture is an asset. But if a furniture
dealer purchases furniture for sale, the furniture will be called „Goods‟.

Businessman purchases (Purchase) and sells(Sale) goods. Sometimes,

he receives some defective goods from his suppliers. If goods purchased by
businessman are defective, It will be returned to the supplier (Return
outwards or purchase return). The businessman may have some unsold goods
on a given date (closing stock & opening stock). Goods with which business is
started, is called opening stock and goods lying in the business at the end of an
accounting period, is called closing stock. Stock at the end of the year will
become opening stock at the start of new accounting year.

FREIGHT AND CARRIAGE: Freight is the charge made for conveyance of

goods by the railways. Carriage is the charge made for conveyance of goods
by land (motor, lorry transport). For the purpose of accounting carriage is
divided into two parts – carriage inward and carriage outward. Carriage
inward indicates the carriage on purchases. On the other hand, carriage
outward indicates the carriage on sale.

BAD DEBT: The debt which cannot be recovered is called bad debt.
Sometimes, debtor fails to pay debt due to his inability. The amount
unrealized from debtor is called bad debt.
Meaning of Accounting
The literal meaning of “Accounting” is - the process or work of keeping financial
accounts.

 Accounting, as an information system is a process of identifying,

measuring, and communicating the economic information of a business
to its users who need the information for decision making.
 The systematic recording, reporting, and analysis of financial
transactions of a business. The accountant is typically required to
follow a set of rules and regulations, such as the GAAP –
Generally Accepted Accounting Principles.
Accounting allows business organizations to analyze the financial performance
of the business, and to get statistics such as net profit.

Scope of Accounting

Scope of Accounting is not limited to the business world alone but spread over
in all areas of society and in all professions.

Economic activities and transactions occur all along in business organizations,

government institutions, NGOs, and professionals. It also includes individuals
and families. Accounting is all about keeping accounts of those financial
transactions.

 Business Organisations
 Government Institutions
 Working Professionals i.e. accountants, doctors, advocates.
 Individual and Families
 Non-profit Organisations
 Tax Accounting
 Investors and Management
IFRS
IFRS Standards are set by the International Accounting Standards Board (Board) and are
used Primarily by publicly accountable companies—those listed on a stock exchange and by
financial Institutions, such as banks. Authoritative interpretations of the Standards, which provide
further guidance on how to apply them, are developed by the IFRS Interpretations Committee and
called IFRIC Interpretations. Standards set by the Board’s predecessor body, the International
Accounting Standards Committee, are called IAS Standards. These Standards have the same status
as the IFRS Standards. Authoritative interpretations of those Standards, developed by the Standing
Interpretations Committee, are called SIC Interpretations. The Board has also developed the IFRS
for SMEs Standard, which is used by small and medium-sized companies without public
accountability.

IASB
International Accounting Standards Board (IASB). The International Accounting Board is an
independent, privately-funded accounting standard setter based in London. Contributors include
major accounting firms, private financial institutions, industrial companies throughout the world,
central and development banks, and other international and professional organizations.

IFRS Means
1. Conceptual Framework.

2. International Accounting Standards.

3. IFRS.

4. SIC Interpretations (Standard Interpretation Committee).

5. IFRIC Interpretations (International Financial Reporting Interpretations Committee)

6. Practice Statements.

7. Back Pages.

The characteristics of IFRS are

A. These are global accounting standards.

B. These standards are ‘principle based’, and not ‘rule-based’.

C. IFRS are developed and maintained by the IASB.

D. These are issued with the intention of applying these standards across the globe on a consistent
basis.

E. It ensures high quality transparent reporting that would ensure comparability among the entities
across the globe.

F. Every standard has a specific structure to ensure uniformity and facilitate reading, interpretation
and application. They are: Introduction, Standards, Basis of Conclusion (BC), Implementation
Guidelines (IG), Illustrative Examples (IE), and Dissenting Opinions of board members.

IFRS 1 First-time Adoption of International Financial Reporting Standards

IFRS 2Share-based Payment

IFRS 3 Business Combinations.

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

IFRS 6 Exploration for and Evaluation of Mineral Resources

IFRS 7 Financial Instruments: Disclosures

IFRS 8 Operating Segments

IFRS 9 Financial Instruments

IFRS 10 Consolidated Financial Statements.

IFRS 11 Joint Arrangements

IFRS 12 Disclosure of Interests in Other Entities

IFRS 13 Fair Value Measurement

IFRS 14 Regulatory Deferral Account.

IFRS 15 Revenue from Contracts with Customers

IFRS 16 Leases.

IFRS 17 Insurance Contracts

Importance of IFRS

It is treated as an international accounting standard and holds great importance for

many countries and the world economy. Here is its significance:

#1 – Transparency

It encourages transparency and accountability of financial statements prepared by

companies, small firms, and government agencies. As a result, it minimizes the margin of
error and manipulation of any holdings and irregularities of funds, transactions, and
balances. Besides, it also motivates consistency and clarity of work.

#2 – Uniformity and Comprehensive

The International Financial Reporting Standards are developed to set uniformity in

the presentation and understandability of statements. When everyone follows and
recognizes the standards, it becomes easy for companies and agencies to follow a
common law that helps world economies compare their growth comprehensively. Also,
it is easy to read for everyone.

#3 – Security and Flow

It helps track the flow of transactions, records funds information, and works towards
attaining a security level for direct and indirect foreign investments across nations. This
accounting standard is essential when we are dealing with significant assets or getting
into heavy transactions.

#4 – Accountability

It strengthens accountability by bridging the gap of incompetent financial reporting. If

not complied with it, the companies may face penalties. For example, last year, the
Johannesburg Stock Exchange fined a sugar firm Tongaat Hulett Ltd. Its financial
statements, account reports, and other information details did not comply with IFRS and
were incorrect.