Chapter 1
Basic Understanding
of Accounting
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Accounting
• Accounting is the language of business.
• Luca Pacioli, a Franciscan monk, is considered
to be the father of the modern system of
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to be the father of the modern system of
accounting known as the double-entry system
of bookkeeping and accounting.
Accounting
• Accounting is a service-based discipline.
• Accounting is a measurement discipline.
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• Accounting is the process of preparing and
presenting the accounts.
Definition
• Accounting is ‘the art of 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
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which are, in part, at least, of a financial
character, and interpreting the results thereof.’
- AICPA
Book-keeping
• Bookkeeping is the record-making phase of
accounting.
• Bookkeeping is the systematic recording of
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• Bookkeeping is the systematic recording of
financial and economic transactions,
accounting is the analysis and interpretation
of bookkeeping records.
Function of Accounting
• Ascertaining the claims and interest in the said entity;
• measuring the resources and changes in these resources;
assigning the changes to specified period of times
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• assigning the changes to specified period of times in terms of money;
• communicating information about an entity; and
• fulfilling the statutory requirements, particularly in respect of income tax, sales tax, etc.
Limitations of Accounting
• Financial Nature
• Historical costs
• Measurement unit
• Personal Judgment
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• Personal Judgment
• Estimates
• Inexact informations
Users of Accounting
• Outside Users
• Inside Users
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Kind of Accounting Activities
• Financial Accounting
• Cost Accounting
• Taxation Accounting
• Management Accounting
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• Management Accounting
Basic Terminology
• Capital
• Equity
• Liability
• Drawings
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• Drawings
• Assets
• Goods or Merchandise
Basic Terminology
• Revenue, Income or Turnover
• Expenses
• Discounts
• Debtors
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• Debtors
• Creditors
Basic Terminology
• Loss
• Profits
• Cost of Goods Sold
• Expenditures
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• Expenditures
Cyclical Nature of Business
• receiving assets from owners and creditors;
• purchasing assets (including traded items for
resale) or materials to produce saleable goods
and/or services;
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and/or services;
• selling goods or services;
• collecting cash or assets equivalent to cash-in-
kind from customers; and
• repaying creditors their dues.
Cyclical Nature of Business
• Financial Cycle
• Operating Cycle
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Accounting Equation
• Assets = Claims
• Assets = Liabilities + Equity
• Equity = Assets – Liabilities
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Accounting Equation
• Owners’ Equity = Capital + Retained Earnings
• Retained Earnings = Income − Expenses −
Drawings by Owners
• Owners’ Equity = Capital + (Income − Expenses
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• Owners’ Equity = Capital + (Income − Expenses
− Drawings)
• Assets = Liabilities + Capital + Retained
Earnings
Accounting Events and Transactions
• A transaction is a particular kind of economic
event that involves the transfer of something
between two enterprises.
• An accounting event is an economic
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• An accounting event is an economic
transaction that has an impact on the
organization’s assets, liabilities, and/or equity.
The transactions may be internal, or external,
Accounting Basics
• Effects of transactions on Accounting Equation
• Personal Accounts and Impersonal Accounts
• Accounting Methods
– Cash Basis
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– Cash Basis
– Accrual Basis
Classification of Accounts
• Traditional Approach
– Personal Account
– Impersonal Account
• Real account
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• Real account
• Nominal account
Classification of Accounts
• Modern Approach
– Assets Account
– Liability Account
– Capital Account
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– Capital Account
– Revenue Account
– Expense Account
Role And Activities of an Accountant
• Primary Role
• Decision-Maker
• Tax Planner
• External Verifier
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• External Verifier
• Conscience Keeper
• Manager of Information
Accounting Personnel
• Auditor
• Controller
• Treasurer
• Finance Director
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• Finance Director
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