TALLY TUTORIALS-Lesson 1: Basics of Accounting

 

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 informa- tion to decision makers in the form of financial statements. Financial statements will be useful to the followingparties:   ‡   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   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 follow- ing.   ‡   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 Expensesaccounts are posted to Profit and Loss Account.   1.1.2  Golden Rules of Accounting     Real Accounts Personal Accounts Nominal Accounts Debit What Comes in The Receiver Expenses and Losses Credit What Goes out The Giver Incomes and Gains   1.1.3  Accounting Principles, Concepts and Conventions   The Accounting Principles, concepts and conventions form the basis for how business transac- tions 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 isvital 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. Note :  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, used only in select situations such as for very small busi- nesses Going Concern   As per this assumption, the business will exist for a long period and transactions are recorded from this point of view.