Introduction to

Accounting Built
Environment
By Dr Megha Jain
- University of Delhi

RICS, AMITY, Basic Accounts for Beginners

 Agenda
 What is Accounting
 Mode of Learning Accounting
 Accounting and Finance - Difference
 Accounting Concepts / Conventions
 Accounting Events
 Rules of Accounting
 Preparation of Financial Statements
 A Simple Case Study

RICS, AMITY, Basic Accounts for Beginners

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 What is Accounting
Vision Enterprises
Financial Statement
at December 31, 1997
Vision Enterprises
Assets Financial Statement

JOURNAL
Cash at December 31, 1997
Account Receivable Vision$4,456
Enterprises
Land Assets $5,714
Financial Statement
Cash $ 981
at December 31, 1997
Total Assets
Account Receivable --------- $4,456
Land Assets $11,151 $5,714
Liability Cash ======$ 981
AccountTotal Account Receivable --------- $4,456
Assets
Payable
Land $3,830 $11,151 $5,714
Notes Payable $ 416======$ 981
Liability ---------
Total
Account Assets
Payable ---------
Total Liability $4,246 $3,830$11,151
Notes Payable ======$ 416======
PAYMENT
Liability
Stockholder’s Equity $2,365---------
Contributed Account Payable$ 367$4,246
Capital
Total Liability $3,830
Retained Earnings
Notes Payable ---------======$ 416
Total Stockholder’s
Equity Stockholder’s Equity $2,732 $2,365---------
Contributed Capital
Total Liability ======$ 367$4,246
Retained Earnings ---------======
Total Stockholder’s
Equity Stockholder’s Equity $2,732 $2,365
Contributed Capital ======$ 367
Retained Earnings ---------
Total Stockholder’s
Equity $2,732
======

Accounting is defined as the art of Recording,

Classifying and Summarizing transactions in
monetary terms (in Money terms) for the
preparation of Financial Statements
RICS, AMITY, Basic Accounts for Beginners
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 What is Accounting
 Accounting is the art of recording, classifying and Summarizing
financial transactions in the Preparation of Financial Statements
 Recording refers to creating Journal entry for every financial
transaction with Debit and Credit amounts.
 Classifying refers to Classifying each of the Debit / Credit
Transaction to Capital or Revenue and Asset, Liability, Revenue or
Expense
 Summarizing refers to Grouping the Transactions of Asset,
Liability, Revenue and Expenses and preparing the Financial
Statements (Trading, Profit and Loss Account and Balance Sheet)
 In case of
• Trading, Manufacturing and Customer Service oriented
Organization, the sum of all income and expenses is referred to
as Profit and Loss account
• Social Service oriented Organization like Schools, Hospitals and
Government Organizations, Banks it is referred to as Income
and Expenditure account .

Note:- Trial Balance is not a Financial Statement. It is only a summary

of all Debit and Credit Transactions.
RICS, AMITY, Basic Accounts for Beginners
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 Mode of Learning Accounting
 Change your mindset that accounting means
only Debit and Credit
 Do not blindly learn Accounting Rules and
apply the rules of Debit and Credit
 The Best way to Learn Accounting is
 Learn the Accounting Concepts
 Understand the Accounting Conventions
 Classify the Accounting Event
 Apply the Accounting Rules
 Record, Classify and Summarize the Journal
• You are Confused. Am I right?
 Do not become panic and move forward, you will understand

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Mode of Learning Accounting
Learn Accounting Concepts
(Ten Fundamental Accounting Concepts)

Understand Accounting Conventions

(Three major conventions)

Classify the Accounting Events

(Capital, Revenue, Deferred Revenue Expenditure)

Apply the Accounting Rules

(Personal, Real and Nominal Rules)

Record the Transaction as a Journal

(Entering the Debit and Credit Side of Transaction)

Classify the Transaction

(Asset, Liability, Revenue or Expense)

Summarize the Transaction

(Prepare Trial Balance, Trading, P&L and Balance Sheet)
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RICS, AMITY, Basic Accounts for Beginners
Finance and Accounting - Difference
Finance Accounts
Procurement and Utilization of Recording of an Accounting
Funds Event
Leads to Investment Decisions Expressed in Monetary Terms
Financing Decisions Recording , Classifying and
Summarizing Transactions
Futuristic Preparation of Financial
Statements (Trading, Profit and
loss Account and Balance
Sheet)
Cost of Capital Historical
Cash Flow / Fund Flow Compliance with Statutory
Matters like companies Act,
Income Tax Act, Sales Tax Act
Etc.,
Project Appraisal
Ratio Analysis 7
 Accounting Concepts/Conventions
(US GAAP/UK GAAP/IFRS/SOX)
 The Concepts and conventions of accounting are
developed by IASC (International Accounting Standards
Committee) which is in-charge of releasing International
Accounting Standards (IAS)

 The IASC Decides the preferred Accounting practices

worldwide and encourages the worldwide acceptance

 There are 41 International Accounting Standards

 Now IFRS (International Financial Reporting Standards)

and SOX (Sarbanes Oxley) Act gain more importance
which came up from US GAAP and UK GAAP
RICS, AMITY, Basic Accounts for Beginners
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Difference between Concepts and Conventions
 The Accounting Concepts / Principles evolved out of the
Practice and Procedures followed by different countries
and later on established by the International Statutory
Accounting Bodies like The Institute of Chartered
Accountants of India, The Institute of Chartered
Accountants of England and Wales etc to become an
Accounting Principle statutorily need to be followed
while preparing the Financial Statements. In nutshell this
has evolved out of standard Practice followed by several
countries while preparing the Trading, Profit and Loss
Account and Balance Sheet.

 The Accounting Conventions / Practices are basically

assumptions and expected to be followed while
preparing the Financial Statements.
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RICS, AMITY, Basic Accounts for Beginners
Accounting Concepts / Principles
 Business Entity Concept
 Money Measurement Concept
 Dual Aspect Concept
 Cost Concept
 Accounting Period
 Conservatism
 Realization Concept
 Matching Concept
 Materiality Concept
 Objectivity
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Accounting Conventions / Practices
 Going Concern
 Consistency
 Accrual

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 Accounting Concepts
 Business Entity Concept
Accounts can be kept only for Entities, which are different from the
persons who are associated with these entities
Ex. Sole Proprietary, Partnership firm, Company
This is one of the most Important and fundamental accounting
principle with which Double entry system of accounting has evolved.

Accounts need to be maintained separate from the Owners and

providers of capital. If you understand the simple logic, then you know
30% of Accounting. Just Recall Fundamentals of Accounting from
Oracle Perspective Level I Example of Siva, Oracle and Bank.

See Next Slide for More Examples. If you cannot understand this
Concept Please Do not Proceed Further and try to understand by
reading again Level I and Level II Material

RICS, AMITY, Basic Accounts for Beginners 12

 Types of Entities
Type of Organization Example
Sole Proprietary

Partnership Firm
Private Company

Public Company

Closely Held Company

Trust

Society

Association of Persons

Body of Individuals (one Man Corp)

Any other Legal Entity (HUF)

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 Types of Entities
Type of Organization Example
Sole Proprietary Siva & Co

Partnership Firm Ganesan Bros

Private Company Oracle India Pvt Ltd (A Private Company in
which shares are not traded in Stock Exchange
and members cannot exceed 50)

Public Company Hindustan Unilever Ltd (A Public Company in

which Shares are traded in Stock Exchange)

Closely Held Company Cadbury India Ltd (A Public Company in which

shares are not traded but shares are held by
more than 50 persons)

Trust Hutchinson Private Trust

Society Sembur Co-op Society

Association of Persons ICAI, ICWAI, ICSI, Rotary Club

Body of Individuals (one Man Corp) President of India, Governor of State

Any other Legal Entity (HUF) A Hindu Undivided Family Jointly holding the
Investment and Properties for the benefit of
Family members.
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RICS, AMITY, Basic Accounts for Beginners
 Accounting Concepts
 Business Entity Concept
 Ex 1: You are running your own Textile Showroom as a Dealer in Cloth as a Sole
Proprietor/Individual Owner of the Business. The entire capital amount for the
Business is provided by you. In this case also for the purpose of accounting you
need to maintain Two set of books.
• One set of books for the purpose of Textile Business in which, Business
owes you equivalent to the Capital Provided (Capital + Profit earned) or
(Capital – Losses)
• In your own Books the amount of Capital invested will be shown as an
Investment in Business as an Asset. This need not be maintained as a Normal
Set of Books but required to know the Cash Inflow and Cash Outflow from
Income Tax Perspective.

 Ex 2: You are working for Oracle Corporation and Oracle has a Bank Account with
Bank of America and You have Bank Account with Citi Bank and the salary at end
of every month is transferred from Bank of America to Citi Bank. How many
accounting Entities involved in this case?
• If your answer is 4, then you are right (You, Oracle Corp, Bank of America,
Citi Bank)

 Ex 3: You run your own Business in Software Consulting and your Friend has
agreed to provide a Loan of 50000 USD which he goes and deposit directly into
your Bank account - How many accounting Entities involved in this case?
• If you say 3, You are right, it is only Three. (You, Your Friend and Bank)

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 Accounting Concepts
 Money Measurement Concept
Record should be made only of that information which can be expressed in
Monetary Terms (i.e.) Currency value (USD,GBP,INR)
Ex 1. Sole Proprietor had 40 Tables & Chairs. This cannot be
recorded unless a Value of Furniture is known in monetary value

Ex 2. Very Famous Indian Example – Rama Killed Ravana. Can this be

Accounted? – NO

Ex 3. My wife Loves me so much – Can this be accounted?

– A Big NO (Hahhah). This is Flaw in Financial Accounting as it does
not understand the human values

Ex 4. My Father in Law gave his Personal Property to start my Business.

Can this be Accounted – Yes (If the Value of the Property is provided)

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RICS, AMITY, Basic Accounts for Beginners
 Accounting Concepts
 Money Measurement Concept
A Normal Doubt comes to your mind in the first and fourth
example in previous slide how to get the value. We should not be
taking the Purchase value, but we should take the Market value on
the date of transferring the assets to Business. This is an
exception to cost concept only in case of transfer to another
business

Ex 5: Siva started his software consulting Business with his own

Property (Cost Price 1 Million USD and Market Value 1.5 Million
USD) and Furniture's Cost price 50000 worth Market Value 30000
USD
- In this case, You can record Siva Capital (1530000) and
Building 1500000 and Furniture 30000 as Assets
Liabilities Assets
Siva Capital 1530000 Building 1500000
Furniture 30000
Total 1530000 Total 1530000
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RICS, AMITY, Basic Accounts for Beginners
 Accounting Concepts
 Dual Aspect Concept
The Value of the Assets owned by the concern is equal to the claims on
the Assets
ASSETS = LIABILITIES + OWNER’S EQUITY
OWNER’S EQUITY = ASSETS – LIABILITIES
LIABILITIES = ASSETS – OWNER’S EQUITY

Ex: If Owners Equity is 600000 and Liabilities are 400000, then Total
Asset = 1000000

Asset Owner’s Equity + Liabilities

Liabilities Assets – Owner’s Equity

Owner’s Equity Assets - Liabilities

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RICS, AMITY, Basic Accounts for Beginners
 Accounting Concepts
 Cost Concept
Assets are always shown at their Cost and not at
their current Market Value
Ex 1. A Land Purchased for Rs.5 Lacs will be
recorded only at Rs.5 Lacs even though Market
value may be lower say Rs.4 Lacs or Higher Rs.6
Lacs than the Cost Price

Ex 2. You are acquiring a Business for a

Million USD and its value as per Books is 0.8 Million,
then the difference of 0.2 Million is termed as
Goodwill and you should records the assets and
liabilities at the price you have paid for the Business
(i.e.) 1 Million

RICS, AMITY, Basic Accounts for Beginners 19

 Accounting Concepts
 Accounting Period
Accounting measures activity for a specified interval of time, usually a
year
(e.g) Calendar Year (Jan’07-Dec’07)
Fiscal Year (Apr’07-Mar’08)
Choosing the Accounting period is the entities choice, but there are legal
rules like Companies Act and Income Tax Act which prescribes the period
in which the entity has to report to them.

Remember still Entities can have different accounting period for their own
Internal Management Reporting

A Company in India can have for Company Law Purpose (Jan-Dec) Year
and Income Tax Purpose (Apr-Mar) Year and for own internal Reporting
(Jul-Jun) Year

Note: The Entities cannot change their accounting period without getting
proper approval only in case of Companies Act and not possible with
Income Tax Authorities.
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 Accounting Concepts
 Conservatism
Anticipate no Profits but provide for all possible losses.

Accountants are by nature Conservative and also to protect the interest of

the Shareholders and Creditors it is required to provide for all losses.

Ex 1. A pharmaceutical Company going to Loose the case filed for Patent

Right filed for a medicine
Ex 2.Company is likely to Win a Major Legal Dispute or a Sales Contract.
Note: This rule should not be misinterpreted to provide anticipated reduction
in market price of a Product and Providing Losses
Ex 3: You are a Government Company and there is a possibility that
Government will withdraw the subsidy for Fertilizers in the forthcoming
budget, You cannot provide loss of subsidy as a loss now itself.
Ex 4: The Government is likely to increase the Price of petrol which is one of
the essential input for your business, then you cannot provide for losses.
Ex 5:There is a Fire in your in your Factory and Goods were lost and the
Goods are insured, then the claim you submitted can be booked to the
satisfaction of Insurance Company and Auditors.

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 Accounting Concepts
 Realization Concept
The Sales is considered to have taken place only when either the cash
is received or some third party becomes legally liable to pay the
amount. Revenues are recognized when they are earned or realized. 
Realization is assumed to occur when the seller receives cash or a
claim to cash (receivable) in exchange for goods or services

Ex 1: A Sales invoice for Rs.1 Million

Credit Note for Rs.15000 received

Ex 2: For instance, if a company is awarded a contract to build an

office building the revenue from that project would not be recorded in
one lump sum but rather it would be divided over time according to the
work that is actually being done. 

RICS, AMITY, Basic Accounts for Beginners 22

 Accounting Concepts
 Matching Concept
When an Event affects both the revenues and expenses, the effect on
each should be recognized in the same accounting period

Ex 1: Generally Employees Salaries are paid for the previous month

at the beginning of the next month. But they have rendered their
services to produce goods and sold and Sales revenue is recognized
in previous month. So to match the cost with the revenue earned, we
need to make provision for Salaries in previous month itself. (i.e.)
March Salary paid in April, but a Salary Payable provision will be
made in March itself

EX 2: Insurance Premium paid for Jan- Dec whereas your accounting

period closes on March. In this case only three months premium need
to be treated as Expense and balance 9 months treated as advance
premium paid as an asset

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 Accounting Concepts
 Materiality concept
Insignificant events would not be recorded, if the
benefit of recording them does not signify the
cost
Ex: A calculator worth Rs.500 not recorded asset
rather than charged off as an Expense even
though the benefit is enduring in nature.

This concept need to read in conjunction with

accounting events which signifies the transaction
into Capital, Revenue and deferred revenue
expenditure.
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RICS, AMITY, Basic Accounts for Beginners 24
 Accounting Concepts
 Objectivity Concept

An Evidence of the happening of the Transaction should support

every Transaction in the form of paper. External Evidence is
considered to be more authenticated proof than Internal Evidence.
This rule is more important from Audit perspective as Auditors
always consider and bound to get more external evidences than
internal Evidences.

Ex 1: Third Party Evidence (Credit Note from Supplier)

Ex 2: Auditors Collect Statements from Customer and Suppliers for

the amount showing as Outstanding from Customers and amounts
Payable to Suppliers.

Ex 3: The Sales Invoices alone is not considered as an objective

evidence unless it is not supported by Delivery challan and
acknowledgement of Goods Received by Customer.

RICS, AMITY, Basic Accounts for Beginners 25

 Accounting Conventions
 Going Concern

Accounting Records , Events and Transactions on the

assumption that the entity will continue to operate for an
indefinitely Long period of time

Ex. An Entity will not be started with an intention to close

within the specified time period. Business is always not
started with an intention to close and it is expected to
continue forever.

RICS, AMITY, Basic Accounts for Beginners 26

 Accounting Conventions
 Consistency
The Accounting Policies and methods followed by the
company should be the same every year
Ex 1. Period should not be changed frequently from Jan-
Dec to Apr-Mar
Ex 2. Inventory Valuation change from FIFO to LIFO or
Weighted Average not permitted frequently
Ex 3. Changing Depreciation Policy from Straight Line to
Reducing Balance Method frequently
Note: If any Company decides to change the policy, then
that Company has to report on the effect of Profit/Loss
due to the change for past 5 Years.

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 Accounting Conventions
 Accrual
In General it is assumed that Accounts are always
prepared based on Accrual basis. However there are
entities which follow Cash Basis of Accounting Also
Ex: Salary Payable to employees (March salary paid in
April), Interest Receivable on Investments (NSC interest),
Dividend Receivable on shares, Tax Payable to
Government (March sales Tax and Annual Income Tax)

The Company Law / Income Tax Act Prescribes all

Companies to follow Accrual Basis of Accounting except
for Professional Firms and Government Organizations
which are allowed to follow Cash Basis of Accounting.

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Classification of Accounting Event
 Capital Item: Any expenditure that creates an asset, for
example:
 Purchase of plant or machinery

 Improvements to assets that increase their

usefulness or extend their effective useful life of the

asset
 Expenditure incurred in transporting an asset to its

site and preparing it for use.

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Classification of Accounting Event
 Revenue Item: An Income or Expenditure and the
benefit of which will be exhausted within a year (i.e.) The
Calendar Year or the Financial Year whichever is set up
for the Set of Books
 Ex: Salary and wages, Printing and Stationery, Sales

Revenue, Interest Income, Salary Payable, Bonus

Payable, Tax Payable etc.,
 In Simple terms this is an event which generates

revenue and the related cost to earn the revenue are

accounted as expense.

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Classification of Accounting Event
 Deferred Revenue Expenditure: It is neither a Capital
nor Revenue and the benefit of which will be realized for
more than a year (Exceeding beyond the Calendar year
for the set of books) and does not result in creation of
an asset.
 Ex 1: Advertisement Expenditure the benefit of which

is likely to be obtained over a period more than one

year (E.g.) PepsiCo Pays USD 2 Million to Sachin
Tendulkar for an Advertisement Contract for two
Years and benefit of which is expected to be for four
years
 Ex 2: Royalty paid to the author of the book for five

years

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 Rules of Accounting
Accounts

Personal Impersonal

Debit the Receiver

Credit the Giver
Ex: Sole Prop, Company
Real Nominal
Debit what comes in Debit Expenses and Losses
Credit what goes out Credit Revenue and Income
Ex: Cash, Bank, Building,Inv Ex: Sales, Power, Rent
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 Application of Accounting Rule
 Check whether is there a Money Transaction Involved?
 Is that transaction affects your set of books?
 Check whether does the transaction falls under which accounting
period.
 Does the transaction involve a personal account (i.e.) Siva as a
Person or a Company or any other entity as mentioned in
Business entity concept
 Is that person is receiver or giver in the transaction and
accordingly debit or credit the person account.
 Does the transaction involves any Cash inflow or Cash outflow?
(i.e.) Cash or Bank involved
 If there is no cash involvement then the choices are as follows
 Both can be real ( Debit and credit both real accounts)
 One real and one nominal (Either Debit/Credit for Real or Credit/ Debit
for Nominal accounts)

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 Accounting Rule of Thumb

Nature of Transaction Increase Decrease

Asset Debit Credit
Liability Credit Debit
Revenue Credit Debit
Expense Debit Credit
Profit Credit Debit
Losses Debit Credit

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 Combination of Rules
Dr Personal A/c Dr Real A/c
Cr Real A/c Cr Personal A/c
Ex:Drawings or Advance to Employee,
Ex:Capital invested, Payment Received
Payment to Supplier
from Customer

Dr Real A/c Dr Real A/c

Cr Real A/c Cr Real A/c
Ex:Purchase of Inventory by Cash Ex: Cash withdrawal or Deposit

Dr Real A/c Dr Nominal A/c

Cr Nominal A/c Cr Real A/c
Ex: Interest Recd by Cash, Cash Sales Ex: Rent Paid by Cash

Dr Personal A/c Dr Nominal A/c

Cr Nominal A/c Cr Personal A/c
Ex: Interest Accrued on Investment, Ex: Hire Purchase Charges accrued, Interest
Dividend accrued on Investment Payable, Salary Payable

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 Combination of Accounting Rules
Debit

Combination Personal Real Nominal

Personal X  

Credit
Real   

Nominal   X
36
Combination of Accounting Rules
 Both Debit and Credit cannot be Personal Accounts
 EX 1: Siva paid Cash to Ajay. The Entry Cannot be
• Ajay A/c Dr
• Siva A/c Cr
 The Correct entries are as follows. In Ajay set of Books
Cash A/c Dr 1000
Siva A/c Cr 1000

In Siva set of Books

Ajay A/c Dr 1000

Cash A/c Cr 1000

Similarly Both Debit and Credit cannot be Nominal Accounts

Note: Remember this important aspect and therefore You

will not commit any mistake in Debit and Credit
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 Recording of Accounting Transactions
 Recording of an Accounting event is known as Journal
entry
 Recording is made in Primary and Secondary Books in
Manual Accounting system
 Primary Books
 General Ledger

 Cash Book

Secondary Books
 Purchase Register

 Sales Register

 Fixed Assets Register

 Returns (Purchase return/Sales Return)

 Journal Register

 In Oracle ERP System GL is called Main Ledger and the

Transactions emanating from Modules are referred to as
Sub Ledger RICS, AMITY, Basic Accounts for Beginners
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 Recording of Accounting Transactions
 First the transactions are entered as Journal
 Then Second step is they are posted to individual account as ‘T’
Accounts – In Oracle or any other ERP system this happens
immediately when a transaction is created
 Prior to ERP system except for Non cash charges, Journals are
directly posted in Primary and secondary ledger with supporting
Document reference Number (like Invoice Number), date, amount
and a cross reference ledger folio number (Page Number) of
respective Debit and Credit Entries in Ledger.
 Journals are entered only for year end Provision Entries.
 Then the balance from each T account is taken and which becomes a
Trial Balance with Sum of Debits and Sum of Credit which should be
equal.
 Trial Balance forms the basis for preparation of Financial Statements
and in ERP systems including Oracle Applications Debit is shown as
Positive and Credit is shown as Negative
 In ERP systems the chance of Trial Balance not matching or not
tallying issue is very minimal. In case of manual Accounting this will
happen most of the time and unless it is corrected and balanced, the
accountant should not proceed to prepare Financial Statements
RICS, AMITY, Basic Accounts for Beginners
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 Preparation of Financial Statements
 Preparation of Trial Balance
 Balances Extracted from General Ledger

 Sum of debit and credit balances = 0

 Preparation of Trading, Profit & Loss Account or Income &

Expenditure Account and Balance sheet
 Trial Balance is the base for preparing Financial

Statements
 Adjustment entries are made in adjustment period and

passed as Journal Vouchers before making the financial

statements
 Trading and Profit and Loss Account is Always for a

period say for an Year (Jan - Dec or Apr - Mar), Quarterly

for 3 months or Half yearly for 6 months
 Balance Sheet is always as on Date (As on 31-12-2007 or

31-03-2008)
RICS, AMITY, Basic Accounts for Beginners
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 Accounting Concepts

A Simple Case Study

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 Case Study
 Siva started Business in dealer in Computer Spare parts and
Computer Stationery on 01-APR-2007 and following events occurred
in the month of April.
 Siva invested USD 50000 Cash and USD 50000 worth of furniture
 Siva purchased USD 75000 worth of goods on credit
 Siva friend Ajay promised him to give a loan of USD 25000
 Siva sold USD 50000 worth of good for USD 100000
 Siva paid rent USD 2000 for two months
 Siva paid Salary to Staff USD 5000
 Siva incurred USD 5000 on interior decoration which will last for two
years.
 Siva sold USD 10000 worth of goods on credit for USD 18000
 Siva has a Bank account with Citi Bank which credited USD 5000
wrongly of John account
 Purchased Vehicle for USD 25000 paid through Bank
 Cash Deposited by Siva into Bank 50000 USD

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