Module I

Fundamentals of Accounting
Basics of Accounting and Recording of Transactions

(Module – I)
Meaning and Definition of Accounting
Accounting is the process of recording financial transactions pertaining to a
business. The accounting process includes summarizing, analyzing, and
reporting these transactions to oversight agencies, regulators, and tax
collection entities. The financial statements used in accounting are a concise
summary of financial transactions over an accounting period, summarizing a
company's operations, financial position, and cash flows.
The American Institute of Certified Public Accountants (AICPA) had

defined accounting as the “art of recording, classifying, and summarising in
a significant manner and in terms of money, transactions and events which
are, in part at least, of financial character, and interpreting the results
thereof”.
Objective of Accounting
• To maintain a systematic record of business transactions

• To ascertain profit and loss
• To determine the financial position
• To provide information to the various interested parties or stakeholders
Branches of Accounting
• Financial accounting
• Management accounting
• Cost accounting
• Tax accounting
• Project accounting
• Not-for-profit accounting
• International accounting
• Government accounting
• Social Responsibility accounting
Accounting Cycle
User of Accounting Information
• Shareholders and Investors

• Creditors
• Employees
• Government
• Management
• Consumers and others
Limitations of Accounting
• Accounting is not precise

• Accounting is done on historic values of assets
• Ignore the effect of price level changes
• Ignore the qualitative information
• Affected by window dressing
Basic Accounting Concepts or Assumptions
• The Business Entity Concept

• Going Concern Concept
• Money Measurement Concept
• Verifiable Objective Evidence Concept
• Accounting Period Concept
Standard of Accounting Principles
(i) Usefulness (Relevance)

(ii) Objectivity and
(iii) Feasibility.
Basic Accounting Principles
• Principle of Matching of Cost and Revenue

• Principle of Full Disclosure
• Dual Aspect Principle
• Principle of Materiality
• Principle of Consistency
• Principle of Conservatism or Prudence
• Principle of Timeliness
• Principle of Industry Practice
Accounting Standards
Accounting standards are the written statements consisting of rules and

guidelines, issued by the accounting institutions, for the preparation of
uniform and consistent financial statements and also for other
disclosures affecting the different users of accounting information.
Accounting standards lay down the terms and conditions of accounting
policies and practices by way of codes, guidelines and adjustments for
making the interpretation of the items appearing in the financial
statements easy and even their treatment in the books of account.
Objectives of Accounting Standards
• For bringing uniformity in accounting methods

• For improving the reliability of the financial statements
• Simplify the accounting information
• Prevents frauds and manipulations
• Helps auditors
Limitations of Accounting Standards
• Brings Inflexibility & Rigidity

• Involves High Costs
• Difficult To Choose Among Alternatives
• Scope Is Restricted
• Time-Consuming
Accounting Standards Specified by ICAI
•AS-1: Disclosure of Accounting Policies

•AS-2: Valuation of Inventories
•AS-3: Cash Flow Statements
•AS-4: Contingencies and Events Occurring After Balance Sheet Date
•AS-5: Net profit or Loss for the period, Prior Period Items and Changes in
Accounting Policies
•AS-7: Construction Contracts
•AS-9: Revenue Recognition
•AS-10: Property, Plant and Equipment
•AS-11: The Effects of Changes in Foreign Exchange Rates
•AS-12: Government Grants
•AS-13: Accounting for Investments
•AS-14: Accounting for Amalgamations
•AS-15: Employee Benefits
•AS-16: Borrowing Costs
•AS-17: Segment Reporting
•AS-18: Related Party Disclosures
•AS-19: Leases
•AS-20: Earnings Per Share
•AS-21: Consolidated Financial Statements
•AS-22: Accounting for Taxes on Income
•AS-24: Discontinuing Operations
•AS-25: Interim Financial Reporting
•AS-26: Intangible Assets
•AS-27: Financial Reporting of Interests in Joint Ventures
•AS-28: Impairment of Assets
•AS-29: Provisions, Contingent Liabilities and Contingent Assets
Recording of Transactions
Books of original entry are referred to as the books or journal where a

business records all the business transactions initially. The information that
is contained in the books of original entry are summarised and recorded in
the general ledger, which is then used to prepare trial balance and the
financial statements.
• Books of Original Entry – Journal
• Subsidiary Books – Cash Book, Purchase Book, Sales Book, Purchase
Return Book, Sales Return Book, Bills Receivable Book, Bills Payable
Book.
Golden / Traditional Rule of Accounting
• Personal Account:- Debit the Receiver and Credit the Giver

• Real Account:- Debit what comes in and Credit what goes out
• Nominal Account:- Debit all Expenses and Credit all Income
Modern Rule of Accounting
Type of Accounts Debit Credit

Asset Increase Decrease
Liability Decrease Increase
Capital Decrease Increase
Revenue Decrease Increase
Expense Increase Decrease
Drawings Increase Decrease
Ledger
A ledger in accounting refers to a book that contains different accounts

where records of transactions pertaining to a specific account is stored.
The information stored in a ledger account contains both starting and
ending balances which are adjusted during the course of the accounting
period with respective debits and credits.
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Fundamentals of Accounting

Basics of Accounting and Recording of Transactions

The American Institute of Certified Public Accountants (AICPA) had

• To maintain a systematic record of business transactions

• Shareholders and Investors

• Accounting is not precise

• The Business Entity Concept

(i) Usefulness (Relevance)

• Principle of Matching of Cost and Revenue

Accounting standards are the written statements consisting of rules and

• For bringing uniformity in accounting methods

• Brings Inflexibility & Rigidity

•AS-1: Disclosure of Accounting Policies

Books of original entry are referred to as the books or journal where a

• Personal Account:- Debit the Receiver and Credit the Giver

Type of Accounts Debit Credit

A ledger in accounting refers to a book that contains different accounts

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