Accounts

1 Unit

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• The American Institute of Certified Public Accounts (AICPA) defined
Accounting as “Accountancy is the art of recording classifying and
summarizing in a significant manner and in terms of money
transactions and events which are in part of at least a financial
characters and interpreting the result there of”
• Again in 1966, AICPA defines Accounting as “The process of
identifying, measuring and communicating economic information to
permit; informed judgement and decisions by the uses of accounts”.

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• There is difference between the terms “Book keeping” and
“Accounting”.
• Book keeping is merely concerned with orderly record keeping and
recording business transactions and
• Financial Accounting is border in scope than book keeping.
Accounting involves analysis and judgements at different stages such
as recording of transactions, classification, summarization and
interpretation

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Introduction to financial accounting
• Financial accounting is the process of recording, summarizing, and
reporting the financial transactions of a business to provide an
accurate picture of its financial position. It is essential for businesses,
investors, regulators, and other stakeholders who need reliable
information for decision-making.

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Key Concepts of Financial
Accounting
1. Financial Statements:
a. Income Statement (Profit & Loss Statement): Shows revenues, expenses,
and profits over a period.
b. Balance Sheet: Provides a snapshot of assets, liabilities, and equity at a
specific point in time.
c. Cash Flow Statement: Tracks the inflows and outflows of cash over a
period.

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2. Double-Entry Accounting: Every transaction affects at least two
accounts, following the principle that total debits must always equal
total credits. This ensures that the accounting equation remains
balanced:

3. Accrual vs. Cash Accounting:

• Accrual Accounting: Revenues and expenses are recognized when they are
earned or incurred, regardless of when cash is exchanged.
• Cash Accounting: Revenues and expenses are recognized only when cash is
received or paid.

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4. Generally Accepted Accounting Principles (GAAP) and International
Financial Reporting Standards (IFRS): These are frameworks that
govern how financial accounting should be performed. GAAP is
primarily used in the U.S., while IFRS is used internationally.
• In India, financial statements are prepared on the basis of accounting
standards issued by the Institute of Chartered Accountants of India
(ICAI) and the law laid down in the respective applicable acts (for
example, Schedule III to Companies Act, 2013 should be compulsorily
followed by all companies)

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5. The Accounting Cycle:
• Transaction Analysis: Identifying the financial impact of business
activities.
• Journal Entries: Recording transactions chronologically in the
accounting journal.
• Ledger Posting: Summarizing journal entries into accounts.
• Trial Balance: Ensuring debits equal credits.
• Financial Statements Preparation: Creating financial reports for a
specific period.
• Closing Entries: Resetting temporary accounts (revenues and
expenses) to zero at the end of the period.

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6. Key Users of Financial Information:
• Internal Users: Management and employees for operational decisions.
• External Users: Investors, creditors, regulators, and the public for
assessing the business’s financial health.
Importance of Financial Accounting
• Ensures transparency and helps build trust with external stakeholders.
• Assists in decision-making, providing data for both internal
management and external investors.
• Ensures regulatory compliance and provides a record for tax purposes
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Introduction to Management
Accounting
• Management accounting, also known as managerial accounting,
focuses on providing information to internal users (managers and
executives) to aid in decision-making, planning, and control. Unlike
financial accounting, which is governed by external reporting
standards (like GAAP or IFRS), management accounting is more
flexible and is tailored to meet the needs of a business's internal
operations.

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2. Types of Information Provided:
• Cost Data: Breaks down how much it costs to produce goods or
services.
• Performance Metrics: Helps assess the efficiency and effectiveness of
different departments or segments of the business.
• Budgets and Forecasts: Used for planning future operations and
setting financial targets.
• Variance Analysis: Compares actual results to budgets or standards to
determine the reasons for any differences.

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3. Key Tools in Management Accounting:
• Cost-Volume-Profit (CVP) Analysis: Helps managers understand the
relationship between costs, sales volume, and profits. It assists in
determining break-even points and the impact of changes in costs or
prices.
• Budgeting: Involves creating detailed financial plans for income and
expenditure, which serve as a guide for business operations.
• Standard Costing: Involves comparing actual costs to predetermined or
"standard" costs to analyze performance.
• Activity-Based Costing (ABC): Allocates overhead and indirect costs to
specific activities that drive those costs, providing a more accurate
picture of product and service profitability.
• Key Performance Indicators (KPIs): Quantifiable metrics used to
evaluate how well an organization or department is achieving its
objectives. 12
4. Cost Classifications:
• Fixed Costs: Costs that do not change with production levels (e.g.,
rent, salaries).
• Variable Costs: Costs that fluctuate with production levels (e.g., raw
materials, direct labor).
• Direct Costs: Costs that can be directly traced to a specific product or
service (e.g., materials).
• Indirect Costs (Overhead): Costs that are not directly traceable to a
specific product or service but are necessary for operations (e.g.,
utilities, administrative expenses).
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5. Decision-Making in Management Accounting:
• Make or Buy Decisions: More cost-effective to produce a product in-
house or outsource it.
• Pricing Decisions: Involves determining the appropriate price for
products or services based on cost data and market factors.
• Capital Budgeting: Evaluates the profitability and financial impact of
long-term investments such as new machinery or expansion projects.
• Product Mix Decisions: Helps determine which products to produce
and in what quantities to maximize profit.

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Performance Measurement:
• Balanced Scorecard: A performance measurement tool that evaluates
an organization from multiple perspectives, including financial,
customer, internal processes, and learning/growth perspectives.
• Return on Investment (ROI): Measures the profitability of an
investment or project by comparing the net gain to the initial
investment.
• Profitability Analysis: Examines the profitability of different products,
services, or business segments to identify areas of strength and
weakness.
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Comparative Focus:
• Financial Accounting is retrospective, focusing on historical data and
meeting regulatory requirements.
• Management Accounting is forward-looking, helping managers plan
and make decisions to achieve future business goals.

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Importance of Management Accounting
1. Improves Decision-Making
2. Supports Strategic Planning
3. Enhances Operational Control
4. Promotes Cost Control

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 Introduction to Cost Accounting
• Cost accounting is a branch of accounting that focuses on capturing
and analyzing the costs associated with producing goods or services.
• Purpose of Cost Accounting:
• The primary goal of cost accounting is to determine the actual cost of
production or services rendered. It helps businesses identify
inefficiencies, manage resources, and establish cost control measures.
• It provides detailed insights into the costs involved in each step of
production, enabling businesses to set prices, plan budgets, and make
decisions regarding production processes.

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Classification of Costs:
• Direct Costs: Costs that can be directly attributed to the production of
goods or services (e.g., raw materials, direct labor).
• Indirect Costs: Costs that are not directly tied to production but are
necessary for operations (e.g., rent, utilities, administrative expenses).
• Fixed Costs: Costs that remain constant regardless of production
volume (e.g., factory rent, salaries of permanent staff).
• Variable Costs: Costs that fluctuate with production levels (e.g., raw
materials, wages of temporary workers).
• Semi-Variable Costs: Costs that have both fixed and variable
components (e.g., utility bills that have a basic fixed charge and
additional charges based on usage).

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Types of Costing Methods:
• Job Costing: Costs are assigned to specific jobs or projects, commonly used in
industries like construction, custom manufacturing, and consulting, where each
job is different.
• Process Costing: Costs are averaged over units produced, used in industries like
chemicals, oil, and food processing, where production is continuous and
products are identical.
• Activity-Based Costing (ABC): Allocates overhead costs based on activities that
drive costs, providing more accurate costing by tracing costs to specific products
or services.
• Standard Costing: Uses pre-determined or standard costs for products or
services, which are compared to actual costs to determine variances and
efficiency.
• Marginal Costing: Focuses on the additional or incremental costs of producing
one more unit, helping businesses make decisions about production levels and
pricing.
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 Key Concepts of Cost Accounting
• Purpose of Cost Accounting:
• The primary goal of cost accounting is to determine the actual cost of
production or services rendered. It helps businesses identify
inefficiencies, manage resources, and establish cost control measures.
• It provides detailed insights into the costs involved in each step of
production, enabling businesses to set prices, plan budgets, and make
decisions regarding production processes.

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 Classification of Costs:
• Direct Costs: Costs that can be directly attributed to the production of
goods or services (e.g., raw materials, direct labor).
• Indirect Costs: Costs that are not directly tied to production but are
necessary for operations (e.g., rent, utilities, administrative expenses).
• Fixed Costs: Costs that remain constant regardless of production volume
(e.g., factory rent, salaries of permanent staff).
• Variable Costs: Costs that fluctuate with production levels (e.g., raw
materials, wages of temporary workers).
• Semi-Variable Costs: Costs that have both fixed and variable components
(e.g., utility bills that have a basic fixed charge and additional charges based
on usage).
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Types of Costing Methods:
• Job Costing: Costs are assigned to specific jobs or projects, commonly used in
industries like construction, custom manufacturing, and consulting, where each
job is different.
• Process Costing: Costs are averaged over units produced, used in industries like
chemicals, oil, and food processing, where production is continuous and products
are identical.
• Activity-Based Costing (ABC): Allocates overhead costs based on activities that
drive costs, providing more accurate costing by tracing costs to specific products
or services.
• Standard Costing: Uses pre-determined or standard costs for products or services,
which are compared to actual costs to determine variances and efficiency.
• Marginal Costing: Focuses on the additional or incremental costs of producing
one more unit, helping businesses make decisions about production levels and
pricing.

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Cost Accounting Systems:
• Traditional Cost Accounting: Relies on direct costs and simple
allocation of indirect costs, often using a single overhead rate.
• Activity-Based Costing (ABC): A more detailed and accurate method
that allocates costs based on activities and resource consumption
rather than a simple overhead rate.
Cost Control and Reduction:
• Cost Control: Refers to the process of monitoring costs to ensure they
do not exceed a pre-determined level. This includes budgeting, setting
cost standards, and implementing cost-saving measures.
• Cost Reduction: Involves actively finding ways to reduce costs, such as
improving production efficiency, outsourcing, or using cheaper raw
materials.
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Cost Analysis and Decision-Making:
• Break-Even Analysis: Determines the level of sales or production at
which total revenues equal total costs, meaning the business neither
makes a profit nor incurs a loss.
• Cost-Volume-Profit (CVP) Analysis: Examines the relationship
between cost, sales volume, and profit, and helps in decision-making
regarding pricing, production levels, and product mix.
• Make or Buy Decisions: Analyzes whether it is more cost-effective to
produce a component in-house or purchase it from an external
supplier.
• Product Mix Decisions: Helps in determining the most profitable
combination of products or services to produce and sell.

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Variance Analysis:
• In cost accounting, variance analysis involves comparing actual costs
with standard or budgeted costs to identify the reasons for any
differences. Key variances include:
• Material Variance: Differences in the cost or quantity of materials used.
• Labor Variance: Differences in labor costs, often due to changes in wage rates
or productivity.
• Overhead Variance: Variances in the allocation of indirect costs like utilities or
administrative expenses.
Overhead Allocation:
• Overheads are indirect costs that cannot be directly attributed to a
product or service. Cost accounting assigns overheads to products or
services based on certain allocation methods, ensuring that the full cost
of production is understood.
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 Importance of Cost Accounting

1.Enhanced Decision-Making: By providing a detailed breakdown of

costs, managers can make better decisions regarding pricing,
budgeting, and production efficiency.
2.Cost Control: Cost accounting enables businesses to monitor and
manage their costs, leading to better resource allocation and
improved profitability.
3.Profitability Analysis: Cost accounting helps in determining the
profitability of individual products, services, or projects, guiding
businesses on where to focus their efforts.
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4. Budgeting and Forecasting: Cost accounting provides the data
necessary for preparing accurate budgets and forecasts, helping
businesses plan for future growth and manage resources effectively.
5. Performance Measurement: Regular cost analysis, variance
analysis, and break-even analysis help managers evaluate the
performance of departments or production processes, allowing for
corrective actions when needed.

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 Generally accepted accounting
principles (GAAP)
• GAAP comprise a set of accounting rules and procedures used in
standardized financial reporting practices. By following GAAP
guidelines, compliant organizations ensure the accuracy, consistency,
and transparency of their financial disclosures.
• Publicly traded companies, businesses operating in regulated
industries, registered non-profit groups, government agencies, and
organizations that receive federal funding awards from the U.S.
government are required to follow GAAP

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GAAP encompasses:
• Basic accounting principles/guidelines
• Accounting Standards usually issued by the premier accounting body
of the country
• Industry-specific accounting practices to cover unusual scenarios
• In India, financial statements are prepared on the basis of accounting
standards issued by the Institute of Chartered Accountants of
India (ICAI)

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 Types of business entity
• Sole trader
• Partnership
• Limited liability company
• Sole trader. An individual may enter into business alone, either selling goods
or providing a service. Such a person is described as a sole trader.
• For accounting purposes business is seen as being separate from the person’s
other interests and private life.
Disadvantages
• If the business is not successful and the sole trader is unable to meet
obligations to pay money to others, then creditors may ask a court of law to
authorise the sale of the personal possessions, and even the family home, of
the sole trader.
• Cost of bank borrowing will be high because the bank fears losing its money.
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Partnership
• Sole trader may expand is to enter into partnership with one or more
people.
• Persons to whom money is owed by the business may ask a court of law to
authorise the sale of the personal property of the partners in order to meet
the obligation. Even more seriously, one partner may be required to meet all
the obligations of the partnership if the other partner does not have
sufficient personal property, possessions and cash.
• For accounting purposes the partnership is seen as a separate economic
entity, owned by the partners
• Partner may wish to be sure that they are receiving a fair share of the
partnership profits.
• Other persons requesting accounting information, such as HM Revenue and
Customs, banks who provide finance and individuals who may be invited to
join the partnership
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Limited liability company
1. Private limited company: The private limited company is prohibited
by law from offering its shares to the public, so it is a form of limited
liability appropriate to a family-controlled business. ‘Limited’
(abbreviated to ‘Ltd’)
2. Public limited company: is permitted to offer its shares to the public.
In return it has to satisfy more onerous regulations. Where the shares
of a public limited company are bought and sold on a stock exchange,
the public limited company is called a listed company because the
shares of the company are on a list of share prices.

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 Accounting Principles

Accounting Concepts Accounting Conventions

a) Business entity a) Disclosure
b) Going Concern b) Materiality
c) Money Measurement c) Consistency
d) Cost Concept d) Conservatism
e) Accounting period
f) Duel aspect
g) Accrual Concept
h) Matching Cost
i) Realisation

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a) Business Entity Concepts: According to Entity concept, business is
treated as a unit of entity separate from its Owner, Creditors and
Management etc. Accounts are kept for business entity as
distinguished form a person associated with it. All business
transactions are recorded in the books of Accounts from the point of
view of business only. Every type of business organisation is treated as
separate Accounting entity
The overall effect of adopting this concept is
1. Only the business transactions are reported and not the personal
transactions of the owners.
2. Profit is the property of business unless distributed to the owners.
3. The personal assets of the owners are not considered while recording
and reporting the assets of the business entity.
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b. Going Concern: Business transactions are recorded on the
assumption that the business will continue for a long time. There is
neither the intention nor the necessity to liquate the particular
business in near future.
When an enterprise liquidates a branch or one division or one segment
of its business, the ability of the enterprise to continue as a going
concern is not imparted.
In case of enterprise going to liquidate or become insolvent. Then the
enterprise cannot be considered as a going concern.

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c) Money Measurement Concept: Money is common denominator in
terms of which the exchange ability of goods and services are
measured.
• Non monetary events like public political contract, location of
business; certain disputes, efficient sales force etc. can not be
recorded in the books of Accounts even through these have great
effects
• Drawback: Money has time value the value of money decreases over
time

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d) Cost Concepts: According to cost concept the various assets
acquired by enterprise should be recorded on the basis of actual cost
incurred, rather than their current market value. As per cost concept
Fixed Assets are shown at cost less depreciation charged from year to
year .
e) Accounting Period Concept: life of the business is divided into
appropriate parts or segments of analysing the results shown by the
business. Each part divided is known as an accounting period. Usually
12 months

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f) Duel Aspect Concept: one entry is debited and the other credited
One entry consists of debit to one or more accounts and another effect
consist of credit to some other one or more accounts. However, the
total amount debited is always equal to the total amount credited.
Therefore at any point of time total assets of a business are equal to its
total liabilities. Liabilities to outsider are known as liabilities, liabilities
to the owner are referred to as capital.

Assets referred to valuable things owned by the business, Capital refers

to the owner’s contribution to the business.

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g. Accrual Concept: This accounting concept states that revenue is
recognised when they are earned and when they are not received
similarly, cost are recognised as and when they are incurred and not
when they are paid. This concept implies that the income should be
measured as difference between revenues and expenses rather that
the difference between cash received and disbursements.
In other words, the revenue earned and expenses incurred are entered
into the company's journal regardless of when money exchanges hands.

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h. Matching Cost Concept: The matching principle is an accounting
concept that dictates that companies report expenses at the same time as
the revenues they are related to. Revenues and expenses are matched on
the income statement for a period of time (e.g., a year, quarter, or month).
Eg:
• In 2018, the company generated revenues of $100 million and thus will
pay its employees a bonus of $5 million in February 2019.
• Even though the bonus is not paid until the following year, the matching
principle stipulates that the expense should be recorded on the 2018
income statement as an expense of $5 million.

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i. Realisation Concept: helps accountants understand when they can
recognize and record a payment received by their client as revenue.
According to this principle, accountants can record revenue when their
clients complete a service or deliver a product to a customer

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 Accounting Conventions:
• The term ‘Convention’ denotes customs or traditions or practice
based on general agreement between the accounting bodies which
guide the accountant while preparing the financial statements.
a. Disclosure:
According to convention of full disclosure, accounting must disclose all
the material facts and informations so that interested parties after
reading such accounting report can get a clear view of the state of
affairs of the business.

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b. Materiality
• The term material means “relative importance”, Accounding to the
convention of materiality; account should report only what is material and
ignore insignificant details while the preparing the final accounts. Materiality
will differ or changed with nature, size and tradition of the business. What is
material for one enterprise may be immaterial for another enterprise.
c. Consistency:
• This accounting convention state that ones a particular accounting practice,
method or policy is adopted to prepare accounts, statements and Reports. It
should be continued for years together and should not charge unless it is
forced to change it.
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d. Conservatism
• Financial Statements are usually drawn up on a conservative basis.
Their are two principles which stem directly from conservatism.
1. The accountant should not anticipate income and should provide
all possible losses, and
2. Faced with the choice between two methods of valuing an asset the
accountant should choose a method which leads to the lesser value.
• It is also called “Principles of prudence”. Therefore, provision for bad
and doubtful debts is also permitted and made every year

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 Indian Accounting Standards
• Indian Accounting Standards (Ind ASs) are Standards prescribed
under Section 133 of the Companies Act, 2013.

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 Financial statements
• The objective of financial statements is to provide information about the
financial position, financial performance and cash flows of an entity that is
useful to a wide range of users in making economic decisions. Financial
statements also show the results of the management’s stewardship of the
resources entrusted to it. To meet this objective, financial statements provide
information about an entity’s:
a) assets;
b) liabilities;
c) equity;
d) income and expenses, including gains and losses;
e) contributions by and distributions to owners in their capacity as owners; and
f) cash flows.

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 Complete set of financial
statements
1. Balance sheet as at the end of the period ;
2. Statement of profit and loss for the period;
3. Statement of changes in equity for the period;
4. Statement of cash flows for the period;
5. Notes, comprising significant accounting policies and other explanatory
information;
6. (a) Comparative information in respect of the preceding period as specified in
paragraphs 38 and 38A; and
7. Balance sheet as at the beginning of the preceding period when an entity applies an
accounting policy retrospectively or makes a retrospective restatement of items in
its financial statements, or when it reclassifies items in its financial statements in
accordance with paragraphs 40A–40D.
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• Many entities present, outside the financial statements, a financial review by
management that describes and explains the main features of the entity’s financial
performance and financial position, and the principal uncertainties it faces. Such a
report may include a review of:
a) the main factors and influences determining financial performance, including
changes in the environment in which the entity operates, the entity’s response to
those changes and their effect, and the entity’s policy for investment to maintain
and enhance financial performance, including its dividend policy;
b) the entity’s sources of funding and its targeted ratio of liabilities to equity; and
c) the entity’s resources not recognised in the balance sheet in accordance with Ind
ASs.

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• Many entities also present, outside the financial statements, reports
and statements such as environmental reports and value added
statements, particularly in industries in which environmental factors
are significant and when employees are regarded as an important
user group. Reports and statements presented outside financial
statements are outside the scope of Ind ASs.

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 General features
• Presentation of True and Fair View and compliance with Ind Ass
• An entity whose financial statements comply with Ind ASs shall make
an explicit and unreserved statement of such compliance in the notes.
An entity shall not describe financial statements as complying with
Ind ASs unless they comply with all the requirements of Ind ASs.
• An entity cannot rectify inappropriate accounting policies either by
disclosure of the accounting policies used or by notes or explanatory
material.

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• When an entity departs from a requirement of an Ind AS in accordance with
paragraph 19, it shall disclose:
• that management has concluded that the financial statements present a true and fair
view of the entity’s financial position, financial performance and cash flows;
• that it has complied with applicable Ind ASs, except that it has departed from a
particular requirement to present a true and fair view;
• the title of the Ind AS from which the entity has departed, the nature of the departure,
including the treatment that the Ind AS would require, the reason why that treatment
would be so misleading in the circumstances that it would conflict with the objective
of financial statements set out in the Framework, and the treatment adopted; and
• for each period presented, the financial effect of the departure on each item in the
financial statements that would have been reported in complying with the
requirement.

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• Going concern
• An entity shall prepare financial statements on a going concern basis
unless management either intends to liquidate the entity or to cease
trading, or has no realistic alternative but to do so.
• When management is aware, in making its assessment, of material
uncertainties related to events or conditions that may cast significant
doubt upon the entity’s ability to continue as a going concern, the
entity shall disclose those uncertainties.

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Accrual basis of accounting: An entity shall prepare its financial
statements, except for cash flow information, using the accrual basis of
accounting.
Materiality and aggregation
An entity shall present separately each material class of similar items.
An entity shall present separately items of a dissimilar nature or
function unless they are immaterial except when required by law

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Offsetting
• An entity shall not offset assets and liabilities or income and expenses,
unless required or permitted by an Ind AS.

Frequency of reporting
• An entity shall present a complete set of financial statements (including
comparative information) at least annually. When an entity changes
the end of its reporting period and presents financial statements for a
period longer or shorter than one year, an entity shall disclose, in
addition to the period covered by the financial statements:
a) the reason for using a longer or shorter period, and
b) the fact that amounts presented in the financial statements are not entirely
comparable.

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Comparative information
• An entity shall present, as a minimum, two balance sheets , two
statements of profit and loss, two statements of cash flows and two
statements of changes in equity, and related notes.
Consistency of presentation
• An entity shall retain the presentation and classification of items in
the financial statements from one period to the next unless:
• a significant change in the nature of the entity’s operations or a review of its
financial statements,
• an Ind AS requires a change in presentation

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Balance Sheet
The balance sheet shall include line items that present the following
amounts:
1. Property, plant and equipment;
2. Investment property;
3. Intangible assets;
4. Financial assets (excluding amounts shown under (5), (8) and (9);
5. Investments accounted for using the equity method;
6. Biological assets within the scope of Ind AS 41 Agriculture;
7. Inventories;
8. Trade and other receivables;
9. Cash and cash equivalents;
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10. the total of assets classified as held for sale and assets included in
disposal groups classified as held for sale in accordance with Ind AS
105, Non-current Assets Held for Sale and Discontinued Operations;
11. Trade and other payables;
12. Provisions;
13. Financial liabilities (excluding amounts shown under 11) and (12));
14. Liabilities and assets for current tax, as defined in Ind AS 12, Income
Taxes;
15. Deferred tax liabilities and deferred tax assets, as defined in Ind AS 12;
16. Liabilities included in disposal groups classified as held for sale in
accordance with Ind AS 105;
17. Non-controlling interests, presented within equity; and
18. Issued capital and reserves attributable to owners of the parent.
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• An entity shall present additional line items (including by
disaggregating the line items listed above), headings and subtotals in
the balance sheet when such presentation is relevant to an
understanding of the entity’s financial position.
• When an entity presents current and non-current assets, and current
and noncurrent liabilities, as separate classifications in its balance
sheet, it shall not classify deferred tax assets (liabilities) as current
assets (liabilities).

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Current/non-current distinction
• An entity shall disclose the amount expected to be recovered or
settled after more than twelve months for each asset and liability line
item that combines amounts expected to be recovered or settled:
Current Asset/Liability - No more than twelve months after the
reporting period,
Non-current assets/liability - More than twelve months after the
reporting period.

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Current assets
An entity shall classify an asset as current when:
a) It expects to realise the asset, or intends to sell or consume it, in its
normal operating cycle;
b) It holds the asset primarily for the purpose of trading;
c) It expects to realise the asset within twelve months after the
reporting period; or
d) The asset is cash or a cash equivalent (as defined in Ind AS 7) unless
the asset is restricted from being exchanged or used to settle a
liability for at least twelve months after the reporting period.
An entity shall classify all other assets as non-current.

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The operating cycle of an entity is the time between the acquisition of
assets for processing and their realisation in cash or cash equivalents.
When the entity’s normal operating cycle is not clearly identifiable, it is
assumed to be twelve months. Current assets include assets (such as
inventories and trade receivables) that are sold, consumed or realised
as part of the normal operating cycle even when they are not expected
to be realised within twelve months after the reporting period. Current
assets also include assets held primarily for the purpose of trading
(examples include some financial assets that meet the definition of
held for trading in Ind AS 109) and the current portion of non-current
financial assets.
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Current liabilities
• An entity shall classify a liability as current when:
a) It expects to settle the liability in its normal operating cycle;
b) It holds the liability primarily for the purpose of trading;
c) The liability is due to be settled within twelve months after the reporting
period; or
d) It does not have an unconditional right to defer settlement of the liability for
at least twelve months after the reporting period (see paragraph 73). Terms
of a liability that could, at the option of the counterparty, result in its
settlement by the issue of equity instruments do not affect its classification.
An entity shall classify all other liabilities as non-current.
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Information to be presented either in the balance sheet or in the notes
a) items of property, plant and equipment are disaggregated into classes in
accordance with Ind AS 16;
b) Receivables are disaggregated into amounts receivable from trade customers,
receivables from related parties, prepayments and other amounts;
c) Inventories are disaggregated, in accordance with Ind AS 2, Inventories, into
classifications such as merchandise, production supplies, materials, work in
progress and finished goods;
d) Provisions are disaggregated into provisions for employee benefits and other
items; and
e) Equity capital and reserves are disaggregated into various classes, such as paid-in
capital, share premium and reserve
66
Statement of Profit and Loss
• The statement of profit and loss shall present
a) Profit or loss;
b) Total other comprehensive income;
c) Comprehensive income for the period, being the total of profit or
loss and other comprehensive income.
An entity shall present the following items, in addition to the profit or
loss and other comprehensive income
d) profit or loss for the period attributable to:
1. non-controlling interests, and
2. owners of the parent.

67
b) comprehensive income for the period attributable to:
1. non-controlling interests, and
2. owners of the parent

68
Information to be presented in the profit or loss section of the statement of
profit and loss
(a) Revenue, presenting separately interest revenue calculated using the
effective interest method;
(aa)Gains and losses arising from the derecognition of financial assets
measured at amortised cost;
(b) finance costs;
(ba) impairment losses (including reversals of impairment losses or
impairment gains) determined in accordance with Section 5.5 of Ind AS 109;
(c) share of the profit or loss of associates and joint ventures accounted
for using the equity method;
(ca) if a financial asset is reclassified out of the amortised cost measurement
category so that it is measured at fair value through profit or loss, any gain
or loss arising from a difference between the previous amortised cost of the
financial asset and its fair value at the reclassification date (as defined in Ind
69
(cb) if a financial asset is reclassified out of the fair value through other
comprehensive income measurement category so that it is measured at
fair value through profit or loss, any cumulative gain or loss previously
recognised in other comprehensive income that is reclassified to profit or
loss;
(d) tax expense;
(e) [Refer Appendix 1]
(ea) a single amount for the total of discontinued operations (see Ind AS
105)

70
• An entity shall disclose the following, either in the balance sheet or the
statement of changes in equity, or in the notes:
(a) for each class of share capital:
i. the number of shares authorised;
ii. the number of shares issued and fully paid, and issued but not fully paid;
iii. par value per share, or that the shares have no par value;
iv. a reconciliation of the number of shares outstanding at the beginning and
at the end of the period;
v. the rights, preferences and restrictions attaching to that class including
restrictions on the distribution of dividends and the repayment of capital;
vi. shares in the entity held by the entity or by its subsidiaries or associates;
and
vii. shares reserved for issue under options and contracts for the sale of
shares, including terms and amounts; and
(b) a description of the nature and purpose of each reserve within equity.

71
• Assume that Michael McBryan, an experienced auto mechanic, opens
his own automotive repair business, Overnight Auto Service. A
distinctive feature of Overnight’s operations is that all repair work is
done at night. This strategy offers customers the convenience of
dropping off their cars in the evening and picking them up the
following morning

72
• The Company’s First Transaction McBryan officially
started Overnight on January 20, 2011. On that day, he
received a charter from the state to begin a small,
closely held corporation whose owners consisted of
himself and several family members. Capital stock
issued to

73
• Purchase of an Asset for Cash: On January 21, Overnight purchased the land from
the city for $52,000 cash. This transaction had two immediate effects on the
company’s financial position: first, Overnight’s cash was reduced by $52,000; and
second, the company acquired a new asset—Land.

80,000-52000=28,000
74
• Purchase of an Asset and Financing Part of the Cost

On January 22, Overnight

purchased the old garage building
BUILDING 36,000= from Metropolitan Transit Authority
28,000-6000=22,000
CASH 6000+ Notes for $36,000. Overnight made a cash
6000 CASH FOR
payable 30,000 down payment of $6,000 and
PURCHASE OF
issued a 90-day non-interest-
BUILDING
bearing note payable for the 75
Purchase of an Asset on Account On January 23, Overnight purchased tools and
automotive repair equipment from Snappy Tools. The purchase price was $13,800, due
within 60 days. After this purchase, Overnight’s financial position is depicted below.

Purchased on credit from Snappy Tools 13,800.

Purchased tools on credit 13,800 Both 30,000 and 13,800 are owed by people
outside of company so they are clubbed together
as liabilities (43,800)
76
• Sale of an Asset After taking delivery of the new tools and equipment, Overnight found that it
had purchased more than it needed. Ace Towing, a neighboring business, offered to buy the
excess items. On January 24, Overnight sold some of its new tools to Ace for $1,800, a price
equal to Overnight’s cost.2 Ace made no down payment but agreed to pay the amount due
within 45 days. This transaction reduced Overnight’s tools and equipment by $1,800 and
created a new asset, Accounts Receivable, for that same amount. A balance sheet as of
January 24 appears below

Tools and equipment 13,800-1800(sold

Ace will pay
to Ace)= 12,000
after 45 days
77
Collection of an Account Receivable On January 26, Overnight received $600 from Ace Towing as
partial settlement of its account receivable from Ace. This transaction caused an increase in
Overnight’s cash but a decrease of the same amount in accounts receivable. This transaction converts
one asset into another of equal value; there is no change in the amounts of total assets

600 cash received form Ace

Ace Towing partial settlement of 600 So
Towing added to cash so
1800-600= 1200
20,000+600=22,600

78
Payment of a Liability On January 27, Overnight made a partial payment of $6,800 on its
account payable to Snappy Tools. This transaction reduced Overnight’s cash and accounts
payable by the same amount, leaving total assets and the total of liabilities plus owners’
equity in balance. Overnight’s balance sheet at January 27

Both Total assts and Accounts payable of Snappy

6800 cash payment to to Snappy
liability 123,800- Tools paid 6,800, So 13,800 -
Tools so 22,600-6800 = 15,800
6,800=117,000 6,800 = 7000
79
Earning of Revenue: McBryan had acquired the assets Overnight needed to start operating, and he
began to provide repair services for customers. Rather than recording each individual sale of repair
services, he decided to accumulate them and record them at the end of the month. Sales of repair
services for the last week of January were $2,200, all of which was received in cash. Earning of
revenue represents the creation of value by Overnight. It also represents an increase in the financial
interest of the owners in the company. As a result, cash is increased by $2,200 and owners’ equity is
increased by the same amount. To distinguish owners’ equity that is earned from that which was
originally invested by the owners, the account Retained Earnings is used in the owners’ equity section
of the balance sheet. The balance sheet in Exhibit 2–9 , as of January 31,

Cash increased Any profit from operations will be

15,800+2,200 = 18,000 added to Owner's equity 80
• Payment of Expenses: In order to earn the $2,200 of revenue Overnight had to pay some
operating expenses, namely utilities and wages For January, he owed $200 for utilities and $1,200
for wages to his employees, a total of $1,400, which he paid on January 31. Paying expenses has an
opposite effect from revenues on the owners’ interest in the company— their investment is reduced.
Of course, paying expenses also results in a decrease of cash. The January 31 balance sheet.

Profit reduce after paying

Cash reduced after paying expenses 119,200-2,200 expenses 2,200-1400=800
18,000 -1,400 =16,600 = 117,800
81
82
 Accounting cycle
• For practical purposes, businesses do not prepare new financial
statements after every transaction. Rather, they accumulate the
effects of individual transactions in their accounting records. Then, at
regular intervals, the data in these records
• The sequence of accounting procedures used to record, classify, and
summarize accounting information in financial reports at regular
intervals is often termed the accounting cycle.

83
 Accounting Cycle Steps
1. journalize (record) transactions,
2. post each journal entry to the appropriate ledger accounts, and
3. prepare a trial balance.
4. making end-of-period adjustments,
5. preparing an adjusted trial balance,
6. preparing financial statements,
7. journalizing and
8. posting closing entries, and
9. preparing an after-closing trial balance.

84
 THE ROLE OF ACCOUNTING
RECORDS
1. Establishing accountability for the assets and/or transactions under
an individual’s control.
2. Keeping track of routine business activities—such as the amounts of
money in company bank accounts, amounts due from credit
customers, or amounts owed to suppliers.
3. Obtaining detailed information about a particular transaction.
4. Evaluating the efficiency and performance of various departments
within the organization.
5. Maintaining documentary evidence of the company’s business
activities. (For example, tax laws require companies to maintain
accounting records supporting the amounts reported in tax returns.) 85
 The Journal
• In an actual accounting system, the information about each business
transaction is initially recorded in an accounting record called the
journal.
• The journal is a chronological (day-by-day) record of business
transactions. At convenient intervals, the debit and credit amounts
recorded in the journal are transferred (posted) to the accounts in the
ledger.

86
 Format of ledger book

Date Particulars L.F. Dr. Amount Cr. Amount

Date Particulars L.F. Dr. Cr. Amount

Amount
2011 Cash 80,000
Jan. To Capital account 80,000
20 (Owners invest cash in the
business)
87
 POSTING JOURNAL ENTRIES TO THE
LEDGER ACCOUNTS
• transactions are recorded first in the journal. Ledger accounts are
updated later, through a process called posting
• Posting simply means updating the ledger accounts for the effects of
the transactions recorded in the journal

88
 The Ledger
• The record used to keep track of the increases and decreases in
financial statement items is termed a “ledger account” or, simply, an
account. The entire group of accounts is kept together in an
accounting record called a ledger.

89
 The Use of
Accounts
Title of Account
Left or Right or
Debit Side Credit Side

An account is a means of accumulating in one place all the

information about changes in specific financial statement items,
such as a particular asset or liability. For example, the Cash
account provides a company’s current cash balance, a record of
its cash receipts, and a record of its cash disbursements. called a
T account because of its resemblance to the letter “ T”.
90
All asset accounts normally have debit balances
 Debit and Credit Entries
• An amount recorded on the left, or debit, side of an
account is called a debit, or a debit entry.
• Likewise, any amount entered on the right, or credit,
side is called a credit, or a credit entry.
• In simple terms, debits refer to the left side of an
account, and credits refer to the right side of an
account.

91
 Debit and Credit Entries

When these cash transactions are recorded in the Cash

account, the receipts are listed on the debit side, and
the payments are listed on the credit side.
92
 Determining the Balance of a T
Account
• The balance of an account is the difference between the
debit and credit entries in the account.
• If the debit total exceeds the credit total, the account has a
debit balance;
• if the credit total exceeds the debit total, the account has a
credit balance.
• The total cash receipts (debits) recorded in January amount
to $82,800, and the total cash payments (credits) amount to
$66,200. By subtracting the credit total from the debit total
($82,800 $66,200), we determine that the Cash account has
a debit balance of $16,600 on January 31.
93
Debit Balances in Asset Accounts

94
Credit Balances in Liability and
Owners’ Equity Accounts

95
Concise Statement of the Debit
and Credit Rules

96
97
DOUBLE-ENTRY ACCOUNTING—THE EQUALITY
OF DEBITS AND CREDITS

98
The three golden rules are:

• Debit the receiver, credit the giver (Personal Account).

• Debit what comes in, credit what goes out (Real Account).
• Debit all expenses and losses, credit all incomes and gains (Nominal
Account).

99
100
Michael McBryan and family invested $80,000
cash in exchange for capital stock.

101
102
 Date Particulars L.F. Debit Credit
2011 Cash 80,000
Jan. To Capital account 80,000
20 (Owners invest cash in the business)

Cash Account
Date Particulars L.F. Debit(₹) Date Particulars L. Credit(₹)
2023 F.
Jan To Capital 1 80,000
20

103
 Cash Account
Date Particulars L.F. Debit(₹) Date Particulars L. Credit(₹)
2023 F.
Jan To Capital 1 80,000
20

104
 Cash Account
Date Particulars L.F. Debit(₹) Date Particulars L. Credit(₹)
2023 F.
Jan To Capital 1 80,000
20

105
 Capital Account
Date Particulars L.F. Debit(₹) Date Particulars L. Credit(₹)
2023 2023 F.
1/20 By Cash 1 80,000

106
• Jan. 20 Michael McBryan and family invested $80,000 cash
in exchange for capital stock.
• Jan. 21 Representing Overnight, McBryan negotiated with
both the City of Santa Teresa and Metropolitan Transit
Authority (MTA) to purchase an abandoned bus garage. (The
city owned the land, but the MTA owned the building.) On
January 21, Overnight Auto Service purchased the land from
the city for $52,000 cash.
• Jan. 22 OvernightOvernight completed the acquisition of its
business location by purchasing the abandoned building
from the MTA. The purchase price was $36,000; Overnight
made a $6,000 cash down payment and issued a 90-day,
non-interest-bearing note payable for the remaining
$30,000.
• Jan. 23 Overnight purchased tools and equipment on
• Jan. 24 Overnight found that it had purchased more tools
than it needed. On January 24, it sold the excess tools on
account to Ace Towing at a price of $1,800. The tools were
sold at a price equal to their cost, so there was no gain or loss
on this transaction.
• Jan. 26 Overnight received $600 in partial collection of the
account receivable from Ace Towing
• Jan. 27 Overnight made a $6,800 partial payment of its account payable to
Snappy Tools.
110
As previously noted, net income is an increase in owners’ equity resulting
from the profitable operation of the business. Net

111
112
• Jan. 31 Recorded revenue of $2,200, all of which was
received in cash
• Jan. 31 Paid for utilities used in January, $200.
• Feb. 1 Paid Daily Tribune $360 cash for newspaper
advertising to be run during February.
• Feb. 2 Purchased radio advertising from KRAM to be
aired in February. The cost was $470, payable within 30
days.
• Feb. 4 Purchased various shop supplies (such as grease,
solvents, nuts, and bolts) from CAPA Auto Parts; the cost
was $1,400, due in 30 days. These supplies are expected
to meet Overnight’s needs for three or four months.
• Feb. 15 Collected $4,980 cash for repairs made to
vehicles of Airport Shuttle Service. 113
Feb. 28 Billed Harbor Cab Co. $5,400 for maintenance and
repair services Overnight provided in February. The
agreement with Harbor Cab calls for payment to be
received by March 10.

114