Introduction to Accounting

Introduction to accounting is the first chapter of the fundamentals of Accounting.

This chapter deals with the following concepts

Illustration 1 During the financial year 2009 – 10, Ashok had cash sales of Rs.3,90,000and credit sales of Rs.1,60,000. His expenses for the year were Rs.2,70,000 out of which Rs.80,000 are yet to be paid. Find out Ashok’s income for 2009 – 10 under both the bases of Accounting.

(i) When Cash Basis of Accounting is followed:

Credit sales and outstanding expenses will not be considered under Cash Basis of Accounting.

(ii) When Accrual Basis of Accounting is followed:

Solution:		Rs.
Total Sales = Cash Sales (Rs.3,90,000) + Credit Sales (Rs.1,60,000)	=	5,50,000
Less:  Total Expenses for the Year		2,70,000
Net Income		2,80,000

Note: Rs.80,000 on account of expenses still to be paid relate to this year and hence are to be charged to the revenue of this year. Similarly, credit sales of Rs.1,60,000 is taken in the year in which sales transaction is done.

Illustration 2 Mr. Ashok supplies you the following information about his income and expenses for the financial year 2009 – 10:

	Rs.
Expenses paid	1,60,000
Expenses paid in advance (Included in Rs.1,60,000)	40,000
Expenses not yet paid	20,000
Income received	2,40,000
Income received in advance (Included in Rs.2,40,000)	30,000
Income not received yet	24,000

Find out the net income of Mr. Ashok if he adopts (i) Cash Basis, and (ii) Accrual Basis of Accounting.

Solution:
(i)   If Cash Basis of Accounting is Adopted:
Revenues:	Rs.
Income received	2,40,000
Less: Expenses:
Expenses paid	1,60,000
Profit	80,000

(ii) If Accrual Basis of Accounting is Adopted:
Revenues:		Rs.
Income received	2,40,000
Add: Income not received yet	24,000
		2,64,000
Less: Income received in advance	30,000
(A)		2,34,000
Expenses:
Expenses paid	1,60,000
Add: Expenses not paid yet	20,000
		1,80,000
Less: Expenses paid in advance	40,000
(B)		1,40,000

Profit = A – B = Rs.2,34,000 – Rs.1,40,000 = Rs94,000.