Introduction to Accounting

Introduction to Accounting

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

This chapter deals with the following concepts

1.01  Meaning and Definition of Accounting

1.02  Attributes (Characteristics) of Accounting

1.03  Functions of Accounting

1.04  Accounting Process

1.05  Book Keeping

1.06  Objectives of Accounting

1.07  Advantages of Accounting

1.08  Limitations of Accounting

1.09  Users of Accounting Information

1.10  Systems of Accounting 1.11  Basis of Accounting

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:

Solution:Rs.
  
Revenues (inflows of cash, i.e., cash sales)3,90,000
Less: Expenses (outflow of cash) (Rs.2,70,000 – Rs.80,000)1,90,000
Net Income2,00,000

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.

Introductions to Accounting

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

 Rs.
Expenses paid1,60,000
Expenses paid in advance (Included in Rs.1,60,000)40,000
Expenses not yet paid20,000
Income received2,40,000
Income received in advance (Included in Rs.2,40,000)30,000
Income not received yet24,000

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 received2,40,000
Less: Expenses: 
Expenses paid1,60,000
Profit80,000
(ii) If Accrual Basis of Accounting is Adopted:  
Revenues: Rs.
Income received2,40,000 
Add: Income not received yet24,000 
  2,64,000
Less: Income received in advance30,000 
(A) 2,34,000
Expenses:  
   
Expenses paid1,60,000 
Add: Expenses not paid yet20,000 
  1,80,000
Less: Expenses paid in advance40,000 
(B) 1,40,000

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

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