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 Income | 2,00,000 |
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.
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.