ACCOUNTING SYSTEMS

BASES OF ACCOUNTING

Cash Basis

Accrual Basis
 CASH BASIS
Actual cash receipts and actual cash
payments are recorded.

Credit transactions are not recorded at all

until the cash is actually received or paid.

Ignores outstanding, prepaid expenses,

accrued income, income received in advance.
 ACCRUAL BASIS
Income if earned or
due(accrued) and cash paid
or payment outstanding(due)
forms part of the period in
which services have been
given or received even if
actual cash has not been
received or paid.
 ACCRUAL BASIS VS CASH BASIS
Accrual Basis of Cash Basis of
Accounting Accounting
1. Under this method there 1. There is no outstanding or
may be outstanding expenses, prepaid expenses, accrued
prepaid expenses, accrued income, income received in
income, income received in advance in the Balance Sheet
advance in the Balance Sheet
2. Income statement will show 2. Income statement will show
relatively higher income lower income in case there are
because of prepaid expenses prepaid expenses and accrued
and accrued income income
3. Income statement will show 3. Income statement will show
relatively lower income higher income if there are
because of outstanding items of outstanding expenses
 Accrual Basis Cash Basis
4. The basis is recognized 4. The basis is not recognized
under the Companies Act 1956 under the Companies Act 1956

5. Depreciation is recorded 5. Depreciation cannot be

recorded

6. Enterprises with cash and 6. Enterprises with mostly

credit transactions prefer this cash transactions prefer this
basis basis of accounting

7. Business enterprises with Professional people like

profit motive ascertain their doctors, lawyers etc. and small
profit or loss under this basis non-trading concerns ascertain
their profit or loss under cash
basis
 Accrual Basis Cash Basis
8. Reliable Basis as it makes a 8. Not reliable
complete record of all cash and
credit transactions and
ascertains correct profit & loss
9. Is technical because it 9. Simple basis
involves adjustments of
accounts for preparing the
final accounts

10. Basis gives a true and fair 10. Does not give true and fair
view of P&L for a particular view.
period and exhibits true
financial position of business
on a particular day
 ACCOUNTING STANDARDS
 Tomaintain uniformity in accounting
principles throughout the world,
International Accounting Standards
Committee (IASC) came into being on 29th
June, 1973.

 TheInstitute of Chartered Accountants of

India(ICAI) being the premier accounting
body in India has tried to improve its
accounting and auditing standards
continuously.
 CONTINUED…
 ICAIset up Accounting Standard Board
(ASB) in 1977 whose main function is to
formulate accounting standards so that the
standards are established by the Council of
the ICAI.

 Inthe formulation and finalization of AS,

the ASB seeks the views and guidance of
members of ICAI, ICWAI, ICSI,
Government, Industrial concerns are taken.
 TASK OF ASB
RMPTD
R=Recognition
M=Measurement
P=Presentation
T=Treatment
D=Disclosure
 CONTINUED…
 Areas
(Eg: Fixed Assets, Exposure Draft
Depreciation)

 Definition

 Class of enterprise

 Date

 Content

STANDARD
 EXAMPLES
AS 2: Inventory

AS 3: Cashflow

AS 6: Depreciation

AS 10: Fixed assets

CLASSIFICATION OF ACCOUNTS

An account is an
individual
representation of assets,
liabilities, incomes or
expenses
ACCOUNTS ARE OF TWO TYPES

Personal Account

Impersonal Account
PERSONAL ACCOUNTS ARE OF 3 TYPES

1. Natural Personal Account(Ram A/C,

Hari A/C, Sangeeta A/C etc.)

2. Artificial Personal Account (Companies

Eg: Vinod & Bros Co., etc, Bank)

3. Representative Personal Accounts

(Outstanding Expenses, Prepaid
expenses, Income received in advance,
Accrued Income)
CONTINUED…

Any nominal account

suffixed or prefixed
becomes a representative
personal account. Eg-
Outstanding rent, Prepaid
salary etc.
IMPERSONAL ACCOUNTS ARE OF 2 TYPES

Real Account (Assets)

Nominal Account(Expenses)
 REAL ACCOUNTS ARE AGAIN OF 2 TYPES

Tangible(that can be touched, felt,seen

and measured eg: furniture a/c,goods a/c,
P&M a/c, Cash a/c)

Intangible(Eg: Goodwill, Patents,

Copyrights, Trademarks)
 IDENTIFY THE TYPE OF ACCOUNTS
BELOW
Drawings Machinery
Bank Salary Outstanding
Cash Unexpired
Discount Insurance/Prepaid
Patent Insurance
Arihant Industries Ltd Stock Account
Goodwill Bank Overdraft
Salaries Purchases
Bad Debts Bills Receivable
Capital Reserve for Discount
on creditors
 ANSWERS
Personal Personal
Personal Personal
Real Real
Nominal Personal
Real Real
Personal Real
Real Nominal
Nominal
Nominal
Personal
Real
THERE ARE TWO SYSTEMS OF ACCOUNTING

 Single Entry System: Only personal accounts are

maintained. It does not record complete business
transactions during a specified period. Hence final accounts
cannot be prepared. It is less costly system and is adopted by
small business concerns where business transactions are few.

 Double Entry System: Owes its origin to Fra Luca Pacioli.

All business transactions have two sides i.e receipt and
payment. Eg: Purchase of goods. This method of recording
every transaction in two accounts is known as Double Entry
system. One account is debited and the other is credited with
the same amount
POINTS TO REMEMBER

Real and personal accounts

reflect in the balance sheet

Nominalaccount reflects in the

P&L Account
 WHAT IS AN ASSET?
 Resources owned by a company which have
future economic value that can be measured
and can be expressed in monetary terms.
 Examples: cash, investments, accounts
receivable, inventory, supplies, land,
buildings, equipment, and vehicles.
 Anything which has an income generating
ability and is a property owned by the
organization.
 WHAT IS A LIABILITY?
Where the company is liable to pay
outsiders
Obligations of a company or
organization.
Eg: Amounts owed to lenders and
suppliers, income received in advance,
loan,creditors, outstanding expenses
Liabilities often have the word
"payable" in the account title.
 WHAT IS INCOME?
An excess of revenue over expenses for
an accounting period. It is also called
earnings or gross profit.

Accrued Income
Accrued income is income that is earned
but not yet received.
 ACCRUED
EXPENSES/OUTSTANDING
EXPENSES

Accrued expenses are

those expenses which
have been incurred but
not paid.
 WHAT IS EXPENSE?
 Expense is any amount paid by the organisation
the benefit of which has already been exhausted.

 Costs
that have been consumed in the process of
producing revenue are expired costs or expenses.

 Example: Insurance, Wages, Advertising,

Interest .
 Expense
is different from
Loss
 WHAT IS REVENUE?
1. Revenue results from the sale of
goods and rendering of services.

2. Revenue is the increase in capital

attributable to business activities.

3. Net income can be calculated by

subtracting expenses from revenue
 REVENUE VS GAIN VS INCOME.
 Revenueis the amount earned from a company’s
main activities such as selling merchandise or
providing services.

A gain results from secondary activities, such as

selling the old delivery truck. A gain is the amount
received that is in excess of the asset’s carrying
amount (book value). For example, if the company
receives Rs 3,000 for the truck, and its carry
amount was Rs 600, the company will report a gain
of Rs 2,400.
 CONTINUED…
Income is sometimes used instead of
the word revenue.

Generally, accountants use the word

income to mean “net of revenues and
expenses.” For example, a retailer’s
income from operations is sales minus
the cost of goods sold minus other
expenses.
WHAT IS EXPENDITURE?

Expenditure is the amount

incurred by the organization
the benefit of which is yet to be
exhausted.

Eg: P&M, L&B, Furniture etc.

 WHAT IS CAPITAL?
1. Cash or goods used to generate income
either by investing in a business or a
different income property.

2. The net worth of a business or the amount

by which its assets exceed its liabilities.

3. The money, property, and other valuables

which collectively represent the wealth of
an individual or business.
WHAT IS MEANT BY DEFERRED REVENUE
EXPENDITURE?
The expenditure done in the initial stage
but the benefit of which will also be
available in subsequent years is called
deferred revenue expenditure.

Eg: Advertisement