FUNDAMENTALS OF ACCOUNTING AND COMPUTER

TECHNOLOGY
 BOOKKEEPING :
Bookkeeping is the process of recording all financial transactions of a
business in a systematic and organized manner.

Features of bookkeeping:

1. Systematic Recording: Bookeeping involves recording all business

transactions in a structured and organized manner. This helps
avoid confusion and ensures no transaction is missed.
2. Chronological Order: All transactions are recorded according to
the date and time they occur. This helps maintain a timeline of
financial activities, making it easy to track and verify past events.
3. Basis for Accounting: Bookeeping serves as the foundation of
accounting. Accurate bookkeeping ensures correct preparation of
accounting records like the trial balance, income statement, and
balance sheet.
4. Double Entry System: Most businesses use the double-entry
system, where every transaction affects two accounts- one is
debited, and the other is credited. This ensures the accounting
equation (Assets= Liabilities + Capital) stays balanced.
5. Recording Financial Transactions Only: Bookeeping only deals
with financial transactions. Non-financial matters, like employee
performance, are not recorded.
6. Accuracy and Completeness: Every entry must be recorded
correctly and fully. Mistakes can lead to incorrect financial
reports, which may affect business decisions.
 7. Helps in Financial Control: By maintaining regular records,
business owners can monitor cash flow, expenses, and profits,
helping them stay in control of finances.
8. Legal and Tax Compliance: Bookeeping helps maintain records
that are often required by law and for tax filing. It ensures that the
business complies with government regulations.
9. Use of Books and Tools: Transactions are recorded in books like
the Journal, Ledger, Cash Book, etc. Nowadays, bookkeeping is
also done using computer software like Tally or Excel.
10. Assists in Decision Making: With updated and accurate
financial records, owners and managers can make better decisions
regarding investment, cost cutting, and business growth.

 ACCOUNTING:

Accounting is the process of recording, classifying, summarizing, analyzing,

and interpreting financial transactions of a business to provide useful
information for decision-making.

Key features of Accounting:

1. Recording : Accounting includes the systematic recording of all

financial transactions. The transactions are recorded in the journal
entries in a day to day basis. It ensures no business activity is missed
or forgotten.
2. Classifying: Classifying includes grouping similar transactions under
common heads (e.g., all rent payments under “Rent Account”).
Makes it easy to analyse specific areas like income, expenses, assets.
 3. Summarizing: Transactions are summarized to prepare financial
statements like- Profit & Loss Account, Balance Sheet, Cash Flow
Statement. It gives a clear snapshot of business performance and
position.
4. Analyzing: Evaluating financial data to understand profitability,
liquidity, and solvency. Helps in comparing performance over periods
or with competitors.
5. Interpreting: It means drawing conclusions from financial reports. It
helps shareholders, owners, investors, banks make better decisions.
6. Communicating : It means sharing financial information with users
(internal and external). It is important as it builds transparency and
trust in business.
7. Monetary Measurement: Only those events that can be measured
in money terms are recorded. It ensures uniformity and
comparability in records.
8. Historical Nature: Accounting records past events not future
predictions. It provides a factual base for decision-making.
9. Dual Aspect: Every transaction has two sides i.e. Debit and Credit. It
ensures the accounting equation stays balanced.
Assets = Liabilities + Capital.
10. Objectivity: Records should be based on verifiable evidence like
invoices and receipts. It increases reliability and accuracy of data.

 BASIC TERMS OF ACCOUNTING:

 Assets: Resources owned by the business (e.g., Cash, Land,

Machinery)
 Liabilities: Obligations to pay others (e.g., Loans, Creditors)
  Capital: Owner’s investment in the business
 Revenue: Income earned from business operations
 Expenses: Costs incurred to earn revenue
 Drawings: Cash or goods taken by the owner for personal use
 Debit (Dr): Entry on the left side of an account (e.g., assets increase)
 Credit (Cr): Entry on the right side of an account (e.g., liabilities
increase)
 Journal: Book of original entry for recording transactions
 Ledger: Book where all accounts are maintained
 Trial Balance: List of all accounts with balances to check arithmetical
accuracy
 Profit and Loss Account: Statement showing net profit or loss for a
period
 Balance Sheet: Statement showing financial position (assets =
liabilities + capital)
 Profit: When income more than expenses.
 Loss: When expenses are more than income.
 Transaction: Any business activity that involves money ( eg., buying
goods, paying rent).
 Account: A record of all transactions related to a particular item ( like
cash, rent, sales).

 TYPES OF ACCOUNTS AND THEIR RULES:

In accounting, types of accounts and their rules form the foundation of

the double-entry system. Below is a detailed explanation:
1. Types of Accounts in Accounting
Accounts are classified into three main types:

 Personal Account
o Definition: Accounts related to individuals, firms,
companies, or institutions.
- Examples: Ram’s Account, SBI Bank Account, Debtor
Account, Creditor Account

 Real Account
o Definition: Accounts related to assets or properties (both
tangible and intangible).
- Examples: Cash Account, Furniture Account, Building
Account, Goodwill Account

 Nominal Account
o Definition: Accounts related to income, expenses, gains, and
losses.
- Examples: Salary Account, Rent Account, Interest Received
Account, Commission Paid Account

2. Golden Rules of Accounting

Each type of account has its own golden rule for debit and credit:

Type of Account Debit Credit

Personal Account The Receiver The Giver
Real Account What Comes In What Goes Out
Nominal Account All Expenses and All Incomes and
Losses Gains
 3. Examples of Each Rule

Personal Account
Transaction: Paid ₹1,000 to Mohan
- Debit: Mohan (Receiver)
- Credit: Cash (Giver)

Real Account
Transaction: Bought furniture for ₹5,000
- Debit: Furniture (What Comes In)
- Credit: Cash (What Goes Out)

Nominal Account
Transaction: Paid salary ₹10,000
- Debit: Salary (Expense)
- Credit: Cash

 OBJECTIVES OF ACCOUNTING:

Accounting serves as the language of business. Its primary goal is to

provide financial information that is useful for decision-making. Below
are the key objectives:

1. To Maintain Systematic Records

Accounting helps in keeping a complete and organized record of all
financial transactions.
Why it matters: It acts as a memory aid and forms the basis for all
future analysis.

2. To Ascertain Profit or Loss

By preparing the Profit and Loss Account, accounting shows the net
result of business activities during a specific period.
Why it matters: Helps businesses evaluate their performance and plan
strategies.

3. To Determine Financial Position

The Balance Sheet prepared at the end of the accounting period shows
the assets, liabilities, and capital of the business.
Why it matters: It reflects the financial health of the business.

4. To Provide Information to Users

Accounting provides financial information to internal and external users
like owners, investors, creditors, government, etc.
Why it matters: Helps stakeholders make informed decisions.

5. To Assist in Decision Making

Accounting information helps managers plan, control, and make
business decisions.
Why it matters: Sound financial decisions depend on accurate
accounting data.

6. To Comply with Legal Requirements

Businesses are legally required to keep proper accounting records and
report their income for taxation and other legal purposes.
Why it matters: Helps in avoiding penalties and ensures transparency.

7. To Facilitate Auditing
Proper accounting records make it easy for internal or external auditors
to verify the correctness of accounts.
Why it matters: Builds trust among stakeholders and ensures accuracy.

8. To Prevent and Detect Errors and Frauds

A systematic accounting system can help in locating mistakes or
misappropriations.
 Why it matters: Ensures reliability of financial data and promotes
integrity.

 DIFFERENCE BETWEEN BOOKKEEPING AND ACCOUNTING:

Bookkeeping and accounting are important parts of financial

management, but they differ in terms of function, scope, and process.
Below is a detailed comparison based on different points of distinction:

Basis of Difference Bookkeeping Accounting

Meaning Recording of daily Summarizing,
financial analyzing, and
transactions. reporting financial
data.
Nature Routine and clerical Analytical and
in nature. subjective in nature.
Scope Narrower scope – Wider scope –
only recording of includes recording,
transactions. classification, and
interpretation.
Objective To maintain To determine
accurate and financial position
systematic records. and aid decision-
making.
Process First stage of Follows
accounting. bookkeeping and is
the next step.
Skills Required Basic knowledge of Advanced
accounting. knowledge and
analytical skills.
Financial Financial Financial
Statements statements are not statements are
 prepared. prepared from
recorded data.
Decision Making Does not support Supports internal
decision making. and external
decision making.
Performed By Bookkeepers or Accountants or
accounting clerks. financial experts.
Legal Requirement Not mandatory for Mandatory for
all organizations. businesses and legal
compliance.

 ACCOUNTING CYCLE

The Accounting Cycle is the step-by-step process used by businesses to record

and manage financial transactions throughout an accounting period. It
ensures that all financial data is recorded properly and the financial
statements are accurate.

1. Identify Transactions: Record every financial activity like sales, purchases,

expenses.
2. Record in Journal: Transactions are written in the Journal in date order.
3. Ledger Posting: Entries from the journal are transferred to individual
Ledger Account. Eg – posting to Cash Account and Sales Account.
4. Prepare Trial Balance: A list of all ledger account balances is made to
check if total debits=credits.
5. Adjusting Entries: Some expenses or incomes might not be recorded yet.
These are adjusted.
6. Adjusted Trial Balance: After adjustments, another trial balance is
prepared to confirm balances.
7. Prepare Financial Statements: Includes-
 a. Income Statement (profit/loss)
b. Balance Sheet (assets, liabilities,equity)
c. Cash Flow Statement.
8. Closing Entries: Temporary accounts like revenues and expenses are
closed to zero for the next cycle.
9. Post-Closing Trial Balance: A final trial balance with only permanent
accounts is prepared to ensure books are ready for the next period.

 ADVANTAGES OF ACCOUNTING CYCLE:

1. Accurate Financial Reporting: The accounting cycle ensures that

financial transactions are recorded, classified, and reported accurately,
providing stakeholders with reliable financial information.

2. Error Detection and Correction: The cycle helps identify and correct
errors or discrepancies in financial records, reducing the risk of material
misstatements.

3. Financial Analysis and Planning: The accounting cycle provides a

framework for analyzing financial performance, enabling businesses to
make informed decisions about future operations and investments.

4. Compliance with Accounting Standards and Regulations: By

following the accounting cycle, businesses can ensure compliance with
relevant accounting standards, laws, and regulations, reducing the risk
of non-compliance.

5. Informed Decision-Making: The accounting cycle provides

stakeholders with timely and accurate financial information, enabling
them to make informed decisions about investments, lending, or other
business activities.

6. Internal Control and Risk Management: The cycle helps strengthen

internal controls, reducing the risk of financial misstatement, fraud, or
errors.

7. Improved Financial Management: The accounting cycle promotes

financial discipline, enabling businesses to manage their finances
effectively, and make informed decisions about resource allocation.

8. Enhanced Transparency and Accountability: By providing accurate

and reliable financial information, the accounting cycle promotes
transparency and accountability, building trust with stakeholders.

9. Better Financial Performance Evaluation: The accounting cycle

enables businesses to evaluate their financial performance, identify
areas for improvement, and make adjustments to optimize results.

10. Supports Auditing and Assurance: The accounting cycle provides a

framework for auditors to review and verify financial statements,
ensuring that financial reporting is accurate and reliable.

Additional Benefits:

- Facilitates budgeting and forecasting

- Enables financial statement analysis and ratio analysis

- Supports financial planning and strategy development

- Enhances financial reporting quality and reliability

 - Promotes financial accountability and governance

By following the accounting cycle, businesses can ensure accurate

financial reporting, improve financial management, and make informed
decisions to drive growth and success.

 LIMITATIONS OF ACCOUNTING CYCLE:

The accounting cycle is a crucial process that ensures accurate financial

reporting, but it has some limitations:

1. Human Error

- The accounting cycle relies on human input, which can lead to errors
or inaccuracies.

- Mistakes in recording, classifying, or reporting transactions can affect

financial statements.

2. Limited Scope

- The accounting cycle focuses on financial transactions, ignoring non-

financial information.

- It may not capture important aspects like customer satisfaction,

employee morale, or environmental impact.

3. Historical Nature

- The accounting cycle records past transactions, which may not reflect
a company's current financial situation.

- It may not account for changes in market conditions, economic trends,

or other external factors.
4. Complexity

- The accounting cycle can be complex, especially for large or complex

organizations.

- It may require significant resources, time, and expertise to manage

effectively.

5. Inflexibility

- The accounting cycle follows a standard framework, which may not

accommodate unique or exceptional transactions.

- It may require adjustments or modifications to handle unusual or one-

time events.

6. Dependence on Assumptions

- The accounting cycle relies on assumptions, such as the going concern

assumption or the accrual basis of accounting.

- These assumptions may not always hold true, affecting the accuracy of
financial statements.

7. Limited Predictive Value

- The accounting cycle focuses on historical data, which may not predict
future performance.

- It may not account for changes in business strategy, market

conditions, or other factors that can impact future results.

8. Vulnerability to Manipulation

- The accounting cycle can be vulnerable to manipulation or earnings

management.
 - Companies may use accounting techniques to present a more
favorable financial picture.

9. Lack of Real-Time Information

- The accounting cycle typically provides financial information on a

periodic basis (e.g., monthly, quarterly, annually).

- It may not provide real-time information, which can limit its

usefulness for decision-making.

10. Regulatory Requirements

- The accounting cycle must comply with relevant laws, regulations, and
standards.

- Changes in regulations or standards can impact the accounting cycle

and financial reporting.

By understanding these limitations, businesses can take steps to

mitigate their impact and ensure accurate financial reporting.

 BASIS OF ACCOUNTING:

The basis of accounting refers to the rules and guidelines that govern
how financial transactions are recorded and reported. There are two
main basis of accounting:

1. Cash Basis

- Revenues are recognized when cash is received.

- Expenses are recognized when cash is paid.

- This basis is often used by individuals and small businesses.

2. Accrual Basis

- Revenues are recognized when earned, regardless of when cash is

received.

- Expenses are recognized when incurred, regardless of when cash is

paid.

- This basis is widely used by businesses and is required for financial

reporting under Generally Accepted Accounting Principles (GAAP) and
International Financial Reporting Standards (IFRS).

3. Hybrid or Modified Basis:

Combines elements of both cash and accrual basis. Some items are
recorded on a cash basis, other on a accrual basis.

Key differences:

- Timing: Cash basis recognizes transactions when cash changes hands,

while accrual basis recognizes transactions when earned or incurred.

- Matching principle: Accrual basis matches revenues with expenses,

providing a more accurate picture of financial performance.

Which basis is right for you?

- Cash basis: Suitable for small businesses or individuals with simple

financial transactions.

- Accrual basis: Suitable for businesses with complex financial

transactions, inventory, or credit sales.
- Cash+ Accrual Basis/ Hybrid basis: Suitable for Non- profit
organizations or government entities.

The choice of basis depends on the specific needs and requirements of

your business or organization.

 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP):

GAAP is a set of fundamental principles that guide financial
accounting and reporting. Here are the key principles:

1. Accounting Entity Principle

- Treats the business as a separate entity from its owners, creditors,

and other businesses.

2. Going Concern Principle

- Assumes the business will continue to operate for the foreseeable

future.

3. Monetary Unit Principle

- Assumes that the currency used in financial transactions remains

stable over time.

4. Historical Cost Principle

- Records assets and liabilities at their original cost.

5. Matching Principle

- Matches revenues with the expenses incurred to generate those

revenues.
6. Materiality Principle

- Requires disclosure of all material transactions and events that could

influence user decisions.

7. Consistency Principle

- Requires consistent application of accounting methods and

procedures.

8. Comparability Principle

- Enables comparison of financial statements across companies and

industries.

9. Accrual Principle

- Recognizes revenues and expenses when earned or incurred, not

when cash changes hands.

10. Full Disclosure Principle

- Requires disclosure of all relevant information that could impact user

decisions.

11. Objectivity Principle

- Financial information should be based on verifiable evidence and free

from bias.

These principles provide a framework for financial accounting and

reporting, ensuring that financial statements are presented in a fair,
consistent, and transparent manner.