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Chapter 1: Fundamentals of Accounting

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Here in this slide fundamentals of accounting are discussed. After study this slide you will be able to know

Meaning and Definition of Accounting
Attributes (Characteristics) of Accounting
Functions of Accounting
Accounting Process
Book Keeping
Objectives of Accounting
Advantages of Accounting
Limitations of Accounting
Users of Accounting Information
Systems of Accounting
Basis of Accounting


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Chapter 1: Fundamentals of Accounting

  1. 1. Fundamentals of Accounting Visit www.afzalur.com for more content Chapter 1 Fundamentals of Accounting www.afzalur.com
  2. 2. Fundamentals of Accounting CHAPTER AT A GLANCE (Chapter 1) 1.01 Meaning and Definition of Accounting 1.02 Attributes (Characteristics) of Accounting 1.03 Accounting Process 1.04 Difference between Book Keeping, Accounting and Accountancy 1.05 Objectives of Accounting 1.06 Advantages of Accounting 1.07 Limitations of Accounting 1.08 Users of Accounting Information 1.09 Branches or Sub-fields of Accounting 1.10 Systems of Accounting www.afzalur.com
  3. 3. Fundamentals of Accounting 1.01 MEANING AND DEFINITION OF ACCOUNTING Accounting is an art of  recording,  classifying and  summarizing  in a significant manner and  in terms of money,  transactions and events  which are of a financial character and  interpreting the result thereof. www.afzalur.com
  4. 4. Fundamentals of Accounting 1.02 CHARACTERISTICS OF ACCOUNTING  Transactions and events that are of financial character are recorded.  Transactions are recorded in terms of Money. www.afzalur.com
  5. 5. Fundamentals of Accounting 1.03 FUNCTIONS OF ACCOUNTING i) Recording: Recording is a process in which transactions are recorded in the books of original entries, i.e. in Journal Books. Journal Book is sub-divided into subsidiary books according to the number of transactions of particular category. www.afzalur.com
  6. 6. Fundamentals of Accounting 1.03 FUNCTIONS OF ACCOUNTING These subsidiary books are:  Cash Book  Purchases Book  Purchases Return Book  Sales Book  Sales Return Book  Bills Receivable Book  Bills Payable Book www.afzalur.com
  7. 7. Fundamentals of Accounting 1.03 FUNCTIONS OF ACCOUNTING Cash Book to record cash and bank transactions. Cash book may be-:  Single Column Cash Book  Two Column Cash Book  Three Column Cash Book www.afzalur.com
  8. 8. Fundamentals of Accounting 1.03 FUNCTIONS OF ACCOUNTING ii) Classifying:  Classification means transactions or entries of one nature are grouped under one head of account.  The transactions recorded in ‘Journal’ or the ‘Subsidiary Books’ are classified or posted to the ‘Ledger Account’.  Ledger is the book that contains individual account heads under which all financial transactions of a similar nature are collected. www.afzalur.com
  9. 9. Fundamentals of Accounting 1.03 FUNCTIONS OF ACCOUNTING iii) Summarizing: Summarizing is presenting the classified data in a form that is understandable and useful to users of accounting information. It means preparation of Trial Balance, leading to preparation of financial statements i.e.  Trading and Profit and Loss Account, and  Balance Sheet. Profit and Loss Account and Balance Sheet are collectively known as’ Final Accounts or Financial Statements’. www.afzalur.com
  10. 10. Fundamentals of Accounting 1.03 FUNCTIONS OF ACCOUNTING iv) Analysis and Interpretation: Analysis and interpretation means  analyzing and then interpreting the financial data  to make a meaningful judgment of the profitability and financial position of the business.  It helps in planning the future in a better way. www.afzalur.com
  11. 11. Fundamentals of Accounting 1.03 FUNCTIONS OF ACCOUNTING v) Communicating  Finally, the accounting function is to communicate the financial data to the users. www.afzalur.com
  12. 12. Fundamentals of Accounting Financial Transactions or Events RecordingJournal 1. Cash Book 2. Purchase Book 3. Sales Book 4. Purchases Return Book 5. Sales Return Book 6. Bills Payable Book 7. Bills Receivable Book 8. Journal Proper Classifying (Posting into Ledger) Summarizing Trial Balance Trading and Profit and Loss Account Balance Sheet. Analysis and Interpretation Communicating to the User 1.04 ACCOUNTING PROCESS www.afzalur.com
  13. 13. Fundamentals of Accounting 1.05 BOOK KEEPING  Book Keeping is a part of accounting and is concerned with recording financial transactions and events in the books of accounts following accounting concepts and principles. Thus, Book Keeping is concerned with: • Identifying financial transactions and events; • Measuring them in terms of money; • Recording the financial transactions and events so identified in the books of accounts; and • Classifying recorded transactions and events, i.e., posting them into Ledger accounts. www.afzalur.com
  14. 14. Fundamentals of Accounting 1.06 OBJECTIVES OF ACCOUNTING  Ascertaining Profit or Loss.  Ascertaining Financial Position.  Facilitating Management.  Providing Accounting Information to Users. www.afzalur.com
  15. 15. Fundamentals of Accounting 1.07 ADVANTAGES OF ACCOUNTING  Financial Information about Business.  Assistance to Management.  Replaces Memory.  Facilitates Comparative Study.  Facilitates Settlement of Tax Liabilities.  Facilitates Loans.  Evidence in Court.  Assistance in the Event of Insolvency.  Helpful in settlement of accounts. www.afzalur.com
  16. 16. Fundamentals of Accounting 1.08 LIMITATIONS OF ACCOUNTING 1. It is Not Fully Exact. Accounting is based on evidences but yet estimates are also made for ascertaining profit or loss. Examples are  estimating the useful life of an asset,  bad debts,  market price of closing stock, etc. www.afzalur.com
  17. 17. Fundamentals of Accounting 1.08 LIMITATIONS OF ACCOUNTING 2. It Ignores the Qualitative Elements. Since accounting is confined to monetary matters only, qualitative elements like  quality of management  labour force  industrial relations  public relations  are ignored. www.afzalur.com
  18. 18. Fundamentals of Accounting 1.08 LIMITATIONS OF ACCOUNTING 3. It Ignores the Effect of Price Level Changes.  Accounting statements are prepared at historical cost. Money, as a measurement unit, changes in value.  Since Price Level Changes are not considered  the financial statements do not show correct financial status. www.afzalur.com
  19. 19. Fundamentals of Accounting 1.08 LIMITATIONS OF ACCOUNTING 4. Accounting May Lead to Window Dressing. The term window dressing means  manipulation of accounts  to conceal vital facts  present better or worse financial position than actual  In this situation, income statement fails to provide a true and fair view of the result of operations and  the Balance Sheet fails to provide a true and fair view of the financial position of the enterprise. www.afzalur.com
  20. 20. Fundamentals of Accounting
  21. 21. Fundamentals of Accounting 1.10 SYSTEMS OF ACCOUNTING The systems of recording transactions in the books of accounts are classified into two types: (a) Double Entry System of Accounting (b) Single Entry System of Accounting www.afzalur.com
  22. 22. Fundamentals of Accounting 1.10 SYSTEMS OF ACCOUNTING (a) Double Entry System of Accounting  Double entry system of accounting has two aspects— Debit and Credit.  At the time of recording a transaction,  it is recorded once on the debit side and  again on the credit side. www.afzalur.com
  23. 23. Fundamentals of Accounting 1.10 SYSTEMS OF ACCOUNTING For example, at the time of cash purchases, goods are acquired and in return cash is paid. In this transaction, two aspects are involved  receiving goods  paying cash. Under the Double Entry System, both these aspects are recorded. This system is universally applied in accounting. www.afzalur.com
  24. 24. Fundamentals of Accounting 1.10 SYSTEMS OF ACCOUNTING (b) Single Entry System of Accounting  Single Entry System of accounting may be defined as a system, which is an incomplete double entry system.  In this system, all transactions are not recorded on the double entry basis. www.afzalur.com
  25. 25. Fundamentals of Accounting 1.11 BASES OF ACCOUNTING Transactions are recorded in the books of account following either  Cash Basis of Accounting; or  Accrual Basis of Accounting www.afzalur.com
  26. 26. Fundamentals of Accounting 1.11 BASES OF ACCOUNTING Cash Basis Of Accounting Cash Basis of Accounting is a method in which  income is recorded when cash is received, and  expenses are recorded when cash is paid out. www.afzalur.com
  27. 27. Fundamentals of Accounting 1.11 BASES OF ACCOUNTING Cash Basis Of Accounting (Contd…) Advantages: (i) It is simple as adjustment entries are not required. (ii) This approach is more objective as very few estimates and judgments are required. (iii) This basis of accounting is suitable for those enterprises where most of the transactions are on a cash basis. www.afzalur.com
  28. 28. Fundamentals of Accounting 1.11 BASES OF ACCOUNTING Cash Basis Of Accounting (Contd...) Disadvantages (i) It does not give a true and fair view of the profit or loss and the financial position of an enterprise because  it ignores outstanding and prepaid expenses,  accrued incomes and incomes received in advance. (ii) It does not follow the matching principle of accounting. www.afzalur.com
  29. 29. Fundamentals of Accounting 1.11 BASES OF ACCOUNTING Cash Basis Of Accounting Disadvantages: (Contd...) (iii) actual cash inflows and outflows are considered. Therefore there is great possibility of profit manipulation. www.afzalur.com
  30. 30. Fundamentals of Accounting 1.11 BASES OF ACCOUNTING Accrual Basis of Accounting  System of accounting is based on 'accrual concept'  Revenue is recognized (recorded) when earned  Expenses are recognized when incurred. Under this system Income earned and expenditure incurred is recognised irrespective of cash received or cash paid. www.afzalur.com
  31. 31. Fundamentals of Accounting 1.11 BASES OF ACCOUNTING Accrual Basis of Accounting (Contd...) It is based on two basic accounting principles,  Revenue Recognition Concept  Matching Concept www.afzalur.com
  32. 32. Fundamentals of Accounting 1.11 BASES OF ACCOUNTING Accrual Basis of Accounting (Contd…) Revenue Recognition Concept Accounting rule that revenue should be recorded only when the (1) revenue generation process has been substantially completed, and (2) an exchange has taken place. It is a restatement of the old maxim: "Don't count your chickens until they are hatched." www.afzalur.com
  33. 33. Fundamentals of Accounting 1.11 BASES OF ACCOUNTING Accrual Basis of Accounting (Contd...) Matching Concept  Fundamental concept of accrual basis accounting that offsets revenue against expenses on the basis of their cause-and-effect relationship.  It requires that, in measuring net income for an accounting period,  the costs incurred in that period should be matched against the revenue generated in the same period. www.afzalur.com
  34. 34. Fundamentals of Accounting 1.11 BASES OF ACCOUNTING Accrual Basis of Accounting (Contd...) Advantages: (i) It is more scientific compared to Cash Basis (ii) This basis of accounting shows a complete picture (iii) This system discloses correct profit or loss for a particular period and also exhibits true financial position of the business on a particular day. (iv) It reflects correct profit or loss during the accounting period www.afzalur.com
  35. 35. Fundamentals of Accounting 1.11 BASES OF ACCOUNTING Disadvantages: (i) This system is not as simple as Cash Basis of Accounting. (ii) The accounting process under this basis is too elaborate. (iii) A quick appraisal of the profit/loss is not possible because many adjustments are required to ascertain the true financial position of the business. www.afzalur.com
  36. 36. Fundamentals of Accounting Example Illustration During the financial year 2009 – 10, Ashok had cash sales of Rs. 3,90,000 and 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. www.afzalur.com
  37. 37. Fundamentals of Accounting (i) When Cash Basis of Accounting is followed: www.afzalur.com Solution Revenue (inflow of Cash i.e. Cash Sale) 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.
  38. 38. Fundamentals of Accounting (ii) When Accrual Basis of Accounting is followed: www.afzalur.com Solution 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.
  39. 39. Fundamentals of Accounting Visit afzalur.com www.afzalur.com

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