2. ACCOUNTING
Accounting is the process of identifying, measuring, recording,
classifying, summarizing, analyzing, interpreting and communicating
the financial transactions and events in monetary terms.
Accounting is a discipline which provides financial and other
essential information for effective evaluation of the activities of an
organization or Business enterprises.
Business activities and transaction
Recording of data
Processing, preparation and storage of data
Communication of data
Accounting Equation, the basis for the double entry system
Assets = Liabilities + Stakeholders’ equity
3. At its highest level, accounting sets up the basics of record keeping
and a process to track financial accounts according to the following
classifications:
Assets. These are items owned, purchased, or acquired which have
economic value. Note that assets usually include cash and intangible
items such as goodwill and patents.
Liabilities. These are obligations of the business, to be paid at a later
date.
Equity. This is found by simply subtracting liabilities from assets.
Revenue. This is the amount received from customers in exchange
for the goods or services provided. Revenue may be recognized by
the company under an accrual or cash basis.
Expenses. This is the cost associated with producing the product or
service or the assets spent or consumed during a given timeframe.
Transactions. These are the financial movements and events within
the classifications above.
Reporting. Once all of the above business transactions settle, it is
the controller’s role to present the net profit or loss for a given
timeframe.
8. SCOPE OF ACCOUNTING
To test and verify the entries of book keeping
To test the total and balances of ledger
To prepare trail balance from the ledger
To disclosed adjustment
To prepare final account
9. BOOK KEEPING VERSES ACCOUNTING
Book Keeping :- It is concerned with the
identification of business transactions, measuring
them in term of money, recording in the book of
original entry and classifying them in different
accounts.
Accounting :- It is concerned with summarizing
the classified transactions in the form of final
accounts, analyzing and interpreting them and
lastly communicate the results to the concern
people.
10. STRUCTURE OF BOOK KEEPING AND
ACCOUNTING
BOOK
KEEPING
TRANSACTION
MEMORANDUM
BOOK
JOURNAL
LEDGER
ACCOUNTING
TRAIL
BALANCE
PROFIT AND
LOSS
ACCOUNT
FINAL
ACCOUNT
ANALYSIS OF
FINAL
ACCOUNT
11. ADVANTAGES OF ACCOUNTING
Useful for management
Facilitate memory
Helpful in comparative study
To know the net profit or loss
To know the financial position
To know the value of business
Helpful in legal compliance
12. LIMITATIONS OF ACCOUNTING
It does not includes non-monitory
transactions
It records only past transactions. It does not
tell about future transactions
It is not absolutely correct
No effect of inflation are adjusted in it
Window dressing in balance sheet
13. OBJECTIVES OF ACCOUNTING
1) To maintain full and systematic records of
business transactions
2) To ascertain profit or loss of the business
3) To depict financial position of the business
4) To provide accounting information to the
interested parties
14. GENERAL ACCEPTED ACCOUNTING PRINCIPLES
(GAAP)
It may be defined as those rules and conducts of accounting
which are derived from experience and practices when they are
grouped to be useful. They become accepted as principle of
accounting.
ICAI stand for Institute of Chartered Accountants of India
The general acceptance of the accounting principles defined on
the four criteria :-
i. Understanding
ii. Relevance
iii. Reliability
iv. comparability
15. ACCOUNTING CONCEPT
Accounting concepts refers to the rules of accounting which are
to be followed, while recording business transactions and
preparing final accounts.
1. Separate Entity Concept
2. Money Measurement
3. Going Concern Concept
4. Accounting Period Concept
5. Dual Aspect Concept
6. Historical Concept
7. Matching Concept
8. Accrual Concept
9. Realization Concept
16. Separate entity concept :-
Business is treated separate from the owners. All the
transactions are recorded in the book of business and not in the
book of the owners.
According to this concept owner is treated as a creditor for the
business. Thus, this concept requires to make a difference
between a personal transactions and the business transaction.
Money measurement concept :-
Only those transactions are recorded in books of accounts
which can be expressed in money. An event all transactions is very
important for business not be recorded unless it can be measured
in term of money.
Going concern concept :-
This concept related with the indefinite long economical life
of the business. Based on this concept we purchased and record
fixed assets at their original price and depreciation charge on
these assets year by year. The assumption is that business will
continue to exist for unlimited period of time.
17. Accounting period concept :-
Every businessman want to know the result of his investment
and efforts after a certain period. Usually one year period is regarded as
an ideal for this purpose. From 1st April to 31st March may be called as
accounting period.
Dual aspect concept :-
Accounting concept is that every transaction affects two
accounts. This is why double entry system of book keeping came into
existence. No transaction is complete without double aspect. One is
debited and another is credited.
Historical cost concept :-
According to this concept fixed assets are recorded at the price
at which they are required. This price is term as ‘cost’. These assets do
not appear always at cost price every year but systematically it is
reduced by the amount of annual depreciation and thus they appear at
the amount which is cost less depreciation. This value is called book
value.
18. Matching concept :-
This principle dictates that for every entry of revenue recorded
in a given accounting period, an equal expense entry has to be recorded
for correctly calculating profit or loss in a given period.
Accrual concept :-
if the accounting period is one year for a business, whatever net
profit is made during the year, it increases the owners equity i.e.;
capital. The net loss is made during the year, it decreases the owners
equity i.e.; capital. Excess of revenue income is over revenue expenses is
net profit. While excess of revenue income is loss.
Realization concept :-
According to this concept, profit is recognized only when it is
earned. An advance or fee paid is not considered a profit until the goods
or services have been delivered to the buyer.
19. ACCOUNTING CONVENTION
Accounting conventions implies the customs or practices that
are widely accepted by the accounting bodies and are adopted
by the firm to work as a guide in the preparation of final
accounts.
1. Full Discloser Convention
2. Consistency Convention
3. Conservatism Convention
4. Materiality Convention
20. Full discloser convention :-
This principle state that the financial
statement should be prepared in such a way that it
fairly discloses all the material information to the
users, so as to help them in taking a rational
decision.
Consistency convention :-
Financial statements can be compared only
when the accounting policies are followed
consistently by the firm over the period. However,
changes can be made only in special circumstances.
21. Conservatism convention :-
This convention states that the firm should
not anticipate incomes and gains, but provide for
all expenses and losses.
Materiality convention :-
This concept is an exception to the full
disclosure convention which states that only
those items to be disclosed in the financial
statement which has a significant economic
effect.