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Financial accounting concepts


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A clear picture on financial accounting and its concepts. A simple presentation that talks about the objectives of accounting and its applications.

Financial accounting concepts

  1. 1. What is Accounting?Accounting may be defined as the art ofrecording, classifying and consolidating businesstransactions that are financial in nature for audit andtax purposes.
  2. 2. Objectives of Accounting To provide information about the business activities to the owners , stake holders or investors and creditors facilitating them to take decisions on investment and lending. To effectively manage the material resources available. To facilitate social functions and control. To provide information regarding accounting policies.
  3. 3. Various classifications of Accounting Financial: The main purpose is to record the business transactions in the books of accounts enabling businessmen to know the results. In general, the term accounting refers to financial accounting only. Cost Accounting: ICMA London refers to cost accounting as “an application of accounting and costing principles, methods and techniques in the ascertainment of cost and analysis of savings as compared with past or with established standards. Management Accounting: Both financial and cost accounting methods and results contribute to management accounting where the data is interpreted mainly for arriving at optimal managerial decisions.
  4. 4. Main Accounting Concepts B u s i n e s s E n t i t y Co n c e p tLets say an entrepreneur starts a business. Though he is the owner, the business is treated as a separate entity. It is treated as a distinct feature and therefore it becomes necessary to record the business transactions separately to distinguish from the owner’s personal transactions.
  5. 5. Main Accounting Concepts Going Concern ConceptPeople may come and go, but the business remains forever. Until and unless the business dies by itself. Money Measurement Concept Business transactions can only be recorded in terms of their monetary value. Depreciation, rent, use of clerical services etc., can be only added up if expressed in terms of money.
  6. 6. Cost Concept The transactions are recorded keeping in mind the actual cost involved and this concept does not consider the projected value or appreciation. Even if a firm knows that a land purchased for Rs. 2,00,000 will fetch double the amount in the near future or worth more than the actual cost, the transaction is recorded only at the actual cost.
  7. 7. Dual Aspect Concept Each transaction has two aspects. When a business acquires an asset, it has to pay money. Acquiring an asset and paying money are two sides of the coin. Similarly, if the asset is acquired through credit, there arises a liability to that extent. Thus if there is an increase in asset, there will be increase in liability also. Assets = Liabilities+CapitalOr Capital = Assets-Liabilities
  8. 8. Realisation ConceptUnless money has been realised, no transaction can said to have been taken place.Accounting Period ConceptIn order to ascertain the state of the business affairs at regular intervals, usually a period of 52 weeks or 365 days is considered as the accounting period.
  9. 9. Two methods of Accounting Cash SystemIn this method, entries are made only when cash is received or paid and no entry being recorded when there is a payment or receipt due. Mercantile SystemHere, entries are made on the basis of amount having become due for payment or receipt.
  10. 10. Book Keeping It is the art of recording the business transactions in a set of books systematically. The two systems in book-keeping are1. Single entry system of book-keeping and2. Double entry system of book-keeping The set of books are1. Journal2. Subsidiary books3. Ledger4. Trial Balance and5. Final Accounts.