some basic information about accounting

1. By
R. Venkat Reddy
CFP, CA, MBA, M.Com

2. Financial Accounting
Definition of accounting: “The art of recording, classifying and
summarizing in a significant manner and in terms of money,
transactions and events which are, in part at least of a
financial character and interpreting the results there of”.
Concepts of accounting (or) assumptions:
separate entity concept
going concern concept
money measurement concept
cost concept
dual aspect concept
accounting period concept
periodic matching of costs and revenue concept
Realization concept.
Accrual concept
Materiality concepts

3. 1. Business entity concepts: According to this concept, the business is
treated as a separate entity distinct from its owners and others.
2. Going concern concept: It is assumed that the business will exist for a long
time and transactions are recorded from this point of view.
3. Money measurement concept: This concept says that the accounting
records only those transactions which can be expressed in terms of
money only.
4. Cost concept: Transactions are entered in the books of account at the
amounts actually involved. Suppose a firm purchases a piece of land for
Rs. 1, 50,000/- but considers it as worth Rs.3, 00,000/-. The purchase will
be recorded at Rs.1, 50,000/- and not any more.
5. Dual aspect concept: In every transaction, there will be two aspects – the
receiving aspect and the giving aspect; both are recorded by debiting one
accounts and crediting another account. This is called double entry.

4. 6. Accounting period concept: It means the final accounts
must be prepared on a periodic basis. Normally
accounting period adopted is one year, more than this
period reduces the utility of accounting data.
7. Realization concept: Accounting is a historical record of
transactions; it records what has happened. It does not
anticipate events though anticipated adverse effects of
events that have already occurred are usually recorded.
8. Materiality concepts: It is a one of the accounting
principle, as per only important information will be taken,
and unimportant information will be ignored in the
preparation of the financial statement.
9. Matching concepts: The cost or expenses of a business
of a particular period are compared with the revenue of
the period in order to ascertain the net profit and loss.
Matching means requires proper matching of expense
with the revenue.
10. Accrual concept: The profit arises only when there is an
increase in owner’s capital, which is a result of excess of
revenue over expenses and loss.

5. Conventions of accounting
• conservatism
• Full disclosure
• Consistency
• Materiality.

6. Conservatism: Financial Statements are usually drawn up
on rather a conservative basis. Window-dressing, i.e.,
showing a position better that what it is, is not permitted.
It is also not proper to show a position substantially worse
than what it is. In other words, secret reserves are not
permitted.
Convention of Full disclosure: According to this
convention, all accounting statements should be honestly
prepared and to that end full disclosure of all significant
information will be made.
Convention of consistency: According to this convention it
is essential that accounting practices and methods remain
unchanged from one year to another.
Materiality: Materiality means relative importance. In
other words whether a matter should be disclosed or not
in the financial statements depends on its materiality, i.e.
whether it is material or not.

7. Systems of accounting
A. Cash system accounting
B. Mercantile system of accounting.

8. Principles of accounting
A. Personal a/c : Debit the receiver
Credit the giver
B. Real a/c : Debit what comes in
Credit what goes out
C. Nominal a/c : Debit all expenses and losses
Credit all gains and incomes

9. Sub Fields or Types of Accounting:
Book keeping: The systematic recording of a company's
financial transactions. The two most common bookkeeping
methods are single-entry and double-entry.
Management Accounting: It covers the generation of
accounting information for management decisions. So it
addresses to a single user group, the management. It includes
cost accounting which deals with keeping cost records,
measurement of cost of product/service and cost control
methods.
Financial Accounting:
It covers the preparation and interpretation of financial
statements and communication to the users of accounts.
Cost Accounting: It is thus concerned with recording,
classifying, and summarizing costs for determination of costs of
products or services planning, controlling and reducing such
costs and furnishing of information management for decision
making.

10. Terms used in accounting
Posting: it means transferring the debit and credit items
from the journal to their respective accounts in the ledger.
Credit note: the customer when returns the goods get credit
for the value of the goods returned. A credit note is sent to
him intimating that his a/c has been credited with the value
of the goods returned.
Debit note: when the goods are returned to the supplier, a
debit note is sent to him indicating that his a/c has been
debited with the amount mentioned in the debit note.
Debtor: Means taken goods on credit, who owes an amount
to some body, People who has taken loan or money.
Creditor: Means from whom have taken goods on credit
people to whom we owes
Contra entry: which accounting entry is recorded on both
the debit and credit side of the cashbook is known as the
contra entry.

11. Depreciation:
A noncash expense that reduces the value of an asset
as a result of wear and tear, age, or obsolescence. Most
assets lose their value over time (in other words, they
depreciate), and must be replaced once the end of their
useful life is reached. There are several accounting
methods that are used in order to write off an asset's
depreciation cost over the period of its useful life.
Methods of depreciation:
Fixed installment method
Depletion method
Machine hour rate method.
Diminishing balance method
Sum of years digits method
Annuity method
Depreciation fund method

12. Depletion: it implies removal of an available but not
replaceable source, Such as extracting coal from a coal
mine.
Amortization: The gradual elimination of a liability,
such as a mortgage, in regular payments over a
specified period of time. Such payments must be
sufficient to cover both principal and interest the
process of writing of intangible assets is term as
amortization.
Suspense account: the suspense account is an account
to which the difference in the trial balance has been put
temporarily.
Capital employed: the term capital employed means
sum of total long term funds employed in the business.
i.e. (Share capital+ reserves & surplus +long term loans
–
(Non business assets + fictitious assets)

13. Joint venture: A contractual agreement joining together
two or more parties for the purpose of executing a
particular business undertaking. All parties agree to
share in the profits and losses of the enterprise.
Partnership: partnership is the relation b/w the persons
who have agreed to share the profits of business
carried on by all or any of them acting for all.
A Firm is created by mutual agreement between
partners, registration is optional
Membership incase of firm two partners minimum, and
maximum banking business -10 nos , other business 20
nos
A firm does not have a separate legal entity
In case of firm partners are jointly & severally liable

14.  Provision:
Provisions is charge against profits
is made for known liability or expenditure
it is utilized for that purpose only
is shown above the line
above the line means profit and loss account
 Reserve:
Reserve in an appropriation profits
it is made for future unknown liability
it can be utilized for any future purpose
is known below the line
below the line means P&L appropriation account