accounting

1. INTRODUCTION:
Accounting is a system meant for measuring business activities, processing of information into reports and making the findings available to decision-makers. The documents, which communicate these findings about the
performance of an organisation in monetary terms, are called financial statements.Usually, accounting is understood as the Language of Business. However, a business may have a lot of aspects which may not be of financial nature.
As such, a better way to understand accounting could be to call it The Language of Financial Decisions. The better the understanding of the language, the better is the management of financial aspects of living. Many aspects of our
lives are based on accounting, personal financial planning, investments, income-tax, loans, etc. We have different roles to perform in life-the role of a student, of a family head, of a manager, of an investor, etc. The knowledge of
accounting is an added advantage in performing different roles. However, we shall limit our scope of discussion to a business organisation and the various financial aspects of such an organisation.When we focus our thoughts on a
business organisation, many questions (is our business profitable, should a new product line be introduced, are the sales sufficient, etc.) strike our mind. To answer questions of such nature, we need to have information generated
through the accounting process. The people who take policy decisions and frame business plans use such information.
Objectives of Accounting:
Recording business transactions systematically− It is necessary to maintain systematic records of every business transaction, as it is beyond human capacities to remember such large number of transactions. Skipping the record of
any one of the transactions may lead to erroneous and faulty results.
Determining profit earned or loss incurred− In order to determine the net result at the end of an accounting period, we need to calculate profit or loss. For this purpose trading and profit and loss account are prepared. It gives
information regarding how much of goods have been purchased and sold, expenses incurred and amount earned during a year.
Ascertaining financial position of the firm− Ascertaining profit earned or loss incurred is not enough; proprietor also interested in knowing the financial position of his/her firm, i.e. the value of the assets, amount of liabilities owed,
net increase or decrease in his/her capital. This purpose is served by preparing the balance sheet that facilitates in ascertaining the true financial position of the business.
Assisting management− Systematic accounting helps the management in effective decision making, efficient control on cash management policies, preparing budget and forecasting, etc.
Assessing the progress of the business− Accounting helps in assessing the progress of business from year to year, as accounting facilitates the comparison both inter-firm as well as intra-firm.
Detecting and preventing frauds and errors− It is necessary to detect and prevent fraud and errors, mismanagement and wastage of the finance. Systematic recording helps in the easy detection and rectification of frauds, errors
and inefficiencies, if any.
Communicating accounting information to various users− The important step in the accounting process is to communicate financial and accounting information to various users including both internal and external users like
owners, management, government, labour, tax authorities, etc. This assists the users to understand and interpret the accounting data in a meaningful and appropriate manner without any ambiguity.
What is Bookkeeping?
Bookkeeping is the process of systematic recording and classification of financial transactions of an organisation.Bookkeeping is said to be the basis of accounting, whereas accounting forms a part of the broader scope in finance.The
most important focus of bookkeeping is to maintain an accurate record of all the monetary transactions of a business. Companies use this information to take major investment decisions.The bookkeeper maintains bookkeeping
records. Accurate bookkeeping is critical for business as it gives a piece of reliable information on the performance of a company.
Bookkeeping process consists of the following steps:1Identifying a financial transaction, 2Recording a financial transaction,3Preparing a ledger account,4Preparing trial balance
What is Accounting?
Accounting is the systematic process of recording, measuring and communicating information about the financial transaction taking place in a business. Accounting helps in determining the financial position of a firm and present the
same to stakeholders.It helps a business in the short and long term decision making and also conveys the credibility of a company to the market.It is also known as the language of business.The purpose of accounting is to provide a
clear view of financial statements to its users, which includes investors, creditors, employees, and government
Following are the limitations of financial accounting :
(i) Incomplete information: The accountant measures only those events that are financial in nature, i.e., are capable of being expressed in money. Non-monetary items or events, however significant they may be, are not measured
or recorded in accounting, for example, competency of management, competition in the market, industrial relations, etc.
(ii) Inexactness: Accounting data is sometimes based on estimations and it may be inaccurate. Therefore, profits and financial position disclosed by such accounts may not be true and exact. For example, stocks are also valued on
some assumptions. Actual useful life of an asset cannot be accurately calculated for the purpose of depreciation.
(iii) Personal influence of accountant: Accounting may be influenced by the personal judgement of the accountant. He applies a choice between different methods of inventory valuation, depreciation methods, provision for doubtful
debts, treatment of capital and revenue items and so on. Thus due to lack of objectivity, income measured may not be true in certain cases.
(iv) Assets may not be shown at their real value: Fixed assets are shown at written down value, i.e., cost less depreciation. There may be a great difference between book value at which assets are shown and current replacement
cost certain valueless assets are also shown in the Balance sheet, such as, goodwill, patents, and trademark, preliminary expenses, etc.
(v) Effect of price level changes not considered: Accounting statements are prepared at historical cost. Money as a measurement unit changes are considered while preparing Profit & Loss Account, the accounting information will
not show true financial results.

2. 2
BASIC ACCOUNTING PRINCIPLES
There are certain basic principles of accounting that are to be kept in mind while preparing financial statements. The following are discussed below:
Historical Cost Principle:This principle needs the companies to keep a track of the goods purchased, services rendered, or capital assets acquired at the price expended for them. Assets are then recorded on the balance sheet at their
historical cost without adjusting them for the changes in the market value of these assets.
Revenue Recognition Principle:This principle needs the companies to record their income or revenue as and when it is earned instead of when it is received. This accrual basis of accounting provides a more precise presentation of financial
events that occurred during the accounting period.
Matching Principle:This principle mentions that all the expenses must be matched and recorded with their particular revenues at the time that they were experienced instead of when they are spent. This principle coordinates with the
principle of revenue recognition confirming that all incomes and expenses are recorded on an accrual basis.
Disclosure Principle:This principle necessitates that any information that would significantly affect the decision of the user of financial statements about the company must be disclosed in the form of notes in the financial statements. This
restricts the companies from misappropriating significant information about accounting practices or known possibilities in the future.
Cost-Benefit Principle:This principle binds the essential amount of research and time to record or account for the financial information if the cost crosses over the benefit. Therefore, if recording an insignificant event costs the company a
substantial amount of money, it should not be recorded in the books.
Conservatism Principle:It is the principle that shows the general idea of identifying expenses and liabilities as soon as possible when there is doubt about the result but to only identify revenues and assets when they are confident of being
received.
Objectivity Principle:Under this principle, the financial statements, records of accounts, and financial information as a total should be not dependent and free from biases. The financial statements are intended to show the financial position
of the company and not to influence the end-users to take appropriate actions.
Consistency Principle:This principle mentions that all accounting principles and traditions should be functional steadily from one period to the other. This guarantees that financial statements can be compared between different stages and
during the past of the company
Accounting standards are authoritative standards for financial reporting and are the primary source of generally accepted accounting principles (GAAP).Accounting standards specify how transactions and
other events are to be recognized, measured, presented and disclosed in financial statements. Their objective is to provide financial information to investors, lenders, creditors, contributors, and others that is
useful in making decisions about providing resources to the entity.In Canada, accounting standards for all entities outside the public sector are issued by the Accounting Standards Board (AcSB). The AcSB
adopted IFRS®
Standards as the accounting standards used by publicly accountable enterprises. Private enterprises and not-for-profit organizations can choose to use separately developed standards for those
entities or IFRS Standards. Separate accounting standards exist for pension plans.ccounting standards adopted by the AcSB (including IFRS Standards) are published in the CPA Canada Handbook –
Accounting.The Canada Business Corporations Act and provincial corporations and securities legislation generally require companies to prepare financial statements for their shareholders in accordance with
GAAP as set out in the CPA Canada Handbook – Accounting. Other legislation applies to financial institutions and certain other types of reporting entity.
What is an Accounting Estimate?An accounting estimate is an approximation of the amount of a business transaction for which there is no precise means of measurement. Estimates are used in
accrual basis accounting to make the financial statements more complete, usually to anticipate events that have not yet occurred, but which are considered to be probable. These estimates may be
subsequently revised as more information becomes available. Changes in accounting estimates impact the current period and future periods, but have no impact on prior periods.The amount of an accounting
estimate is based on historical evidence and the judgment of the accountant. The basis upon which an accounting estimate is made should be fully documented, in case it is audited at a later date.
1. What is Accounting Process?
The primary objective of financial accounting is to record financial transactions to arrive at the results of the operations of the business during a year. This is done by preparing financial statements, i.e. Profit
and Loss Account and Balance Sheet at the end of the year. For preparing these financial statements, a business transaction has to pass through a number of stages in the accounting process. This means
when a business transaction occurs, the process begins to record the transaction in the account books.The accounting process is a series of steps that begin with a transaction taking place and ends with
closing of the account books at the end of the year. Because the complete sequence of accounting procedure is repeated in the same order during each accounting year, it is also referred to as accounting
cycle.
2. Steps in Accounting Process1Source documents2Journal3Ledger4Trial balance5Final accounts
Of these five steps, first four steps are discussed in this chapter and the last step i.e. final accounts is discussed in a subsequent chapter.
3. Source DocumentsThe starting point in the accounting process is to record the transaction on the basis of a documentary evidence. This means that the origin of a transaction is the source document. In
other words, source document is the voucher or written evidence on the basis of which transactions are recorded in the books of account. Such voucher may be generated within the business or may flow into
the business from outside. Examples of vouchers are pay-in-slips of the bank deposit, cash memos, bills, invoices, rent receipts, order received, etc. These documents are the foundation of all accounting
records.Steps AccountingProcess,There should be some documentary evidence (voucher) of each transaction. These documents reveal that transactions have occurred and initiate the accounting process.On
the basis of documentary evidences, the accountant makes a record of a transaction in journal in chronological order. Journal is a subsidiary book.Information given in journal is then entered in ledger. This is
known as posting. Ledger is a principal book having a set of accounts.The equality of debits and credits in the ledger accounts is verified by preparing a trial balance at the end of the period.Profit and Loss
Account and Balance Sheet are the two basic financial statements, also known as final accounts, which are prepared from information given in the trial balance.
4. Journal in Accounting ProcessJournal is a book of first entry. It is a preliminary book to provide a chronological record of transactions in which each transaction is recorded with relevant supplementary
information. Journal is known as a book of original entry because the transactions are first recorded in journal and it is from this record that various accounts are posted in the ledger. Journal is also known as
subsidiary book or day book. The process of recording transactions in journal is known as journalising.

3. (a) Personal Accounts: This includes:
(i) Accounts of natural persons, e.g., debtor’s a/c, creditor’s a/c, Ram’s a/c, etc.
(ii) Accounts of artificial persons and body of persons e.g., partnership firm’s a/c, company’s a/c, bank a/c, club’s a/c, insurance company’s, etc.
(iii) Representative personal accounts When an account represent a certain person, it is called representative personal account. For example, if salary of 10 employees has not been paid, the total amount due to these
employees will be added and shown under one common account called ‘salaries outstanding a/c’, but in the books the names of employees will appear. Therefore, salaries outstanding a/c is a personal account because
it represents certain persons. Similarly, insurance prepaid a/c, rent outstanding a/c, interest accrued a/c, etc. are personal accounts.
(b) Real Accounts: These are accounts of things tangible or intangible, e.g., furniture a/c, cash a/c, goodwill a/c, patent rights a/c, machinery a/c, land and building a/c, etc.
(c) Nominal Account: These are accounts of expenses (and losses) and incomes (and gains), e.g., interest paid a/c, wages a/c, interest earned a/c, commission a/c, rent a/c, discount a/c, profit on sale of old machine a/c,
etc.
$Nominal Account v. Personal Accounts
Generally there is a confusion regarding some of nominal accounts and personal accounts. A simple rule is that when a prefix or suffix is added to a nominal account, it becomes a personal account. For example, wages
a/c is a nominal a/c but wages outstanding a/c is a personal a/c. Similarly, rent a/c and insurance a/c are nominal accounts but rent paid in advance a/c and unexpired insurance a/c are personal accounts.
$Compound Journal Entries
Sometimes two or more transactions of the same nature take place on the same date. Instead of passing a separate entry for each transaction, a combined entry (known as compound entry) may be passed to record all
these transactions. Such compound entries may be of three types:
1. One account to be debited and two or more accounts to be credited.
2. Two or more accounts to be debited and one account to be credited
3. Two or more accounts to be debited and two or more accounts to be credited.
%Ledger in Accounting Process
The ledger is a set of accounts. In other words, the book which contains various accounts is known as ledger. It may be a bound book or a set of loose leaf pages or punched cards. Each account is opened on a separate
page or card in the ledger.
Distinction between Journal and Ledger
&The main points of distinction between journal and ledger are as under :
Subsidiary Book and Principal Book
Journal is a subsidiary book. It is also called a book of original entry or first entry. Ledger is the principal book, also known as a book of second entry. In other words, journal an original record while ledger is a derived
record.
Chronological and Analytical Record
Journal is a chronological record of day-to-day business transactions while a ledger is an analytical record of these transactions.
Narrations
Journal entries are supported by narrations to help in properly understanding the entries. Ledger entries are not supported by narrations.
Balancing
Journal is not balanced while ledger accounts are balanced.
Cash Book definition
Cash book is a special type of book that is only concerned with the recording of cash transactions of an organisation. It performs the dual role of both journal and a ledger for all the cash
transactions taking place in a business organisation.
A cash book records all the cash receipts on the debit side and all the cash payments of the organisation on the credit side.
Features of Cash Book
Cash book has the following features:
1.Acts as both a journal and a ledger.
2.Can be used as an alternative to a cash account for recording transactions.
3.It follows the dual entry system of accounting (i,e. Debit and credit side in cash book).
4.The debit side should be identical to the credit side.
5.Cash book should always have a debit balance.

4. Depreciation:
Every business acquires fixed assets for its use in the business over a period of time. As the benefits of these assets can be availed over a long period of time (due to their regular use), there exists continuous wear and
tear and consequently fall in their value. This fall in the value of fixed assets (due to regular use or expiry of time) is termed as depreciation.
machinery that costs Rs 1,00,000 and its useful life of 10 years, its depreciation will be calculated as:To ascertain true net profit or net loss− Correct profit or loss can be ascertained when all the expenses and losses
incurred for earning revenues are charged to profit and loss account. Assets are used for earning revenues and its cost is charged in form of depreciation from profit and loss account.To show true and fair view of
financial statements− If depreciation is not charged, assets are shown at higher value than their actual value in the balance sheet; consequently, the balance sheet does not reflect true and fair view of financial
statements.
For ascertaining the accurate cost of production− Depreciation on plant and machinery and other assets, which are engaged in production, is included in the cost of production. If depreciation is not included, cost of
production is underestimated, which will lead to low sale price and thus leads to low profit.
Distribution of dividend out of profit− If depreciation is not charged, which leads to overestimating of profit and consequently more profit is distributed as dividend, out of capital instead of the profit. This leads to the
flight of scarce capital out of the business.To provide funds for replacement of assets− Unlike other expenses, depreciation is not a cash expense. So, the amount of depreciation charged will be retained in the business
and will be used for replacement of fixed assets after its useful life.Consideration of tax− If depreciation is charged, then profit and loss account will disclose lesser profit as to when the depreciation is not charged. This
depicts reduced profit and thus the business will be liable for lesser tax amount.
Below are given the causes for depreciation.
Constant use− Due to constant use of the fixed assets there exists normal wear and tear that leads to fall in the value of fixed assets.
Expiry of time− With the passage of time, whether assets are used or not, its effective life decreases. The natural forces like rain, weather, etc. lead to deterioration of the fixed assets.
Obsolescence− Due to the fast technological innovations and inventions today’s assets may be outdated by tomorrow’s sophisticated assets. This leads to the obsolescence of fixed assets.
Expiry of legal rights− If an asset is acquired for a specific period of time, then, whether the asset is put to use or not, its value becomes zero at the end of its useful life. For example, if a land is acquired for Rs 1,00,000
for 25 years on lease, then each year its value depreciates by of its gross value. At the end of the 25th year, the value of the lease will be zero.
Accident− An asset may lose its value and damage may happen to it due to mishaps such as a fire accident, theft or a natural calamity. The loss due to accident is permanent in nature.
Permanent fall in value− Generally, we do not record fluctuations in the market price of the fixed assets in the books. However, if the fall in market price is permanent, it is accounted, which leads to a fall in the value of
fixed assets in the books.
Final Accounts Meaning
Final accounts are those accounts that are prepared by a joint stock company at the end of a fiscal year. The purpose of creating final accounts is to provide a clear picture of the financial position of the organisation to
its management, owners, or any other users of such accounting information.
Final account preparation involves preparing a set of accounts and statements at the end of an accounting year. The final account consists of the following accounts:
Trading and Profit and Loss Account
Balance Sheet
Profit and Loss Appropriation account
Objectives of Final Account preparation
Final accounts are prepared with the following objectives:
To determine profit or loss incurred by a company in a given financial period
To determine the financial position of the company
To act as a source of information to convey the users of accounting information (owners, creditors, investors and other stakeholders) about the solvency of the company.

5. What is Computerised Accounting?
The computerised accounting system is an accounting data system that processes the financial transactions and transactions as per GAAP (Generally Accepted Accounting Principles) to produce reports as per user demands. Every accounting
system, either computerised or manual, has two (2) aspects. First, it has to work under a set of well-defined theories known as accounting principles. Another, that there is a user-defined structure for the maintenance of records and the creation
of reports.In a computerised accounting system, the structure of storage and processing of data is known as an operating environment that comprises of hardware as well as software in hardware. Further, the choice of hardware is reliant upon
many factors such as the number of users, level of privacy and the nature of multiple activities of operational departments in an organisation.
What Accounting software does:
Accounting software automates and streamlines the accounting processes by using computers to record and track a business’s financial transactions.
It is software for financial record-keeping and analysis.
It records the purchase of goods and services, sales value and other financial transactions.
Accounting Software saves time, money and resources.
It is a business tool for bookkeeping and other financial operations. Accountants use this software in recording and tracking financial transactions.
The software is designed to make accounting tasks easier and more accura
Advantages of Computerized Accounting System:
1. Accuracy: Accounting errors are one of the biggest problems that businesses face in their accounting process. Accounting software is designed to anticipate common errors and correct them before they are added to the company’s records. It
is more accurate than most manual systems.
2. Simplicity: Regardless of the size of a company, accounting software is designed to be straightforward and easy to use. This means that even new employees can quickly understand how to use the system and record their financial activities.
3. Financial Report Accuracy: Accounting software is designed to be completely accurate. Companies can be assured that their financial reports have no errors. This means that managers can quickly make decisions based on the accounting data.
4. Standardized Financial Reporting: The use of accounting software in a business ensures the production of standard financial statements over the years. These reports are very vital when comparing a company’s financial performance over the
years, or when comparing different businesses that are similar in operation.
• What Accounting software does:
• Accounting software automates and streamlines the accounting processes by using computers to record and track a business’s financial transactions.
• It is software for financial record-keeping and analysis.
• It records the purchase of goods and services, sales value and other financial transactions.
• Accounting Software saves time, money and resources.
• It is a business tool for bookkeeping and other financial operations. Accountants use this software in recording and tracking financial transactions.
• The software is designed to make accounting tasks easier and more accura
• What Accounting software does:
• Accounting software automates and streamlines the accounting processes by using computers to record and track a business’s financial transactions.
• It is software for financial record-keeping and analysis.
• It records the purchase of goods and services, sales value and other financial transactions.
• Accounting Software saves time, money and resources.
• It is a business tool for bookkeeping and other financial operations. Accountants use this software in recording and tracking financial transactions.
• The software is designed to make accounting tasks easier and more accura