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BUSINESS ACCOUNTING
Unit -1 : Introduction to Accounting and Accounting System
Dr. J.Mexon ,
Department of Management,
Kristu Jayanti College, Bengaluru.
Contents
Introduction
Needs and Role of Accounting
System of Accounting
Branches of Accounting
Objectives of Accounting
Generally Accepted Accounting principles
Accounting Concepts and Conventions
Documents in Accounting
Introduction
A businessman/businesswoman invests capital with
the objective of making profit.
He/She incurs various expenses like salaries, rent and
other expenses to operate his/her business.
He/She receives income from different sources like
commission, interest and discount.
He/She deals with several persons in the course of
buying and selling of goods, purchasing and selling of
assets and borrowing of money for financing the
business.
Assets must be properly maintained to increase the
productivity.
Liabilities of a business have to be repaid in due time.
Dealing with customers and suppliers must be
managed properly.
The businessperson requires complete information
about all his business transactions to be successful.
The businessman/businesswoman interested in
knowing at the end of each year.
i. What he/she owns?
ii. What he/she owes?
iii. How much profit he/she has earned?
iv. What his/her financial position is?
Thus, transactions (accounting) relating to business
have become so important that their recording has
become a necessity.
Modern accounting has often been called ‘the
language of business’. The basic function of language
is to serve as a means of communication.
Accounting serves the purpose of communicating the
results of business operations to all the interested
parties such as proprietors managers, creditors and
investors.
Definition of Accounting
• Accounting is defined as "the art and the science of recording,
classifying and summarizing transactions in a business".
• Accounting can be considered as an art because it requires creative
judgment and skills. Accounting can be considered as
a science follows a systematic and organized path to understanding.
• According to the American Institute of Certified Public Accountants
(AICPA) “Accounting is the 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 results thereof'.
Attributes and Steps of Accounting
1. Recording of business transactions
2. Classification of transactions
3. Summarising
4. Significant manner
5. Recorded transactions in terms of money
6. Transactions and events of financial character
7. Interpreting the results
Objectives of Accounting
1. Maintenance of Records of Business Transactions: Accounting aims
at maintenance of a systematic record of all financial transactions of
the business in book of accounts. The recorded information helps
verifiability and acts as an evidence and made available to all the
interested and vital stakeholders, both external and internal.
2. Estimation of Profit or Loss: Another objective of accounting is to
ascertain the profit earned or loss sustained by a business during an
accounting period which can be easily workout with help of preparing a
profit or loss account for the period.
3. Determination of Financial Position: Accounting also aims at
ascertaining the financial position of the business concern in the form
of its assets and liabilities at the end of every accounting period
Advantages of Accounting
1. Systematic records of business transactions
2. Preparation of financial statements
3. Assessment of business progress
4. Aid to decision making
5. Statutory requirements
6. Information to interested groups of business
7. Accounting records accepted as Evidence in courts
8. Basic source for Tax computation and problems
9. Merger of firms
Branches of Accounting
1. Financial accounting: The branch of accounting that is responsible
for preparation of books of accounts and final accounts (profit or
loss, financial position).
2. Cost Accounting: The purpose of cost accounting is to analyse the
expenditures and ascertain the cost of various products
manufactured by the firm.
3. Management Accounting: The purpose of management accounting
is to assist the management in taking rational policy decisions and
to evaluate the impact of its decisions and actions.
Financial Accounting Cost Accounting Management Accounting
Prepare books of accounts and
final accounts
Estimate cost and devise
techniques to reduce cost
Use accounting information to help
management take decisions
Prepares journals, ledgers, and
final accounts
Prepares cost sheets and other
cost statements.
Prepare statements and reports needed
by management such as fund flow
statement, cash flow statement etc.
Take information of transactions
from memo, vouchers etc.
Depends on information
supplied by financial
accountant
Depends on information supplied by
financial accountant and cost accountant
Users of Accounting Information
1. Internal Users: Internal users are those who users who are
present within the organisation. Internal users have access to
detailed information Some examples of internal users are
employees, top management, supervisors etc.
• Owners
• Management
• Employees
2. External Users: External users are those users who are present
outside the organisation. The external users have access to limited
information. Also, the external users have information that are
disclosed by the organisation. Some examples of external users are
government, creditors, banks, tax department etc
• Creditors and Financiers
• Potential Investors
• Consumers
• Government
• Tax Authorities
Accounting Equation:
Accounting Process:
System of Accounting
1. Single entry system:
The term ‘single entry’ does not mean that there is only one entry for
each transaction. It simply signifies that principles of double entry
book-keeping have not been observed in all cases. Under this system,
only the personal accounts of the debtors and creditors and cash book
of the trader are maintained.
Profit & Loss A/c and B/S cannot be prepared due to the absence of
nominal and real accounts. Hence, single entry is not only incomplete
but the final results are also not reliable.
There is no hard and fast rule for maintaining records under this
system. This system is followed by those firms only maintain essential
records.
2. Double entry system:
According to this system, every transaction has two aspects. One is
benefit receiving aspect or incoming aspect and the other one is
benefit giving aspect or outgoing aspect.
For every transaction, one account is to be debited and another
account is to be credited in order to have a complete record of the
transaction.
Therefore, the basic principles, under this system is that for every
debit, there must be a corresponding and equal credit and for every
credit there must be a corresponding and equal debit.
Debit and credit
• Debit – the benefit receiving aspect of a transaction is known
as debit.
• Credit – the benefit giving aspect of a transaction is known
as credit.
• The abbreviations ‘Dr’ for Debit and ‘Cr’ for Credit are
usually used.
• By convention, the left hand side of an account is termed as
debit side and right hand side of an account is termed as
credit side.
Advantages of Double entry system
1. Complete record of all business transactions
2. Ascertainment of result of business (Profit or loss)
3. Knowledge about financial position of business
4. Check arithmetic accuracy of accounts
5. No scope for fraud and Misappropriation
6. Satisfy Tax authorities
7. Reveal Amount due by customers
8. Ascertain Amount due to suppliers
9. Comparative study of results
Types of Accounts
1. Personal Accounts
2. Real Accounts
3. Nominal Accounts
1. Personal Accounts: Accounts of person with whom the
business has dealings are known as personal accounts.
a.) Natural Persons: (Human beings)The name of an individual
(e.g.) John A/c , Angel A/c.
b.) Artificial Persons or Legal bodies: Not human beings but can
act and work like human. Have separate identity in the eye of law
and capable to enter into agreements. Firm’s accounts,
Educational institution’s accounts and co-operative society
accounts etc.
c.) Representative Personal Accounts: These accounts represents
the accounts of natural or artificial persons. When the expenses
become outstanding or pre-paid and incomes become accrued or
unearned they fall under this category. (e.g) prepaid insurance,
outstanding wages, rent etc.
2. Real Account: Records the real things owned by it. i.e.,
assets and liabilities of the business are known as real
accounts. We do not close these accounts at the end of
accounting year and appear in the B/S. Thus, we carry forward
the balance to the next accounting year. Real accounts are two
types tangible and intangible.
Buildings, furniture and machinery etc. are tangible real
accounts.
Trademarks, goodwill, patent and copyright etc. are
intangible real accounts.
3. Nominal Accounts: It relates to the items which exist in
name only. Accounts which record expenses, losses, incomes
and gains of the business are known as nominal accounts.
These are temporary accounts and thus we need to transfer
their balance to Trading and Profit & Loss A/c at the end of
accounting year.
(e.g.) Rent A/c, Salaries A/c, Advertising A/c etc.
Accounting Rules
• Personal Accounts: Debit the Receiver
Credit the Giver
• Real Accounts: Debit what comes in
Credit what goes out
• Nominal Accounts: Debit all expenses and losses
Credit all incomes and gains
Bases of Accounting
1. Cash basis Accounting: All incomes are considered to be
earned only when they are actually received in cash.
Expenses are considered to be incurred only when they are
actually paid.
2. Accrual basis Accounting: Accounting entries are made on
the basis of amounts having become due for payments or
receipt.
3. Mixed or Hybrid basis Accounting: Some items of income
are taken on cash basis while most of the expenses are
shown on accrual basis. It combines both ‘cash basis and
accrual basis’.
GAPP
In order to maintain uniformity and consistency in accounting
records, certain rules or principles have been developed which
are generally accepted by the accounting profession. These
rules are called by different names such as principles,
concepts, conventions, postulates, assumptions and modifying
principles.
Thus, Generally Accepted Accounting Principles (GAAP) refers
to the rules or guidelines adopted for recording and reporting
of business transactions, in order to bring uniformity in the
preparation and the presentation of financial statements.
• Accounting Principles have evolved over a long period of
time on the basis of past experiences, usages or customs,
statements by individuals and professional bodies and
regulations by government agencies and have general
acceptability among most accounting professionals.
• However, the principles of accounting are not static in
nature. These are constantly influenced by changes in the
legal, social and economic environment as well as the needs
of the users. These principles are also referred as accounting
concepts and conventions.
Accounting Concepts
1. Business entity concept
2. Money measurement concept
3. Going concern concept
4. Accounting period concept
5. Accounting cost concept
6. Dual aspect concept
7. Realisation concept
8. Accrual concept
9. Matching concept
1. Business entity concept : This concept assumes that, for
accounting purposes, the business enterprise and its owners
are two separate independent entities. Thus, the business and
personal transactions of its owner are separate.
2. Money measurement concept: This concept assumes that
all business transactions must be in terms of money, that is in
the currency of a country. Thus, as per the money
measurement concept, transactions which can be expressed
in terms of money are recorded in the books of accounts.
3. Going concern concept: This concept states that a business firm will
continue to carry on its activities for an indefinite period of time.
Simply stated, it means that every business entity has continuity of life.
Thus, it will not be dissolved in the near future.
4. Accounting period concept: All the transactions are recorded in the
books of accounts on the assumption that profits on these transactions
are to be ascertained for a specified period. This is known as
accounting period concept. Thus, this concept requires that a balance
sheet and profit and loss account should be prepared at regular
intervals. It may be of one year, six months, three months, one month,
etc. But usually one year is taken as one accounting period which may
be a calendar year or a financial year.
5. Accounting cost concept: Accounting cost concept states
that all assets are recorded in the books of accounts at their
purchase price, which includes cost of acquisition,
transportation and installation and not at its market price.
6. Dual aspect concept: Dual aspect is the foundation or basic
principle of accounting. This concept assumes that every
transaction has a dual effect, i.e. it affects two accounts in
their respective opposite sides. Therefore, the transaction
should be recorded at two places. It means, both the aspects
of the transaction must be recorded in the books of accounts.
7. Realisation concept: This concept states that revenue from any
business transaction should be included in the accounting records only
when it is realised. The term realisation means creation of legal right to
receive money. Revenue is said to have been realised when cash has
been received or right to receive cash on the sale of goods or services
or both has been created.
8. Accrual concept: The meaning of accrual is something that becomes
due especially an amount of money that is yet to be paid or received at
the end of the accounting period. It means that revenues are
recognised when they become receivable. Though cash is received or
not received and the expenses are recognised when they become
payable though cash is paid or not paid.
9. Matching concept: The matching concept states that the
revenue and the expenses incurred to earn the revenues must
belong to the same accounting period. So, once the revenue is
realised, the next step is to allocate it to the relevant
accounting period. This can be done with the help of accrual
concept.
Accounting Conventions
1. Convention of full Disclosure
2. Convention of Consistency
3. Convention of Materiality
4. Convention of Conservatism
1. Convention of Full Disclosure:
All accounting statements should be prepared honestly and disclose all
significant information.
Facts, figures and the details which are of material interest to the
owner, investors, creditors etc., must be clearly presented in the
financial statements.
Full disclosure does not imply providing any information require by
anybody or revealing trade secrets and strategies.
2. Convention of Consistency:
According to this convention, the rules, practices and concepts used in
accounting should be continuously observed and applied year after
year. Consistency can be at three levels.
Vertical consistency – Consistency in the various aspects of financial
statements in the same year in a firm.
Horizontal consistency – Consistency of practices between different
years in a firm.
Dimensional consistency – Consistent accounting practices in the
financial statements of different firms in the industry.
It makes financial statements more reliable and comparable.
3. Convention of Materiality:
Materiality means ‘relative importance’. All important items and facts
should be disclosed in accounting statements. Unimportant and
immaterial details need not be separately given. Otherwise, the
accountant becomes over burned with unnecessary details. The test of
materiality can be applied to three aspects.
i.) information
ii.) amounts
iii.) procedures
4. Convention of Conservatism:
Conservatism is the defensive accounting mechanism against
‘uncertainty’. Conservatism is a guideline which chooses between
acceptable accounting alternatives for recording events and
transactions so that least favourable immediate effects on assets,
income and owner’s equity is reported.
Uncertainty is unavoidable in the estimation of useful life of assets,
contingent liabilities, realization of receivables etc.
All provisions like provision for doubtful debts, provision for discount
on debtors are based on convention of conservatism.
Conservatism may result in understatement of assets and income and
overstatement of provisions and liabilities.
Documents in Accounting
•Cash Memo
•Invoice and Bill
•Receipt
•Pay in Slip
•Cheque
•Debit Note
•Credit Note
•Vouchers
1. Cash Memo
• Cash memo is a source document in which all transactions pertaining
to cash sales or purchases are to be recorded.
• When goods are purchased by a business enterprise on cash basis
then the firm receives cash memo and when a business enterprise
sells goods, it gives cash memo, in which all details of the transaction
relating to the purchase or sales viz. number or quantity
purchased/sold, price, discount received or allowed and sales tax
collected or deposited are provided.
• On the basis of cash memos, these transactions are then recorded in
the book of accounts.
2. Invoice and Bill
• Invoice or bill records the credit transactions related to sale or
purchase. This is prepared when a firm purchases or sells the goods
on credit.
• At the time, when the goods are sold by the business enterprise on
credit, sales invoice is prepared in which all details of the credit sales
viz. the quantity, rate and total amount etc. are mentioned.
• Similarly, when goods are purchased on credit, the supplier prepares
the invoice in duplicate. When the main copy is received by the
purchaser, it becomes a bill.
• Usually, invoices are made in duplicate, the main copy (original) is
sent to the purchaser and the another is kept by the business
enterprise for record and future reference.
3. Receipt
• Receipt is an evidence of making the payment on account of any
business transaction. This source document is prepared for showing
the proof of giving any cash to the party (who receives the cash) on
account of any business transaction. At least two copies are made of
any receipt.
• The original copy is prepared for giving it to the party who makes the
payment and another copy is kept for record.
• The details about the business transaction on account of which the
cash is received viz. date, amount, name of the party and the nature
of payment etc. are given in this source document.
4. Pay in Slip
• This document serves the purpose of providing an evidence that on
particular date, a specific amount has been deposited in the bank.
• When a depositor deposits money in the bank account, he fills up a
form provided by the bank containing the information about the date,
amount to be deposited and the name of the depositor etc.
• The bank clerk signs, stamps the counterfoil of the pay in slip and
returns it to the depositor.
• The counterfoil of the pay in slip becomes a source document, which
acts as an evidence for the customer to record this transaction in the
books of accounts.
5. Cheque
• A cheque is an unconditional order, drawn upon a specified banker,
signed by the maker, directing the banker to pay on demand a certain
sum of money only to the order of a person or the bearer of the
instrument. -Negotiable Instruments Act, 1881
• A cheque is an instrument drawn upon a banker and payable on
demand. The bank issues a booklet containing cheque forms to its
account holders. Digits mentioned on the bottom of the cheques
denote code of ‘State’, ‘Bank’, ‘Branch’, ‘Cheque’ and ‘Type of
Account’ respectively.
6. Debit Note
• A debit note is a document which shows that the business
enterprise has raised debit against the party to whom this
document is sent in respect of any business transaction
other than the credit sale.
• Business enterprise may make a debit note against the
supplier for an amount which is to be recovered from him,
when the business enterprise returns some goods which are
defective in nature or not as per specifications.
7. Credit Note
• A credit note is a document which shows that the business
enterprise has given the credit to the party to whom this
document is sent in respect of any business transaction
other than credit purchase.
• When a business enterprise receives back the goods sold
earlier then it makes a credit note in favour of the purchaser
showing that his account has been credited in the books of
business enterprise.
8. Vouchers
• The documents prepared for the purpose of recording
business transactions in the books of accounts are known as
vouchers. Voucher is prepared on the basis of source
documents.
• For recording business transactions in the books of accounts,
source documents are further analyzed and conclusion is
drawn as to which account is to be debited and which
account is to be credited. The document on which this
conclusion is written is known as voucher or accounting
voucher.
a. Cash Vouchers: Cash Vouchers are vouchers that are prepared at
the time of receipt or payment of cash. It also includes receipt and
payment through cheque. Cash Vouchers are of two types:
(i) Credit Vouchers: Credit Vouchers are vouchers that are prepared at
the time when cash is received. Cash may be received when:
• Goods are sold
• Sale of assets or investments etc.
(ii) Debit Vouchers: Debit Vouchers are vouchers that are prepared
when payment is made. Payment may be on account of expenses,
purchases, drawing of the proprietor, payment to creditor etc.
b. Non-Cash Vouchers (Transfer Vouchers): Non-cash
Vouchers are vouchers prepared for the transitions that do
not involve in flow or out flow of cash. For example, Debit
Note, Credit Note, Bills etc. These are prepares when
transitions such as credit sales, credit purchase etc are to be
recorded.
Introduction to Accounting - Dr. J. Mexon
Introduction to Accounting - Dr. J. Mexon

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Introduction to Accounting - Dr. J. Mexon

  • 1. BUSINESS ACCOUNTING Unit -1 : Introduction to Accounting and Accounting System Dr. J.Mexon , Department of Management, Kristu Jayanti College, Bengaluru.
  • 2. Contents Introduction Needs and Role of Accounting System of Accounting Branches of Accounting Objectives of Accounting Generally Accepted Accounting principles Accounting Concepts and Conventions Documents in Accounting
  • 3. Introduction A businessman/businesswoman invests capital with the objective of making profit. He/She incurs various expenses like salaries, rent and other expenses to operate his/her business. He/She receives income from different sources like commission, interest and discount. He/She deals with several persons in the course of buying and selling of goods, purchasing and selling of assets and borrowing of money for financing the business.
  • 4. Assets must be properly maintained to increase the productivity. Liabilities of a business have to be repaid in due time. Dealing with customers and suppliers must be managed properly. The businessperson requires complete information about all his business transactions to be successful.
  • 5. The businessman/businesswoman interested in knowing at the end of each year. i. What he/she owns? ii. What he/she owes? iii. How much profit he/she has earned? iv. What his/her financial position is? Thus, transactions (accounting) relating to business have become so important that their recording has become a necessity.
  • 6. Modern accounting has often been called ‘the language of business’. The basic function of language is to serve as a means of communication. Accounting serves the purpose of communicating the results of business operations to all the interested parties such as proprietors managers, creditors and investors.
  • 7. Definition of Accounting • Accounting is defined as "the art and the science of recording, classifying and summarizing transactions in a business". • Accounting can be considered as an art because it requires creative judgment and skills. Accounting can be considered as a science follows a systematic and organized path to understanding. • According to the American Institute of Certified Public Accountants (AICPA) “Accounting is the 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 results thereof'.
  • 8. Attributes and Steps of Accounting 1. Recording of business transactions 2. Classification of transactions 3. Summarising 4. Significant manner 5. Recorded transactions in terms of money 6. Transactions and events of financial character 7. Interpreting the results
  • 9. Objectives of Accounting 1. Maintenance of Records of Business Transactions: Accounting aims at maintenance of a systematic record of all financial transactions of the business in book of accounts. The recorded information helps verifiability and acts as an evidence and made available to all the interested and vital stakeholders, both external and internal. 2. Estimation of Profit or Loss: Another objective of accounting is to ascertain the profit earned or loss sustained by a business during an accounting period which can be easily workout with help of preparing a profit or loss account for the period. 3. Determination of Financial Position: Accounting also aims at ascertaining the financial position of the business concern in the form of its assets and liabilities at the end of every accounting period
  • 10. Advantages of Accounting 1. Systematic records of business transactions 2. Preparation of financial statements 3. Assessment of business progress 4. Aid to decision making 5. Statutory requirements 6. Information to interested groups of business 7. Accounting records accepted as Evidence in courts 8. Basic source for Tax computation and problems 9. Merger of firms
  • 11. Branches of Accounting 1. Financial accounting: The branch of accounting that is responsible for preparation of books of accounts and final accounts (profit or loss, financial position). 2. Cost Accounting: The purpose of cost accounting is to analyse the expenditures and ascertain the cost of various products manufactured by the firm. 3. Management Accounting: The purpose of management accounting is to assist the management in taking rational policy decisions and to evaluate the impact of its decisions and actions.
  • 12. Financial Accounting Cost Accounting Management Accounting Prepare books of accounts and final accounts Estimate cost and devise techniques to reduce cost Use accounting information to help management take decisions Prepares journals, ledgers, and final accounts Prepares cost sheets and other cost statements. Prepare statements and reports needed by management such as fund flow statement, cash flow statement etc. Take information of transactions from memo, vouchers etc. Depends on information supplied by financial accountant Depends on information supplied by financial accountant and cost accountant
  • 13. Users of Accounting Information 1. Internal Users: Internal users are those who users who are present within the organisation. Internal users have access to detailed information Some examples of internal users are employees, top management, supervisors etc. • Owners • Management • Employees
  • 14. 2. External Users: External users are those users who are present outside the organisation. The external users have access to limited information. Also, the external users have information that are disclosed by the organisation. Some examples of external users are government, creditors, banks, tax department etc • Creditors and Financiers • Potential Investors • Consumers • Government • Tax Authorities
  • 17.
  • 18. System of Accounting 1. Single entry system: The term ‘single entry’ does not mean that there is only one entry for each transaction. It simply signifies that principles of double entry book-keeping have not been observed in all cases. Under this system, only the personal accounts of the debtors and creditors and cash book of the trader are maintained. Profit & Loss A/c and B/S cannot be prepared due to the absence of nominal and real accounts. Hence, single entry is not only incomplete but the final results are also not reliable. There is no hard and fast rule for maintaining records under this system. This system is followed by those firms only maintain essential records.
  • 19. 2. Double entry system: According to this system, every transaction has two aspects. One is benefit receiving aspect or incoming aspect and the other one is benefit giving aspect or outgoing aspect. For every transaction, one account is to be debited and another account is to be credited in order to have a complete record of the transaction. Therefore, the basic principles, under this system is that for every debit, there must be a corresponding and equal credit and for every credit there must be a corresponding and equal debit.
  • 20. Debit and credit • Debit – the benefit receiving aspect of a transaction is known as debit. • Credit – the benefit giving aspect of a transaction is known as credit. • The abbreviations ‘Dr’ for Debit and ‘Cr’ for Credit are usually used. • By convention, the left hand side of an account is termed as debit side and right hand side of an account is termed as credit side.
  • 21. Advantages of Double entry system 1. Complete record of all business transactions 2. Ascertainment of result of business (Profit or loss) 3. Knowledge about financial position of business 4. Check arithmetic accuracy of accounts 5. No scope for fraud and Misappropriation 6. Satisfy Tax authorities 7. Reveal Amount due by customers 8. Ascertain Amount due to suppliers 9. Comparative study of results
  • 22. Types of Accounts 1. Personal Accounts 2. Real Accounts 3. Nominal Accounts
  • 23. 1. Personal Accounts: Accounts of person with whom the business has dealings are known as personal accounts. a.) Natural Persons: (Human beings)The name of an individual (e.g.) John A/c , Angel A/c. b.) Artificial Persons or Legal bodies: Not human beings but can act and work like human. Have separate identity in the eye of law and capable to enter into agreements. Firm’s accounts, Educational institution’s accounts and co-operative society accounts etc. c.) Representative Personal Accounts: These accounts represents the accounts of natural or artificial persons. When the expenses become outstanding or pre-paid and incomes become accrued or unearned they fall under this category. (e.g) prepaid insurance, outstanding wages, rent etc.
  • 24. 2. Real Account: Records the real things owned by it. i.e., assets and liabilities of the business are known as real accounts. We do not close these accounts at the end of accounting year and appear in the B/S. Thus, we carry forward the balance to the next accounting year. Real accounts are two types tangible and intangible. Buildings, furniture and machinery etc. are tangible real accounts. Trademarks, goodwill, patent and copyright etc. are intangible real accounts.
  • 25. 3. Nominal Accounts: It relates to the items which exist in name only. Accounts which record expenses, losses, incomes and gains of the business are known as nominal accounts. These are temporary accounts and thus we need to transfer their balance to Trading and Profit & Loss A/c at the end of accounting year. (e.g.) Rent A/c, Salaries A/c, Advertising A/c etc.
  • 26. Accounting Rules • Personal Accounts: Debit the Receiver Credit the Giver • Real Accounts: Debit what comes in Credit what goes out • Nominal Accounts: Debit all expenses and losses Credit all incomes and gains
  • 27. Bases of Accounting 1. Cash basis Accounting: All incomes are considered to be earned only when they are actually received in cash. Expenses are considered to be incurred only when they are actually paid. 2. Accrual basis Accounting: Accounting entries are made on the basis of amounts having become due for payments or receipt. 3. Mixed or Hybrid basis Accounting: Some items of income are taken on cash basis while most of the expenses are shown on accrual basis. It combines both ‘cash basis and accrual basis’.
  • 28. GAPP In order to maintain uniformity and consistency in accounting records, certain rules or principles have been developed which are generally accepted by the accounting profession. These rules are called by different names such as principles, concepts, conventions, postulates, assumptions and modifying principles. Thus, Generally Accepted Accounting Principles (GAAP) refers to the rules or guidelines adopted for recording and reporting of business transactions, in order to bring uniformity in the preparation and the presentation of financial statements.
  • 29. • Accounting Principles have evolved over a long period of time on the basis of past experiences, usages or customs, statements by individuals and professional bodies and regulations by government agencies and have general acceptability among most accounting professionals. • However, the principles of accounting are not static in nature. These are constantly influenced by changes in the legal, social and economic environment as well as the needs of the users. These principles are also referred as accounting concepts and conventions.
  • 30. Accounting Concepts 1. Business entity concept 2. Money measurement concept 3. Going concern concept 4. Accounting period concept 5. Accounting cost concept 6. Dual aspect concept 7. Realisation concept 8. Accrual concept 9. Matching concept
  • 31. 1. Business entity concept : This concept assumes that, for accounting purposes, the business enterprise and its owners are two separate independent entities. Thus, the business and personal transactions of its owner are separate. 2. Money measurement concept: This concept assumes that all business transactions must be in terms of money, that is in the currency of a country. Thus, as per the money measurement concept, transactions which can be expressed in terms of money are recorded in the books of accounts.
  • 32. 3. Going concern concept: This concept states that a business firm will continue to carry on its activities for an indefinite period of time. Simply stated, it means that every business entity has continuity of life. Thus, it will not be dissolved in the near future. 4. Accounting period concept: All the transactions are recorded in the books of accounts on the assumption that profits on these transactions are to be ascertained for a specified period. This is known as accounting period concept. Thus, this concept requires that a balance sheet and profit and loss account should be prepared at regular intervals. It may be of one year, six months, three months, one month, etc. But usually one year is taken as one accounting period which may be a calendar year or a financial year.
  • 33. 5. Accounting cost concept: Accounting cost concept states that all assets are recorded in the books of accounts at their purchase price, which includes cost of acquisition, transportation and installation and not at its market price. 6. Dual aspect concept: Dual aspect is the foundation or basic principle of accounting. This concept assumes that every transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides. Therefore, the transaction should be recorded at two places. It means, both the aspects of the transaction must be recorded in the books of accounts.
  • 34. 7. Realisation concept: This concept states that revenue from any business transaction should be included in the accounting records only when it is realised. The term realisation means creation of legal right to receive money. Revenue is said to have been realised when cash has been received or right to receive cash on the sale of goods or services or both has been created. 8. Accrual concept: The meaning of accrual is something that becomes due especially an amount of money that is yet to be paid or received at the end of the accounting period. It means that revenues are recognised when they become receivable. Though cash is received or not received and the expenses are recognised when they become payable though cash is paid or not paid.
  • 35. 9. Matching concept: The matching concept states that the revenue and the expenses incurred to earn the revenues must belong to the same accounting period. So, once the revenue is realised, the next step is to allocate it to the relevant accounting period. This can be done with the help of accrual concept.
  • 36. Accounting Conventions 1. Convention of full Disclosure 2. Convention of Consistency 3. Convention of Materiality 4. Convention of Conservatism
  • 37. 1. Convention of Full Disclosure: All accounting statements should be prepared honestly and disclose all significant information. Facts, figures and the details which are of material interest to the owner, investors, creditors etc., must be clearly presented in the financial statements. Full disclosure does not imply providing any information require by anybody or revealing trade secrets and strategies.
  • 38. 2. Convention of Consistency: According to this convention, the rules, practices and concepts used in accounting should be continuously observed and applied year after year. Consistency can be at three levels. Vertical consistency – Consistency in the various aspects of financial statements in the same year in a firm. Horizontal consistency – Consistency of practices between different years in a firm. Dimensional consistency – Consistent accounting practices in the financial statements of different firms in the industry. It makes financial statements more reliable and comparable.
  • 39. 3. Convention of Materiality: Materiality means ‘relative importance’. All important items and facts should be disclosed in accounting statements. Unimportant and immaterial details need not be separately given. Otherwise, the accountant becomes over burned with unnecessary details. The test of materiality can be applied to three aspects. i.) information ii.) amounts iii.) procedures
  • 40. 4. Convention of Conservatism: Conservatism is the defensive accounting mechanism against ‘uncertainty’. Conservatism is a guideline which chooses between acceptable accounting alternatives for recording events and transactions so that least favourable immediate effects on assets, income and owner’s equity is reported. Uncertainty is unavoidable in the estimation of useful life of assets, contingent liabilities, realization of receivables etc. All provisions like provision for doubtful debts, provision for discount on debtors are based on convention of conservatism. Conservatism may result in understatement of assets and income and overstatement of provisions and liabilities.
  • 41. Documents in Accounting •Cash Memo •Invoice and Bill •Receipt •Pay in Slip •Cheque •Debit Note •Credit Note •Vouchers
  • 42. 1. Cash Memo • Cash memo is a source document in which all transactions pertaining to cash sales or purchases are to be recorded. • When goods are purchased by a business enterprise on cash basis then the firm receives cash memo and when a business enterprise sells goods, it gives cash memo, in which all details of the transaction relating to the purchase or sales viz. number or quantity purchased/sold, price, discount received or allowed and sales tax collected or deposited are provided. • On the basis of cash memos, these transactions are then recorded in the book of accounts.
  • 43.
  • 44. 2. Invoice and Bill • Invoice or bill records the credit transactions related to sale or purchase. This is prepared when a firm purchases or sells the goods on credit. • At the time, when the goods are sold by the business enterprise on credit, sales invoice is prepared in which all details of the credit sales viz. the quantity, rate and total amount etc. are mentioned. • Similarly, when goods are purchased on credit, the supplier prepares the invoice in duplicate. When the main copy is received by the purchaser, it becomes a bill. • Usually, invoices are made in duplicate, the main copy (original) is sent to the purchaser and the another is kept by the business enterprise for record and future reference.
  • 45.
  • 46. 3. Receipt • Receipt is an evidence of making the payment on account of any business transaction. This source document is prepared for showing the proof of giving any cash to the party (who receives the cash) on account of any business transaction. At least two copies are made of any receipt. • The original copy is prepared for giving it to the party who makes the payment and another copy is kept for record. • The details about the business transaction on account of which the cash is received viz. date, amount, name of the party and the nature of payment etc. are given in this source document.
  • 47.
  • 48. 4. Pay in Slip • This document serves the purpose of providing an evidence that on particular date, a specific amount has been deposited in the bank. • When a depositor deposits money in the bank account, he fills up a form provided by the bank containing the information about the date, amount to be deposited and the name of the depositor etc. • The bank clerk signs, stamps the counterfoil of the pay in slip and returns it to the depositor. • The counterfoil of the pay in slip becomes a source document, which acts as an evidence for the customer to record this transaction in the books of accounts.
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  • 50. 5. Cheque • A cheque is an unconditional order, drawn upon a specified banker, signed by the maker, directing the banker to pay on demand a certain sum of money only to the order of a person or the bearer of the instrument. -Negotiable Instruments Act, 1881 • A cheque is an instrument drawn upon a banker and payable on demand. The bank issues a booklet containing cheque forms to its account holders. Digits mentioned on the bottom of the cheques denote code of ‘State’, ‘Bank’, ‘Branch’, ‘Cheque’ and ‘Type of Account’ respectively.
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  • 52. 6. Debit Note • A debit note is a document which shows that the business enterprise has raised debit against the party to whom this document is sent in respect of any business transaction other than the credit sale. • Business enterprise may make a debit note against the supplier for an amount which is to be recovered from him, when the business enterprise returns some goods which are defective in nature or not as per specifications.
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  • 54. 7. Credit Note • A credit note is a document which shows that the business enterprise has given the credit to the party to whom this document is sent in respect of any business transaction other than credit purchase. • When a business enterprise receives back the goods sold earlier then it makes a credit note in favour of the purchaser showing that his account has been credited in the books of business enterprise.
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  • 56. 8. Vouchers • The documents prepared for the purpose of recording business transactions in the books of accounts are known as vouchers. Voucher is prepared on the basis of source documents. • For recording business transactions in the books of accounts, source documents are further analyzed and conclusion is drawn as to which account is to be debited and which account is to be credited. The document on which this conclusion is written is known as voucher or accounting voucher.
  • 57. a. Cash Vouchers: Cash Vouchers are vouchers that are prepared at the time of receipt or payment of cash. It also includes receipt and payment through cheque. Cash Vouchers are of two types: (i) Credit Vouchers: Credit Vouchers are vouchers that are prepared at the time when cash is received. Cash may be received when: • Goods are sold • Sale of assets or investments etc. (ii) Debit Vouchers: Debit Vouchers are vouchers that are prepared when payment is made. Payment may be on account of expenses, purchases, drawing of the proprietor, payment to creditor etc.
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  • 59. b. Non-Cash Vouchers (Transfer Vouchers): Non-cash Vouchers are vouchers prepared for the transitions that do not involve in flow or out flow of cash. For example, Debit Note, Credit Note, Bills etc. These are prepares when transitions such as credit sales, credit purchase etc are to be recorded.