• Existed in ancient times• Modern system took its birth in 1494• One Luca Pacioli, an Italian monk published a book called ‘Summa’, primarily a book on mathematics – foundation for the modern double-entry book keeping.
• Need for Book Keeping:• Profit to a business is like food to a human body – W.C.F.Harteley• So every businessman is forced to record his business transaction in a set of account books called ‘Books of Accounts’• Thus Book Keeping can be defined as the art of recording business transactions in a systematic manner.
• Essential Aspect of Book Keeping:• Recording of• only business transactions• That business transaction in terms of money• Recording of only the monetary or financial aspects of business transactions/ activities
• Advantages of Book Keeping• It has complete information about its expenses and losses, income and gains• There by ascertain its net profit or losses• Compare the results with that of the last yr• Keep a good control over various activities of the business. That is why ‘Book Keeping Records are called the eyes of a business.
Differences between Book Keeping and Accountancy• Book keeping is mere recording of business transaction• Accountancy denotes not only recording of business transaction but also an analysis of the recording leading to preparation of final accounts and interpretation of financial statement
• Accountancy begins where book keeping ends• Accountancy lays down the principles while book keeping practices.• The process of accounting begins with Identifying the transaction, recording of transaction, classification, summerising, Analysis and interpretation, and ends with communication of information
• Modern definition of Accounting• An information system with• Financial transactions and events as inputs• Process them in the form of ledgers and Trial Balance, Final a/c, FFS,CFS, Analysis and interpretation etc.• Accounting reports communicated to the users as outputs
Principles of accounting• The general rules or principles adopted in accounting are called Accounting Standards or Accounting principles.• Accounting principles can be classified into• Accounting concepts –assumptions upon which accounting is based• Accounting conventions
• Important accounting concepts are:• Money measurement concept –• record is made only of those transactions which can be expressed in terms of money• Ex: Team of dedicated employees, Inefficiency of management etc
• Business entity concept/Separate entity concept –• The business and the proprietor who owns the business are treated as separate entity.• To record the transactions between businessman and the business• Not to record the pvt transactions of business man in the books of business• This concept conflicts with law.
• Going-concern concept/concept of continuity:• A concern that will continue to operate for a fairly long time and it is from this point of view the transactions are recorded.• It is due to this aspect that:• Proper distinction is made between capital and revenue expenditure• Assets and liabilities are classified into long term and short Term
• Cost concept –• an asset acquired by a concern is recorded in the books of account at cost at the time of purchase and the market value is ignored.• An asset for which the concern has not paid is not recorded in the balance sheet of the concern• Disadvantage: does not reflect the true and fair view of the value of the asset•
• Advantages• In the absence of this concept, the figures shown in the accounting records becomes a subjective views of a person.• Drawbacks• Financial transactions does not depict the true and fair position of the business
• Dual-aspect concept -• Basic concept of accounting• Every transaction will result in receiving some benefit and giving some benefit• Either Increases/decreases one asset/liability and decreases/increase another asset/liability• Give example• Leads to accounting equation• Liabilities=Assets
• Accounting period concept –• This concept comes from the ongoing concern concept.• The performance of the business have to be analysed from time to time to keep a check on its performance• The accounts are prepared generally for a period of one year.
• Objective evidence concept:• All accounting entries should be evidenced and supported by business documents like invoices, vouchers etc.,• Exceptions• Estimation of depreciation, bad and doubtful debts etc.
• Realization concept/The Revenue Recognition Concept• When the revenue should be recognised?• Sale should be recognised when property in goods passes to the buyer and he becomes liable to pay.• Ex: If ‘A’ places an order for goods, the transaction is presumed to have been made only when the goods are delivered
• The Accrual concept:• Revenues recognised when they are earned and not when they are settled• Similarly expenditure –when they are incurred and not when they are paid.• Transaction recorded when it actually takes place and not when the settlement is made• Examples: Building taken on Rent on 1st August and rent not paid for three months. Total Rent for 8 months should be shown in P & L a/c
• Matching concept:• The expenses of an accounting period should be matched with the revenues whether received or not during a period.• When an item of revenue is entered the P&L a//c then all the expenses incurred to earn that income should be entered.• Ex: outstanding expenses, accrued income etc.
• Hence a statement or an account known as income & expenditure statement or profit and loss account is prepared• Profit or loss is the result of two factors• Revenue/income• Expenses and losses• If the revenues is more than expenses, it results in profit• If the revenues is less than expenses, it results in loss.•
• Legal aspect concept –• the accounting records and books should reflect the legal position -• if goods are sold on an approval basis, the customers to whom goods are sold on approval basis should not be shown as debtors unless the goods are approved by them• It mainly affects the current assets and not the fixed assets
Accounting conventions• Convention of conservatism/prudence – Provide for all possible losses like provision for doubtful debts, discount on debtors etc, but anticipate no profits.• Ex: we don’t make provision for discount on creditors• Inventory is valued at cost or market price whichever is lower.
• Draw backs:• Confliction with the convention of consistency• Confliction with the principle of full disclosure-when you create a secret reserve
• Convention of consistency – ex: depreciation, valuation of closing stock• FIFO, LIFO, Deprn etc
• Convention of full disclosure• Financial Statement should act as means of conveying information and not as• Means of concealing information• On this prinnciple, company Act prescribes the format for financial statement• Contingent liabilites, market values of investments are shown as annexure• Ex: in the case of fixed assets their cost prices and the depreciation written off to date should be disclosed
• Convention of materiality• A modified form of the principle of full disclosure• Detailed record of transactions which are trivial/insignificant to the users of accounts may not be disclosed.• What is significant?• Any information or misstatement changing the decision of users of financial statements-AS-1
Users of accounting• Internal users• Management• External users• Creditors• Investors- present and potential• Employee groups• General public• Govt Agency
Financial Statements• It is the presentation of business transactions in a proper way by converting them in figures and assembling them.• Types of Financial statements• Mfg Account, Tdg Account & P& L Account, Balance Sheet• Income Statement• Cash flow statement• Fund Flow Statement
• In case a manufacturing firm is engaged in manufacturing more than one product then it prepares a separate mfg a/c for each type of product.• A Mfg account is intended to disclose the factory cost of production• Cost of materials consumed: this is also referred to as direct materials. The balancing fig. gives cost of materials consumed.
• Direct Labour Cost:• Labour cost which can be identified with and allocated to cost centre or cost units• Cost Unit: A mfg business is set up for mfg some articles like pencils, bricks etc., These things, the enterprise is set up to provide, are termed “Cost Units”• Prime Cost: also referred to direct cost – made up of direct materials, direct wages and direct expenses
• Trading a/c – Need & importance• Ascertainment of Gross Profit or Loss• Calculation of cost of goods sold• Comparison of stock with that of previous year’s• Comparison of actual performance with the desired performance• Comparison of current Yr’s performance with that of the previous Yr.
• Profit and Loss Account: Need & importance• Knowledge of Net Profit or Net loss• Net profit/sales ratio• Maintaining of Provisions & reserves• Determination of future line of action.
• Balance Sheet• Knowledge of financial position• Ascertainment of current Assets & current liabilities• Proprietors equity• Working Capital position• Comparing of current Yr’s position with the last yr’s position
• Income Statement• It matches the income and expenditure of a particular period. It deals with only Revenue Items