ACCOUNTING Accounting is a process of identifying, measuring and communicating the economic information so that they can make informed judgments and decisions. Accounting as a function is related to all other functions of any organization. Accounting provides useful information to insiders and outsiders so that they can take decissions.
USES OF FINANCIAL REPORTSA) External users: (1) Investors (2) Creditors (3) Government (4) Consumers (5) Research scholarsB) Internal users (1) Owners (2) Management (3) Employees
LIMITATIONS OF ACCOUNTING Records only monetary transaction Lack of realistic information Personal biasness of the accountant Historical in nature
ACCOUNTING CONCEPTS Business Entity concept: The owner and the entity both are different. Money Measurement concept: All transactions and events are measured in terms of monetary units. Those events can not be measured in terms of money can not be taken into consideration in the books of accounts. Going Concern concept: The enterprise is normally viewed as a going concern, that is as continuing for the foreseeable future.
ACCOUNTING CONCEPTS Accrual Concept: Revenues and costs are accrued, that is recognized as they are earned or incurred and recorded in the financial statements. Cost Concept : The assets are recorded in the books at the price paid to acquire it and this cost is the basis for the future course of action. Dual Aspect Concept : Every financial transaction involves two fold aspect, yielding of a benefit and the giving something for the benefit.
ACCOUNTING CONVENTIONS Convention of Consistency: Accounting rules, practices should be continuously observed and applied. This should not change from one year to another. Convention of Full Disclosure: All accounting statements should be honestly prepared and to that end full disclosure of all significant information should be made. Convention of Conservatism: A policy of caution or playing safe. It safeguards from all possible losses. Convention of Materiality: Statements should disclose those items which is having a relevant material.
BALANCE SHEET1) Ram want to purchase a car costing Rs. 5,00,000. To purchase the car he has to borrow and one bank has agreed to finance the car. The bank agrees if Ram will invest Rs.1,00,000 as margin money. Ram has following items owned and owed:- Ram has a savings deposit of Rs.50,000. He has term deposit of Rs. 1,50,000. His other personal possessions are Rs.50,000. He has taken a loan from his friend Rs.50,000. What is the change in the net worth of Ram before and after purchase of the car.