2.introduction to accounting

7/31/2019 2.Introduction to Accounting

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MEANING OF ACCOUNTING : Accounting is the process of recording,classifying, summarizing, analyzing & communicating economic information topermit informed judgments and decisions by user of the information.

FUNCTIONS OF ACCOUNTING :1. RECORDING: This is the basic function of accounting .It is concerned withrecording of all business transaction in a systematic manner so systematicinformation can easily be obtained.

Recording of transaction is done in the book of Journal. This is further dividedinto several subsidiary books.2. CLASSIFYING: Classification is concerned with the systematic analysis of

the recorded data with a view to group transactions or entries of one nature atone place. The work of classification is done in the book termed asLEDGER.

3. SUMMARISING: This involves presenting the classified data in a manner which is understandable and useful to the internal as well as external end-user of accounting statement .This process leads to the preparation of thefollowing statement :a. Trial balance b.Trading & profit loss a/c c.Balance sheet


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DEALS WITH FINANCIAL TRANSACTION: Accounting records only thosetransactions which are financial in nature, it means transactions which arecash transaction or can be measured in terms of money.5. INTERPRETATION: This is the final function of accounting. Therecorded financial data is interpreted in a manner that end-user can make

meaningful judgments about the financial-conditions and profitability of business. This data is also used for preparing future plans.

OBJECTIVES OF ACCOUNTING

To keep systematic records : Accounting is done to keep a systematic

record of financial transactions. In the absence of accounting there wouldhave been terrific burden on human memory.

Ascertaining financial position: To ascertain strength and weakness, thefinancial position is ascertain by preparing a Balance-Sheet, which showsassets owned and the sources of financing these resources.

Calculating results and operations : The results of an operation areascertained by preparing a profit and loss account which shows profit or loss of business by recording all incomes and expenses.

Communicating information to users : Accounting sends information tointernal and external users top level management requires information for planning the external users rely on financial statement as the source of information. They are interested in the solvency and profitability of theenterprise.


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ACCOUNTING CONCEPTS AND CONVENTIONS

Accounting is the language of business through which normally a businesshouse communicates with the outside world. In order to make this languageintelligible and commonly understood by all, it is necessary that it should bebase on certain uniform standards. These standards are termed asaccounting principles.

Accounting principles may be defined as those rules of actions or conduct which are adopted by the accountants universally while recordingaccounting transaction. These principles can be classified into two categories: Accounting concepts Accounting Conventions

ACCOUNTING CONCEPTS: A concept term is used to denote necessaryassumptions upon which accounting is based.

1. Separate entity/ accounting entity/business entity concept : In accountingbusiness is considered to be separate entity from the proprietor. This conceptis extremely helpful in keeping business affairs strictly free from the effect of private affairs of the proprietor.Thus when one person invest Rs. 10000/- into business ,it will be treated thatproprietor has given that much of money to the business which will be shown

as liability.


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2. Going concern concept: - According to this concept it is assumed thatbusiness will continue for a fairly long time unless there is any reason to stopit. This is why the business purchase fixed assets like land and building, plantand machinery, furniture etc.If the assumption of going concern is not there, the assets would have beenhired and not purchased. These assets are acquired for use and not for sale.

3 . Dual aspect concept: - This concept is basis for accounting according tothis every business transaction has a dual effect. For example if A start abusiness with a capital of Rs. 10000/- , there are two aspects of thetransaction. On the one hand the business has assets of Rs. 10000/- whileon other hand the business has to pay to the proprietor a sum of Rs. 10000/-,which is taken as proprietors capital.

4. Money measurement concept: - Accounting records only monetarytransaction, which cannot be expressed in money do not find place in the

books of accounts though may be useful for the business. For example ateam of dedicated and trusted employees are definitely and asset to thebusiness but since their money measurement is not possible, they are notshown in the books of the business.


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5. Cost concept: According to this concept:-a. An asset is ordinarily entered in the accounting records at the price paid toacquire it, andb. This concept is basis for all subsequent accounting for the assets.Ex. If a machine is purchase for Rs.15000 than it is recorded in the books of

accounts at Rs.15000 even if its market value at that time happens to be Rs.16000/-

6. Accounting period concept: - Every business man wants to know the resultof business operation. Since the life of the business is assumed to beindefinite so it has been agreed that accounting record should be evaluatedafter a period of one year. It is called accounting period concept. In simplewords, every businessman is required to prepare final accounts for a periodof a one year, so that financial position of company is known to all.


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7. Periodic matching of cost and revenue concept: This concept is based onaccounting period concept. The main objective of business is to earn profit. In

order to know actual profit of business it is necessary that revenues of theperiod should be matched with the cost (expenses) of the period. It means tomeasure actual income of a business it is necessary that revenue earnedduring the year is compared with expenditure incurred for earning thatrevenue, whether the payment is made or not.For Ex. For December 1998 commission of employee is paid in January

1999. This means revenue of December 1998 (sales) should be matched withthe cost incurred for earning revenue (i.e. commission).

8. Realization Concepts: The principle tells us about when we should assumethat revenue have been earned. According to accounting period conceptrevenue must be considered with the specific accounting period. Revenue

realization can be determined on the sales, production or cash basis.


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ACCOUNTING CONVENTIONS: Conventions are methods of procedurewhich have been recognized as common for accounting .These are the

customs or traditions which guide the accountant while preparing accountingstatement.1. Conservatism: According to this convention, accountant follows the ruleanticipate no profit but provide for all losses while recording all transactions.It means accountant follow the policy of playing safe. Since the future isuncertain therefore some provision should be made for future uncertainties.

The practice of making provision should be made for future uncertainties. Thepractice of making provision for future is called conservation.Ex. (a) Making provision for bad-debts

(b) Valuation of stock at cost price or market price which ever is less.

2. Consistency: According to this convention accounting practices should

remain unchanged from one period to another.For Ex. If stock is valued at cost price and market price which ever is lower,than this method should be followed year after. Similarly for calculation of depreciation one method should be followed year after years.


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3. Full disclosure concept: The disclosure concept implies that accounts mustbe honestly prepared and all important information must be disclosed there in.The notion is so important (because of divorce between capital &management) that the companies act make ample provision for disclosure of essential information in company concerns. The contents of Balance-Sheetand P & L A/C are prescribed by law. These are designed to make disclosureof all material fact compulsory.

This convention states that information, which is of material interestto proprietors, Present and potential customer and investor should bedisclosed. If information do not Find place in accounting statement then itshould be written as notes.Ex. Contingent liabilities


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4. Materiality: - According to this convention the accountant should attach

importance to material details and ignore insignificant details. The termmaterial defines by American accounting association as an item is regardedas material if the knowledge of it may influence the decision of investors.

5. Timeliness: This is one of the latest accounting convention. It means thetransaction should be recorded in appropriate way as well as at proper time.

The business transaction of particular day should be recorded on the sameday. The delay in recording may result in manipulation, embezzlement, fraudand misplacement of vouchers. In certain cases like cash book, the principleof timeliness is strictly followed.


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ACCOUNTING TERMINOLOGY

1. Capital: - capital means the amount which the proprietor has invested inthe firm. It may be in terms of money, goods or property. For the firm it isliability towards the owner.

2. Assets: Assets are economic resources of an enterprise that can beexpress in monetary term. Those items which are used by the business in itsoperation are called assets. Assets can be classified in two types.

(a) Fixed Assets: - fixed assets are those assets which are held on long termbasis. These assets are purchased for the purpose of operating the businessand not for resale.Ex. Land, building, machinery, furniture, computer etc.(b) Current Assets: - Current assets are those assets of the business whichare kept for short term and are expected to be converted into cash or consumed in the production of goods.Ex. Cash, bank balance, debtor, stock.

3. Entry: whenever the transactions are recorded in the books, they areknown as entry.


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4. Transaction: Transaction refers to business activities involving transfer of money or goods or services between two accounts. Transaction may be cashtransaction or credit transaction. When party does not give cash immediatelyon entering into transaction than it is called credit transaction.

5. Goods: All such things are included in goods which are purchased for resaleor converted for sales. Various forms of goods are:

Purchase: The goods which are purchased for selling are known aspurchases. If it is purchased on credit it is known as credit purchase and in

case of cash purchase it is known as cash purchase.

Sales: what ever articles are sold, they are included in sales. If it is sold oncredit it is known as credit sales and in case of cash sales it is known as cashsales.

* Purchase return: If the goods once purchased are returned back then it iscalled purchase return or return outward.

* Sales return: If goods sold are returned by purchaser then it is called salesreturn or return inward.


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6. Liabilities: Liabilities are debts that a business has to pay to someone atsometime in the future. Ex. Creditors, loan etc.

7. Debtor: The person who takes the goods and services on credit is calledthe debtor.

8. Creditor: When ever the purchases are made on credit the person whosupplies such goods is known as creditor.

9. Stock / inventory: The term stock means goods being unsold on a particular date.

10. Accounts: Account is a schedule, under which transactions are recordedand classified in a systematic way. Ex. Building A/C, Cash A/C etc.

11. Revenues: These are the amount earned by the business by selling of products.

12. Expenses: It is the amounts spend in order to produce (purchase) andsale goods.


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13. Discount: It is a kind of concession, which is provided by the trader to itscustomers. It is of two types:

Trade Discount Cash Discount* Allowed for increase in sales. * To get quick payment (cash).

* Allowed on all transaction. * Allowed only on cash transactions.* Not shown in books of accounts. * Always shown in books of

accounts.

14. Insolvent: If a person is unable to repay his loan, he is treated asinsolvent. The liability of such person is more than the assets and he is notin a position to make full payments for his debt taken.

15. Bad- Debts: When a debtor become insolvent i.e. unable to pay onesdebt, the entire amount due from him is not realized. This unrealized

amount is loss for the business and it is called bad-debts.

16. Drawings: The amount which is taken by proprietor for his personal useis called drawings.


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17. Outstanding Expenses: Outstanding expenses are related to current year but have not been paid till the year end. It means services are taken butpayment is not made. This is liability of business in current year.

18. Prepaid Expenses: It means payment in advance. Prepaid expensesmeans payment is made during the current year but services will be taken innext year. This expense is asset of business in current year.

19. Advance / Unearned / unaccrued Income: Money received in advance. Itmeans services are not given but payment is received. It is liability of business.

20. Accrued income: Services are given but payment is not received. It isasset for the business.


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Date Particulars L.F. Debit Amount

Credit Amount

Show thedate of transaction

Account to be debited &credited as per rules of debitand credit and explanationof transaction.

Page no.of ledger book

JOURNAL: A journal is a book of original entry where the transactions arefirst recorded. The journal is the date wise record of the transaction of abusiness.

Format of Journal


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TYPES OF ACCOUNTS # Personal Account: There are two types of persons i.e. natural & artificial.

Accounts is related to both these types of persons.1. Natural persons mean human beings, such as Ram, Mohan.2. Artificial persons do not have physical constructions as human beings but theywork as

Person. These accounts are related to companies, institutions, factories, firms.3. Representative personal account: - Represent a particular person and group of person, such as outstanding expense account, advance income account.

Rules: - Debit the receiver.Credit the giver.

# Real Account: - Real accounts are related to life less property which cannot doanything at their will. It is classified as tangible and intangible.1. Tangible real account: - This account is related to property. It means tangible realaccounts are generally those accounts which are concerned with the things whichreally exist. Ex. cash account, building account, furniture account, goods accounts.Rules: - Debit what comes in .

Credit what goes out.

2. Intangible real account: - These real accounts are intangible that is they do nothave any physical construction, form, size, shape. They can neither be seen nor touched.# Nominal account: - These accounts are related to income and expenditure or gainand losses. Ex - wages account , interest account.

Rules: - Debit all expenses and losses.Credit all incomes and gains.


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Date Particulars J.F. Amount Date Particulars J.F. Amount

To -------a/c By -------a/c

LEDGER: Ledger is a set of accounts. It contains all accounts of thebusiness enterprise whether real, personal or nominal.An account is a ledger record in a summarized form of all the transactionthat has taken place with the particular person or things specified. Ledger posting: - Collection of requisite information concerning a particular account and presenting them under one head is known as ledger posting.

Format of Ledger AccountDr. Cr.


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Balancing of ledger accounts:-

1. Personal a/c, assets a/c, liabilities a/c, and capital a/c balances aretransferred to next year so they have opening & closing balances. Closing

balances of this year is written as To balance c/d or By balance c/d which isopening balance of next year and written as By balance b/d or To balanceb/d.

If credit side of ledger a/c is greater than debit side than account hascredit balance and difference of debit and credit side is written in debit sideas To Balance c/d.

If debit side of ledger a/c is greater than credit side than accounthas debit balance and difference of debit and credit side is written in creditside as By Balance c/d.

2. Nominal a/c balances are transferred to P & L a/c. (only indirect expenses)

3. Accounts related to goods and direct expenses are transferred to tradinga/c.


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TRIAL-BALANCE: Various debit and credit balances of ledger accounttaken down into a statement, called Trial-Balance. So,Trial-Balance is a statement, prepared with the debit and credit balancesof ledger account to test the arithmetical accuracy of the books. Every transaction has two effects. Every debit has corresponding credit ,so total of the debit and credit columns of the amount must tally .


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2.introduction to accounting

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