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8/8/2019 Ani ACC Prenstation

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What is Accountancy?

It is the art of recording, classifying,summarizing and interpreting in a significant

manner and in monetary terms.


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Objectives of Accounting

To keep systematic records.

To protect business properties.

To ascertain the operational profit or loss. To ascertain the financial position ofbusiness.

To help in decision making.


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Users of Accounting information

Proprietors

Managers

Creditors Prospective investors

Employees

Government Citizens


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Diff. between Financial A/c &

Management A/cBasis Financial A/c Management A/c

Objectives Provides information to

external parties.

For internal use by the

management.

Analyzing performance Paints overall picture. Analyses at a

departmental/divisionallevel.

Data used Only past monetary data. Past data and future

projections.

Monetary measurement Only events of monetary

value recorded.

Events of monetary and

non-monetary values

recorded.

Periodicity of reporting Longer- yearly or half

yearly.

Shorter- according to the

needs of the organization.

Nature Objective. Subjective.

Legal compulsion Compulsory . Non- compulsory.


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Bookkeeping Vs Accounting

Bookkeeping is the recording of financial transactions

accordance with some predefined rules. Transactions

include sales, purchases, income, and payments by an

individual or organization. Bookkeeping is usuallyperformed by a bookkeeper.

Accounting is the process of deriving the financial

statements that emerge from the book keeping records.

It is performed by an accountant.


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Roles of an Accountant

Maintenance ofbooks of accounts

Auditing of accounts

Taxation Financial services


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GAAP

(Generally Accepted Accounting Principles)

What is GAAP?

A set of standards generally accepted and

universally practiced by accountants Indicates how economic events are reported

Generated by the Financial Accounting

StandardsB

oard (FASB

) and Securities &Exchange Commission (SEC)


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Accounting Principles

Concepts

Separate Entity

Going concernMoney Measurement

Cost

Dual Aspect

Accounting PeriodPeriodic Matching of

Costs & Revenue

Realisation

Conventions

Conservatism

Full Disclosure

Consistency

Materiality


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Separate Entity concept

This concept implies that the affairs of a

business are to be treated as being separate

from the non-business activities of its owners. Personal transactions of the owner should not

be included.


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Separate entity concept

e.g.

A directors private car should

not be included in the fixedassets of the company.


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Going concern concept

This concept implies that the business will

continue to operate for the foreseeable future.

D

epreciation on fixed assets is in the basis ofthe expected live rather than the market value.

An enterprise will not be considered as a

going concern when it as gone into liquidation

or it has become insolvent.


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Going concern concept

e.g.

Fixed assets are

shown at cost lessaccumulated

depreciation.


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Money measurement concept

It can be measured only in monetary value.

Events or transactions which cannot be

expressed in money is not recorded. It helps in understanding the state of affairs of

the business in a much better way.


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Money measurement concept

e.g.

Accounting doesnt tell how good thequality of employees skills are

although this is important for the

success of a business.


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The Cost Concept:

Assets are always shown at their cost price ratherthan their market price

Every transaction must be recorded at its acquisitionprice.

This does not mean that the asset will always beshown at the cost price. It means that the asset isrecorded at its cost price and is systematicallyreduced or increases in value by charging

depreciation/appreciation. This is applicable to fixed assets and not the current

assets.


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Cost concept

E.g.

If a piece of land is acquired for Rs.50,000, it

will be recorded at the acquisition costregardless of the market value. Only

depreciation/appreciation will be adjusted.


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Dual Aspect Concept

The value of the assets owned by the

company is equal to the claims on these

assets.

This is the basic concept of accounting.

Every Dr entry has its corresponding Cr entry.

This concept can be expressed asASSETS = CAPITAL + LIABILITIES


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Dual aspect concept

E.g.

When an item is sold there is an inflow and

outflow of assets. The asset outflow is goods and the inflow is

cash.

B

oth the aspects of the transaction will berecorded, hence the name Dual aspect

concept.


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Accounting Period Concept

Accounting measures activity for a specified

interval of time, usually a year.

At the end of each period an incomestatement and balance sheet are prepared for

finding the profit and loss and financial

position of the business as on the last day of

the accounting period.


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Accounting period concept

E.g.

The usual period of accounting is usually a

year, but in case of large firms it is morefrequent quarterly or monthly.


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Matching Concept

Matching means appropriate association of

related revenues and expenses.

The profit of the business is ascertained onlywhen the revenue earned during a particular

period is compared with the expenditure

incurred for earning that particular revenue.


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The Realisation concept

This concept holds to the view that profit can

only be taken into account when realisation

has occurred.

Generally, sales revenue arising from the sale

of goods is recognised when the goods aredelivered to the customers.


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The Realisation concept

e.g.

Profit is earned when goods or

services are provided tocustomers. Thus it is incorrect

to record profit when order is

received, or when the

customer pays for the goods.


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Conventions


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Conservatism

Anticipate the profits but provide for all

losses.

The conservatism concept means thatnormally the accountant will take the figure

which will understate rather than overstate

the profit.

Provision is made for all known liabilities.


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Conservatism

E.g.

Provision for doubtful debts

should be deducted from

debtors in balance sheet.


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Disclosure

The financial statements of a firm must

include all information necessary for the

formation of valid decisions by the users.

Any information that might be relevant to an

investor or creditor should be disclosed,

either in the body of the financialstatements or in the notes attached thereto.


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Consistency

When a firm has once fixed a method for the

accounting treatment of an item, it will enter all

similar items that follow in exactly the same way.

Frequent changes in the accounting methods would

lead to misleading profits calculated from the

accounting records.

It states that when a firm has chosen a method for

the accounting treatment of an item, all similar itemsshould be treated in the same way.


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Consistency

E.g.

Depreciation method of

certain fixed assets once

adopted should be used in

the following years.


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Materiality

Financial statement should separately disclosesignificant items for they would influencedecisions of users.

Accounting does not serve a useful purpose ifthe effort of recording a transaction in acertain way is not worthwhile.

In other words do not waste your time in theelaborate recording of trivial items.


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Materiality

e.g.

A stock of stationery

worthR

s.10 shouldbe treated as an

expense when it was

bought.

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