introduction of ifrs and gaap
TRANSCRIPT
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Accounting is the art of recording transactions in the best manner possible, so as to enable the reader
to arrive at judgments/come to conclusions, and in this regard it is utmost necessary that there are set
guidelines. These guidelines are generally called accounting policies. The intricacies of accounting
policies permitted Companies to alter their accounting principles for their benefit. This made it
impossible to make comparisons. In order to avoid the above and to have a harmonised accounting
principle, Standards needed to be set by recognised accounting bodies. This paved the way for
Accounting Standards to come into existence.
Accounting Standards in India are issued By the Institute of Chartered Accountanst of India (ICAI). At
present there are 30 Accounting Standards issued by ICAI.
Objective of Accounting Standards
Objective of Accounting Standards is to standarize the diverse accounting policies and practices with a
view to eliminate to the extent possible the non-comparability of financial statements and the reliability to
the financial statements.
The institute of Chatered Accountants of India, recognizing the need to harmonize the diversre
accounting policies and practices, constituted at Accounting Standard Board (ASB) on 21st April, 1977.
Introduction
Financial statements are prepared to summarize the end-result of all the business
activities by an enterprise during an accounting period in monetary terms. These
business activities vary from one enterprise to other. To compare the financial
statements of various reporting enterprises poses some difficulties because of thedivergence in the methods and principles adopted by these enterprises in preparing
their financial statements. In order to make these methods and principles uniform and
comparable to the extent possible – standards are evolved.
What are Accounting Standards?
Accounting Standards are the statements of code of practice of the regulatory
accounting bodies that are to be observed in the preparation and presentation of
financial statements. In layman terms, accounting standards are the written documents
issued by the expert institutes or other regulatory bodies covering various aspects of
measurement, treatment, presentation and disclosure of accounting transactions.
What are the objectives of Accounting Standards?
The basic objective of Accounting Standards is to remove variations in the treatment
of several accounting aspects and to bring about standardization in presentation. They
intent to harmonize the diverse accounting policies followed in the preparation and
presentation of financial statements by different reporting enterprises so as to
facilitate intra-firm and inter-firm comparison.
Who issues Accounting Standards in India?
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viii) Holding and subsidiary enterprises of any one of the above at any time during the
accounting period.
Level II Company:
Enterprises, which are, not Level I enterprises but fall in any one or more of the
following categories are classified as Level II enterprises;
i) All commercial, industrial and business reporting enterprises, whose turnover for
the immediately preceding accounting period on the basis of audited financial
statements exceeds Rs. 4 million, but does not exceed Rs. 500 million. Turnover does
not include ‘other income’.
ii) All commercial, industrial and business reporting enterprises having borrowing,
including public deposits, in excess of Rs. 10 million but not in excess of Rs. 100
million at any time during the accounting period.
iii) Holding and subsidiary enterprises of any one of the above at any time during the
accounting period.
Level III Company:
Enterprises, which are not covered under Level I and Level II are considered as Level
III enterprises.
Applicability
Level II and Level III enterprises are considered as SMEs
Level I enterprises are required to comply fully with all the accounting standards.
No relaxation is given to Level II and Level III enterprises in respect of recognition
and measurement principles. Relaxations are provided with regard to disclosure
requirements. Accordingly, Level II and Level III enterprises are fully exempted from
certain accounting standards, which mainly lay down disclosure requirements. In
respect of certain other accounting standards, which lay down recognition,
measurement and disclosure requirements, relaxations from certain disclosurerequirements are given.
Sr. No. Particulars Applicability
1 Disclosure of Accounting Policies I, II, III
2 Valuation of Inventories I, II, III
3 Cash Flow Statements I
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4Contingencies and Events Occurring After the
Balance Sheet DateI, II, III
5Net Profit or Loss for the period, Prior periodItems and Changes in Accounting Policies.
I, II, III
6 Depreciation Accounting I, II, III
7 Construction Contracts I, II, III
8
Accounting for Research and Development(This standard has been withdrawn w.e.f.
01.04.2004 for all levels of enterprises andAS 26 is applicable)
As withdrawn
9 Revenue recognition I, II, III
10 Accounting for Fixed Assets I, II, III
11The Effect of Changes in Foreign Exchange
RatesI, II, III
12 Accounting for Government Grants I, II, III
13 Accounting for Investments I, II, III
14 Accounting for Amalgamations I, II, III
15Accounting for Retirement Benefits in the
Financial Statements of EmployersI, II, III
16 Borrowing Costs I, II, III
17 Segment Reporting III-with modification
III- with modification
18 Related Party Disclosures I
II-with modificationIII- with modification
19 Leases III-with modification
III- with modification
20 Earning Per Share III-with modification
III- with modification
21 Consolidated Financial Statements I
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22 Accounting for Taxes on Income I,II,III
23Accounting for Investments in Associates in
Consolidated Financial StatementsI
24 Discontinuing Operations I
25 Interim Financial Reporting I
26 Intangible Assets I,II,III
27Financial Reporting of Interests in Joint
Ventures
I-with clarificationII-with clarification
III-with clarification
28 Impairment of Assets III-with modificationIII-with modification
29Provisions, Contingent Liabilities and
Contingent AssetI
AccountancyAccountancy is the process of communicating financial information about a business
entity to users such as shareholders and managers.[1] The communication is generally
in the form of financial statements that show in money terms the economic resources
under the control of management; the art lies in selecting the information that is
relevant to the user and is reliable. [2] Accountancy is a branch of mathematical science
that is useful in discovering the causes of success and failure in business. The
principles of accountancy are applied to business entities in three divisions of
practical art, named accounting, bookkeeping, and auditing.[3]
Accountancy is defined by the Oxford English Dictionary (OED) as "the professionor duties of an accountant".
Accounting is defined by the American Institute of Certified Public Accountants
(AICPA) as "the art of recording, classifying, and summarizing in a significant
manner and in terms of money, transactions and events which are, in part at least, of
financial character, and interpreting the results thereof."[4]
Accounting is thousands of years old; the earliest accounting records, which date back
more than 7,000 years, were found in Mesopotamia (Assyrians). The people of that
time relied on primitive accounting methods to record the growth of crops and herds.
Accounting evolved, improving over the years and advancing as business advanced.[5]
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Early accounts served mainly to assist the memory of the businessperson and the
audience for the account was the proprietor or record keeper alone. Cruder forms of
accounting were inadequate for the problems created by a business entity involving
multiple investors, so double-entry bookkeeping first emerged in northern Italy in the
14th century, where trading ventures began to require more capital than a single
individual was able to invest. The development of joint stock companies createdwider audiences for accounts, as investors without firsthand knowledge of their
operations relied on accounts to provide the requisite information.[6] This development
resulted in a split of accounting systems for internal (i.e. management accounting) and
external (i.e. financial accounting) purposes, and subsequently also in accounting and
disclosure regulations and a growing need for independent attestation of external
accounts by auditors.[7]
Today, accounting is called "the language of business" because it is the vehicle for
reporting financial information about a business entity to many different groups of
people. Accounting that concentrates on reporting to people inside the business entity
is called management accounting and is used to provide information to employees,managers, owner-managers and auditors. Management accounting is concerned
primarily with providing a basis for making management or operating decisions.
Accounting that provides information to people outside the business entity is called
financial accounting and provides information to present and potential shareholders,
creditors such as banks or vendors, financial analysts, economists, and government
agencies. Because these users have different needs, the presentation of financial
accounts is very structured and subject to many more rules than management
accounting. The body of rules that governs financial accounting is called Generally
Accepted Accounting Principles, or GAAP.[8]
Contents
[hide]
• 1 Theory
• 2 Etymology
• 3 History
o 3.1 Proof of Beginning of Accounting in
Vedas
o 3.2 Token accounting in ancient
Mesopotamia
o 3.3 Accounting in the Roman Empire
o 3.4 Islamic accounting and algebra
o 3.5 Luca Pacioli and double-entry
bookkeeping
• 4 Accounting scandals
• 5 Notes and references
[edit] Theory
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The basic accounting equation is assets=liabilities+stockholders equity. This is the
balance sheet. The foundation for the balance sheet begins with the income statement,
which is revenues-expenses=net income or net loss. This is followed by the retained
earnings statement, which is beginning retained earnings+net income-
dividends=ending retained earnings or beginning retained earnings-net loss-
dividends=ending retained earnings.
[edit] Etymology
The word "Accountant" is derived from the French word Compter , which took its
origin from the Latin word Computare. The word was formerly written in English as
"Accomptant", but in process of time the word, which was always pronounced by
dropping the "p", became gradually changed both in pronunciation and in orthography
to its present form.[9]
[edit] History
[edit] Proof of Beginning of Accounting in Vedas
Vedas are the oldest books of the world and after deep study of these sanskrit books,
you can find that accounting was started at India's vedic period. Vikraya is found in
the Atharvaveda and the Nirukta denoting ‘sale’. Sulka in the Rig veda clearly means
‘price’. In the Dharma Sutras it denotes a ‘tax’.[10]
[edit] Token accounting in ancient Mesopotamia
Map of the Middle East showing the Fertile Cresent circa. 3rd millennium BC
The earliest accounting records were found amongst the ruins of ancient Babylon,
Assyria and Sumeria, which date back more than 7,000 years. The people of that time
relied on primitive accounting methods to record the growth of crops and herds.
Because there is a natural season to farming and herding, it is easy to count and
determine if a surplus had been gained after the crops had been harvested or the
young animals weaned.[5]
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Accounting tokens made of clay, from Susa, Uruk period, cira 3500 BCE. Department
of Oriental Antiquities, Louvre.
The invention of a form of bookkeeping using clay tokens represented a huge
cognitive leap for mankind.[11]
Globular token envelope with a cluster of accounting tokens. Clay, Susa, Uruk period
(4000 to 3100 BCE). Department of Oriental Antiquities, Louvre.
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Economic tablet with numeric signs. Proto-Elamite script in clay, Susa, Uruk period
(3200 BC to 2700 BCE). Department of Oriental Antiquities, Louvre.
[edit] Accounting in the Roman Empire
Part of the Res Gestae Divi Augusti from the Monumentum Ancyranum (Temple of
Augustus and Rome) at Ancyra, built between 25 BCE - 20 BCE.
The Res Gestae Divi Augusti (Latin: "The Deeds of the Divine Augustus") is a
remarkable account to the Roman people of the Emperor Augustus' stewardship. It
listed and quantified his public expenditure, which encompassed distributions to thepeople, grants of land or money to army veterans, subsidies to the aerarium(treasury), building of temples, religious offerings, and expenditures on theatrical
shows and gladiatorial games. It was not an account of state revenue and expenditure,
but was designed to demonstrate Augustus' munificence. The significance of the Res
Gestae Divi Augusti from an accounting perspective lies in the fact that it illustrates
that the executive authority had access to detailed financial information, covering a
period of some forty years, which was still retrievable after the event. The scope of
the accounting information at the emperor's disposal suggests that its purpose
encompassed planning and decision-making.[12]
The Roman historians Suetonius and Cassius Dio record that in 23 BC, Augustus prepared a rationarium (account) which listed public revenues, the amounts of cash in
the aerarium (treasury), in the provincial fisci (tax officials), and in the hands of the
publicani (public contractors); and that it included the names of the freedmen and
slaves from whom a detailed account could be obtained. The closeness of this
information to the executive authority of the emperor is attested by Tacitus' statement
that it was written out by Augustus himself.[13]
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Roman writing tablet from the Vindolanda Roman fort of Hadrian's Wall, in
Northumberland (1st-2nd century AD) requesting money to buy 5,000 measures of
cereal used for brewing beer. Department of Prehistory and Europe, British Museum.
Records of cash, commodities, and transactions were kept scrupulously by military
personnel of the Roman army. An account of small cash sums received over a few
days at the fort of Vindolanda circa 110 CE shows that the fort could compute
revenues in cash on a daily basis, perhaps from sales of surplus supplies or goods
manufactured in the camp, items dispensed to slaves such as cervesa (beer ) and clavicaligares (nails for boots), as well as commodities bought by individual soldiers. The
basic needs of the fort were met by a mixture of direct production, purchase and
requisition; in one letter, a request for money to buy 5,000 modii (measures) of braces(a cereal used in brewing) shows that the fort bought provisions for a considerable
number of people.[14]
The Heroninos Archive is name given to a huge collection of papyrus documents,
mostly letters, but also including a fair number of accounts, which comes from
Roman Egypt in 3rd century CE. The bulk of the documents relate to the running of a
large, private estate [15] is named after Heroninos because he was phrontistes (Koine
Greek : manager ) of the estate which had a complex and standarised system of accounting which was followed by all its local farm managers.[16] Each administrator
on each sub-division of the estate drew up his own little accounts, for day to day
running of the estate, payment of the workforce, production of crops, the sale
produce, the use of animals, and general expetiditure on the staff. This information
was then summarized as pieces of papyrus scroll into one big yearly account for each
particular subdivision of the estate. Entries were arranged by sector, with cash
expenses and gains extrapolated from all the different sectors. Accounts of this kind
gave the owner the opportunity to take better economic decisions because the
information was purposefully selected and arranged.[17]
Simple accounting is mentioned in the Christian Bible (New Testament) in the Book
of Matthew, in the Parable of the Talents.[18]
[edit] Islamic accounting and algebra
In the Qur’an, the word "account" (Arabic: hesab) is used in its generic sense, relating
to one's obligation to account to God on all matters pertaining to human endeavour.
According to the Qur’an, followers are required to keep records of their indebtedness
(Sura 2, ayah 282), thus Islam thus provides general approval and guidelines for the
recording and reporting of transactions.[19]
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The Islamic law of inheritance (Sura 4, ayah 11) defines exactly how the estate is
calculated after death of an individual. The power of testamentary disposition is
basically limited to one-third of the net estate (i.e. the assets remaining after the
payment of funeral expenses and debts), providing for every member of the family by
allotting fixed shares not only to wives and children, but also to father and mothers.[20]
The complexity of this law served as an impetus behind the development of algebra (Arabic: al-jabr ) by the Persian mathematician Muhammad ibn Mūsā al-Khwārizmī
and other medieval Islamic mathematicians. Khwārizmī's "The Compendious Book
on Calculation by Completion and Balancing" (Arabic: Hisab al-jabr w’al-muqabala,
Baghdad, c. 825) devoted a chapter on the solution to the Islamic law of inheritance
using linear equations.[21] In the 12th century, Latin translations of al-Khwārizmī's
"Book of Addition and Subtraction According to the Hindu Calculation"
(Arabic:Kitāb al-Jam wa-l-tafrīq bi-ʿ ḥisāb al-Hind ) on the use of Indian numerals,
introduced the decimal positional number system to the Western world.[22] Zakah is
charged on earnings,agricultural produce, animals, mecahantile goods etc. Islam has
fixed Nisab (minimum amount) that is chargiable to Zakah, rates at that Zakah is to be
chaged as well as periodicity. It is remarkable that has fixed Nisab for different itemsin terms of their own quantity and not relied on their monetary worth. In case of
animals Nisab is fixed in terms of their number. However in respect of merchandise it
has fixed Nisab in terms of their monetary value. Hifzur Rab has discussed its
implications and the guiding principles that emanate from it. According to him
'Command to measure correctly implies that any error in measurement/accounting
must be corrected accordingly we must correct all our accounts that use currency as
unit for the error resulting from manipulation of currency. The best approach to this
problem lies in applying the advancement in our knowledge derived from
observations with wisdom based on the sure knowledge derived from Quran-e-Hakim
and Sunnah Mubarakah. One of major guiding principles it provides is that value of
anything is best measured in terms of a given quantity of itself. For example: gold in
terms of gold and rice in terms of rice. Thus growth in wheat production should be
measured in terms of quantity produced and not its value. Second guiding principle
based on these infallible sources of knowledge is to use the most reliable unit in cases
that require use of a common unit of value. A third guiding principle pertinent to our
case is to let free open markets determine the prices.' Thus, where unit of account is
manipulated Islamic Accounting mandates that all data and accounting be corrected to
free it from the error resulting from the manipulation. [23] The development of
mathematics and accounting was intertwined during the Renaissance. Mathematics
was in the midst of a period of significant development in the late 15th century.
Hindu-Arabic numerals and algebra were introduced to Europe from Arabmathematics at the end of the 10th century by the Benedictine monk Gerbert of
Aurillac, but it was only after Leonardo Pisano (also known as Fibonacci) put
commercial arithmetic, Hindu-Arabic numerals, and the rules of algebra together in
his Liber Abaci in 1202 that Hindu-Arabic numerals became widely used in Italy.[24]
[edit] Luca Pacioli and double-entry bookkeeping
Main articles: Luca Pacioli and Double-entry bookkeeping system
Bartering was the dominant practice for traveling merchants during the Middle Ages.
When medieval Europe moved to a monetary economy in the 13th century, sedentarymerchants depended on bookkeeping to oversee multiple simultaneous transactions
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financed by bank loans. One important breakthrough took place around that time: the
introduction of double-entry bookkeeping,[25] which is defined as any bookkeeping
system in which there was a debit and credit entry for each transaction, or for which
the majority of transactions were intended to be of this form.[26] The historical origin
of the use of the words ‘debit’ and ‘credit’ in accounting goes back to the days of
single-entry bookkeeping in which the chief objective was to keep track of amountsowed by customers (debtors) and amounts owed to creditors. ‘Debit,’ is Latin for ‘he
owes’ and ‘credit’ Latin for ‘he trusts’.[27]
The earliest extant evidence of full double-entry bookkeeping is the Farolfi ledger of
1299-1300.[25] Giovanno Farolfi & Company were a firm of Florentine merchants
whose head office was in Nîmes who also acted as moneylenders to Archbishop of
Arles, their most important customer.[28] The oldest discovered record of a complete
double-entry system is the Messari (Italian: Treasurer 's) accounts of the city of Genoa
in 1340. The Messari accounts contain debits and credits journalised in a bilateral
form, and contains balances carried forward from the preceding year, and therefore
enjoy general recognition as a double-entry system.[29]
Pacioli's portrait, a painting by Jacopo de' Barbari, 1495, (Museo di
Capodimonte).The open book to which he is pointing may be his Summa de
Arithmetica, Geometria, Proportioni et Proportionalità.[30]
Luca Pacioli's "Summa de Arithmetica, Geometria, Proportioni et Proportionalità" (Italian: "Review of Arithmetic, Geometry, Ratio and Proportion") was first printed
and published in Venice in 1494. It included a 27-page treatise on bookkeeping,
"Particularis de Computis et Scripturis" (Italian: "Details of Calculation andRecording"). It was written primarily for, and sold mainly to, merchants who used the
book as a reference text, as a source of pleasure from the mathematical puzzles it
contained, and to aid the education of their sons. It represents the first known printed
treatise on bookkeeping; and it is widely believed to be the forerunner of modern
bookkeeping practice. In Summa Arithmetica, Pacioli introduced symbols for plus and
minus for the first time in a printed book, symbols that became standard notation in
Italian Renaissance mathematics. Summa Arithmetica was also the first known book
printed in Italy to contain algebra.[31]
Although Luca Pacioli did not invent double-entry bookkeeping,[32] his 27-page
treatise on bookkeeping contained the first known published work on that topic, and issaid to have laid the foundation for double-entry bookkeeping as it is practiced today.
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[33] Even though Pacioli's treatise exhibits almost no originality, it is generally
considered as an important work, mainly because of its wide circulation, it was
written in vernacular Italian language, and it was a printed book.[34]
According to Pacioli, accounting is an ad hoc ordering system devised by the
merchant. Its regular use provides the merchant with continued information about hisbusiness, and allows him to evaluate how things are going and to act accordingly.
Pacioli recommends the Venetian method of double-entry bookkeeping above all
others. Three major books of account are at the direct basis of this system: the
memoriale (Italian: memorandum), the giornale (journal), and the quaderno (ledger ).
The ledger is considered as the central one and is accompanied by an alphabetical
index.[35]
Pacioli's treatise gave instructions in how to record barter transactions and
transactions in a variety of currencies – both being far more commonplace than they
are today. It also enabled merchants to audit their own books and to ensure that the
entries in the accounting records made by their bookkeepers complied with themethod he described. Without such a system, all merchants who did not maintain their
own records were at greater risk of theft by their employees and agents: it is not by
accident that the first and last items described in his treatise concern maintenance of
an accurate inventory.[36]
The nature of double-entry can be grasped by recognizing that this system of
bookkeeping did not simply record the things merchants traded so that they could
keep track of assets or calculate profits and losses; instead as a system of writing,
double-entry produced effects that exceeded transcription and calculation. One of its
social effects was to proclaim the honesty of merchants as a group; one of its
epistemological effects was to make its formal precision based on a rule bound system
of arithmetic seem to guarantee the accuracy of the details it recorded. Even though
the information recorded in the books of account was not necessarily accurate, the
combination of the double entry system's precision and the normalizing effect that
precision tended to create the impression that books of account were not only precise,
but accurate as well. Instead of gaining prestige from numbers, double entry
bookkeeping helped confer cultural authority on numbers.[37]
Double entry accounting means that money is never lost or gained. It is always
transferred from one place to another. This is done by recording transactions. Each
transaction requires the use of at least two accounts.
Book keeping
is the recording of financial transactions. Transactions include sales, purchases,
income, and payments by an individual or organization. Bookkeeping is usually
performed by a bookkeeper. Bookkeeping should not be confused with accounting.
The accounting process is usually performed by an accountant. The accountant creates
reports from the recorded financial transactions recorded by the bookkeeper and files
forms with government agencies. There are some common methods of bookkeeping
such as the Single-entry bookkeeping system and the Double-entry bookkeeping
system. But while these systems may be seen as "real" bookkeeping, any process thatinvolves the recording of financial transactions is a bookkeeping process.
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A bookkeeper (or book-keeper), also known as an accounting clerk or accounting
technician, is a person who records the day-to-day financial transactions of an
organization. A bookkeeper is usually responsible for writing the "daybooks." The
daybooks consist of purchases, sales, receipts, and payments. The bookkeeper is
responsible for ensuring all transactions are recorded in the correct day book,
suppliers ledger, customer ledger and general ledger. The bookkeeper brings thebooks to the trial balance stage. An accountant may prepare the income statement and
balance sheet using the trial balance and ledgers prepared by the bookkeeper
Contents
[hide]
• 1 Bookkeeping systems
o 1.1 Single-entry
systemo 1.2 Double-entry
system
• 2 Daybooks
• 3 Petty cash book
• 4 Journals
• 5 Ledgers
• 6 Chart of accounts
• 7 Computerized
bookkeeping
• 8 Online bookkeeping
• 9 Notes and references
[edit] Bookkeeping systems
Two common bookkeeping systems used by businesses and other organizations are
the single-entry bookkeeping system and the double-entry bookkeeping system.
Single-entry bookkeeping uses only income and expense accounts, recorded primarily
in a revenue and expense journal. Single-entry bookkeeping is adequate for many
small businesses. Double-entry bookkeeping requires posting (recording) each
transaction twice, using debits and credits.
[edit] Single-entry system
The primary bookkeeping record in single-entry bookkeeping is the cash book, which
is similar to a checking (cheque) account register but allocates the income and
expenses to various income and expense accounts. Separate account records are
maintained for petty cash, accounts payable and receivable, and other relevant
transactions such as inventory and travel expenses. These days, single entry
bookkeeping can be done with DIY bookkeeping software to speed up manual
calculations.
Sample revenue and expense journal for single-entry bookkeeping[1]
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No.Dat
e
Descript
ion
Reven
ue
Expen
seSales
Sales
Tax
Servic
es
Invento
ry
Adve
rt.
Freig
ht
Offic
e
Sup
pl
Misc
7/1
3
Balance
forward
1,826.
00 835.00
1,218.
00
98.0
0 510.00 295.00
245.0
0
150.0
0
83.5
0 61.50
104
1
7/1
3
Printer-
Advert
flyers
450.00450.0
0
104
2
7/1
3
Wholesal
er -
inventory
380.00 380.00
104
3
7/1
6
office
supplies92.50
92.5
0
--7/1
7
bank
deposit
1,232.
00- Taxable
sales400.00
32.0
0
- Out-of-
state
sales
165.00
- Resales 370.00
- Service
sales265.00
ban
k
7/1
9
bank
charge
23.40 23.40
104
4
7/1
9
petty
cash100.00
100.0
0
TOTALS3,058.
00
1,880.
90
2,153.
00
130.
00775.00 675.00
695.0
0
150.0
0
176.
00
184.9
0
[edit] Double-entry system
Main article: double-entry bookkeeping system
[edit] DaybooksA daybook is a descriptive and chronological (diary-like) record of day-to-day
financial transactions also called a book of original entry. The daybook's details must
be entered formally into journals to enable posting to ledgers. Daybooks include:
• Sales daybook, for recording all the sales invoices.
• Sales credits daybook, for recording all the sales credit notes.
• Purchases daybook, for recording all the purchase invoices.
• Purchases credits daybook, for recording all the purchase credit notes.
• Cash daybook, usually known as the cash book, for recording all
money received as well as money paid out. It may be split into two daybooks:
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receipts daybook for money received in, and payments daybook for money
paid out.
[edit] Petty cash book
A petty cash book is a record of small value purchases usually controlled by imprest
system. Items such as coffee, tea, birthday cards for employees, a few dollars if you're
short on postage, are listed down in the petty cash book.
[edit] Journals
A journal is a formal and chronological record of financial transactions before their
values are accounted for in the general ledger as debits and credits. A company can
maintain one journal for all transactions, or keep several journals based on similar
activity (i.e. sales, cash receipts, revenue, etc.) making transactions easier to
summarize and reference later. For every debit journal entry recorded there must bean equivalent credit journal entry to maintain a balanced accounting equation [2].
[edit] Ledgers
A ledger is a record of accounts, these accounts are recorded separately showing their
beginning/ending balance. Unlike the journal, which lists financial transactions in
chronological order without showing their balance but showing how much is going to
be charged in each account. The ledger takes each financial transactions from the
journal and records them into the right account for every transaction listed. The ledger
also sums up the total of every account which is transferred into the balance sheet andincome statement. There are 3 different kinds of ledgers that deal with book-keeping.
Ledgers include:
• Sales ledger, which deals mostly with the Accounts Receivable
account. This ledger consists of the financial transactions made by customers
to the business.
• Purchase ledger is a ledger that goes hand and hand with the Accounts
Payable account. This is the purchasing transaction a company does.
• General ledger representing the original 5 main accounts: assets,
liabilities, equity, income, and expenses
[edit] Chart of accounts
A chart of accounts is a list of the accounts codes that can be identified with numeric,
alphabetical, or alphanumeric codes allowing the account to be located in the general
ledger.
[edit] Computerized bookkeeping
Computerized bookkeeping removes many of the paper "books" that are used torecord transactions and usually enforces double entry bookkeeping.
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[edit] Online bookkeeping
Online bookkeeping, or remote bookkeeping, allows source documents and data to
reside in web-based applications which allow remote access for bookkeepers and
accountants. All entries made into the online software are recorded and stored in a
remote location. The online software can be accessed from any location in the world
and permit the bookkeeper or data entry person to work from any location with a
suitable data communications link.
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Differences b/w accounting and book keeping
ACCOUNTING:
Accounting is a four stage process of recording, classifying, summarizing and the
interpretation of the financial statements.
The four stage process are defined below:
Recording- transactions being recorded in the books of the business
Classifying- sorting and categorizing into meaningful and orderly types or manners
Summarizing- the accounting data are summarized
Interpreting- financial data are analyzed and used to assist decision making
BOOKKEEPING:
Bookkeeping is a part of Accounting. It is merely a mechanical aspect of recording,
classifying and summarizing transaction.
Therefore, keeping the books of accounts is always the theme in bookkeeping. The
finer aspect of interpreting all these data into information for management to act upon
is excluded.
Accounting has been defined as "the language of business" because it is the basic tool
for recording, reporting, and evaluating economic events and transactions that affect
business enterprises. Accounting processes document all aspects of a business's
financial performance, from payroll costs, capital expenditures, and other obligationsto sales revenue and owners' equity. An understanding of the financial data contained
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in accounting documents, then, is regarded as essential to reaching an accurate picture
of a business's true financial well being. Armed with such knowledge, businesses can
make appropriate financial and strategic decisions about their future; conversely,
incomplete or inaccurate accounting data can cripple a company, no matter its size or
orientation. Accounting's importance as a barometer of business healthpast, present,
and futureand a tool of business navigation is reflected in the words of theAmerican Institute of Certified Public Accountants (AICPA), which defined
accounting as a "service activity." Accounting, said the AICPA, is intended "to
provide quantitative information, primarily financial in nature, about economic
activities that is intended to be useful in making economic decisionsmaking
reasoned choices among alternative courses of action."
A business's accounting system contains information potentially relevant to a wide
range of people. In addition to business owners, who rely on accounting data to gauge
their enterprise's financial progress, accounting data can communicate relevant
information to investors, creditors, managers, and others who interact with the
business in question. As a result, accounting is sometimes divided into two distinctsubsetsfinancial accounting and managerial accounting that reflect the different
information needs of these end users. Financial accounting is a branch of accounting
that provides people outside the businesssuch as investors or loan officerswith
qualitative information regarding an enterprise's economic resources, obligations,
financial performance, and cash flow. Managerial accounting, on the other hand,
refers to accounting data used by business owners, supervisors, and other employees
of a business to gauge their enterprises's health and operating trends.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
Generally accepted accounting principles (GAAP) are the guidelines, rules, and
procedures used in recording and reporting accounting information in audited
financial statements. Various organizations have influenced the development of
modern-day accounting principles. Among these are the AICPA, the Financial
Accounting Standards Board (FASB), and the Securities and Exchange
Commission (SEC). The first two are private sector organizations; the SEC is a
federal government agency.
The AICPA played a major role in the development of accounting standards. In 1937the AICPA created the Committee on Accounting Procedures, which issued a series
of Accounting Research Bulletins (ARB) with the purpose of standardizing
accounting practices. This committee was replaced by the Accounting Principles
Board (APB) in 1959. The APB maintained the ARB series, but it also began to
publish a new set of pronouncements, referred to as Opinions of the Accounting
Principles Board. In mid-1973 an independent private board, the FASB, replaced the
APB and assumed responsibility for the issuance of financial accounting standards.
The FASB remains the primary determiner of financial accounting standards in the
United States. Comprised of seven members who serve full-time and receive
compensation for their service, the FASB identifies financial accounting issues,
conducts research related to these issues, and is charged with resolving the issues. A
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supermajority vote (i.e., at least five to two) is required before an addition or change
to the Statements of Financial Accounting Standards is issued.
The Financial Accounting Foundation is the parent organization to the FASB. The
foundation is governed by a 16-member Board of Trustees appointed from the
memberships of eight organizations: AICPA, Financial Executives Institute, Instituteof Management Accountants, Financial Analysts Federation, American Accounting
Association, Securities Industry Association, Government Finance Officers
Association, and National Association of State Auditors. A Financial Accounting
Standards Advisory Council (approximately 30 members) advises the FASB. In
addition, an Emerging Issues Task Force was established in 1984 to provide timely
guidance to the FASB on new accounting issues.
The SEC, an agency of the federal government, has the legal authority to prescribe
accounting principles and reporting practices for all companies issuing publicly traded
securities. The SEC has seldom used this authority, however, although it has
intervened or expressed its views on accounting issues from time to time. U.S. lawrequires that companies subject to the jurisdiction of the SEC make reports to the SEC
giving detailed information about their operations. The SEC has broad powers to
require public disclosure in a fair and accurate manner in financial statements and to
protect investors. The SEC establishes accounting principles with respect to the
information contained within reports it requires of registered companies. These
reports include: Form S-X, a registration statement; Form 10-K, an annual report;
Form 10-Q, a quarterly report of operations; Form S-K, a report used to describe'
significant events that may affect the company; and Proxy Statements, which are used
when management requests the right to vote through proxies for shareholders.
THE ACCOUNTING SYSTEM
An accounting system is a management information system that is responsible for
the collection and processing of data useful to decision makers in planning and
controlling the activities of a business organization. The data processing cycle of an
accounting system encompasses the total structure of five activities associated with
tracking financial information: collection or recording of data; classification of data;
processing (including calculating and summarizing) of data; maintenance or storage
of results; and reporting of results. The primarybut not solemeans by which these
final results are disseminated to both internal (in-company) and external users such as
creditors and investors is the financial statement.
The elements of accounting are the building blocks from which financial statements
are constructed. According to the FASB, the primary financial elements that are
directly related to measuring performance and the financial position of a business
enterprise are as follows:
• Assets: probable future economic benefits obtained or controlled by a
particular entity as a result of past transactions or events.
• Comprehensive Income: the change in equity (net assets) of an entity
during a given period as a result of transactions and other events and
circumstances from nonowner sources. Comprehensive income includes all
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changes in equity during a period except those resulting from investments by
owners and distributions to owners.
• Distributions to Owners: decreases in equity (net assets) of a particular
enterprise as a result of transferring assets, rendering services, or incurring
liabilities to owners.
• Equity: the residual interest in the assets of an entity that remain after deducting liabilities. In a business entity, equity is the ownership interest.
• Expenses: events that expend assets or incur liabilities during a period
from delivering or providing goods or services and carrying out other
activities that constitute the entity's ongoing major or central operation.
• Gains: increases in equity (net assets) from peripheral or incidental
transactions. Gains also come from other transactions, events, and
circumstances affecting the entity during a period except those that result from
revenues or investments by owners. Investments by owners are increases in
net assets resulting from transfers of valuables from other entities to obtain or
increase ownership interests (or equity) in it.
• Liabilities: probable future sacrifices of economic benefits arising frompresent obligations to transfer assets or provide services to other entities in the
future as a result of past transactions or events.
• Losses: decreases in equity (net assets) from peripheral or incidental
transactions of an entity and from all other transactions, events, and
circumstances affecting the entity during a period. Losses do not include
equity drops that result from expenses or distributions to owners.
• Revenues: inflows or other enhancements of assets, settlements of
liabilities, or a combination of both during a period from delivering or
producing goods, rendering services, or conducting other activities that
constitute the entity's ongoing major or central operations.
FINANCIAL STATEMENTS
Financial statements are the most comprehensive way of communicating financial
information about a business enterprise. A wide array of usersfrom investors and
creditors to budget directorsuse the data contained in financial statements to guide
their actions and business decisions. Financial statements generally consist of the
following:
• Balance sheet (or statement of financial position): summarizes the
financial position of an accounting entity at a particular time as represented byits economic resources (assets), economic obligations (liabilities), and equity.
• Income statement: summarizes the results of operations for a given
period.
• Cash flow statement: summarizes the impact of an enterprise's cash
flows on its operating, financing, and investing activities over a given period.
• Statement of retained earnings: shows the increases and decreases in
earnings retained by the company over a given period.
• Statement of changes in stockholders' equity: discloses the changes in
the separate stockholders' equity account of an entity, including investments
by distributions to owners during the period.
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Notes to financial statements are considered an integral part of a complete set of
financial statements. Notes typically provide additional information at the end of the
statement and concern such matters as depreciation and inventory methods used in
the statements, details of long-term debt, pensions, leases, income taxes, contingent
liabilities, methods of consolidation, and other matters. Significant accounting
policies are usually disclosed as the initial note or as a summary preceding the notesto the financial statements.
ACCOUNTING PROFESSION
There are two primary kinds of accountants: private accountants, who are employed
by a business enterprise to perform accounting services exclusively for that business,
and public accountants, who function as independent experts and perform accounting
services for a wide variety of clients. Some public accountants operate their own
businesses, while others are employed by accounting firms to attend to the accounting
needs of the firms' clients. The largest U.S. accounting firms, commonly referred to asthe Big Five, are Arthur Andersen & Co., Deloitte and Touche, Ernst & Young,
KPMG Peat Marwick, and Price WaterhouseCoopers.
A certified public accountant (CPA) is an accountant who has (1) fulfilled certain
educational and experience requirements established by state law for the practice of
public accounting and (2) garnered an acceptable score on a rigorous three-day
national examination. Such people become licensed to practice public accounting in a
particular state. These licensing requirements are widely credited with maintaining the
integrity of the accounting service industry, but in recent years this licensing process
has drawn criticism from legislators and others who favor deregulation of the
profession. Some segments of the business community have expressed concern thatthe quality of accounting would suffer if such changes were implemented, and
analysts indicate that small businesses without major in-house accounting
departments would be particularly impacted.
The accounting profession was changing in a variety of other ways by the late 1990s.
"The accounting profession is at a critical juncture in its development with many of its
longstanding traditions being challenged by an evolving workplace and workforce,"
according to Patricia M. Flynn, John D. Leeth, and Elliott S. Levy in an article for
CPA Journal. "In recent years, the profession has experienced a changing work
environment, characterized by an expanding scope of services, rising costs,
technological changes, organizational restructuring, and increased specialization."One of the most noticeable changes has been a major influx of women into the
traditionally male-dominated profession.
The AICPA is the national professional organization of CPAs, but numerous
organizations within the accounting profession exist to address the specific needs of
various subgroups of accounting professionals. These groups range from the
American Accounting Association, an organization composed primarily of accounting
educators, to the American Women's Society of Certified Public Accountants.