Accounting:
Accounting is the process of identifying, recording, classifying, summarising, interpreting & communicating financial information relating to organisation to the interested user for judgement & decision making.
Financial Accounting:
Financial accounting deal's with the preparation of financial statements for the basic purpose of providing information to various interested groups like creditor, banks, shareholder, financial institutions, Government, consumers etc.
Process of Accounting:
Identifying:
The first step in accounting is to determine what to record. i.e to identify the financial events which are to be recorded in the books of accounts.
Recording:
A transaction will be recorded in the books of accounts only if it is considered as an economic event & can be measured in terms of money.
Classifying:
Process of grouping of transactions or entries of one nature at one place.
Summarising:
It involves presenting the classified data in a manner which is understandable & useful to various users of accounting statements.
Analysis & Interpretation:
It helps users to make a meaningful judgment of profitability & financial position of the business.
Communication:
It involves communicating the financial statements to the various users.
Objectives :
1. To maintain systematic & complete record of business transactions in the books of account.
2. To ascertain the financial position of the business.
3. To ascertain the profit earned or loss incurred during a particular accounting period.
4. To provide useful information to various interested parties.
Functions of Accounting
1. Maintaining systematic records
The primary function of accounting is to maintain the systematic records of business transactions, post them to the ledger and to prepare the final accounts.
2. Communicating the financial results for decision-making
Accounting is used to communicate financial information to various interested users for decision-making.
3. Meeting government regulation
The accounting system should comply with legal requirements. The various governing laws such as Companies Act, Income Tax and Sales Tax Acts require the submission of statements or returns , annual accounts, income tax return, sales tax returns, etc.
4. Protecting business assets
Accounting helps the management to exercise proper control over the assets of the business by maintaining proper records of various assets.
5. Assistance to management
Accounting assists the management in the task of planning, controlling and coordination of business activities.
6. Stewardship or trusteeship
The management is entrusted with the resources of the enterprise, in case of companies. The management is expected to act as the trustee of the company’s funds and accounting helps to achieve the same.
7. Control
Accounting helps in maintaining control as it helps in identifying the weaknesses in the system and provides feedback to check such weaknesses.
Advantages of Accounting
1. Helps in Ascertaining Financial Position
Through preparations of position statement, accounting facilitates to ascertain the financial position of business.
2. Assistance to Management
Accounting helps the management in making business plans, taking decisions and exercising control over the affairs of the business.
3. Facilitates Comparative Study
A systematic record enables a businessman to compare current years results with those of past years and in finding out significant factors leading to the change.
4. Facilitating Raising Loans
Banks and financial institutions grant loans on the basis of growth prospects supported by the performance. Accounting makes available the information with respect to performance.
Disadvantages of Accounting
1. Accounting is not fully exact
Although, most of the transactions are recorded on the basis of evidence such as sale or purchases or receipt of cash, yet some transactions are purely based on estimates for ascertaining profit or loss.
2. Ignore the qualitative elements
Qualitative elements like quality of employees, better public relations are ignored as accounting is confined to monetary transactions only.
3. Window dressing
The term ‘window dressing’ means manipulation of accounts in a way so as to present the financial statements to show better position than the actual. This way, financial statements fail to provide a true and fair view of the overall financial position of the business.
4. Not free from bias
Financial statements are not free from bias as they are subject to personal judgment of the accountant. In various situations, the accountant has to make a choice among various alternatives available.
Accounting Concepts:
Basic Concepts
1. Entity Concept:
It assumes that a business has a distinct & separate entity from its owner.
2.Money Measurement Concept:
This concept states that record only those transactions and happenings in an organisation which can be expressed in terms of money such as sale of goods or payment of expenses or receipt of income, etc., are to be recorded in the book of accounts.
Valuation Criteria
1. Going Concern Concept:
It assumes that a business firm would continue to carry out its operations indefinitely.
2.Cost Concept:
All assets are recorded in the book of accounts at their purchase price, which includes cost of acquisition, transportation, installation and making the asset ready to use. It is also called the Historical Cost Concept.
3. Realization Concept:
This Concept speaks about recording of transactions in books of account only when they are actually realized.
Time Related Concepts
1. Periodicity Concept:
As per Going Concern concept, a business firm life is assumed indefinite. It is not desirable to measure the performance of a business entity at the end of its life. So to measure the performance of business the life of business is divided into small and equal intervals. i.e 12 months . So as to measure the performance of business.
2. Accrual Concept:
This concept said that record the transactions and other events as and when they actually occur & not as the cash or cash equivalent is received or paid.
Core Concepts
1. Matching Concept:
This concept said that:-
All expenses matched with revenue of that period should be taken into consideration.
If any revenue is recognized, then expenses related to earn that revenue should also be recognized.
2. Dual Aspect Concept:
It is the foundation or base of the principle of accounting. This concept states that every transaction has a dual effect and should therefore be recorded at two places. Or
At least two accounts will be involved in recording a transaction.
Other Concepts
1. Conservatism concept:
It requires that profits should not be recorded until realised but all losses, even those which may have a rare possibility, are to be provided for in the books of account.
2. Consistency:
This concept said that same accounting policies should be followed in each year.So that there is not any bias involved and the financial statements of each year can be compared.
3. Materiality:
All items which have significant economic effect on business of the enterprises should be disclosed & any insignificant item which is not relevant to users' needs ,should not be disclosed in the financial statement.
ACCOUNTING TERMS:
1. Transaction
Those activities of a business, which involve transfer of money or goods or services between two persons or accounts.
2. Assets
The Properties owned by a business enterprise which helps to generate revenues in future is called Assets. E.g. Land, Building, Machinery, Stock etc.
Types of Assets: There are two main types of Assets:-
1. Current Assets: Converted into cash within one year
-Short Term Loan
-Cash
-Trade Receivables
-Inventories
-Current Investments
2. Non Current Assets:
-Long Term Loan
-Deferred Tax Assets
-Non Current Investments
-Fixed Assets( Tangible, Intangible, Capital Work in Progress, Intangible assets under development)
3. Liabilities
The financial Obligations of a business to pay some time in future.
Types of Liabilities:
- Current or Short term liabilities: Those debts that are payable within a year. Eg. Short Term Borrowings, Trade Payables, Short Term Provisions.
- Non Current or Long Term Liabilities: Those liabilities typically payable over a period of time greater than one year. Eg. Long Term Borrowing, Deferred Tax liabilities, Long Term provisions.
- Contingential Liabilities: liability that may or may not occur depending on the outcome of an uncertain future event.
4. Capital
The Cash or resources invested by any person in his business is called capital. It is an internal liability.
Capital= Assets- Liabilities
5. Sales
The goods purchased when sold to customers are called sales. It includes both cash & credit sales.
6. Sales Return
Goods sold when returned by the customer are termed as sales return. It is also called as return inward.
7. Revenues
The amount of the business earned by selling its product or providing services to customers is called sales revenue.
8. Expenses
The cost incurred by a business in the process of earning revenue.
9. Expenditure
The amount spent or liability incurred to acquire assets, goods or services.
Types:
- Capital Expenditure:
- Non recurring Nature,
- Increases the earning Capacity of Business,
- Shown in the balance Sheet, Benefit derived in future.
- Revenue Expenditure:
- Recurring Nature.
- To meet day to day expenses.
- Shown in the debit side of trading or P/ L account.
- Benefit is consumed within accounting period. E.g- Rent paid, Salary Paid Etc.
- Deferred Revenue Expenditure:
- Revenue in nature
- Written off in more than one accounting period
- Benefit derived in more than one year. E.g-Heavy Advertisement Expenditure.
10. Profit
Income earned by a business from its operating activities.
11. Gain
Increase in owner's equity resulting from something other than day to day earning from irregular or non recurring nature.
12. Loss
Excess of expenses of a period over it's related revenues is termed as Loss.
13. Discount
It is the reduction in price by the seller to the purchase of goods.
Types:
- Trade discount: Reduction in price by the seller to the purchase of goods when they buy goods of certain quantity or value.
- Cash discount : Allowed for timely payment of due amount.
14. Voucher
Documentary evidence in support of a transaction.
15. Goods
The products in which the business unit is dealing.
16. Drawings
Withdrawal of money & goods by the owner from the business for his personal use.
17. Purchases
The purchase of raw material or finished goods for sale is called Purchase. It includes both cash & credit purchase. It is used only for purchase of goods not for assets.
18. Purchase Returns
Part of goods purchased which are returned to the seller for any reason is called purchase return. It's also called as return outward.
19. Stock
It's a measure of something on hand- goods, spares, & other items in a business. Goods left unsold at the end of the accounting period are called closing stock.
20. Debtor
A person to whom goods are sold on credit.
21. Creditor
A person from whom goods are purchased on credit.
22. Bad Debts
The amount which has become irrecoverable. It is loss to a business & thus debit to P/L account.
23. Balance Sheet
Statement of the financial position of an enterprise which shows assets, liabilities, capital, reserves etc.
24. Bookkeeping:
- Recording phase of an accounting system.
- Primary stage & basis for accounting.
- Routine in nature & does not require any special skills or knowledge.
25. Depreciation
Loss of value in an asset over time.
26. Accrued Income
Income which has been earned but not yet received.
27. Insolvency
A state in which a business or a person is unable to pay their bills.
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