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Accounting
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Unit 2.
Accounting: The Languageof Business
By Moinuddin hasan
1- 2
What is accounting?
• The language of business
– Measures financial aspects of a business
– Communicates this information to decision makers
The Need for Accounting
Managers, investors, and other internal groupswant the answers to two important questions:
How well didthe organization
perform?
Where doesthe organization
stand?
The Need for Accounting
Accountants answer these questionswith three major financial statements:
Incomestatement
Balancesheet
Statement ofcash flows
Users of Accounting Information
Different categories of users need
different kinds of information for
making decisions. These users can be
divided into :
•Internal Users; and
•External Users.
ACCOUNTING PRINCIPLES
Accounting principles can be subdivided into
two categories:
· Accounting Concepts; and
· Accounting Conventions.
ACCOUNTING PRINCIPLES
Accounting principles can be subdivided into
two categories:
· Accounting Concepts; and
· Accounting Conventions.
ACCOUNTING PRINCIPLES
• Accounting Concepts
• Accounting Conventions
The term ‘concept’ is used to connote accounting postulates, that is necessary assumptions and conditions upon which accounting is based. The term ‘convention’ is used to signify customs and traditions as a guide to the presentation of accounting statements.
ACCOUNTING PRINCIPLES
Accounting Concepts
• Business Entity Concept
• Money Measurement Concept
• Cost Concept
• Going Concern Concept
• Dual Aspect Concept
• Realization Concept
• Accounting Period Concept
ACCOUNTING PRINCIPLES
Accounting Conventions
• Convention of Consistency
• Convention of Disclosure
• Convention of Conservation
ACCOUNTING PRINCIPLES
Accounting Concepts
The term ‘concept’ is used to connote accounting postulates, that is necessary assumptions and conditions upon which accounting is based.
Business Entity Concept
Business is treated as a separate entity or unit apart from its owner and others. All the transactions of the business are recorded in the books of business from the point of view of the business as an entity and even the owner is treated as a creditor to the extent of his/her capital.
Money Measurement Concept
In accounting, we record only those
transactions which are expressed in
terms of money. In other words, a fact
which can not be expressed in
monetary terms, is not recorded in the
books of accounts.
Cost Concept
Transactions are entered in the books of accounts at the amount actually involved. Suppose a company purchases a car for Rs.1,50,000/- the real value of which is Rs.2,00,000/-, the purchase will be recorded as Rs.1,50,000/- and not any more. This is one of the most important concept and it prevents arbitrary values being put on transactions.
Going Concern Concept
It is persuaded that the business will
exists for a long time and transactions
are recorded from this point of view.
Dual Aspect Concept
Each transaction has two aspects, that
is, the receiving benefit by one party
and the giving benefit by the other.
This principle is the core of
accountancy.
Dual Aspect Concept continue…
For example, the proprietor of a business starts his business with Cash Rs.1,00,000/-, Machinery of Rs.50,000/- and Building of Rs.30,000/-, then this fact is recorded at two places. That is Assets account (Cash, Machinery & Building) and Capital accounts. The capital of the business is equal to the assets of the business.
Dual Aspect Concept continue…
Thus, the dual aspect can be expressed as under
Capital + Liabilities = Assets
or
Capital = Assets – Liabilities
Realization Concept
Accounting is a historical record of
transactions. It records what has
happened. It does not anticipate
events. This is of great important in
preventing business firms from
inflating their profits by recording
sales and income that are likely to
accrue.
Accounting Period Concept
Strictly speaking, the net income can be measured by comparing the assets of the business existing at the time of its liquidation. But as the life of the business is assumed to be infinite, the measurement of income according to the above concept is not possible. So a twelve month period is normally adopted for this purpose. This time interval is called accounting period.
ACCOUNTING PRINCIPLES
Accounting Conventions
The term ‘convention’ is used to
signify customs and traditions as a
guide to the presentation of
accounting statements.
Convention of Consistency
In order to enable the management to draw important conclusions regarding the working of the company over a few years, it is essential that accounting practices and methods remain unchanged from one accounting period to another. The comparison of one accounting period with that of another is possible only when the convention of consistency is followed.
Convention of Disclosure
This principle implies that accounts must be honestly prepared and all material information must be disclosed therein. The contents of Balance Sheet and Profit and Loss Account are prescribed by law. These are designed to make disclosure of all material facts compulsory.
Convention of Conservation
Financial statements are always drawn up on rather a conservative basis. That is, showing a position better than what it is, not permitted. It is also not proper to show a position worse than what it is. In other words, secret reserves are not permitted.
FUNCTIONS OF ACCOUNTING
• Keeping systematic records
• Protecting properties of the business
• Communicating the results
• Meeting legal requirements
Keeping systematic records
The first function of accounting is to
keep a systematic record of financial
transactions, to post them to the
ledger accounts and ultimately
prepare final statements.
Protecting properties of the business
The second important function is to
protect the property of the business.
The system accounting is designed in
such a way that it protects its assets
from an unjustified and unwarranted
use.
Meeting legal requirements
The fourth and the last function of
accounting is to meet the legal
requirements under the Companies
Act, Income Tax Act, Sales Tax Act and
so on.
THE ACCOUNTING CYCLE
Recording transactions in subsidiary books.
Classifying data by posting from subsidiary books to the accounts.
Closing the books and preparation of final accounts.
CLASSIFICATION OF ACCOUNTS
• Accounts in the names of persons are known as “Personal Accounts”
• Accounts in the names of assets are known as “Real Accounts”
• Accounts in respect of expenses and incomes are known as “Nominal Accounts”
CLASSIFICATION OF ACCOUNTS
ACCOUNTS
PERSONALACCOUNTS
IMPERSONALACCOUNTS
REALACCOUNTS
NOMINALACCOUNTS
PERSONAL ACCOUNTS
Accounts in the name of persons are known as personal accounts.
Eg: Babu A/C,
Babu & Co. A/C,
Outstanding Salaries A/C, etc.
REAL ACCOUNTS
These are accounts of assets or properties. Assets may be tangible or intangible. Real accounts are impersonal which are tangible or intangible in nature.
Eg:- Cash a/c, Building a/c, etc are Real Accounts related to things which we
can feel, see and touch.
Goodwill a/c, Patent a/c, etc Real Accounts which are of intangible in nature.
NOMINAL ACCOUNTS
These accounts are impersonal, but invisible and intangible. Nominal accounts are related to those things which we can feel, but can not see and touch. All “expenses and losses” and all “incomes and gains” fall in this category.
Eg:- Salaries A/C, Rent A/C, Wages A/C, Interest Received A/C, Commission Received A/C, Discount A/C, etc.
DEBIT AND CREDIT
Each accounts have two sides – the left side
and the right side. In accounting, the left
side of an account is called the “Debit Side”
and the right side of an account is called the
“Credit Side”. The entries made on the left
side of an account is called a “Debit Entry”
and the entries made on the right side of an
account is called a “Credit Entry”.
RULES FOR DEBIT AND CREDIT
Personal Account
Debit the Receiver
Credit the Giver
Real Accounts Debit what comes in
Credit what goes out
Nominal Accounts
Debit all Expenses and Losses
Credit all Incomes and Gains
Steps for finding the debit and credit aspects of a particular transaction
• Find out the two accounts involved in the
transaction.
• Check whether it belongs to Personal,
Real or Nominal account.
• Apply the debit and credit rules for the
two accounts.
Exercise
• Purchased a Building for Rs.20,000/-.
• Paid Cash Rs.1,000/- to Satheesh.
• Paid Salary Rs.1000/-.
• Received Commission Rs.250/-.
• Sold goods for Cash Rs.3500/-.
Journal
Journal is the prime or original book of entry in which all transactions are recorded in the form of entries. Journalising is an act of recording or entering transactions in a Journal in the order of date.Date Particulars LF Debit
AmountCredit
Amount
Journal Entry
Jan 1, 2013 Prakash Started a business Rs. 50,000/-Date Particulars LF Debit
AmountCredit
Amount
2013Jan 1
Cash a/c Dr. To Prakash’s Capital a/c(Being cash invetsed to business)
50,00050,000