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ACCOUNTING CONCEPTS

By Dr. Archana

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OUTLINE

Overview of Business Activities

Basic Concepts Underlying Financial Accounting

Accounting Standards

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Business organisations

What do business organisations do?

What are the different types of businessorganisations?

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BUSINESS ACTIVITIES

Establish goalsand strategies

Conductoperations

Raisefinances

Invest inresources

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Accounting

What is Accounting?

Why should managers and other decisionmakers know accounting?

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Accounting Information System

Input Processing Output

Users

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Users Investors Suppliers Business Analysts

Government Public Lenders Managers Employees Customers

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BASIC CONCEPTS UNDERLYING FINANCIALACCOUNTING

Entity Concept

Money Measurement Concept Going Concern Concept Cost Concept Conservatism Dual Aspect Concept

(Double Entry Concept) Accounting Period Concept Accrual Concept Realisation Concept Matching Concept

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Branches of accounting

Financial accounting Cost accounting Management accounting

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GAAP

What is GAAP? Need for accounting Standard:

Accounting standards are concerned withthe system of measurement and disclosurerules for preparation and presentation of financials statements.

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ACCOUNTING STANDARDS

Accounting standards are technical accounting rules of valuation,measurement, recognition, and disclosure.

In India, the ACCOUNTING STANDARDS are prescribed by theInstitute of Chartered Accountants of India.

Accounting standards in the UK are called FINANCIALREPORTING STANDARDS and originate from the AccountingStandards Board. These standards are backed by the professionalbodies of accountants to which auditors belong.

In the US, STATEMENTS OF FINANCIAL ACCOUNTINGSTANDARDS are issued by the FINANCIAL ACCOUNTINGSTANDARDS BOARD (FASB) They form part of GENERALLYACCEPTED ACCOUNTING PRINCIPLES which are insistedupon by the SECURITIES AND EXCHANGE COMMISSION(SEC)

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Accounting equation

Asset = Liabilities + Equity

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A SIMPLE ILLUSTRATION: RAM ENTERPRISES

1. RAM CONTRIBUTES Rs.50,000 AS EQUITY CAPITAL.

2. RAM ENTERPRISES PAYS Rs.100,000 FOR A BUILDING.

3. RAM ENTERPRISES BUYS FURNITURE & FIXTURES FOR Rs.300,000 IN CASH.

4. RAM ENTERPRISES BUYS MERCHANDISE WORTH Rs.300,000 ON CREDIT.

5. RAM ENTERPRISES DEPRECIATES ITS FURNITURES & FIXTURES BY

Rs.10,000.

6. RAM ENTERPRISES PAYS ESTABLISHMENT EXPENSES OF Rs.5,000 IN CASH.

7. RAM ENTERPRISES PAYS Rs. 9,000 AS RENT IN CASH.

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ACCOUNTING IS AS SIMPLE AS 1-2-3-4

Rule 1 : Every transaction has a bearing on at least twoaccounts in the balance sheet.

Rule 2 : Irrespective of what the transaction is, the balancesheet identity is always preserved.

Assets = Liabilities + Equity

Rule 3 : Transactions which do not result in a revenue orexpense, have no bearing on the Reserves & Surplus account.

Rule 4 : Transactions which result in a revenue or expense havea bearing on the Reserves and Surplus account.

Revenues Reserves & SurplusExpenses Reserves & Surplus

Transactions which result in revenues and expensesare reflected on the Profit and Loss Account.