Basics of Acc

7/30/2019 Basics of Acc

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BASICS OFACCOUNTING

-CA Priyanka Satarkar


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NEED FOR ACCOUNTING

Most of the activities are done

through organizations.

Organizations means group of

people working together for

achieving one or more common

objectives.

In achieving these common objectives they use resources like

material, labour, services, equipment, buildings, etc.

For working effectively people need to know about the amounts

of these resources available and the means of financing these.

SYSTEM OF ACCOUNTING PROVIDES THIS

INFORMATION.


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ACCOUNTI NG IN MODERN DAYS

Barter exchange has been replacedby monetary transactions

Industries have come into being

Complex machinery is used

Scale of operations has enlarged

Transactions occur on a large

scale.

All this has made Accounting a very important task in

the modern days.


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Meaning of the Term Accounting

Accounting is 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 a financial character and

interpreting the results thereof.


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FEW BASIC TERMS IN THE DEFINITION

Recording

Classifying

Summarizing

Dealing with

financial transactions

Analyzing and

interpreting

Communicating


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FEW BASIC TERMS IN ACCOUNTING

Transaction

Recording

Incomes

Expenses

Profit

Loss

Capital

Assets

Liabilities

Income Statements

Balance Sheet


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Transaction

A Transaction can be defined as the

occurrence of an event that must be recorded

Example:-

Let us take the example of a trading organization which sells

electronic products, for this business the following would be

the form of transactions:-

1) Buying of the various electronic goods for sale.

2) Selling of these articles to their customers

3) Purchase of a shop where their products would be stored

4) Paying various expenses like rent, electricity, maintainance,

advertising, etc.


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RecordingRecording basically relates to the documentation of

the various transactions that take place in the

business

Documentation of any transaction is

important because the businessorganizations that operate today are very

complex, hence it is not possible to

remember each and every transaction, so

it is essential to keep some track of the

transactions for future reference and

knowing how the business is doing.

Record keeping may be manual or

computerized.


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IncomeIncome is something that is earned in monetary terms,

from the business or commercial activity on regular basis,

it is the amount before deducting any expenses associatedwith that activity

In the case of a trading organization the following can be

the sources of income:-

1) Amount got from the sale of products in the normal

course of business

2) Amount got from the sale of defective products at lower

prices3) Amount received as interest on any amount of loan

given to other business firms or individuals

4) Amount earned as dividend from the shares in which the

business has invested.


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ExpensesExpenses are those costs which are incurred by the business

in the normal coarse of activity or sometimes there may besome costs which are abnormal yet related to business

Some examples of Expenses are:-

1) Purchases made

2) Wages and transport charges

3) Salaries

4) Electricity, Repairs & Maintainance, Housekeeping

5) Printing and Stationary, Postage & Telephone

6) Taxes paid, etc.


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ProfitProfit is that part of income which you earn over

and above your ExpensesWhen Income exceeds expenses

there is profit.

Every business has the basic motive

of earning profit

Profit is required for sustaining in the

same line of business and for starting

new lines of businessProfit is necessary for the growth of

the business.

PROFIT can be written as ALL INCOMES -ALL EXPENSES

in relation to that business activity.


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Loss

When the expenses incurred in the business exceed the

incomes generated then there is said to be a loss

Thus LOSS can be stated as where there is more of expenses

that the incomes.

A continuous loss will lead to problems in the business and

finally to its closure.

Thus for sustaining a business activity well, care should be

taken that the business does not incur losses.

The health of the business is at stake if it suffers losses.


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CapitalCapital is the amount that is invested in the business, this

can be either owned capital or borrowed capital

When a new business is started there is some amount that

has to be invested in it, this is called as capital.

Owned capital means the amount of capital that is invested

by the person(s) starting the business. E.g. Share capital

Borrowed capital is the amount that is borrowed by the

owners of the business for the purpose of starting the

business. E.g.. Debentures

The profit that is earned gets added up to the capital or gets

accumulated in the form of reserves. On the other hand the

losses eat up the capital that the business has.


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Assets

Assets are tangible or intangible properties that are owned by the

business. These properties help the business to earn incomes.

Thus they can be called as the source of generating incomes

Assets generate revenue

They can be tangible (i.e. they have physical form) like Building,

Plant & Machinery or Intangible (i.e. do not have physical form)like Goodwill, patents, copyrights etc.

Assets are further classified into

1. FIXED ASSETS2. CURRENT ASSETS.


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Liabilities

Liabilities are the claims that the business has against

its assets. Thus it can be said that when a business owessome amount to other people or organizations it is the

liability of the business

Liabilities are amounts payable by the business.

They can be called as obligations of the business that are

payable in the future.

These can be further classified into

1. Long Term Liabilities

2. Current Liabilities.


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Income Statement

Income statement is the summary of the revenues and

Expenses of a business entity for a specific period of time

such as a month or a year. If the total revenue for the period

in question exceeds the total expenses of that period it results

in Net Profit. If the total expenses exceed total revenues the

result is Net Loss

The Income Statement is normally said to be the Profit &

Loss Account.

This statement gives the idea of how the business is performing

It gives a general idea of the various sources of incomes of the

business and also the various ways in which the business is

spending


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Balance Sheet

A Balance Sheet is the final Statement of Accounts for a

specified period depicting a list of Assets Liabilities and

Owners Equity. Usually it gives the position of the firm at

the close of the last day of the month or Year

The balance sheet shows the exact sources from which the

business has got its funds.

It shows how these funds are being invested in the business

in the form of Assets.

It shows the position of the business in the sense of Sourcesof funds and their applications.


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CONCEPTS OF ACCOUNTING

There are certain principles that are to be followed

while carrying out the task of accounting. These are

called as accounting principles.

These may not be put on the paper while preparing theaccounts but these are self evident. It can be said that

these are assumed.

While preparing the accounts of an organization orbusiness these concepts are taken care of.


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Importance of F inancial

Statements

IMPORTANCE TO OWNERS/ SHAREHOLDERS

IMPORTANCE TO MANAGERS

IMPORTANCE TO CUSTOMERS

IMPORTANCE TO SUPPLIERS

IMPORTANCE TO LENDERS OR FINANCERS

PROSPECTIVE INVESTORS

IMPORTANCE TO GENERAL PUBLIC


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ROLE OF ACCOUNTANT

ACCOUNTANTS IN PUBLIC PRACTICE :They

are the ones who are appointed by a certain institute

after qualifying for a specified examination Eg:-CA,CWA etc

ACCOUNTANTS IN EMPLOYMENT :These are

the accountants who are employed in business or non-

business entities


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ACCOUNTANTS SERVICES

MAINTAINANCE OF BOOKS OF ACCOUNTS

-Help to management

-Replacement of Memory

-Comparative study

-Acceptance by tax authorities

-Evidence in the Court

-Sale of Business

AUDITING OF ACCOUNTS

TAXATION

FINANCIAL SERVICES


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OBJECTIVES OF ACCOUNTING

TO KEEP SYSTEMATIC RECORDS

TO PROTECT BUSINESS PROPERTIES

TO ASCERTAIN OPERATIONAL PROFIT OR

LOSS

TO ASCERTAIN THE FINANCIAL POSITION OF

BUSINESS

TO FACILITATE RATIONAL DECISION

MAKING


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BASIC CONCEPTS OF ACCOUNTING

The Separate entity concept The Going concern concept

The money measurement concept

The cost concept The dual aspect concept

Accounting period concept

The Matching Concept

The realization concept


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The Separate entity concept

The business is considered to be

separate and distinct from the

person who is owning it or

managing it.

Thus when you write the accountsof a business you need to

concentrate only on the

transactions that are related to the

business.

What is related to the business

and what is not would depend on

the circumstances

Separate


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The Going Concern concept

It is assumed that the businesswill continue for an indefinitely

long period in the future.

The business will be considered

to have no intention of stopping

its affairs in the future.

Circumstances may occur when

the business was formed for a

certain purpose and the purpose

is accomplished then Going

concern concept ceases to exist.


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Money measurement Concept

Money is used as a common

denominator of expressing

different facts.

The effect of the transactioncan be measured easily when it

gets converted into the monetary

terms

Thus all articles recorded are

measured in monetary terms.


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The cost Concept

While recording the assets ofthe business they are always

recorded at their COST.

Even if the cost of the asset

fluctuates after its purchase, it

does not make any difference to

its value in the books of

accounts.

Thus amounts which are shown

in the books may not indicate its

actual sales value.


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Accounting period concept

The Going concern concept assumes that business willcontinue for an indefinite period in the future

Business needs to know, at regular intervals how things

are going.

This need has resulted in the formation of the

Accounting period concept.

This concept focuses on measuring activities atspecified intervals of time.


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The Matching Concept

Newtons Law in Science states that Every Action hasan equal an Opposite reaction

In Accounts this same principle is

reflected by the MatchingConcept.

It is stated that when something

is got in the business, something

has to leave the business.

Here the Revenues and

Expenses are matched by the

business.


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The realization concept

The Realization concept indicates the amount of

revenue that should be recognized from a given

sale.

Realization refers to the inflow of Cash or claims

to Cash

It states that the amount recognized as revenue is

the amount that is reasonably certain to be realized.


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ACCOUNTING CONVENTIONS

CONSERVATISM

FULL DISCLOSURE

CONSISTENCY

MATERIALITY


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The conservatism concept

This Concept focuses on two things:

RECOGNIZE REVENUES only when they are CERTAIN

RECOGNIZE EXPENSES as soon as they are reasonablypossible

However there might be problems in assessing what is the

meaning of reasonably certain and reasonably possible.


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FULL DISCLOSURE

Reports should fully and fairly disclose the

information purport to be represented

The Companies Act 1956 specifically states that theProfit & and Loss and Balance Sheet of the company

should give a true and fair view of the state of affairs of

the business.


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Consistency Concept

This concept states that once an Entity has decided one

method it should use the same method for all

subsequent events of the same character.Frequent changes in the methods of recording will not

only lead to problems in preparing them but also will

not be useful in Comparison of statements of different

time periods.


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The Materiality Concept

The events that are recorded in the accounts

should be significant and must effect the

business.

When all the material events of the business

get reflected in the accounts they will give a

correct picture of the Entity.


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Basics of Acc