Chapter 1 - Introduction To Accounting
Chapter 1 - Introduction To Accounting
Chapter 1 - Introduction To Accounting
INTRODUCTION TO ACCOUNTING
1.1 Why is accounting required for todays world?
1.2.1. Meaning
Book keeping is the science and art of systematic recording and organizing
financial transactions for a company or firm. Book keeping is recorded on day to day basis.
It includes recording of journal, ledger posting and balancing of accounts. Book keeping is
also called quality control because it helps for timely and accurate records. Accountant
shows the business results from such records at the end of the every financial year which
ends on 31st March.
1.2.2 Definition
R.N.Carter Book- keeping is the science and art of correctly recording in books of
account all those business transactions that result in the transfer of money or moneys
worth .
ii) Soundness of a firm can be assessed from the records of assets and abilities on a
particular date.
iii) Entries related to incomes and expenditures of a concern facilitate to know the profit
and loss for a given period.
iv) It enables to prepare a list of customers and suppliers to ascertain the amount to be
received or paid.
v) It is a method gives opportunities to review the business policies in the light of the
past records.
vi)Amendment of business laws, provision of licenses, assessment of taxes etc., are based
on records.
1.3.2 Definition
1.3.3 Objectives
1.3.4 Features
Financial Accounting
1. Management Accounting
2. Cost Accounting
Cost accounting is the records of all the costs incurred in a business in a way that can
be used to improve its accounts. It is a process of collecting, recording, classifying,
analyzing, summarizing, allocating and control of cost. It generally relates to the future
and involves an estimation of future costs to be incurred. The process of cost
accounting based on the data provided by the financial accounting. This data is then
summarized and analyzed to arrive at a selling price, or to determine where savings are
possible. It is concerned primarily for the purpose of valuation of stock and
measurement of profits.
1.7 Parties Interested in Accounting Information
i) Owners: The owner provides capital for the organization to start the business.
They want to know about the profitability and financial soundness of the business.
Comparing the accounts of various years helps in getting information to improve
performance.
ii) Management: The management is interested in knowing the financial position of the
firm. The accounts are the base from which the management can understand the
business activity. Thus, the management is interested in financial accounting to
find whether the business is earning profits or no.
iii) Creditors: Creditors are the persons who supply goods on credit. Before granting
loan, creditor wants to know about the creditworthiness of the company .The
financial accounts helps to understand whether the company will be able to pay its
creditor.
iv) Lenders: Lenders are interested to know the financial soundness before granting
credit. Such information provided by financial accounts only.
v) Employees: Payment of salary depends upon the size of profit earned by the firm.
The more important point is that the workers expect regular income. For these
reasons, this group is interested in accounting.
vi) Investors: The prospective investors, who want to invest their money in a firm, of
course wish to see the progress and prosperity of the firm, before investing their
amount, by going through the financial statements of the firm. This is to safeguard
the investment.
vii) Government: Government keeps a close watch on the firms which yield good
amount of profits. The state and central Governments are interested in the
financial statements to know the earnings for the purpose of taxation.
viii) Consumers: These groups are interested in getting the goods at reduced price.
Therefore, they wish to know the establishment of a proper accounting control,
which in turn will reduce to cost of production, in turn less price to be paid by the
consumers.
ix) Researchers: Accounting information, being a mirror of financial performance of a
business enterprise, is of important value to the research scholar who wants to
make an indepth study of the financial operation of an enterprise.
1) Transactions: Exchange id goods and services for money or moneys worth between
two or more persons or parties is knows as transactions
There are two types of transactions
a) Cash Transactions: It is transaction is one where cash receipt or payment is
involved in the exchange.
b) Credit Transactions: It is a transaction which will not have cash either received
or paid for exchange of goods and services. Payment will be made on later date.
Transactions can be classified again in two types such as External and Internal
transaction.
External transaction is when company purchases or sells any goods and services.
Internal transaction is when company transaction is one where the question of receipt or
payment of cash does not at all arise, e.g. Depreciation, return of goods etc.
13)Sales: When the goods purchased are sold out, it is known as sales. Here, the
possession and the ownership right over the goods are transferred to the buyer.
Sales can be divided into two types:
a) Cash Sales: Cash is received immediately for a sale of goods and services.
b) Credit Sales: When goods and services is sold but payment will be received later.
The term sale is not used for sell of an asset.
14)Sales Return: When some customers return the goods sold to them for any reason it
is termed as sales return as well as return inward.
15)Stock/Inventory: The goods purchased are for selling, if the goods are not sold out
fully, part of the total goods purchased is kept with the trader unlit it is sold out, it
is said to be a stock. Following are two kinds of stock
a) Opening Stock: The value of unsold goods lying at the beginning of the accounting
year.
b) Closing Stock: The value of unsold goods lying at the end of the accounting year.
16)Account: It is a statement of the various dealings which occur between a customer
and the firm. It can also be expressed as a clear and concise record of the
transaction relating to a person or a firm or a property (or assets) or a liability or an
expense or an income.
17)Revenue: Revenue in accounting means the income of a recurring nature from any
source. It is related to the day to day business activities. It means the amount which,
as a result of operations, is added to the capital
18)Expenses: The terms expense refers to the amount incurred in the process of
earning revenue. It is the cost incurred in production and sell of the goods and
services. It is recurring in nature.
19)Income: Income and Revenue are not same. The amount received from sale of goods
is revenue and the amount paid sold of goods is expense. The surplus of revenue
over expense is called income
21) Capital: The amount invested by the owner or the proprietor to start the
business .It can be in form of cash or other asset. It is also known as owners equity
or net worth. Owners equity means owners claim against the assets.
Capital = Assets - Liabilities.
22)Drawings: It is the amount of money or the value of goods which the proprietor
takes for his personal use. It reduces the capital.
23)Solvent: When a persons assets are more than his liabilities, he is known as solvent.
It means a person is able to pay off his liabilities
24)Insolvent: When a persons assets are less than his liabilities, he is known asa
insolvent. It means a person is notable to pay off his liabilities.
25) Asset: Any physical thing or right owned that has money value is an asset. In other
words, an asset is that expenditure which results in acquiring of some property or
benefits of a lasting nature.
Example-Stock, Plant and Machinery, Building etc
Following are the types of assets
a) Fixed Asset: Asset purchased for continuous use for producing goods and
services and not meant for resale is termed as fixed asset.
Example- Furniture, Plant, Vehicles etc.
b) Current Asset: Assets which gets converted into cash within one year with a
purpose of sale.
For example- Cash in hand, debtors, bill receivables etc.
c) Tangible Asset: The assets that can be seen, touched and felt are called
tangible asset. For example- Motor car, Cash etc
d) Intangible Asset: The assets which cannot be seen, touched and felt are
called intangible asset. For example Goodwill, Trade mark, Patent etc.
26) Goodwill: Goodwill is the value of reputation of a firm in respect of profits expected
in future over and above the normal rate of profit. It is an intangible asset.
27)Liabilities: -It means the amount which the firm owes to outsiders that is, excepting
the proprietors.
a) Fixed Liabilities: Owing of business towards outsider which is long term is termed as
fixed liabilities. For example Loan, Bonds, Capital etc.
b) Current Liabilities: Owing of business towards outsider which is short term is
termed as current liabilities. For example- Creditors, Bills payable, Overdraft etc.
c) Contingent Liabilities: These are liabilities which may arise on happening or non-
happening of a specific event in future. These liabilities are not recorded in the
books of accounts until they arise. For example- If a suit against the firm is pending
in the court, the actual liability in this respect will arise only if the suit is decided
against the firm.
The following are the common accounting concepts adopted by many business concerns:
Example If Mr. Jay is a proprietor who invest Rs 100,000 as capital and uses the
business vehicle partly for personal use, the capital is treated as a liability and the
personal use is treated as drawings.
2) Money Measurement Concept: Money is base for all work. Only those transactions
and events are recorded in accounting which can be expressed or valued in
monetary terms. Without money measurement it is difficult to calculate the value
or result f any business activity. Hence, the accounting does not give a complete
picture of all the transactions of a business unit. This concept does not also take
care of the effects of inflation because it assumes a stable value for measuring.
For example- Raju Sandwich stores owns 25 chairs, 20 tables, 2 computers etc ,
this things cannot be recorded in accounts unless it is valued in money
measurement. If it is expressed in terms of money such 25 chairs Rs25000, 20
tables Rs15000, 2 computers Rs 30000. As such, to make accounting records
relevant, simple, understandable and homogeneous.
5) Accounting Period Concept: the company or firm is assumed to carry out business
on continuous bases due this it is divided into time intervals for the measurement
of the profits of the business. Twelve months period is usually adopted for this
purpose. As per income tax law, it is compulsory to maintain accounting period as
per the financial year, which begins from 1st April and ends on 31st March.
6) Revenue Recognition Concept: Revenue means the amount which is added to the
capital as a result of business activities. As per the concept, it determines the time
or particular period in which the revenue is earned. Sale is considered to be
complete when the ownership and property are transferred from the seller to the
buyer and the consideration is paid in full. However, there are two exceptions to
this concept, viz., 1. Hire purchase system where the ownership is transferred to
the buyer when the last instalment is paid and 2. Contract accounts, in which the
contractor is liable to pay only when the whole contract is completed, the profit is
calculated on the basis of work certified each year. Revenue in case of incomes
such as rent , interest , brokerage, etc is recognized on time basis.
ASSETS=LIABILITES +CAPITAL
OR
CAPITLA =ASSETS-LIABILITIES
For example-Miss Tanya starts a business with Rs 25Lakh as capital and borrows Rs
30Lakh as bank loan.
ASSETS=LIABILITES +CAPITAL
55Lakh=30Lakh +25Lakh
10) Matching Concept: The essence of the matching concept lies in the view that all
costs which are associated to a particular period should be compared with the
revenues associated to the same period to obtain the net income of the business.
This concept is very important for correct determination of net profit. Expense
incurred in an accounting period should be matched with the revenues recognized in
that period.
11) Verifiable Objective or Objective Evidence Concept: This concept ensures that
all accounting must be based on objective evidence, i.e., every transaction recorded
in the books of account must have a verifiable document in support of its,
existence. Only then, the transactions can be verified by the auditors and declared
as true or otherwise.
1.12.2 Accounting Conventions
The accounting conventions may be defined as a custom or generally accepted practice
which is generally adopted either by an agreement or common consent among
accountants. Accounting system have been developed in responses to the needs of the
management and the outside creditors for making decisions. The financial statements
namely the Profit and Loss Account and the Balance Sheet are based on this accounting
conventions.
The following conventions are to be followed to have a clear and meaningful information
and data in accounting:
iv) Materiality: An accountant must always keep in mind that he must record only the
information which is significant and ignore insignificant details. This convention is an
exception to the convention of disclosure. Contingent liability which is shown as a
footnote in the balance sheet is through convention of materiality otherwise
accountants would have shown it as other liability. It should be noted that what is
material for one concern may be immaterial for other. Thus, the accountant should
judge the importance if each transactions to determine its materiality.
Source
APC NEW ISC ACCOUTNING CLASS XI
CHETNA ACCOUTNING CLASS X1
I .Theory Questions
Answers
Answers
6-liability, 7-Expense
1. The convection of prudence is to anticipate no profit and provide for all possible
losses
2. Assets are always to liabilities without capital
3. Goodwill is tangible asset
4. Accounting is helpful in raising loans
5. Accounting will not be affect by window dressing
6. All items or facts whether material or immaterial are recorded in accounting.
7. Materiality principle is an exception to the Full Disclousure Principle
Answers
True-1, 4, 6, 7
False-2, 3, 5