Introduction To Accounting
Introduction To Accounting
Introduction To Accounting
MEANING OF ACCOUNTING
1.
Accounting,
as
an
information
system is the process of identifying, measuring and communicating the economic information of an
The systematic recording, reporting, and analysis of financial transactions of a business. The accountant is typically required to follow a set of rules and regulations, such as the Generally Accepted Accounting Principles.
2.
Accounting allows a company to analyze the financial performance of the business, and look at statistics such as net
3.
Accounting
is
the
art
of and
recording,
classifying
summarizing in the significant manner and in terms of money, transaction and events which are in the part at least of a financial character and interpreting the result thereof.
Meaning of Book-Keeping
Book-keeping may be defined as a systematic and regular record of events affecting a firm with a view to obtaining a clear picture of the financial state of affairs of the firm and of its performance in monetary terms over a period of
Accounting
Decision Makers
Information needs
Dat a
Information
OBJECTIVES OF ACCOUNTING
1.
To maintain accounting records : Accounting is done to keep a systematic record of (i) financial transactions, (ii) assets and (iii) liabilities.
2.
To calculate the results of operations : Preparation of Income statement (Profit & Loss A/c)
3.
4.
To communicate the information to the users : Communicate information to internal users (Participants at all levels of management) and external users (Banks, creditors).
Summarising the classified data to know the result of business operation and its financial position (preparation of Trial balance, Income statement and Balance sheet) Analysis and interprets the summarised data in such a way to get a meaningful judgement about the operational result and financial position of the business. Communicating the interpreted data to the various users such as Owners, Investors, Bank, etc.
Advantages of Accounting
Facilitates to replace memory Facilitates to comply with legal requirements Facilitates to ascertain net result of operations Facilitates to ascertain financial position Facilitates the users to take decisions Facilitates a comparative study
Advantages of Accounting
Assists the management in planning and controlling and decision making Facilitates control over assets Facilitates the settlement of tax liability Facilitates raising loans
Limitations of Accounting
1. 2. 3. 4.
5.
Ignores the qualitative elements Not free from Bias Estimated position and not real position Ignores the price-level changes in case of financial statement prepared on historical costs Danger of window dressing
Branches of Accounting
1.
Financial Accounting :- It is the process of identifying, measuring, recording, classifying, summarising, analysing, interpreting and communicating the financial transactions and events.
Branches of Accounting
2.
Cost Accounting :- It is the process of accounting and controlling the cost of a product, operation or function. The purpose of this branch of accounting is to ascertain the cost, to control the cost and to communicate information for decision-making.
Branches of Accounting
3.
Management Accounting :- It is the application of accounting techniques for providing information designed to help all levels of management in planning and controlling the activities of business enterprise and in decision making. The purpose of this branch of accounting is to supply any and all information that management may need in taking decision and to evaluate the impact of its decisions and actions.
Financial Accounting
2. It records what has happened 2. It provides information which based on past transactions in a is used to take decisions about true and fair manner. the future. 3. It is heavily constrained by 3. It is relatively free of legal regulation and accounting constraints imposed by legal principles. regulation and accounting standards. 4. It must comply with statute and generally accepted accounting principles. 5. It emphasizes on the type of expenses. 4. It is tailored to suit the needs of the users 5. It emphasizes on the products, processes and departments.
USERS OF ACCOUNTING
USERS OF ACCOUNTS
Investors Information about growth - sales, volumes Profitability (profit margins, overall level of profit) Investment (amounts invested, assets owned) Business value (share price) Comparative information of competitors
Lenders
Cash flow Security of assets against which the lending may be secured Investment requirements in the business
Creditors
Cash flow Management of working capital Payment policy
Debtors
Sales growth New product development Investment in the business (e.g. production capacity)
Employees
Revenue and profit growth Levels of investment in the business Overall employment data (numbers employed, wage and salary costs) Status and valuation of company pension schemes / levels of company pension contributions
Government
Customs & Excise need accounting information to verify Value Added Tax ("VAT") returns local government need similar information to levy local taxes and rates
Analysts
They require very detailed financial and other information in order to analyse the competitive performance of a business and its sector.
According to this assumption, only those transactions which are capable of being expressed in term of money are included in the accounting records. In other words, the information which cannot be expressed in terms of money is not included in accounting records.
6. Cost Concept
According to this concept : a)An asset is ordinarily entered in the accounting records at the price paid to acquire it. b)This cost is the basis for all subsequent accounting for the assets. Note :- Asset is recorded at cost at the time of its purchase but it may systematically be reduced in its value by charging
7. Matching Concept
The expenses incurred in an accounting period should be matched with the revenues recognised in that period. This concept calls for adjustment to be made in respect of prepaid expenses, outstanding expenses, accrued revenue and unaccrued revenues.
8. Realisation Concept
Revenue is recognised in the period in which it is earned irrespective of the fact whether it is received or not during that period. Revenue is recognised when a sale is made. Sale is considered to be made at the point when the property in goods passes to the buyer and he becomes legally liable to pay.
Accounting Conventions
Conservatism Principle : Anticipate no profit but provide for all probable losses For e.g. provision for doubtful debts and discount on debtors are the applications of this principle. In other words, this principle requires that in the situation of uncertainty and doubt, the transactions should be recorded in such a manner that the profits and assets are not overstated and the losses and
1.
Full Disclosure
The financial statements must disclose all the relevant and reliable information which they purport to represent, so that the information may be useful for the users. The disclosure should be full, fair and adequate so that the users of the financial statements can make correct assessment about the financial performance and position of the enterprise.
Consistency
According to this principle, whatever accounting practices are selected for a given category of transactions, they should be followed on a horizontal basis from one accounting period to another to achieve compatibility. For e.g. if the inventory is valued on LIFO basis, should be followed year after year and if a particular asset is depreciated according to WDV
Materiality
All relatively relevant items, the knowledge of which might influence the decision of the users of the financial statements, should be disclosed in the financial statement. Which information is more relevant than others is largely a matter of judgement. The materiality depends not only upon the amount of item but also upon the
Accounting Equation Assets = Liabilities + Capital 1.Increase in an asset, increase in capital, for e.g., owner introduces further capital 2.Increase in an asset, increase in a liab., for e.g., purchased plant on credit. 3.Increase in an asset, decrease in another asset, for e.g., purchased machines against cash. 4.Decrease in one asset, decrease in a liab., for e.g. creditors paid off by cheque 5.Decrease in capital, decrease in
Q. Using Accounting Equation, show the effect of following transactions on the assets, liabilities and capital 1 2 3 4 5 6 7 8 9 10 11 12 Started business with cash Purchased goods on credit Purchased goods for cash Purchased furniture Withdrew for personal use Paid rent Received interest Sold goods for cash Paid to creditors Paid for salaries Further capital invested Borrowed from Ajay 5000 400 100 50 70 20 10 70 40 20 1000 1000