Meaning of Accounting:
According to American Accounting Association Accounting is “the process of
identifying, measuring and communicating information to permit judgment and
decisions by the users of accounts”.
Users of Accounts:
Generally 2 types. 1. Internal management.
2.
External users or Outsiders- Investors, Employees, Lenders, Customers,
Government
and other agencies, Public.
Sub-fields of Accounting:
ü Book-keeping: It
covers procedural aspects of accounting work and embraces record keeping function.
ü Financial accounting: It
covers the preparation and interpretation of financial statements.
ü Management accounting: It
covers the generation of accounting information for management decisions.
ü Social responsibility accounting: It
covers the accounting of social costs incurred by the enterprise.
Fundamental Accounting
equation:
Assets
= Capital+ Liabilities.
Capital = Assets - Liabilities.
Accounting elements: The elements directly
related to the measurement of financial position i.e., for the preparation of
balance sheet are Assets, Liabilities and Equity. The elements
directly related to the measurements of performance in the profit & loss
account are income and expenses.
Four phases of accounting
process:
ü Journalisation
of transactions
ü Ledger
positioning and balancing
ü Preparation
of trail balance
ü Preparation
of final accounts.
Book keeping: It
is an activity, related to the recording of financial data, relating to
business operations in an orderly manner. The main purpose of accounting for
business is to ascertain profit or loss for the accounting period.
Accounting: It
is an activity of analysis and interpretation of the book-keeping records.
Journal:
Recording each transaction of the business.
Ledger: It
is a book where similar transactions relating to a person or thing are
recorded.
Types:
Debtors ledger
Creditor’s ledger
General ledger
Concepts: Concepts are necessary
assumptions and conditions upon which accounting is based.
ü Business entity concept: In
accounting, business is treated as separate entity from its owners. While
recording the transactions in books, it should be noted that business and
owners are separate entities. In the transactions of business, personal
transactions of the owners should not be mixed. For example: - Insurance premium of the
owner etc...
ü Going concern concept:
Accounts are recorded and assumed that the business will continue for a long
time. It is useful for assessment of goodwill.
ü Consistency concept: It
means that same accounting policies are followed from one period to another.
ü Accrual concept: It
means that financial statements are prepared on mercantile system only.
Types of Accounts:
Basically accounts are three types,
ü Personal account:
Accounts which show transactions with persons are called personal account. It
includes accounts in the name of persons, firms, companies.
In this: Debit the receiver
Credit the giver.
For example: - Naresh a/c, Naresh&co
a/c etc…
ü Real account:
Accounts relating to assets is known as real accounts. A separate account is
maintained for each asset owned by the business.
In this: Debit what comes in
Credit what goes out
For example: - Cash a/c, Machinery
a/c etc…
ü Nominal account:
Accounts relating to expenses, losses, incomes and gains are known as nominal
account.
In this: Debit expenses and loses
Credit incomes and gains
For example: - Wages a/c, Salaries
a/c, commission received a/c, etc.
Accounting conventions: The term convention denotes
customs or traditions which guide the accountant while preparing the accounting
statements.
ü Convention of consistency: Accounting
rules, practices should not change from one year to another.
ü For
example: - If Depreciation on fixed assets is provided on straight line method.
It should be done year after year.
Convention of Full disclosure: All
accounting statements should be honestly prepared and full disclosure of all
important information should be made. All information which is important to
assets, creditors, investors should be disclosed in account statements.
Trail Balance: A
trail balance is a list of all the balances standing on the ledger accounts and
cash book of a concern at any given date. The purpose of the trail balance is
to establish accuracy of the books of accounts.
Trading a/c: The first step of the preparation of
final account is the preparation of trading account. It is prepared to know the
gross margin or trading results of the business.
Profit or loss a/c: It
is prepared to know the net profit. The expenditure recording in this a/c is
indirect nature.
Balance sheet: It
is a statement prepared with a view to measure the exact financial position of
the firm or business on a fixed date.
Outstanding Expenses:
These expenses are related to the current year but they are not yet paid before
the last date of the financial year.
Prepaid Expenses:
There are several items of expenses which are paid in advance in the normal
course of business operations.
Income and expenditure a/c: In
this only the current period incomes and expenditures are taken into
consideration while preparing this a/c.
Royalty: It
is a periodical payment based on the output or sales for use of a certain
asset.
For example: - Mines, Copyrights,
Patent.
Hire purchase: It
is an agreement between two parties. The buyer acquires possession of the goods
immediately and agrees to pay the total hire purchase price in installments.
Hire purchase price = Cash
price + Interest.
Lease: A contractual
arrangement whereby the lessor grants the lessee the right to use an asset in
return for periodic lease rental payments.
Double entry: Every
transaction consists of two aspects
1. The receiving aspect
2. The giving aspect
The
recording of two aspect effort of each transaction is called ‘double entry’.
The
principle of double entry is, for every debit there must be an equal and a
corresponding credit and vice versa.
BRS: When the cash book
and the passbook are compared, some times we found that the balances are not
matching. BRS is prepared to explain these differences.
Capital Transactions: The
transactions which provide benefits to the business unit for more than one
year is known as “capital Transactions”.
Revenue Transactions: The
transactions which provide benefits to a business unit for one accounting
period only are known as “Revenue Transactions”.
Deferred Revenue Expenditure: The expenditure which is of revenue nature but
its benefit will be for a very long period is called deferred revenue expenditure.
Ex:
Advertisement expenses
A
part of such expenditure is shown in P&L a/c and remaining amount is shown
on the assests side of B/S.
Capital Receipts: The
receipts which rise not from the regular course of business are called “Capital
receipts”.
Revenue Receipts: All
recurring incomes which a business earns during normal course of its
activities.
Ex: Sale of good, Discount
Received, Commission Received.
Reserve Capital: It
refers to that portion of uncalled share capital which shall not be able to
call up except for the purpose of company being wound up.
Fixed Assets:
Fixed assets, also called noncurrent assets, are assets that are expected to
produce benefits for more than one year. These assets may be tangible or
intangible. Tangible fixed assets include items such as land, buildings, plant,
machinery, etc… Intangible fixed assets include items such as patents,
copyrights, trademarks, and goodwill.
Current Assets: Assets
which normally get converted into cash during the operating cycle of the firm.
Ex: Cash, inventory, receivables.
Fictitious assets:
They are not represented by anything tangible or concrete.
Ex:
Goodwill, deferred revenue expenditure, etc…
Contingent Assets: It
is an existence whose value, ownership and existence will depend on occurance
or non-occurance of specific act.
Fixed Liabilities:
These are those liabilities which are payable only on the termination of the
business such as capital which is liability to the owner.
Longterm Liabilities:
These liabilities which are not payable with in the next accounting period but
will be payable with in next 5 to 10 years are called long term liabilities.
Ex: Debentures.
Current Liabilities:
These liabilities which are payable out of current assets with in the
accounting period. Ex: Creditors, bills payable, etc…
Contingent Liabilities: A
contingent liability is one, which is not an actual liability but which will
become an actual one on the happening of some event which is uncertain. These
are staded on balance sheet by way of a note.
Ex:
Claims against company, Liability of a case pending in the court.
Bad Debts:
Some of the debtors do not pay their debts. Such debt if unrecoverable is
called bad debt. Bad debt is a business expense and it is debited to P&L
account.
Capital Gains/losses:
Gains/losses arising from the sale of assets.
Fixed Cost: These
are the costs which remains constant at all levels of production. They do not
tend to increase or decrease with the changes in volume of production.
Variable Cost: These costs tend to vary with the volume of
output. Any increase in the volume of production results in an increase in the
variable cost and vice-versa.
Semi-Variable Cost: These
costs are partly fixed and partly variable in relation to output.
Absorption Costing: It
is the practice of charging all costs, both variable and fixed to operations,
processess or products. This differs from marginal costing where fixed costs
are excluded.
Operating Costing: It
is used in the case of concerns rendering services like transport. Ex: Supply
of water, retail trade, etc...
Costing:
Cost accounting is the recording, classifying the expenditure for the
determination of the costs of products for the purpose of control of the costs.
Rectification of Errors: Errors
that occur while preparing accounting statements are rectified by replacing it
by the correct one.
Errors like: Errors of posting, Errors of
accounting etc…
Absorbtion:
When a company purchases the business of another existing company that is
called absorbtion.
Mergers: A
merger refers to a combination of two or more companies into one company.
Variance Analasys: The
deviations between standard costs, profits or sales and actual costs are known
as variances.
Types
of variances :
1: Material
Variances
2: Labour
Variances
3: Cost
Variances
4: Sales or
Profit Variances
