Amity School of Business
Amity School of Business
Programme BBA, Semester I
Accounting Fundamentals
Module 1
Faculty
Dr. Priya Solomon
1
Definition of Accounting
Amity School of Business
The art of keeping a permanent record of business transactions is book
keeping but Accounting involves not only book keeping but also many other
activities. In 1941, the American Institute of Certified Public Accountants
(AICPA) defined as “The art of recording, classifying, summarising,
analysing and interpreting the business transactions systematically and
communicating business results to interested users is accounting”
Accounting is identified with a system of recording of business transactions
that creates economic information about business enterprises to facilitate
decision making. The function of accounting is to provide quantitative
information, primarily financial in nature, about economic entities, that is
intended to be useful in making economic decisions.
The American Accounting Association defined accounting as : “It is the
process of identifying, measuring, recording and communicating the
required information relating to the economic events of an organisation to
the interested users of such information.
2
Objectives of Accounting
Amity School of Business
• To maintain the records of business
transaction
• Calculation of Profit or Loss
• Depiction of financial position
• To make information available to various
groups and users.
• To facilitate rational decision making.
3
Functions of Accounting
Amity School of Business
Collection
Collection in money terms of information relating to transactions that have
resulted from business operations
Recording and Classifying
Recording and classifying data into a permanent and logical form. This is
usually referred to as "Book-keeping“
Summarising
Summarising data to produce statements and reports that will be useful to the
various users of accounting information - both external and internal
Interpreting and Communicating
Interpreting and communicating the performance of the business to the
management and its owners
Forecasting and Planning
Forecasting and planning for future operation of the business by providing
management with evaluations of the viability of proposed operations. The
key forecasting and planning tool is the "Budget"
4
Accounting Process
Amity School of Business
•
•
•
•
•
Financial Transactions
Recording:- Journal
Classifying: Ledger
Summarizing and
Analysis and Interpretation
5
Importance of Accounting
Amity School of Business
Accounting is essentially an "information process" that
serves several purposes:
➢ - Providing a record of assets owned, amounts owed to
others and monies invested;
➢ - Providing reports showing the financial position of an
organisation and the profitability of its operations
➢ - Helps management actually manage the organisation
➢ - Provides a way of measuring an organisation's
effectiveness (and that of its separate parts and
management)
➢ - Helps stakeholders monitor an organisation’s activities
and performance
➢ - Enables potential investors or funders to evaluate an
organisation and make decisions
6
Accounting cycle
Amity School of Business
7
Users of accounting information
Amity School of Business
There are two broad categories of accounting information users:
external users
internal users.
External users are parties outside the reporting entity (company) who are
interested in the accounting information.
❑
Investors (owners) use accounting information to make buy, sell or keep
decisions related to shares, bonds, etc. Creditors (suppliers, banks) utilize
accounting information to make lending decisions. Taxing authorities
(Internal Revenue Service) need accounting information to determine a
company's tax liabilities. Customers may need accounting information to
decide which products and from which company to buy.
Internal users are parties inside the reporting entity (company) who are
interested in the accounting information.
❑
A company's senior and middle management uses accounting
information to run business. Employees utilize accounting information to
determine a company's profitability and profit sharing
8
Branches of Accounting
Amity School of Business
• Financial Accounting
• Cost Accounting
• Management Accounting
9
Financial Accounting
Amity School of Business
• The accounting system concerned only with the
state of affairs and financial results of operations is
called Financial Accounting.
• It Includes ascertainment of profit earned or loss
incurred and position of business at the end of
accounting period and providing financial
information required by the management and other
parties interested.
• The basic objective of accounting is to present
TRUE & FAIR view of the affairs of the company.
10
Cost Accounting
Amity School of Business
➢The basic limitation of financial accounting
is that it fails to provides the information
relating to the cost of individual products.
➢Cost Accounting deals with this problem
➢The main purpose of cost accounting has
been to analyze the expenditure involved
so as to calculate the cost of various
products manufactured and fix their price.
➢It also helps in cost control.
11
Management Accounting
Amity School of Business
• The branch of accounting which provides
necessary information to management for
decision making is called management
accounting.
• The Input for management accounting is
from financial accounting and cost
accounting.
12
Management accounting
Amity School of Business
• Management accounting is the process of
measuring and reporting information about
economic activity within organizations, for use by
managers in planning, performance evaluation,
and operational control
• Thus, Management accounting is concerned
with generating accounting information for
managers and other employees to assist them in
performing their jobs
Amity School of Business
Accounting Principles
• Accounting is termed as language of business.
As in case of language there are set of rules
which are adopted for communication same is
the case with accounting also.
• Are those rules of action or conduct which are
adopted by accountant universally while
recording accounting transactions.
• These principles are of two types:
– Accounting Concepts
– Accounting Conventions
14
Accounting concepts
Amity School of Business
• Concepts includes those basic
assumptions or conditions upon which
the science of accounting is based.
1.
2.
3.
4.
5.
6.
7.
8.
Separate Entity Concept
Going Concern Concept
Money Measurement Concept
Cost Concept
Dual Aspect Concept
Accounting Period Concept
Matching Concept (Periodic matching of Cost and Revenue)
Realization Concept
15
Conventions
•
Amity School of Business
Are those customs or traditions which
guide the accountant while preparing
the accounting statements.
1.
2.
3.
4.
Convention of Conservatism
Convention of Full Disclosure
Convention of Consistency
Convention of Materiality
16
Important Terms
Amity School of Business
• Assets
– It denotes the economic resources (property) of a
business and includes all current and fixed assets
– Fixed Assets are those that are acquired for
continued use and not meant for resale. They may be
tangible like land, buildings, plant and machinery,
furniture etc. or Intangible like patents, goodwill
etc.
– Current Assets are those assets which are kept
temporarily for resale or for converting into cash.
Stock, Cash in Hand, Debtors etc.
17
Important Terms
Amity School of Business
• Liabilities
– It denotes all claims against the assets of the
business and include those of the outsider or
those of the owner of the business.
– Liabilities may include the following• Owner's Fund
• Long term Liabilities or Fixed liabilities
• Current Liabilities
18
Debtors
Amity School of Business
– Are the persons or parties who are liable to pay to the
business on account of credit sales.
Creditors
– Are the persons or parties to whom business is
liable to pay on account of credit purchases.
Capital
– Total interest of the owner or owners in the business
is called. It is sometime called as owner’s fund
➢Revenue
– The income that accrues to the firm by the sale of
goods/services/assets or by supply of the firm’s resources to
others.
19
Expense
Amity School of Business
– It is the amount spent in order to produce and sell the
goods and services which produce the revenue.
Payment of wages, rent, salaries etc.
Purchase
The term purchase is used only for the purchase of goods. Goods
are those which are purchased for resale or for the production of
finished goods which are also meant for sale.
Sale
– The term sale is used for the sale of goods only. It
includes both credit as well as cash sale.
➢Stock
- Goods lying unsold on a particular date.
20
➢ Cash flow statement: Under IndianAmity
GAAP
(AS 3)
School of Business
, inclusion of Cash Flow statement in financial
statements is mandatory only for companies
whose share are listed on recognized stock
exchanges. On the other hand, US GAAP
mandates furnishing of cash flow statements for 3
years- current year & 2 immediate preceding years
irrespective of whether the company is listed or
not.
➢ Preoperative expenses: Under Indian GAAP
direct revenue expenditure during construction
period like Preliminary Expenses are allowed to be
Capitalised. Under US GAAP, the concept of preoperative expenses itself does not exist. The
enterprise has to prepare its balance sheet & P&L
a/c as if it were a normal running organisation.
21
Differences between US GAAP & Amity
Indian
GAAP
School of Business
➢Underlying assumptions: Under Indian
GAAP, Financial statements are prepared
in accordance with the principle of
conservatism Under US GAAP
conservatism is not considered
➢Prudence vs. rules: Indian GAAP is
based on the International Accounting
Standards ( IAS) , which employ concepts
and `prudence' as the principle in contrast
to the US GAAP, which are "rule oriented",
detailed and complex.
22
➢ Depreciation - Under the Indian GAAP,
School of Business
depreciation is provided based on Amity
rates
prescribed by the Companies Act, 1956. Higher
depreciation provision based on estimated
useful life of the assets is permitted, but must be
disclosed. Under US GAAP, depreciation has to
be provided over the estimated useful life of the
asset.
➢ Format/ Presentation of financial statements:
Under Indian GAAP, financial statements are
prepared in accordance with the presentation
requirements of Schedule VI to the Companies
Act, 1956. Under US GAAP, no set format as
long as they comply with disclosure
requirements.
23
➢ Consolidation of subsidiary companies: Under Indian
Amity
of Business
GAAP (AS 21), Consolidation of Accounts
ofSchool
subsidiary
companies is not mandatory. AS-21 is mandatory if an
enterprise presents consolidated financial statements.
Under US GAAP, consolidation is mandatory
➢ Foreign currency transactions: Under Indian
GAAP(AS-11) Forex transactions are recorded at the
rate prevalent on the transaction date Exchange rate
differences arising on payments at closing exchange
rates are treated as Profit /loss in the income statement
.
Under US GAAP, translation adjustments are not
included in determining net income for the period but are
disclosed and accumulated in a separate component
24
Amity School of Business
Assets
=
Liabilities
+
Owners’
Equity
Capital
Stock
The
Accounting
Equation
A = L + OE
Retained
Earnings
Revenue
=
-Expenses
Net
Income