Definition Of Accounting
According to the American Institute Of
Certified Public Accountants “ 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 financial character
and interpreting the result thereof.”
The above definition also highlights the
steps in the accounting process.
Accounting Concepts,
Conventions, Bases & Policies
Concepts vs Conventions
Concepts are the basic ideas, the theories
on how and why certain categories of
transactions should be treated in a
particular manner.
Once the theories have been established
and tested and proved to be acceptable,
the task of the Conventions is to set out
the limit of their applications.
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Accounting Concepts
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1. Business Entity Concept – business is a
separate entity.
2. Money Measurement Concept – money
common denominator of measurement.
3. Going Concern Concept – perpetual
succession.
4. Accounting Period Concept – predetermined periodicity generally an year.
5. Cost Concept – an asset’s cost is the
basis of all subsequent accounting.
Accounting Concepts
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6. Realisation Concept – revenue should
be recognized “when it is earned”.
7. Matching Concept – associating the
cause and effect relationship of revenues
and expenses.
8. Accrual Concept – similar to matching,
period should be decided on the basis of
accrual.
9. Dual Aspect Concept – 2 aspects must
be examined – the giving and the
receiving.
Accounting Conventions
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1. Consistency – method once adopted should be
followed.
2. Disclosure – all relevant facts concerning financial
position must be communicated to users.
3. Materiality – concerned with significant information.
4. Objectivity – unbiased and subject to verification by
external expert.
5. Stable Monetary Unit – the Indian Rupee.
6. Conservatism or Prudence – when in doubt, choose
the solution that is least likely to overstate net assets
and net income for the current period.
Accounting Bases and Policies
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Accounting bases are the methods which
have been deployed for applying
fundamental accounting concepts to
financial transactions and items. Eg.
Depreciation and Inventory.
Accounting policies are the specific
accounting bases selected and
consistently followed by a business
enterprise.
Some Important Terminology Of
Accounting
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Assets : The economic resources which
are owned by a business and are
expected to benefit future operations.
Assets may have definite physical form,
such as buildings, machinery or
merchandise.
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Equity : this is the claim against the
assets owned by the business. Equities
or claim against the assets indicate the
sources from which the assets of a
business were obtained.
Continued…..
Liabilities : liabilities are the debts owed by a
business to out side parties ( called creditors ). This
includes amount owed to suppliers for goods or
services purchased amount borrowed from banks
or other lenders, salaries and taxes due but not paid.
Net worth : the term net worth, proprietorship,
owner’s investment, or capital– all have the same
meaning in accounting : namely, the owner’s equity
or interest in the assets of the business. It is the
difference between what the business owns and
what it owes.
Continued…..
Revenue : It may be defined as the inflow of cash assets
resulting from the sale of goods and services in the
ordinary course of business. For eg., interest received on
investments, commission received, rent received etc.
Revenue cause an increase in capital.
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Expenses : it may be defined as the cost of the goods
and services used up in the process of obtaining revenue.
Example include - the cost of goods sold, wages and
salaries of employees, charges for news paper, advertising
etc.
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BALANCE SHEET
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Introduction :
A balance sheet is a classified
summary of the balances remaining open in a set
of books after the preparation of the trading and
profit & loss account. It shows the financial
position of a business at a particular moment in
time. It is a snapshot of the financial condition of
the business and hence it is also known as the
‘mirror’ of the business.
The Accounting Equation
ASSETS= LIABILITIES +CAPITAL
Or
CAPITAL = ASSETS - LIABILITIES
Features of a balance sheet
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Statement of a financial position.
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Prepared at a given date.
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In balance sheet total assets equal total
liabilities.
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Assets are listed on the right side of the balance
sheet and liabilities are on the left side.
OBJECTIVE OF PREPARING A
BALANCE SHEET
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To disclose the financial condition of a
business.
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Examine the worth of a company and the
profitability of the company.
PRINCIPLES TO BE OBSERVED IN
PREPARING A BALANCE SHEET
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The first principle to be observed in the
preparation of a balance sheet is that the balance
of similar significance should be grouped
together, and that the balances of dissimilar
significance should be stated under separate
heads.
Eg: plants & machinery, building, sundry debtors, land &
building should be grouped in a same group.
Continued…..
The second principle of accounting relates to
“marshalling” . The assets and liability
should be arranged in a specific order. This
arrangement is called a marshalling.
There are three methods for marshalling.
Continued…..
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The first method is to arrange the assets
according to their availability to pay off the
liabilities i.e those assets which are
represented by cash or easily convertible
into cash would take the first place while
those which are not immediately available
for the payment of the liability will take
the second place.
Continued…..
The second method of arranging the item is
almost the reverse of the first method.
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Immovable property should be taken at
first place.
Moveable assets should be taken on
second place.
Liquid assets should be taken on third
place .
Continued…..
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The third method is a mixture of the first
and second methods, assets are arranged
in the first method and the liability in the
second method.
Profit & Loss
Balance Sheet
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It is an account.
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It is prepared to know
the final result of the
business.
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It include only
revenue receipts and
revenue expenses.
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It is an statement not
an account.
It shows the financial
position of the
business.
It includes assets and
liability.
Profit & loss
Balance sheet
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It is prepared for the
particular period.
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It is prepared on the
particular date.
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The left side of the
account is known as
debit side and the
right side is known as
the credit side.
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Left side is known as
the liability side and
right side is known as
the assets side.