Ms.K.GOWRI, Associate Professor in Management Studies, Excel Business School
Ms.K.GOWRI, Associate Professor in Management Studies, Excel Business School
Ms.K.GOWRI, Associate Professor in Management Studies, Excel Business School
Need of Accounting
What he owns? What he owes? Whether he has earned a profit or Loss? What is the financial position of the company?
Balance sheet
Fundamental concepts
What is accounting? The language of business. A means to communicate financial information. A way to convey information about a business to users.
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Fundamental concepts
1.Cash basis = Cash Receipts and cash payments are recorded. 2.Accrual basis = Credit Transactions are recorded. 3.Mixed system = Both the combination of two.
Definition Of Accounting
(a) Accounting is the art (b) Of recording ,classifying and summarizing (c) In terms of money and (d) Interpreting the results
Definition of accounting
(a) Accounting is an art
(b) Of recording, classifying and summarizing
Definition of accounting
(a) Accounting
Objectives of accounting
1) Systematic recording of the business transactions 2) Calculation of profit or loss 3) Depiction of financial position 4) To make information available to various group and users at a particular time. 5) To know the solvency position
Advantages of Accounting
1) 2) 3) 4) 5) 6) 7) 8) 9) 10) Maintenance of business records. Preparation of financial statements Comparison of results. Decision-making Good evidence in courts Planning and control operations Provides information to interested groups Taxation problems Valuation of business Helps in planning for expansion
Accounting
1) Summarizing transactions. 2) Language of the business. 3) Decisions can be taken 4) Several sub-fields 5)Financial position can be ascertained
Government
Managers
Investor
Need different kinds of information for making decisions. These users can be divided into : 1.Internal Users; and 2.External Users.
1.Internal Users
These are the persons who manage the business, i.e. management at the top, middle, and lower levels. Their requirements of information are different because they make different types of decisions.
Internal Users
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External Users
All persons other than internal users come in the group of external users. External users can be divided into two groups:
in a business organization.
External Users
having direct interest.
Tax authorities,
regulatory agencies, customers,
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labour unions,
trade associations, stock exchanges,
investors, etc are indirectly interested in the companys financial strength, its ability to meet short-term and long-term obligations, its future earning power, etc for making various decisions.
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Management accounting
Financial accounting
Cost accounting
Financial Accounting
Accounting for revenues, expenses, assets and liabilities that is carried on the general offices on the business is known as Financial Accounting.
Primarily prepared for users external to the company.
Cost Accounting
It determines cost, profit and loss of each product. Detailed system of control for Material, Labour and overhead.
Management Accounting
Which is meant exclusively for managerial decision making. Management accounting is concerned with accounting information that is useful to management.
Primarily for internal purposes
Costing, budgeting, net present value, etc.
1) Permanent record 2) Control on expenses 3) For operational profit\loss 4) Show financial position 5) For forecasting
ASSETS
These are economic resources of an enterprise that can be usefully expressed in monetary terms. Assets are things of value used by the business in its operations.
Fixed Assets
Current Assets
Classification of Assets
Assets
Short term assets (current assets) Cash Tangible Long term assets (fixed assets)
Short-term investments
Receivables Inventory Accruals & defferrals, etc.
Intangible
Financial (Investment)
ASSETS
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ASSETS
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LIABILITIES
These are obligations or debts that the enterprise must pay in money or services at some time in the future. Long-term liabilities
Short-term liabilities
Classification of Liabilities
Liabilities
Current liabilities (Short-term liabilities) Accounts payable Loans payable Deferred taxes Accrued expenses Long-term debt Provisions Capitalised lease obligations Long-term liabilities
LIABILITIES
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LIABILITIES
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CAPITAL
Investment by the owner for use in the
firm is known as capital. Owners equity is
REVENUES
These are the amounts the business
EXPENSES
These are costs incurred by a business in the process of earning revenue. Generally, expenses are measured by the cost of assets consumed or services used during an accounting period.
The usual titles of expenses are: depreciation, rent, wages, salaries, interest, costs of heat, light and water, telephone, etc.
PURCHASES
Purchases are total amount of goods procured by a business on credit and for cash, for use or sale. In a trading concern, purchases are made of merchandise for resale with or without processing. In a manufacturing concern, raw materials are purchased, processed further into finished goods and then sold. Purchases may be cash purchase or credit purchase.
SALES
Sales are total revenues from goods
or services sold or provided to
STOCK
Stock (Inventory) is a measure of
something on hand goods, spares
STOCK: continue
In a trading concern, the stock on hand is the amount of goods which have not been sold on the date on which the balance sheet is prepared. This is also called closing stock.
STOCK
comprises raw
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In a manufacturing concern, closing stock materials, semi-finished goods and finished goods on hand on the closing date. Similarly, opening stock is the amount of stock at the beginning of the accounting year.
DEBTORS
Debtors are persons and/or other entities
CREDITORS
Creditors are persons and/or other entities who have to be paid by an enterprise an amount for providing the enterprise goods and services on credit.
The total amount standing to the favour of such persons and/or entities on the closing date, is shown in the Balance Sheet as Sundry Creditors on the liability side.
ACCOUNTING PRINCIPLES
Accounting principles can be subdivided into two categories:
ACCOUNTING PRINCIPLES
Accounting Concepts
The term concept is used to connote accounting postulates, that is necessary assumptions and conditions upon which accounting is based.
1.COST CONCEPT
Transactions are entered in the books of accounts at the amount actually involved. Suppose a company purchases a car for Rs.1,50,000/- the real value of which is Rs.2,00,000/-, the purchase will be recorded as Rs.1,50,000/- and not any more. This is one of the most important concept and it prevents arbitrary values being put on transactions.
In other words, a fact which can not be expressed in monetary terms, is not recorded in the books of accounts. Accounting doesnt tell how good the quality of employees skills are although this is important for the success of a business.
It is persuaded that the business will exists for a long time and transactions are recorded from this point of view. This concept implies that the business will continue to operate for the foreseeable future. This is why we use the historical cost concept and ignore the current market value in asset valuation. e.g.Fixed assets are shown at cost less accumulated depreciation.
8.Matching Concept.
All the revenue of a particular period Match of income will be matched with the cost of that period for determining the net profits of that period. Net income=Revenues-Expenses
9.Disclosure Concept
Full disclosure concept Since financial statements contain information which is used by different groups of people such as investors, lenders, supplier, government and others in taking various financial decisions regarding the company. Hence the principle of full disclosure requires that all material and relevant facts concerning financial performance of an enterprise must be fully and completely disclosed in the financial statements and their accompanying footnotes. This is to enable the users to make correct assessment about the profitability and financial soundness of the enterprise and help them to take informed decisions.
10.Materiality Concept
Financial statement should separately disclose significant items for they would influence decisions of users. Accounting does not serve a useful purpose if the effort of recording a transaction in a certain way is not worthwhile. In other words do not waste your time in the elaborate recording of trivial items. e.g. A stock of stationery worths $10 should be treated as an expense when it was bought.
11.Conservatism Concept
1) All possible losses must be considered 2) Anticipated profit ignored 3) Principle of prudence.
12.Consistency Concept
Transactions and valuation methods are treated the same way from year to year, or period to period. Users of accounts can, therefore, make more meaningful comparisons of financial performance from year to year. Consistency is a concept used when applying accounting methods to a business, the business must continue to use that particular method. The consistency concept: that the same principles for constructing accounts will be maintained from one set of accounts to the next. For an example if a company is charging depreciation using the straight line method, they must stick with the straight line method.
ACCOUNTING PRINCIPLES
Accounting Conventions
The term convention is used to signify
ACCOUNTING CONVENTIONS
1.Convention of full disclosure - Completion of proper statements 2.Convention of consistency -vertical, horizontal and dimensional. 3.Convention of Materiality -information about the material conversion 4.Convention of conservation - Policy of cause/playing safe
1.Convention of Disclosure
This principle implies that accounts must be honestly prepared and all material information must be disclosed therein. The contents of Balance Sheet and Profit and Loss Account are prescribed by law. These are designed to make disclosure of all material facts compulsory.
2.Convention of Consistency
In order to enable the management to draw important conclusions regarding the working of the company over a few years, it is essential that accounting practices and methods remain unchanged from one accounting period to another. The comparison of one accounting period with that of another is possible only when the convention of consistency is followed.
3.Convention of Materiality
It refers to the relative importance of an item or even. According to this convention only those events or items should be recorded which have a significant bearing and insignificant things should be ignored. This is because otherwise accounting will be unnecessarily over burden with minute details. There is no formula in making a distinction between material and immaterial events. It is a matter of judgment and it is left to the accountant for taking a decision. It should be noted that an item material for one concern may be immaterial for another. Similarly, an item material in one year may not be material in the next year.
4.Convention of Conservation
Financial statements are always drawn up on rather a conservative basis.
That is, showing a position better than what it is, not permitted. It is also not proper to show a position worse than what it is. In other words, secret reserves are not permitted.
CLASSIFICATION OF ACCOUNTS
Accounts in the names of persons are known as Personal Accounts
Accounts in the names of assets are known as Real Accounts Accounts in respect of expenses and incomes are known as Nominal Accounts
CLASSIFICATION OF ACCOUNTS
ACCOUNTS
PERSONAL ACCOUNTS
IMPERSONAL ACCOUNTS
REAL ACCOUNTS
NOMINAL ACCOUNTS
2.Real accounts
- Debit what comes in - Credit what goes out 3.Nominal accounts -Debit all expenses and losses Credit all incomes and gains
PERSONAL ACCOUNTS
Accounts in the name of persons are known as personal accounts.
Eg: Babu A/C, Babu & Co. A/C, Outstanding Salaries A/C, etc.
REAL ACCOUNTS
These are accounts of assets or properties. Assets may be tangible or intangible. Real accounts are impersonal which are tangible or intangible in nature.
Eg:- Cash a/c, Building a/c, etc are Real Accounts related to things which we can feel, see and touch. Goodwill a/c, Patent a/c, etc Real Accounts which are of intangible in nature.
NOMINAL ACCOUNTS
These accounts are impersonal, but invisible and intangible. Nominal accounts are related to those things which we can feel, but can not see and touch. All expenses and losses and all incomes and gains fall in this category.
Eg:- Salaries A/C, Rent A/C, Wages A/C, Interest Received A/C, Commission Received A/C, Discount A/C, etc.
Nominal Accounts
Debit all Expenses and Losses Credit all Incomes and Gains
Steps for finding the debit and credit aspects of a particular transaction
Find out the two accounts involved in the
transaction. Check whether it belongs to Personal, Real or Nominal account. Apply the debit and credit rules for the two accounts.
Exercise
Purchased a Building for Rs.20,000/-.
Paid Cash Rs.1,000/- to Satheesh.
Subsidiary Books
General Journal Special Journals Purchase Book Sales Book Purchase Return Book Sales Return Book Bills Receivable Book Bills Payable Book Cash Book Petty Cash Book
Journal
Journal is the prime or original book of entry which all transactions are recorded in the form entries. Journalising is an act of recording entering transactions in a Journal in the order date.
Date Particulars LF Debit Amount
in of or of
Credit Amount
Journal Entry
Jan 1, 1981 Prakash Started a business Rs. 15,000/Date 1981 Jan 1 Particulars Cash a/c Dr. To Prakashs Capital a/c (Being cash invetsed to business) LF Debit Amount 15,000 15,000 Credit Amount