1. From The Desk of Nikhil B Lecturer of Marchad Institute of Management
Introduction of Accounting
Meaning:
Accounting is a language of business
Definition of Accounting:
According to AICPA (American Institute of Certified Public
Accountancy) “ Accounting is a art of recording, classifying, summarising a
significant manner and interms of money, transactions and events atleast in a
year, of a financial character and interpreting the result there of.”
According to AAA (American Accounting Association) “the
accounting is the process of identifying measuring and communicating the
economic information to permit informed judgement and decision by the user
of accounts.”
Objectives of Accounting:
Systematic Recording of the Transaction
Basic object of accounting is to systematic record financial
aspects of business transaction that is journal -ledger/subsidiary books-
trial balance and financial statements.
To Know the trading result, financial result
Accountant prepares the trading and profit and loss accounts to
know the result of an accounts of business operation for the particular
period of time, the profit and loss of accounting helps the management
and different stake holders (Share Holders) in taking rational actions.
To know the financial position of the business
Businessman is not only interested in knowing the result of the
business interms of profits or loss for a particular period. But also to
know that what he owes (liability) to the outsiders and what he owns
(assets) on a certain date. To know this accountant prepares a financial
position statement popularly known as balance sheet.
To provide financial information to the user of accountancy
2. From The Desk of Nikhil B Lecturer of Marchad Institute of Management
Accountancy as a language of business communicates the
financial results of an enterprise to various stake holders by the means
of financial decision making.
To know the solvency position
To know that what he is owes to the outsiders and what he owns
for a particular period of time.
Essential Aspects/ Characteristics of Accounting
1. Recording: This is the basic function of accounting all business
transactions of a financial character as evidence by some documents
such as sales bill, voucher, salary slips etc., are recorded in the books
of accounts. Recording is done in a book called journal.
2. Classifying: Classification is concerned with a systematic analysis of
the recorded data, with a view to group of transactions are entries of
one nature at one place so that to put information in compact and
useable form. The book containing classified information is called
ledger.
3. Summarising: Its concerned with the preparation and presentation of
the classified data in a manner useful to the internal as well as the
external user of financial statements. This process leads to the
preparation following financial statements.
a. Trial Balance
b. Trading and Profit and loss account
c. Balance Sheet
d. Cash flow Statement.
4. Analysing: The term analysis means methodical classification of
the data even in the financial statement for ex: all items relating to
fixed assets are put at one place by all items relating to current assets
are put at another place.
5. Interpreting: This is the final function of accounting. Its concerned
with explaining the meaning and significance of the releationship as
established by the analysis of accounting data.
3. From The Desk of Nikhil B Lecturer of Marchad Institute of Management
6. Communating: This is concerned with the transmision of
summerised, analysied and interpreated information to the end users to
enable them to make rational decission.
Who are the users of accounting?
Users of accounts are classified into two types:
Internal Users
Managers
Accountants
Clerks
External Users
Investors
Lenders
Govt and Public
Book Keeping
Book keeping is an activity concerned with the recording of
financial data relating to business operation in a significant and orderly
manner.
In other words book keeping is defiined as “ an art as well as
science of recording all the financial transaction and dealing
systematically in a set of books”.
Objectives of book-keeping:
To have the complete recording of transaction.
For ascertain of financial results of business.
Difference Between Book-Keeping and Accounting:
Sl No Book Keeping Accounting
1 It is a process concerned with
recording of transaction
It is a process with summarising of
the recorded transaction
2 It constitute as basee for
accounting
It is considered as the language of
business
3 Financial statement donot
form a part of this process
Financial statement are prepared in
this process
4 Managerial decission cannot Managerial decission can be taken
4. From The Desk of Nikhil B Lecturer of Marchad Institute of Management
be taken with the help of
these records
on the bases of these records.
5 There is no subfields of
bookkeeping
There are severalsubfields
6 Financial position of a
business cannot be
ascertained
Financial position of a business
can be ascertained
Accountancy:
“It is the application of book keeping and accounting principles,
concepts and conventions, accounting standards and rules of debit and credit
in real practice”.
Subfields of accounting or Branches of Accounting:
1. Financial Accounting
2. Cost Accounting
3. Management Accounting
4. Inflation Accounting
5. Human Resources Accounting
6. Social Responsibility Accounting
5. From The Desk of Nikhil B Lecturer of Marchad Institute of Management
Functions of Accounting:
1. Recording
2. Classifying
3. Measuring
4. Forecasting
5. Decision Making
6. Comparison & Evaluation
7. Controlling
8. Communicating
Types or Classification of Accounts
Personal Account
Natural Person
Artificial Person
Representative Person
Impersonal Account
Real Account
Tangible Assets
Intangible Assets
Nominal Account
Expenses and Losses
Income and Gains
Personal Account
These are the accounts relating to the persons, firms, companies,
institutions etc., with whom a business man deals. This account is further
classified into three catefories.
1. Natural Persons:
It relates to the transaction of human beings like Ram,
Robert, Rahim Etc.,
2. Artificial Persons:
These relates to institutions or corporate bodiesetc., they
are recognised as a person in the eye of law Ex: Companies, Banks,
Governments Etc.,
6. From The Desk of Nikhil B Lecturer of Marchad Institute of Management
3. Representative Person:
These are not in the name of any person or organisation but
are repersentate as personal account. Ex: Creditors, Debitors, Outstanding
Wages, Outstanding salaries etc.,
Real Account
These accounts are applicable only for assets Ex: Land, Building, Plant
and Machinery, Stock, Furniture, Cash Etc., Real account may be the
following types
Tangible Assets:
These are those assets which have it physical resistance
which can be seen and touched and felt Ex: Land and Building, Furniture,
Plant and Machinery, Cash etc.,
Intangible Assets:
These assets are those which do not have physical
existence and which cannot be seen touched and felt. Ex: Good Will, Copy -
Writes, and Patents etc.,
Real Account Rule:
Debit: Debit what comes in
Credit: Credit what goes out
Nominal Account:
Nominal account which relates to expenses, loses, income andgains.
Nominal Account Rule:
Debit: Debit all expenses and losses.
Credit: Credit all income and gains.
Account Principles
Meaning:
Accounting principle are rules or doctrines which are adopted by
accountant universally while recording the day to day business transaction.
Accounting principles are a body of ddoctrines commonly associated with
the theory and procedure of accounting serving as an explation of current
practices and as a guide for selection of conventions or procedures where
alternative exits.
7. From The Desk of Nikhil B Lecturer of Marchad Institute of Management
Accounting Principles may be classified into two types:
1. Accounting Concepts
2. Accounting Conventions
Accounting Concepts:
Accounting concepts defined as “the assumption on the basis of which
financial statement of a business entity are pre-paid “. The word concept
means an idea or assumption or notion which has universal application
concept are those basic assumption and condition which from the basic upon
the accountancy laid.
Important Accounting Concepts:
1. Business Entity Concept
2. Periodicity Concept
3. Money Measurement Concept
4. Cost Concept
5. Matching Concept
6. Dual Aspect Concept
7. Going Concern Concept
8. Accrual Concept
9. Realisation Concept
Accounting Conventions:
Accounting conventions are those customs or traditions or guide lines
that have been followed by an accountant for a long time while preparing the
financial statement.
These conventions are derived y usage and practice the following are
important conventions.
Important Accounting Convention
1. Consistency
2. Conservation
3. Materiality
4. Disclosure
8. From The Desk of Nikhil B Lecturer of Marchad Institute of Management
Meaning of Certain Items
Assets: The term asset is derived from the French word „ASSEZ‟ means
enough
In general assets means sufficient economic resources owned by the
business activities and with the intentions of earning profits.
In other words assets refer to the properties owned by the business
entity with the intention of earning profits.
In general assets refer to the resources controlled by the business entity
with the intention of earning revenues.
Types of Assets
Fixed Assets: Fixed assets are those assets which are acquired by the
business entity for the purpose of used and not for sale.
In other words fixed assets are the properties acquired not meant for
sale. These fixed assets are classified into two types i.e. Movable and
Immovable.
Tangible Assets Intangible Asset
Fixed Assets Current Assets
Moveable Assets
Immoveable Assets
9. From The Desk of Nikhil B Lecturer of Marchad Institute of Management
Current Assets: Current assets are those assets which are acquired with the
intention of resale.
In other words current assets are those assets which are current
realisable or converted into cash assets within a period of one year or less
than one year. These assets may be classified into two types i.e. movable and
Immovable.
Liabilities: The term liability derived from frenches word „lier‟ which means
to bind.
The term liability refers to the debt owned (given or own) by the
business entity to the outsiders.
Types of Liabilities
Long term liability
Medium term liability
Current or short term liability.
Capital or Equity: The amount of money or money worth invested or
introduced by the owner towards his business at the time of commensment is
called capacity.
In other words capital is the difference between the assets and
liabilities.
Capital = Assets - Liabilities
Expenses: Expenses are the cost incurred inconection with the earning of
revenue.
In other words expenses means the amount spent for obtaining
immediate benefit in an accounting period.
Losses: Losses refers to any expenditure in written for which no benefit is
received.
Income: It is the earnings of the business from the sale of goods or by
rendering services to customers during an accounting period.
10. From The Desk of Nikhil B Lecturer of Marchad Institute of Management
Gain: It refers to received which is not generated through regular business
activity.
Debt: The term debt is derived from Latin Word „debere‟ which means what
is due.
So literally the term debt means the amount own (due) by or due from
an account for the benefit receive by that account.
Credit: The credit is derived from Latin word “credege” which means trust
or belief so literally the term credit means an amount owed to an account for
the benefit given by that account.
Accounting Cycle
The term accounting cycle refers to the process of flow of accounting
data in the course of accounting during the period of accounting.
In other words the accounting cycle is a complete sequence of
accounting procedure which are repeated in the same manner or order during
each accounting procedure which are repeated in the same manner or order
during each accounting period. Accounting cycle is being with recording of
business transaction in an original entry i.e. journal and ends with preparation
of financial statement.
Cycle:
Journal
Ledger
Trial
Balance
Trading &
Profit &Loss
A/C
Balance
Sheet
11. From The Desk of Nikhil B Lecturer of Marchad Institute of Management
Journal: The word journal is derived from French word „Jour‟ which means
a day.
A simple meaning of journal is a day book or a daily record. It is the
book of original entry in which transactions are recorded chronologically
from the source documents.
In the journal each transaction is classified into debit aspect and credit
aspect and both debit and credit aspect of each transaction is recorded
together in one entry along with a brief explanation for the entry called
narration.
Therefore the journal is also known as book of original entry or prime
entry.
Journalising: Journalising is the process of entering the business transaction
affecting both aspect of double entry in a book called journalising.
Narration: Narration is a sharp description of the nature of transaction
explaining the reason for debting a particular account and crediting another
account.
Note: The journal entry without narration is not a complete entry.
Objectives of Journal:
To record daily transaction of business.
To have a complete record of all transaction.
To know the complete picture of transaction.
It helps in cross checking of entries in the ledger.
It is useful for quick references.
It is a base for posting in ledger.