2. 2
Accounting Process
Accounting process starts with transactions that are recorded usually in waste book.
Then from there the transactions are recorded in the Journal, which is classified on the
basis of similarity of transactions usually called subsidiary journals like; Purchases Day
Book, Sales Day Book, Purchases Returns Book, Sales Returns Book, Bills Receivable
Book, Bills Payable Book, Cash Book further taking the forms of simple cash book, double
column cash book, triple column cash book, petty cash book, multi column cash book,
etc. and Journal proper.
The next stage is, when entries passed in journal are further posted in Ledger. Ledger is
set of accounts: real, personal as well as nominal accounts.
After posting all the journal entries to ledger, ledger accounts are balanced and from all
the balances a summary statement known as Trial Balance is prepared to check the
arithmetical accuracy of records.
Trial Balance is used to prepare the Final Accounts. From Trial Balance all the nominal
accounts are taken to prepare Manufacturing account, Trading account and Profit and
Loss account respectively as the case may be, and all the real and personal accounts
are taken to prepare the Balance sheet.
Closing Balance Sheet of one accounting year becomes the Opening Balance Sheet of
the next Accounting year. Then, next year transactions enter the accounting process and
this cycle continues, making it Accounting Cycle.
Final accounts i.e. Trading Account, Profit and Loss Account and Balance Sheet are
further analyzed with the help of accounting tools and techniques and then conclusions
are drawn and then communicated to the interested parties for decision making.
Steps in Accounting Process
1. Transactions
2. Journal
3. Ledger
3. 3
4. Trial Balance
5. Trading Account
6. Profit and Loss Account
7. Balance Sheet
Generally Accepted Accounting Principles
(GAAP)
Generally Accepted Accounting Principles refer to the rules or guidelines adopted for
recording and reporting of business transactions in order to bring uniformity in the
preparation and presentation of financial statements and are also known as concepts,
conventions, principles, postulates, conventions modifying principles, assumptions, etc.
Basic Accounting Concepts
The basic accounting concepts are referred to as the fundamental ideas or basic
assumptions underlying the theory and practice of financial accounting.
Business Entity concept
This concept assumes that business has distinct and separate entity from its owners. For
the purpose of accounting, business and its owners are to be treated as two separate
entities. Business assets and personal assets of the proprietor and business liabilities
and personal liabilities of the proprietor are to be kept separate. Only business
transactions should be recorded in accounting books. Any personal transaction is to be
ignored.
Money Measurement concept
The concept of money measurement states that only those transactions and happenings
in an organization, which can be expressed in terms of money are to be recorded in the
book of accounts. Also, the records of the transactions are to be kept not in the physical
units but in the monetary units. Any transaction not expressed in terms of money should
4. 4
not be recorded e.g. Goods purchased can be recorded but loyalty of workers towards
the business cannot be recorded.
Going Concern concept
The concept of going concern assumes that a business firm would continue to carry out
its operations indefinitely (for a fairly long period of time) and would not come to an end
in the near future. So, difference must be made in fixed assets and current assets and
capital items and revenue items.
Accounting Period concept
Accounting period refers to the period of time at the end of which the financial
statements of an enterprise are prepared to know the amount of profits or losses during
that period and to know its financial position i.e. position of its assets and liabilities, at
the end of that period. These financial statements are prepared in the form of Income
statement and Position statement i.e. Statement of Profit and Loss and Balance Sheet.
Generally a period of twelve months is considered an accounting period which may be
calendar year or Government’s financial year commencing with first day of April and
ending with the last day of March next or any other such period.
Cost Concept
The cost concept requires that all assets are recorded in the books of accounts at their
cost price, which includes cost of acquisition, transportation, installation and making the
asset ready for the use e.g.an asset purchased for ` 30,000 on which carriage ` 500 has
been paid should be recorded at ` 30,500.
Dual Aspect
Dual aspect or Duality concept states that every transaction has a dual or twofold effect
on various accounts and should therefore be recorded at two places e.g. when goods are
purchased for cash ,goods are increasing stock and cash is decreasing ,both of which
must be recorded and should be same in books. The duality principle is commonly
expressed in terms of fundamental accounting equation, which is:
5. 5
Capital + Liabilities = Assets
Balance sheet is based on this equation.
Revenue Recognition
Revenue is the gross receipts of cash arising from the sale of goods and services by an
enterprise and interest, royalties and dividends etc. According to this concept of revenue
recognition, the revenue for a business transaction should be considered realized when
legal right to receive it arises e.g. When goods are sold ,revenue should be recorded
though the cash is received after a few days or a bill of exchange is received that will
mature after two months.
Matching concept
According to the matching concept expenses incurred in an accounting period should be
matched with revenues during that period, in order to calculate the results of business
operations in terms of Profit or Loss. Excess of Revenues over Expenses represent Profit
and vice-versa. It follows from this that the revenue and expenses incurred to earn this
revenue must belong to the same accounting period.
Full Disclosure concept
This concept requires that all material and relevant facts concerning financial
performance of an enterprise that can affect the decision making by the users of
accounting information must be fully and completely disclosed in the financial
statements. If there is need, some information can be given in the form of footnotes.
Consistency concept
This concept states that accounting policies and practices followed by enterprises should
be uniform and consistent over the period of time so that results are comparable. Results
are comparable when the same accounting principles are consistently being applied by
different enterprises for the period under comparison, or the same firm for a number of
periods. If however there is a change in the methods or policies, it must be mentioned.
6. 6
Conservatism concept
This concept requires the business to play safe. It means that business transactions
should be recorded in such a manner that profits are not overstated. All anticipated
losses should be accounted for but all unrealised gains should be ignored. It means that
profits are to be recorded only when actually become due, but provisions for any
possible losses must be made.
Materiality concept
This concept states that accounting should focus on material facts means important from
effect on decision making point of view. If the item is likely to influence the decision of a
reasonably prudent investor or creditor, it should be regarded as material, and shown in
the financial statements i.e. Income Statement as well as Balance Sheet.
Objectivity concept
According to this concept, accounting transactions should be recorded in the manner so
that it is free from the bias of accountants and others. It should not be affected by the
prejudices of the persons using this information.
Systems of Accounting
There are two systems of recording business transactions, double entry system and
single entry system. Under double entry system every transaction has two-fold effects
where as single entry system is known as incomplete records.
Basis of Accounting
The two broad approach of accounting are cash basis and accrual basis. Under cash
basis transactions are recorded only when cash are received or paid. Whereas under
accrual basis, revenues or costs are recognizes when they occur rather than when they
are paid.
7. 7
Accounting Standards
Accounting standards are written statements of uniform accounting rules and guidelines
in practice for preparing the uniform and consistent financial statements. These
standards cannot override the provisions of applicable laws, customs, usages and
business environment in the country. In India, preparing Accounting Standards is the
responsibility of Institute of Chartered Accountants of India (ICAI).
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