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Accounting Basics

Accounting Basics. - Money Matters Club. WHY ACCOUNTING?. Accounting is an organized method for record-keeping and has been around almost as long as the trade and business industries have been . Learn how the financial statements can be used to assist business planning and decision making .

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Accounting Basics

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  1. Accounting Basics - Money Matters Club

  2. WHY ACCOUNTING? • Accounting is an organized method for record-keeping and has been around almost as long as the trade and business industries have been. • Learn how the financial statements can be used to assist business planning and decision making. • You will also learn financial analysis techniques.

  3. NEED & IMPORTANCE OF ACCOUNTING • What has happened to My investment? • What is the result of the business transactions? • What are the earnings and expenses? • How much amount is receivable from customers to whom goods have been sold on credit? • How much amount is payable to suppliers on account of credit purchases? • What are the nature and value of assets possessed by the business concern? • What are the nature and value of liabilities of the business concern?

  4. ACCOUNTING • “The process of identifying, measuring, classifying, summarising, concluding and communicating economic information to permit informed judgments and decision by users of the information”

  5. ACCOUNTING CONCEPTS Financial reporting involves significant professional judgments by accountants, the concepts therefore ensure that the users of financial information are not mislead by the adoption of accounting policies and practices that go against the spirit of the accountancy profession. Accounting concept refers to the basic assumptions and rules and principles which work as the basis of recording of business transactions and preparing accounts. Debits are a component of an accounting transaction that will increase assets and decrease liabilities and equity. Credits are a component of an accounting transaction that will increase liabilities and equity and decrease assets.

  6. BUSINESS ENTITY CONCEPT This concept assumes that, for accounting purposes, the business enterprise and its owners are two separate independent entities. Thus, the business and personal transactions of its owner are separate. For example, • when the owner invests money in the business • when the owner takes away from the business cash/goods for his/her personal use GOING CONCERN CONCEPT This concept states that a business firm will continue to carry on its activities for an indefinite period of time.

  7. COST CONCEPT This concept states that all assets are recorded in the books of accounts at their purchase price, which includes cost of acquisition, transportation and installation and not at its market price. For example: A machine was purchased by XYZ Limited for Rs.5,00,000 for manufacturing shoes. An amount of Rs.1,000 was spent on transporting the machine to the factory site. In addition, Rs.2,000 were spent on its installation. Suppose the market price of the same is now Rs 90,000. Further, it may be clarified that cost means original or acquisition cost only for new assets and for the used ones, cost means original cost less depreciation. Goodwill appears in the accounts only if the entity has purchased this intangible asset for a price, otherwise not.

  8. MONEY MEASUREMENT CONCEPT As per this concept, transactions which can be expressed in terms of money are recorded in the books of accounts. For example - sale of goods worth Rs.200000, purchase of raw materials Rs.100000, Rent Paid Rs.10000 etc. But the transactions which cannot be expressed in monetary terms are not recorded in the books of accounts. For example, sincerity, loyalty, honesty of employees It helps in recording business transactions uniformly. DUAL ASPECT CONCEPT This concept assumes that every transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides. For example - goods purchased for cash has two aspects which are (i) Giving of cash (ii) Receiving of goods. Thus, the duality concept is commonly expressed in terms of fundamental accounting equation : Assets = Liabilities + Capital

  9. Let us analyse some more business transactions in terms of their dual aspect : 1. Capital brought in by the owner of the business 2. Purchase of machinery by cheque 3. Goods sold for cash 4. Rent paid in cash to the landlord ACCOUNTING PERIOD CONCEPT All the transactions are recorded in the books of accounts on the assumption that profits on these transactions are to be ascertained for a specified period. This concept requires that a balance sheet and profit and loss account should be prepared at regular intervals. This is necessary for different purposes like, calculation of profit, ascertaining financial position, tax computation etc. As all the transactions are recorded in the books of accounts for a specified period of time. Hence, goods purchased and sold during the period, rent, salaries etc. paid for the period are accounted for and against that period only.

  10. MATCHING CONCEPT The matching concept states that the revenue and the expenses incurred to earn the revenues must belong to the same accounting period. So once the revenue is realised, the next step is to allocate it to the relevant accounting period. This can be done with the help of accrual concept. Let us study the following transactions of a business during the month of December, 2006 :- • Sale : cash Rs.2000 and credit Rs.1000 • Salaries Paid Rs.350 • Commission Paid Rs.150 • Rent received Rs.140, out of which Rs.40 received for the year 2007 • Rent paid Rs.200, out of which Rs.50 belong to the year 2005 • Goods purchased in the year for cash Rs.1500 and on credit Rs.500 Therefore, the matching concept implies that all revenues earned during an accounting year, whether received/not received during that year and all cost incurred, whether paid/not paid during the year should be taken into account while ascertaining profit or loss for that year.

  11. REALISATION CONCEPT This concept states that revenue from any business transaction should be included in the accounting records only when it is realised. The term realisation means creation of legal right to receive money. Selling goods is realisation, receiving order is not. Let us study the following examples : • N.P. Jeweller received an order to supply gold ornaments worth Rs.5,00,000. They supplied ornaments worth Rs.2,00,000 up to the year ending 31st December 2005 and rest of the ornaments were supplied in January 2006. • The revenue for the year 2005 for N.P. Jeweller is Rs.2,00,000. Mere getting an order is not considered as revenue until the goods have been delivered.

  12. INCOME STATEMENT Meaning: The income statement summarizes a financial "movie" of operational results over a period of time (such as for the year ending December 31). It shows performance -- the company's revenues minus expenses equal net income.

  13. The income statement is divided into two parts: Operating items section Non-operating items section.The operating items section discloses information about revenues and expenses that are a direct result of the regular business operations.The non-operating items section discloses revenue and expense information about activities that are not tied directly to a company's regular operations.

  14. ITEMS • Net sales • Cost of goods • Direct expenses • Depreciation • Operating expenses • Interest • Income taxes • Extraordinary items

  15. BALANCE SHEET Meaning: The sheet of a firm represents the financial history of a firm at one point in time—normally the end of a company’s fiscal quarter or year. The balance sheet must balance. Asset values must equal the sum ofliabilities and owner’s interest (or equity). Assets = Liabilities + Equity

  16. ITEMS ON LIABILITIES SIDE • Current Liabilities& provisions Accounts payable Taxes payable Accrued expenses (interest payable, rent payable) unearned revenues • Long term Liabilities Bank loan Debentures/Bonds Shareholder’s Equity(Reserves& Surplus, Paid-up capital)

  17. Items on Assets Side: • Cash And Bank Balances • Current Assets Accounts receivable Inventories Pre- paid expenses • Investments • Fixed Assets • Miscellaneous expenditure

  18. DEFERRED REVENUE EXPENDITURE • Deferred revenue expenditure is that expenditure for which payment has been made or a liability incurred but which is carried forward on the presumption that it will be of benefit over a subsequent period or periods. • In short it refers to that expenditure that is for time being deferred from being charge against income. • Eg. Advertisement cost

  19. DIFFERENCE BETWEEN EXPENSE AND EXPENDITURE?

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