DEFINITION AND SCOPE ACCOUNTING STANDARDS. ACCOUNTING IS AN ART OF RECORDING CLASSIFYING AND SUMMARIZING TRANSACTIONS IN A SYSTEMATIC MANNER AND IN TERMS OF MONEY TRANSACTIONS AND EVENTS WHICH ARE IN PART AT LEAST OF FINANCIAL CHARACTER AND INTERPRETING THE RESULTS THEREOF.
Accounting • ACCOUNTING SHOULD BE DONE IN SUCH A MANNER THAT THE READER (INVESTOR,CREDITOR, FINANCIER or BANK) IS ABLE TO UNDERSTAND FOR THE PURPOSES FOR WHICH ACCOUNTS ARE BEING READ & INTERPRETED. i.e THE RESULTs OF BUSINESS OPERATIONS, FINANCIALS & AND OTHER RELEVANT ASPECTS
DIFFERENCE BETWEEN ACCOUNTANY AND BOOKKEEPING. • BOOK KEEKPING IS MERELY RECORDING THE BUSINESS TRANSACTIONS IN BOOKS AND LEDGERS . • ACCOUNTANCY IS WIDER CONCEPT: COMPILATION OF ACCOUNTS IN SUCH A WAY THAT ONE IS IN A POSITION TO UNDERSTAND STATE OF AFFAIRS OF BUSINESS. • USERS OF FINANCIAL STATEMENTS ARE INCOME TAX DEPT., S.T DEPARMENT SHAREHOLDERS, INVESTORS,BANKS AND FIS AND SO ON APART FROMMANAGEMENT OF ENTITY FOR MAKING POLICY DECISIONS. • IT IS IN THE INTEREST OF ALL THAT FINANCIAL STATEMENTS REFLECT TRUE AND FAIR VIEW OF STATE OF AFFIAIRS OF A BUSINESS ENTITY.
ACCOUNTANCY • ACCOUNTANCY INVOLVES: • SYSTEAMATIC(including regulatory compliance) CLASSIFICATION OF BUSINESS TRANSACTIONS IN TERMS OF MONEY AND FINANCIAL CHARACTER. • SUMMARIZING : TRIAL BALANACE AND B/S • INTERPRETING THE FINANCIAL TRANSACTIONS.
PURPOSE OF ACCOUNTANCY • TO KEEP A SYSTEMATIC RECORD • TO ASCERTAIN THE RESULTS OF OPERATIONS • TO ASCERTAIN FINANCIAL POSITION OF BUSINESS. • TO FACILITATE RATIONAL DECISION MAKING • TO RAISE FINANCE. • TO SATISFY REQUIREMENT OF LAW AND USEFUL IN MANY RESPECTS.
Concepts of Accountancy • Concepts are basic rules associated with terminology in Accountancy. They are called Accounting concepts. • 1. Business Entity Concept : THIS CONCEPT SEPARATES THE ENTITY OF PROPRIETOR FROM THE BUSINESS TRANSACTION. • CAPITAL CONTRIBUTED BY THE OWNER IS LIABILITY FOR BUSINESS BECAUSE BUSINESS IS DIFFERENT FROM OWNER.
Concepts of Accountancy : Business Entity…… • ANY MONEY WITHDRAWN BY PROP. IS DRAWINGS. • PROFIT IS LIABILITY AND LOSS IS AN ASSET. • ALL ENTRIES ARE KEPT DISTINCT FROM THE POINT OF VIEW OF BUSINESS AND NOT FROM OWNER. • AN ENTERPRISE IS ECONOMIC UNIT SEPARATE FROM OWNER.
Money Measurement • EVERY TRANSACTION IS MEASURED IN TERMS OF MONEY. VIZ PRODUCTION/ SALES/ WAGES ETC ALL CONVERTED TO MONEY. • INFLATION OR DEFLALTION NOT INCLUDED IN VALUE OF ANY ASSET. • Health of the owner or Director is not taken into accounts even though it may have significant impact.
COST CONCEPT • COST CONCEPT: BUSINESS TRANSACTIONS ARE RECORDED IN BOOKS AT COST PRICE. • FIXED ASSETS ARE KEPT AT COST OF PURCHASE AND NOT AT THEIR MARKET PRICE. • EVERY TRANSACTION IS RECORDED WITH PRESENT VALUE AND NOT ANY FUTURE VALUE. • UNREALIZED GAINS ARE IGNORED. • COST OF AN ASSET THAT HAS LONG BUT LIMITED LIFE IS SYSTAMATICALLY REDUCED BY A PROCESS CALLED DEPRECIATION. BUT SUCH DEPRECIATION HAS NO RELATION TO MARKET VALUE OF ASSET.
Historical Records concept. • This concept accepts that transaction that have taken place are recorded. • The business transaction are recorded as & when they take place. Futuristic or transaction which are yet to take place are not considered. Future transaction can hardly be measured or identified.
REALISATION CONCEPT. • THIS CONCEPT TELLS US WHEN REVENUE IS TREATED AS REALISED OR EARNED. IT IS TREATED AS REALIZED ON THE DATE WHEN PROPERTY IN GOODS PASSES TO BUYER AND HE BECOMES LEGALLY LIABLE TO PAY. • NO FUTURE INCOME IS CONSIDERED. • GOODS SOLD ON APPROVAL WILL BE INCLUDED IN SALES BUT ON COST ONLY.
GOING CONCERN CONCEPT • BUSINESS IS A GOING CONCERN AND TRANSACTIONS ARE RECORDED ACCORDINGLY. • IF AN EXPENSE IS INCURRED AND UTILITY IS CONSUMED DURING THE YEAR, THEN IT IS TREATED AS AN EXPENSE OTHERWISE IT IS RECORDED AS AN ASSET. • RESERVES AND PROVISIONS ARE CREATED FOR ANY FUTURE LIABILITY. • DEFERRED REVENUE EXPENDITURE IS WRITTEN OFF OVER A NUMBER OF YEARS. • WHY LOSS IS SHOWN UNDER ASSETS SIDE ?
DUAL ASPECT CONCEPT • EVERY TRANSACTION HAS DOUBLE EFFECT. • ACCOUNTING EQUATION: ASSETS= CAP+ LIABILITY or Capital =Assets- Liability. • This has in turn the background the double –entry system of accounting.
ACCOUNTING PERIOD CONCEPT. • BUSINESS WILL RUN THROUGH LONG PERIOD. HENCE ACCOUNTS OF EACH PERIOD IS RECORDED. • RESULTS OF OPERATIONS CAN BE KNOWN PRECISELY ONLY AFTER BUSINESS CEASES TO OPERATE AND ENTIRE ASSETS ARE SOLD AND ENTIRE LIABILITIES PAID. • BUT ONE IS INTERESTED IN KNOWING PERIODICALY OPERATING RESULTS OF BUSINESS SAY YEARLY OR HALF YEARLY OR QUARTERLY. • HENCE ALL THE EXPENSES OR INCOME DURING THIS ACCOUNTING PERIOD HAS TO BE TAKEN INTO CONSIDERATION IRRESPECTIVE OF WHETHER THEY ARE REALISED IN CASH OR PAID IN CASH.
ACCOUNTING FOR FULL DISCLOSURE • DISCLOSURE OF MATERIAL FACTS.( MATERIAL AND IMMATERIAL FACT IS A MATTER OF JUDGEMENT) • CONTINGENT LIABILITY • MARKET VALUE OF INVESEMENTS. • CHANGE IN METHOD OF DEPRECIATION/VALUATION OF GOODS ETC.
CONVENTION OR PRINCIPLES OF CONSERVATISM • ALL POSSIBLE LOSSES TO BE TAKEN INTO CONSIDERATION AND ANTICIPATED PROFITS TO BE IGNORED. • CREATION OF PROVISION FOR DOUBTFUL DEBTS. • VALUE OF STOCK • CONVENTION OF CONSISTENCY: METHOD OF DEPRECIATION.
Accrual & Cash Basis • Before the right to receive arises. • After the right to receive is created. -Revenue is recognized as it is earned.-Cots are matched against revenues. Any costs that are matched against are on the basis of relevant time period. Materiality : It does not mean to ignore small items.
DOUBLE ENTRY SYSTEM • SCIENTIFIC SYSTEM: • EVERY TRANSACTION HAS TWO ASPECTS. • CRUX OF ACCOUNTANCY IS TO FIND OUT WHICH TWO ACCOUNTS ARE EFFECTED AND WHICH IS TO BE DEBITED AND WHICH IS TO BE CREDITED.
PERSONAL & IMPERSONAL ACCOUNTS • PERSONAL ACCOUNTS: NATURAL/REPRESENTATIVE & ARTIFICAL • IMPERSONAL : REAL ACCOUNTS TANGIBLE & INTANGIBLE NOMINAL ACCOUNTS
Personal Account • 1.Natural Person : Proprietor’s A/c , supplier’s a/c, Mohan’s A/c, Rajesh’s A/c etc. • 2. Artificial person A/c : These include accounts of Limited Company, Firm , Club, Bank or Insurance Company.3. Representative personal account: Salary outstanding A/c may pertain to a number of employees.
Impersonal Account : • Tangible Real Accounts : These assets can be touched or felt physically. i.e Land building, furniture , Cash (But not the Bank Account). • Intangible Real Accounts : These assets can not be touched but however measurable in monetary terms . Goodwill, trademark, patent rights.
Nominal Accounts • These are the items of expenses or income. • The entries are generally associated with personal or real accounts. • For e.g : When Rent is paid Cash (real) goes out . When Debtor( Personal) pays Cash(real) for the amount of goods sold.
Match the following • 1.Rent outstanding a. Natural Personal A/c • 2. Bank of India b. Nominal A/c • 3. Salaries c. Artificial personal A/c. • 4. Salaries d. Representative Personal A/c. Outstanding A/c • 5. Ram e. Representative Personal A/c.(In exam. Q may be limited to Personal, Real or Nominal categories)
Answers to Match the following 1.Rent outstanding d. Representative Personal 2. Bank of India c. Artificial Personal A/c. 3. Salaries b. Nominal A/c. 4. Salaries e. Artificial Personal A/c Outstanding A/c 5. Ram a. A/c Natural Personal A/c
Answers A RAMESH 1 PERSONAL B RENT 2 NOMINAL C COMPUTER 3. REAL D LAND 4 REAL E DISCOUNT 5. NOMINAL
Golden Rules 1.DEBIT (Dr.) the Receiver and CREDIT(Cr.) the Giver. 2. DEBIT (Dr.) the What come in and CREDIT(Cr.) What goes out. 3. DEBIT (Dr.) the Expenses & Losses. CREDIT(Cr.) the Income & Gains.
Examples • You would observe while passing journal entries that that there will be combination of one or more component of golden rules that we have seen in previous slide. For eg. Ramesh gives Suresh Rs.5000 then Ramesh would pass entries as : Suresh A/c Dr. Dr. Rs.5000 To Cash Cr. Rs.5000 (Being the amount paid to Suresh) Golden Rule Applied • i.e. DEBIT (Dr.) the Receiver and CREDIT(Cr.) the Giver- What goes out.
Ram Pays Rent of Rs.2000 • Rent A/c Dr. Rs.2000 To Cash A/c. Rs.2000 (Being the amount of Rent paid for April,2010). Golden Rule applied : • Dr. the expenses and Credit what goes out.
Shyam would pass entriesas Cash A/c. Dr. Rs.2000 To Rent A/c. Cr. Rs.2000( Being the amount received by way of Rent ) (DEBIT (Dr.) What comes in and CREDIT (Cr.) the Income
Shyam Receives commission For Commission Received by Shyam Cash A/ Dr. Rs.1000 To Commission A/c Rs.1000(Being the amount of Commission Received) Dr. what comes in CREDIT(Cr.) the Income & Gains.
JOURNAL • JOURNAL RECORDS EACH AND EVERY RECORD BY WAY OF JOURNAL ENTRY. • BUT TO FIND OUT A TRANSACTION EFFECTING A PERSON, EXPENSES ACCOUNT OR ASSET ONE HAS TO TURNOVER ALL PAGES OF JOURNAL. • HENCE TRANSACTIONS ARE POSTED FROM JOURNAL TO PARTICULAR PAGES OF LEDGER. • HENCE JOURNAL CONTAIN A COLUMN L.F
CASH BOOK • CASH BOOK KEEPS RECORDS OF ALL CASH TRANSACTIONS I.E CASH RECEIPTS AND CASH PAYMENTS. ALL RECEIPTS ARE RECORDED ON RIGHT SIDE AND ALL PAYMENTS ON LEFT SIDE. • CASH BOOK IS BOOK OF ORIGINAL ENTRY.
RECORD KEEPING BASIS • RECORDING: JOURNALISING AS AND WHEN TRANSACTION TAKES PLACE. JOURNAL IS BOOK OF ORIGINAL OR FIRST ENTRY. • CLASSIFYING: ALL ENTRIES IN JOURNAL OR SUBSIDIARY BOOKS ARE POSTED TO LEDGER ACCOUNT(POSTING) TO FIND OUT AT A GLANCE THE TOTAL EFFECT OF ALL SUCH TRANSACTIONS. LEDGER IS BOOK OF SECONDARY ENTRY. • SUMMASRISING: LAST STAGE IS TO PREPARE THE TRIAL BALANCE AND FINAL ACCOUNTS WITH A VIEW TO ASCERTAIN THE PROFIT OR LOSS DURING PARTICULAR PERIOD. • IT IS CUSTOMARY TO USE TO AND BY WHILE POSTING LEDGER. • BALANCING AN ACCOUNT MEANS EQUALIZING TWO SIDES. • IF DEBIT SIDE OF ACCOUNT EXCEED CREDIT SIDE, DIFFERENCE IS PUT ON CREDIT SIDE AND IT IS SAID TO HAVE DEBIT BALANCE AND VICE VERSA..
Questions. • CREDIT BALANCE IN CAPITAL ACCOUNT IS LIABILITY OR AN ASSET FOR BUSINESS: • A. LIABILITY • B. A REVENUE • C. AN EXPENSE • D. NONE OF THESE.
Answer • Liability as Capital brought is a liability for the business which is independent of Owner.
QUESTION • AMOUNT BROUGHT IN BY PROPRIETOR IN BUSINESS SHOULD BE CREDITED TO • A.DRAWINGS ACCOUNT • B.CAPITAL ACCOUNT OF PROPRIETOR. • C.ASSET ACCOUNT • D. NONE OF THE ABOVE
Answer • B.CAPITAL ACCOUNT OF PROPRIETOR • As we have seen earlier example : Liability as Capital brought is a liability for the business which is independent of Owner
QUESTIONS • WAGES PAID TO MUNNA TO BE DEIBED TO • A. MUNNA • B WAGES • C. CASH • D. BANK
Answer • Answer : B • Amount being paid to Munna are Wages which are “ Debit the Expenses “
QUESTIONS. • Q. CREDIT SALES MADE TO ROHIT TO BE DEIBTED TO • A. SALES • B. PURCHASE • C. CASH • D. ROHIT
Answer • D: ROHIT : ‘As debit the receiver’
QUESTIONS • FURNITURE PURCHASED BY ISSUING CHEQUE : • WHAT ENTRIES TO BE PASSED • A. DEBIT FURNITURE AND CREDIT BANK ACCOUNT. • B.DEBIT BANK ACCOUNT AND CREDIT FURNITURE. • C.DEBIT FURNITURE AND CREDIT CASH. • D.DEBIT BANK AND CREDIT FURNITURE SHOP ACCOUNT
Answer • Ans:A : • Debit What Comes in Credit What goes out • Furniture comes in Bank payment goes out.
QUESTIONS • ENTRY FOR RETURN OF GOODS, IN RESPECT OF SALES EFFECTED ON CREDIT, SHOULD BE CREDITED TO : • A. SALES RETURN • B PURCHASE RETURN • C.CUSTOMER ACCOUNT • D. GOODS ACCOUNT
Ans:C When Sales was effected the Customer’s Account was debited & Sales Returns takes place Customer’s Account should be Credited thus which would reduce dues.
QUESTION • WHAT IS JOURNAL ENTRY • A. ORIGINAL ENTRY • B. DOUBLE ENTRY • C DUPLICATE ENTRY • NONE