Accounting
-accounting is an art as well as a science
-it is a systematic process of identifying, measuring, recording, classifying summarising ,interpreting and
communicating financial information to the users
-characteristics of accounting/accounting process
1. Identification of financial transaction
2. Measuring the identified transaction
3. recording-recording the transaction in journal and its subsidiary books
4. classifying (posting into ledger)-
-the process of grouping transactions of one nature at one place and transactions recorded in journal
and its subsidiary books are classified to the ledger
5. summarising-Preparation of the following statements
A. Trial balance B. Trading and profit and loss account C. Balance sheet
6.Analysis and interpretation of financial data
7. Communicating the financial data to users
Branches of accounting:-
1. Financial accounting
2. Cost accounting
3. Management accounting-the newly developed branch of accounting
Book keeping:-
-it is an art of recording business dealings in a set of books
-accounting and bookkeeping are different from each other
-accounting is a wider concept of bookkeeping. bookkeeping is a part of accounting
-bookkeeping is a primary stage while the accounting is a secondary stage
-bookkeeping is concerned with only
1. Identify financial transaction
2. Measuring
3. Recording
4. Classifying
Accounting and accountancy
-accountancy is knowledge where as accounting is the action or process or application
Accounting information
1. Regarding profit of surplus-profit and loss account
2. Regarding financial position-balance sheet
3. Regarding cash flow
Qualitative characteristics of accounting information
-reliability
-relevance
-understandability
-comparability
Users of accounting information
-internal users:-
*Owners,management ,employees
External users:-
*Banks, financial institutions, investors, creditors,government,researchers,consumer's and public
System of accounting:-
1. Double entry system
2. Single entry system:-
-it is an incomplete double entry system. The accounts maintained under the system are
incomplete,unsystemic and not reliable
*instead of maintaining all the accounts only personal accounts and cash book are maintained under
this system
Basic accounting terms
Capital:-it is also known as owner equity or net worth.it is an internal liability.
Current liability-is payable within 12 months
-ex. Outstanding expenses
A.Non current assets-assets held from a long-term point of view.ex. long term loans and fixed assets
Fixed assets-
a. Tangible assets-physical existence, can be seen and touched,
-ex. Land building machinery computer furniture
b. Intangible assets-don't have physical existence,
-ex. Patent Goodwill trademark computer software
B.Current assets-converting into cash within a short period 12 months.
-Ex. Prepaid expenses
C. Fictitious assets-which are neither tangible assets nor intangible assets
-ex. deferred revenue expenditure such as advertisement expenditure, discount or loss on issue of
debentures
Deferred revenue expenditure-
-it is a Revenue expenditure in nature but is written off in more than one accounting period because it is
estimated that benefit of such expenditure will accrue in more than one financial year
- for example large advertisement expenditure will give benefit for more than one accounting period
Working capital=current assets-current liability
Stock/ inventory:-
A. Stock of goods remaining unsold
B. Stock of raw material
C. Work in progress-in the process of being finished
#it is shown in balance sheet as a current assets
#it is valued on the cost price or market price whichever is less
Trade receivable:- debtor + B/R
#B/R-bill of exchange accepted by a debtor
Trade payables:- creditors+ B/P
Balance sheet-statement of the financial position
Financial statement or final accounts:-
-trading account, profit and loss account and balance sheet
*Sales is recognised as revenue at the point of sale or performance of service
*Merchandise means goods for resale
Bases of accounting:-
1. Cash basis of accounting
-only cash transactions whether it is receipt or payment are recorded
-it is not recognised by the company act 2013. So so it is Less reliable and not acceptable in business.
-it is suitable for not for profit organisations, charitable institutions ,clubs and schools and professionals
such as chartered accountant, lawyer etc
2. Accrual basis of accounting
-both cash and credit transactions are recorded
-accounting entries are recorded when incomes are earned and expenses are incurred irrespective of
cash received or paid
-it is recognised by the company act 2013. It is more reliable and more acceptable in business
-outstanding and prepaid expenses ,accrued income and income received in advance are accounted on
accrual basis
*We maintain accounts in 'T' form
Classification of accounts:-
A. Traditional approach (English approach)
1. Personal accounts:-capital account ,drawings account ,debtor/creditor account, loan account, bank
overdraft account
a. Natural personal accounts-ram account, capital account
b. Artificial personal accounts-bank account ,insurance company account
c. Representative personal accounts:-outstanding account ,prepaid account ,accrued account, advance
account
2. Impersonal accounts
a. Real accounts-assets account
b. Nominal accounts-income and expenses account ,purchase account(exp) ,sales account(Inc), bad
debts written off and bad debts recovered
Modern approach:-
1. Assets account
2. Liability accounts
3. Capital accounts
4. Revenue accounts
5. Expenses account
