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FATHER
OF ACCOUNTANCY:
LUKAA
PASHIALL.
MEANING OF ACCOUNTING: According
to American accounting association accounting is “The process of identifying ,
measuring and communicating information to permit judgment and decisions by the
users of accounts”.
USER
OF ACCOUNTS:
Generally 2 types. 1. Internal
management, 2. External users or Outsiders- Investors, Employees, Lenders,
Customers, Gov.t and other agencies,
Public.
SUB-FIELDS
OF ACCOUNTING:
ü Book-keeping: It
covers procedural aspects of accounting work and embraces record keeping
function.
ü Financial accounting: It
covers the preparation and interpretation of financial statement.
ü Management accounting: It
coverse the generation of accounting information for management decision.
ü Social responsibility
accounting: It coverse the accounting of
social costs in curred by the enterprise.
FUNDAMENTAL ACCONTING EQUATION:
Assets =
Capital + liabilities.
Capital =
Assets – liabilities.
Accounting elements: The
elements directly related to the measurement of financial position i.e. ., for
the preparation of balance sheet are assets, liabilities and equity. The elements directly related
to the measurments of performance in the profit and loss account are income
and expenses.
Four steps(phases)of accounting process:
ü Journalisation
of transations
ü Ledger
positioning and balancing
ü Preparation
of trail balance
ü Preparation
of final accounting.
Book
keeping:
It is an activity, related to the recording of financial data, relating to
business in an orderly manner. The main purpose of accounting for businesses is
to as certain profit or loss of the accounting period.
Accounting:
it is an activity of analysis and interpretation off the book keeping records.
Journal: Recording
each transaction of the business.
Ledger:
It is a book where similar transactions relating to a person or thing are
recorded.
Types of ledger: Debtors
ledger
Creditor’s ledger
General
ledger.
Concepts:
Concepts are necessary assumptions and conditions upon which accounting is
based.
ü Business entity
concept: In accounting, business is treated as
separate entity from its owners. While recording the transaction in books, it should
be noted that business and owners are separate entities. In the transaction of
business, personal transactions of the owners should not be mixed.
For example:- Insurance premium of the
owner etc………………
ü Going concern concept: Accounts
are recorded and assumed that the business will continue for a long time. It is
useful for assessment of goodwill.
ü Consistency concept: It
means that same accounting policies are followed from one period to another.
ü Accrual concept: It
means that financial statements are prepared on mercantile system only.
Types
of Accounts:
Basically accounts are three types
ü Personal Account:
Accounts which show transactions with persons are called personal account. It
includes accounts in the name of persons, firms, companies.
In
this: Debit the receiver
Credit the giver.
For example:- Marsh a/c,
Karuna&co a/c, Maharnika a/c etc…..
ü Real Account: Accounts
relating to assets is known as real accounts. A separate account is maintained
for each asset owned by the business.
In
this: Debit what comes in
Credit what
goes out.
For example:- Cash a/c, Machinary a/c
etc……
ü Nominal Account: Accounts
relating to expenses, losses, incomes and gains are known as nominal account.
In this: Debit expenses and
loses
Credit
incomes and gains.
For example:- Wages a/c, Salaries a/c,
commission recived a/c etc…..
Accounting
convention:
The term convention denotes customs or
traditions which guide the accountant while preparing the accounting
statements.
ü Convention of
consistency: Accounting rules, practices should
not change from one year to another.
For
example:- If depreciation on fixed assets is provided on straight line method.
It should be done year after year.
ü Convention of full
disclosure: All accounting statements should be
honestly prepared and full disclosure of all important information should be
made. All information which is important to assets, creditors, investors should
be disclosued in account statements.
Trail
balance:
A trail balance is a list of all the
balances standing on the ledger accounts and cash book of a concern at any give
data. The purpose of the trail balance
is to establish accurancy of the books of accounts.
Trading
Account:
The first step of the preparation of
final account is the preparation of trading account. It is prepared to know the
gross margin or trading results of the business.
Profit
and Loss a/c:
It is prepared to know the net profit.
The expenditure recording in this a/c is indirect nature.
Balance
sheet:
It is a statement prepared with a view to measure the exact financial position
of the firm or business on a fixed date.
Outstanding
Expenses:
These expenses are related to the
current year but they are not yet paid before the last date of the financial
year.
Prepaid
Expenses:
There are several items of expenses which are paid in advance in the normal
course of business operations.
Income
and expenses A/c:In
this only the current period incomes and expenditures ara taken into
consideration while preparing this a/c.
Royalty:It
is a periodical payment based on the output or sales for use of a certain
asset.
For example:- Mines, Copyrights,
Patent.
Hire
purchase:
It is an agreement b/w two parties. The
buyer acquires possession of the goods immediately and agrees to pay the total
hire purchase price in instalments.
Hire purchase price = Cash price + Interest.
Lease: A
contractual arrangement where by the lessor grants the lessee the right to use
an asset in return for periodic lease rental payments.
Double
entry:
Every transaction consists of two
aspects
1. The
receving aspect
2. The
giving aspect
The recording of two aspect effort of
each transaction is called “ double entry”.
The principle of double entry is, for
every debit there must be an equal and a corresponding credit and vice versa.
BRS:When
the cash book and the passbook are compared, some times we found that the
balances are not matching. BRS is preparaed to explain these differences.
Capital
transaction:
The transactions which provide benefits to the business unit for more than one
year is knowen as “capital transactions”.
Revenue
transactions:
The transactions which provide benefits
to a business unit for one accounting period only are known as “Revenue
Transactions”.
Deffered
revenue Expenditure:
The expenditure which is of revenue nature but its benefit will be for a very
long period is called deffered revenue expenditure.
Ex:- Advertisement expences
A part of such expenditure is shown in
p&l A/c and remaining amount is shown on the assets side of B/S.
Capital
receipts:
The receipts which rise not from the
regular course of business are called “capital receipts”.
Revenue
receipts:
All recurring incomes which a business
earns during normal cource of its activities.
Ex:- Sale of good, Discount received,
Commission received.
Reserve
capital:
It refers to that portion of uncalled
share capital which shall not be able to call up except for the purpose of
company being wound up.
Fixed
Assets:
Fixed assets also called Non-current
assets, are assets that are expected to produce benefits for more than one
year. These assets may be tangible or intangible. Tangible fixed assets include
items such as land, buildings, plant, machinery, ets……Intagible fixeds include
items such as patents, copyrights, trademarks and goodwill.
Current
assets:
Assets which normally get converted into
cash during the operating cycle of the firm.
Ex:- Cash, inventory(R, W, F),
Receivables.
Flictitious
assets:
They are not represented by anything tangible or concrete.
Ex:- Goodwill, Deffred revenue
expenditure, etc……
Contingent
assets:
It is an existence whose value, ownership and existence will depend on
occurance or non-occurance of specific act.
Fixed
liabilities:
These are those liabilities which are
payable only on the termination of the business such as capital which is
liability to the owner.
Longterm
liabilities:
These liabilities which are not payable
with in the next accounting period but will be payablewhich in next 5 to 10
years are called longterm liabilities. Ex:- Debentures.
Current
liabilities:
These liablities which are payable out
of current assets with in the accounting period. Ex:- Creditors, Bills payable,
Over draft etc…………
Contingent
liabilities:
A contingent liabilities is one, which
is not an actual liabilities but which will become an actual one on the
happening of some event which is uncertain. These are staded on balance sheet
by way of a note.
Ex:- Claims against company, Liability
of a case pending in the court.
Bad
debts:
Some of the debtors do not pay their
debts. Such debt if unrecoverable is called bad debt. Bad debt is a business
expense and it is debited to p&l a/c.
Capital
gains and losses:
Gains and losses arising from the sale
of assets.
Fixed
cost:
These are the costs which remains
constant at all levels of production. They do not tend to increase or decrease
with the changes in volume of
production.
Variable
cost:
The valume of output. Any increase in
the valume of production results in an increase in the variable cost and
vice-versa.
Semi-variable
cost:
These costs are partly fixed &
partly variable in relation to output.
Absorption
costing:
It is the practice of charging all
costs, both variable and fixed to operations processess or products. This differs from marginal costing
where fixed costs are excluded.
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