Accounting : An introduction

 What is accounting? | Definition of accounting.

Accounting can be defined, as the process of identifying, measuring, recording, and communicating the required information relating to the economic events of an organization to the interested users of such information. 

Objectives of Accounting

•   Systematic recording of business transactions 
•  Ascertainment of financial position
•  Providing accounting information to its users for decision-making
•  Calculation of profit and loss

Relationship between Book-keeping, Accounting and Accountancy

 Book-keeping is a part of accounting, it is concerned with record keeping or maintenance of books accounts. Accounting is a wider concept than book-keeping. It starts where book-keeping ends.

 Accountancy refers to the entire body of theory and practice of accounting. 

Thus, we can say that book-keeping is sub-field of accounting and accounting is sub-field of accountancy. 

Accounting Process or Cycle

 It starts with identifying financial transaction, involves recording, classifying and summarising and ends with interpreting accounting information to various concerned parties. 

Also, Read This

Accounting for Partnership Firms - Fundamentals

System of Accounting 

       (i) Double Entry System

 It is based on the principle of dual aspect which states that every transaction has two aspects, i.e., debit and credit. The basic principle followed is that every debit must have a corresponding credit. Thus, one account is debited and the other is credited.

        (ii) Single Entry System 

This system is not a complete system of maintaining records of financial transactions. It does not record two fold effect of each and every transaction. Only personal accounts and cash book are maintained under this system instead of maintaining all the accounts. No uniformity is maintained under this system while recording transactions. The single entry system is also known as accounts from incomplete records.

Basis of Accounting

       (i) Cash Basis of Accounting 

Under the cash basis of accounting, entries in the books of accounts are made, when cash is received or paid and not when the receipts or payment becomes due. Revenue is recognised at the time when cash is received and not at the time of sale or change of ownership of goods. Expenses are recorded only at the time of actual payments. The difference between total revenue (receipts) and expenses (payments) is profit earned or loss suffered. 

(ii) Accrual Basis of Accounting 

Under accrual basis of accounting, revenue is recognised when sales take place or ownership of goods and services changes whether payment for such sales is received or not, is not relevant. Accrual basis of accounting is based on realisation and matching principle. 

Generally Accepted Accounting Principles (GAAP) 

These 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. These principles are based on past experiences, usages or customs, statements by individuals and professional bodies, and regulations by government agencies. These principles are not static in nature and are influenced by changes in the legal, social and economic environment. 

Classification of Accounting Principles 

Accounting principles are sub-divided into concepts and assumptions, which are/as follows

Accounting Assumptions

 (i) Going Concern

 This concept assumes that a business firm would continue to carry out its operations indefinitely for a very long period of time and there is no intention to close the business or scale down its operations significantly

(ii) Consistency

 This assumption states that the accounting practices once selected and adopted, should be applied consistently year after year. This will help in better understanding of inter firm and intra firm comparison of financial statements.

 (iii) Accrual 

According to this assumption, revenue is recognised when the goods are sold or services are rendered whether cash has been realised in the same accounting year or not. Similarly expenses are recognised as expenses in the same accounting year in which revenue relating to it, is recognised whether cash has been paid or not.

Also, Read This

PARTNERS’ CAPITAL ACCOUNTS | ACCOUNTANCY

Accounting Concepts 

(i) Business Entity Concept 

This concept assumes that a business has a separate and distinct entity from its owners. 

(ii) Money Measurement Concept

 This concept states that only those transactions and happenings in an organization that can be expressed in terms of money, are to be recorded in the books of accounts.

 (iii) Accounting Period Concept 

This concept refers to the span of time at the end of which an enterprise's financial statements are prepared to know whether it has earned profits or incurred losses during that period and the position of its assets and liabilities at the end of that period. 

(iv) Cost Concept 

This concept requires that all assets are recorded in the books of accounts at their purchase price, including the cost of acquisition, transportation, installation, and making the asset ready for use.

 (v) Dual Aspect Concept

 This concept states that every transaction has a two-fold effect and should therefore be recorded at two places. It is the basic principle of accounting. 

(vi) Revenue Recognition Concept 

According to this concept, revenue is considered to have been realized when a transaction has been entered into and the obligation to receive the amount has been established.

 (vii) Matching Concept 

This concept states that the expenses incurred in an accounting period should be matched with the revenues of that period to ascertain the amount of profit earned or loss incurred.

(viii) Materiality Concept 

The concept of materiality requires that accounting should on conveying material information only. Material information has the capacity to influence a decision.

 (ix) Objectivity Concept

 This concept requires that accounting transactions should be recorded objectively, free from the bias of the accountants, and should be supported with documentary proof.

 (x) Full Disclosure Concept 

The principle of full disclosure requires that all material and relevant facts concerning the financial performance of an enterprise must be fully and completely disclosed in financial statements and their accompanying footnotes.

 (xi) Convention of Conservatism

 This convention requires that profits should not be recorded unless realized but all losses, even those which may have a remote possibility are to be provided for in the books of accounts. Standards.

Accounting Standards 

These are a set of guidelines issued under Companies Accounting Standards), Rules 2006, that are followed to prepare and present financial statements to bring uniformity in accounting practices and ensure transparency, consistency, and comparability. These standards are mandatory in nature. 

List of Accounting Standards 

AS 1 Disclosure of Accounting Policies 

AS 2 Valuation of Inventories 

AS 3 Cash Flow Statement 

AS4 Contingencies and Events Occurring after the Balance Sheet Date 

AS 5 Net Profit or loss for the period, prior period items, and changes in accounting policies 

AS 7 Construction Contract 

AS 9 Revenue Recognition 

AS 10 Accounting for Fixed Assets 

AS 11 The Effects of Changes in Foreign Exchange Rates (Revised 2003) 

AS 12 Accounting for Government Grants

 AS 13 Accounting for Investments

AS 14 Accounting for Amalgamations

 AS 15 Employee Benefits (Revised 2005)

 AS 16 Borrowing Costs 

AS 17 Segment Reporting 

AS 18 Related Party Disclosures 

AS 19 Leases 

AS 20 Earnings Per Share 

AS 21 Consolidated Financial Statements 

AS 22 Accounting for Taxes on Income 

AS 23 Accounting for Investments in Associates in Consolidated Financial Statements 

AS 24 Discontinuing Operations 

AS 25 Interim Financial Reporting 

AS 26 Intangible Assets 

AS 27 Financial Reporting of Interests in Joint Ventures

 AS 28 Impairment of Assets 

AS 29 Provisions, Contingent Liabilities and Contingent Assets 

AS30 Financial Instruments- Recognition and Measurement

 AS 31 Financial Instruments- Presentation 

AS 32 Financial Instruments- Disclosures

 Note   AS 30, 31, and 32 are not mandatory in nature.

Accounting Equation

 It is an equation that signifies that a business's assets are always equal to the total of its liabilities and capital (owner's equity). It is also called the balance sheet equation as the accounting equation depicts the fundamental relationship among the balance sheet components.

 It can be expressed as Assets Capital + Liabilities

Classification of Accounts 

(1) Personal Accounts

 The accounts relate to the name of the persons. Such persons can be natural or artificial. Personal accounts are broadly classified into three categories 

(a) Natural Personal Accounts 

Accounts created in the name of human beings are natural personal accounts e.g., Ram account, debtors account, creditors account, capital account, drawings account.

(b) Artificial Personal Accounts 

Artificial persons are those who are not living human beings but they may have existed in the eyes of law e.g. Reliance Ltd. Shyam provisions stores, X and Co, bank account. 

(c) Representative Personal Accounts 

Accounts which represent a certain group of people to whom or from whom the amount is payable or receivable respectively, Outstanding expense account, Prepaid expense, Accrued income, Income received in advance. jo 

(ii) Impersonal Accounts 

(a) Real Accounts 

Accounts are created for tangible or intangible assets of the firm. These are broadly classified as 

Tangible Real Accounts

 Tangible real accounts are those accounts that relate to such things which can be touched, felt, measured, etc. e.g., Land Account, Stock Account, etc. 

Intangible Real Accounts 

These are the accounts that cannot be seen and touched. Such accounts represent legal rights e.g., Goodwill Account, Patents Account, Brand/Trademarks Account, Copyrights/Mastheads Account, Licences/Franchise Account, etc. 

(b) Nominal (Revenue or Expense) Accounts 

All accounts are simply opened as per the nature of the transactions. They do not really exist. These are of two types 

Expenses and Losses 

Expenses are rent paid account, salaries account and losses are loss on sale of assets account, loss due to decrease in the value of assets or increase in the value of liabilities.

 Incomes and Gains 

Incomes are interest received account, discount received account and Gains are profit on the sale of assets account, profit due to increase in the value of assets or decrease in the value of liabilities.

Rules of Debit and Credit | Accounting rule for  Debit and Credit 

 Debit (Dr) means to enter an amount of transaction on the left side of an account and credit (Cr) means to enter an amount on the right side of an account. Depending on the nature of the account, both debit and credit may represent increase or decrease. Entries are recorded in journal on the basis of source documents following the rules of debit and credit. 

Rules For Debit and Credit According to Traditional Classification

 (i. e., Personal, Real and Nominal) 

Rules For Debit and Credit According to Traditional Classification

Rules for Debit and Credit According to Modern

 Classification or Accounting Equation Based Classification

Accounting Equation Based Classification

Journal  | Journal Entry

Journal is the book of original entry or prime entry. order in which they occur, i.e., in chronological order. The process of recording a transaction in a journal is called journalising. An entry made in the journal is called a journal entry. 

Format of Journal

Format of Journal

Ledger | Ledger Posting

 A ledger is the principal book of the accounting system which contains all the accounts (assets, liabilities, revenue, expenses). All the transactions recorded in the books of original entry are transferred to ledger. Ledger is called the principal book/ book of final entry as trial balance is prepared from it and thereafter financial statements are prepared. It is the ultimate destination of all the transactions. The book which contains a classified and permanent record of all the business transactions is called a ledger.

Format of Ledger

Format of Ledger

Posting the Entries

 The process of transferring the entries from the books of original entry (journal) to the ledger is referred as posting. Posting is the grouping of all the transactions, in respect to a particular account at one place which facilitates meaningful conclusion. 

Cash Book 

It is a special journal which is used for recording all cash receipts and cash payments. Cash book is a book of prime entry/original entry in which all cash and bank transactions are recorded in a chronological order. It has two sides, i.e., debit and credit. Debit side records all receipts of cash (including Credit side records all payments of cash (including cheques).

 1. Single Column Cash Book or Simple Cash Book 

The single-column cash book records all transactions of the business in a chronological order, i.e., it is a complete record of cash receipts and cash payments.

 Single Column Cash Book 

 Single Column Cash Book 

2. Two Column or Double Column Cash Book 

(Cash Book with Discount Column)

 Two column cash book is a cash book which has two columns on cach side of the cash book. One for cash and another for Discount. All the cash receipts, and discount allowed are recorded on debit side and all cash payments, and discount received are recorded on credit side. 

 Two Column Cash Book

 Two Column Cash Book

3. Three Column Cash Book 

This cash book has three columns each side, i.e., cash, discount and bank column. All the cash receipts, deposits into bank and discount allowed are recorded in debit side and all cash payments, withdrawals from bank and discount received are recorded in credit side. 

Three Column Cash Book 

Three Column Cash Book 

Also, Read This

Accounting: An introduction

Accounting for Partnership Firms - Fundamentals

PARTNERS’ CAPITAL ACCOUNTS | ACCOUNTANCY

Remuneration (Salary or Commission) to Partners | Accounting Treatment

INTREST ON PARTNERS' CAPITALS