Book-keeping
Recording of transactions in money or money’s worth,
correctly.
Accounting
It is the process of identifying,
measuring and communicating the economic information of an organization to its
users who need the information for decision making.
Book Keeping+ analysis and reporting of recorded
information apart from designing a proper & suitable system of recording.
Financial Accounting
Recording, summarizing and reporting a company's business
transactions through financial statements, to serve external parties.
Cost Accounting
Collection, classification and
ascertainment of elements of cost like materials, labour and overheads.
Determines the actual cost associated with manufacturing a product or providing
a service by looking at all expenses.
Management Accounting
Use of data collected with the help of
financial accounting and cost accounting for the purpose of policy formation,
planning, control and decision making by the management.
- Designed for use in the operational needs of the business
- Provides the necessary information to the management for
discharging its functions
- Analysis and interpretation of data
- Facilitates control
Principles of Accounting
The accounting principles are rules of action or
scientifically laid down norms or body of doctrines adopted while recording of
transactions, in preparation of financial statements.
It is classified in accounting concepts and accounting
conventions.
1.
Accounting
Concepts – assumptions on which accounting is based.
· Money
Measurement Concept: Transactions expressed in monetary terms are only
recorded.
· Business
Entity Concept: Business is treated as separate from the proprietor. Proprietor
is the creditor to the business, to the extent of the capital contributed.
· Going
Concern Concept: Any business is intended to continue to survive for an
indefinite period of time. Hence, in final accounts, a record is made for
outstanding expenses and prepaid expenses on the assumption that the business
will continue.
· Cost
Concept: All events are considered only if it is associated to a cost. For eg:
when an asset is purchased, it is recorded with the price paid towards it and
not with the market value. Also, the asset is shown in its book value (Cost –
Depreciation), in the Balance sheet, at the end of the year.
· Dual
Aspect Concept/ Accounting Equation Concept: For every Debit, there is a
corresponding Credit. Hence, in the double entry book keeping, the receiving
and giving aspects of each transaction are recorded.
Total
Assets = Total Liabilities
Total
Assets = Capital + Outsiders’ liabilities
· Accounting
Period Concept: The income and position statements, of the business, are
prepared for a particular period i.e., 3 months, 6 months or 1 year, which is
called accounting period.
· Matching
Concept: According to this concept, the expenses incurred during the accounting
period are matched with the revenues of the same period, as profits and losses
are computed bringing the revenues and expenses together.
· Realization
Concept/ Revenue Recognition Concept: According to the concept, revenue is
considered to be earned on the date on which it is realized, which prevents
firms from presenting inflated profits. In simple words, it means the revenue
is recognized on its realization and not on its actual receipt. Eg: A customer pays Rs 1000 in advance for a custom designed product. The seller does not realize the Rs 1000 until the product has been produced and delivered to the customer.
· Objectivity
Concept: The business documents like invoices, vouchers, support all the accounting
transactions, should be objective i.e., free from bias of the accountant or
others, and therefore universally acceptable.
· Accrual
Concept: As realization concept relates to revenues, accrual concept relates to
payments. Under the accrual concept, costs are recognized when they are
incurred and not when payment is made. Eg. Mr. A makes a credit purchase of
materials worth Rs.5000 on January 1, but makes the payment to the supplier
only on January 10. As per Accrual concept principle, the entry will be made on
January 1 when cost is incurred and not January 10 when payment is made.
2.
Accounting
Conventions
It denotes the customs, traditions, usage which are
used as a guide in preparation of accounting reports and statements.
· Convention
of disclosure: According to this convention, accounting statements should be
honestly prepared and all significant information should be disclosed.
· Convention
of consistency: Management draws conclusions from the accounting, hence it is
essential that the practices and methods of accounting remain unchanged from
one period to another. Since comparisons are possible only if a consistent
policy of accounting is followed. In case there is any change, its effect
should be clearly mentioned in the financial statements.
· Convention
of Conservatism: This is a convention of caution or playing safe and is to be
adhered while preparing the financial statements. The essence of this
convention is “Anticipate no profit and provide for all possible losses”.
Showing a position better than what it is, is a risk and not permitted.
· Convention
of Materiality: It implies that the economic significance of an item (of a
business) has an effect on its accounting treatment, to some extent. Therefore,
in a business, some of the unimportant items are either left out or included
with other items. For eg: purchase of pen, stapler, pins can be treated as part
of assets, considering its durability and life span. And it’s not needed to
maintain separate ledgers.
Methods of Accounting
1.
Cash
basis: All incomes and expenses are earned or incurred only when they are
actually received or paid in cash. Non-cash items like outstanding, prepaid,
accrued are ignored. It is a simple system.
2.
Accrual
or Mercantile basis: Incomes and expenses are recorded irrespective of the
fact, whether it’s actually received or paid. In other words cash and non-cash
items are recorded, unlike cash system. It is a scientific and reliable system.
3.
Hybrid
or Mixed basis: It is a combination of cash and mercantile system of
accounting. Under this, the incomes are recorded in cash basis and expenses are
recorded in mercantile basis.
Classification of Accounts
1.
Personal
Account: Relates to natural persons, artificial persons and representative
persons. Eg.
Ram a/c, Ram & Co. a/c, Outstanding Salary a/c
2.
Real
Account: Relates to tangible and
intangible real assets. Eg. Land a/c, Goodwill a/c
3.
Nominal
Account: Relates to profits &
gains, losses & expenses. Eg. Purchase a/c, Sales a/c, Loss to fire a/c
Accounting Rules
1.
Personal Account
Debit the Receiver
Credit the Giver
2.
Real
Account
Debit what comes in
Credit what goes out
3.
Nominal
Account
Debit all expenses & losses
Credit all incomes & gains
Journal
- A day to day book in which transactions are recorded in the order
in which they occur i.e in a chronological order.
- Book of prime entry / original entry.
Journalizing
It
is the process of recording a transaction in a journal.
Journal Entry
It
is an entry made in the journal.
Eg:
Purchases a/c Dr
To Ram a/c
Subsidiary Books
1. Purchase Book: Only
credit purchases are recorded.
2. Sales Book: Only
credit sales are recorded.
3. Purchases Return
Book: Goods purchased on credit and returned to the supplier by the purchaser,
if found defective, are recorded.
4. Sales Return Book:
Goods sold on credit and returned by the customer, if found defective, are
recorded.
5. Cash Book: It has a
daily record of transactions related to receipts and payments of cash.
Trial Balance
A
statement in which the debit and credit balances of all accounts are recorded
in order to ascertain the arithmetic accuracy of the books of accounts. In the
trial balance, the debit side must be equal to the credit side. If the balance
does not tally, then there is a mistake and the bookkeeper must go through each
account to see what was recorded incorrectly.
Bank Reconciliation Statement
It is a statement where
the cash book (with bank column) of the business is reconciled with the
customers’ account in the bank ledger.
Closing
Stock
The unsold goods lying
in the business is known as closing stock. It is always valued at cost or
market price whichever is lower.
Closing Stock = Opening
Stock + Purchases – Cost of Goods Sold
Eg. Opening Stock =
Rs.10,000 ; Purchases = Rs.3000 ; Cost of Goods Sold = Rs.5000
Closing Stock = 10,000
+ 3000 – 5000 = Rs.8000
Outstanding
expenses
The expenses that
relate to an accounting period but not yet paid are called outstanding
expenses.
Unexpired
or Prepaid expenses
When the payment
(towards an expense) is done but the benefit is to be availed in the future is
prepaid expense.
Examples: Prepaid
insurance and prepaid rent which are frequently paid in advance for multiple
future periods.
Accrued
Income
It is the amount earned
but not actually received during the accounting period.
Income
Received in Advance
Income received during
the accounting period for a work to be done in the future.
Depreciation
The gradual and
permanent decrease in the value of an asset is known as depreciation. This may
happen due to the wear and tear, passing of time, obsolescence, exhaustion,
non-use, market trend.
Bad
Debts
When the debtors fail
to pay the dues and the amount becomes irrecoverable, it is known as bad debts.
Provision
for doubtful debts
The amount set apart
from the profits or a percentage of the amount due from the debtors, of an
accounting period, to set off the doubtful debts (debts which may or may not
occur).
Capital
Expenditure
Any Expenditure
incurred in acquiring a permanent asset or a fixed asset or that has the effect
of increasing the capacity, efficiency, life span or economy of operation of an
existing fixed asset, used in the business, to earn revenue is known as capital
expenditure. It is intended to benefit future period.
Eg: Cost of land &
building (Fixed asset), Amount spent on air conditioning the already existing
theatre (Effect of increasing the capacity, efficiency of an existing fixed
asset i.e., theatre)
Revenue
Expenditure
All expenses incurred
in the normal course of business, in the current period is known as revenue
expenditure. It is intended to benefit the current period.
Eg: Expenditure on
rent, salaries, wages etc.
Deferred
Revenue Expenditure or Capitalized Expenditure
Any revenue expenditure
whose benefit extends to a number of years is deferred revenue expenditure.
Eg: Preliminary
Expenses, Underwriting Commission etc.
Receipts
& Payments a/c
- It is a consolidated summary of cash
book wherein all the cash receipts are recorded on the debit side and the cash
payments are entered on the credit side.
- It starts and ends with opening and
closing balance of cash and bank respectively.
- Outstanding amounts are not recorded.
- It can be capital or revenue nature and
may relate to current or previous or subsequent year.
Income
& Expenditure a/c
- All expenses and losses are recorded on
the debit side, incomes and gains on the credit side.
- Only revenue items of the current year
are recorded.
- It does not start with opening balance
but ends with surplus or deficit.
- Outstanding amounts are recorded.
Joint
Venture
It is a business where
two or more persons agree to undertake jointly to complete a specific business
undertaking, to share profit or losses in an agreed proportion. This temporary
partnership exists until the completion of the specific business activity. It
has no firm name, in other words it is a partnership without name. The members
are known as co-venturers.
Royalty
The periodical amount
which is paid as a consideration for the use of rights like patent, copyright,
to the owner.
Partnership
According to Sec of the
Indian Partnership Act 1932, it is the relation between two or more persons who
have agreed to share the profits and losses of a business carried on by all or
any of them acting for all. Persons constituting partnership are individually
known as PARTNERS and collectively called PARTNERSHIP FIRM.
Kinds
of Partners
1.
Active Partner: One who is actively
engaged in the conduct of business.
2.
Dormant/ Sleeping Partner: One who is
not actively engaged in the conduct of business.
3.
Nominal Partner: One who lends his name
to the firm without any real interest in terms of investment in the firm or
sharing profits.
4.
Partner in profit only: One who does not
want to take risk of taking losses become a partner in profit only.
5.
Sub-Partner: When a partner agrees to
share the profits of the firm with an outsider, then the outsider is called a
sub-partner.
6.
Partner by Estoppel/ Holding Out: A
partner who is not a real partner but by words spoken or written or conduct
represents himself to be the partner to the firm, is known as partner by
estoppel.
Partnership
Deed
It is the document in
writing, containing the important terms of partnership as agreed to by the
partners.
Goodwill
It is the value of the
reputation which the business builds due to its efficient service to its
consumers and quality of its products.
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