Glossary - Accounting(Part I)

 

                                                              

 

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 Real 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

•         It is a Nominal 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.

 

If you find the article informative, do "Like, Share and Comment"...

Thanks for reading.