FUNDAMENTALS OF ACCOUNTING
- Accounting is the art of:-
· Dealing with financial transactions
· Analysis and interpretation
- Accounting is different from book keeping.
- Book keeping is concerned with proper recording of business transactions in a systematic manner.
- Accounting is more concerned with designing the system for recording of business transaction.
- The functions of Accounting are :-
Comparison & Evaluation
Complying with Government regulation and Taxation.
- The Main objectives of Accounting are:-
- To maintain records of the business transactions.
- To ascertain true profit or loss.
- To depict true financial position
- To Provide Key information to different users of financial statements.
- The following are the sub-fields of the Accounting:-
Social responsibility Accounting
Human Resource Accounting
- The main objectives of Financial Accounting are:-
· Preparation of financial statements as required by statute
· Appraising the owners of the business about the results of the business over a period of time.
· To protect business properties
· To help in decision making.
- Management Accounting is concerned with internal reporting to the managers of the business to discharge the function of stewardship, planning, control and decision making.
- Cost Accounting is concerned with ascertainment and control of cost.
- Social responsibility Accounting is concerned with accounting for social costs incurred by the social benefits created.
- Human Resource Accounting is concerned with identification and reporting investment made in human resources of an enterprise that are not presently accounted for under conventional accounting practices.
- There are the following two systems of accounting :-
· Mercantile or Accrual system of accounting
- The following may be considered end users of Accounting information:-
· Government Agencies
- A Practicing Accountant has the following role in a society:-
· Conduct Statutory Audit
· Conduct internal Audit
· To Act as a Financial Advisor/ Consultant
· To Act as a Tax Advisor/ Consultant, etc.
- Accounting Principles may be defined as those rules of action, principles or conduct which are adopted by accountants while recording business transactions.
- Accounting Principles can be categorized in to the following two:-
18 Accounting concepts refers to those basic assumptions for conditions, postulates which the accountants have to keep in mind while preparing accounting statements.
19 Accounting conventions refers to those customs or habits, traditions followed from time immemorial which guide the accountants in preparing the accounting statements.
20 The following are major accounting concepts:-
· Entity concept
· Going concern concept
· Money measurement concept
· Cost concept
· Dual Aspect concept
· Accounting period concept
· Realization concept
· Matching concept
- The following are major accounting conventions:-
- Full disclosure
· Making provision for doubtful debts.
· Non-accounting of anticipated discount on creditors.
- The following are examples of application of concept of separate business entity:-
· Treating cash withdrawal by the proprietor as drawing
· Charging interest on drawing, etc.
- The following are the systems of book keeping:-
· Double entry system
- Accounting cycles involves the following stages:-
Summarizing the transaction
Interpreting the results.
- The document where any transaction is initially recorded is known as journal.
- Transactions are recorded in the books of account on the basis of source documents.
- Vouchers are the source documents upon which accounting entries are based.
- Vouchers may be :-
Invoices or any other evidential documents etc.
- All transaction of a business is recorded on the concept of double entry system.
- According to double entry system every transaction has a two fold effect.
- As per double entry system for every debit is there is a corresponding credit.
- Accounting equation says that:-
· Capital + external liabilities = Assets
- There are three rules for debit or credit:-
Debit the receiver and credit the giver
Debit losses, expenses and credit gains and profits
- Classification of transaction according to nature is done in ledger
- Summarization of transaction involves preparation of trial balance, Profit and loss a/c, and Balance sheet.
- Interpretation of transaction is done through ratio analysis.
- Journal may be defined as a book containing a chronological record of business transactions.
- The process of recording transaction in a journal is termed as ‘journalizing’.
- Ledger may be defined as a book containing various accounts.
- Posting may be understood as a process of transferring any transaction from journal to respective accounts in the ledger.