Basics of Accounting: Concepts, Book-keeping, and Accountancy Overview
Accounting concept and convention
by Prof. sachin jadhav
undefined
Point of
discussion…
Meaning & Definition of Book -
Keeping
Features of Book - keeping
Objectives of Book -
keeping
Meaning & Definition of
Accountancy
Branches of
Accounting
Basic
accounting
Terminologies
Meaning &
Definition…
Book keeping is a process of recording business transitions in the
books
of
accounts in a very
systematic
manner
According to J.R. Batilobi
:
“ Book – Keeping is an
art
of recording business dealings in a
set
of
books.”
According to Nocth
Cott
:
“ Book – Keeping is an
art
of recording in the
books
of
accounts
the
monetary
aspects of
commercial
or financial
transactions.”
Features
of Book
keeping
1
、
It is
the
process
of
recording
business
transition
2
、
Monetary transactions
are
only
recorded
3
、
Recording
is
made
in
given
set
of
books
of accounts
4
、
For
specific
period
5
、
Art
of
recording
business
transactions
scientifically
Objectives of Book
keeping
…
Permanent
record
To
know the
P&L
To
know the total
amount
of Capital
To
know the total
assets
and
liabilities
To
know the progress of the
business
To
know Legal requirement and
tax
liabilites
Meaning & Definition of
Accountancy
Accountancy includes Book keeping &
classifying, summarizing
and
interpreting of the business
transactions.
According to Kohler
:
“ Accountancy refers to the entire body of theory and process of
accounting.”
According to Robert N. Anthony
:
“ Nearly every
business
enterprise has
an
accounting
system.
It
is
a
means
of
collecting, summarizing, analyzing and
reporting
in
monetary terms information
about the
business
transactions,”
Branches
of
Accounting
Financial
Accounting
Cost
Accounting
Management
Accounting
Journal
Ledger
Trial
balance
Final
accounts
Cost
Sheet
Job &
Contract
Process
Costing
Operating
Costing
Ratio
analysis
Break
even
point
Standard
Costing
Analysis
of
financial
S
Basic accounting
Terminologies
Business
Transaction
Entry &
Narration
Goods
Profit &
Loss
Assets, Liabilities & Net
worth
Capital &
Drawing
Expenditure and types of
expenditure
Discount
Good
will
Bad
debts
Debtors and
creditors
Solvent &
Insolvent
Accounting
Year
Folio, Insurance, Freight
Deposit
Business
Transaction
Any
dealing of business that involves buying and
selling
of
goods
and
services in exchange of value be
called
as business
transaction.
Cash
Transaction
Credit
Transactions
Entry,
Narration &
Goods
Entry : Recording of transaction in the proper form or
method in
the
books
of accounts is
called
an
entry.
It is a first record of any business
transaction
in the
books
of
accounts
Narration
:
A
brief
explanation
of
the
business
transaction
for
which
an
entry is passed is
called
as a narration. It
starts with
a word ‘Being’
(….)
Goods:
The
commodities
or
articles
in which the trader deals are
called
as
goods
for that
business
Profit
&
Loss
Profit : Excess of
income
over the expenses during the accounting
year
is
called
a
profit
Ex:…..
Loss : Excess of expenses over the
income
is
called
loss
Ex:…..
Assets, Liabilities & Net
worth
Assets : Property of any kind owned by a
businessman
is
called
an
asset,
Ex……
Liabilities
:
Total
amount
payable by the business to others is
known
as
liability
Ex…..
Net
Worth
or owned equity : The
amount
of fund provided by
the
proprietor
in the business is
called
as net worth or capital
also
Types
of
Assets
Assets : Property of any kind owned by a
businessman
is
called
an
asset,
Ex……
Fixed Assets
: Ex…..
Current
Assets
:
Ex…..
Fictitious
Assets
:
Ex…..
Accounting
concept
Accounting principles are those rules which are to be adopted by
the
accountants
Accounting is the language of business. This are general guidelines
for
sound accounting
practices
1)
Reliable
financial
statements
2)
Generally acceptable basis of
measurement
3)
Valid
and appropriate
assumptions
4)
Uniformity
in
presentation
5)
Valid
and appropriate
assumptions
6)
Proper
information
to
all
Classifications
of
Account
Analysis of
Transactions
Accounting
concepts
1)
Business
entity
2)
Money
measurement
3)
Cost
concept
4)
Consistency
concept
5)
Conservatism
6)
Going
concern
7)
Realization
8)
Accrual
9)
Dual
aspect
10)
Disclosure
11)
Materiality
12)
Revenue
recognition
principle
13)
Marching
principle
14)
Accounting
standards
Business entity
concept
:
This concept assumes
that, for
accounting purposes,
the business
enterprise and its
owners are two separate independent entities. Thus,
the
business
and personal transactions of its owner are
separate.
For example, when
the
owner invests money in
the
business, it is recorded
as liability of the
business
to the owner. Similarly, when the owner takes
away
from
the business
cash/goods
for his/her
personal use, it is
not
treated
as business expense.
Money Measurement
concept
:
This concept assumes
that
all business transactions
must be in terms of
money.
In our country such transactions are in
terms
of rupees. Thus,
as
per
the
money
measurement
concept, transactions which
can
be
expressed in terms of
money
are recorded in
the books
of accounts
Going concern
concept
This concept states that a
business firm
will continue to carry on its activities
for
an
Future period
of
time.
Simply stated, it
means
that every
business
entity has
continuity
of life. Thus,
it will not be dissolved in
the
near future. This is
an
important assumption of
accounting, as
it provides
a basis
for
showing
the
value of assets in
the
balance sheet.
Accounting period
concept
:
The life of an entity is
divided into short
economic
time
periods on which
reporting statements
are
fashioned. All
the
transactions are recorded in the
books
of accounts on the assumption that
profits
on these transactions are to be
ascertained
for
a specified period. This is known as accounting
period
concept.
Thus, this concept requires that a balance sheet and profit and loss account
should
be prepared at regular intervals for different purposes like,
calculation
of
profit, ascertaining financial position
etc.
Accounting cost
concept
Accounting cost concept states that all assets are recorded in the
books
of
accounts at their purchase price, which includes cost of acquisition,
transportation and installation and
not
at its
market
price. It means that fixed
assets like building, plant and machinery, furniture, etc are recorded in the
books
of accounts at a price paid for
them.
For example, a machine was purchased by XYZ Limited for Rs.500000, for
manufacturing shoes. An amount of Rs.1,000 were spent
on
transporting the
machine to the factory site. In addition, Rs.2000 were spent
on
its installation.
The total amount at which the machine will be recorded in
the books
of
accounts would be
the
sum of all these
items
i.e. Rs.503000. This cost is also
known
as
historical
cost.
Matching
Concept
:
The
matching
concept
states
that
the
revenue and the expenses incurred to
earn
the revenues
must
belong to the
same
accounting period. So once the
revenue
is
realised,
the next
step
is to
allocate
it
to the
relevant
accounting
period.
The
matching
concept
implies
that
all
revenues earned during an
accounting year, whether received/not
received
during that
year and
all cost
incurred, whether paid/not paid during the year should be
taken
into
account while
ascertaining
profit or loss for
that
year.
Dual aspect
concept
Dual aspect is the foundation or basic principle of accounting. It provides the
very basis of recording business transactions in the
books
of accounts. This
concept
assumes
that every transaction has a dual effect, i.e. it affects two
accounts in their respective opposite sides. Therefore, the transaction should
be recorded at two places.
It
means,
both the aspects of the transaction
must
be
recorded in the
books
of accounts. For
example,
goods
purchased for cash has
two
aspects which are (i) Giving of cash (ii)
Receiving
of
goods.
These two aspects are to be recorded. Thus, the duality concept is
commonly
expressed in
terms
of fundamental accounting equation
Assets
= Liabilities +
Capital
Realisation
concept
This concept holds to
the
view that profit
can
only be
taken
into
account when
realization
has
occurred. According to this concept
revenue is
recognized when a
sale
is
made. Sale
is
considered to be
made
at
the
point when the property in goods
passes
to the buyer
and he
becomes
legally
liable
to
pay.
Revenue
is
said to have been realized when cash
has been
received
or right to receive cash on the
sale
of goods or services
or both
has
been
created
Conservatism
The convention is the based on principle that,
“Anticipate no
profit,
but
provide for
all
possible
losses”.
It provides guidance
for
recording
transactions
in
the
books of accounts. It is
based
on the
policy
of
playing
safe in regard
to showing profit.
The main objective
of this
convention
is to
show
minimum
profit.
Profit should not be overstated.
If
profit shows more
than
actual,
it
may
lead to
distribution
of
dividend
out of
capital.
This is not a fair
policy
and it
will
lead
to
the reduction in the capital of the
enterprise
Consistency
The convention
of
consistency means that
same
accounting principles should
be
used
for
preparing financial
statements
year after year.
For
example: if a stock
is
valued
at
“cost
or
market
price
whichever is less”,
this
principle should
be
followed year
after
year
.
Example : under deprecation used fixed installment method.
Materi
a
li
t
y
The convention of materiality states that, to
make
financial statements
meaningful, only material fact i.e. important
and
relevant information
should be
supplied
to the users of accounting information. The question that
arises here is what is a material fact. The materiality
of
a fact depends on its
nature and
the
amount involved.
Material fact
means
the
information of which will
influence the
decision of
its
user.
.
Inflation Accounting
DEFINITION
OF
INFLATION
ACCOUNTING:
A
state
in
which
the
value
of
money
is
falling
that
is
prices
are
rising.
A
process
of
steadily
rising
prices
resulting in diminishing
purchasing
power
of a
given
nominal
sum of
money.
Objective:
1) The
user
or
decision
maker
gets
an
information
which shows
the
performance.
2) To
facilitate the
comparison
of
the
performance
of
two
different
periods
it is necessary that the
figures
are
adjusted
for
inflation.
3) The
monetary
items,
income
&
expenses do not
show
the
correct
purchasing
power
of
money
therefore,
their
values should be
adjusted
.
ADVANTAGES
•
It
enables the
maintenance
of
capital intact
which
is
essential
in
a
limited
liability
business.
•
Profit/loss
is
determined
by
matching
the
cost
&
the
revenue
at
current
values
which
are
comparable.
•
The
assets
are
shown
at
real
values
uniformly
instead
of
at
distorted
values.
•
Trade
unions,
employees,
shareholders
& public
are
not misled
by
giving
an
exaggerated
profit
figures.
•
By
showing
the
current
values
of
fixed
assets
it
enables
the establishment
of
realistic
price
for
the
company’s
shares
DISADVANTAGES
•
Depreciation being the
process
of
distribution
of
original
cost,
charging anything
in
excess
does not
fit
into
the
concept
of
depreciation.
•
Replacement
cost
is
an
indefinite
figure
closured by
future
technological
developments
&
the
time
period
at
which
the
asset will
be
scrapped.
•
Charging
depreciation
on
replacement
cost
basis
will
be
acceptable
to
income-tax
authorities
&
hence
there
is
no
purpose
in doing the
exercise.
This content covers key concepts in accounting, including the definitions and features of book-keeping, objectives of book-keeping, meaning of accountancy, and branches of accounting such as financial, management, and cost accounting. It emphasizes the systematic recording of business transactions and the importance of interpreting financial information for decision-making.
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Presentation Transcript
Accounting concept and convention by Prof. sachin jadhav
Point of discussion Meaning & Definition of Book -Keeping Features of Book - keeping Objectives of Book -keeping Meaning & Definition ofAccountancy Branches ofAccounting Basic accountingTerminologies
Meaning & Definition Book keeping is a process of recording business transitions in the booksof accounts in a very systematicmanner According to J.R. Batilobi: Book Keeping is an art of recording business dealings in aset of books. According to Nocth Cott : Book Keeping is an art of recording in the books ofaccounts the monetary aspects of commercial or financialtransactions.
Features of Book keeping 1 It is the process of recording business transition 2 Monetary transactions are only recorded 3 Recording is made in given set of books of accounts 4 For specific period 5 Art of recording business transactions scientifically
Objectives of Book keeping Permanent record To know the P&L To know the total amount of Capital To know the total assets and liabilities To know the progress of the business To know Legal requirement and tax liabilites
Meaning & Definition of Accountancy Accountancy includes Book keeping & classifying, summarizingand interpreting of the businesstransactions. According to Kohler: Accountancy refers to the entire body of theory and process of accounting. According to Robert N. Anthony: Nearly every business enterprise has an accounting system. Itis a means of collecting, summarizing, analyzing and reportingin monetary terms information about the businesstransactions,
Branches ofAccounting FinancialAccounting ManagementAccounting CostAccounting Journal Ledger Trial balance Final accounts Cost Sheet Job & Contract ProcessCosting Operating Costing Ratio analysis Break even point Standard Costing Analysis of financial S
Basic accounting Terminologies BusinessTransaction Entry & Narration Goods Profit & Loss Assets, Liabilities & Net worth Capital & Drawing Expenditure and types of expenditure Discount Goodwill Bad debts Debtors and creditors Solvent & Insolvent AccountingYear Folio, Insurance, Freight Deposit
BusinessTransaction Any dealing of business that involves buying and selling of goodsand services in exchange of value be called as businesstransaction. Cash Transaction Credit Transactions
Entry, Narration & Goods Entry : Recording of transaction in the proper form or method in the books of accounts is called an entry. It is a first record of any business transaction in the books ofaccounts Narration :Abrief explanation of the business transaction for which an entry is passed is called as a narration. It starts with a word Being ( .) Goods: The commodities or articles in which the trader deals are called as goods for that business
Profit & Loss Profit : Excess of income over the expenses during the accounting yearis called a profit Ex: .. Loss : Excess of expenses over the income is calledloss Ex: ..
Assets, Liabilities & Net worth Assets : Property of any kind owned by a businessman is called anasset, Ex Liabilities : Total amount payable by the business to others is knownas liability Ex .. Net Worth or owned equity : The amount of fund provided bythe proprietor in the business is called as net worth or capitalalso
Types ofAssets Assets : Property of any kind owned by a businessman is called anasset, Ex Fixed Assets : Ex .. Current Assets :Ex .. Fictitious Assets :Ex ..
Accounting concept Accounting principles are those rules which are to be adopted bythe accountants Accounting is the language of business. This are general guidelinesfor sound accountingpractices 1) Reliable financial statements 2) Generally acceptable basis ofmeasurement 3) Valid and appropriate assumptions 4) Uniformity in presentation 5) Valid and appropriate assumptions 6) Proper information to all
Accounting concepts 1) Business entity 2) Money measurement 3) Cost concept 4) Consistency concept 5) Conservatism 6) Going concern 7) Realization 8) Accrual 9) Dual aspect 10) Disclosure 11) Materiality 12) Revenue recognitionprinciple 13) Marching principle 14) Accounting standards
Business entity concept: This concept assumes that, for accounting purposes, the business enterprise and its owners are two separate independent entities. Thus, the business and personal transactions of its owner are separate. For example, when the owner invests money in the business, it is recorded as liability of the business to the owner. Similarly, when the owner takes away from the business cash/goods for his/her personal use, it is not treated as business expense.
Money Measurement concept: This concept assumes that all business transactions must be in terms of money. In our country such transactions are in terms of rupees. Thus, as per the money measurement concept, transactions which can be expressed in terms of money are recorded in the books of accounts
Going concern concept This concept states that a business firm will continue to carry on its activities for an Future period of time. Simply stated, it means that every business entity has continuity of life. Thus, it will not be dissolved in the near future. This is an important assumption of accounting, as it provides a basis for showing the value of assets in the balance sheet.
Accounting period concept: The life of an entity is divided into short economic time periods on which reporting statements are fashioned. All the transactions are recorded in the books of accounts on the assumption that profits on these transactions are to be ascertained for a specified period. This is known as accounting period concept. Thus, this concept requires that a balance sheet and profit and loss account should be prepared at regular intervals for different purposes like, calculation of profit, ascertaining financial position etc.
Accounting cost concept Accounting cost concept states that all assets are recorded in the books of accounts at their purchase price, which includes cost of acquisition, transportation and installation and not at its market price. It means that fixed assets like building, plant and machinery, furniture, etc are recorded in the books of accounts at a price paid for them. For example, a machine was purchased by XYZ Limited for Rs.500000, for manufacturing shoes. An amount of Rs.1,000 were spent on transporting the machine to the factory site. In addition, Rs.2000 were spent on its installation. The total amount at which the machine will be recorded in the books of accounts would be the sum of all these items i.e. Rs.503000. This cost is also known as historical cost.
Matching Concept: The matching concept states that the revenue and the expenses incurred to earn the revenues must belong to the same accounting period. So once the revenue is realised, the next step is to allocate it to the relevant accounting period. The matching concept implies that all revenues earned during an accounting year, whether received/not received during that year and all cost incurred, whether paid/not paid during the year should be taken into account while ascertaining profit or loss for that year.
Dual aspect concept Dual aspect is the foundation or basic principle of accounting. It provides the very basis of recording business transactions in the books of accounts. This concept assumes that every transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides. Therefore, the transaction should be recorded at two places. It means, both the aspects of the transaction must be recorded in the books of accounts. For example, goods purchased for cash has two aspects which are (i) Giving of cash (ii) Receiving of goods. These two aspects are to be recorded. Thus, the duality concept is commonly expressed in terms of fundamental accounting equation Assets = Liabilities + Capital
Realisation concept This concept holds to the view that profit can only be taken into account when realization has occurred. According to this concept revenue is recognized when a sale is made. Sale is considered to be made at the point when the property in goods passes to the buyer and he becomes legally liable to pay. Revenue is said to have been realized when cash has been received or right to receive cash on the sale of goods or services or both has been created
Conservatism The convention is the based on principle that, Anticipate no profit, but provide for all possible losses . It provides guidance for recording transactions in the books of accounts. It is based on the policy of playing safe in regard to showing profit. The main objective of this convention is to show minimum profit. Profit should not be overstated. If profit shows more than actual, it may lead to distribution of dividend out of capital. This is not a fair policy and it will lead to the reduction in the capital of the enterprise
Consistency The convention of consistency means that same accounting principles should be used for preparing financial statements year after year. For example: if a stock is valued at cost or market price whichever is less , this principle should be followed year after year. Example : under deprecation used fixed installment method.
Materiality The convention of materiality states that, to make financial statements meaningful, only material fact i.e. important and relevant information should be supplied to the users of accounting information. The question that arises here is what is a material fact. The materiality of a fact depends on its nature and the amount involved. Material fact means the information of which will influence the decision of its user..
Inflation Accounting DEFINITION OF INFLATION ACCOUNTING: A state in which the value of money is falling that is prices are rising. A process of steadily rising prices resulting in diminishing purchasing power of a given nominal sum of money. Objective: 1) The user or decision maker gets an information which shows the performance. 2) To facilitate the comparison of the performance of two different periods it is necessary that the figures are adjusted for inflation. 3) The monetary items, income & expenses do not show the correct purchasing power of money therefore, their values should be adjusted.
ADVANTAGES It enables the maintenance of capital intact which is essential in a limited liability business. Profit/loss is determined by matching the cost & the revenue at current values which are comparable. The assets are shown at real values uniformly instead of at distorted values. Trade unions, employees, shareholders & public are not misled by giving an exaggerated profit figures. By showing the current values of fixed assets it enables the establishment of realistic price for the company s shares
DISADVANTAGES Depreciation being the process of distribution of original cost, charging anything in excess does not fit into the concept of depreciation. Replacement cost is an indefinite figure closured by future technological developments & the time period at which the asset will be scrapped. Charging depreciation on replacement cost basis will be acceptable to income-tax authorities & hence there is no purpose in doing the exercise.
