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FUNDAMENTALS OF ACCOUNTING Dr. Rana Singh www.ranasingh.org 98 11 828 987 www.ranasingh.org.

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Presentation on theme: "FUNDAMENTALS OF ACCOUNTING Dr. Rana Singh www.ranasingh.org 98 11 828 987 www.ranasingh.org."— Presentation transcript:

1 FUNDAMENTALS OF ACCOUNTING Dr. Rana Singh

2 TOPICS COVERED What is Business? Forms of Business Parties Interested in Business Defining Accounting Objectives of Accounting Functions of Accounting Branches of Accounting Accounting Concepts & Conventions

3 CONTENTS… Process of Accounting Financial Statements Important Terminology Usefulness of Accounting for Managers Recent Trends in Accounting

4 BUSINESS Business is a form of activity involving production and purchase of goods with the object of selling a profit. Producing and selling at profit is essential to constitute a business. The term business also includes the performance of services for others on payments.

5 FORMS OF BUSINESS Sole Proprietor Partnership Company or Corporation Every business whether small or large has the basic objective to see whether the money invested is efficiently utilized or not.

6 PARTIES INTERESTED IN BUSINESS Owner or Shareholder Managers Creditors Banks, Financial Institutions Prospective Investors Government Employees Society Researchers All these parties are interested in the Financial position of the organisation in order to take decisions.

7 ACCOUNTING Accounting is a language of business. The basic objective of language is to communicate the results of business operations to various parties Business must know:- –What is owns? –What he owes? –Whether it has earned a profit or loss on account of running a business? –What is financial position i.e. will it be able to meet all his commitments in the near future ? Accounting provides the answer of all these questions

8 DEFINING ACCOUNTING Accounting is a process of recording, classifying and summarizing in a significant and in terms of money, transactions and events which are, in part, at least of financial character and interpreting results thereof ---- AICPA (1941) Accounting may be defined as the process of recording, classifying, summarizing, analyzing and interpreting the financial transactions and communicating the results thereof to the parties interested in such information.

9 OBJECTIVES OF ACCOUNTING To maintain the records of business transaction Calculation of Profit or Loss Depiction of financial position To make information available to various groups and users. To facilitate rational decision making.

10 FUNCTIONS OF ACCOUNTING Recording –Only transactions that have financial character are recorded. –Recording is done in the book JOURNAL Classifying Grouping of transactions of similar nature at one place i.e LEDGER

11 FUNCTIONS OF ACCOUNTING Summarizing It involves presenting the classified data in a manner which is understandable and useful to the internal as well as external users of accounting statements. Trial Balance Income Statement Balance Sheet Deals with financial transactions Only financial transactions are recorded in the books of accounts. Analysis and Interpretation It helps the management to judge the performance of the business operations and for preparing future plans.

12 Communicating Results –Accounting information so analyzed and interpreted has to be communicated in a proper form and manner to the proper person. This is done through distribution of accounting reports Making Information more Reliable –This is done by use of internationally accepted accounting standards

13 BRANCHES OF ACCOUNTING Financial Accounting Cost Accounting Management Accounting

14 FINANCIAL ACCOUNTING The accounting system concerned only with the state of affairs and financial results of operations is called Financial Accounting. It Includes ascertainment of profit earned or loss incurred and position of business at the end of accounting period and providing financial information required by the management and other parties interested. The basic objective of accounting is to present TRUE & FAIR view of the affairs of the company.

15 COST ACCOUNTING The basic limitation of financial accounting is that it fails to provides the information relating to the cost of individual products. Cost Accounting deals with this problem The main purpose of cost accounting has been to analyze the expenditure involved so as to calculate the cost of various products manufactured and fix their price. It also helps in cost control.

16 MANAGEMENT ACCOUNTING The branch of accounting which provides necessary information to management for decision making is called management accounting. The Input for management accounting is from financial accounting and cost accounting.

17 ACCOUNTING PRINCIPLES Accounting is termed as language of business. As in case of language there are set of rules which are adopted for communication same is the case with accounting also. Are those rules of action or conduct which are adopted by accountant universally while recording accounting transactions. These principles are of two types: –Accounting Concepts –Accounting Conventions

18 ACCOUNTING CONCEPTS Concepts includes those basic assumptions or conditions upon which the science of accounting is based. 1.Separate Entity Concept 2.Going Concern Concept 3.Money Measurement Concept 4.Cost Concept 5.Dual Aspect Concept 6.Accounting Period Concept 7.Matching Concept (Periodic matching of Cost and Revenue) 8.Realization Concept

19 CONVENTIONS Are those customs or traditions which guide the accountant while preparing the accounting statements. 1.Convention of Conservatism 2.Convention of Full Disclosure 3.Convention of Consistency 4.Convention of Materiality

20 ACCOUNTING PROCESS Financial Transactions Recording:- Journal Classifying: Ledger Summarizing and Analysis and Interpretation

21 FINANCIAL STATEMENTS Financial Statements are the end product of financial accounting Financial Statements includes:- Profit and Loss Account (Income Statement) Balance Sheet

22 PROFIT & LOSS ACCOUNT It is also know as Income Statement, Statement of earnings, Statement of operations Profit and loss account is a flow statement that portrays the operations over/during a particular time period. It reports the profit or loss earned by a business unit out of its activities during a particular period. It is generally prepared after the end of financial year i.e. Accounting year

23 BALANCE SHEET A Statement which sets out the assets and liabilities of a firm or an institution as at a certain date. It is statement which reports the property values owned by the enterprise and the claims of the creditors and owner against these properties. It is prepared with a view to measure the True financial position of a business concern at a particular point of time.

24 IMPORTANT TERMS Assets –It denotes the economic resources (property) of a business and includes all current and fixed assets –Fixed Assets are those that are acquired for continued use and not meant for resale. They may be tangible like land, buildings, plant and machinery, furniture etc. or Intangible like patents, goodwill etc. –Current Assets are those assets which are kept temporarily for resale or for converting into cash. Stock, Cash in Hand, Debtors etc.

25 Liabilities –It denotes all claims against the assets of the business and include those of the outsider or those of the owner of the business. –Liabilities may include the followings:- Owner's Fund Long term Liabilities or Fixed liabilities Current Liabilities

26 Debtors –Are the persons or parties who are liable to pay to the business on account of credit sales. Creditors –Are the persons or parties to whom business is liable to pay on account of credit purchases. Capital –Total interest of the owner or owners in the business is called. It is sometime called as owners fund Revenue –The income that accrues to the firm by the sale of goods/services/assets or by supply of the firms resources to others.

27 Expense –It is the amount spent in order to produce and sell the goods and services which produce the revenue. Payment of wages, rent, salaries etc. Purchase –The term purchase is used only for the purchase of goods. Goods are those which are purchased for resale or for the production of finished goods which are also meant for sale. Sale –The term sale is used for the sale of goods only. It includes both credit as well as cash sale. Stock - Goods lying unsold on a particular date.

28 USEFULNESS OF ACCOUNTING FOR MANGERS Planning Performance Evaluation (Controlling) Decision Making Communication

29 RECENT TRENDS IN ACCOUNTING Human Resource Accounting Inflation Accounting Social Accounting Kaizen Costing ABC Costing Target Costing

30 THANK YOU


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