Foundation of Accounting B.Com (Professional) Sharda University K.R.Gola

ACCOUNTIG- INTRODUCTION After going through this chapter you should be able to Understanding the meaning of accounting & need for accounting Understanding accounting as a measurement discipline & its objectives How does it differ from book keeping Determine the groups or parties interested in accounting information

Accounting-? Need to study It is a common experience of all of us that money must be spend carefully. If u careless, a day will come you will be left with no money. the firm should manage its affairs in such a way as will enable it to receive more than its spends

Need of accounting The need of accounting for a person to run a business To know fundamental assumptions of accounting which help to run the business to know profit and loss account of running business To know the financial position of business

Accounting Concept Accounting is the language of business. The affairs and the results of the business are communicated to others through accounting information, which has to be systematically recorded and presented.

Accounting-definition Accounting may be defined as a process of recording, classifying, summarizing, analysis and interpreting the financial transactions and also communicate to the interested person in such information. Recording means- transaction in journal. Classifying means- transaction in ledger. Summarizing-transaction in final account

Accounting… Accounting is a science of recording and classifying business transactions & events. Book-keeping-? Book-keeping is a primary stage of accounting. It concerned mainly recording of financial transaction of business.

Book-keeping vs. accounting Primary stage of accounting Higher stage of book-keeping Mainly concerned recording the financial transactions It concerned designed the scientific system of recording, classifying & summarizing. A book-keeper work is a clerical nature An accountant work is based on conceptual and analytical skills Does not produce financial statement Concerned with preparation financial statement.

Users of Accounting Information Different categories of users need different kinds of information for making decisions. These users can be divided into : Internal Users; and External Users.

Internal users These are the persons who manage the business, i.e. management at the top, middle, and lower levels. Their requirements of information are different because they make different types of decisions.

Internal users like- owner, management, employee….? Internal users

External users of accounting All persons other than internal users come in the group of external users. External users can be divided into two groups: ·       those having direct interest; and ·       those having indirect interest in a business organization.

External users Investors and creditors are the external users having direct interest.

conti... Tax authorities, regulatory agencies, customers, stock exchanges, etc are indirectly interested in the company’s financial strength, its ability to meet short-term and long-term obligations, its future earning power, etc for making various decisions.

External Users of accounting Investors, government, banks, creditors, and suppliers ….? Accounting provides quantitative information of financial nature to both management & other users for making rational economic decisions. External users

Objective/advantage of accounting To keep systematic record of business To protect business properties Assistance to the management Maintenance of business record

Objective/advantage of accounting To Helpful in decision making Good evidence in courts. Provides information to interested groups To helpful in taxation and valuation of business

Management accounting of accounting branches b Accounting Financial accounting Management accounting Cost accounting

Management accounting Is the presentation of planning of accounting information to assist management in the creation of policy and day to day operation of an undertaking. Management accounting

Cost Accounting- Definition Cost accounting is a branch of Accounting. It is the classification, recording and appropriate allocation of expenditure for the determination of the costs of product or services.

Difference between financial accounting and cost accounting Internal & external part of organization Internal part of organization Gives information about P&L and Financial position To management for proper planning & control of expenditure to manufacture a product

distinguish Prepare report, mostly annually Half yearly, quarterly, or monthly Monetary information used only in F.A Both monetary & non-monetary (quantitative) Mandatory statement Not or May be Mandatory

It is emphasizes only on recording of transaction of data in the financial statement It emphasizes on cost control with help of standards budgets The F.A data is historical in nature Historical & futuristic in approach

Conti……… F.A system can be installed without proper cost A/C system C.A system can not be installed without proper F.A system

Important accounting terms Assets Liabilities Capital Revenue Expenses Purchases Sales Stock Debtors Creditors Drawings

ASSETS These are economic resources of an enterprise that can be usefully expressed in monetary terms. Assets are things of value used by the business in its operations. ·        Fixed Assets   ·       Current Assets

ASSETS continue… Fixed Assets are assets held on a long-term basis. e.g. Land, Building, Machinery, Plant, Furniture etc.  Current Assets are assets held on a short-term basis.

Current assets. e.g. Debtors, Bills receivable, Stock (Inventory), Cash and Bank balances, prepaid expenses , short term investment, etc.

LIABILITIES These are obligations or debts that the enterprise must pay in money at some time in the future. Long-term liabilities Short-term liabilities Long-term liabilities are those that are usually payable after a period of one year. e.g. A term loan from a financial institution, debentures (bonds) issued by a company.

LIABILITIES continue.. Short-term liabilities are obligations that are payable within a period of one year. e.g. Creditors, bills payable, overdraft from a bank for a short period, outstanding expenses, etc

CAPITAL Investment by the owner for use in the firm is known as capital. Owner’s equity is the ownership claim on total assets. It is equal to total assets minus total liabilities.

REVENUES These are the amounts the business earns by selling its products or providing services to customers. exp: sales, fees, commission, interest, dividends, royalties, rent received, etc.

EXPENSES These are costs incurred by a business in the process of earning revenue. Generally, expenses are measured by the cost of assets consumed or services used during an accounting period. exp: depreciation, rent, wages, salaries, interest, light and water, telephone, etc.

PURCHASES Purchases are total amount of goods procured by a business on credit and for cash, for use or sale. In a manufacturing concern, raw materials are purchased, processed further into finished goods and then sold. Purchases may be cash purchase or credit purchase.

SALES Sales are total revenues from goods or services sold or provided to customers. Sales may be cash sales or credit sales.

STOCK Stock (Inventory) is a measure of something on hand – goods, spares and other items – in a business. It is called stock on hand. In a trading concern, the stock on hand is the amount of goods which have not been sold on the date on which the balance sheet is prepared. This is also called closing stock.

Conti… In a manufacturing concern, closing stock comprises raw materials, semi-finished goods and finished goods on hand on the closing date. Similarly, opening stock is the amount of stock at the beginning of the accounting year.

DEBTORS Debtors are persons and/or other entities who owe to an enterprise an amount for receiving goods and services on credit. The total amount standing against such persons and/or entities on the closing date, is shown in the Balance Sheet as Sundry Debtors on the asset side.

CREDITORS Creditors are persons and/or other entities who have to be paid by an enterprise an amount for providing the enterprise goods and services on credit. The total amount standing to the favour of such persons and/or entities on the closing date, is shown in the Balance Sheet as Sundry Creditors on the liability side.

Drawings The value of goods or cash withdrawn by the owner from the business for the personal use is called drawings.

Assignment-1. B.Com(Prof) Which decision-makers use accounting information. Accounting is said to be the language of business. What does it try to communicate and how. Write the name of commerce & finance minister of India. What is difference between commerce ministry and finance ministry.

Format of assignment Submitted by submitted to Rahul Kumar K.R.Gola Foundation of Accounting SHARDA UNIVERSITY Submitted by submitted to Rahul Kumar K.R.Gola B.Com(Prof) Term-1

Unit-II Theory based accounting Accounting principles: these principle are the assumptions and rules of accounting, procedure of accounting and the application of these rules, methods and procedure to actual practice of accounting.

Types of accounting principles conventions Accounting concepts

Necessary assumption and conditions upon which accounting is based. Accounting concepts Necessary assumption and conditions upon which accounting is based. (a) Separate business entity concepts: business is treated as separate entity from its owner. exp: when a person invests Rs. 1000 into business, it will be shown as liability & if withdraws Rs. 2000 from the business, it will be charged to him

(b) going concern concept: accounting to this concept business will continue for long time to come. (c) dual aspect concept: it is based on the principle the ‘for every debit transaction there is a corresponding credit transaction, exp: liabilities+ capital= assets

Accounting concepts (d) cost concept: assets is recorded in the books of accounts at the price paid to acquire it. Any change in the value of asset due to change in the price level (inflation) is not considered. exp: an asset is purchased for Rs. 600000 & if at the time of preparation of final accounts its market value is Rs. 400000 or 700000 yet it will be recorded on the basis of its purchase price, Rs. 600000

Conti… (e) Money measurement concept: according to this concept accounting records only those transactions we can express in the term of money. Exp: cash, stock, furniture, etc. a fact which can not be expressed in term of money, exp: efficiency of worker, sales policy pursued by the enterprise, value of human resources

Conti.. (f) Accounting period concept: a particular period of 12 months is called accounting period. It is generally of a year such as from 1 April up to 31st march (financial year) & January 1 to 31st Dec ( calendar year) (g) Realization concept: according to this concept revenue is completed when a sale is made. Sale is considered to be made at the point when it property in goods passes to the buyer and he become liable to pay

Conti.. Matching concept: it is necessary revenue of the period should be matched with the cost for the period .

Accounting Conventions The term ‘convention’ is used to signify customs and traditions as a guide to the presentation of accounting statements.

Convention of Conservatism Conservatism means tendency to maintain a state of affairs without a sudden change. According to this convention accountant follow the rule that, anticipate no profit but profit but provide all possible losses. Exp: discount on debtors is provided while not provide on creditors.

Convention of Consistency it is essential that accounting practices and methods remain unchanged from one accounting period to another. A particular practice once adopted for some accounting aspect should be maintained form year to year. Exp: charging Dep method under diminishing balance method, it should be carrying on year to year.

Convention of Full Disclosure This principle implies that accountant should prepare & present the report disclose full information regarding financial result & position.

Convention of materiality ‘Materiality means important’ according to this conventions accountant is expect to disclose all important fact & ignore unimportant fact to avoid burden of unnecessary small details in accounting.