Accounting Basics concepts and conventions.pptx

Basics of Accounting concepts and conventions

1. Introduction to Accounting Accounting is the systematic process of recording, classifying, summarizing, and interpreting financial transactions and events. The purpose of accounting is to provide financial information about the business to various stakeholders like owners, managers, investors, and regulatory authorities.

2. Basic Concepts Business Entity Concept : The business is treated as a separate entity from its owners. Money Measurement Concept : Only those transactions that can be measured in monetary terms are recorded in accounting. Going Concern Concept : It is assumed that the business will continue to operate for an indefinite period. Cost Concept : Assets are recorded in the books at their historical cost, not at market value. Dual Aspect Concept : Every transaction affects two accounts in opposite directions; this is the foundation of the double-entry system. Revenue Recognition Concept : Revenue is recognized when it is earned, not necessarily when cash is received. Matching Concept : Expenses should be matched with the revenues they helped to generate in the same accounting period. Accrual Concept : Transactions are recorded when they occur, not when the cash is received or paid. Conservatism : Anticipate no profits but provide for all possible losses. Consistency : The same accounting principles should be used consistently from one accounting period to another.

3. Golden Rules of Accounting Accounting is based on the Double Entry System, and the Golden Rules of Accounting are categorized into three types of accounts: Personal Accounts : Debit the Receiver Credit the Giver Real Accounts : Debit what comes in Credit what goes out Nominal Accounts : Debit all expenses and losses Credit all incomes and gains

4. Principles and Conventions of Accounting Consistency Principle : Ensures uniformity in accounting processes over time. Full Disclosure Principle : All relevant information should be disclosed in the financial statements. Materiality Principle : Only significant information that would affect the decision-making process should be recorded. Prudence Principle : Caution should be exercised to ensure that profits are not overstated and losses are not understated. Entity Concept : Treats the business as separate from its owner. Cost Concept : Assets are recorded at their original purchase price. Revenue Recognition Principle : Revenue is recognized when it is earned and realizable.

5. Accounting Standards Accounting Standards are guidelines or rules for the preparation and presentation of financial statements. In India, the Institute of Chartered Accountants of India (ICAI) issues these standards, known as Accounting Standards (AS), which ensure transparency, consistency, and comparability in financial reporting.

6. Cash Transactions Cash transactions involve the exchange of cash between two parties. They are recorded in the Cash Book and are categorized as cash receipts or cash payments. Goods Goods refer to tangible products that are bought and sold in the normal course of business. For accounting purposes, goods are classified as stock or inventory until sold. Profit/Loss Profit : The financial gain when revenue exceeds expenses. Loss : The financial deficit when expenses exceed revenue.

7. Assets Assets are resources owned by a business that are expected to provide future economic benefits. They are classified into: Fixed Assets : Long-term assets like land, buildings, machinery. Current Assets : Short-term assets like cash, inventory, accounts receivable. Liabilities Liabilities are obligations that a business must pay in the future. They are categorized into: Current Liabilities : Short-term obligations like accounts payable, short-term loans. Non-Current Liabilities : Long-term obligations like long-term loans, bonds payable. Net-Worth Net-worth, also known as Owner’s Equity, represents the residual interest in the assets of the entity after deducting liabilities. It is calculated as: Net-Worth=Assets−Liabilities\text{Net-Worth} = \text{Assets} - \text{Liabilities}Net-Worth=Assets−Liabilities Contingent Liability A contingent liability is a potential obligation that may arise in the future depending on the outcome of an uncertain event. It is not recorded in the financial statements but is disclosed in the notes to the accounts. Capital & Drawings Capital : The amount invested by the owner(s) in the business. Drawings : The amount withdrawn by the owner(s) from the business for personal use.

8. Capital Expenditure Capital expenditure is the amount spent by the business on acquiring or upgrading fixed assets, which will provide benefits over several accounting periods. Revenue Expenditure Revenue expenditure is the amount spent on the day-to-day running of the business, such as salaries, rent, and utilities. These are fully charged to the income statement in the accounting period in which they are incurred.

9. Deferred Revenue Expenditure Deferred revenue expenditure is an expense that is paid in advance and benefits more than one accounting period. The expense is spread over the period during which it benefits the business. Cash Discount and Trade Discount Cash Discount : A reduction in the invoice amount given to customers for early payment. Trade Discount : A reduction in the listed price of goods given to buyers at the time of sale. Solvent and Insolvent Solvent : A business or individual that can meet its financial obligations as they come due. Insolvent : A business or individual that cannot meet its financial obligations when they come due.

10. Accounting Year The accounting year, also known as the fiscal year, is the period for which a business prepares its financial statements. It is usually 12 months long. Trading Concerns & Non-Profit Concerns Trading Concerns : Businesses engaged in the buying and selling of goods with the intent of making a profit. Non-Profit Concerns : Organizations established for purposes other than making a profit, such as charities, clubs, and educational institutions.