Basics of Accounting and accounts(1).pptx

hushjxgrvucjh

1. Definition of Accounting According to American Accounting Association (AAA) defines Accounting as: The process of identifying, measuring and communicating economic information, to permit informed judgments and decisions by a user of the information. It is an application of the general theory of information, to the problem of efficient economic operations.

2. Functions of Accounting Planning & Control Forecasting Decision Making Measure Interpret Communication Comparison and Evaluation

3. Generally accepted accounting principles - GAAP Combination of authoritative standards (set by policy boards) and the accepted ways of doing accounting Differs from country to country based on the accounting principles and standards adopted in that country Rules that business entities are expected to follow while preparing their financial statements

4. Accounting standards-setting organization in selected countries Country Policy Setting Board Australia The Australian Accounting Standards Board (AASB) sets GAAP in Australia. China PRC GAAP are issued by the Ministry of Finance of the People’s Republic of China. India The Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) is the body entrusted with the work of preparing the standards. The standards are issued under the authority of the council of the ICAI. U.K. The Financial Reporting Council (FRC) is the UK's independent regulator responsible for issuing accounting standards. U.S.A Financial Accounting Standards Board (FASB) is the body solely in charge of US GAAP

5. Basic concepts of accounting – accepted as principles Business Entity the entity is separate and distinct from the owners and the entity is liable to the owner Hence, in a limited liability company, the enterprise is liable to the owner (shareholder) based on the proportion of the capital investment (share capital) made by the latter

6. Going Concern entities have a life of infinite duration, unless facts are known that indicate otherwise the basis of valuation of resources is influenced more by their future utility to the business entity than by their current market valuation Money Measurement Representation in a common denominator and amenable to summarization by addition & subtraction The obvious advantages of monetary expression in accounts are: It provides a simple measuring device to represent many different facts in a common denominator (say, Indian Rupees); and When things can be expressed in monetary terms, they are amenable to summarization by using addition, subtraction and relation.

7. Matching Determining the profits after charging the expenses of a period with the revenues earned in the same period. For instance, School collected fees on February 2021 for conducting yoga classes from May 2021 which will continue till December 2021. The proper way of accounting as on March 2021, would be to treat the amount received as an advance for the courses to start in the next financial year. It would be taken as revenue in the next year (ending March 31, 2022) and adjust the expenses incurred in taking those classes, with this revenue (or proceeds), to determine the profits of that year. Realization Determines the point of time when revenue and hence returns (or profits) can be recognized objectively, unbiased, and with certainty. For instance, if the goods are sold in the month of March, for which the payment is received in the month of April, revenue and hence, profits will be considered to have been earned or realized in the month of March. Profits are recognized at the point of sale, when the ownership is passed on to the buyer. Consistency Once a choice is made for the treatment of a transaction, the same is consistently followed

8. Conservatism Method of measurement, which ensures ‘the quality of being prudent: cautiousness’ . “Anticipate no gains, but provide for all possible losses” and “if in doubt, write it off” Results in an understatement of profits and values Close nexus with idea of ‘capital maintenance Materiality Necessitated by practicability and feasibility a balance is always struck between accuracy and the costs of achieving it . Any information that could influence a decision of a user of the financial statements shall be deemed to be material information and shall be disclosed properly in the same. Timeliness The idea of accounting periods is used so as to ensure regularity and timeliness of reporting

9. Reporting on the financial health Signaling the user about the need to take a decision Provision of such information that would enable to find solutions

10. Accounting Information users Stakeholders are the ones who have an interest in what happens as a result of the entities activities Stakeholders classified as Internal users viz., managers External users viz., creditors, equity investors, government, and society 10

11. Accounting equation This idea fundamental to accounting could be expressed as an equality : Owner(s) claim is residual : It shows the duality represented by ‘ benefit-sacrifice ’, from the point of the view of an entity Assets = Liabilities + Owners Equity Owners Equity = Assets – Liabilities

12. Accounting equation Other way to look at accounting equation… Uses of funds = Sources of funds Assets + Expenses = Debt + Equity + Revenues Assets = Debt + Equity + (Revenue – Expenses) Assets = Debt + Equity + (Profits or retained earnings) Assets = Debt + (Equity + Retained earnings) Assets = Debt or liabilities + Owner’s equity

13. Accounting equation Let us look at some examples of transactions changing the accounting equation Capital stock was issued for $100,000 cash Cash + $100,000; Capital stock + $100,000. Bonds payable of $25,000 were refunded with capital stock Bonds payable - $25,000; Capital stock + $ 25,000 Depreciation on plant and equipment equaled $8,500 for the year Retained earnings (Depreciation expense) - $ 8,500; Accumulated depreciation on plant and equipment + $8,500. Inventory was purchased for $15,900 cash Cash - $15,900; Inventory + $15,900 .

14. Accounting equation $ 9,400 worth of inventory was purchased on credit Inventory + $9,400; Accounts payable + $ 9,400. Inventory costing $4,500 was sold for $7,200 on credit Inventory - $4,500; Accounts receivable + $7,200; Retained earnings + $2,700 $3,500 in cash was received for merchandise sold on credit Cash + $3,500; Accounts receivable - $3,500. Dividends of $3,000 were declared Dividends payable + $3,000; Retained earnings - $ 3,000 The declared dividends of $3,000 were paid Cash - $3,000; Dividends payable - $3,000. The company declared a stock split, and replaced each outstanding share with two new shares No effect