MODULE1.pptx : introduction of accounting

Basics of accounting

1. Accounting

2. Content Introduction Meaning of Accounting Objectives of Accounting Advantage of Accounting Limitations of Accounting

3. Introduction The main purpose of accounting is to ascertain profit or loss during a specified period, to show financial condition of the business on a particular date and to have control over the firm’s property. Accounting records are required to be maintained to measure the income of the business and communicate the information so that it may be used by managers, owners and other parties. Accounting is a discipline which records, classifies, summaries and interprets financial information about the activities of a concern so that intelligent decisions can be made about the concern. The attributes of accounting are: It is the art of recording and classifying business transactions and events The transactions of a business must be recorded in monetary terms. It is an art of making summaries, analysis and interpretation of the transaction. The results of such analysis must be communicated to the persons who are to make decisions or form judgments

4. Meaning of accounting The accounting system is a series of steps performed to analyze, record, quantify, accumulate, summarize, classify, report, and interpret economic events and their effects on an organization and to prepare the financial statements . American Accounting Association defines accounting as “ the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of information”

5. Users of accounting information EXTERNAL USERS OF ACCOUNTING INFORMATION Investors Creditors Members of non-profit organisations Government Consumers Research scholars INTERNAL USERS OF ACCOUNTING INFORMATION Owners Management Employees

6. OBJECTIVES OF ACCOUNTING The objectives of accounting are to provide information for the following purpose. Making decisions concerning the use of limited resources including identification of crucial decisions areas and determination of objectives and goals. effectively directing and controlling the organizations human and materials resources. Maintaining systematic records and reporting on the custodianship of resources. Facilitating special functions and control. From the above, two main objectives of accounting are as follows: To ascertain whether the business operations have been profitable or not. To ascertain the financial position of the business.

7. Advantage of accounting Replacement of memory Evidence in court Settlement of taxation liability Comparative study Sale of business assistance to the insolvent person Assistance to various parties

8. LIMITATIONS OF ACCOUNTING THE FOLLOWING ARE THE LIMITATIONS OF ACCOUNTING Records only monetary transactions. Effect of price level changes not considered. No realistic information. Personal bias of accounting affects the accounting statements. Permits alternative treatments. No real test of managerial performance Historical in nature. CLASSIFICATIONS OF ACCOUNTING Financial accounting Cost accounting Management accounting.

9. BASIS OF ACCOUNTING CASH BASIS Under this basis actual cash receipts and actual cash payments are recorded. credit transactions are not recorded at all until the cash is actually received or paid. This basis does not make a complete record of financial transactions in a trading period as it does not record outstanding transactions like outstanding incomes and outstanding expenses. MERCANTILE OR ACCRUAL BASIS The accrual basis of accounting rests on the concepts of realization and expiration. In this basis of accounting, the income whether received or not but has been earned or accrued during the period forms part of the total income of that period. This basis of accounting gives a complete picture of the financial transactions of the business as it makes a record of all transactions relating to a period. MIXED BASIS In this method both cash and accrual basis are followed. Incomes are recorded on cash basis whereas expenses are taken on accrual basis and net income is ascertained by matching expenses on accrual basis with income on cash basis.

10. ACCOUNTING CONCEPTS Accounting concepts are basic assumptions or conditions upon which the science of accounting is based. They are as follows: Business entity concepts This concept implies that a business unit is separate from the person who supply capital to it .a business unit has its own individuality as distinguished from the person who own or control. business is kept separate from the proprietor so that transactions of the business may also be recorded with him. Money measurement concepts Money is the only practical unit of measurement that can be employed to achieve homogeneity of financial data, so accounting records only those transactions which can be expressed in terms of money though quantitative records are also kept. Going concern concepts It is assumed that business unit has a reasonable expectation of continuing business at a profit for an indefinite period of time. a business unit is deemed to be a going concern and not a gone concern. Cost concept An asset is recorded in the books at the price paid to acquire it and this cost is the basis for all subsequent accounting for the asset. This concept does not mean that the asset will be always shown at cost but it means that cost becomes the basis for all future accounting for the asset.

11. Dual aspect concep t This is the basic concept of accounting, that every financial transaction involves a two fold aspect. a) yielding of a benefit and b) the giving of that benefit. There must be a double entry to have a complete record of each business transaction. Accounting period concept It is assumed that a business entity has a reasonable expectation of continuing business for a definite period of time. So it is reasonable to divide the life of a business into accounting periods so as to enable to know the profit/loss of each such periods and the financial position at the end of such period. Matching concept T he determination of profit of a particular accounting period is essentially a process of matching the revenue recognized during the period and the cost to be allocated the period to obtain the revenue. Realization concept According to this concept, revenue is considered as being earned on the date at which it is realized i.e. on the date when the property in goods passes to the buyer and he becomes liable to pay. Objective evidence concept Objectivity connotes reliability, trustworthiness and verifiability, which means that there is some evidence in ascertaining the correctness of the information reported. Entries in accounting records and data reported in financial statements must be based on objectively determined evidence. Accrual concept The essence of accrual concept is that revenue recognized when it is realized, that is when sale is complete/services are given and it is immaterial whether cash is received/not. Similarly according to this concept expenses recognized in the accounting period in which they help in earning the revenue whether cash is paid or not.

12. ACCOUNTING CONVENTIONS Accounting conventions are circumstances or traditions which guide the accountant while preparing the accounting statements. They are as follows: Convention of consistency Accounting rules ,practices and conventions should be continuously observed and applied i.e. these should not change from one year to another. The result of different years will be comparable only when accounting rules are continuously adhered to from year to year. Convention of full disclosure According to this convention, all accounting statements should be honestly prepared and to that end full disclosure of all significant information should be made. All information's which is of material interest to proprietors, creditors, and investors should be disclosed in accounting statements. Convention of conservatism Conservatism means taking the gloomy view of the situation. It is a policy of caution /playing safe and had its origin as a safeguard against possible losses in a world of uncertainty. The rule is anticipate no-profits but provide for all possible losses. Convention of materiality Whether something should be disclosed or not in the financial statements will depend on whether it is material or not. Materiality depends on the amount involved in the transaction.

13. Frequently asked questions Discuss about the advantages of accounting system.

14. assignment Briefly discuss about features of accounting system.

15. glossary Conventions - Accounting conventions are circumstances or traditions which guide the accountant while preparing the accounting statements.

16. reference Financial Accounting-Reddy & Murthy Advanced Accounting-Jain & Narang