BASICS OF ACCOUNTING -CA Priyanka Satarkar

NEED FOR ACCOUNTING

Most of the activities are done through organizations.

Organizations means group of people working together for achieving one or more common objectives.
In achieving these common objectives they use resources like material, labour, services, equipment, buildings, etc. For working effectively people need to know about the amounts of these resources available and the means of financing these. SYSTEM OF ACCOUNTING PROVIDES THIS INFORMATION.

ACCOUNTING IN MODERN DAYS

Barter exchange has been replaced by monetary transactions

Industries have come into being

Complex machinery is used

Scale of operations has enlarged

Transactions occur on a large scale. All this has made Accounting a very important task in the modern days.

Meaning of the Term Accounting

Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of a financial character and interpreting the results thereof.

FEW BASIC TERMS IN THE DEFINITION

Recording

Classifying Summarizing Dealing with financial transactions Analyzing and interpreting Communicating

FEW BASIC TERMS IN ACCOUNTING Transaction Liabilities

Recording Incomes Expenses Profit Loss Capital Assets Income Statements Balance Sheet

Transaction
A Transaction can be defined as the occurrence of an event that must be recorded
Example:Let us take the example of a trading organization which sells electronic products, for this business the following would be the form of transactions:1) Buying of the various electronic goods for sale. 2) Selling of these articles to their customers

3) Purchase of a shop where their products would be stored

4) Paying various expenses like rent, electricity, maintainance, advertising, etc.

Recording
Recording basically relates to the documentation of the various transactions that take place in the business
Documentation of any transaction is important because the business organizations that operate today are very complex, hence it is not possible to remember each and every transaction, so it is essential to keep some track of the transactions for future reference and knowing how the business is doing. Record keeping may be manual or computerized.

Income
Income is something that is earned in monetary terms, from the business or commercial activity on regular basis, it is the amount before deducting any expenses associated with that activity In the case of a trading organization the following can be the sources of income:1) Amount got from the sale of products in the normal course of business 2) Amount got from the sale of defective products at lower prices

3) Amount received as interest on any amount of loan given to other business firms or individuals
4) Amount earned as dividend from the shares in which the business has invested.

Expenses
Expenses are those costs which are incurred by the business in the normal coarse of activity or sometimes there may be some costs which are abnormal yet related to business Some examples of Expenses are:1) Purchases made

2) Wages and transport charges

3) Salaries 4) Electricity, Repairs & Maintainance, Housekeeping 5) Printing and Stationary, Postage & Telephone 6) Taxes paid, etc.

Profit
Profit is that part of income which you earn over and above your Expenses
When Income exceeds expenses there is profit.
Every business has the basic motive of earning profit Profit is required for sustaining in the same line of business and for starting new lines of business

Profit is necessary for the growth of the business.

PROFIT can be written as ALL INCOMES -ALL EXPENSES in relation to that business activity.

Loss
When the expenses incurred in the business exceed the incomes generated then there is said to be a loss Thus LOSS can be stated as where there is more of expenses that the incomes. A continuous loss will lead to problems in the business and finally to its closure. Thus for sustaining a business activity well, care should be taken that the business does not incur losses. The health of the business is at stake if it suffers losses.

Capital
Capital is the amount that is invested in the business, this can be either owned capital or borrowed capital When a new business is started there is some amount that has to be invested in it, this is called as capital. Owned capital means the amount of capital that is invested by the person(s) starting the business. E.g. Share capital Borrowed capital is the amount that is borrowed by the owners of the business for the purpose of starting the business. E.g.. Debentures The profit that is earned gets added up to the capital or gets accumulated in the form of reserves. On the other hand the losses eat up the capital that the business has.

Assets
Assets are tangible or intangible properties that are owned by the business. These properties help the business to earn incomes. Thus they can be called as the source of generating incomes

Assets generate revenue

They can be tangible (i.e. they have physical form) like Building, Plant & Machinery or Intangible (i.e. do not have physical form) like Goodwill, patents, copyrights etc. Assets are further classified into

1. FIXED ASSETS

2. CURRENT ASSETS.

Liabilities
Liabilities are the claims that the business has against its assets. Thus it can be said that when a business owes some amount to other people or organizations it is the liability of the business Liabilities are amounts payable by the business. They can be called as obligations of the business that are payable in the future. These can be further classified into

1. Long Term Liabilities

2. Current Liabilities.

Income Statement
Income statement is the summary of the revenues and Expenses of a business entity for a specific period of time such as a month or a year. If the total revenue for the period in question exceeds the total expenses of that period it results in Net Profit. If the total expenses exceed total revenues the result is Net Loss

The Income Statement is normally said to be the Profit & Loss Account.
This statement gives the idea of how the business is performing

It gives a general idea of the various sources of incomes of the business and also the various ways in which the business is spending

Balance Sheet
A Balance Sheet is the final Statement of Accounts for a specified period depicting a list of Assets Liabilities and Owners Equity. Usually it gives the position of the firm at the close of the last day of the month or Year The balance sheet shows the exact sources from which the business has got its funds.

It shows how these funds are being invested in the business in the form of Assets.
It shows the position of the business in the sense of Sources of funds and their applications.

CONCEPTS OF ACCOUNTING
There are certain principles that are to be followed while carrying out the task of accounting. These are called as accounting principles. These may not be put on the paper while preparing the accounts but these are self evident. It can be said that these are assumed. While preparing the accounts of an organization or business these concepts are taken care of.

Importance of Financial Statements

IMPORTANCE TO OWNERS/ SHAREHOLDERS
IMPORTANCE TO MANAGERS IMPORTANCE TO CUSTOMERS IMPORTANCE TO SUPPLIERS IMPORTANCE TO LENDERS OR FINANCERS

PROSPECTIVE INVESTORS
IMPORTANCE TO GENERAL PUBLIC

ROLE OF ACCOUNTANT
ACCOUNTANTS IN PUBLIC PRACTICE :They are the ones who are appointed by a certain institute after qualifying for a specified examination Eg:-CA, CWA etc
ACCOUNTANTS IN EMPLOYMENT :These are the accountants who are employed in business or nonbusiness entities

ACCOUNTANTS SERVICES
MAINTAINANCE OF BOOKS OF ACCOUNTS
-Help to management

-Replacement of Memory
-Comparative study -Acceptance by tax authorities -Evidence in the Court -Sale of Business

AUDITING OF ACCOUNTS
TAXATION FINANCIAL SERVICES

OBJECTIVES OF ACCOUNTING
TO KEEP SYSTEMATIC RECORDS
TO PROTECT BUSINESS PROPERTIES TO ASCERTAIN OPERATIONAL PROFIT OR LOSS TO ASCERTAIN THE FINANCIAL POSITION OF BUSINESS TO FACILITATE RATIONAL DECISION MAKING

BASIC CONCEPTS OF ACCOUNTING

The Separate entity concept The Going concern concept The money measurement concept The cost concept The dual aspect concept Accounting period concept The Matching Concept The realization concept

The Separate entity concept

The business is considered to be separate and distinct from the person who is owning it or managing it. Thus when you write the accounts of a business you need to concentrate only on the transactions that are related to the business. What is related to the business and what is not would depend on the circumstances

Separate

The Going Concern concept

It is assumed that the business will continue for an indefinitely long period in the future. The business will be considered to have no intention of stopping its affairs in the future. Circumstances may occur when the business was formed for a certain purpose and the purpose is accomplished then Going concern concept ceases to exist.

Money measurement Concept

Money is used as a common denominator of expressing different facts. The effect of the transaction can be measured easily when it gets converted into the monetary terms

Thus all articles recorded are measured in monetary terms.

The cost Concept

While recording the assets of the business they are always recorded at their COST. Even if the cost of the asset fluctuates after its purchase, it does not make any difference to its value in the books of accounts.

Thus amounts which are shown in the books may not indicate its actual sales value.

Accounting period concept

The Going concern concept assumes that business will continue for an indefinite period in the future

Business needs to know, at regular intervals how things are going.

This need has resulted in the formation of the Accounting period concept. This concept focuses on measuring activities at specified intervals of time.

The Matching Concept

Newtons Law in Science states that Every Action has an equal an Opposite reaction In Accounts this same principle is reflected by the Matching Concept. It is stated that when something is got in the business, something has to leave the business. Here the Revenues and Expenses are matched by the business.

The realization concept

The Realization concept indicates the amount of revenue that should be recognized from a given sale. Realization refers to the inflow of Cash or claims to Cash It states that the amount recognized as revenue is the amount that is reasonably certain to be realized.

ACCOUNTING CONVENTIONS
CONSERVATISM
FULL DISCLOSURE CONSISTENCY MATERIALITY

The conservatism concept

This Concept focuses on two things: RECOGNIZE REVENUES only when they are CERTAIN RECOGNIZE EXPENSES as soon as they are reasonably possible However there might be problems in assessing what is the meaning of reasonably certain and reasonably possible.

FULL DISCLOSURE
Reports should fully and fairly disclose the information purport to be represented
The Companies Act 1956 specifically states that the Profit & and Loss and Balance Sheet of the company should give a true and fair view of the state of affairs of the business.

Consistency Concept
This concept states that once an Entity has decided one method it should use the same method for all subsequent events of the same character.
Frequent changes in the methods of recording will not only lead to problems in preparing them but also will not be useful in Comparison of statements of different time periods.

The Materiality Concept

The events that are recorded in the accounts should be significant and must effect the business. When all the material events of the business get reflected in the accounts they will give a correct picture of the Entity.