Basics of Business Accounting

 Meaning: Accounting has rightly been termed as the language of the business. Accounting is the very basic of any business.  The basic function of a language is to serve as means of communication. Accounting also serves this function.  It communicates the result of business operations to various parties who have some stake in the business namely the proprietor, creditors, investors, Government and other agencies.

 Though accounting is generally associated with business but it is not only business which makes use of accounting.  Persons like housewives, Government and other individuals also make use of accounting for taking the relevant decisions.  For example, a housewife has to keep a record of the money received and spent by her during a particular period.  She can record here receipts of money on one page of her household diary, while payments for different items such as milk, food, clothing, house, education etc, on some other page or pages of her diary in a chronological order.

 Definition: Accounting is the art of recording, classifying and summarizing in 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.

Many words have similar, but not same, meaning as in common English. Similar to English, some rules are definite others are not. Rules continue to evolve.

 Recording: This is the basic function of accounting. It is essentially concerned with not only ensuring that all business transactions of financial character are in fact recorded but also that they are recorded in an orderly manner.  Classifying: Classification is concerned with the systematic analysis of the recorded data, with a view to group transactions or entries of one nature at one place. The work of classification is done in the book termed as Ledger.

 Summarizing: This involves presenting the classified data in a manner, which is understandable and useful to the internal as well as external end-users of accounting statements. This leads to the preparation of the following statements: i. Trial Balance; ii. Income statement; iii. Balance sheet.  Dealing with financial transactions: Accounting records only those transactions and events in terms of money, which are of a financial character.

 Analyzing and interpreting: The recorded financial data is analyzed and interpreted in a manner that the end users can make a meaningful judgement about the financial condition and profitability of business operations.  Communicating: The accounting information has to be Communicated to the external world

 Systematic Records: Accounting is done to keep a systematic record of financial transactions. In the absence of accounting there would have been terrific burden on human memory which in most cases would have been impossible to bear.  Ascertain Profit/Loss: Accounting helps in ascertaining the net profit earned or loss suffered on account of carrying the business.

1. Ascertain the financial position of business: The profit and loss account gives the amount of profit or loss made by the business during a particular period. 2. Protect the business properties: Accounting provides protection to business properties from unjustified and unwarranted use. Facilitate rational decision making: Accounting these days has taken upon itself the task of collection, analysis and reporting of information at the required points of time to the required levels of authority in order to facilitate rational decision making

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Money measurement. Entity. Going concern. Cost. Dual aspect. Accounting period. Conservatism. Realization. Matching. Consistency. Materiality.

 Money Measurement Concept: This concept states that the accounting records only monetary aspects of a transaction. Non-monetary aspects like love, affection, and gratitude to employees do not have a place in accounting.  Going Concern Concept: According to this concept life of the business is likely to continue for a fairly long period of time.  Separate Entity Concept: In accounting business is considered to have a separate legal existence from that of proprietor(s). Cost Concept: cost of acquisition of asset is recorded in accounting records and this cost is the basis for all subsequent transactions

 Dual Aspect Concept: Each transaction has two aspects namely debit and credit. Suppose if a business is commenced with Rs.10,00,000, it means that the capital is Rs.10,00,000 and cash is also Rs.10,00,000.  Accounting Period Concept: According to this concept, the life of the business is divided into appropriate segments for studying the results shown by the business after each segment.

 Periodic Matching of Revenue and Cost Concept: The term matching means appropriate association of related revenues and expenses. In order to ascertain profit/loss, the revenues and expenditure should be known during a particular period of time.  Realization Concept: According to this concept revenue is recognized when a sale is made. Sale is considered to be made at the point when the property in goods passes to the buyer and he becomes legally liable to pay.

 Conservatism: In the initial stages of accounting, certain anticipated profits, which were recorded, did not materialize.  Full disclosure: According to this convention, accounting reports should disclose fully and fairly the information which is of material interest to proprietors, present and potential creditors and investors.  Consistency: According to this convention accounting practices should remain unchanged from one period to another. Materiality: According to this convention the accountant should attach importance to the material details and ignore insignificant details.

 The meaning of journal is recording transactions on a daily basis.  It is very difficult to remember the various transactions unless some records are kept.  Say for example a student is asked to furnish the details of his expenditure out of pocket money, for a week somehow he may give the account. Imagine if he is asked to furnish for 6 months or one year what may be his position? When this is the position for an individual what may be the position to an organization where the transactions are varied and multitudinous.  Obviously there is a need for maintaining records pertaining to the days transactions.

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The business and proprietor (i.e., owner) of the business must be considered as two distinct (i.e., separate) entities (i.e., parties). While writing the name of real account or a nominal account, we have to add the word Account after the name of the asset or expenses or income. After passing all the journal entries, the two amount columns of the journal should be totaled.

4.Whenever the proprietor of a business brings in cash or any other thing in to the business, an account called Capital Account should be opened in the name of the proprietor 5.Whenever the proprietor invests in the business the sale proceeds of his private assets, or recorded in the books of the business as additional capital introduced by the proprietor. 6.Whenever the proprietor commences business with loan borrowed from his wife, children or friend, the two accounts that are required to be taken in to the account

7.Whenever the proprietor of a business withdraws cash goods or any other thing from business for his personal or domestic use, an account called the Drawings Account should be opened . 8. Whenever the personal expenses of the proprietor, are paid by the firm, those transactions should be recorded in the books of the business.

9. It is preferable to split the goods account in to (a) Purchase account, (b) Sales Account (c) Purchase Returns/return outwards, (d) Sales return/ returns inwards, (e) opening stock account and (f) closing stock account. 10.Generally, purchases account, sales account, purchase returns account and sales returns account are treated as real accounts, and the rules applicable to real accounts, are applied to these accounts, while journalizing the transactions.

11.If the name of supplier is mentioned, the purchase should be considered as credit purchase. 12. Whenever goods are purchased from a party for cash, the two accounts involved in that transaction are (1) purchases account and (2) cash account 13. Whenever goods are purchased from party on credit, the two accounts involved in the transaction are (1) purchases account and (2) the suppliers (i.e., sellers) account

14.Whenever some investments or securities, say, shares or debentures are sold the two accounts involved are (1) Cash account (2) investments account (and not sales account 15. Cash discount allowed by the business to its debtor at the time of receipt of money from the debtor , for his prompt payment 16. Trade discount should not be separately recorded at all either in the books of the seller or in the books of the buyers.

 After journalizing the various transactions of a business concern the entries are to be posted into separate set of accounts termed as ledger.  As said earlier each transaction has two aspects. Ledger accounts are to be kept for each individual accounts.  This ledger account is maintained in T form. On the other hand it is divided into two parts namely the debit side and credit side respectively. The left hand side is debit side and the right hand side is credit side. The following is the format of a ledger account

 A Trial Balance is a statement containing ledger balances of the accounts.  It gives the arithmetic accuracy of the books of accounts.  It is the statement through which final accounts like manufacturing account, Trading Account, Profit and Loss Account and a statement termed as a Balance Sheet are prepared to know the financial position as on a particular date.

Journalise the following transactions, post the same in relevant ledger accounts and balance the same. 2006 June 1. Anurag commenced business with Rs.20000 2. Paid into bank Rs.5000 3. Purchased Plant worth Rs.10000 from Modi&Co 4. Purchased goods worth Rs. 5000 from Anwar 6. Goods worth Rs.4000 sold to Abhishek 8Sold Goods worth Rs.2000 for cash 10 Goods returned by Abhishek Rs.50 15 Paid rent Rs.250

June 18. Withdrawn from bank for office use Rs.2,500 20 Paid Salaries Rs.1800 25Withdrawn for personal use Rs. 250 26 Goods returned to Anwar Rs.100 27 Paid for office furniture Rs.1,500 by cheque 28 Received Rs.3,900 cash from Abhishek and discount allowed Rs.50 29 Paid Anwar Rs.4800 and discount allowed by him Rs.100

Adjustment Closing Stock O/S Expenses

Prepaid Exps

O/S Incomes Income recd. in Adv Bad Debts Prov. For B/D Provision for discount on drs

Trading P&L A/C Credit side of Trading A/c Added to the concerned expenditure Deducted from concerned expenditure Added to the respective incomes Deducted from the concerned incomes Dr side of P&L Account Dr side of P&L Account Dr side of P&L Account

Treatment in Balance Sheet Assets side of the Balance Sheet To be shown under Liabilities side of the Balance Sheet Assets side of the Balance Sheet Assets side of the Balance Sheet Liabilities side of the Balance Sheet Deducted from S.Drs in B/S Deducted from S.Drs in B/S Deducted from S.Drs in B/S

Adjustment Res. For Discount on Crs Depreciation Appreciation

Interest on Capital

Balance Sheet Deducted from S.Crs on the liabilities side of the Cr. Side of the Balance Sheet P&L A/C Debit side of P&L Deducted from concerned Asset A/c Credit side of P&L Added to Concerned Asset A/c Added to the Capital A/c on the Liabilities side of the Dr. side of the Balance Sheet Profit and Loss A/c Trading P&L A/C Deducted from capital on the Liabilities side of the Balance Sheet

Interest on Drawings

Credit side of the P&L A/c

As per companies act all companies must follow Accounting Standard issued by Institute of Chartered Accountants of India (I.C.A.I). According to Accounting Standards issued by I.C.A.I, company may follow different accounting policies. For example for valuation of Inventories a number of methods have been given in Accounting Standard 2 Valuation of Inventories. Therefore a need arise to form a manual which will specify the standard practices to be followed by all units uniformly.
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Presentation Form

Direct Method

Indirect Method

Adjusting the net profit receipts & for the effects of Major classes of gross cash or loss gross cash changes during theby adjusting inventory cost of sales payments calculated period in the sales, and operating receivables and the P/L Account and other items in payables, non cash items like depreciation, provisions, deferred taxes, the period The adjustment could be w.r.t. changes during unrealized foreign exchange gains/losses and all the other items in inventories, operating receivables and payables; or for which other non-cash items; and changes in items cash changes in cash effects are investing or financing for flows the cash effects are investing/financing cash flows which Most of the Indian companies use the indirect method to state their cash flow from operations

An enterprise should report separately major classes of gross cash receipts and payments except in the following cases where reporting should be on net basis i.e.

Receipts or payments on behalf of customers where the cash flow reflects the activities of the customer rather than those of the enterprise for e.g. Rent collected on behalf of and paid to the owners of property Receipts or payments for items in which the turnover is Quick, amounts are large and maturities are short. Eg: Short term borrowings having maturity of less than or equal to 3 months

AS6

Provides a manual for depreciating the various assets of the company.

To provide guidelines for the valuation and disclosure of certain information relating to fixed assets owned by an enterprise, in the books of accounts. Fixed assets should be shown in the balance sheet either at their historical cost or at their revalued figures. figures. Cost consists of : Purchase price, duties and non price, refundable taxes, and al the other attributable taxes, costs for bringing the asset to working condition, for its intended use.

To establish principles for reporting financial information about the different types of products and services an enterprise produces and the different geographical areas in which it operates. Such information helps the users of financial statements in a better understanding the performance of the enterprise; Better assessing the risks and returns of the enterprise; Making more informed judgements abhout the enterprise as a whole.

To prescribe the principles for the determination and presentation of the earnings per share, which will facilitate a comparison of performance among different enterprises for the same period and among different accounting periods for the same enterprise. The focus of this statement is on the denominator in the earnings per share calculation. AS 20 requires an enterprise to clearly present the basic and diluted earnings per share for all the reported accounting periods, even if the amounts disclosed are negative ( a loss per share)