UNIT - I INTRODUCTION TO ACCOUNTING CONCEPTS Synopsis: 1. Introduction 2. Objectives and Principles 3. Accounting Concepts and conventions 4.

Principles of accountancy according to GAAP . !ouble entry syste" #. Classification of accounts $. Accounting cycle

1. INTRODUCITON FINANCIAL ACCOUNTING %&e "ain object of any business is to "a'e profits. It is "ay be a business engaged in t&e purc&ase and sales of goods or it "ay be engaged in t&e production of goods or provision of services (&atever be it)s nature* t&e "ain object is to earn profits. A business"an enters into business in order to earn profits. in t&e business"an (is&es to find out &o( "uc& profit &e &as "ade during a given period* &e "ust be able to re"e"ber all t&e transactions t&at &ave ta'en place in &is business. +ut it is not possible for any business"an to re"e"ber all t&e transactions t&at &ave ta'es place in &is business. ,o &e &as to record t&e" in &is boo's of accounts. History of Acco ntin!: Accounting is as old as civili-ation itself. .ro" t&e ancient relics of +abylon* it can be (ill proved t&at accounting did e/ist as long as 2#00 +.C. 1o(ever* in "odern for" accounting based on t&e principles of !ouble 2ntry ,yste" ca"e into e/istence in 1$t& Century. Fra Luka Paciolo* a De computic et .ransiscan "on' and "at&e"atician publis&ed a boo'

scripturies in 1434 at 4enice in Italyl. %&is boo' (as translated into 2nglis& in 1 43. In t&is boo' &e covered a brief section on 5boo'6'eeping). Accounting in India is no( a fast developing discipline. %&e t(o pre"ier Accounting Institutes in India vi-.* c&artered Accountants of India and t&e Institute of Cost and 7or's Accountants of India are "a'ing continuous and substantial contributions. %&e international Accounts ,tandards Co""ittee 8IA,C9 (as establis&ed as on 23 t& :une. In India t&e 5Accounting ,tandards +oard 8A,+9 is for"ulating 5Accounting ,tandards) on t&e lines of standards fra"ed by International Accounting ,tandards Co""ittee. "oo#-#$$pin! is t&e art of recording all business transactions in t&e boo's of account "aintained by business"an for t&at purpose. ;eeping a separate boo' to recording all t&e business transaction by using principle of accounting is also called +oo'6'eeping. Acco ntin! is an art as (ell as sciences of identifying* analy-ing* recording* classifying and su""ari-ing of business transactions (&ic& are of a financial c&aracter and are e/pressed in ter"s of "oney. It also includes interpretation aspect of t&e recorded infor"ation. A%$ric&n Instit t$ of C$rtifi$' P ()ic Acco nt&nts *AICPA+: <%&e art of recording* classifying and su""ari-ing in a significant "anner and in ter"s of "oney transactions and events* (&ic& are in part at least* of a financial c&aracter and interpreting t&e results t&ereof.= %&us* accounting is an art of identifying* recording* su""ari-ing and interpreting business transactions of financial nature. 1ence accounting is t&e L&n! &!$ of " sin$ss. O",ECTI-ES OF "OO. .EEPING / ACCOUNTANC0 %o ascertain"ent of financial position of t&e business organi-ation. %o deter"ine t&e profit and loss of organi-ation %o 'no(ing t&e infor"ation about capital e"ployed in t&e business. %o 'no( t&e value of asset of t&e organi-ation %o Calculation of a"ounts due to and due by ot&ers. %o 'no( &o( "uc& ta/ to pay to t&e govern"ent

%o co"parison bet(een t&e current year and t&e previous year)s records. %o plan t&e organi-ation %o 'no( t&e financial infor"ation of t&e ot&er organi-ation %o preparation of financial state"ents

"ASIC ACCOUNTING CONCEPTS Accounting is a syste" evolved to ac&ieve a set of objectives. In order to ac&ieve t&e goals* (e need a set of rules or guidelines. %&ese guidelines are ter"ed &ere as <+A,IC ACCO>?%I?G CO?C2P%,=. %&e ter" concept "eans an idea or t&oug&t. +asic accounting concepts are t&e funda"ental ideas or basic assu"ptions underlying t&e t&eory and profit of .I?A?CIA@ ACCO>?%I?G. %&ese concepts &elp in bringing about unifor"ity in t&e practice of accounting. In accountancy follo(ing concepts are Auite popular. 1+ " sin$ss Entity Conc$pt %&is concept treats t&e o(ner as totally a different entity fro" t&e business. %o put in to nuts&ell BO(ner is different and +usiness is differentB. %&e capital (&ic& is broug&t inside t&e fir" by t&e o(ner* at t&e co""ence"ent of t&e fir" is 'no(n as capital. %&e a"ount of t&e capital* (&ic& (as initially invested s&ould be returned to t&e o(ner considered as due to t&e o(nerC (&o (as not&ing but t&e contributory of t&e capital. 1+ Goin! Conc$rn Conc$pt %&e concept deals (it& t&e Auality of long lasting status of t&e business enterprise irrespective of t&e o(nersD status* (&et&er &e is alive or not. %&is concept is 'no(n as concept of long6ter" assets. %&e fi/ed assets are boug&t in t&e intention to earn profits during t&e season of t&e business. %&e assets (&ic& are idle during t&e slac' season of t&e business retained for future usage* in spite of t&at t&ose assets are freAuently sold out by t&e fir" i""ediately after t&e utility leads to "ean t&at t&ose assets are not fi/ed assets but tradable assets. %&e fi/ed assets are retained by t&e fir" even after t&e usage is only due to t&e principle of long lastingness of t&e business enterprise. If t&e business disposes t&e assets i""ediately after t&e current usage by not considering t&e future utility of t&e assets in t&e fir" (&ic& (ill

not distinguis& in bet(een t&e long6ter" assets and s&ort6ter" assets 'no(n as tradable in categories 2+ 3on$y 3$&s r$%$nt Conc$pt %&is is t&e concept tunes t&e syste" of accounting as fruitful in recording t&e transactions and events of t&e enterprise only in ter"s of "oney. %&e "oney is used as (ell as e/pressed as a deno"inator of t&e business events and transactions. %&e transactions (&ic& are not in t&e e/pression of "onetary ter"s cannot be registered in t&e boo' of accounts as transactions. 4+ Cost Conc$pt It is t&e concept closely relevant (it& t&e going concern concept. >nder t&is concept* t&e transactions are recorded only in ter"s of cost rat&er t&an in "ar'et value. .i/ed assets are only entered in ter"s of t&e purc&ase price (&ic& is a original cost of t&e asset at t&e "o"ent of purc&ase. %&e depreciation is deducted fro" t&e original value (&ic& is t&e initial purc&ase price of t&e asset (ill &ig&lig&t t&e boo' value of t&e asset at t&e end of t&e accounting period. %&e "ar'eting value of t&e asset s&ould not be ta'en into consideration* 7&yE %&e "ain reason is t&at t&e "ar'et value of t&e asset is subject to fluctuations due to de"and and supply forces. %&e entry of "ar'et value of t&e asset (ill reAuire t&e freAuent update of infor"ation to t&e tune of c&anges in t&e "ar'et 5+ Acco ntin! P$rio' Conc$pt %&oug& t&e life period of t&e business is longer in span* (&ic& is classified into t&e operating periods (&ic& are s"aller in duration. %&e accounting period "ay be eit&er calendar year of :an6!ec or fiscal year of April6Far. %&e operating periods are not Concept of fusion in bet(een t&e e/penses and revenues O(ner and business organi-ations are t(o separate entities Accounting concept for long lastingness of t&e business enterprise eAuivalent a"ong t&e trading fir"s* (&ic& "eans t&at t&e operating period of one fir" .inancial Accounting "ay be s&orter t&an t&e ot&er one. %&e ulti"ate ai" of t&e concept is to nullify t&e deviations of t&e operating periods of various traders in t&e trading practice 6+ D &)ity or Do ()$ $ntry &cco ntin! conc$pt

It is t&e only concept (&ic& portrays t&e t(o sides of a single transaction. %&e la( of entire business revolves around only on "utual agree"ent s&aring policy a"ong t&e players. 1o( "utual agree"ent is ta'ing place E %&e entire principle of business is "ainly conducted on "utual agree"ent a"ong t&e parties fro" one occasion to anot&er. %&e pay"ent of (ages are only "ade by t&e fir" out of t&e services of labourers. 7&at 'ind of "utual agree"ent in s&aring t&e benefits is ta'ing placeE %&e services of t&e labourers are availed by t&e fir" t&roug& t&e pay"ent of (ages. @i'e6(ise* t&e labourers are regularly getting (ages for t&eir services in t&e fir". ACCOUNTING CON-ENTIONS Accounting is based on so"e custo"s or usages. ?aturally accountants &ere to adopt t&at usage or custo".%&ey are ter"ed as convert conventions in accounting. %&e follo(ing are so"e of t&e i"portant accounting conventions. 1. F )) Disc)os r$G According to t&is convention accounting reports s&ould disclose fully and fairly t&e infor"ation. %&ey purport to represent. %&ey s&ould be prepared &onestly and sufficiently disclose infor"ation (&ic& is if "aterial interest to proprietors* present and potential creditors and investors. %&e co"panies AC%* 13 # "a'es it co"pulsory to provide all t&e infor"ation in t&e prescribed for". 2.3&t$ri&)ityG >nder t&is convention t&e trader records i"portant factor about t&e co""ercial activities. In t&e for" of financial state"ents if any uni"portant infor"ation is to be given for t&e sa'e of clarity it (ill be given as footnotes. 3.Consist$ncyG It "eans t&at accounting "et&od adopted s&ould not be c&anged fro" year to year. It "eans t&at t&ere s&ould be consistent in t&e "et&ods or principles follo(ed. Or else t&e results of a year Cannot be conveniently co"pared (it& t&at of anot&er. 4. Cons$r7&tis%G %&is convention (arns t&e trader not to ta'e unreali-ed inco"e in to account. %&at is (&y t&e practice of valuing stoc' at cost or "ar'et price* (&ic& ever is lo(er is in vague. %&is is t&e policy of <playing safe=C it ta'es in to consideration all prospective losses but leaves all prospective profits.

DOU"LE ACCOUNTING S0STE3 !ouble entry syste" of +oo'6'eeping is si"ple and universal in its application. It &as t&e test of four &undred years continuous use. It "ay be clai"ed t&at it is t&e only syste" (ort&y of adoption by t&e practical business"an. %o understand t&e syste" of double entry syste" of boo'6 'eeping all t&at (e need to re"e"ber is t&e funda"ental ruleG Debit the account which receives the benefit. Credit the account which gives the benefit %ypes of account 19 Personal Account 29 Heal Account 39 ?o"inal Account RULES FOR DE"IT / CREDIT. 1+P$rson&) Acco ntG 6 %&is account deals (it& t&e individuals of t&e organi-ation t&ese includes accounts of natural persons in varied capacities li'es suppliers and buyers of goods* lenders and borro(ers of loans etc. Debit the receiver Credit the giver 29 R$&) Acco ntG 6 %&is account deals (it& t&e group of individuals of t&e organi-ation t&ese include co"binations of t&e properties or assets are 'no(n as real account. Debit what comes in Credit what goes out 39 No%in&) Acco ntG 6 ?o"inal accounts relate to suc& ite"s (&ic& e/ist in na"e only. %&ese ite"s pertain to e/penses and gains li'e interest* rent* co""ission* discount* salary etc* Debit all expenses and losses Credit all incomes and gains

"r&nc8$s9c)&ssific&tion of Acco ntin!: %&e i"portant branc&es of accounting areG 1. Fin&nci&) Acco ntin!: %&e purpose of Accounting is to ascertain t&e financial results i.e. profit or loass in t&e operations during a specific period. It is also ai"ed at 'no(ing t&e financial position* i.e.

assets* liabilities and eAuity position at t&e end of t&e period. It also provides ot&er relevant infor"ation to t&e "anage"ent as a basic for decision6"a'ing for planning and controlling t&e operations of t&e business. 1. Cost Acco ntin!: %&e purpose of t&is branc& of accounting is to ascertain t&e cost of a product I operation I project and t&e costs incurred for carrying out various activities. It also assist t&e "anage"ent in controlling t&e costs. %&e necessary data and infor"ation are gat&err4ed for" financial and ot&er sources. 2. 3&n&!$%$nt Acco ntin!: Its ai" to assist t&e "anage"ent in ta'ing correct policy decision and to evaluate t&e i"pact of its decisions and actions. %&e data reAuired for t&is purpose are dra(n accounting and cost6accounting. ACCOUNTING C0CLE: %&e accounting cycle is a series of steps perfor"ed during t&e accounting period to analyze* classify* record* summarize* and report useful financial infor"ation for t&e purpose of preparing financial state"ents. In boo''eeping* t&e accounting period is t&e period for (&ic& t&e boo's are balanced and t&e financial state"ents are prepared. Generally* t&e accounting period consists of 12 "ont&s. 1o(ever* t&e beginning of t&e accounting period differs according to t&e co"pany. .or e/a"ple* one co"pany "ay use t&e regular calendar year* :anuary to !ece"ber* as t&e accounting year* (&ile anot&er entity "ay follo( April to Farc& as t&e accounting period. St$ps in t8$ Acco ntin! Cyc)$ :ournali-e transactions in t&e journal. Post journal entries to t&e accounts in t&e ledger. Prepare a trial balance of t&e accounts and co"plete t&e (or's&eet 8includes adjusting entries9. Prepare .inancial ,tate"entsI.inal Accounts Journalize Transactions

Prepare Financial Statements/Final Accounts Prepare a Trial Balance

Ledger Accounts

1. !efine t&e concepts 5Accounting)* .inancial Accounting and Accounting ,yste"). 2. Give a brief account on t&e i"portant records of Accounting under !ouble 2ntry ,yste" and discuss briefly t&e scope of eac&E 3. 2/plain t&e accounting principles of GAAP and accounting cycle E 4.