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Introduction of Accounting
Accounting is the systematic recorded presentation of the
financial activity of business/Enterprise. Human activities
may be classified as economic and non-economic activities. Noneconomic activities have service motive. These activities are
performed to honour our social, cultural, emotional, religious and
patriotic commitments and Satisfaction. Cooking by mother for
their families, rendering services by wives to their husbands,
nursing ailing husband by the nurse, teaching his own children by
the teachers are some examples of non-economic activities.
Economic activities aim at generating remuneration as wages,
salaries, fee, commission, brokerage or other receipt in cash or
kind. Our accounting is concern with the economic activities of the
business. Trade is purchase and sale of goods are profit motive.
The businessman work very hard to earn the maximum profit, so
he can accelerate the pace of growth of his business.
Cont.
The trader is also very keen know the result of his business
activities. For this, it is essential that he should keep in his
memory the entire business transactions. It is impossible for the
businessman to keep in his memory entire various, varied and
complex transaction of the business. Memory is not enough.
There is must documentary evidence of every business
transaction. It required systematic and scientific record of all the
transactions of financial nature.
Financial transactions have an effect on the assets, liabilities
and capital of the business. For example, commencement of
business, purchase of goods, machinery and furniture, sale of
goods, payment of wages, rent, salaries, repair and maintenance
etc.
We can ascertain the result of business in terms of profit and
loss and value of assets and liabilities, if maintain systematic,
proper, orderly and scientific record of the business transactions.
In other words, it requires proper accounting.
Cont..
Identifying business transaction is the first steep of
accounting. These transaction are recorded in the
subsidiary books and journal proper. With the help of
these books we prepare ledger accounts. The balance
shown by ledger accounts are used for preparing trial
Balance, which serves as bases of the preparation of
Financial statement. Financial statement are classified
as Income statement and position statement. Income
statement consists of trading account which shown
Gross profit/loss and profit and loss account showing
Net profit or loss of the business. Finally position
statement (Balance Sheet) is prepared, which reflect
the true position of assets and liabilities of the
business.
Definition of Accounting
The American Institute of Certified Public
Accountants has defined the financial accounting
as, the art of recording, classifying, and
summarizing in the significant manner & in
term of money, transaction and events which
are,in part, at least of a financial character
and interpreting the result thereof.
American accounting association defines
accounting as, the process of identifying,
measuring and communicating economic
information to permit informed judgment
and by user of the information.
Dealing with financial transaction:Accounting records only those transactions and events in term of
money which are of a financial character. Transaction which are
not a financial character are not recorded in the book of account.
For example, Company has got a team of dedicated and trusted
employees, it is of great use to the business but since it is not of a
financial character and not capable of being expressed in term of
money, it will not be recorded in the book of account.
Importance of Accounting
1)
2)
3)
4)
5)
To
To
To
To
To
Limitations of Accounting
The main limitations of accounting are as follows:
1. It does not disclose the present value of all
assets.
2. Non monetary factors are not considered.
3. Impact of inflation is not properly assessed.
4. Sometimes it is influenced by personal
judgments.
5. Alternative treatments may be made for some
transactions and as a result it will influence the
profit or loss of the business.
(1) Assets
The valuable things owned by the business are known
as assets.
Classifi cation of Assets
Fixed
Asset
s
Current
Assets
Fictitiou
s Assets
Tangibl
e
Assets
Intangib
le
Assets
Wasting
Assets
Liquid
Assets
Fixed Assets
These assets are acquired for long term use of the
business. They are not meant for sale. These assets
increase the profit earning capacity of the business.
Expenditure on these assets is not regular in nature.
Current assets
These assets, also known as circulating,
fluctuating or floating assets change their value
constantly. In the other words current assets are
those assets, which are converted in to cash with
in year. For Example:- cash in hand, cash at bank,
debtors, stock etc.
Suppose in business, cash in hand change so
many times during the day. Opening balance in
the morning was Rs. 2000, cash sale of Rs.6000,
will make it Rs. 2000+6000=8000. Payment of
salaries Rs.4000 will ,make it 8000-4000=4000. In
this way cash balance will change with every cash
transaction. There is always regular transaction
regarding floating assets.
a.
b.
c.
d.
e.
Fictitious Assets
Fictitious assets are those assets,
which do not have physical form.
They do not have any real value.
They are not the real assets but
they are called assets on legal and
technical ground.
Example of the assets are loss on
issue of shares, advertising
expenses and preliminary expenses
Tangible assets
Assets
Intangible assets
Wasting assets
Assets, whose value goes on declining with
the passage of time are known as wasting
assets. Assets taken on lease are its
example.
Liquid
Assets
(2) Capital
It is the part of wealth which is used of further
production and thus capital consists all current and
fixed assets. Capital should need not necessarily be in
cash, it may be in kind also.
Classification of
Capital
Fixed capital
Floating capital
Working capital
Fixed Capital
The amount investing in acquiring Fixed assets is called
fixed capital. The money is blocked in in fixed assets and
not available to meet the current liabilities. Plant and
Machinery, Land and Building, Furniture and vehicle
etc. are some of the example of fixed capital.
Floating Capital
Assets purchase with the intention of sale, such as stock
and investment are termed as floating capital.
Working Capital
The part of capital is available with the firm for day to day
working of the business is known as working capital.
Working capital = Current assets Current
liabilities.
Liability to owners or
Owners Equity
Liability to Creditors or
Creditors Equity
Creditors for
Expenses
b)
Creditors for loan. These Creditors are the parties, bank and other
financial institutions. The liability is named as Bank loan, Bank overdraft.
c)
(6) Stock
i.
ii.
iii.
(7) Debtors
The term debtors represents the persons or parties who have
purchased goods on credit from us and have not paid for the
goods sold to them. They still owe to the business. For example,
if goods worth Rs. 20,000 have been sold to Mahesh, he will
continue to remain the debtors of the business so for he does
not make the full payment. In case, he makes a payment of Rs.
16,000, he will remain to be debtor for Rs. 20,000- 16,000 =
4,000.
(8) Creditors
In addition to cash purchases the firm has to make credit
purchase also. The seller of goods on credit to the firm are
known as its creditors for goods. Creditors for liability of the
business. They will continue to remain the creditors of the firm
so for the full payment is not made to them. Liability to
creditors will reduce with the payment made to them.
Thank
you..
INDU GUPTA
B-Com, M.B.A,