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Accounting Process & Principles

Accounting is concerned with the qualification and interpretation of past and prospective economic transactions. It helps in preparing the financial statements of a business, which are a fundamental source of financial information. Accounting can rightly be termed as the language of the business, through it, the results of business operations can be communicated to various interested parties of the business viz, proprietors, creditors, investors, governments, etc.

Above all accounting is a base of financial managements decisions.

Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transaction and event which are a part of financial character and interpreting the result thereon
American Institute of Certified Public Accountants

Language of business This is a service activity. Its function is to provide quantitative information, of financial performance which are intended to be useful in making economic decision.

Objectives of Accounting System

1. Systematic recording of transactions 2. To process the information efficiently 3. To obtain reports quickly 4. To ensure a high degree of accuracy 5. Ascertainment of the financial positions of the business 6. Providing information to users for rational decisionmaking. 7. To know the solvency position

1. Analyze transaction

2. Journalize original entries

3. Post journal entries to ledger 4. Balances of Ledger transfers to Trail Balance 5. Journalize and post closing entries 6. Prepare financial statements

Functions of Accounting
Recording This is the basic function of accounting. It ensures that all business truncations of a financial character are correctly recorded in a chronological order. The recording is done in the book popularly known as Journal Classifying Classification involves systematic analysis of the recoded data with the objective of grouping transaction or entries of one nature at one place. This work is done in the book popularly known as Ledger Summarizing This is concerned with presenting the classified data in a readily understandable manner to both internal as well as external users of accounting information. It involves preparation of the following statements- Trail Balance, Profit and loss account, Balance sheet.

Financial accounting it is mainly concerned with recoding, classifying, summarizing, the all financial transactions or event. it provide the information of profit and loss of a business and as well it also helps to get the information of financial position composition of asset and liabilities, to all internal users and external users. Management accounting It provides the necessary information to the management for their functions like planning, organizing, controlling, directing etc. after obtaining the financial results through Financial accounting. So this branch serves to internal users only.

Limitations of Accounting
A common man presumes that an income statement shows the correct income or loss of the business enterprise and a balance sheet portrays a perfectly true and fair picture of financial standing of that enterprise. It must be recognized that accounting as a language has its own limitations. So some of following points can be taken as its limitations1. Different accounting policies for the treatment of same item add to the probability of manipulations, through various laws, different accounting standards. 2. A financial statement only considers those assets which can be expressed in only monetary terms. The factors which may be relevant in assessing the worth of the enterprise dont find place in the accounts as they cannot be measured in terms of money, like loyalty and skill of the personnel which may be most valuable asset for any business.

3. Balance sheet shows the positions of the business on the day of its preparation and not on the future date while the users of the account are interested in knowing the position of the business in the near future and also in long run on behalf of past performance.

4. Certain accounting estimates depends on the personal judgments of the accountant, e.g. provisions for doubtful debts, methods of depreciation adopted, recording certain expenditure as revenue or capital expenses, selections of methods of valuation of stockin- hand, period of writing off intangible assets, and list is quite long.


Difference between Accounting and Book keeping

1. Book keeping is a process concerned with the recording of transactions only, but accounting is a process deals with summarizing of recorded transactions. 2. Book keeping is a base for accounting, but accounting deemed as a language of the business. 3. Book keeping has no sub-filed, but accounting has several sub- fields like financial accounting, management accounting etc.


4. Financial position of the business cannot be ascertained through Book keeping records, but accounting is way from which financial position and financial results of a business can be ascertained.

5. From the record of book keeping, managerial decisions cannot be taken, but accounting provides all kind of information like profit or loss status and financial position composition of assets and liabilities, so through this lots of managerial decision can be taken.


Information from Accounting

Nonquantitative information Quantitative information

Accounting information Operating information Financial Accounting

Non-accounting information Management Accounting


Owners Management Creditors Government Prospective owners and prospective creditors  Employees  Public     



Accounting principles can be subdivided into two categories: y Accounting Concepts.

Accounting Conventions.


y The term concept is used to indicate the necessary assumptions and conditions upon which accounting is based.

The term convention is used to signify customs and traditions as a guide to the presentation of accounting statements.


Various types of Accounting Concepts

Business Entity Concept Money Measurement Concept Cost Concept Going Concern Concept Dual Aspect Concept Realization Concept Accounting Period Concept


Accounting Conventions
Convention of Consistency Convention of Disclosure Convention of Conservation


Business Entity Concept

Business is treated as a separate entity or unit apart from its owner and others. All the transactions of the business are recorded in the books of business from the point of view of the business as an entity and even the owner is treated as a creditor to the extent of his/her capital.


Money Measurement Concept

In accounting, we record only those

transactions which are expressed in terms of money. In other words, a fact which can not be expressed in monetary terms, is not recorded in the books of accounts.

Cost Concept
Transactions are entered in the books of accounts at the amount actually involved. Suppose a company purchases a car for Rs.1,50,000/- the real value of which is Rs.2,00,000/-, the purchase will be recorded as Rs.1,50,000/- and not any more. This is one of the most important concept and it prevents arbitrary values being put on transactions.

Going Concern Concept

It is persuaded that the business will exists for a long time and transactions are recorded from this point of view.


Dual Aspect Concept

Each transaction has two aspects, that is, the receiving benefit by one party and the giving benefit by the other. This principle is the core base of accountancy.

Dual Aspect Concept continue

For example, if there is a purchase of Rs 10,000 cash in business, then two accounts will come; one is purchase account and next is cash account.


Dual Aspect Concept continue

Thus, the dual aspect can be expressed as under Capital + Liabilities = Assets or Capital = Assets Liabilities


Realization Concept
Accounting is a historical record of

transactions. It records what has happened. It does not anticipate events. This is of great important in preventing business firms from inflating their profits by recording sales and income that are likely to accrue.

Accounting Period Concept

In accounting carries the financial result of a certain period, generally here we take twelve month period is normally adopted for this purpose. This time interval is called accounting period.


Accounting Conventions


Convention of Consistency
In order to enable the management to draw important conclusions regarding the working of the company over a few years, it is essential that accounting practices and methods remain unchanged from one accounting period to another. The comparison of one accounting period with another is only possible when the convention of consistency is followed.

Convention of Disclosure
This principle implies that accounts must be honestly prepared and all material information must be disclosed therein. The contents of Balance Sheet and Profit and Loss Account are prescribed by law. These are designed to make disclosure of all material facts compulsory.


Convention of Conservation
Financial statements are always drawn up on a conservative basis. Here we assume to maintain some part of profit towards some reserves and provision for facing some contingencies in the future.