Accounting Concepts 11111

8/8/2019 Accounting Concepts 11111

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BASIC ACCOUNTINGCONCEPTS


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The Need for Accounting

Managers, investors, and other internal groupsManagers, investors, and other internal groups

want the answers to two important questions:want the answers to two important questions:

How well didHow well did

the organizationthe organization

perform?perform?

Where doesWhere does

the organizationthe organization

stand?stand?


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Accountants answer these questionsAccountants answer these questions

with three major financial statements:with three major financial statements:

IncomeIncome

statementstatement

BalanceBalance

sheetsheet

Statement ofStatement of

cash flowscash flows


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AAtransactiontransaction is any event that affects theis any event that affects the

financial position of an organizationfinancial position of an organization

and requires recording.and requires recording.


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DEFINITION OF ACCOUNTING

Accounting is the art of identifying, 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 result thereof.

It is often referred to as the language of business and, like any

other language, it has its own unique vocabulary and rules


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Some common terms in accountancy

Book-Keeping:-It means recording of business transactions

in the books of accounts in accordance with the principles

of accounting.

Account:- It is a statement of various dealings that occur

between a customer and the firm.


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Accounting Process

Recording of transaction (Journal entry)

Classification (Ledger Posting)

Summarizing (Trial balance)

Interpreting (Income &position statement)

Analysis of transactions


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ACCOUNTING EQUATION

OR

DUAL CONCEPT

Each Business transaction has a two fold effect and it is

referred to as dual aspect or duality of a transaction. Thedual aspect states that for each debit there is a credit

i.e. for every debit there is a credit.


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Double entry system

It is a common system of book-keeping whereby the two

aspects of every transaction i.e., It is based on the dual

aspectcon

cept. This method of writing every transa

ctionin two different accounts on opposite sides for equal

value is known as the double entry system of book

keeping. This is the most accurate, complete and

scientific system of accounting.


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ACCOUNTING EQUATION


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CLASSIFICATION OF ACCOUNTS:

Personal Account:- Natural Personal Account i.e. account of natural or

physical persons e.g. Rams A/c,

Sitas A/c etc.

Artificial Personal Accounts i.e. accounts of artificial orlegal person e.g. accounts offirms,companies,banks,government,schools and

colleges etc.

Representative personal accounts these accounts arecalled representative personal account as they representcertain person behind them e.g. outstanding expenses

acc

ount, income re

ceived a

ccount


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Real Account:

Real accounts are accounts of properties,assets orthings owned by a concern and with which the businessis carried on. Real or assets accounts may be-

1)Tangible Assets-assets such asgoods account,cash account,furniture account etc.

2)Intangible Assets- such asgoodwill account,patent account,copyrights etc.


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Nominal Account:

Nominal or fictitious accounts are accounts of theexpenses and loses and income and gains which aconcern earn in the course of its business-

1)income a

ccount-a

ccounts ofrevenue,income,gains etc

2)Expenses account-accounts ofloses such as bad debts ,discount

allowed.


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RULES OF DEBIT AND CREDIT

Personal Accounts:

Debit the receiver and credit the giver

Real Accounts:

Debit what comes in and Credit what goes out

Nominal Account:

Debit expenses and loses and Credit incomes

and gains


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Performa of journal

DATEDATE PARTICULARSPARTICULARS L.FL.F AMOUNTAMOUNT AMOUNTAMOUNT


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ADVANTAGES OF JOURNAL

Show all necessary information relating to a

transaction

Provide the explanation of the transaction

Date wise record of all the transaction can be

obtained

Help in locating and preventing the errors


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LIMITATIONS OF JOURNAL

Recording all the transaction in a journal

requires:

1)writing down name of account involved

2)individual posting of each accountdebited and credited

Does not provide information on prompt basis

Does not facilitate the internal check system

since the journal can be handled only by one

person


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ADVANTAGES

Transactions relating to a particular person, item or

heading of expenditure or income are grouped in the

concerned account at one place.

Ledger is the destination of all entries made in journal orsub-journals.

Ledger is the "store-house" of all information which

subsequently is used for preparing final accounts and

financial statements.


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Branches of Accounting

Financial Accounting:- It is concerned with recording

and processing the financial transactions which affect

the financial position of the business. It leads to the

preparation of income statement & position statement ofthe business.

Cost accounting is concerned with the recording,

classifying and appropriate allo

cation of expenditure forthe determination of the cost of products or services and

for the presentation of suitably arranged data for

purposes ofcontrol and guidance of the management.


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It is concerned with the collecting systematically andregularly all such information as will help management in

discharging its functions of planning, control, decision

making, etc. this is also named as accounting for

management.


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Accounting Concepts 11111

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