Accounting Information & Concepts

7/21/2019 Accounting Information & Concepts

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Accounting Conceptsand Procedures:An Introduction

Chapter 1

coplete


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Accounting

ManagersManagers

OwnersOwners

ManagersManagers

OwnersOwners

InvestorsInvestors

GovernmentGovernment

InvestorsInvestors

GovernmentGovernment


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Sole ProprietorshipSole Proprietorship

Sole ProprietorshipSole Proprietorship

PartnershipPartnership

PartnershipPartnership

CorporationCorporation

CorporationCorporation

Categories of BusinessOrganizations


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Tpes of BusinessOrganizations

OwnershipOwnership Business owned by one person.Business owned by one person.

FormationFormation Easy to orm.Easy to orm.

Owner !ould lose personalOwner !ould lose personal

assets to meet obligationsassets to meet obligationso business.o business."iability"iability

ClosingClosingEnds with death o ownerEnds with death o owner

or !losing o business.or !losing o business.


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Business owned byBusiness owned by

more than one person.more than one person.

OwnershipOwnership

Easy to orm.Easy to orm.FormationFormation

Ends with death o partnerEnds with death o partner

or e#it o a partner.or e#it o a partner.ClosingClosing

Partners !ould lose personalPartners !ould lose personal

assets to meet obligationsassets to meet obligationso partnership.o partnership."iability"iability


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Business owned by sto!$holders.Business owned by sto!$holders.OwnershipOwnership

More dii!ult to orm.More dii!ult to orm.FormationFormation

Can !ontinue indeinitely.Can !ontinue indeinitely.ClosingClosing

"imited personal ris$."imited personal ris$.

Sto!$holders% loss is limited toSto!$holders% loss is limited totheir investment in the !ompany.their investment in the !ompany."iability"iability


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ClassifingBusiness Organizations

ServiceService businesses provide servi!es.businesses provide servi!es.ServiceService businesses provide servi!es.businesses provide servi!es.

MerchandiseMerchandisebusinesses sell produ!ts.businesses sell produ!ts.MerchandiseMerchandisebusinesses sell produ!ts.businesses sell produ!ts.

ManufacturingManufacturingbusinesses ma$e produ!ts.businesses ma$e produ!ts.ManufacturingManufacturingbusinesses ma$e produ!ts.businesses ma$e produ!ts.


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%e&nition of Accounting

&!!ounting is the pro!ess that...&!!ounting is the pro!ess that...

analy'es(analy'es(

re!ords(re!ords(

!lassiies(!lassiies(

summari'es(summari'es(

reports( and...reports( and...interprets inan!ial inormation.interprets inan!ial inormation.

&!!ounting is the pro!ess that...&!!ounting is the pro!ess that...

analy'es(analy'es(

re!ords(re!ords(

!lassiies(!lassiies(

summari'es(summari'es(

reports( and...reports( and...

interprets inan!ial inormation.interprets inan!ial inormation.


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The Accounting Infor(ation

)ste(

Inputs Processing Outputs *sers

Business Accounting +inancial In,estors

transactions principles state(ents lenders

and e,ents and procedures and reports(anagers


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*sers of AccountingInfor(ation

In,estor

/enders

)ecurit Analsts and Ad,iser

0anage(ent

(ploees and Trade *nions

)uppliers and Other Trade Creditors

Custo(erso,ern(ent and egulator Agencies

The Pulic


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0a5or Branches of Accounting

) Financial Accounting

) +or e6ternal users

) 7istorical infor(ation

) )tandardised for(at

) /a8s and con,entions

) )u((arised

) Inco(e state(ent9Balance sheet9 Casho8 state(ent9

Accounting policies

Management Accounting

For internal users

Future-oriented

Flexible format

Context-specific More detailed

Product cost statement;Standard costs; Budgets;

Variances; Performancereports


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Accounting 0easure(ent

) Accounting records the e;ect of econo(ice,ents

) Internal e,ents) 6ternal e,ents: transactions

* e6change

* one-8a transfer

) Other e6ternal e,ents* no e6change or transfer

Chapter 1

t


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enera ccepteAccounting Principles

+hese are the pro!edures and guidelines+hese are the pro!edures and guidelinesthat must be ollowed duringthat must be ollowed during

the a!!ounting pro!ess.the a!!ounting pro!ess.

+hese are the pro!edures and guidelines+hese are the pro!edures and guidelinesthat must be ollowed duringthat must be ollowed during

the a!!ounting pro!ess.the a!!ounting pro!ess.


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Institutions that InuenceIndian AAP

%epart(ent of Co(pan A;airs

The )ecurities and 6change Board of India

The Institute of Chartered Accountants of India

The Inco(e Ta6 Authorities

eser,e Ban@ of India

Co(ptroller and Auditor eneral of India

The International Accounting )tandards Board

The International +ederation of Accountants


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Preparing +inancial)tate(ents

Shah +radersShah +radersBalan!e SheetBalan!e Sheet

September ,-( --#September ,-( --#

&ssets&ssets

CashCash /s. 0(,--/s. 0(,--

+otal+otal /s. 2,(3--/s. 2,(3--

&ssets&ssets

CashCash /s. 0(,--/s. 0(,--

+otal+otal /s. 2,(3--/s. 2,(3--

"iabilities and Owner%s E1uity"iabilities and Owner%s E1uity

&!!ounts Payable /s. 3--&!!ounts Payable /s. 3--

Owner%s E1uityOwner%s E1uity

Mr. Shah%s CapitalMr. Shah%s Capital

2,(---2,(---

+otal+otal /s. 2,(3--/s. 2,(3--

"iabilities and Owner%s E1uity"iabilities and Owner%s E1uity&!!ounts Payable /s. 3--&!!ounts Payable /s. 3--


Mr. Shah%s CapitalMr. Shah%s Capital 2,(---2,(---

+otal+otal /s. 2,(3--/s. 2,(3--


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Balance )heet elatedConcepts

) Accounting ntit Concepts:

A usiness is treated as an accounting

entit 8hich is distinct and separate fro( itso8ners and fro( other &r(s=

ithout the entit assu(ption the personal&nancial a;airs of the o8ners and the

acti,ities of other enterprises 8ould e(ingled the transactions of the usinessand no (eaningful &nancial infor(ationaout the usiness can e produced=


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) oing Concern Concept:

*nless there is sustantial e,idence to the

contrar it is assu(ed that the usinessis continuing enterprise or a goingconcern=

The assu(ption is ased on the fact thatthe (a5orit usiness enterprise dosur,i,e in spite of (an usiness failures=


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) 0onetar *nit Concept:

In &nancial accounting a record is(ade onl of these facts that can ee6pressed in (onetar ter(s=

Because (one pro,ides co((ondeno(inator=


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) Cost Concepts:

+or purpose of accounting all

transactions are recorded at their(onetar cost of ac?uisition=

i=e= the price paid for ac?uiring

the assets or for recei,ing theser,ices pro,ided=


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) Conser,atis( Concept:

Anticipate no pro&t and pro,ide forall possile losses=

i=e= pro,ision for ad dets


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The Accounting ?uation

&ssets are the&ssets are the

items owned byitems owned by

the business.the business.

&ssets are the&ssets are the

items owned byitems owned by

the business.the business.

E1uities areE1uities are

the !laimsthe !laims

against theagainst the

assets.assets.

E1uities areE1uities are

the !laimsthe !laims

against theagainst the

assets.assets.


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"iabilities are"iabilities are

the !reditor%sthe !reditor%s

e1uity.e1uity.

"iabilities are"iabilities are

the !reditor%sthe !reditor%s

e1uity.e1uity.

Owner%s e1uityOwner%s e1uity

is the rightsis the rights

o ownership.o ownership.

Owner%s e1uityOwner%s e1uity

is the rightsis the rights

o ownership.o ownership.


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&ssets&ssets

D "iabilities"iabilities

EOwner%sOwner%s

E1uityE1uity


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Assets = = = de&ned

Proale future econo(ic ene&ts

otained or controlled a particularentit as a result of past transactionsor e,ents=

Or


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Tpes of Assets

) Current Assets: Cash )hort-Ter(In,est(ents Accounts ecei,aleIn,entor and Prepaid 6penses

) Property, Plant & Equipment

) Long-Term Investments) Intangible Assets

) t!er Assets


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/iailities = = = de&ned

enerall = = = a(ounts usinesses to third

parties=

TYPES

Current: Accounts Paable! Accrued "iabilities!

#otes Paable

Long-Term: "ong-$erm #otes Paable! Mortgages

Paable! "ong-$erm Accrued "iabilities


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O8nerFs ?uit

) esidual interest of o8ners

) 6a(ples

* )hare capital* )hare pre(iu(

* e,enues

* 6penses

* %i,idends

* etained pro&t


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&. &ugust 04 Shah invested&. &ugust 04 Shah invested

/s.3(--- in !ash and /s.0-- o oi!e/s.3(--- in !ash and /s.0-- o oi!ee1uipment into the business.e1uipment into the business.

&. &ugust 04 Shah invested&. &ugust 04 Shah invested

/s.3(--- in !ash and /s.0-- o oi!e/s.3(--- in !ash and /s.0-- o oi!ee1uipment into the business.e1uipment into the business.

B. &ugust 54 Shah buysB. &ugust 54 Shah buys

oi!e e1uipment or !ash /s.5--.oi!e e1uipment or !ash /s.5--.

B. &ugust 54 Shah buysB. &ugust 54 Shah buys

oi!e e1uipment or !ash /s.5--.oi!e e1uipment or !ash /s.5--.

C. &ugust ,-4 Buys additionalC. &ugust ,-4 Buys additional

oi!e e1uipment on a!!ount /s.6--.oi!e e1uipment on a!!ount /s.6--.

C. &ugust ,-4 Buys additionalC. &ugust ,-4 Buys additional

oi!e e1uipment on a!!ount /s.6--.oi!e e1uipment on a!!ount /s.6--.


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Rs.8,200 = RS. 8,200Rs.8,200 = RS. 8,200

a7a7 CashCash 8/s.3(---8/s.3(--- 8/s.3(0--8/s.3(0--

a7 E1uipmenta7 E1uipment 88 0-- 0--

b7b7 CashCash ** 5-- 5--

E1uipmentE1uipment 88 5-- 5--

E1uipmentE1uipment 88 6-- 6-- 88 6--6--

a7a7 CashCash 8/s.3(---8/s.3(--- 8/s.3(0--8/s.3(0--

a7 E1uipmenta7 E1uipment 88 0-- 0--

b7b7 CashCash ** 5-- 5--

E1uipmentE1uipment 88 5-- 5--

E1uipmentE1uipment

88

6-- 6--

88

6--6--

AssetsAssets == LiabilitiesLiabilities ++OwnersOwners

EquityEquity


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)hift in Assets

+he ma$eup o the assets has+he ma$eup o the assets has!hanged( but the total o the!hanged( but the total o the

assets remains the same.assets remains the same.

+he ma$eup o the assets has+he ma$eup o the assets has!hanged( but the total o the!hanged( but the total o the

assets remains the same.assets remains the same.


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The Balance )heet

+he balan!e sheet shows the !ompany%s+he balan!e sheet shows the !ompany%s

inan!ial position as o a parti!ular date.inan!ial position as o a parti!ular date.

+he balan!e sheet shows the !ompany%s+he balan!e sheet shows the !ompany%s

inan!ial position as o a parti!ular date.inan!ial position as o a parti!ular date.

Company nameCompany nameCompany nameCompany name

9ame o the statement9ame o the statement9ame o the statement9ame o the statement

:ate:ate:ate:ate


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The Balance )heet

Mr. Shah +radersMr. Shah +raders

Balan!e SheetBalan!e Sheet

&ugust ,2( --#&ugust ,2( --#

&ssets&ssets

CashCash /s. /s. ;(2--;(2--

E1uipmentE1uipment (2-- (2--

&ssets&ssets

CashCash /s. /s. ;(2--;(2--

E1uipmentE1uipment

(2-- (2--




Mr. Shah%s CapitalMr. Shah%s Capital 3(0--3(0--

+otal+otal /s.0(-- /s.0(--




Mr. Shah%s CapitalMr. Shah%s Capital 3(0--3(0--

+otal+otal /s.0(-- /s.0(--


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The Accounting?uation 6panded

&n e#panded a!!ounting e1uation&n e#panded a!!ounting e1uation

in!ludes the ollowing4in!ludes the ollowing4

/evenues

E#pensesE#penses

=ithdrawals=ithdrawals

&n e#panded a!!ounting e1uation&n e#panded a!!ounting e1uation

in!ludes the ollowing4in!ludes the ollowing4

/evenues

E#pensesE#penses

=ithdrawals=ithdrawals


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The Accounting?uation 6panded

/evenues/evenues/evenues/evenues9et in!ome or9et in!ome or

9et loss9et loss

9et in!ome or9et in!ome or

9et loss9et lossD EE#pensesE#pensesE#pensesE#penses

h i i


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The Accounting ?uation6panded

BeginningBeginning

!apital!apital

PLUSPLUS

&dditional&dditionalinvestmentinvestment

BeginningBeginning

!apital!apital

PLUSPLUS

&dditional&dditionalinvestmentinvestment

9et in!ome9et in!ome9et in!ome9et in!ome =ithdrawals=ithdrawals=ithdrawals=ithdrawalsG D


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:. September 2>,-4 Shah provided:. September 2>,-4 Shah provided

legal servi!es or !ash( /s.,(---.legal servi!es or !ash( /s.,(---.

:. September 2>,-4 Shah provided:. September 2>,-4 Shah provided

legal servi!es or !ash( /s.,(---.legal servi!es or !ash( /s.,(---.

E. September 2>,-4 Provided legalE. September 2>,-4 Provided legal

servi!es on a!!ount( /s.6(---.servi!es on a!!ount( /s.6(---.E. September 2>,-4 Provided legalE. September 2>,-4 Provided legal

servi!es on a!!ount( /s.6(---.servi!es on a!!ount( /s.6(---.

F. September 2>,-4 /e!eived /s.3--F. September 2>,-4 /e!eived /s.3--

!ash as partial payment rom previous!ash as partial payment rom previousservi!es perormed on a!!ount.servi!es perormed on a!!ount.

F. September 2>,-4 /e!eived /s.3--F. September 2>,-4 /e!eived /s.3--

!ash as partial payment rom previous!ash as partial payment rom previousservi!es perormed on a!!ount.servi!es perormed on a!!ount.

G. September 2>,- paid salaries e#pense( /s.;--.G. September 2>,- paid salaries e#pense( /s.;--.G. September 2>,- paid salaries e#pense( /s.;--.G. September 2>,- paid salaries e#pense( /s.;--.


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?. September 2>,-4 Paid rent e#pense( /s.3--.?. September 2>,-4 Paid rent e#pense( /s.3--.?. September 2>,-4 Paid rent e#pense( /s.3--.?. September 2>,-4 Paid rent e#pense( /s.3--.

I. September 2>,-4 In!urred advertisingI. September 2>,-4 In!urred advertising

e#penses o /s.,--( to be paid ne#t month.e#penses o /s.,--( to be paid ne#t month.

I. September 2>,-4 In!urred advertisingI. September 2>,-4 In!urred advertising

e#penses o /s.,--( to be paid ne#t month.e#penses o /s.,--( to be paid ne#t month.

@. September 2>,-4 Shah@. September 2>,-4 Shahwithdrew /s.-- or personal use.withdrew /s.-- or personal use.

@. September 2>,-4 Shah@. September 2>,-4 Shahwithdrew /s.-- or personal use.withdrew /s.-- or personal use.

P i +i i l


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Preparing +inancial)tate(ents

Mr. Shah +radersMr. Shah +radersIn!ome StatementIn!ome Statement

For Month Ended September ,-( --#For Month Ended September ,-( --#

/evenue4/evenue4 "egal ees"egal ees /s.3(--- /s.3(---

Operating e#penses4Operating e#penses4

Salaries e#penseSalaries e#pense /s. ;--/s. ;--

/ent e#pense/ent e#pense 3--3-- &dvertising e#pense&dvertising e#pense ,--,-- 2(;--2(;--

9et in!ome9et in!ome /s.A(6--/s.A(6--

/evenue4/evenue4 "egal ees"egal ees /s.3(--- /s.3(---

Operating e#penses4Operating e#penses4

Salaries e#penseSalaries e#pense /s. ;--/s. ;--

/ent e#pense/ent e#pense 3--3-- &dvertising e#pense&dvertising e#pense ,--,-- 2(;--2(;--

9et in!ome9et in!ome /s.A(6--/s.A(6--

P i +i i l


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Preparing +inancial)tate(entsShah +radersShah +raders

Statement o Owner%s E1uityStatement o Owner%s E1uity

For Month Ended September ,-( --#For Month Ended September ,-( --#

Shah%s Capital( Sept. 2( --#Shah%s Capital( Sept. 2( --# /s. 3(0--/s. 3(0--9et In!ome or Sept.9et In!ome or Sept. /s. A(6--/s. A(6--

"ess =ithdrawals or Sept."ess =ithdrawals or Sept. -- --

In!rease in CapitalIn!rease in Capital A(-- A(--

Shah%s Capital( Sept. ,-( --#Shah%s Capital( Sept. ,-( --# /s. 2,(---/s. 2,(---

Shah%s Capital( Sept. 2( --#Shah%s Capital( Sept. 2( --# /s. 3(0--/s. 3(0--9et In!ome or Sept.9et In!ome or Sept. /s. A(6--/s. A(6--

"ess =ithdrawals or Sept."ess =ithdrawals or Sept. -- --

In!rease in CapitalIn!rease in Capital A(-- A(--

Shah%s Capital( Sept. ,-( --#Shah%s Capital( Sept. ,-( --# /s. 2,(---/s. 2,(---

P &t d / )t t t


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Pro&t and /oss )tate(entelated Concepts

) Accounting Period Concepts:

Hor(all the pro&t loss state(entor inco(e state(ent is prepared fora period of one ear=


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) ealization Concept:

ealization concept re,ol,es around thedeter(ination of the point of ti(e 8hen re,enues

are earned=The concept follo8ed is that re,enue is realised

8hen goods and ser,ices produced a usinessenterprise are transferred to a custo(er either for

cash or so(e other asset or for a pro(ise to pacash or other assets in future=

e,enue is earned onl 8hen the goods aretransferred or 8hen ser,ices are rendered=


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) 0atching 6penses 8ith e,enue:

This principles re?uires recordinge6penses in the sa(e accountingperiod in 8hich the re,enue 8ereearned as a result of the e6penses=


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) Accrual Concept:

*nder this concept the transactions are

recorded as soon as the ta@e placeirrespecti,e of the ti(ings of receipt orpa(ent of (one thereto=

This concept is necessar to ensure that the&nancial state(ents of an period reecte;ect of all rele,ant transactions that too@place in that period=

Accounting Information & Concepts

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