Afm Chapter 1 Basic Concepts of Accounting

8/3/2019 Afm Chapter 1 Basic Concepts of Accounting

1/16

Basic

Understandingof Accounting

Chapter 1


2/16

Transactions & Events Transaction is used to mean A business,

Performance of an act, an Agreement.

Event is used to mean A happening, as aconsequence of transaction, a result.


3/16

Accounting MeaningAccording to American Institute of Certified Public Accountants in

1961 Accounting is an art of recording, classifyingand summarizingin asignificant manner and in termsof money, transactionsand eventswhich are in part at

least, of financial character and interpreting theresult thereof.

According to American Accounting Association, The process of

Identifying, Measuring & Communicating economicinformation to permit informed judgments anddecisionsby theusersoof accounts.

It isdifferent from book keeping


4/16

Book KeepingIt is an activity, complementary to the accounting

process which is concerned with the recording offinancial data relating to business operation inspecific manner .


5/16

Objectives of Accounting Meansof recording the monetary transactionsand events

Earnings of the company, achieved by preparing Profit & LossA/ c

Identify the obligations (Liabilities) & resources (Asset) of theorganization, by preparing Balance Sheet

It is required to maintain statutorily by certain government &

regulatory body Required by management for taking financial decisions

Investors and certain lenders also require the preparation offinancial statements


6/16

Economic & Non economic

Transactions Those transactions in which money is exchanged or

such things or services are exchanged which can be

measured in terms of money are called economictransactions

E.g.. If we invite a friend for a dinner, it is not an

economic transaction, because the cost of dinner isnot to be recovered from the fr iend


7/16

Cash & Credit Transactions

A transaction in which there is a receipt orpayment of cash is a cash transaction. Cash

or bank balance is affected by such atransaction

In credit transaction, there is no receipt or

payment of cash immediately, but it ispostponed to some future date.


8/16

How to determine Cash & Credit

transaction? If the word cash or cheque is mentioned in the

transaction, it is treated as a cash transaction. E.g.

Sold goods for cash Rs.720

It the transaction does not mention the word cashbut containsonly the name of a person, it is a credit

transaction. E.g. Sold goodsto Mr. A


9/16

How to determine Cash & Credit

transaction? When the transaction doesnot indicate cash or credit,

and does not mention the name of any person, then it

must be cash transaction. E.g. Sold goodsRs.720

If in a transaction, the name of any person ismentioned and also cash receipt or payment is

indicated, then it is a cash transaction. E.g. Sold goods

for cash Rs.720 to Mr. A


10/16

Classify the transaction as

cash or credit1. Sold furniture to Sita for cash Rs.5000

2. Bought goods from Mohan Rs.3000

3. Sold goods Rs.2000

4. Paid for railway freight Rs.100

5. Expenses incurred on running the cattle camp

during the draught period Rs.60006. A gift of Rs. 10000 given to daughter on her

birthday


11/16

Classify the transaction as

cash or credit

7. Purchased stationery from Dinesh Stationery

Mart Rs.3008. Purchased cupboard from Chintan Furniture

Mart by cheque Rs.3000

9.Sold goods to Pulin Rs.10000 and cheque for halfof the amount was received

10. Paid to Dhruvi for shop rent Rs1000


12/16

Accounting Process

Identification of Transaction

Preparation of Business Documents (Voucher)

Recording of Transactions (Journal)

Posting to respective Accounts (Ledger,Subsidiary Books, Journal Proper)

Preparation of Trial Balance

Passing of Adjusting Entries

Preparation of Financial Statements

Profit & Loss A/ c

Balance Sheet


13/16

The Anatomy of BusinessAssets Fixed assets

Current assets

Investments

Liabilities Long term liabilities

Current l iabil it ies

Financial position

IncomeExpenses

Financial Performance


14/16

Users of Financial Statements

Internal Users External Users

Management Group BOD Partners Managers Officers

Financial Group Investors

Lenders

Suppliers

Public Group Governmental

Agencies Employees Customers Others Likeacademicians,researchers, analysts.


15/16

Branches of Accounting

Cost

Accounting

Financial

Accounting

Management

Accounting


16/16

Afm Chapter 1 Basic Concepts of Accounting

Documents

Transcript of Afm Chapter 1 Basic Concepts of Accounting