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It tells us why and how to prepare the books of accounts and how to summarize . ACCOUNTANCY It refers to a systematic knowledge of accounting. ACCOUNTING It is termed as language of business which records all events and transactions that are of monetary value and facilitates communication among individuals in a society. It explains “why to do” and “how to do” of various aspects of accounting.INTRODUCTION Accounting is perhaps one of the oldest. The accounting system is a means to provide relevant and reliable financial information to all the interest. BOOK-KEEPING Book-keeping is defined as the science and art of recording business transactions in a systematic manner in a certain set of books known as books of accounts. structured management information system.
Accounting Encompasses 1. Identification 2. Interpreting 8. Recording 4. Summarising 6. Communicating . Classifying 5. Measuring 3. measuring the transactions and events in terms of money. recording them in a systematic manner in the books of accounts. Analysing 7.the accounting information and communicate it to the interested parties. ACCOUNTING PROCESS It is the process of identifying the transactions and events.
. It defines the transaction of financial character that is required to be recorded in the books of accounts. 2.1. Events of non financial character cannot be recorded even through such events may have an impact on the operational results of the firm. Measuring This denotes expressing the value of business transactions and events in terms of money. Recording o It deals with recording of identifiable and measurable transactions and events in a systematic manner in the books of original entry that are in accordance with the principles of accountancy. Identification This is the first step of accounting process. 3.
5. . Summarizing It deals with summarizing or condensing transactions in a manner useful to the users.4. 6. Interpreting It deals with explaining the significance of those data in a manner that the end users of the financial statement can make a meaningful judgment about the profitability and financial position of the business. 7. Analyzing It deals with establishment of relationship between the various items or group of items taken from income statement or balance sheet or both. Classifying It deals with periodic groping of transactions of similar nature that appear in the books of original entry into appropriate heads by posting or transfer entries.
Ex :: Balance sheet Accounting information system: . Communicating It deals with communicating the analyzed and interpreted data in the form of financial reports or statements to the users of financial information.8.
Written records are more preferable to memorizing because the latter may fade away with time. cash budget report. project appraisal report. balance sheet and cash flow statements. accounts payable. The management report s the financial performance of the firm to external users such as shareholders. Accounting facilitates the result to both internal & external users. receivable report. Accounting measure the financial performance of the enterprise. The results of operations are ascertained by preparing profit & loss account. The management requires information for internal purpose at various levels of operations. idle time report. capital budgeting report etc. . This will enable the business person to ascertain what the business owes to others. Accounting involves following functions & objective: Accounting helps in systematic recording of all business events or transactions. creditors. They need to prepare various reports as production report. Also systematic records can be used by different persons for different decision making process.
lapses or under performance. tax planning. cost analysis. interpreting the analyzed results and communicating the information to the users of financial statement Analyzing and interpreting requires skill. government etc. recording and analyzing the transactions in books of accounts Adopt principles of accounting for recording Book keeping is the first stage of accounting process The objective is to prepare final accounts and balance sheet in a systematic manner at the end of Accounting It involves summarizing the classified transaction. stock exchanges. Accounting helps in internal control by holding the concerned persons responsible for any errors. Preparation of budgets. stock brokers. Book keeping is recording of business transactions. SEBI ( Securities Exchange Board of India) income tax authorities and the government. Accounting is analyzing and reporting of financial data Distinction between Book-keeping & Accounting Book keeping It is a process of identifying. measuring. Equally it helps to identify the strong/ weak areas of each unit or department. It is the secondary stage The objective is to ascertain net results of financial operations and communicate the results to all . auditing are some of the functions of accounting. Accountants: Accountancy is the profession and the practitioners of accountancy are called accountants. employees. Accounting is requires to fulfill the statutory requirements of various regulatory bodies such as Registrar of Companies.bankers. investors. Current year’s financial performance becomes the basis for future predictions and estimations. knowledge and experience Accounting follows book keeping.
Equity analyst. Accountants who perform this function need higher analytical skills to interpret the data and to take appropriate decisions. trade union & tax authorities: Employees are keen to know about the general health of the organization in terms of stability & profitability. Lenders: Banks. profitability in terms of turnover & investment. It has to ensure effective utilization of its resources. financial institutes & debenture holders are the main lenders & they need information about the financial stability of the borrower enterprise. teleconference & video conference. Rating agencies & security analyst: investors & creditors seek the assistance of information specialist in assessing prospective returns. Security analyst obtain valuable information including insider information by means of face-to-face meetings with the company officials. Eg. Employees. The nature of job is non routine but analytical Investors: It may be broadly classified as retail investors. They are keen to know both the return from their investments & the associated risk. Tax authorities need information to assess the tax liability of the firm. high net worth individuals. bond analyst & credit rating agencies offer a wide range of information in the form of answering queries. Trade unions use financial reports for negotiating wage package. declaration of bonus & other benefits. Management: management needs information to review the firm’s short term solvency & long term solvency.accounting period Accounts executives who perform this function may not require higher level of knowledge The nature of job is routine and clerical Users of Accounting Information: stakeholders in a manner they understand. Car owners . Regulators. visit their premises & make constant enquiry using e-mails. Customers: customers have an interest in the accounting information about the continuation of the company especially when they have established a long term involvement with or are dependent on the company. institutional investors both domestic & foreign. Firms build a good rapport with such type of information seekers to gain visibility in the market.
which are based on the estimates that may lead to over valuation or under valuation of assets and liabilities. The danger of window dressing arises when the management decides to incorporate wrong figures to artificially inflate revenue or deflate losses or when there is a threat of hostile takeover. brand image etc. Firms depend on local economy to meet their varied needs. Accounting reveals the estimated position and not the real position of the firm. it grossly lacks qualitative elements. Financial statements are prepared on separate entity concept. Limitation: Though accounting system is the only source for extracting financial information of the firm. to regulate the activities of the enterprise if any. Government & regulatory agencies: government & the regulatory agencies require information to obtain timely & correct information. there is considerable room for bias. (eg: best products. conservation concept etc. inventory valuation etc. though the convention says consistency has to be maintained on the policies adopted.) The accountants have some leeway or freedom on the methods of depreciation charged. The public: every firm has a social responsibility. Basic Terminologies: Transaction: Transfer of money or goods or services from one person/account to another person/account Example: Paid cash for goods purchased. Fixed assets are shown in the balance sheet at historical cost less accumulated depreciation and not at their replacement value. Rent received for letting out services . In such a situation the management fails to provide true and fair view of the financial position to the various users of the financial statement. Accounting ignores the price level changes when financial statements are prepared on historical cost. Prosperity of the enterprise may lead to prosperity of the economy both directly & indirectly. favourism and personal judgment.
Liquid asset: those which can be easily converted into cash. Liability: it is a financial obligation of an enterprise arising from past event the settlement of which is expected to result in an outflow of resources embodying economic benefit. Fictitious asset: they are in the form of such expenses which could not be written off during the period of their incidence. Capital is a liability for the business. Current asset: those which are held or receivable within a year or within the operating cycle of the business.. Share: a share in a company is one of the units into which the total capital of the company is divided. Sole Trader: A single individual owning and carrying on business with or without the help of his/her kith and kin. Equity: it is the residual interest in the asset of the enterprise after deducting all its liabilities. Partnership: it is a relationship between partners to contribute capital to start business. Types: Fixed Capital: capital use to purchase fixed assets is called fixed capital Working Capital: The capital use for day to day affairs of business is known as working capital. Current liability: it is that obligation which has to be satisfied within a year. agree to distribute profits and losses in an agreed proportion and the . Capital: Funds brought in to start business to earn profits.etc. Fixed asset: those which are held for use in the production or supply of goods & services. Entity: it is an economic unit that performs economic activities. Assets: An asset is a resources legally owned by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.
Sales return or return inward: goods returned to a business by its customers out of the sales already made to them Opening stock: unsold goods lying in a business at the beginning of a year. Trade debtor: it is a person who owes money to the business for the goods supplied to him on credit. Drawings: it refers to cash. collecting capital by issue of shares.business being carried on by all or. Compulsorily registered under Companies Act. Sales: Transfer of ownership in goods from seller to buyer is called sale. Debtor for asset sold: it is a debtor who owes money to the business for any asset sold to him on credit. Purchase return or return outward: goods returned by the business to its suppliers out of the purchase already made from them. A company enjoys perpetual existence and an independent entity Goods: Commodities or articles purchased in a business for sale or resale Purchases: Indicate buying of goods in which the trader deals in. Inventory: it refers to goods held by a business for sale in the ordinary course of business or for consumption in the production of the goods or services for sale. A loan debtor: it is a person who owes money to the business for the loan advanced to him. Closing stock: unsold goods lying in a business at the end of a year. Debtor: a debtor is a person who owes money to the business. goods or any other asset withdrawn by the proprietor from his business for his personal or domestic use. Joint Stock Company: Association of persons. A debtor for service rendered: it is a debtor who owes money to the business for the service rendered to him on credit. Good Debt: fully recoverable debt Bad Debt : irrecoverable . any one acting for all. 1956. Debt: the amount due from a debtor to the business.
Entry: it is the record of a transaction made in any book of account. Loss: it refers to money or money’s worth given up without any benefit in return. Voucher: it refers to any written document in support of a financial transaction. Brought forward: it is used at the head of the page to indicate that the total amount at the head of that page has been b/f from the foot of the previous page. liabilities and owners equity as of a specific point in time. Profit: it is a situation where the revenue of a business exceeds its expenses. used to make sure the books are “in balance” total debits and credits are equal. Creditor for asset purchased: it is a person to whom the business owes money for any asset purchased from him on credit. Balance sheet: it is the financial statement . Expenses creditor: it is a person to whom the business owes money for any service received from him on credit. Posting: it is the process of entering in the ledger the information already recorded in the journal or in any of the subsidiary books. Narration: it is a brief explanation to a journal entry. Carried forward: it is used at the foot of a page to indicate that the total amount at the foot of that page has been c/f to the head of the next page. Doubtful debt : recovery is doubtful Creditor: a creditor is a person to whom the business owes money Trade creditor: it is a person to whom the business owes money for goods purchased from him on credit Loan credit: it is a person to whom the business owes money for the loan borrowed from him. Trial balance: a worksheet listing of all the accounts appearing in the general ledger with the dollar amount of the debit or credit balance of each. . Journal: it is a daily record of business transaction Ledger: it is an account book in which all the accounts are maintained. given below the journal entry. which shows the amount and nature of the business assets. with in brackets.
When customer accept it becomes B/R. . directing a certain person to pay a certain sum of money only to. a certain person or the bearer of the instrument Bill payment / Bill receivable: B/P : In case of purchase of raw materials on credit the supplier or the creditor draws bill of exchange . or to the order of . Carried down: it is written in a ledger account at the time of its closing to indicate that the balance in that account has been carried down to next page. Brought down: it is written in a ledger account at the time of its opening to indicate that the opening balance in that account has been brought down from the previous period. B/R : On sale of goods on credit the entity draws a bill of exchange on the customer. When entity accepts it becomes B/P . Bill of Exchange : Documentary evidence in writing containing an unconditional order signed by th maker.
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