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Definition of accounting:Accounting is the process of identifying, measuring & communicating economic information to permit informed Judgments &decisions by users of information.

Meaning of accounting:The discipline which analyses the art & principles of recording monetary transactions.

A number of basic terms are used in accounting , so it is necessary to know the meanings of these basic accounting terms are as follows:

1. Transaction :Any exchange of goods & services, for cash or non credit by the business with any other business transaction is an economic activity of the business that change its financial business.

2. Entity :Entity means something or someone having a separate existence. In other words, Entity means a thing or a person having a definite separate existence.

3. Proprietor or owner:Proprietor is the person who invests money or money’s worth into the business as capital & bears all the risks of the business.

4. Equity:Equity means the claims against the assets of an enterprise or rights in the assets of an enterprise. There are two types of equity:

a)Owner’s equity :Owner’s equity means the claims of the owner against the assets of the enterprise Owner’s equity refers to owner’s capital.

b)Outsider’s equity:Outsider’s equity refers to liabilities of an enterprise.

5. Capital:Capital is total assets minus total liabilities. For e.g. The total assets of business are Rs 60000 & total liabilities of the business are Rs 20000 the excess of the total assets over the total liabilities of the business viz. ( 60000-20000 )=Rs 40000 will be the owner’s capital.

6. Net worth or Net assets :Net worth or Net assets means the excess of the total assets of a business over its total liabilities at any particular point of time.

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7. Drawings:Drawings refers to cash, goods or any other asset withdrawn by the proprietor from his business for his personal , private or domestic use or purpose.

8. Assets:Assets are future economic benefits, the rights which are owned or controlled by an organization or individuals .Assets include: a) Physical or real properties or things called tangible assets like lands, buildings. P &M etc, owned by a business. b) Rights in certain things or certain rights having money value called intangible assets, such as goods will patent right, trade marks & copy rights possessed by a business. C) Debts or amounts due to a business from others, such as sundry debtors, bill receivable & accrued incomes etc.

9. Liabilities:Liabilities means claims of outsiders against a business concern which blind the business concern to others.

10. Debtors:A debtor is a person who owes money to the business. He owes money to the business because he has received some benefit from the business. A constitutes an asset for the business. A debtor may be a trade debtor, a loan debtor, a debtor for an asset sold on credit, a debtor for the service rendered on credit.

11. Debt:The amount of a business transaction due from a person to the person is called debt.

12. Book Debt:Book debt is the amount due to the business from a debtor as per the books of account. In other words, it is nothing but debt.

13. Good debt :Good debt refers to a debt which can be collected in full & there is no doubt about its recovery. It means fully recoverable debt.

14. Bad debt:A debt which is irrecoverable is called bad debt .bad debt is known loss to the business.

15. Doubtful debt:A debt, the realization or recovery of which is uncertain or doubtful is called doubtful debt.

16. Creditor:© ARUN GULERIA | arun_guleria@in.com

A creditor is a person to whom the business owes money to him, because he has given some benefit to the business. A creditor constitutes a liability for the business. A creditor may be a trade creditors, a loan creditor, creditor for an asset purchased on credit, an expenses creditor.

17. Solvent:A businessman is said to be solvent when he is able to pay his liabilities in full.

18. Insolvent:A business is said to be insolvent when he is not able to pay his liabilities in full.

19. Goods:Goods refer to merchandise, commodities, products, articles or things in which a trade deals.For e.g. for a stationery merchant, pens, pencils, etc

20. Purchases:Goods purchased by a business are called purchases. The purchases of goods may be cash purchases or credit purchases. The purchases of goods are recorded in purchases account.

21. Sales:Goods sold by the business are called sales. The sales of goods may be cash sales or credit sales. The sales of goods are recorded in sales account.

22. Purchase Return, Returns outward or Returns to supplier:Goods returned by a business to its suppliers out of purchases already made are called Purchase Return, return outward or return to supplier.

23. Sale return, Return Inwards or Return from customers:Goods returns to the business by its customers out of the sales already made to them are called Sale Return, Return Inward or return from customer.

24. Inventory or Stock:Inventory or stock refers to the stock of finished goods held for sale in the ordinary course of business, or the stocks of raw materials and work in progress held for consumption in the production of finished goods for sale or stock of consumable stores like cotton waste, grease, lubricants held for use in the factory.

25. Expenses:Expenses are the costs incurred in connection with the earning of revenue.

26. Loss:-

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Loss refers to money or money’s worth given up without getting any benefit in return .Loss occurs accidently and involuntarily e.g. loss of goods by fire , damages paid to others.

27. Revenue or Income:Revenue or income is the earning of a business from the sale of goods or from the rendering of services to customers during an accounting period.

28. Gain:Gain refers to revenue which is not generated through routine or regular business activities.

29. Profit:Profit is the excess of revenue over the expenses of a given period of time, usually a year. Profit is also termed as net profit.

30. Debit:Debit means the amount owed by or due from an account or charged an account for the benefit received by that account.

31. Credit:Credit means the amount owed to an account for the benefit given by that account in belief that its value will be returned at a later date.

32. Account :An account is the summary of transaction affecting one person, one kind of property or one class of gains or losses.

33. Folio:Folio means the page of a journal or the page of a ledger.

34. Entry:The record of a transaction in a book of accounts is known as an entry.

35. Folioing or paging:Entering the folio number of the journal or any subsidiary in the ledger & the folio number of ledger in the journal or any subsidiary book is called folioing.

36. Carried down, Brought down :Carried down is written in a ledger account, at the time of balancing it, at the end of an accounting period, to indicate the balance in that account has been carried down to the next period.& Brought down is written on a ledger account, at beginning of the next accounting period, to indicate that the opening balance in that account has been brought down from the previous accounting period.

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i) Relevance:The convention of relevance stresses the need of relevant informations should be made available which are relevant and useful for achieving its objectives.For e.g. the business is interested in knowing as to what has been total labour cost? It is not interested in knowing this aspect that how many are employed, how much employees spend and what they save.

ii) Objectivity:The convention of objectivity states that all accounting must be based on objecting evidence.it means that the transactions recorded in the books should be supported by verifiable documents. It also emphasis that accounting information should be measured & expressed by the standards which are commonly acceptable.for e.g. the unsold stock at the end should be valued at cost price & not a higher although it is likely to be sold at higher price in future.

iii) Feasibility:The convention of feasibility emphasis that the time, labour & cost of analyzing, information should be compared vis-à-vis benefit arising out of it. For e.g. the cost of ‘oiling & greasing ‘the machinery is so small that its break up per unit produced will be meaningless & will amount to wastage of labour & time of the accounting staff.

CONCEPTS i)Materiality concept:Materiality needs that accounting should should focus on material facts & should not be wasted in recording & analyzing immaterial & insignificant facts. it places a restriction on what should be recorded and reported. For e.g. the fall in the value of stocks, loss of markets due to competition or government regulation, increase in wage bill under recently concluded agreement, published accounts of business entities round off all figures to nearest rupees etc. The essence of material concept is :the omission or misstatement of an item is material if in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgement of a reasonable person relying on the report would have been changed or influenced by the inclusion or correction of the item.

ii) Accounting period:The concept of going concern implies that business activities will continue indefinitely in the process of generation of income. the complete of financial affairs of the business can be available only at the time of liquidation of the business. But information made available only at the time of liquidation, hardly has any use. to provide timely information, keeping in view its usefulness of time from the user, point of view, indefinite life of business is split into shorter intervals of time which are called” Accounting Period “. © ARUN GULERIA | arun_guleria@in.com

Normally, the accounting period is the calendar year ( 1st Jan to 31st Dec.) but in other cases it may be financial year ( 1st April to 31st Dec) or any other period depending upon the convenience of the business concern.

iii) Realization:This concept emphasis that profit should be considered only when realized .the question is at what stage profit should be deemed to have accrued Whether at the time of receiving the order at the time of execution of the order or at the time of receiving the cash? For answering this question the accounting is in conformity with the law & recognizes the principle of law i.e. revenue is earned only when the goods are transferred .it means that profit is deemed to have accrued when ‘property’ in goods passes to the buyer viz. when sales are affected.

iv) Matching concept:The matching concept states that all costs which are applicable to the revenue of the period should be charged against that revenue in order to determine the net income of the business. The matching concept requires that expenses should be matched to the revenues of the appropriate accounting period. So we requires that expenses should be matched to the revenues of the appropriate accounting period.

v) Entity concept:It is very important to note that for accounting purposes the business is related as a unit apart from its owners, creditors & others .in other words, the owner of an enterprise if always considered to be separate & distinct from the business he controls. For e.g., goods used from the stock of the business for the purposes of business is treated as a business expense but if similar goods are used by the proprietor for his personal use then these are treated as drawings.

vi)Stable money measurement concept:In accounting each worth event, transaction is recorded in terms of money. In other words, a transaction which cannot have effect on the result of the business materially cannot be recorded in the accounting books if they are convertible in money terms.

vii)Conservation:This concept emphasis that profit should never be overstarted or anticipated. Traditionally accounts follow the rule “ anticipated no profit & provide for all possible losses.

viii) Revenue recognition concept:This principle is mainly concerned with the revenue being recognized in the income statement of an enterprise. Revenue is the gross inflow of cash, receivables or other consideration arising in the course of ordinary activities of an enterprise from the sale of goods, rendering of services .

ix) Full disclosure concept:According to this principle financial statements should act as means of conveying & not consulting. The financial statements must disclose all the relevant & reliable information which they purport to represents, so that information may be useful for the users.

x) Cost benefit concept:According to this concept the cost of applying an accounting principle should not be more than its benefits.

xi) Timeliness Concept:According to this concept , timely information should be made available to the decision makers. If the quarterly reports are made available on half yearly basis, the information © ARUN GULERIA | arun_guleria@in.com

contained in the quarterly report would not be very useful to the decision during the period of half year, after expiry of which are Quarterly Report had been submitted.

xii) Industry Practice Concept:The peculiar Characteristics of an industry may require departure from the accounting guidelines discussed above. For example in case of an agriculture industry, it is a common practice to disclose the crops at market value rather than at a cost since it is costly to obtain accurate cost figures of individual crops.


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Relationship accounting?







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1. Financial accounting relates to the information presented based on past events & records. Cost & managerial accounting is the presentation of financial information to the management to be used in decision making while in managerial accounting projections are made based on past trends. For example :projected cashflows, profit & loss account & balance sheet. 2. Financial accounting relates to the information presently based on past events & records. Cost & managerial accounting is the presentation of financial information to the management to be used in decision making while in managerial accounting projections are based on past trends . For example : projected cashflows, profit & loss account, balance sheet.

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