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Basic Concepts of Accounting

(Go through the reference books for details)
5. Accounting Information System (Kieso, 6th Ed., p 276)
The system that collects and processes business transaction data and disseminates financial
information to interested parties is known as the Accounting Information System.

 Input (Identifying): Identify and collect economic events

 Process (Recording): Process business transactions to generate accounting information
 Output (Communicating): Disseminates the processed information through financial
statements to various users
6. Qualitative Characteristics of Accounting Information ( Porwal, p 116)
1. Relevance: Helping users to make predictions about the outcome to past, present and
future events or to confirm or correct prior expectations
2. Reliability: Information is reliable if it is free from error and bias, and faithfully
represents and users can depend upon the information to represent the economic
conditions.
3. Timeliness: Having information available to decision maker before it loses its capacity to
influence decisions
4. Comparability: The quality of information that enables users to identify similarities in
and differences between two sets of economic phenomena.
5. Consistency: Conformity from period to period with unchanging policies and procedures.
7. Users of Accounting Information (Kieso, 6th Ed., p 4 )
A. Internal Users B. External Users
 Marketing Manager  Investors
 Production supervisor  Prospective Investors
 Finance Director  Creditors
 Company officers  Tax authorities
 Regulatory agencies
 Customers
 Labour Unions
 Economic planners
 Competitors

8. Some Definitions

 Assets: (Larson, 9th Ed. , p 10, Porwal, p 184, Kieso, 6th ed, p. 13)
An asset is a resource controlled by the enterprise and from which future economic
benefits are expected to inflow to the enterprise. Simply, assets are resources owned by
the enterprise.

i) Current Assets (Kieso, 6th ed, p. 151)

Current assets are cash and other resources that are reasonably expected to be realized in
cash or sold or consumed in the business within one year of the balance sheet date or the
company’s operating cycle, whichever is longer. For example, accounts receivable,
inventory etc.
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ii) Fixed Assets

Fixed assets are resources that are not expected to be realized in cash or sold or consumed
in the business within one year of the balance sheet date or the company’s operating
cycle. For example, land, building, machinery, furniture etc.

 Liabilities: (Larson, 9th Ed. , p 10, Porwal, p 184, Kieso, 6th ed, p. 13)
A liability is a present obligation of the enterprise arising from past events, the settlement
of which is expected to result in an outflow from the enterprise. Simply, liabilities are
claims against assets i. e. liabilities are existing debts and obligations.
i) Current Liabilities (Kieso, 6th ed, p. 153)

Obligations expected to be paid within one year or an operating cycle, whichever is

longer, are classified as current. For example, accounts payable, salaries payable, interest
payable etc.
ii) Long-term Liabilities (Kieso, 6th ed, p. 154)

Obligations expected to be paid after one year or an operating cycle, whichever is longer,
are classified as long-term liabilities. For example, bonds payable, Mortgages payable etc.
 Capital: That amount supply by the owners of the business.
 Owner’s equity (Larson, 9th Ed. , p 10, Porwal, p 184, Kieso, 6th ed, p. 13)
The ownership claim on total assets is known as owner’s equity. Equity is the residual
interest in the assets of the enterprise after deducting all its liabilities. The ownership
claim on total assets is known as owner’s equity. The revenue and expenses change
owner’s equity.

 Cost (Porwal, p 93)

Cost is related to assets. By incurring cost we can get any type of assets. It represents the
exchange price or monetary consideration given for acquiring goods or services. On the
other hand, expenses are the using or consuming of goods and services in the process or
obtaining revenues.

 Expense (Porwal, p 185, Kieso, 6th ed, p. 13)

Expenses are a decrease in the economic benefits during the accounting period in the
form of outflows or depletion of assets. Expenses are the cost of assets consumed or
services used in the process of earning revenue. The amount that is incurred to operate a
business or for generate revenue.

 Revenue (Porwal, p 185, Kieso, 6th ed, p. 13)

Revenue is an increase in economic benefits during the accounting period in the form of
inflows or enhancements of assets. Revenues are the gross increase in owner’s equity
resulting from business activities.
 Net Income: The excess of revenues over expenses.
 Net Loss: The excess of expenses over revenues.