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VISHISHT SCHOOL OF MANAGEMENT, INDORE UNIT-1 Introduction to Accounting

ACCOUNTING
Accounting is an art of identifying, classifying, recording, summarizing and interpreting business transactions of financial nature. The process of accounting contains the following steps: All financial transactions which have documentary evidence are identified as accounting transactions. The elements of the transactions are classified as assets, liabilities, capital, revenue and expense. These transactions are recorded in the appropriate books of accounts. Income statements are prepared to ascertain profit or loss of the business during accounting period. Position statements are prepared to ascertain assets and liabilities of the business. Finally, results of the business transactions are communicated. Definition of Accounting : - In the words of Smith and Ashburne, "Accounting is a means of measuring and reporting the results of economic activities. In the opinion of Bierman and Derbin, "Accounting may be defined as the identifying, measuring, recording and communicating of financial inform ation." Difference between Book-Keeping and Accountancy Book-keeping is the part of accountancy. Accounting is concerned with the initial records, ledger accounts, trial balance and also with the preparation of financial statement to ascertain profit or loss of the business. The value of assets and liabilities are also reported. The results of the business are also interpreted in terms of ratios and statements. Book-keeping as an initial and integral part of accounting is restricted to initial records i.e., journal, subsidiary books, ledger and trial balance. Book-keeping is the art of preparing original or initial books of accounts, whereas accounting is concerned with the recording, reporting and interpreting the results of the business. In this way, book-keeping is an essential part of accounting. Both Book-keeping and Accounting are complementary and supplementary to each other, but even then they are different in the following respects: -

Point Difference 1. Objective

of

Book-Keeping

Accounting

The objective of book-keeping is The objective of accounting is to to prepare original books of record, analyze and interpret the accounts. It is restricted to journal, business transactions. subsidiary books and ledger accounts only.
Mr. Robin Neema (Asst. Professor- Finance) Contact on: - robin@vsom.in, robin.neema@gmail.com

vary from firm to firm. management. It tells us about the profit earned and also about the assets and liabilities of the business. varied and complex. Accounting records these transactions in writing and thus it is no t necessary that the business should memorize all the transactions. Replacing Memory: . The account can also be used to prove the claim of the business against the debtors in the court. business transactions.neema@gmail. business 6. Level of Work 4. 2. accounting The methods of reporting and of In concepts and conventions are interpretation in accounting may followed. We can send the debtors their statement of accounts and thus enable them to verify entries and also to make early payment of the amount due. Mutual Book-keeping is only art of recording transactions. INDORE UNIT-1 Introduction to Accounting 2. work. Documentary evidence: . Income statements are prepared with these records and we are able to know the profit earned and the loss suffered by the business. the court accepts these records as evidence. 5. SIGNIFICANCE OF ACCOUNTING 1. so it has to Dependence depend upon accounting which makes it more meaningful and purposeful 5.in.Accounting keeps proper and systematic record of all business transactions. clerical work is involved in medium level and even top level it. Assisting in realization of debts: . Mr. Balance Sheet of the business. Principles Accountancy book-keeping.Financial position of the business is displayed through position statement i. This is why.Accounting records can also be used as evidence in the court to substantiate the claim of the business. The personal account shows the exact amount due from the debtors.Business transactions are innumerable. The statement is prepared at the end of the accounting year and reflects the true position of assets and liabilities of the business on a particular date. 3. T hese records are based on documentary proof.com .robin@vsom. Scope It has limited scope and is It has wider scope as compared to concerned with the recording of book-keeping.VISHISHT SCHOOL OF MANAGEMENT. Assessing the performance of the business: . Accounting is based upon bookkeeping which is its initial and vital part.Finance) Contact on: . 3. It depends upon book keeping. Robin Neema (Asst. Low level clerks prepare the accounts. 4. Assessing the financial status of the business: . Accounting shows the net result of the business. Professor.We prepare personal ledger accounts of all the parties. It is restricted to low level of It is concerned with low level. Every entry is supported by authentic vouchers. medium level report it and top level interpret it. Results of the It does not show the net result of the financial position of business. as such it is quite impossible to memorize each and every transaction. robin.e.

The purpose of accounting is summarized a s under: 1. Afterwards pr ofit and loss account is prepared to calculate net profit or net loss.Accounting reveals the actual performance of the business in terms of production. robin. cheating takes place. theft or embezzlement is made and fraud is committed. 4. Comparison reveals deviation in terms of weaknesses and plus points. and accordingly passed through book. we prepare position statement. profit. so that requisite information may be obtained a glance from the books of accounts. is the source to evaluate the performance of the business in terms of profit. Helpful to management: . liabilities. Calculation of Profit or loss: . Actual performance can be compared with the desired performance or with the performance of previous years. It can also be compared with the previous performance.The proper accounting system and effective arrangement of internal check prevents leakage of goods and cash. The value of assets and liabilities are depicted in the balance sheet. INDORE UNIT-1 Introduction to Accounting 6. loss.robin@vsom. so it is necessary that business transactions must be recorded in the books of accounts with their documentary proof. 8.com . Causes responsible Mr. cap ital.The main purpose of accounting is to identify business transactions of financial nature and enter them into appropriate books of accounts. Causes responsible for the poor performance are identified and efforts are made to remove them. Facilitating the sale of the business: . reflecting the true position of assets and liabilities on a particular date.The position statement of the business shows the value of assets and liabilities of the business. The accounting records should be made properly and systematically. The actual performance can be compared with the planned or des ired performance of the business.At the end of accounting period. The proper accounting of these transactions will enable the business to evaluate its performance by preparing income and position statements. expenses. we prepare Trading Account.Finance) Contact on: .Accounting is useful to the management in various ways. Accounting facilitates in the calculation of the consideration for which the business should be sold. 2. It enables the management to assess the achievement of its performance. Preventing and detecting frauds: . Professor. also known as position statement. cost of production and the book value of sundry assets.neema@gmail. We can calculate the 'Net Worth' of the business on the basis of these stateme nts. revenue. Income statements are prepared with the help of trial balance. Business transactions are classified as. 3. and ascertain Gross Profit or Loss.in. Robin Neema (Asst. PURPOSE OR OBJECTIVE OF ACCOUNTING It is impossible for the business or the management of the enterprises to memories of all the business transactions. accounting helps in detection of these losses and also fixes responsibility for it. Depiction of the Financial Position: . At the end of accounting period. Proper accounting prevents employees from committing fraud. In c ase. 7. Balance sheet is said to be a mirror. The weaknesses of the busi ness can be identified and corrective measures can be applied to remove them.VISHISHT SCHOOL OF MANAGEMENT. sales. assets. Providing effective control over the business: . Maintaining proper record of business: . Accounting in this way.One of the main objectives of accounting is to calculate the profit or loss of the business.

While maintaining books of accounts we follow going concern concept i.com . robin. are not recorded in Accounting. Ignorance about the present value of business: . Manipulation: . the business will be carried on for indefinite period. Certain very important information such as competency of the management. Inexactness: .Accounting assesses profit or loss of the business on the basis of both the real and assumed estimates. Mr. INDORE UNIT-1 Introduction to Accounting for better performance are reinforced. 3. Accountants make the valuation of stock. competitions in the market and change in consumers preferences etc. discount on issue of share etc.Business. enables the management to adopt effective control over the business. lenders. The management may be biased and feed manipulative information to prove its point of view. determine the method of depreciation and maintain various reserves and provision in any way. Making information available to various groups: . Accountants can show the result of business . In addition to the owners of the business various groups.Accounting records only those transactions which are financial in nature. change in the economic and political situations. Accounting makes information available to all these interested parties. These assets are goodwill. 5. Showing these assets in the books of accounts makes its result doubtful. though they affect the financial soundness of the business. these days is a social institution. preliminary expenses. Accounting in this way. Government policies. in this way. as desired by the owners of the business. such as creditors. patents. researchers. 4. Different firms have their own different methods. government and even workers and consumers have an interest in the performance of business.robin@vsom.VISHISHT SCHOOL OF MANAGEMENT. Robin Neema (Asst.There are certain assets which do not have real value but they are shown in our Balance Sheet. LIMITATIONS OF ACCOUNTING 1. under -estimating or over-estimating the value of assets.Accounting results are based upon the information supplied to it.in. Professor. we show the value of our assets in the balance at its book value not at the market value. Incomplete information: . It records only the quantitative aspect of our transactions. increasing or decreasing the amounts of certain accounts.Finance) Contact on: . This may be done by omitting certain accounts. Transactions of non-financial nature do not find place in accounting. With this principles in view. 5. fails to show the present sale value of the business. Accounting.neema@gmail. investors.e. they like. Showing valueless assets: . so the results of the business will change with the change in the practice. 2. Sometimes certain assets may be valueless in the market but we continue to show it in the books of accounts.

Business transactions must be presented in numerical monetary terms. invoice. INDORE UNIT-1 Introduction to Accounting BASIC ACCOUNTING TERMINOLOGY 1. cash memo. Companies must adopt financial year as their accounting year.com .neema@gmail. 3. capital.in. if there remains any surplus. revenue. liabilities. They pay wages to labour.robin@vsom. After meeting all the expenses of business. 4. Special features of Business Transactions are as under: a. Business Transactions The economic event that relates to a business entity is called business transaction. While passing entries. Accounting Year Book of accounts are closed annually. Business transactions must cause an effect on assets. The proprietor is rewarded with profit fo r the risk undertaken by him. monetary term causing effect on assets. revenue Business transactions as such refer to business activities involving transfer of money or goods or services between two parties or two accounts. The only restriction is that the accounting period must consist of 12 months. If expenses exceed revenue the deficit is a loss to be borne by the proprietor. Business transactions must be financial in nature.e. They invest their funds into the business as capital. 2. deeds or any document as an evidence of transaction Mr. It may be a receipt. Business transactions must be supported by documentary evidence. wages bill. These documentary proo fs in support of the transactions are termed as vouchers. They may adopt the accounting year of their choice. rent to land. interest to capital and salary to organization. Entry An entry is the systematic record of business transactions in the books of accounts. Professor. Proprietor: An individual or group of persons who undertake the risk of the business are known as "Proprietor". capital. it is known as profit. capital and organization.Finance) Contact on: . c. capable of being presented in numerical.VISHISHT SCHOOL OF MANAGEMENT. robin. It may be between January 1st to December 31 of the same year or July 1st of the year to June 30th of the next year or between two Diwalis or even financial year i. liabilities. Vouchers Accounting transactions must be supported by documents. the principle "every debit has got its corresponding credit" is adopted. 5. b. and expenses is termed as Business Transactions. April 1st to March 31st of the next year. Different accounts are debited and credited in the entry with the same amount. salaries bill. Every activity of financial nature having documentary evidence. d. Robin Neema (Asst. Proprietors are adventurous persons who make arrangement of land. labour. There is no legal restriction about the accounting year of sloe proprietorship and partners hip firm.

neema@gmail. N. The money is blocked in fixed assets and not available to meet the current liabilities. Only the court can declare the business firms as insolvent if it is satisfied that the continuation of the firm will be against the interest of the public or creditors. The contents of vouchers are date. Assets are the economic resources of an enterprise which can be expressed in monetary terms. Anthony. Fixed Capital: . In case of solvency. Capital is classified as fixed capital and working capital: a. 9. If the funds realized fall short of the liabilities creditors are paid proportionately.in. No firm can declare itself as insolvent. purpose of the payment. payment passed by competent authority. In the words of Prof. Plant & Mr. Land & Building. Assets The valuable things owned by the business are known as assets. R.These assets are acquired for long term use in the business. Solvency shows the financial soundness of the business. b.The amount invested in acquiring fixed assets is called fixed capital. Operational expenses are met with working capital. 8. These assets increase the profit earning capacity of the business. Working Capital: . Capital should need not necessarily be in cash. Vouchers are the basis of accounting records. "Assets are valuable resources owned by a business which were acquired at a measurable money cost" Classification of Assets a. INDORE UNIT-1 Introduction to Accounting having taken place. 6. Current assets and current liabilities constitute working capital. Robin Neema (Asst. It may be in kind also. Capital It is that part of wealth which is used for starting a business and for further production and thus capital consists of all fixed and current assets. Vouchers are also used for verification and auditing of business records. Solvent firms have sufficient funds and assets to meet proprietors' and creditors' claim. the assets of the business are sold and liabilities paid with the funds realized from the sale assets. Insolvent All business firms who have been suffering losses for the last many years and are not even capable of meeting their liabilities out of their assets are financially unsound. amount paid. 7.VISHISHT SCHOOL OF MANAGEMENT. These are the properties owned by the business.Finance) Contact on: . robin. They are not meant for sale. Solvent Solvent are those persons and firms who are capable of meeting their liabilities out of their own resources. Expenditure on these assets is not regular in nature. payment made and cancelled the voucher. Fixed or Tangible Assets: . Sufficient funds are required for purchasing good and incurring direct and in direct expenses. They facilitate accounting. Professor.com .robin@vsom.The part of capital available with the firm for day -to-day working of the business is known as working capital.

the value of goods on the opening day of the accounting year is known as opening stock. Liabilities Liabilities are the obligations or debts payable by the enterprise in future in the form of money or goods. Liabilities can be classified as under: a. The value of these liabilities goes on changing. Robin Neema (Asst. They do not have any real value . for more than one year. In other words. increases or decreases and goes on changing. 12.robin@vsom.com .Liabilities payable within a year are termed as current liabilities. they are not the real assets but they are called assets on legal and technical ground. Loose Tools etc. we use the term stock widely as opening and closing stock. trademarks. Creditors. In the same way. Furniture. robin. In case of business which is being carried on for the last so many years. Vehicles. Goods Articles purchased for sale at profit or processi ng by the business or for use in the manufacture of certain other goods as raw material are known as goods. patents. Bank Overdraft. In the words of Institute of Certified Public Accountants. Professor.Fictitious assets are those assets. Furniture will be goods for the firm dealing in furniture but it will be an asset for the firm dealing in stationery. Capital. The business should have sufficient assets to meet its lia bility.Finance) Contact on: . It varies i. b. cash at bank. In accoun ting. Mortgage etc. fluctuating. Actually. Goodwill. loss on issue shares. bills receivables.. USA. are some of the examples of current assets. and Outstanding Expenses etc. INDORE UNIT-1 Introduction to Accounting Machinery. goods are the commodities.neema@gmail. In case of manufacturing enterprises stock is classified as under: Mr. Cash in hand. the value of goods on the closing day of the accounting year will be closing stock. advertising suspense are some of the example of fictitious assets. commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating circle of th e business". b. Current or Short Term Liabilities: .e. It is the proprietors and creditors claim against the assets of the business. preliminary expenses. or floating assets change their values constantly. "Current assets include cash and other assets or resources. copyrights. Loans. are its example.These assets. Fixtures & Fittings. Fictitious or Intangible Assets: . 11. 10. c.VISHISHT SCHOOL OF MANAGEMENT. also known as circulating. in which the business deals. Americans use the term 'merchandise' for goods. Current Assets: . are current liabilities. Bills Payable. stock. Stock The goods available with the business for sale on a particular date is termed as stock. are some of the examples of fixed assets. which do not have physical form.These liabilities are paid after a long period. Fixed or Long Term Liability: .in. debtors.

Professor. the firm is a service institution and the payment for service still remains to be realized. Purchases of assets.VISHISHT SCHOOL OF MANAGEMENT. This return may be due to unnecessary. because it is the return of goods outside the business. INDORE UNIT-1 Introduction to Accounting a. robin. Purchases returns are also known as returns outward. 17. excessive and defective supply of goods. Work-in-progress: . Sales Return or Returns Inward It is that part of sales of goods which is actually returned to us by purchasers.Manufactured and finished goods ready for sale are known as stock of finished goods. 14. Stock of Raw Material: . Sales return. It includes both cash and credit sales. unnecessary and defective supply of goods or violation of terms of agreement. Creditors are the Mr. Sales The ultimate end of the goods purchased or manufactured by the business is their sales.It is the stock of partly finished or partly manufactured goods just as price of thread and unfinished cloth in case of cotton mill. which is returned to the seller. In case.Raw material required for manufacturing of the product in which the business deals is know n as stock of Raw material. Stock of Finished Goods: . In accounting terminology. are not the purchases in accounting terminology as these assets are not m eant for sale. in order to calculate net sales. b. Debtors The term "Debtors" represents the persons or parties who have purchased goods on credit from us and have not paid for the goods sold to them. Purchase Return or Return Outward It is that part of the purchases of goods.robin@vsom. Purchases In its routine business. c. 13. also known as retu rns inward is deducted from sales. beneficiaries of the services will also be known as "debtors" 18. purchase return is deducted from purchases. the firm has to either purchase finished goods for sale or purchase raw material for the manufacture of the article. The acquisitions of these articles are purchases.neema@gmail. never the sale of assets sales should have a r egular feature. 15. if the supplier violates the terms and conditions of the order and agreement. Finished cloth is its example. This return may also be due to excessive.in. Cotton in case of cotton mill is its example. being sold by the firm. 16. Creditors In addition to cash purchases the firm has to make credit purchases also. In order to calculate net purchases. sales means the sale of goods. The sellers of goods on credit to the firm are known as its creditors for goods.com . It is immaterial whether goods have been purchased for cash or on credit. It may also result. They still owe to the business. Robin Neema (Asst.Finance) Contact on: .

Finance) Contact on: . 23. It is shown at the liabilities side of the Balance Sheet. Acquiring personal assets with business funds is also drawing. which become a part of Bills Payables. Generating income is the foremost objective of every business. Expenditure Expenditure is the amount of resources consumed. Losses Losses are unwanted burden which the business is forced to bear. Certain debtors accept bills drawn by us and become part of bills receivable.in.VISHISHT SCHOOL OF MANAGEMENT. When we purchase goods on credit. Professor. Revenue Revenue in accounting means the amount realized or receivable from the sale of goods. revenue is also used to mean receipt of rent. The total of debtors and Bills receivable is known as Receivables. The cost of using business assets for private or domestic use is also drawing. In wider sense. 20. robin. Normal loss is due to the inherent weakness in the Mr. Expense Expenses are cost incurred by the business in the process of earning revenues. 22. what busi ness has to receive from outside parties on revenue account.robin@vsom. commission and discoun t etc.neema@gmail. Amount received from sale of assets or borrowing loan is not revenue. The firm has to use certain goods and services to produce articles sold by it. When we sell goods on credit. We accept bills drawn by certain creditors. It is the account spent for the purchase of assets. The total of creditors and Bills Payable is termed as Payables. sellers are known as creditors. Robin Neema (Asst. Use of business car for domestic use or use of business premises for residential purpose is also drawing. It is long term in nature. or flood or storm or accidents are termed as 'losses' in accounting. It is the benefit to be derived in future. INDORE UNIT-1 Introduction to Accounting liability of the business. 25. 19. Receivables Receivable means. Payables Payable means. what the business has to pay to outside parties. Drawings Amount or goods withdrawn by the proprietor for his private or personal use is termed as Drawing. Losses of goods due to theft or fire. Expenditures are incurred to ac quire assets of the business.com . They will continue to remain the creditors of the firm so far the full payment is not made to them. Payment for these goods and services is called "expense" 24. purchasers are known as debtors. 21. These are shown at the assets side of the Balance Sheet. Losses may be classified as normal and abnor mal.

We record and report only those economic events.in. Profit/Income Excess of Revenue over expense is termed as income. if any are ascertained. accounting period is supposed to consist of 12 months. FUNCTIONS OF ACCOUNTING DATA Accounting data performs the following functions:  Measurement of past performance: .robin@vsom.Accounting data of the past is also used to forecast the future possibilities and performance. 27. We do not record possibilities and expectations  Forecasting future performance: . sales tax act. It must concern routine activities of the business. The various users of accounting information use accounting data for making their own decisions. prepares ledger accounts and reports the result of past performance. Income must be regular in nature. profit and value of assets are made on the basis of accounting information. Robin Neema (Asst. sales. Here. Partnership and Companies acts et Mr. 26. concerning their interest. which have already occurred. fire. It must relate to the business of the current year. Gain Change in the net worth due to change in the form and pl ace of goods and holding of assets for a long period. whether realized or unrealized is termed as gain.The actual performance of the business is compared with the desired performance and deviations. It is shown at the credit side of profit and loss A/c. Professor. The decision making process needs accounting information as source documents. flood. such a provisions of Income tax Act. robin. A rough estimate of future production.Accounting data must be prepared and presented to honour the legal formalities of various acts and government legislations. storm.VISHISHT SCHOOL OF MANAGEMENT. We identify the areas of weaknesses and apply remedial measures. is an extra ordinary loss due to earthquake.neema@gmail.com .The management is required to formulate future policies and take important decision.Finance) Contact on: . theft and accidents.accounting keeps proper record of all economic events. INDORE UNIT-1 Introduction to Accounting commodities.  Controlling of performance: .  Honouring legal commitments of the business: .  Helping decision making: . Abnormal loss on the other hand.

VISHISHT SCHOOL OF MANAGEMENT. Going Concern Assumption While recording business transactions in the books of accounts.Finance) Contact on: . howsoever. We evaluate the value of the commodities in terms of money and accordingly reco rd them in the books of accounts. litres. The qualitative aspect of the business.robin@vsom.com . the business purchase fixed assets like land and building. Accounting Entity Assumption Business is assumed to have distinct entity i. Accounting transactions must have their monetary value. liability. industrial and fiscal policies of the government. The capital introduced by the proprietor in its own business is considered liability fro m business point of view. we would have hired these assets and not purchased. we identify and record only those business transactions. Legally. 1. kilogram and quintals. " Mr. popularly known as pillars upon which the sound structure of accounting stands. harmonious relationship between workers and management.neema@gmail. CONVENTIONS AND PRINCIPLES 1. INDORE UNIT-1 Introduction to Accounting CONCEPTS. because they cannot be evaluated in t erms of money. revenue and expense. In all the accounting records.. This is why. The worth of the transaction must be measured in terms of money. vitally affect the performance of the business but are not recorded in the books of accounts because these qualitative aspects cannot be measured in terms of money. 2. a sole proprietor or the partners of a partnership firm are not separate from their business units but in accounting the business units are assumed to have d istinct entity. Professor. " The enterprise is normally viewed as a going concern that is as continuing in operation for the foreseeable future. The efficiency of the management. change in consumer's preferences and fashion etc. we assume that the business will be carried on indefinitely. vehicles and furniture etc. Every business enterprise must adopt these assumptions. important are not recorded in the books of accounts. which are financial in nature. Money Measurement Assumption In accounting. change in economic. While making decision regarding assets. BASIC ASSUMPTIONS/CONCEPTS These assumptions are the foundation of systematic and proper accounting. existence other than the existence of its proprietors and other business units.in. If the assumption of going concern may not have been there. 3. capital. plant and machinery.e. Recording transactions in terms of money makes the information more meaningful. There is never any accounting record in metres. robin. we have amount column showing rupees and paise. business viewpoint is taken into consideration. Robin Neema (Asst. According to International Accounting Standard. It will not be a liability if proprietor's viewpoint is taken. We have to record business transactions from firm's point of view and never from the viewpoint of proprietors.

e. which can also be expressed as under: Assets = Liabilities + Capital 1.e. Plus points. There are two sides of every transaction. 2. This is evident when we study the accounting term i. The business can make effective plans for the future and decide the most suitable line of action. ana lyses them and thus identifies its plus and minus point. Capital: . Professor. 12 months. Accounting Period Assumption The assumption of accounting period facilitates the business in assessing its worth after a year.. Accounting reports profit or loss of the business. It has been an established fact that no business can be carried on without assets. In the context of dual concept capital supplies necessary funds to the business to purchase certain assets. which is used for fu rther production. Income tax and sales tax authorities have also an interest in the results of business and thus accounting year assumptions helps them in assessing the tax of the firm for the year. The management studies the information presented by accounting.These are the valuable articles owned by the business. of the year. Liabilities: . BASIC PRINCIPLES (a) Principle of Dual Aspect Every business transaction has double effect. if any are reinforced.Capital is that part of wealth. This period may a calendar year i. Proprietorship and partnership should not exceed twelve months.com . In order to make accounting meaningful. invoices. assets.in. We do not pass any entry or make any posting in the subsidiary books unless there is a voucher for it. Verifiable Objectivity Assumption The assumption of verifiable objectives means that every business record must be based and supported by documentary evidence. The relationship between assets and liabilities and capital is at present known as Accounting Equation. capital and liabilities. Robin Neema (Asst.VISHISHT SCHOOL OF MANAGEMENT.Capital invested by the proprietor falls short so the business has to borrow funds and thus the loan on the one si de of the liability of the firm and on the other side it will be in the form of cash or other assets. accounting period concept may also be known as accounting year concept.e. INDORE UNIT-1 Introduction to Accounting 4.Finance) Contact on: . accounting year must be the financial year i. useful and legal. robin. 1. to 31st Dec. 1st Jan. 1 st April to 31st March of the next year. salary Mr. 2. (i) Assets: . 1st April to 31st March of the next year or even Diwali to Diwali but always restricted to one year i. In case of companies. an assessment year i.robin@vsom.e.neema@gmail. cash memos. accounting concept cannot be ignored by any business house. bills. Receipts. In this way.e. Remedial measures are adopted to remove the causes responsible for the weaknesses of the firm. It also shows the value of assets and liabilities of the business on the closing date of the accounting period.

com . entries and postings in the books of accounts are checked with reference to the vouchers by auditors. Professor. so he prefers to determine his revenue on the basis of the work completed by him during the year.robin@vsom. verifiable and free from manipulation and personal bias. c) Production Basis: .Revenue is supposed to be realized for part of work completed. The concept of verifiable objectives is always followed by all the accountants. verifiable and definite.Sales is supposed to be complete when title of goods is passed to the buyer and payment or promise to make payment is received from him in exchange.in. b) Cash Basis: . because it is reliable.Revenue is supposed to have been realized when actual payment is received. Objectivity of the documents means that these vouchers contain facts presented in an unbiased way. because the balance of assets and liabilities is carried forward from year to year at its acquisition cost. when sales basis and cash basis fail to identify revenue.VISHISHT SCHOOL OF MANAGEMENT. Verifiability. when we should assume revenue to have been earned. The contractor engaged in construction of a multi -storeyed building is not paid the full value of work completed by him during the accounting period. Principle of Revenue Recognition In accounting terminology. here means examination or the scrutiny of the documents before they are recorded in the books of accounts. where transfer of goods to the consignee. 'revenue' is the amount received or receivable from the sale of goods. They neither show favour nor prejudice to either the party making payment or the party receiving the payment. It will enable us to identify the period for which the revenue has been earned. the agent is not a sale. Aft er accounting of the transaction. Mr. robin. This basis of ascertaining revenue is adopted. 2. Historical approach of presenting as sets and liabilities has clear advantage over other approaches of valuation. Sale of goods or realization of sales proceeds is not the criteri a according to production basis. The use of historical cost as the basis provides verifiable and objective accounting information. revenue determined on production basis. accounting should be definite. According to the principles of objectivity.neema@gmail. irrespective of increase or decrease in the market value of assets. Revenue will result only there is an exchange of title to goods or services and payment is received or receivable. Principle of Historical Cost According to this principle all business transactions must be recorded in the books of accounts at their monetary cost of acquisition. 3. In construction works. INDORE UNIT-1 Introduction to Accounting bills and deeds are some of the vouchers used as documents for recording business transactions. Robin Neema (Asst. The cash basis is adopted when there is doubt regarding realization of the payment.Finance) Contact on: . The principle is called historical. all the payment received or receivable is not the revenue. We can determine the revenue as realized on the following basis: a) Sales Basis: . The principle explains. According to accounting period assumption revenue must be concern with the specific accounting period. The principle explains that mere transfer or possession is not sale. In the same way. as in the case of assignment.

This is why.robin@vsom. The intention is not to over burden accounting with information but present facts without any malifide intention. but in practice accounting information need to be useful. we shall compare and match the sales (revenue) with the cost of goods sold (expense) and the result will be gross income. sales is given. INDORE UNIT-1 Introduction to Accounting 4. We require cost of goods sold to calculate profit. Materiality will differ with the size.000 is the gross income.4.000 = Rs. The whole business structure is based upon the desire to earn profit. we apply the modifying principles of materiality. Business is a going concern.Rs.neema@gmail.00.Finance) Contact on: .com .00. Disclosure of material facts does not mean leaking out the business secrecy. MODIFYING PRINCIPLES Basic assumptions and basic principles of Accounting are used as operating guidelines for preparing financial statements.VISHISHT SCHOOL OF MANAGEMENT. Important conclusions are drawn by comparing accounting statements of the Mr. The principle of materiality is a modifying principle because the material information for one business unit may not be m aterial for the other. nature and traditions of the business. 16.in. Certain unimportant information may be avoided and other may be merged with important information. Materiality here means the information. According to this principle income can be ascertained by matching revenue of the business with its costs. Principle of Matching Cost and Revenue Reasonable profit is the object of every business enterprise.00. 16.000 is revenue of the business but not the profit. According to this principle. concise and intelligible. 7.000. 20. It has been the duty of accountants all over the world to evolve principle of calculating exact and accurate profit. It should be honestly prepared. consistency. In this case. conservation. relevant. favour or prejudice.e. 5. We cannot determine profit or loss if only one information i. free from any bias. if it is mentioned that the cost of goods sold is Rs. if it would have been disclosed. Rs. It does not mean that accounting should b e over-burdened with information. Figure should not be manipulated. It has to continue indefinitely. robin. Modifying Principle of Materiality Accounting should disclose all the material information. The result of these efforts was the introduction of the principle of matching cost and revenue. which would have changed the results of the business. In order to achieve this objective basic accounting assumptions and principles need to be modified. but disclosing all information of proprietors' and investors' interest. consistent and intelligible. comparable. It requires that the accounting information must be reliable. 3. Sales of Rs. Modifying Principle of Consistency It is also known as convention of consistency. Professor. Net income will be calculated after deducting selling and distribution expenses fr om the gross income. In the above information regarding sales. 20. Principle of Full Disclosure The principle is also known as convention of full disclosure.00. certain unimportant items are left and some of them are merged with other items. Robin Neema (Asst.000 . Accounting must disclose all material information. 6.00. timeliness and industry practice to make the accounting information more meaningful.

Modifying Principle of Cost Benefit Accounting to the principle it should be ensured that the cost of applying the particular principle should not exceed the benefits derived from it. robin. It means that the form should not be used as escape goat to conceal substantial information i.Finance) Contact on: . first served' i. The convention of consistency does not mean that the business cannot switch over to better and up-to-date methods.. Modifying Principle of Timeliness This is one of the latest conventions of accounting. useful. Modifying Principle of Prudence (Conservatism) The business according to this principle adopts a very safe policy.com . The delay in recording may result misplacement of vouchers. 10.neema@gmail. the substance of the importance should not be lost in the maintenance of legal form and format of presentation.in. misappropriation. the fact should be disclosed with reasons. According to this principle business transactions should be recorded in such way that profits should not be over stated. Robin Neema (Asst. It accounts for all the prospective losses but leaves aside all the prospective profits. embezzlement and even fraud. Modifying principles of timeliness means supplying relevant and reliable information to the decision makers both internal and external timely i. Modifying Principle of Substance Over Form According to this principle accounting must communicate the material. It means that the information collected and reported must be relevant and reliable. 11. and substantial information to all those who are directly or indirectly interested in its information. manipulation. We record business transactions in order and sequence of dates. The accountants should not sacrifice the substance of the information over its form and format. Accounting is criticized for adopting the policy of conservatism It does not accord equal treatment to prospective losses and prospective profits. if the methods and practice of recording and presentation of accounts does not change. Prudence in financial statements demands that we should avoid uncertainties and ma ke sufficient provisions for unforeseen losses.VISHISHT SCHOOL OF MANAGEMENT. It stresses that undue heavy expenses must not be incurred in supplying information.e. The business transactions of the particular day should preferable be recorded the same day. transactions taking place on 1st January will be recorded before the recording of the transaction of 2 nd January. 9. which are not very relevant. INDORE UNIT-1 Introduction to Accounting current year with statement of the previous years. we follow the policy of 'first come. While recording these transactions into books of accounts. Accounting records must be made at the earliest possible. Mr.robin@vsom. before the information loses its capacity to influence decisions. Professor.e. It ignores prospective and expected income but highlights even the distant possibilities of losses. The principle means "appropriate recording of business transactions at appropriate or proper time". If the business deviates from the previous practices and changes method. 8.e. Accurate comparisons can be made.

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