ACCOUNTING

Need for Accounting

Accounting is the language of business.
The affairs and the results of the
business are communicated to others
through accounting information, which
has to be systematically recorded and
presented.
 Accounting - Definition

Accounting can be defined as the process of

recording, classifying, summarizing,
analyzing and interpreting the financial
transactions and communicating the results
there of to the persons interested in such
information.
 Objectives of Accounting
1. To maintain systematic record
2. To ascertain financial position of business
3. To ascertain the operational profit or loss
4. To facilitate rational decision making
5. Knowledge of debtors and creditors
6. Knowledge of purchase and sales
7. Knowledge of bank and cash balances
8. Basis of Income Tax
Users of Accounting information
 Internal Users  External Users
• Owners • Investors
• Management • Suppliers
• Employees • Customers
• Government
• Researches
• Foreigners
• Trade associations
• Stock exchanges
• Media, etc.
 ACCOUNTING PRINCIPLES
Generally Accepted Accounting Principles (GAAP) are
the basic foundation of accounting structure. These broad
guidelines are the accounting standards which bring
about uniformity in recording classifying, summarizing,
interpreting, reporting and the presentation of the
accounting information.
Accounting principles can be subdivided into two
categories:
·        Accounting Concepts; and
·        Accounting Conventions.
 Accounting Concepts
1. Business Entity Concept
2. Going Concern Concept
3. Accounting Period Concept
4. Money Measurement Concept
5. Cost Concept
6. Dual Aspect Concept
7. Matching concept
8. Realization Concept
9. Accrual concept
10. Objective Evidence Concept
 Accounting Conventions

a. Convention of Consistency
b. Convention of Materiality
c. Convention of Conservatism
d. Convention of Disclosure
 1. Business Entity Concept
Separate
Business is treated as a Separate

separate entity or unit apart

from its owner and others.
All the transactions of the
business are recorded in the
books of business from the
point of view of the business
as an entity and even the
owner is treated as a
creditor to the extent of
his/her capital.
2. Going Concern Concept

It is persuaded that the business will exist

for a long time and transactions are
recorded from this point of view.
 3. Accounting Period Concept

The Accounting Period (Reporting

Period) is the time period for
which a company or organization
reports financial performance and
financial position. So a twelve
month period is normally adopted for
this purpose. This time interval is
called accounting period.
 4. Money Measurement
Concept
In accounting, we record
only those transactions which
are expressed in terms of
money. In other words, a
fact which can not be
expressed in monetary
terms, is not recorded in the
books of accounts.
 5. Cost Concept

Transactions are entered in the books of

accounts at the amount actually involved.
Suppose a company purchases a car for
Rs.800,000/- the real value of which is
Rs.850,000/-, the purchase will be recorded
as Rs.800,000/- and not any more. This is
one of the most important concepts and it
prevents arbitrary values being put on
transactions.
 6. Dual Aspect Concept

Each transaction has

two aspects, that is,
the receiving aspect
and the giving aspect.
This is the basic
concept of
accounting.
 DEBIT
&
CREDIT
Whenever you create an accounting transaction, at
least two accounts are always impacted, with a
debit entry being recorded against one account and
a credit entry being recorded against the other
account.
The totals of the debits and credits for any
transaction must always equal each other, so that
an accounting transaction is always said to be "in
balance.
 7. Matching Concept
 Matching concept is based on the
accounting period concept. In order
to calculate the profit made by the
business during a period, it is
necessary that revenues of the
period should be matched with the
costs of the period.
 The concept ‘matching’ implies
appropriate association of related
revenues and expenses.
 8. Realization Concept

According to this concept, revenue is considered

as being earned on the date at which it is realized,
i.e. on the date when the property in goods
passes to the buyers and he becomes legally liable
to pay. This is also known as Revenue Recognition
Concept.
According to this concept, revenue is
recognized when it is realized, i.e, when
sale is complete and it is not important
whether cash is received or not.
 9. Accrual Concept
 As a result of accrual concept,
outstanding expenses and
outstanding incomes are taken into
consideration while preparing final
accounts of a business entity.
 Expenses are recognised in the
accounting period in which they help
in earning revenue whether cash is
paid or not.
10. Objective Evidence Concept
 Objectivity connotes reliability,
trustworthiness and verifiability,
which means that there is some
evidence in ascertaining the
correctness of the information
reported. Entries in accounting
records and data recorded in
financial statements must be
based on objectively determined
evidence.
Eg: Invoices and vouchers
 ACCOUNTING PRINCIPLES

Accounting Conventions

The term ‘convention’ is used to signify

customs and traditions as a guide to the
presentation of accounting statements.
1. Convention of Consistency
• Convention of consistency assumes that
accounting policies should be consistent from
one period to another.
• It implies that rules, policies , principles and
methods adopted by a firm for the purpose of
preparation and presentation of accounts
should not be subject to frequent changes.
• The comparison of one accounting period with
that of another is possible only when the
convention of consistency is followed.
 2. Convention of Materiality
 All material information should be
disclosed, which is necessary to make the
financial statements clear and
understandable.

 Any information which is insignificant and

immaterial from the point of view of users
of financial statements should not be
reported. But what is material and what is
immaterial depends on the size and nature
of the organization.
3. Convention of Conservatism

It refers to the policy of playing safe by

providing for all possible losses but not for
the anticipated gains. Due to business
uncertainties and risk, it is wiser to account
for possible losses. This is also known as
Doctrine of Prudence.
Eg: valuation of closing stock.
4. Convention of Full Disclosure
 This principle implies that accounts must
be honestly prepared and all material
information must be disclosed therein. The
contents of Balance Sheet and Profit and
Loss Account are prescribed by law. These
are designed to make disclosure of all
material facts compulsory.
Thank You