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The American Institute of Certified Public

Accountants defines Accounting as the art of : Recording

Classifying and

Summaririzing

in a significant manner and in terms of money -transactions and events which are,

in part at least, of a financial character, andinterpreting the results thereof

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SIGNIFICANCE OF FINANCIAL ACCOUNTING Financial Accounting is significant because it

Records and classifies data

Summarizes the records maintained Finds out the net result of financial activities

Exhibits the financial position of a concern

Analyses and interprets financial data

Communicates financial information Provides help for complying with legal necessities

Validates the economic transactions

Helps in best utilising the available resources3

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ACCOUNTING CONCEPTS Accounting conceptor postulate or assumption is generally used to meana mental notion or pattern or related ideas aboutaccounting affairs which aim at achieving theaccounting objectives.

In different countries of the world, these terms havebeen explained differently but used interchangeablyin many occasions.

The different concepts used in accounting are:I. Proprietary Concept, II. Entity Concept, III.FundConcept, IV.Monetary Measurement Concept,V.Accounting Period Concept, VI.Going ConcernConcept, VII.Financial Transaction Concept, VIII.DualAspect Concept, IX.Matching Concept,X. Realization Concept, XI. Sequences Concept, &

XII. Accounting Equation Concept 4

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PROPRIETARY CONCEPT This is accepted asthe oldest accounting concept developed atthe end of the 16th century. It is that basicassumption where the owner of the business is

considered as the centre of focus based onwhom all business operations are carried out andbusiness is not viewed separate from its owners.

ENTITY CONCEPT In this concept, enterprise isviewed as a distinct unit completely separatefrom its owners and all the accounting activitiesare centered around the enterprise instead of its

owners. 5

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FUND CONCEPT It is that accounting conceptwhere instead of owner or separate entity anactivity oriented unit is adopted as the basis ofaccounting. By activity oriented unit is meantone asset or a group of assets employed or

created for performing any specific function.MONETARYUNIT OR MONETARY

MEASUREMENT CONCEPT It is that basicassumption under which collection,

measurement and presentation of accountinginformation are done through money becausemoney is accepted as the dependable meansof expressing different heterogeneous elements,it has universal recognition as medium of

exchange and it is considered to be thestorehouse of wealth. 6

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ACCOUNTING PERIOD CONCEPT In thisconcept, the total expected life span of thebusiness is segregated into different small parts(usually consisting of 1 year period). Each ofthese small time spans is identified as separateaccounting period at the end of which financialstatements are prepared for finding out the endresult of the transactions taken place during thesaid period and exhibiting the state of affairs ofthe concern.

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GOING CONCERN CONCEPT the basic notionof the going concern concept is the continuativeexistence of the enterprise. It means that theconcern will operate for an indefinite period and it

will not be liquidated or closed down within aforeseeable time period. On the basis of thisassumption of continuity, accounting is to be done.

FINANCIAL TRANSACTION CONCEPT In thisconcept it is assumed that the majority of thebusiness transactions evolve out of the continuousexchanges of economic assets. Each exchange-based transaction brings changes to the financialcondition of the enterprise either directly or

indirectly. 8

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DUAL ASPECT CONCEPT It is one of the basicconcepts of accounting the fundamental ofwhich is for every debit there is a correspondingand equivalent credit. To judge each

transaction on the basis of such receiving andgiving benefit for the purpose of accounting isknown as dual aspect concept.

In dual aspect based double entry accountingsystem receiving of benefit by the concern istermed as debit, while giving benefit by theconcern is identified as credit.

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MATCHING CONCEPT According to thisconcept when a given event affects bothrevenues and expenses, the effect on eachshould be recognized in the same accounting

period.REALIZATIONCONCEPT Realization Concept is

that concept where revenue is recognizedusually when sales are made or services are

rendered.

SEQUENCES CONCEPT How the accountingaffairs are to be exhibited or dealt with throughdifferent probable sequences, is the subjectmatter of Sequences concept. 10

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ACCOUNTING EQUATION CONCEPT Thisconcept has come out from the dual aspect ofaccounting. In this concept it is assumed that theentire accounting process can be represented byan algebraic equation.

The main task of accounting is to record the financialtransactions. Each financial transaction signifies thereceiving of benefit by one party in exchange ofgiving benefit by the other party. From this verynature of financial transactions, the algebraic

equation used in accounting has been originated.Each action has a reaction. In case of transactionalso, this nature of action holds good. The benefitsreceived by one party in any transaction are equalto the benefits given either at present or in future byanother party to the former party.

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ACCOUNTING CONVENTIONS AccountingConventions may be defined as the generalagreement or usage and customary practices insocial and economic life of human being whichhave certain bearings on the accounting functions

or techniques. These are accounting policiesadapted by the accounting communities on thebasis of existing customs and traditions to achievethe accounting objectives. The different Conventionsof accounting are: I. Convention of Disclosure, II.

Convention of Materiality, III. Convention ofConsistency, IV. Convention of Conservatism, V.Convention of Comparability, VI. Convention ofObjectivity, VII. Convention of Historical Cost, VIII.Convention of Dependability.

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CONVENTIONOF DISCLOSURE Thefundamental proposition of this convention isthat the financial statements are to be preparedin such a manner so that they fully disclose all the

material financial information and do notconceal any material fact.

CONVENTIONOF MATERIALITY As per thisconvention whether any information is to be

disclosed in financial statements or not thatdepends on the relevance or significance of thatinformation to the users. That is to say, instead ofall information, only those information that arematerial and significant are to be stated infinancial statements. 13

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CONVENTIONOF CONSISTENCYThe practiceof applying same approaches, principles andmethods of accounting in dealing with a class ofevents of same character in different accounting

periods is identified as convention of consistency.

CONVENTIONOF CONSERVATISM It is thatconvention where in income measurement and

valuation of assets and liabilities the policies ofminimum risk taking and adherence to orthodox,pessimistic and traditional techniques arefollowed. This convention is also named as

playing safe principle. 14

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CONVENTIONOF COMPARABILITYUnder thisconvention, accounts are to be kept in such amanner that will facilitate comparative analysis offinancial statements of different years or the sameamong different financial statements of the same

year.

CONVENTIONOF OBJECTIVITY This conventionstresses upon the objective evidence of the financialinformation recorded in accounting. Those financial

information are only to be accounted for which haveobjective evidence and which are the outcome offactual events. It means that financial transactionsrecorded in accounting should be capable of being

verified on the basis of documentary evidences.15

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CONVENTIONOF HISTORICAL COST It is oneof the traditional conventions of accounting. Thefundamentals of historical cost convention are:i. An item is valued and recorded in accounting at

their exchange price on the date of acquisition.

ii. In all the years starting from the year of acquisitionassets are valued on the basis of past cost ororiginal cost (less depreciation).

CONVENTIONOF DEPENDABILITYthis is the

convention under which the factor ofdependence of users on accounting informationis emphasized upon. The users of accountinginformation like owners, creditors, investors etc.very often take vital decisions based on the

information supplied in financial statements.16

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ACCOUNTING STANDARDS Accounting Standard is a common standard for

accounting and reporting. Accounting Standardscontain the principles governing accountingpractices and determine the appropriate treatmentof financial transactions.

Accounting Standards are formulated with a view toharmonise different accounting policies andpractices in use in a country. The objective ofAccounting Standards is, therefore, to reduce the

accounting alternatives in the preparation offinancial statements within the bounds of rationality,thereby ensuring comparability of financialstatements of different enterprises with a view toprovide meaningful information to various users of

financial statements to enable them to makeinformed economic decisions. 17

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AS 1 Disclosure of Accounting Policies AS 2 Valuation of Inventories

AS 3 Cash Flow Statements

AS 4 Contingencies and Events Occurring after

the Balance Sheet Date AS 5 Net Profit or Loss for the Period, Prior Period

Items and Changes in Accounting Policies

AS 6 Depreciation Accounting

AS 7 Construction Contracts

AS 8 Accounting forResearch and Development(Withdrawn pursuant to AS 26 becomingmandatory)

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AS 21 Consolidated Financial Statements AS 22 Accounting for Taxes on Income AS 23 Accounting for Investments in Associates in

Consolidated Financial Statements AS 9 Revenue Recognition AS 10 Accounting for Fixed Assets AS 11 The Effects of Changes in Foreign ExchangeRate

AS 12 Accounting for Government Grants

AS 13 Accounting for Investments AS 14 Accounting for Amalgamations AS 15 Employee Benefits AS 16 Borrowing Costs

AS 17 Segment Reporting 19

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AS 18 Related Party Disclosures AS 19 Leases AS 20 Earnings Per Share AS 24 DiscontinuingOperations

AS 25 Interim FinancialR

eporting AS 26 Intangible Assets AS 27 Financial Reporting of Interests in Joint

Ventures AS 28 Impairment of Assets

AS 29 Provisions, Contingent Liabilities andContingent Assets

AS 30 Financial Instruments: Recognition andMeasurement

AS 31Financial Instruments: Presentation 20

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DOUBLE ENTRY BOOK-KEEPING SYSTEMThe main principles of the double entry Book-

keeping system can be summarized as follows:

a.Every business transaction has a twofold effecti.e. it affects two accounts simultaneously.

b. It is recorded simultaneously in two differentaccounts involved in the business transaction.

c. It appears on the opposite sides of the twoaccounts i.e. if it is placed on the debit of oneaccount, it must be entered on the credit of theother account which is affected.

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Now let us see and explain how two accounts areaffected by a financial transaction.

Say Mr. R goes to a shop and buys some goodsworth Rs.100 for cash.

So Mr. Rgives Cash and receives Goods

The transaction will be recorded in the books ofMr. R to show the decrease in cash by Rs.100 andincrease of stock of goods by Rs.100.

On the other hand, the shop gives Goods and

receives Cash.Now in the books of the shop, the transaction willbe recorded to show the decrease in the stockof goods by Rs.100 and increase in its cash byRs.100.

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ASSETS

Assets are the economic resources or rights toprospective future economic benefits or

services including certain deferred charges

owned by an entity and these economic

resources or rights accrue out of past

transactions.

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ASSETS

REAL ASSETS FICTITIOUS ORUNREALASSETS

CONTINGENT ASSETS

FIXED ASSETS CURRENT ASSETS

TANGIBLEFIXED ASSETS

INTANGIBLEFIXED ASSETS

WASTINGASSETS

NON-WASTINGASSETS

TANGIBLE

CURRENT ASSETS

INTANGIBLE

CURRENT ASSETS

LIQUIDASSETS

CIRCULATINGASSETS

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LIABILITIES

Liabilities may be considered as a monetary orfinancial obligation payable otherwise thangratuitously by an entity to any source fromwhich it has received some benefit.

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LIABILITIES

EXTERNAL LIABILITIES INTERNAL LIABILITIES CONTINGENT

LIABILITIES

LONG-TERM

LIABILITIESSHORT-TERM/CURRENT

LIABILITIES

LIQUID LIABILITIES DEFERRED LIABILITIES

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Suppose Ram starts a business with Rs.5000 cash.

Then the Accounting Equation would be

Some resources of the business are also provided

by some persons other than the owner. Theamounts owing by the business for theseresources are known as LIABILITIES. In view oflegal distinction between the claims of creditors(outside liabilities) and those of owners(ownership liabilities or owners equity or capital),the Equation can now be expressed as:

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CAPITAL = ASSETS

RAMS CAPITAL Rs.5000 = CASH Rs.5000

CAPITAL + LIABILITIES = ASSETS

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The two sides of the Equation are always equal.On the right-hand side are the resources, i.e.assets possessed by the business. On the left-hand side are the sources from which these

resources were obtained. The 2 sides will alwaysbe equal, no matter how many transactions areentered into. The Balance Sheet of a business isan expression of the Accounting Equation (also

known as Balance Sheet Equation).

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CLASSIFICATIONOF ACCOUNTS

PERSONAL

ACCOUNTS(those dealingwith persons)

IMPERSONAL

ACCOUNTS(those dealingwith things)

CREDITORS(persons from

whom thebusiness buys)

DEBTORS(persons to

whom thebusiness sells)

NOMINAL

ACCOUNTS

(thosedealing withintangiblethings)

REAL

ACCOUNTS

(thosedealing withtangiblethings)

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REAL ACCOUNTS

Debit what comes in

Credit what goes out

PERSONAL ACCOUNTS Debit the receiver

Credit the giver

NOMINAL ACCOUNTS

Debit all expenses and losses

Credit all gains and profits

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OVERVIEW

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EQUITY Capital

Reserves

CURRENT

LIABILITIESOD/OCC

Creditors

FIXED

ASSETSGoodwill

Land &

Building, etc

CURRENT

ASSETSStock

DebtorsCash

NET

WORKING

CAPITAL

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LIABILITIES Shareholders Funds

Reserves & Surplus P&L a/c General Reserve

Specific Reserve

Loan Funds Secured Loans

Unsecured Loans

Current Liabilities &Provisions Bills Payable

Creditors Unclaimed Dividend

Provision for Taxation

Proposed Dividend

ASSETS Fixed Assets

Goodwill Land and Building Plant & Machinery Furniture & Fittings Patents, Trademarks,

Designs, Copyrights Livestock

Investments

Current Assets, Loans &Advances Debtors

Stock-in-trade

Cash in hand/bank

Fictitious Assets Discount on Issue of Shares

Underwriting Commission32

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