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What is Accountancy?
It is the art of recording, classifying,summarizing and interpreting in a significant
manner and in monetary terms.
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Objectives of Accounting
To keep systematic records.
To protect business properties.
To ascertain the operational profit or loss. To ascertain the financial position ofbusiness.
To help in decision making.
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Users of Accounting information
Proprietors
Managers
Creditors Prospective investors
Employees
Government Citizens
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Diff. between Financial A/c &
Management A/cBasis Financial A/c Management A/c
Objectives Provides information to
external parties.
For internal use by the
management.
Analyzing performance Paints overall picture. Analyses at a
departmental/divisionallevel.
Data used Only past monetary data. Past data and future
projections.
Monetary measurement Only events of monetary
value recorded.
Events of monetary and
non-monetary values
recorded.
Periodicity of reporting Longer- yearly or half
yearly.
Shorter- according to the
needs of the organization.
Nature Objective. Subjective.
Legal compulsion Compulsory . Non- compulsory.
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Bookkeeping Vs Accounting
Bookkeeping is the recording of financial transactions
accordance with some predefined rules. Transactions
include sales, purchases, income, and payments by an
individual or organization. Bookkeeping is usuallyperformed by a bookkeeper.
Accounting is the process of deriving the financial
statements that emerge from the book keeping records.
It is performed by an accountant.
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Roles of an Accountant
Maintenance ofbooks of accounts
Auditing of accounts
Taxation Financial services
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GAAP
(Generally Accepted Accounting Principles)
What is GAAP?
A set of standards generally accepted and
universally practiced by accountants Indicates how economic events are reported
Generated by the Financial Accounting
StandardsB
oard (FASB
) and Securities &Exchange Commission (SEC)
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Accounting Principles
Concepts
Separate Entity
Going concernMoney Measurement
Cost
Dual Aspect
Accounting PeriodPeriodic Matching of
Costs & Revenue
Realisation
Conventions
Conservatism
Full Disclosure
Consistency
Materiality
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Separate Entity concept
This concept implies that the affairs of a
business are to be treated as being separate
from the non-business activities of its owners. Personal transactions of the owner should not
be included.
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Separate entity concept
e.g.
A directors private car should
not be included in the fixedassets of the company.
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Going concern concept
This concept implies that the business will
continue to operate for the foreseeable future.
D
epreciation on fixed assets is in the basis ofthe expected live rather than the market value.
An enterprise will not be considered as a
going concern when it as gone into liquidation
or it has become insolvent.
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Going concern concept
e.g.
Fixed assets are
shown at cost lessaccumulated
depreciation.
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Money measurement concept
It can be measured only in monetary value.
Events or transactions which cannot be
expressed in money is not recorded. It helps in understanding the state of affairs of
the business in a much better way.
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Money measurement concept
e.g.
Accounting doesnt tell how good thequality of employees skills are
although this is important for the
success of a business.
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The Cost Concept:
Assets are always shown at their cost price ratherthan their market price
Every transaction must be recorded at its acquisitionprice.
This does not mean that the asset will always beshown at the cost price. It means that the asset isrecorded at its cost price and is systematicallyreduced or increases in value by charging
depreciation/appreciation. This is applicable to fixed assets and not the current
assets.
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Cost concept
E.g.
If a piece of land is acquired for Rs.50,000, it
will be recorded at the acquisition costregardless of the market value. Only
depreciation/appreciation will be adjusted.
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Dual Aspect Concept
The value of the assets owned by the
company is equal to the claims on these
assets.
This is the basic concept of accounting.
Every Dr entry has its corresponding Cr entry.
This concept can be expressed asASSETS = CAPITAL + LIABILITIES
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Dual aspect concept
E.g.
When an item is sold there is an inflow and
outflow of assets. The asset outflow is goods and the inflow is
cash.
B
oth the aspects of the transaction will berecorded, hence the name Dual aspect
concept.
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Accounting Period Concept
Accounting measures activity for a specified
interval of time, usually a year.
At the end of each period an incomestatement and balance sheet are prepared for
finding the profit and loss and financial
position of the business as on the last day of
the accounting period.
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Accounting period concept
E.g.
The usual period of accounting is usually a
year, but in case of large firms it is morefrequent quarterly or monthly.
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Matching Concept
Matching means appropriate association of
related revenues and expenses.
The profit of the business is ascertained onlywhen the revenue earned during a particular
period is compared with the expenditure
incurred for earning that particular revenue.
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The Realisation concept
This concept holds to the view that profit can
only be taken into account when realisation
has occurred.
Generally, sales revenue arising from the sale
of goods is recognised when the goods aredelivered to the customers.
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The Realisation concept
e.g.
Profit is earned when goods or
services are provided tocustomers. Thus it is incorrect
to record profit when order is
received, or when the
customer pays for the goods.
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Conventions
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Conservatism
Anticipate the profits but provide for all
losses.
The conservatism concept means thatnormally the accountant will take the figure
which will understate rather than overstate
the profit.
Provision is made for all known liabilities.
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Conservatism
E.g.
Provision for doubtful debts
should be deducted from
debtors in balance sheet.
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Disclosure
The financial statements of a firm must
include all information necessary for the
formation of valid decisions by the users.
Any information that might be relevant to an
investor or creditor should be disclosed,
either in the body of the financialstatements or in the notes attached thereto.
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Consistency
When a firm has once fixed a method for the
accounting treatment of an item, it will enter all
similar items that follow in exactly the same way.
Frequent changes in the accounting methods would
lead to misleading profits calculated from the
accounting records.
It states that when a firm has chosen a method for
the accounting treatment of an item, all similar itemsshould be treated in the same way.
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Consistency
E.g.
Depreciation method of
certain fixed assets once
adopted should be used in
the following years.
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Materiality
Financial statement should separately disclosesignificant items for they would influencedecisions of users.
Accounting does not serve a useful purpose ifthe effort of recording a transaction in acertain way is not worthwhile.
In other words do not waste your time in theelaborate recording of trivial items.
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Materiality
e.g.
A stock of stationery
worthR
s.10 shouldbe treated as an
expense when it was
bought.
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