Accounting (Unit 1)

Accounting is the process of recording financial transactions pertaining to a business. The

accounting process includes summarizing, analyzing, and reporting these transactions to
oversight agencies, regulators, and tax collection entities.

Objectives of Accounting.
 Recording transactions
Systematically recording all financial transactions, including sales, purchases,
expenses, and revenues. This ensures that financial data is accurate and up-to-
date.
 Ascertaining the financial position
Using a balance sheet or position statement to show a business's assets and
liabilities on a specific date.
 Preparing financial statements
Using cost accounting data to prepare and validate financial statements, including
inventory values and the cost of goods sold.
 Preventing fraud
Systematically and accurately recording all transactions, including employee
reports, to help prevent errors and fraud.
 Evaluating and controlling assets and liabilities
Regularly assessing an organization's financial health by monitoring its assets and
liabilities.
 Ensuring compliance
Accounting can be a legal requirement for many companies, and accounting
records can be used to show compliance with legal regulations.
 Ascertaining profit and loss
Keeping appropriate records of business finances to understand expenses and
revenue, and analyze whether the business is making a profit or experiencing
losses.
 Branches of Accounting
The ten branches of accounting include the following:
 Financial Accounting.
 Management accounting.
 Cost Accounting.
 Tax accounting.
 Auditing.
 Accounting information systems.
 Forensic accounting.
 Fiduciary accounting.

GAAP:General Accepted Accounting

Principles
Generally Accepted Accounting Principles (GAAP) are a set of guidelines
that accountants and businesses must follow to ensure that financial
records are consistent, transparent, and comparable. GAAP helps to
provide a clear picture of a company's financial health.

Accounting Concepts & Concepts:

 Accounting concepts: These are the basic assumptions on which
accounting operates. These are the following accounting concepts as discussed
below:

1. The business entity concept: According to this, the business and owner are separate
entities. Business transactions are recorded in the books of accounts from the company’s point
of view, and not the owner’s. The owners are considered separate from their business’s point of
view and are regarded as creditors to the extent of their capital.
2. The money measurement concept: According to this, transactions and events are
measured in monetary terms in the books of accounts of the enterprise.
3. The going concern concept: Under this concept, it is assumed that the business will
continue for an indefinite period, and there is no intention to close the business or cut down its
operations significantly.
4. The accounting period concept: According to the accounting period concept, the
life of an enterprise can be broken into smaller periods, usually termed accounting periods, so
that its performance is measured at regular intervals.
5. The cost concept: According to this concept, an asset is recorded in the books of account at
the price paid to acquire it, and the cost is the basis for all following accounting of the asset.
6. The dual concept: According to the dual aspect concept, every business transaction entered
into by the organisation has two aspects, a debit and an equal creditor amount. For every debit,
there will be an equal amount of credit.
7. The revenue recognition concept: According to this concept, revenue is determined to
have been realised when a transaction has been written in the books and the obligation to
receive the amount has been ascertained.
8. The matching concept: Here, it is ascertained that every cost incurred to earn the revenue
should be recognised as an expense in the accounting period when revenue is earned. In a
given accounting period, expenses are matched with the revenue earned.
9. The accrual concept: A transaction is said to be accrued if a transaction is recorded at the
time when it takes place and not at the time when the settlement takes place.

 Accounting conventions
The guidelines that are followed to prepare financial statements are called
accounting conventions. These are as follows:

1. Convention of Full disclosure: Convention of full disclosure states that there should be
complete reporting on the financial statements of all important information relating to affairs of the
business. All the material facts are to be disclosed.
2. Convention of Consistency: Convention of consistency states that accounting practices,
once selected and adopted, should be followed consistently year after year for a better
understanding and comparability of the accounting information.
3. Convention of Conservatism: This convention states that we should not anticipate a profit
before it’s realisable but provide for all possible losses which might occur in the course of
business.
4. Convention of Materiality: The materiality concept relates to the relative information of an
item or an event. An item is considered material when such knowledge of that could influence the
decision of an investor.
 IFRS and its objectives
When businesses operate in different countries, their accounting practices
may differ because each country has its own laws and rules. This can be
confusing. To address this, the International Accounting Standards Board
(IASB) created IFRS on April 1, 2001. More than 120 countries now use it.

Benefits of IFRS Accounting Standards

IFRS Accounting Standards addressed these challenges by providing one common
reporting language—a high-quality, internationally recognised set of accounting
standards that enable companies to provide efficient, cost-effective reporting that
meets investors’ needs.

IFRS Accounting Standards:

 bring transparency by enhancing the quality of financial information, enabling

investors and other market participants to make informed economic decisions;
 strengthen accountability by reducing the information gap between investors
and companies; and
 boost economic efficiency by helping investors to assess potential
investments across the world, thus allocating capital to the most promising
opportunities, and lowering the cost of capital for companies.

Important Items
Liability defined
In financial accounting, a liability is defined as an obligation of an entity
arising from past transactions or events. A liability is defined by the
following characteristics:
 Any type of borrowing from persons or banks for improving a
business or personal income that is payable during short or long
time;
 A duty or responsibility to others that entails settlement by future
transfer or use of assets, provision of services, or other transaction
yielding an economic benefit, at a specified or determinable date,
on occurrence of a specified event, or on demand;
  A duty or responsibility that obligates the entity to another, leaving
it little or no discretion to avoid settlement; and, a transaction or
event obligating the entity that has already occurred.
 Liabilities in financial accounting need not be legally enforceable;
but can be based on equitable obligations or constructive
obligations. An equitable obligation is a duty based on ethical or
moral considerations

Asset Defined
In financial accounting, an asset is an economic resource. Anything
tangible or intangible that is capable of being owned or controlled to
produce value and that is held to have positive economic value is
considered an asset. Simply stated, assets represent value of ownership
that can be converted into cash (although cash itself is also considered an
asset).
The balance sheet of a firm records the monetary value of the assets
owned by the firm. It is money and other valuables belonging to an
individual or business. Two major asset classes are tangible assets and
intangible assets.
Tangible assets contain various subclasses, including current assets and
fixed assets. Current assets include inventory, while fixed assets include
such items as buildings and equipment.
Intangible assets are nonphysical resources and rights that have a
value to the firm because they give the firm some kind of advantage in
the market place. Examples of intangible assets are goodwill, copyrights,
trademarks, patents and computer programs, and financial assets,
including such items as accounts receivable, bonds and stocks.
Debtor
ither "personal" or "real." Those people who loan money to friends or
family are personal creditors. Real creditors (i.e. a bank or finance
company) have legal contracts with the borrower granting the lender the
right to claim any of the debtor's real assets (e.g. real estate or car) if he
or she fails to pay back the loan.
Drawings Definition; Money withdrawn by the owner of a sole
proprietorship or the partners of a partnership firm from the business.
Stocks: Opening stock is the value of a company's inventory at the start
of an accounting period, while closing stock is the value of inventory at
the end of the period.
INCOME DEFINED
Money that an individual or business receives in exchange for providing a
good or service or through investing capital. Income is consumed to fuel
day-to-day expenditures. In businesses, income can refer to a company's
remaining revenues after all expenses and taxes have been paid. In this
case, it is also known as "earnings". Most forms of income are subject to
taxation.
Expense
Money spent or cost incurred in an organization's efforts to generate
revenue, representing the cost of doing business.
Expenses may be in the form of actual cash payments (such as wages and
salaries), a computed expired portion (depreciation) of an asset, or an
amount taken out of earnings (such as bad debts).