Accounting for New Ventures -

Introduction
Prof. Nimisha Bora
 Forms of Business Entities

I. Traditional Business Entities:

a. Sole Proprietorship – owned and run by one person where there is no distinction between the owner and
the business entity
b. Partnership – a formal agreement of two or more parties to manage and operate a business and share its
profits.
c. Company – a legal entity with an association of people with specific objectives.
II. Hybrid Business Entities
a. Limited Liability Partnership (LLP) – an alternative business form that gives the benefit of limited liability to
the company as well as the flexibility of partnership.
b. One Person Company (OPC) – company incorporated by a single person.

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 What type of business entity should one prefer?

Some of the factors that enable the owners in making the appropriate choice are:
a) Size of the capital and its availability
b) Legal structure of a country
c) Purpose and scope of business
d) Scale of business operation
e) Tax structure of a country for different types of organization

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 Some important questions for a business owner

1. What he/she owns?

2. What he/she owes?
3. Has he/she earned a profit or suffered a loss on account of running a business?
4. What is his/her financial position i.e. whether he will be in a position to meet all his commitments in the near
future or he is in the process of becoming a bankrupt?

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 What is Accounting?
According to the American Institute of Certified Public Accountants (AICPA), accounting is the art of recording,
classifying and summarising in a significant manner and in terms of money, transactions, and events, which are, in
part at least, of a financial character, and interpreting the results thereof.
• Recording: It is concerned with the recording of financial transactions in an orderly manner, soon after their
occurrence in the proper books of accounts.
• Classifying: It is concerned with the systematic analysis of the recorded data so as to accumulate the transactions
of similar type at one place.
• Summarising: It is concerned with the preparation and presentation of the classified data in a manner useful to
the users.
• Interpreting: The accountants should interpret the financial information in a manner useful to action. The
accountant should explain not only what has happened but also (a) why it happened, and (b) what is likely to
happen under specified conditions.
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 Objectives of Accounting

1. To keep systematic records

2. To protect business properties
3. To ascertain the operational profit or loss
4. To ascertain the financial position of the business
5. To facilitate rational decision making
6. Information System

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 Users of Accounting Information
The basic objective of accounting is to provide information which is useful for persons inside the organisation and for
persons or groups outside the organisation. Accounting is the discipline that provides information on which external and
internal users of the information may base decisions that result in the allocation of economic resources in society.
I. External Users of Accounting Information: External users are those groups or persons who are outside the
organisation.
a. Investors
b. Creditors
c. Government
d. Consumers
e. Research Scholars
II. Internal Users of Accounting Information
a. Owners
b. Management
c. Employees

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 Branches of Accounting
A. Financial accounting: Financial accounting or equity accounting is visualized as being primarily concerned with the
providing of financial information relating to the entity, to ‘outsiders’, or to those who are not involved in the day to
day management of the enterprise. These outsiders include shareholders (owners), creditors, bankers, government,
financial analysts, investors and a host of other people who are concerned with the entity.
B. Cost and management accounting: Cost and management accounting aims at reporting the activities of the entity to
the managers, so as to enable them to plan and control the activities of the entity vis-à-vis other (competing) entities.
C. Social accounting: It is a branch of accounting which attempts to measure the social benefits that an organisation
provides and the social costs that an organisation imposes. Social accounting is not a new method of keeping books of
account, but a concept based on evaluating the costs and benefits relating to socially responsible actions by business
enterprises.
D. Human Resource Accounting: Human resource accounting is the accounting for the human resource of an enterprise.
It is the process of identifying and measuring data about human resources and communicating this information to
interested parties. Human resource accounting is, therefore, accounting for people as organisational resource. 8
 Our approach to accounting
Accounting can be approached from either of two directions:
• from the viewpoint of the accountant or
• from the viewpoint of the user of accounting information.
The former approach emphasizes the concepts and techniques that are involved in collecting, summarizing, and
reporting accounting information; the latter emphasizes what the user needs to know about accounting. We focus on
the latter approach.
The difference between these two approaches is only one of emphasis. Accountants need to know how information is to
be used because they should collect and report information in a form that is most helpful to those who use it. Users
need to know what the accountant does; otherwise, they are unlikely to understand the real meaning of the information
that is provided.

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 Accounting for our class

Accounting is the process of measuring and converting the business decisions into financial statements.
A. Business Decisions
Financing Decisions
Investment decisions
Operating Decisions
B. Financial Items
Assets
Liabilities
Equity
Incomes
Expenses
C. Financial Statements
Balance sheet
Income Statement
Cash Flow Statement
Statement of changes in Equity
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Converting business decisions into financial statements

Business Financial Items Financial

Decisions Statements
• Financing • Asset • Balance sheet
• Investment • Liability • Income statement
• Operating • Equity • Cash flow statement
• Income • Statement of changes
• Expense in equity

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 Generally Accepted Accounting Principles

The entire process of categorizing business decisions, classifying them according to financial items and
converting them into financial statements is governed by the Generally Accepted Accounting Principles (GAAP).
 Concepts and conventions
 Accounting standards
o AS (old)
o IndAS
o IFRS
 Provisions of the companies Act
 Provisions income tax act
 SEBI regulations

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 Concepts & Conventions
 Business entity – accounts are kept for entities and are distinguished from the persons associated with those
entities.
 Money measurement – record is only made if information is expressed in monetary terms.
 Accounting period – accounts for the activities that take place for a specific period of time usually one
year/fiscal year.
 Dual aspect – double entry – change on one side brings about a change on the other side.
 Accrual concept –business transactions must be recorded when they occur and not when the related
payments are made or received.
 Matching concept – states that all costs incurred by the entity must be matched with the revenues they give
rise to.
 Going-concern concept – works with the assumption that the company is going to operate for an indefinitely
long period of time in the future.
 Historical Cost Concept – value of an asset is recorded on the balance sheet at its original cost.
 Conservatism concept – preference for an understatement rather than an overstatement about the revenue
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of the company.
 Exercise 1
1. Which of the following is not an internal user of financial statement ?
a. board of directors
b. managers
c. officers
d. Lenders
2. Which of the following is not an external user ?
a. investor
b. government agencies
c. partners
d. Labour union
3. What does the going concern concept mean ?
a. a business is profitable
b. business will continue to operate for the foreseeable future
c. the assets of a business exceed its liabilities
d. the assets of a business should be valued at disposal value

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4. In preparing the accounts of your company, you are faced with a number of problems. These are
summarised below :
a. The managing director wishes the company’s good industrial relations to be reflected in the accounts.
(money measurement concept)
b. The long-term future success of the company is extremely uncertain. (going concern concept)
c. One of the owners of the company has invested his drawings in some stocks and shares. (business entity)
d. At the year end, an amount is outstanding for electricity that has been consumed during the accounting
period. (accrual concept)
e. Fixed assets would now cost a great deal more than they did when they were originally purchased.
(historical)

You are required to:

(i) state which accounting concept the accountant should follow in dealing with each of the above problems;
(ii) explain briefly what each concept means

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