Introduction to Accounting
Accounting was practised in India at the period of Kautilya, King Chandragupta's minister. It is clear from the book written by him, named as "Arthashastra". This book not only relate to politics and economics, but also explains the art of proper keeping of accounts.
1. Recording:
This is the basic function of accounting. Accounting is concerned with the recording of business transactions of financial character in an orderly manner.. Recording is done in a book called Journal.
2. Classifying:
Classifying is the systematic analysis of recorded data with a view to bring together the similar nature items at one place. Classification is done in the book called Ledger by showing each item under one page called Accounts.
3. Summarising:
Summerizing means presenting the classified data in such a way which is useful to the internal and external users. This process leads to the presentation of statements like Trial Balance, Income Statement and Balance Sheet.
4. Deals with financial transactions:
In accounting we record only those transactions and events having financial character.
5. Analysing and Interpreting:
Recorded financial data are analyzed and interpreted in such a way that
the end user scan make a meaningful judgement about the financial
position and operational results of business. Analysis makes the
recorded data a simplified one and interpretation provide meaning and
importance to simplified data.
6. Communication:
After
analyzed and interpreted, should communicate in a proper form and
manner to the proper person. This is done through presentation of
accounting reports like Accounting Ratios, Graphs, Fund Flow Statements
etc in addition to the usual financial statement.
The basic objective of accounting is to provide information to the interested users to enable them to make business decisions. Besides this the primary objectives of accounting are:
1. To maintain records of business
2. Calculation of profits and loss.
3. Ascertainment of Financial position.
4. Providing information to users.
1. To maintain records of business:
Human memory is short. Even the brilliant
manager is not able to remember all the daily operations properly. So
it is necessary to keep proper and complete records of all business
transactions. More over the recorded facts helps the management to make
proper decisions regards business.
2. Calculation of profits or loss:
Earning profit is the main objective of every business. Accounting
system helps the business to find out the information related to the
profit or loss of the concern. This is ascertained with the help of
profit and loss account.
3. Ascertainment of Financial position:
Accounting helps to draws the financial position of the concern. This is made with the help of Balance sheet.
4. Providing information to users:
There are two users who needs accounting information:
a. Internal users
b. External users
Internal users are the officials and staff of the organization, needs
accounting information at proper time to take apt business decisions.
External users are outsider parties like Banks, Government,
Shareholders, Creditors etc, who needs information about the operating
results and financial positions of the business.
Accounting information
can be classified on the basis of the users of such information.Let us
examine the type of information required by each category of users:
1. Investors:
They are the suppliers of finance to business and in their capacity as
owners.They would like to know how their funds were utalized, operating
results, financial position and risk involved.
2 Lenders:
They are Banks and other individuals and institutions who have supplied
funds to the business. They are interested to know the financial
stability of the business, i.e, whether the firm can repay the loans
when due for payment.
3. Management:
They use accounting information for planning and controlling the operations of the business.
4. Employees:
They need accounting information for demanding more salaries, welfare measures bonus etc.
5. Suppliers:
Suppliers needs accounting information to decide how much to supply, at
what rate and under what terms,i.e, credit and cash terms
6. Customers:
Customers use accounting information to decide the ability of the firm
to serve product, warrienty terms and make agreement with them.
7. Government and Regulatory Agencies:
Government required accounting information to regulate business
practices, make policies related to Industry,tp change appropriate tax
rate and so on.
8. Security analysts and Advisers:
They need accounting information to study and make reports about the
firms ability to generate income in future. And also decided the value
of shares.
1. Reliability:
Accounting information must be reliable, i.e, free from bias and representative in nature. Such information have source documents and transparency.
2. Relevance:
Accounting information must be relevant to the business at the right time.
3. Comprehensibility:
Accounting information must be capable of being understood by all its users.
4. Comparability:
Accounting information should facilitate inter-firm comparison as well as intra-firm comparison.
1. Provides quantitative information:
Accounting helps in gathering quantitative information on profits earned by the business or loss sustained by them. Similarly expenses incurred, revenue earned are also available in financial terms.
2. Helps in ascertaining financial position of the business:
Accounting helps the businessman to know the financial position, i.e,how much assets owned and how much liabilities have.
3.Syatematic recording of data is possible:
Accounting helps in making a systematic record of transactions,which can be used for future reference and so on.
4. Acts as an information system:
It provides adequate information to the needed users in a processed form.
1. It records only transactions having monetary terms. Qualitative aspects like managerial skill, services of experts etc are not recorded.
2. It is only a postmartom survey. It records events as they have taken place.
3. Effect of price level changes are not considered here.
1. ASSETS:
Valuable properties are known as Assets. In other words any thing owned by a person, company, which have money value and which may be sold to pay debts.
Assets are in two forms:
a. Fixed Assets
b. Current Assets
a. Fixed Assets:
Fixed assets are those assets used in a business for a long period of time. They are meant not for sales but for earning revenue.
Fixed assets are of four types:
1.Tangible Assets
2. Intangible Assets
3. Wasting Assets
4. Fictitious Assets
1. Tangible Assets:
Tangible Assets are those assets which have definite shape and physical existence and can be touch and see.
Example: Land and Building, Plant and Machinery, Furniture etc.
2. Intangible Assets:
Intangible assets are those assets which have no definit shape and physical existence and cannot be touch and see, but represented by right in certain things.
Example: Goodwill, Patent right, Trade mark etc.
3.Wasting Assets:
Wasting assets are those assets which exhausted rapidly in proportion to the extraction or removel of a natural product.
Example: Mines, Quarries, Oil wells, etc.
4.Fictitious Assets:
Fictitious assets are those assets which have no real value, but are shown in the books of accounts only for technical reasons.
Example: Preliminary expenses,Discount on issue of shares, underwriting commission etc.
b. Current Assets:
Current assets are those assets which can be converted in to cash within an accounting year without affecting the normal operations of the business.
Example: Sundry Debtors, Stock, Bills Receivable, etc.
2. LIABILITIES
Liabilities are the claims of outsiders against the business. It is the amount payable by the business to various persons and organizations. It may occur on account of credit purchases and by borrowings.
Liabilities are of two types:
a. Long Term Liabilities
b. Current Liabilities
a. Long Term Liabilities:
Long term or fixed liabilities are those liabilities which are payable after a long periou of time.
Example: Debentures, Loans from Financial Institutions etc.
b. Current Liabilities:
Current liabilities are those liabilities which can be payable within an accounting year, either from current assets or by creating a new current liability. They arise out of normal trading activities.
Example: Outstanding expenses, Bills payable, etc.
3. CAPITAL OR OWNERS EQUITY:
Capital is the amount or money's worth invested by the owners in the business. It is the owners claim against the business. It is the excess of assets over liabilities.
Capital are of two types:
a. Fixed Capital
b. Working Capital
a. Fixed Capital:
Fixed capital is that porton of total capital which is used for purchasing fixed assets.
b. Working Capital:
Working capital is that part of total capital, which used for meeting daily needs of the business. It is the difference between current assets and current liabilities.
4. REVENUE OR INCOME:
Revenue or Income is the amount earned by the use of fixed assets or from its normal business activities. They are the gain received by the business through trade.
Example: Commission received, Interest received etc.
5. EXPENSES:
The amount spent by the business for conducting normal trade activities. they are unavoidable cash spendings.
Example: Salaries, Rent paid, Printing, Postage and Telegram etc.
Expenses are of two types:
a. Capital Expenditure
b. Revenue Expenditure
a. Capital Expenditure:
Capital expenditure are those expenditure which arise from the acquisition of an asset or for increasing the earning capacity of the business.
Example: Purchases of fixed assets, patents, goodwill, expenses incurred for raising long term capital etc.
b. Ravenue Expenditure:
Revenue expenditure are those expenditure incurred to maintain the business or to keep the assets in good working conditions.In other words, if the benefits of an item of expenditure expires within a year is called revenue expenditure.
Example: Payment of salaries, wages, rent, telephone charges etc.
6. GOODS:
Goods refers to commodities, products, articles or things in which a trader deals. They includes commodities purchased for manufacture and sales.
For the correct accounting of goods they are called by different names like:
1. Purchases
2. Sales
3. Purchases Return
4. Sales Return
1. Purchases:
Purchases refers to the total amount of goods brought by a business for cash and credit and are meant for resale.
2.Purchases return:
Purchases return refers to the return of goods to the suppliers which purchased earlier.
3. Sales:
Sales refers to the selling of goods to other party. It is the major source of income and and may be in the form of cash sales or credit sales.
Assets sold not come under this category.
4. Sales Return:
Sales return refers to the return of goods by the customers to business, which is sold earlier.
7. STOCK:
Stock refers to the unsold portion of goods lying with a business on any given date.It includes raw materials, work - in - progress and finished goods.
Stock are of two types:
a. Closing Stock
b. Opening Stock
The value of the goods remaining unsold at the end of the accounting period is known as Closing stock.
The closing stock of a particular period becomes the opening stock for the next period.
8. DEBTORS:
Debtor is a person who owes money to the business as he has received some benefit from the business.
9. CREDITORS:
Creditor is a person to whom the business owes money as he has given some benefit to the business.
10. DRAWINGS:
Drawings refers to withdrawals of money or mony's worth by the proprietor of the business for his personal use.
11. BUSINESS TRANSACTION:
Business transaction refers to any business dealings, which has some money value and involves receiving benefit in one form and giving benefit in another form. In other words transaction means dealings involves valuable.
Transaction are of three types:
a. Cash Transaction
b. Credit Transaction
c. Barter Transaction
a. Cash Transaction:
Cash transaction refers to business transaction which involves immediate payment or receipt of cash.
b. Credit Transaction:
Credit transaction refers to business transaction, wherein payment or receipt of cash is postponed for a future period.
c. Barter Transaction:
Barter transaction refers to business transaction in which items are exchanged for other items.
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