Fundamental of Accounting

Definition of Accounting
AAA: “The process of identifying ,

measuring and communicating economic
information to permit informed judgments
and decisions by users of the information”
Smith & Ashburne : Accounting is a means
of measuring and reporting the results of
economic activities.
Cont….
 Bierman and Derbin : Accounting may be
defined as the identifying , measuring ,
recording and communicating of financial
information.
 R.N.Anthony : “Accounting system is a means
of collecting , summarizing, analyzing, and
reporting in monetary terms the information
of the business”
Objective of Accounting
 Keep systematic record
 Protect Business properties
 Ascertain operation Profit & Loss
 Ascertain Financial Position of the business
 Facilitate rational decisions making
Scope of Accounting
 Dealing with Financial Transactions
 Recording of Information
 Classification of Data
 Making summaries
 Analyzing
 Interpreting the financial information
 Communicating the results
Functions of Accounting
 Identifying
 Recording
 Classifying
 Summarizing
 Analyzing
 Interpreting
 Communicating
Importance of Accounting
 Business Forecasting
 Correct Decision Making
 Correct Taxation
 Helpful in Solving Business Disputes
 Replacing Memory
 Assessing the performance of the business
 Assessing the financial status of the business
 Documentary Evidence
 Assisting in realization of debt
 Preventing & Detecting Frauds
 Helpful to Management
Disadvantage of Accounting
 Recording of monetary transactions only
 Based on some estimate
 No consideration of price level changes
 Showing some imaginary assets
 May be manipulated
 Bound under certain concept
Branches of Accounting
 Financial Accounting
 Cost Accounting
 Management Accounting
Users of Accounting Information
 Internal users
 Owners
 Managers/Employees
 External users
 Creditors
 Prospective investors
 Financial Institutions
 Customers
 Government
 Research Scholars
 Stock Exchange
 Trade Associations
 Entrepreneurs
 Political Parties
Accounting Terminology
 Assets : Finny & Miller defines- Assets are
future benefits, the rights , which are owned or
controlled by an organization
 Classification of Assets :
 Fixed Assets: Fixed assets refers to those assets
which are held for the purpose of providing or
producing goods or services and those are not
held for resale in the normal course of business.
 Tangible Fixed Assets
 Intangible Fixed assets
Cont…..
 Current Assets : are those assets which are
held for
a) In the form of cash
b) For their conversion into cash
c) For their consumption in production of goods
or rendering services in the course of
business.
d) On a short term basis
Cont….
 Fictitious Assets : Factious assets are those
assets , which don’t have physical form. They
do not have any real value.
 Contingent Assets : Action of the third party
decide , whether you claim it as an assets or
not
Cont……
 Liability : Means the amount the firm owes to
outsiders excepting the owners. These are the
obligation or debts that the enterprise must
pay in money or services at some time in
future
 Classification of Liability
 Long Term Liability
 Short Term Liability
 Contingent Liability
Cont……
 Capital : Capital is the investment made by the
owner for use in the firm. It is also known as
owner’s equity .
 Proprietor/owner : Proprietor is an individuals or
group of persons who undertake the risk of the
business .
 Revenue : Revenue are the amounts, a business
earns by selling its product or providing services
to customers.
 Expenses : Expenses are the cost incurred by a
business in the process of earning revenue.
Cont….
 Income : Income is the difference between revenue and
expenses
 Loss : It represents diminution in ownership equity other
than from withdrawal of capital for which no
compensating value has been received.
 Purchase : Purchase are the total amount of goods
procured by business on credit and for cash with a
intention to sale or convert into finished product for sale
purposes.
 Purchase Return/ Return Outward: Purchase return is the
part of the purchases of goods, which is return to the
seller. This return may be due to unnecessary, defective,
excessive supply of goods
Cont….
 Sales : Sales are the total revenues of goods
sold or services provided to costumers.
 Sales Return/ Return Inward:
 Debtors/ Accounts Receivable : Debtors are
persons and other entities that owe to an
enterprise an amount for receiving goods and
services
 Creditors/ Accounts Payable : Creditors and or
other entities that have to be paid by an
enterprise for goods and services on credit.
 Receipt : is an acknowledgment for cash
received.
 Accounts : Account is summary of relevant
business transactions at one place relating to a
persons, assets, expenses, revenue named in
the heading
 Transaction : Transactions are those activities
of a business, which involve transfer of money
or goods or services between two persons or
two accounts.
Accounting Principles & Policies
 Accounting Is the Language of Business
 In order to make the language convey the
same meaning to all people , accountants all
over the world have developed certain rule,
procedures and conventions, which represents
a consensus view by the profession of good
accounting practices and procedures and are
generally referred to as “Generally Accepted
Accounting Principles”
Cont….
• GAAP is a technical accounting term that
encompasses the conventions, rules and
procedures necessary to define accepted
accounting practices at a particular time.
• Accounting Principles : The term principle
refers to fundamental belief or a general truth
which once established dose not change.
 AICPA defined term “principle” as a guide to
action, a settled ground or basis of conduct
and practice.
Characteristics of Accounting Principles
 Are man made so they don’t have the authoritativeness
as universal principles like principles of Physics and
chemistry and other natural science.
 They represents best possible guidelines based on
reasons and observations.
 Is not in finished form, it is in the process of evolution.
 They are influenced by business practices and customs,
Government agencies and other business groups.
 The general acceptance of accounting principle usually
depends on how well it meets three Criteria.
“Relevance” , “Objectivity” and “Feasibility”
“Accounting Concept & Convention”
 Accounting concepts may be considered as
postulates i.e basic assumption or conditions
upon which the science of accounting is
based.
 Accounting conventions denote circumstances
or traditions which guide the accountant while
preparing the accounting statements.
Accounting Concepts
1) Business Entity Concepts
2) Money Measurement Concepts
3) Going Concern Concept
4) Cost concepts
5) Dual Aspects Concepts
6) Accounting Period Concept
7) Matching Concept
8) Realization Concepts
9) Objective Evidence Concept
10)Accrual Concepts
Accounting Conventions
1) Consistency
2) Full Disclosure
3) Conservatism
4) Materiality

Fundamental of Accounting

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Definition of Accounting

AAA: “The process of identifying ,

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