2. fundas of accounting

8/3/2019 2. Fundas of Accounting

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FUNDAMENTALS OFACCOUNTING



TOPICS COVERED

• What is Business?

• Forms of Business

• Parties Interested in Business

• Defining Accounting

• Objectives of Accounting

• Functions of Accounting

• Branches of Accounting

• Accounting Concepts & Conventions



CONTENTS…

• Process of Accounting

• Financial Statements

• Important Terminology• Usefulness of Accounting for

Managers

• Recent Trends in Accounting



BUSINESS

• Business is a form of activity involvingproduction and purchase of goods with theobject of selling a profit.

• Producing and selling at profit isessential to constitute a business.

• The term business also includes theperformance of services for others onpayments.



FORMS OF BUSINESS

• Sole Proprietor• Partnership• Company or Corporation

Every business whether small or large

has the basic objective to see whetherthe money invested is efficiently utilizedor not.



PARTIES INTERESTED INBUSINESS

• Owner or Shareholder• Managers• Creditors

• Banks, Financial Institutions• Prospective Investors• Government• Employees

• Society• ResearchersAll these parties are interested in the Financialposition of the organisation in order to take

decisions.



ACCOUNTING

• Accounting is a language of business.• The basic objective of language is to

communicate the results of business operationsto various parties

• Business must know:- – What is owns?

– What he owes?

– Whether it has earned a profit or loss on account of

running a business?

– What is financial position i.e. will it be able to meetall his commitments in the near future ?

Accounting provides the answer of all these

questions



DEFINING ACCOUNTING

“Accounting is a process of recording, classifying

and summarizing in a significant and in terms of

money, transactions and events which are, in part,

at least of financial character and interpreting results thereof ” ----CPA

• Accounting may be defined as the process of

recording, classifying, summarizing, analyzingand interpreting the financial transactions andcommunicating the results thereof to the partiesinterested in such information.



OBJECTIVES OF ACCOUNTING

• To maintain the records of businesstransaction

• Calculation of Profit or Loss

• Depiction of financial position

• To make information available to various

groups and users.• To facilitate rational decision making.



FUNCTIONS OF ACCOUNTING

Recording – Only transactions that have financial character are

recorded.

– Recording is done in the book “JOURNAL”

Classifying

Grouping of transactions of similar nature at oneplace i.e “LEDGER”



FUNCTIONS OF ACCOUNTING

SummarizingIt involves presenting the classified data in a manner which isunderstandable and useful to the internal as well as external usersof accounting statements.

Trial Balance

Income Statement

Balance Sheet

Deals with financial transactions

Only financial transactions are recorded in the books of accounts.

Analysis and InterpretationIt helps the management to judge the performance of thebusiness operations and for preparing future plans.



• Communicating Results – Accounting information so analyzed and interpreted

has to be communicated in a proper form and

manner to the proper person. This is done throughdistribution of accounting reports

• Making Information more Reliable – This is done by use of internationally accepted

accounting standards



BRANCHES OF ACCOUNTING

• Financial Accounting

• Cost Accounting

• Management Accounting



FINANCIAL ACCOUNTING

• The accounting system concerned only with thestate of affairs and financial results of operations iscalled Financial Accounting.

• It Includes ascertainment of profit earned or lossincurred and position of business at the end ofaccounting period and providing financialinformation required by the management and other

parties interested.

• The basic objective of accounting is to presentTRUE & FAIR view of the affairs of the company.



COST ACCOUNTING

• The basic limitation of financial accountingis that it fails to provides the informationrelating to the cost of individual products.

• Cost Accounting deals with this problem• The main purpose of cost accounting has

been to analyze the expenditure involved

so as to calculate the cost of variousproducts manufactured and fix their price.

• It also helps in cost control.



MANAGEMENT ACCOUNTING

• The branch of accounting which providesnecessary information to management fordecision making is called management

accounting.

• The Input for management accounting isfrom financial accounting and cost

accounting.



ACCOUNTING PRINCIPLES

• Accounting is termed as language of business.As in case of language there are set of ruleswhich are adopted for communication same isthe case with accounting also.

• Are those rules of action or conduct which areadopted by accountant universally whilerecording accounting transactions.

• These principles are of two types: – Accounting Concepts

– Accounting Conventions



ACCOUNTING CONCEPTS

• Concepts includes those basic assumptionsor conditions upon which the science ofaccounting is based.

1. Separate Entity Concept

2. Going Concern Concept

3. Money Measurement Concept

4. Cost Concept

5. Dual Aspect Concept6. Accounting Period Concept

7. Matching Concept (Periodic matching of Cost and Revenue)

8. Realization Concept



CONVENTIONS

• Are those customs or traditions whichguide the accountant while preparingthe accounting statements.

1. Convention of Conservatism

2. Convention of Full Disclosure

3. Convention of Consistency

4. Convention of Materiality



ACCOUNTING PROCESS

• Financial Transactions

• Recording:- Journal

• Classifying: Ledger

• Summarizing and

• Analysis and Interpretation



FINANCIAL STATEMENTS

• Financial Statements are the end productof financial accounting

• Financial Statements includes:-• Profit and Loss Account (Income Statement)

• Balance Sheet



PROFIT & LOSS ACCOUNT

• It is also know as Income Statement, Statementof earnings, Statement of operations

• Profit and loss account is a flow statement that

portrays the operations over/during a particulartime period.

• It reports the profit or loss earned by a businessunit out of its activities during a particular period.

• It is generally prepared after the end of financialyear i.e. Accounting year



BALANCE SHEET

• “A Statement which sets out the assets andliabilities of a firm or an institution as at acertain date.”

• It is statement which reports the property valuesowned by the enterprise and the claims of thecreditors and owner against these properties.

• It is prepared with a view to measure the Truefinancial position of a business concern at aparticular point of time.



IMPORTANT TERMS

• Assets

– It denotes the economic resources (property) of abusiness and includes all current and fixed assets

– Fixed Assets are those that are acquired forcontinued use and not meant for resale. They may betangible like land, buildings, plant and machinery,furniture etc. or Intangible like patents, goodwilletc.

– Current Assets are those assets which are kepttemporarily for resale or for converting into cash.Stock, Cash in Hand, Debtors etc.



• Liabilities

– It denotes all claims against the assets of thebusiness and include those of the outsider orthose of the owner of the business.

– Liabilities may include the followings:-• Owner's Fund

• Long term Liabilities or Fixed liabilities

• Current Liabilities



• Debtors – Are the persons or parties who are liable to pay to the

business on account of credit sales.

• Creditors – Are the persons or parties to whom business is

liable to pay on account of credit purchases.

• Capital – Total interest of the owner or owners in the business

is called. It is sometime called as owner’s fund

• Revenue – The income that accrues to the firm by the sale ofgoods/services/assets or by supply of the firm’s resources to

others.



• Expense –

It is the amount spent in order to produce and sell thegoods and services which produce the revenue.Payment of wages, rent, salaries etc.

• Purchase

– The term purchase is used only for the purchase of goods.Goods are those which are purchased for resale or for theproduction of finished goods which are also meant for sale.

• Sale

– The term sale is used for the sale of goods only. Itincludes both credit as well as cash sale.

• Stock- Goods lying unsold on a particular date.



USEFULNESS OF ACCOUNTING

FOR MANGERS

• Planning

• Performance Evaluation (Controlling)

• Decision Making• Communication



RECENT TRENDS INACCOUNTING

• Human Resource Accounting

• Inflation Accounting

• Social Accounting

• Kaizen Costing

• ABC Costing

• Target Costing



THANK YOU

2. fundas of accounting

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