Introduction to Accountancy

Accounting is the art of recording, classifying and summarizing, 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.

Accounting is the science of recording and classifying business transactions and events, primarily of a financial character, and the art of making significant summaries, analysis and interpretations of these transactions and events and communicating the result to persons who must make decisions or form judgments. - Herold Bierman and Allan R. Drebin

Accounting may be defined as the process of collecting, recording, summarizing and communicating financial information.

Accounting refers to the system involved in making a financial record of business transactions and in the preparation of statements concerning the assets, liabilities, capital and operating results of the business.

Accounting is nothing but a means of communicating the results of business operations to varies parties interested in or connected with the business, viz., the owner, creditors, investors, government, financial institutions and other agencies. Accounting is, therefore, rightly called as the language of business.

The basis purpose of a language is to serve as a means of communication. Accounting also serves this purpose. Accounting is not only associated with business but also with every body who is interested in keeping an account for the money received and money spent.

basis purpose of a language is to serve as a means of communication. Accounting also serves this purpose. Accounting is not only associated with business but also with every body who is interested in keeping an account for the money received and money spent.

Nature of Accounting:- The analysis of the above definitions brings out the following as attributes of accounting:

It is the art of recording and classifying business transactions and events.
The events and transactions of a financial nature must be recorded in monetary terms, while the events and transactions of a non-financial nature cannot be recorded.
The record should reflect the importance of the transactions so recorded both individually and collectively, which includes summarization, thereby making it amenable to analysis.
The users of the financial statements should be able to obtain the message encompassed in such financial statements, and it is the knowledge of accounting, which enables the user to understand the contents of the financial statements.

Objectives of Accounting

· As an information system, the basic objective of accounting is to provide useful information to the interested group of users, both external and internal. The necessary information, particularly in case of external users, is provided in the form of financial statements, viz., profit and loss account and balance sheet.

· Besides these, the management is provided with additional information from time to time from the accounting records of business.

The primary objectives of accounting include the following:

Maintaining Accounting Records
Ascertainment of Profit or Loss
Ascertainment of Financial Position
Communication of Information

Scope of Accounting:- Accounting plays a key role in serving a systematic and up-to-date record of varied and numerous business transactions. Its target is to analyse the financial transactions as they take place, to record them in orderly fashion, to group and arrange the information in terms of useful and understandable financial report (Balance Sheet, Income Statement) and to assist in the process of interpretation.

Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is useful in making economic decisions, in making reasoned choices among alternative course of action.

Accounting is thus not an end itself but a means to an end. It is mainly a service function. In broad perspective an accounting system should concern itself with the following information:

Analysis of past financial data to find out the reasons for bad condition of the concern and corrective measures for improvement of the business.
Accounting is an art, on the other hand, it is the application of knowledge comprising of some accepted theories, rules, concepts and conventions. It helps us to achieve our goals and tells us the manner in which we may attain our objectives in the best possible way. The more we practice an art the more expert we become in it.
Accounting is a science because recording, classifying and summarising of business transactions is done on the basis of certain principles of double entry system which are universally applicable.
Accounting seems to be very important in financial forecasting and financial forecasting helps in estimating the profitable projects and out of these profitable projects accountant chooses the one which is more profitable for the concern.
For decision-making accounting is useful. Accounting helps the accountants to take decision about capital structures, cost of capital, an ideal capital gearing ratio, capital budgeting, working capital, cash, budget, cost control, inventory management etc.
Accounting is a technique which compares the cost of various departments and thus find out which department is efficient than the other.
As is common with physicians, engineers, lawyers, and architects, accountants (including CPAs) commonly are engaged in professional practice or are employed by business, government entities, non-profit organisations and so on.

Accounting can be classified into the following categories:

Ø Financial accounting

Ø Management accounting (including Cost accounting

Ø Auditing

Ø Others like Price level changes accounting, Social cost accounting, Social auditing, Human resource accounting, Forensic accounting, Creative accounting, Value added accounting etc.

Book keeping

Recording of financial transactions in a proper manner related to the business operation of an entity is known as book- keeping. Book -keeping is the permanent recording of financial transactions in a proper manner in the books of accounts of an entity so that their financial effect on the business of entity can be seen. There is a difference between the two terms bookkeeping and accounting.

Book-keeping and accounting are different from each other. Bookkeeping is an important part of accounting. Accounting is broader than book-keeping. Accounting includes a design of accounting systems which book-keepers use for the preparation of financial statements, audits, cost studies, income-tax statements etc.
It also facilitates the interpretation of accounting information for both internal and external users for business decisions making. It requires skills and experience of an accountant.

There is a difference between the two terms bookkeeping and accounting, let us understand what is bookkeeping and accounting, their processes and difference between the two. While doing Bookkeeping, we need to follow the basic accounting concepts and accounting conventions.

Bookkeeping is clerical in nature. Book-keeping is usually done by junior employees of the entity. Most of the entities nowadays use computers for bookkeeping rather than recording them manually. Accounting of an entity depends on its book-keeping system.

Book-keeping is the basis for accounting. It is because it is responsible for the proper recording of financial transactions. Whereas, Accounting involves classification, summarizing and reporting of financial transactions. It involves the preparation of source documents for all the financial transactions of the entity.

Process of Book keeping

1. Identifying financial transactions

2. Recording of financial transactions

3. Preparation of ledger accounts

4. Preparation of trial balance

Double-entry accounting system:- Double entry accouting refers to the method of bookkeeping which helps a company to maintain its account and keep it balanced which shows the true picture of the finances of the company.

Double-entry refers to the use of an accounting asset which is a summation of liabilities and equity. The credits of an account should be equal to keep an equation in perfect balance. Accountants make use of the credit and debit entries so that they can record the transactions of all the accounts. All these credits and debits are shown in the Balance Sheet.

All the day to day finally activities are recorded and measured by the accounting and bookkeeping process. An event between two economic entities like between customer and business, or vendor and business-like known as a transaction.

To record this event we use accounting and bookkeeping.A systematic accounting process is a procedure under which the activities of the business are recorded under systematic accounts to keep data sorted and classified under different heads.

The meaning of the double-entry system is generally based on the Dual Aspect Concept. The Dual Aspect Concept is based on the fundamentals of accounting principles.

All the transactions related to the business are recorded in the book which is specifically based on the principle of accounting.

According to the Dual Aspect Concept, all business transactions have a two-way or dual effect. This tells us that the business transaction of the particular entity has a minimum of two accounts which are recorded in the books. This principle is known as the double-entry concept or system.

Rules for Debit & Credit:-

Accounting Concepts:- The term accounting concepts refer to basic rules, assumptions, and principles which act as a primary standard for recording business transactions and maintaining books of accounts”.

Business Entity Concept:- This concept assumes that the organization and business owners are two independent entities. Hence, the business transaction and personal transaction of its owner are different.

For example, when the business owner invests his money in the business, it is recorded as a liability of the business to the owner. Similarly, when the owner takes away from the business cash/goods for his/her personal use, it is not treated as a business expense. Thus, the accounting transactions are recorded in the books of accounts from the organization's point of view and not the person owning the business.

Example:Suppose Mr. Birla started a business. He invested Rs 1, 00, 000. He purchased goods for Rs 50,000, furniture for Rs. 40,000, and plant and machinery for Rs. 10,000 and Rs 2000 remained in hand. These are the assets of the business and not of the business owner. According to the business entity concept, Rs.1,00,000 will be assumed by a business as capital i.e. a liability of the business towards the owner of the business.

Dual Aspect Concept:- The dual aspect is the basic principle of accounting. It provides the basis for recording business transactions in the books of accounts. This concept assumes that every transaction recorded in the books of accountants is based on dual concepts. This implies that the transaction that is recorded affects two accounts on their respective opposite sides. Hence, the transaction should be recorded at dual places. It implies that both aspects of the transaction should be recorded in the books of account.

For example, goods purchased in exchange for cash have two aspects such as paying cash and receiving goods. Therefore, both the aspects should be registered in the books of accounts. The duality of the transaction is commonly expressed in the terms of the following equation given below:

Assets = Liabilities + Capital

The dual concept implies that every transaction has a similar effect on assets and liabilities in such a way that the value of total assets is always equal to the value of total liabilities.

Money Measurement Concept:- The money measurement concept assumes that the business transactions are made in terms of money i.e. in the currency of a country. In India, such transactions are made in terms of the rupee. Hence, as per the money measurement concept, transactions that can be expressed in terms of money should be recorded in books of accounts.

For example, the sale of goods worth Rs. 10000, purchase of raw material Rs. 5000, rent paid Rs.2000 are expressed in terms of money, hence these transactions can be recorded in the books of accounts.

Going Concern Concepts:- The Going concept in accounting states that a business activities will be carried by any firm for an unlimited duration This simply means that every business has continuity of life. Hence, it will not be dissolved shortly. This is an important assumption of accounting as it provides a base for representing the asset value in the balance sheet.

For example, the plant and machinery was purchased by a company of Rs. 10 lakhs and its life span is 10 years. According to the Going concept, every year some amount of assets purchased by the business will be represented as an expense and the balance amount will be shown as an asset in the books of accounts.

Accounting Period Concepts:- Accounting period concepts state that all the transactions recorded in the books of account should be based on the assumption that profit on these transactions is to be ascertained for a specific period. Hence this concept says that the balance sheet and profit and loss account of a business should be prepared at regular intervals.

This is important for different purposes like calculation of profit and loss, tax calculation, ascertaining financial position, etc. Also, this concept assumes that business indefinite life is divided into two parts. These parts are termed accounting periods. It can be one month, three months, six months, etc. Usually, one year is considered as one accounting period which may be a calendar year or financial year.

Accounting Cost Concept:- The accounting cost concept states all the business assets should be written down in the book of accounts at the price assets are purchased, including the cost of acquisition, and installation.

The assets are not recorded at their market price. It implies that the fixed assets like plant and machinery, building, furniture, etc are recorded at their purchase price.

For example, a machine was purchased by ABC Limited for Rs.10,00,000, for manufacturing bottles. An amount of Rs.2,000 was spent on transporting the machine to the factory site. Also, Rs.2000 was additionally spent on its installation. Hence, the total amount at which the machine will be recorded in the books of accounts would be the total of all these items i.e. Rs.10, 040, 00. This cost is also termed as historical cost.

Accrual Concept:- The term accrual means something is due, especially an amount of money that is yet to be paid or received at the end of the accounting period.

It implies that revenue is realized at the time of sale through cash or not whereas expenses are recognized when they become payable whether cash is paid or not. Therefore, both the transactions are recorded in the accounting period in which they relate.

In the accounting system, the accrual concept tells that the business revenue is realized at the time goods and services are sold irrespective of the fact when cash is received for the same.

For example, On March 5, 2021, the firm sold goods for Rs 55000, and the payment was not received until April 5, 2021, the amount was due and payable to the firm on the date goods and services were sold i.e. March 5, 2021. It must be included in the revenue for the year ending March 31, 2021.

Matching Concepts:- The Matching concept states that revenue and expenses incurred to earn the revenue must belong to the same accounting period. Hence, once revenue is realized, the next step is to assign the relevant accounting period.

For example, if you pay a commission to a salesperson for the sale that you record in March. The commission should also be recorded in the same month.The matching concept implies that all the revenue earned during an accounting year whether received or not during that year or all the expenses incurred whether paid or not during that year should be considered while determining the profit and loss of the business for that year. This enables the investors or shareholders to know the exact profit and loss of the business.

Realization Concept:- The term realization concept states that revenue earned from any business transaction should be included in the accounting records only when it is realized.

The term realization implies the creation of a legal right to receive money. Hence, it should be noted that selling goods is considered as realization whereas receiving order is not considered as realization.In other words, the revenue concept states that revenue is realized when cash is received or the right to receive cash on the sale of goods or services or both have been created.

Acocounting Conventions:- Accounting conventions are certain restrictions for the business transactions that are complicated and are unclear. Although accounting conventions are not generally or legally binding, these generally accepted principles maintain consistency in financial statements.

While standardized financial reporting processes, the accounting conventions consider comparison, full disclosure of transaction, relevance, and application in financial statements.

Four important types of accounting conventions are:

Conservatism: It tells the accountants to error on the side of calcution when providing the estimates for the assets and liabilities, which means that when there are two values of a transaction available, then the always lower one should be referred to.

Consistency: A company is forced to apply the similar accounting principles across the different accounting cycles. Once this chooses a method it is urged to stick with it in the future also, unless it finds a good reason to perform it in another way. In the absence of these accounting conventions, the ability of investors to compare and assess how the company performs becomes more challenging.

Full Disclosure: Information that is considered potentially significant and relevant is to be completely disclosed, regardless of whether it is detrimental to the company.

Materiality: Similar to full disclosure, this convention also bound organizations to put down their cards on the table, meaning they need to totally disclose all the material facts about the company. The aim behind this materiality convention is that any information that could influence the person’s decision by considering the financial statement must be included.

Journal Entry Format:-

Journal entries Numerical

Format of Ledger

Format of Trail Balance

Format of Trading and Profit and Loss A/c

LEDGER

All the accounts identified on the basis of transactions recorded in different journals/books such as Cash Book, Purchase Book, Sales Book etc. will be opened and maintained in a separate book called Ledger. So a ledger is a book of account; in which all types of accounts relating to assets, liabilities, capital, expenses and revenues are maintained. It is a complete set of accounts of a business enterprise.

Thus, from the various journals/Books of a business enterprise, all transactions recorded throughout the accounting year are placed in relevant accounts in the ledger through the process of posting of transactions in the ledger. Thus, posting is the process of transfer of entries from Journal/Special Journal Books to ledger.

Features of ledger:-

Ledger is an account book that contains various accounts to which various business transactions of a business enterprise are posted.
It is a book of final entry because the transactions that are first entered in the journal or special purpose Books are finally posted in the ledger. It is also called the Principal Book of Accounts.
In the ledger all types of accounts relating to assets, liabilities, capital, revenue and expenses are maintained.
It is a permanent record of business transactions classified into relevant accounts.
It is the ‘reference book of accounting system and is used to classify and summarise transactions to facilitate the preparation of financial statements.

Importance of Ledger:- Ledger is an important book of Account. It contains all the accounts in which all the business transactions of a business enterprise are classified. At the end of the accounting period, each account will contain the entire information of all the transactions relating to it. Following are the advantages of ledger.

Knowledge of Business results:- Ledger provides detailed information about revenues and expenses at one place. While finding out business results the revenue and expenses are matched with each other.

· Knowledge of book value of assets:- Ledger records every asset separately. Hence, you can get the information about the Book value of any asset whenever you need.

· Useful for management:- The information given in different ledger accounts will help the management in preparing budgets. It also helps the management in keeping the check on the performance of business it is managing.

· Knowledge of Financial Position:- Ledger provides information about assets and liabilities of the business. From this we can judge the financial position and health of the business.

· Instant Information:- The business always need to know what it owes to others and what the others owe to it. The ledger accounts provide this information at a glance through the account receivables and payables.

Types of Ledger

1. Assets Ledger : It contains accounts relating to assets only e.g. Machinery account, Building account, Furniture account, etc.

2. Liabilities Ledger : It contains the accounts of various liabilities e.g. Capital (Owner or partner),

Loan‘ account, Bank overdraft, etc.

3. Revenue Ledger : It contains the revenue accounts e.g.. Sales account, Commission earned account,

Rent received account, interest received account, etc.

4. Expenses Ledger : It contains the various accounts of expenses incurred, e.g. Wages account, Rent

paid account, Electricity charges account, etc.

5. Debtors Ledger : It contains the accounts of the individual trade debtors of the business.

Individuals, firms and institutions to whom goods and services are sold on credit by business

become the ‘trade debtors’ of the business.

6. Creditors Ledger : It contains the accounts of the individual trade Creditors of the business.

Individuals, firms and institutions from whom a business purchases goods and services on credit are

called ‘trade creditors’ of the business.

7. General Ledger : It contains all those accounts which are not covered under any of the above types

of ledger. For example Landlord A/c, Prepaid insurance A/c etc.

Illustration :-

Journalise the following transactions and post them in the ledger

2006

January 1 Commenced business with cash 50000

January 3 Paid into bank 25000

January 5 Purchased furniture for cash 5000

January 8 Purchased goods and paid by cheque 15000

January 8 Paid for carriage 500

January 14 Purchased Goods from K. Murthy 35000

January 18 Cash Sales 32000

January 20 Sold Goods to Ashok on credit 28000

January 25 Paid cash to K. Murthy in full settlement 34200

January 28 Cash received from Ashok 20000

January 31 Paid Rent for the month 2000

January 31 Withdrew from bank for private use 2500

Solution :

Students are advised to note such very important topics in your note book.

What Is a Budget?

A budget is an estimation of revenue and expenses over a specified future period of time and is usually compiled and re-evaluated on a periodic basis. Budgets can be made for a person, a group of people, a business, a government, or just about anything else that makes and spends money.

To manage your monthly expenses, prepare for life's unpredictable events, and be able to afford big-ticket items without going into debt, budgeting is important. Keeping track of how much you earn and spend doesn't have to be drudgery, doesn't require you to be good at math, and doesn't mean you can't buy the things you want. It just means that you'll know where your money goes, you'll have greater control over your finances.

Understanding Budgeting:- A budget is a microeconomic concept that shows the trade-off made when one good is exchanged for another. In terms of the bottom line—or the end result of this trade-off—a surplus budget means profits are anticipated, a balanced budget means revenues are expected to equal expenses, and a deficit budget means expenses will exceed revenues.

Differentiate between Journal & Legder :-

what are the different sources of finance:-

What are Financial Statements :- Financial statements are a collection of summary-level reports about an organization's financial results, financial position, and cash flows. They include the income statement, balance sheet, and statement of cash flows.

Advantages of Financial Statements:- Financial Statements are useful for the following reasons:

Ø To determine the ability of a business to generate cash, and the sources and uses of that cash.

Ø To determine whether a business has the capability to pay back its debts.

Ø To track financial results on a trend line to spot any looming profitability issues.

Ø To derive financial ratios from the statements that can indicate the condition of the business.

Ø To investigate the details of certain business transactions, as outlined in the disclosures that accompany the statements.

Ø To use as the basis for an annual report, which is distributed to a company’s investors and the investment community.

Disadvantages of Financial Statements:-

There are few downsides to issuing financial statements. A possible concern is that they can be fraudulently manipulated, leading investors to believe that the issuing entity has produced better results than was really the case. Such manipulation can also lead a lender to issue debt to a business that cannot realistically repay it.

Balance Sheet:-

The term balance sheet refers to a financial statement that reports a company's assets, liabilities, and shareholder equity at a specific point in time. Balance sheets provide the basis for computing rates of return for investors and evaluating a company's capital structure. In short, the balance sheet is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders. Balance sheets can be used with other important financial statements to conduct fundamental analysis or calculating financial ratios.

The balance sheet adheres to the following accounting equation, with assets on one side, and liabilities plus shareholder equity on the other, balance out:

This formula is intuitive. That's because a company has to pay for all the things it owns (assets) by either borrowing money (taking on liabilities) or taking it from investors (issuing shareholder equity)

Components of a Balance Sheet:-

Assets:- Accounts within this segment are listed from top to bottom in order of their liquidity. This is the ease with which they can be converted into cash. They are divided into current assets, which can be converted to cash in one year or less; and non-current or long-term assets, which cannot.

Here is the general order of accounts within current assets:

Cash and cash equivalents are the most liquid assets and can include Treasury bills and short-term certificates of deposit, as well as hard currency.
Marketable securities are equity and debt securities for which there is a liquid market.
Accounts receivable (AR) refer to money that customers owe the company. This may include an allowance for doubtful accounts as some customers may not pay what they owe.
Inventory refers to any goods available for sale, valued at the lower of the cost or market price.
Prepaid expenses represent the value that has already been paid for, such as insurance, advertising contracts, or rent.

Long-term assets include the following:

Long-term investments are securities that will not or cannot be liquidated in the next year.
Fixed assets include land, machinery, equipment, buildings, and other durable, generally capital-intensive assets.
Intangible assets include non-physical (but still valuable) assets such as intellectual property and goodwill. These assets are generally only listed on the balance sheet if they are acquired, rather than developed in-house. Their value may thus be wildly understated (by not including a globally recognized logo, for example) or just as wildly overstated.

Liabilities:- A liability is any money that a company owes to outside parties, from bills it has to pay to suppliers to interest on bonds issued to creditors to rent, utilities and salaries. Current liabilities are due within one year and are listed in order of their due date. Long-term liabilities, on the other hand, are due at any point after one year.

Current liabilities accounts might include:

current portion of long-term debt
bank indebtedness
interest payable
wages payable
customer prepayments
dividends payable and others
earned and unearned premiums
accounts payable

Long-term liabilities can include:

Long-term debt includes any interest and principal on bonds issued
Pension fund liability refers to the money a company is required to pay into its employees' retirement accounts
Deferred tax liability is the amount of taxes that accrued but will not be paid for another year. Besides timing, this figure reconciles differences between requirements for financial reporting and the way tax is assessed, such as depreciation calculations.

Why Is a Balance Sheet Important?

The balance sheet is an essential tool used by executives, investors, analysts, and regulators to understand the current financial health of a business. It is generally used alongside the two other types of financial statements: the income statement and the cash flow statement.

Balance sheets allow the user to get an at-a-glance view of the assets and liabilities of the company. The balance sheet can help users answer questions such as whether the company has a positive net worth, whether it has enough cash and short-term assets to cover its obligations, and whether the company is highly indebted relative to its peers.

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Cash Book:- The word “cash” represents the monetary instruments (currency etc.) and the word “book” represents the record available in written format. Thus, a cash book can be defined as the record of business transactions in a particular period.

In other words, a cash book records all transactions of cash receipts and disbursements (includes both bank deposits and withdrawals). Cash book is divided into two parts namely, cash payments and cash receipts.

Transactions which are not recorded or are excluded in cash book are as follows −

v Transactions related to bank (payments made through checks in receiving or paid).

v Non-cash transactions.

v Discount making or discount received.

v Cash book satisfies objectives of journal and a ledger

Cash book as journal

v Just like a journal, it records transactions in chronological order (as it happens).

v Follows the same procedure in posting transactions to ledger from cash book.

v Maintains special cash books for cash transactions.

v Records cash transactions according to debit and credit.

Cash book as ledger

v Same format as ledger.

v Follows the same T format as ledger.

v Cash book balances are transferred to trial balance.

v Serve purpose of cash account.

Types:- The cash books can be classified primarily into four different types that are:

1. Simple Cash Books -

These are also known as Single Column Cash Books. They are used to record the cash transactions and the cash receipts (cash that comes in) are entered on the left side while the cash payments are recorded on the right side. As all cash transactions are recorded in one book, there is no need for a cash ledger account.

2. Two Column Cash Books -

In a two-column cash book, there is an additional column provided for recording the specific discount entries which allow the discount transactions to be recorded in the same cash book along with the cash transactions. This cash book is usually maintained by organizations where it is a general practice to give or receive discounts.

3. Three Column Cash Books -

As the name suggests, three-column cash books have three columns; one for cash, one for the discount, and the additional bank columns. For most of the organizations that are now dealing with banking instruments like cheques or bills of exchange along with cash, a bank column in the cash book makes simplified accounting entries.