ACCOUNTS

Luca Pacioli Father of accounting In 1494, He published Summa de Arithmetica, Geometrica, Proportioni et Proportionalite First book to have double entry system, profit or loss was entered to capital account to balance the balance sheet. Accounting: The art of recording, classifying, summarizing the money transactions and events which have a financial character and interpret the results Functions of accounting: 1. Recording Uses Journal 2. Classifying Uses ledger 3. Summarizing Financial transactions: Transactions or events which have a monetary value Accounting as information system: 1. 2. 3. 4. Inputs Processing Outputs Users a. Internal users Owners/investors, management, employees b. External users lenders, suppliers, government and regulators, customers, public, researchers

Bookkeeping: It is the art and science of recording in book of accounts of all the business transactions which have monetary value. Difference between accounting and book keeping: Accounting: Involves the design of the system of records, the preparations of reports, classifying and summarizing the recorded data and communicating the results to the users

Bookkeeping: Recording of transactions, in simple words, it is a part of accounting Transactions: 1. Cash Transactions 2. Credit Transactions 3. Barter Transactions Basic definitions: Refer page no: 7, 8, and 9 in ACCOUNTING FOR MANAGERS Kuppapally Objectives of accounting: 1. 2. 3. 4. 5. To keep records To protect business properties To ascertain profit or loss To know the financial position To facilitate decision making

Branches of accounting: 1. Financial accounting 2. Cost accounting 3. Management accounting Limitations: 1. 2. 3. 4. 5. 6. Monetary nature Historical data Preparation of accounts Actual cost alone is recorded Fails to see the price fluctuation Not useful in cost control

Double entry system: It is the system which recognizes and records both the aspects of transactions. For every transaction, there are two contraction parties, involves equal exchange of values or benefits, someone will be receiving and someone to give the benefit.

ACCOUNTING PRINCIPLES
Accounting concepts: Basic assumptions or conditions upon which the science of accounting is based 1. Business entity Business and individuals are two separate entities. 2. Going concern Always consider that the companies have perpetual life and it will be going on like that. 3. Money measurement Only transactions with the monetary value will be considered, others like good will or reputation will not be considered. 4. Cost The price to acquire the asset alone should be considered not the market price, because the asset is recorded at that cost price in the book of accounts. 5. Dual aspect Every transaction has two aspects; giving and receiving. For example, Ram started a company with 1 lakh rupees, now the business is having 1 lakh (cash) as an asset and the business owes its owner (Ram), 1 lakh as liability. 6. Accounting period The life of the company should be divided into appropriate segments, say 12 months for studying the results. For internal reporting, quarterly or half yearly statements can also be prepared which will not be available for the outsiders. Those reports are called interim reports. 7. Matching Revenues should match with the expenses of the company 8. Realization Revenue is recognized when a sale is made not when the payment is made. For example, when Arun ordered a machine from Bala on January 1, the machine is sold for credit on February 1 and the payment is made on March 1, the revenue was

realized neither on Jan 1 nor on March 1, but it was on Feb 1 when the machine is delivered.

Accounting Convention: Customs or traditions which guide the accountant while preparing account statements 1. Conservatism For a business ascertaining profit is not important but it should always consider the possible losses. For example, if a market price of company share is more than the cost price, only the cost price will be considered, but if the market price is less than the cost price, then only the market price will be considered. 2. Full disclosure All the statements, accounts should be made available to the creditors, investors, suppliers, employees to make sure that the process is transparent 3. Consistency The convention followed should not be changed from year to year. For example, if the company follows straight line method of depreciation for this year, next year also it should follow the same method; it should not jump into declining balance method. 4. Materiality Accountant would attach only the necessary details; otherwise accounting may be overburdened with minute details.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

Financial accounting follows a set of ground rules or accounting principles in presenting financial information known as Generally Accepted Accounting Principles (GAAP). It incorporates as to, a. Which resources and obligations should be recorded as assets and liabilities by financial accounting, b. Which changes in assets and liabilities should be recorded, c. When these changes are to be recorded, d. How the changes should be measured, e. What information should be disclosed, f. Which financial statements should be prepared

Some of the institutions in India which are instrumental in the development of most accounting principles are Accounting Standards Board (ASB), Department of Company Affairs (DCA), Institute of Chartered Accountants of India (ICAI), and Securities and Exchange Commission of India (SEBI). In USA, American Institute of Certified Public Accountants (AICPA), Securities Exchange Commission (SEC), Internal Revenue Service (IRS) and American Accounting Association (AAA). GAAP is mainly used in financial accounting and partially used in management accounting to help the management in making the decisions and in operation effectively. Accounting Standards: The term accounting standards is defined as written statements issued from time to time by institutions of accounting profession or institutions which are established for this purpose. Such institutions are Accounting Standards Board (India), Financial Accounting Standards Committee (US), Accounting Standards Committee (UK) and at the international level, International Accounting Standards Committee (IASC) Benefits of accounting standards: 1. To improve the credibility and reliability of financial statements 2. Benefits to preparers and auditors 3. Determining managerial accountability Functions of Accounting Standards Board: 1. Formulate accounting standards as per the laws considering customs and local business environment 2. While formulating the standards ASB will give due consideration to the International Accounting Standards and try to integrate with them with the conditions prevailing in India 3. It will issue under the authority of the council of Chartered Accountant of India, it will also review the accounting standards periodically. Systems of Accounting: It refers to the basis of recording business transactions. 1. Cash system on receipt basis: Only the cash transactions are recorded, hence it does not give the complete picture of the company

2. Mercantile System on Accrual basis: It will consider the credit transactions also. This system recognizes the fact that if a transaction or even has occurred, its consequences cannot be avoided and therefore it should be brought into the books. 3. Hybrid System: Some transactions follow cash system and some follows mercantile system.