é CHAPTER) Meaning and Scope of Accounting T LEARNING OBJECTIVES Te know the meaning and concept of Accounting. To understand the meaning of Book keeping and how st is different from Accounting, To know the system of accounting and differentiate between accrual basis and cash basis of Accounting. Origin and Growth of Accounting ‘Accounting is as old as money itself. However, the act of accounting was not as devel- oped as it is today because in the early stages of civilisation, the number of transactions to be recorded was so small that each businessman was able to record and check for himself all his transactions. Accounting was practised in India twenty-three centuries ago as is clear from the book named ‘Arthashastra’ written by Kautilya, King Chandragupta’s minister. This book hot only relates to politics and economics, but also explains the art of proper keeping of accounts. The chapter “The Business of Keeping up Accounts in the Office of Accountants” describes records of accounts to be maintained in accountant’s office and methods of Checking accounts. However, the modern system of accounting based on the principles of Double Entry System owes its origin to Luco Pacioli who first published the principles of Double Entry System in 1494 at Venice in Italy. Thus, the art of accounting has been practised for centuries but it is only in the late thirties of 20th century that the study of the Subject ‘Accounting’ has been taken up seriously. In the recent years large scale production, cut throat competition, widening of the market and changes in the technology have brought remarkable changes in the field of accounting. In the words of Gordon and Gordon Shillinglaw : “It has come to be recognised as a tool for mastering the various economic problems which a business organisation may have to face. It systematically writes the economic history of the organisation. It provides information that can be drawn upon by those responsible for decisions affecting the organisation's future. Thisua2 MEANING AND SCOPE OF ACCOUNTING story is written mostly in quantitative terms. It consists partly of files of data, panty of reports history is walter Tous’ portions of these data, and partly of the plan’ established by Stunagement, to guide le operations.” Need for Accounting ‘The main aim of a business is to earn profit. For earning profit, a businessman will either purchase the goods in one market at a certain price and sell it in another market at higher Pics or will convert the raw materials into finished products and sell it to the different EUStomers at a price which will give him some percentage of profit on cost of production. But this may not be true in all cases. Sometimes it may happen that the goods purchased or produced may go out of fashion and may be unsaleable simply because of depression in the frarket, or keen competition. He may be able to sell the goods either at a loss or at a very Small margin of profit, However, he will be anxious at the end of the year to find out whether hig goods taken together have been sold at a profit or at a loss and what is financial position on 4 particular date. Moreover in a big business information is required for planning, control, valuation of performance and decision making. This information can be provided only when business transactions are recorded, classified and summarised properly. In order to achieve these purposes it would be necessary to record business transactions according to a well devised system. Book-keeping (in elementary stage) and Accounting (in advanced stage) is the name given to such a system. Meaning of Book-keeping Book-keeping is the art and science of recording, classifying and summarizing business transactions in money or money's worth accurately and systematically so that the businessman may be able to know his profit or loss during a specified period and also his financial position on a particular date. Book-keeping is thus the recording of business transactions in a systematic manner. In the words of Carter “Book-keeping is the science and art of correctly recording in books of accounts all those transactions that result in the transfer of money or money’s worth.” 'S The actual record making phase (/.e. recording, classifying and summarising) of accounting is usually called book-keeping. However, accounting extends far beyond the actual making of records. Accounting is concerned with the use to which these records are put, their analysis and interpretation. An accountant should be concerned with more than the record making phase. In particular he should be interested in the relationship between the financial results and the events which have created them. He should be studying the various alternatives open to the firm, and be using his accounting experience in order to aid the .management to select the best plan of action for the firm. The owners and manager of a firm will need some accounting knowledge to understand what the accountant is telling them Investors and others will need accounting knowledge so that they may read and understand the financial statements issued by the firm and adjust their relationships with the firm. accordingly. Thus, accounting is a wider term and includes the recording, classifying and summarising of business transactions in term of money, the preparation of financial reports, the analysis and interpretation of these reports for the information and guidance of management. Meaning of Accoun’ Definition of Accounting Important purposes of accounting are to ascertain profit or loss during a specified period, to show financial position of the business on a particular date and to have control over the firm's property. Such accounting records are required to be maintained to measure theMEANING AND SCOPE OF ACCOUNTING w4-3 income of the business and communicate the information so that it may be used, by incongers, owners and other parties. Accounting is a discipline which records, classifies: anager, One iniorprets financial imormarion about the activities of a concern so that intelligent decisions can be made about the concern. y : = 2 TEinancial Accounting l= the art of recording, classifying and 9, classifying and summarising in a significant manner in toms or money transactions and events which are in part, at least of a financial character and intorpreting the results thereat. wvAmerican Institute of Certified Public Accountants recounting is “the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information”, scaly cdgtcninn Absootanent tna jrnmtere, Sueur geonemic acti nat is Weel peg ging Principles Bourd (APES renMAccauming may, be defined “as the identiying, measuring, Tecorge, and communicating of rN picrman and AR Drebin eae eumiting te the science of recording and classifying business transactions and events; priming ure nangial charactor and the act of making signiticant summaries, analysis, 2° primarily, of a sinecs Wanoaciione and events and communicating the results to persons SNe mucs tee Gecisions or form judgements.” Smith & Ashburne From the above the following attributes of accounting emerge ( identifying the transactions and events. Accounting identifies transactions 20¢ ovens I erEexurte entity. A tansactions is a particular type of external event which can 26 Sree Ol Sia torino of money and bring change in the financial position of a business Ulin. Ay) SADT ees ed ther internal or external) ts a happening ‘of consequence to an entity (e.g. vee 08 event (wine n i for production). An entity means an economic unit that performs economic Stivities (e.g. Reliance Indusiries Ltd., TISCO). (up it ie the art of recording business transactions. First of all financial Wansscors: ono) Mol totttded in the journal or in the books of original entry known as subsidiary Proke should De reco rSy lake place so that a complete record of financial transactions is available in it is the art of classifying business transactions. All entries. in, the Joon to oun Dat, oi Should be classitied by posting them to the appropriate ledger accounts. 6 subsidiary books shouts Peal elfect of all such transactions in a particular account Fr find Out ata gare sions relating to Shyam Sunder in the journal or various, Subsidiary LOSS example. all trans ghyam Sunders Account, It may be noted that business transactions cee we oe eee Sein such a way so that It may be possible to determine profit or loss Tee o ey the business and its financial position on a specified date. ‘Go The transactions or events of a business must be recorded in monetary Wore in ndiid The transaction te which cannot be measured in terms of money: they wit Not hg W there are contain ovens ming, For oxample, a quarrel between production manager 900 recorded in. financiay be alfeciing the business but it cannot be measured in terms of Money finanfus will not be recorded in the books of accounts. (Die the art of summarising financial transactions. After recording And cesale’ fina nat te tee one next stage Is 10 prepare the trial balance and final accounts with 2 vias financial rasa ciOne Stor lose made during a trading period and the financial position of the Husiness on a particular date. (up it is an art of analysis and interpretation of these transactions. The sccouning It eee aro cie analysed and interpreted by calculating various ratios and percentages oF information mus Pe Porder 1 evaluate the past performance of the business and to make Sound plans for the future.waa MEANING AND SCOPE LF AccouN ny, iS eae ees Of Such analysis must be communicated to the persons Who ay Drosenied to ge amoerm Judgements. All information must be provien yy tien presented to the different categories of th taken at the right time. Distinction Between Book-keeping and Accounting Book-keeping is recording of the financial transaction may be quickly obtained. a yice! mechanical and electronic equipment. raion mer Rand, Accounting is primarily concerned with the design of the systom of reports and. frag ation of reports based on the recorded data, ine inecr estes of the reports ‘and fin: esteeh and Anthony have beautifully given the distinction between book-keeping ang accounting as follows account. naively contuse a book-keeper with an accountant and book-keeping accounting: Hera ae eet they confuse one of the minor mate sod BOS complex Practice epmoUnt to Comparing the simple adminatratien viet with the Slorleat sila of Gecumedicine by ‘the physician. Book-koasing ie ee routine ‘and Glerical side of accounting and requires only mininar knowledge of the accounting Businesees ang oper records the repetitive and uncomplicaten faves aes in most the sccouniang may Maintain the simple records of 4 very Sma eee In contrast, analysis of ear a Professional competent in the deston ot Rie ees: I systems, analysis of complex cconomic eventa: int financial advising, and management consulting reporting, Main differences between Book-keeping and Accounting are as follows « Points of ‘Book-Keeping ‘Accounting Distinction ‘Object propare origina wenckeaPInG Is 1S] The object of accounNag WIS VeCorer classity, “summarise, “analyse and Prepare original books of accounts Mraimaames and final accounts and to | interpret the business iraneaeions wee fnamiain, systematic records of | to ascortain operating resin Benard financial results, Position ang to communicate to various {nas limited scope and is concerned | it has a wide scope and covers book- 2. Scope mum 9gording. classitying. and | keeping plus anaivee eee on, summarising of Business transactions. | torpretation 3. Levet of Sor’, (Betticted to clerical work and is| It" is concorned with all levole of Management. Lower lovel clerke wor Gone By lower lovela ot managemon sf = Prepare the accounts, medium level Fopon it and toys love interpret ie teu De [Ht has io depend on sccounting tor| ithan to copene or Mee ning jor Pendence | making the accounting focoras more | goliing ine eng od emeebing for cootat Secounting ‘wecords and tor wakien thom usotul tor planning, Contror ang decision making,MEANING AND SCOPE OF ACCOUNTING 4-5 5. Results of | It shows the net result and financial | it anal me el Mes sult and financial | It analyses the operating results an‘ the Business| position of the business as the scope | financial position of the business. extends to the. preparation of final ose and Sorieat nates Wer | elcra peters Performing junior statt. e ae senior ‘start, e A brats Is Accounting a Science or an Art ? Accounting is both a science and an art. Before we decide whether it is a science or an art or both, it is better to give the meaning of the two terms. Science may be defined as a systematised body of knowledge based on certain principles which have Universal application. It establishes relationship of cause and effect about any Sccurrence or happening. Scientific knowledge is based on observation, experiments and testing of tacts. Art, on the other hand, is the application of knowledge comprising of some accepted theories, principles, rules, concepts and conventions. It helps us to achieve our goals and tells Us the manner in which we may attain our objectives inthe best posu.ss. way. The more we Practice an art, the more expert we become in it i ‘Accounting is a science because recording, classifying and summarising of business transactions Is done on the basis of certain prineipies ‘of double, entry system whic! are Universally applicable. However, in accounting the relationship of cause and effect |s ne Slidied which Is a basic feature of pure sciences. It may, therefore, be said that accounting In the light of the above discussion, it may be concluded that accour science as well as an art. Objectives of accounting eds ee ung point for any aren of study to e9t forth te bounclar event BON fOr AY Bee ae he ey“ Somatnomaniee hare, OegN , spiter cRange ine hold Sy'necounting. The who s odunung nae ohne Sali chaos La he de et eee nda ate meray St gonial a Aa ey ne tea hatne aa ienceded By. gharepckder Saeco oe! Baisrent wecttiniag Srinciios may be reduirad to Tas Objectives of accounting. ies and determine its ve brought about =ws. MEANING AND SCOPE OF ACCOUNTiy, 5 7 = i The objectives of accounting (as given by the American Accoun; Assouiation} are 16 provide information for the following purpeses : ting ®) Making decisions concerming the use of limited resources including identification cuicial decision areas and determination of objectives and goals. ot (i) Elfectively directing and controlling the organisation's human and materials resources, Ui Maintaining systematic records and reporting on the custodianship of resources, (iv) Facilitating special functions and control. From the objectives as given above three main objectives of accounting can be given as follows = 4. To ascertain whether the business operations have been profitable or not, Accounting heips us to know whether a business has earned profit or sultared loss during the Qscounting period. It will give us an idea of officiency of the business. To determine profit or idea of the accounting period, a Trading and Profit and Loss Account or an income Statement Is prepared by matching revenues and expired costs (/.2,, revenue expenditures) incurred for earning the revenues. In the process of determination of profit or loss, it Is expense or cost first of all revenue is determined and that is matched with revenue and not vice versa. Thus, then expenses incurred for earning the revenue are matched with the revenue for calculating the difference known as net profit or net loss. 2. To ascertain the financial position of the business. Balance Sheet or Position Statement is prepared to give an idea of the financial position of the business on a particular Gate. The financial position of an enterprise is indicaled by ts assets on a given date and its habitives on thal date. Excess of assels over liabilities represent the capital and is indicative of the financial soundness of an enterprise. A properly drawn up balance sheet gives information relating to () the nature and value of assets, (//) the nature and extent of liabilities, (/#) whether the enterprise is solvent, (iv) whether the business concern is over trading. 3. To generate and communicate information to the users. Accounting records generate and communicate information which may be helpful to Various persons in planning, ontrol, evaluation of performance and decision making, Functions of Accounting Important functions of accounting are : 4. Systematic record of business transactions. To keep systematic record of business transactions, post them to the ledger and ultimately to prepare the final accounts is the first main function of accounting 2. Protecting the property of the business. For performing this function the accountant Is required to devise such a system of recording information so that assets of the business are not put lo wrong use and a complete record of the assets of the concern is available without any difficulty. 3. Communicating results to interested parties. This function requires to supply the meaningtut Information about the financial activities of the business to the various parties he. Owners, creditors, invesiors, employees, government, public, research scholars and the Managers at the right time. 4. Compliance with legal requirements. The accounting sysiem must be such which may be able to comply with the legal requirements. Under various onactments a businessman is required to fila various statements e.g. income lax return, return for sale tax purposes ete, 5. Stewardship. In case of companies, the management is entrusted with the resources The managers are expected to act as true trustee of the funds and of the enterprise accounting helps them to achieve the same.MEANING AND SCOPE OF ACCOUNTING weer 6. Assistance to Management. Accounting assits the management in planning evaluation of performance, control and decision making by providing tequired information 7. Fixing Responsibility. Accounting helps in determination of the profitability of different tne Gepartments (of the enierprise and ullimately nelps im fixing ‘the responsibility of Stpantmental heads, Advantages of Accounting Following are the main advantages of accounting : 1. Replacement of memory. In a large business it is very difficult for a business-man to remember all the transactions. Accounting provides records which will furnish tormation as And when desired and thus " replaces human memory 2. Evidence in court. Properly maintamed accounts are often treated as a good evidence in the court to settle a dispute. ‘airless cet ol 3. Settlement of taxation lability. If accounts are properly_maintained, it will be of great assisiance to the businessman in settling the income tax and sale tax lability otherwise tax Ruihoritios may impose any amount of tax which the businessman will have to pay 4. Comparative study. It provides the facility of comparative study of the various aspects of the Business such as profits, Sales, expenses ote. with that of provious year and helps whe businessman to locate significant factor teading to the change, it any. 5. Sale of business. If accounts are properly maintained, it helps to ascertain the proper purchase price in case the businossman is interested to sell his business. 6. Assistance to the insolvent person. _ If a person is maintaining proper accounts anc untoriunately he becomes insolvent (2. when he is unable to pay to his creditors). he can Sxpiain many things about the past wilh the help of accounts and'can start a fresh We. 7. Assistance to various parties. It provides information to various parties. 6. owners: creditors, investors, government. managers, research scholars. public and employees and financial position of a business enterprise from thelr own view point 2, Facilitates in raising loans. Accounting facilitates raising Io: providing inem the required financial information. ‘8. Assistance to the management. Accounting assists the management in taking managerial decisions. For example, Projected Cash Flow Statement facititates {ne management. to know the future receipts and payments and to take decisions regarding Sntieipated surplus or shortage of funds. 70. Facilitate control over assets. Accounting facilitates contro! over assets by providing Information regarding Gash Balanee, Bank Balance, Stock, Debtors, Fixed Assets, ete Jans from tenders by Limitations of Accounting Following are the main limitations of accounting : ve Recors only monetary transactions. Account which Gan be troneuted in inonetary terms, These Wananchone MoRorary forme as contlict between production and marke menggerent ce., may bo very important for a concern but Met a transactions are recorded S ettect of price level changes not considered. Accounting ransay ave recorded cat caste EBLE ries tel oP price lever chances jo aor brought inte te Books with the, Be Seta COONS, oF ane carious yours becomes aiflicull, For example. the ratio of sale 12 {Sit asssiscin Bouse would be much higher than in 2006 due to rising prices, fixed assets boing shown at cost and not at market price nly those transactions Gehich cannot be measured in Ing managers. efficient ogorded in ine business ing records orMEANING AND SCOPE OF ACCOUNT, ws may not be realletic'as asc" ormation. Accounting information may cou statements are prepared OY idea that the business will continue and assets are {'¢3 concern concept dyes Ue 20 ue which tne azoet fe showing may rio! be actually reaieaye ‘Soot at coc! bal ihe Boek value wh. vation tno financial statermenta wil Not renege ener. a taint attecte te accounting sinteiente, Acccinung gee: 2 personal Blas of ac sat true position of the business. oh judgement based on intoprity and competaner of y Hon eee endure, Such judgement based on inted} i deferred reve uffect ine preparation of accounting statements. ‘ qi enermits alternative treatments. Accounting permits alternative treatments within 2 ee ere eatery and Conantidne Pex exammsie, meted een Reon ee eee ceraight ling method or diminishing balance metiod or same one See eaten ian, Closing stock may be valued by FIFO (Firstan-First-oul) or LIFO (eae FrereSy or Average Price Method. Application of Cifferen methods may give different rests ENS rosung may net be comparable. Hence accounting can be mamipulaved. 6. Profit no real test of managerial performance. Profit earned during an accounting period is not the real test of managerial performance, Profit may be shown in excess be franipulation of accounts by supreseing such costs as depreciation, advertisoment ‘arg, research and development of taking excess value of closing stock, Consequently real idea et Taanagerial performance may tol be available by manipulated previt. 7, Historical in nature. Usually accounting supplies information in the form of Profit and Loss Account and Balance Sheet at the end of the year, Thus, tho information provided is of historical interest and only gives post-mortem analysis of the past accounting information. For control and planning purposes management is interested In quick and timely information which is not provided by financial accounting 8. Window Dressing in Balance Sheet. When an accountant resorts to window dressing in the Balance Sheet, the Balance Sheet cannot exhibit the true and fair view of the state of affairs of the business, a Classification (Sub-fields)/Branches of Accounting _“~ Accounting can be classified into the following categéries : 9 Financial Accounting. The main purpose of this type of accounting is to record ibbsinoss tareactions in tha Books of acccunis tr euctha Wer tat apornine seouientere Pantcular period and financial Condtion on a particular date cary be Rnoer hey Rese On Of the various groups of persons _ i) Cost Accounting. It is the provision of such analysis and classification of expenditure as ‘Will enable the total cost of any particular unit of production or service to be ascertained with reasonable degres of accuracy and al the same time to disclose exactly how such toral (Ge., the value of material used, the amount of labour and other expenses Cost is constituted, incurred) so as to control and reduce its cost.) Thus cost accounting relates to the collec ascertainment of cost and its accounting and cost control of the various classifieation, elements of cost. (Ui) Management Accounting. It relates to the use of accounting data collected with the hélp of financial accounting and cost accounting for the purpose oF policy formulation, planning, control and decision making by the management, (Uv) Tax Accounting. Different types of taxes have to be paid by an enterprise on behalt ©f itself or on behalf of others, such as, employees, shareholders etc. Tax Accounting 1sMEANING AND SCOPE OF ACCOUNTING 8 .helptul in. complying with the pr i he provisions of complox tax laws governing income-tax, sales 12%. excise duties, custom duties and estate duties et AWS ee . (¥) Social Responsibility A i a of. a busi counting. It is concerned with social responsibility aspects of a business. Management is held responsible for what it contributes to Ne soc! al ech and progress. It is the process of identitying. measuring and communicating {be soc ‘effects of the business decisions to permit informed judgements and decisions by the users of Systems of Accounting Following are the two systems of Accounting 1. Single Entry System. Under this system, only personal accounts with of winor’ subsidiary books are maintained. this system has me complete record of busine sy transactions done during @ specilied period. Hence, neither the trial balance por fn Recounts can bo prepared. Thie system is simpio and less costly but adopted by small concerns where business transactions are few. In fact, this is @ lack of system, 2. Double Entry System. Every business transaction has two aspects, /.e.. wren wae receive something, we give something olse in return. For example, when we purchase Good’ Ter cash we recowe goods and give cash in return 1 similarly in-a credit sale of GoOSS G7Gce se eeetn te tine customer ana the customer becomes debtor for the amount of Gods SIA Piet va ersined olmtiiniever/imansaatlanjini two/eacounts]is|known as Douslel = Toe ee One Atbounene, OF the two secounts, one account is given debit while, {he Sie eee a given credi¢with an equal amount. Thus, on any date, the total of all depite mus! equal to the total of all credits because every debit has a corresponding credit. eae : Cash Basis of Accounting Under cash basis of accounting actual cash receipts and actual cash_payinent Aiy recon Gioult tansactions are not recorded at all anc! ar ignored til the case Ae tually seers ete eld income is merely the difference between the cash receipis Coe Sart eee wee Tre Recsipts and Payments Account prepared in case of Tet Se ona) Pay re nlions such asa charitable institution, a club, a school, a college etc, and Proves se FET Satins ou ce olor, chartered accountant ete. can be cited as the best example of cash basis. Advantages é Important advantages of cash basis of accounting are = (2). Gash basis of accounting has considerable appeal to many people because it is so Simple, appears to be so realistic, is verifiable and satisfies the conservative instinct. (2) This approach is more objective as very few estimates and judgements are required. (@) This basis of accounting is suitable for those enterprises where most of the transactions are on cash basis.MEANING AND SCOPE OF ACCOUNTING Disadvantages ; : © Granotat because it ignores outstanding and prepaid financial position of the enterprise ts Shpenses and accrued income and income received in advance @) ‘The approach does not follow matching prineiple of accounting. {3 Cash basis of accounting does not distinguish between capilal and revenue items Gnd as a result thore Is no consistency in the profits Of the two years (4) inthis approach actual cash inflows and outflows are considered, there is a great posainiity of prot manipulation e.g., payments may be delayed or prepaid, simiany Incomes may be postponed or collecied early. (8) The basis of accounting does not follow Companies Act. ILLUSTRATION 1. During the financial year 2018-19, Rajan had cash sales of © 90,900 and credit sales of * 60,000. His expenses for the year were © 70.000 out of which © 801000 expenses are still to be paid. Find out Rajan’s income for 2018-19 following cash basis of accounting. : SOLUTION Revenues (inflows of cash) 90,000 Less: Expenses (outtiows of cash) 40,000 Protit 50,000 Note : Credit sales and expenses auitstanding will not be considered in cash basis of accounting. Accrual Basis of Accounting Keeping in view the disadvantages of cash basis of accounting, accrual basis of accpuniing has baer developed by acsounianie. in accounting every cash ‘Scent carnal be treated income for determining the rue profit of tne accounting entity of the period. \Accrua basis of accounting rejects the circumstances of receipt oF payment of cast as er tena for — Associating eilher Income er expense wilh a period, Mather ths basis of accounting 1s based on concept of realisation and expiration and follows two basic accounting principles vis the fevenue fecognition and the matching principle Lin the_ascnual basis ol accounting, te income whether received or not but has Deon earned OF aderued during the period forms part Sh the total income ol that pened e.g. sales made on credit will be ineuiciedin the total alos Sthe parted irrespective of the tack when cash Ie actually roalised. Similarly” Ir'the tiem has taken benefit of a particular service, but has not paid within that porios, the erbense will relate to the period in whtich the service has bean ullis6d and Not to the podod in which the payrnioer fort ig made, ag. rent due to the landlord ut not paid will Be taken as am oxpenae tor the Period when it is due and not in the poriod when itis paid. Thus, uncer accrue! basis of dis the result of matching of revenue realised in the period accounting net income for a peri and costs expired during the period. Advantages Important advantages of accrual basis of accounting are (1) Accrual basis of accounting is preferred by accountants as it is more scientific as Compared to cash basis of accounting, (2) This basis of accounting gives a complete picture of the financial transactions of the business as it makes a record of all transactions relating to a period and takes. ine account adjustments like outstanding expenses. prepaid expenses. income received in advance and income earned but not received etc. This system discloses correct profit or loss for a particular period and also exhibit true financial position of the business on a particular day, 3)MEANING AND SCOPE OF ACCOUNTING (4) Accrual basis of accounting has wide a all companies lo maintain the account possible periodic net income and financial position m advantages Important disadvantages of accrual basi wast wining ne Companies Act req comp: ‘9 Accounting so that faire: fd) to the public. \cceptability under 1s on accrual basis of y be reportes is of accounting are = lot of adjustments are Q). This system is not as simple as cash basis of accounting, (2) A quick appraisal of the profil or loss is not possible as = required for finding the true financial position of the business: (3) This basis of accounting is too elaborate. ILLUSTRATION 2. Taking the figures, according to accrual basis of accounting, SOLUTION Total Sales= Cash Sales (¢ 80,000) + Gredit Sates & Revenues © 90,000 + © 60,000 Loss | Total Expenses for the year Protit fevenuie of this year. transactions are done Difference Between Accrual Accounting Note : Basis Following are the main differences between Basis of Accounting : ‘Acerual Basis of Accounting DeoUnder this basis thare may be outstanding: Supenses. prapaid expenses, accrued fhetme and income received in advance In the Balance Sheet Incame statement will chow relatively. biaher Pr ome i there are Hems of prepaid [Sienses ang accrual income, ; gy Income statement will show relatively lower RCome. it there are Hems of uisiandia BiSsnses ang income reccivadsn-acvance— TNS basis is recognised under the Companies Act” Under this ba! option oF followin Sepreciation (re: ‘Of valuation of inv etc) Enterprises with ca: transacons preter this basis, Businoss enterprises with profit motive Sacerain thelr profit or toss under accrual basis of accounting, ls the accountant has the vanernative method of Sut or DEM) or.method jontory (1.2 LIPO or FIFO © and credit ” I a reliable. basis of accounting because itmakes a complete record of all cash and Tedit transactions. It ascertains correct Brofit or toss se 30,000 expenses still to be paid belong ‘Similarly credit sales given in Illustration 1, find out net inc: 1,50,000 79,000 000 ged to he Shien sale (© 60,000) and hence are to be chat © this year 8 taken in the year in fof 2 60,000 are of Accounting and Cash Basis of g and Gesh Accrual Basis of Accountin: Gash Basis of Accounting anding oF thi baste there is no outstanding OF is basis Mand income accrued Penance inthe Balance Sheet Under propaig, Fecoived in nt will show lower incé Income statement will st me in Income oeeare hems of prepaid expense: Sterued income. eat will show relatively higher Income S1a\emro are items, of outstanding Secuived in advance. Eipenses and income rec’ 2 ne Sipe ee is is not recognised under ty Companies Act Under this method the accountant eee to follow. alternative me BBhreciation or valuation of inventory. has no such thed of ash jransactions prefer Emgnorises with most this basis of accountin Professional poopie hike doctors, lawyers, otc. Ekg Shralt not tor profit organisation fhole prof or loss under cash ba: accounting. itis not a reliable b: Accurate profit or loss can 0 Under this basis. sof Jasis of accounting Gecaue: fot be ascertained—x wa-az MEANING AND SCOPE OF ACCOUNTING This basis of accounting is simple because it “This basis of accounting is technical Ean oar 7 ei does not require any technical knowledge. because it involves the adjustments of accounts for preparing the final accounts. (10) ‘This basis of accounting being based on a complete record ‘of the financial transactions gives a true and fair view of Profit or loss for a particular period and aiso exhibits true financial position of the: business on a particular day. Hybrid or Mixed Basis of Accounting Sash basis of accounting is by far the simplest system whereas accrual basis of feo eye JS, scientific and reliable. So accountants have tried to club the advantages of th Syeystems and have come up with mixed or hybrid basis of accounting. Under mixed baci Sn assgunting beth cash basis and accrual basis are followed. Incomes are recorded soos aenee sis whereas expenses are taken on accrual basis. The net income ic fhe eitained by matching expenses on accrual basis with income on cash basis. This is the petgonservative basis of ascertaining income because all possible expenses relating ts This basis does not give true and fair view of profit or loss and the financial position of the business because it does not take in ne Consideration outstanding transactions. [LLUSTRATION 3. Rajat supplies you the following information about his income and expenses for the financial year 2018-19. Expenses paid 80,000 Income received 1,20,000 Expenses paid in advance 20,000 Income received in advance 15,000 Expenses not paid yet 10,000 Income not received yet 12,000 ed eut ine pet income or profit of Rajat if he adopts (a) Cash basis (6) Accrual basis (© Hybrid basis of accounting. SOLUTION (@) Cash Basis Revenues = Income received Less: Expenses Expenses paid Profit (2) Aceruat Basis Revenues = Income received 1,20,000 +12,000 + Income not received yet — Income received in advance 15,000 : “w 17,000 Expenses =e Expenses paid 80,000 + Expenses not paid yet 10.000 — Expenses paid in advance 20,000 ® 70,000 Profit A= © 1,17,000 ~ = 70,000 = = 47,0004-13. MEANING AND SCOPE OF ACCOUNTING (2 Hybrid Baste Revenues = en inname received 41,20,000 Expenses paid 80,000 40:000, 90,000, + Expenses not paid yet —Expenses paid in advance Profit = Revenues ~ Expenses = ¢ 1,20,000 ~ ¢ 70,000 = ¢ 50,000. Few Basic Terms () Business Transactions. A ha "3 worth as goods and tions. Any exchange of money or money's worth as a: services between two parties Is called a business transaction. Imay relate to purchase and sale of goods, receipt and payment of cash and rendering of service by one party to anetner, in accounting, only business transactions are recorded. A business transaction is an event Which can be expressed in terms of money. An event which cannot be expressed in terms Of money and does not affect the financial pasition of a business enterprise will not be recoroce in accounting, Therefore, all business transactions, are events, put all events fe iy Business ransactions. When payment for a business activity is made immediately, it is called @ Ser én’ areal i Wis called a credit transaction but when the payment is postponed to a future date, transaction, (i) Event. An event is the end result of any transaction. Gi) Account. In accounting, transactions of similar nature are added or subtracted 31 4 pantigular place, Known as an “account, An account is a ledger record in a summarised form Gf all the transactions that have taken place with the particular person er things specitied (iv) Debtor. A debior is a person who owes money. The amount due from him js called debt. ‘The amount due trom a person as per the books of account is called a book debt. (¥) Creditor. A person to whom money is owing or payable is called a creditor (vp Capital, This is the owners financial interest or holding in the business and is represented by the value of net assets (.2., total assets less liabilities.) (vi) Goods. This includes all articles, commodities or merchandise in which the busine te deals, Pras, cloin would be goods for a dealer in cloth, furniture would be goods for a dealer ned that has a money value is an asset. In iy results in acquiring of some property Or in furniture and so on. (vi Assets. Any physical thing or right ow other words, an asset is that expenditure whic! benefit of a lasting nature. (ix) Liability. Any amount for which the business is liable to pay to other parties (except the Gwner of the business). ‘Liabilities are debts, they are amounts owed to creditors. (C0 Equity. A claim which can be enforced against the assets of the firm is called equity: In other words, the rights to properties are called equities. Equities are of two types : the right of creditors and the right of owners. The equities of creditors represent debts-of the business 8nd are called liabilities. The equity of the owners is called capital, proprietorship or owner's equity, Thus assets musi be the sum of liabilities and capital (x) Income. It is the favourable change in owner's equity which results from business operations. In ther words, income is an inflow of assets which-results in an increase in the owner's equity, (xi) Expenditure. An expenditure takes place when an asset or service is acquired Expenditure will include both payment of a sum immediately and a promise to pay it at a future date.iia MEANING AND SCOPE OF ACCOUNTING ili) Expense. it means an expenditure whose benelit is finished or enjoyed immediate suc 2d Expense, means af exper ctCy goods a an expenditure whereas cost of goody such as salaries, rent O16. The Our gacel is acquired during the year, it is an expenditure, itt SeMamsa during ino samé vear, itis also an expense of the year: Teh Deaningg. Any amount or goods withdrawn by tne owner of a business for personat use {a called arawing, (ev) Loss. A loss expanse is incurred to result in some bone! But tose due to fire is lose. ‘Grup Voucher. Any written document in support of a business transaction is called a voucher itis.an ebjactive evidence in support of 4 transaction (evi) Turnover. It means tolal tracing income {rom cash sales and credit sales. (avin) tet Worth, moans assets minus outside llabilities. Profits of a business increase the het worth whereas losses reduce Net worth of a business (xi) Insolvent, A person whe canna! pay his debts is called insolvent. His liabilities are the concern. On the other hang, nt spent on lighting Is an expense an oxpenditure without any benefit fit. Thus, amour more than his assets. (x) Cost. Gost is the amount of expenditure (actual or notional) incurred on, or attributable to 4 specified thing or activity. (ex) Bad Debts. An amount which has become irrecoverable from the trade debtors and treating ita business loss. it is written olf in the debit side of the profit and loss account. Accounting as an Information System (or Users of Accounting Information) Accounting is an information system. A3 an information system, it collects data and communicates economic infarmation about the organisation to 4 wide variety of users whose decisions and actions are related to ite performance. Accounting process begins with the Identification of transactions and ands with he preparation of financial statements. Every step in the process of accounting generates information. Generation of information is not an end in itselt tis a means to facilitate the dissemenation of information among different user groups. Sueh information snables the interested parties to lake appropriate decisions. Accounting is the language of the business. As the primary aim of a tanguage is to serve a means of communication aecounting is used lo communicate business information. The Basic objactive of accounting is to provide information which is usetul for persons inside the organisation’ and for persons or groups outside the organisation ‘As an iniormation system, accounting may be explained with the help of following figure rept —+--+ | Processes i - im Dutput | | Eoonome events. | > ying Communicating (ransactions) in | Summarising Information to manstery tema |__Analysing interpreting | Users Users ef Accounting “Thar are numerous groups which have vested Interest In the accounting information o! the Husiase. These groups may be categorius as intornal users oF external Users ‘MEANING AND SCOPE OF ACCOUNTING u4-45 |. ,Aecording to Siavin and Reynolds, Professors of Accounting, “Conceptually, accountnE is the discipline that provides information on which external and internal users Of Pe, intormation hres’ basin decisions that fea the aoewuonvor ceonorsle Pex0tureoe Mt 2OCIEY Boil kinds of users are discussed bolee eer {Cee Ekternal Users of Accounting Information External users are those groups or persons who are outside the organisation for whet accounting function Is performed. Potiowing can bo the various external users of accounted iMiormanion Investors. Those who are interested in investing money in an organisation a¢¢ inisfested in knowing the financial health of the orgunisatios to know, how safe the invesimant already made is and how sate their proposed investment will beyTe know the financial heal, they need accounting information which wil help them in evalusting tho past perormance At Ididre prospects of the organisation. Thus, insesiors for investment qecisions are dependent upon accounting information included in the financial statements. They can know ne protllabiity and the financial position of ihe organioation in which thoy are interested fo TAKS ihat invesunant by making '@ study of the aecounting Information given in the Hnancie Blgtemonie of the Groanioaioon. oa ‘Srereditors, Creditors (1.., suppliors of goods and services on credit, bankers and other lenders of money) WaMt Io. Khow. the. tanoiae position of a concen bafare giving 1oans OF _Sianting Gredit They want {be gure thar ihe Gonearn will Hol experiance aiMficulty 11, MAN Fer eS ent in Unter fe, liguid postion of ing cancern 1s saustactory, Te know ie position’ iney need accountng information relating to currant aswots, quick ASS vets and current fiabilities which is available in the financial statements. pee aacne. 3. Members of Not for profit Organisations. Members of not for profit eran such as schools, colleges, hospitals, clubs, charitable institutions ete, need SOA. ved and to ascertain if the information to know how their contributed funds are being utilis aia organisation deserves continued support or support should be withdrawn keeping 1 AIST or bad performance depicted by the accounting information and diverted to another aren ace, In knowing the performance of such organisations. criterion will not be the Prot! 8 chiet crjorion will be the service provided to the society. =e Government. Gentral_and_state. governments _are_interested. in ounting infSfmation because they want lo. know earnings of sales fora particular period Tor Pepe tt Brtaxation. Indome tax returns are examples of financial reports which are preperee inforination take tly from accounting records. Government aise needs accounts Information tor carping’ statisles concerning business which, in turn helps mW compil Rational accounts. e NSonsumers. Consumers need accounting information for establishing good accounting. contrat si 1 of production may be reduced with the resultant edu jacuon OF tre = prices © BH iy Soindtimos, prices for some goods are fixed by the government, 26 | Seog Parmation to ix reasenable prices so thal Consumers and manufacturers are Ot Ecplolied Prees are liked keeping in view fair return to manufacturers on thelr invesiment Shown in the accounting records. So Research Scholars. Accounting information. being a mirror of the financial performance ofa business organieation, 1s of immense value to the research scholar who Grants to make a study Into tho financial operations of a particular firm. To make a study into Ihe nancial operations oF a particular firm, the research scholar needs detailed accountiag information relaung 10 purchases, sales. expenses, cos! of materials used, current assets. Current liabilities, fed Assets, long tomm labiities and shareholders: funds which is avaitabte ining agacunting records maintained by te im Grnal Users of Accounting information. Wfflemal usore of accountng information are (nos organisation Following are such internal users in the ac persons or groups which are within the4-16 MEANING AND SCOPE OF ACCOUNTING - Owners. The owners provide funds for the operations of a business and they want to know'wnother their unde are boing properly used or not. They need accounting Information to know the profitability and the financial position of the concern in which they have invesieg their Tunds. The financial statements prepared from time to time trom accounting records tell them the profitability and the financial position. 2. Management. Management is the art of getting things done through others, the management should ensure that the subordinates are doing work properly. Accounting information is an aid in this respect because it helps a manager in planning, control, decision making _and_appraising the pertormance of the subordinates. Actual performance of the employees can be compared with the budgeted performance they were expected to achieve and remedial action can be taken if the actual performance Is not upto the mark. Management Needs information to review the firm's short term and long-term solvency, profitability im relation to turnover, effective utilisation of available resources and profitability in relation to investment and take necessary action to run the business effectively. Thus, accounting information provides “the eyes and ears to management. 3. Employees. Employees are interested in the financial position of a conce: particularly when payment of bonus depends upon the size of the profits earne accounting information to know that the bonus being paid to them is correct. n they serve They seek Factors Common to Every Business To have a clear understanding of the Double Entry System, it is necessary to keep in mind the following factors which are common to every business + 1. The business has to enter into business dealings with a number of persons or firms. So, an account of each person or firm, with whom the business has business dealings, opened. Such accounts are known as Personal Accounts. 2. The business must necessarily have some assets such as stock, cash, urniture etc., with the help of which the business may be carried on. Therefore, an account of cach asact ih the business is opened. Such accounts are classified as Real or Property Accounts. 3. There must be certain sources from which the income of the business is derived. Similarly certain expenses must be incurred to earn the income. Therefore, an account oi gach expense and income is opened in the books. Such accounts are known as Nominal. Ge Fictitious Accounts. ‘CLASSIFICATION OF ACCOUNTS From the above, it is clear that there are three types of accounts, namely, Personal Accounts, Real or Property Accounts and Nominal or Fictitious Accounts which are opened to keep a complete record of all the financial transactions of the business. Accounts Personal Accounts Impersonal Accounts Nattiral Antificiat Représentative Real Aécounts Nominal Accounts Persons Persons’ Persons" Accounts Accounts Accounts Tangible Intanibte Real Accounts Real AccountsMEANING AND SCOPE OF ACCOUNTING Ua-47 actions with an Natural Person's Personal Account. An account recording trans: e.g. Vinod's individual human being is known as a natural person's personal account, Artificial Person's Personal Account. An account recording financial tran an artificial person created by law or otherwise 12 called an artificial perso} account, e.g., Arihant Industries Lid., Bank Account, Ramesh-& Bros. Co. etc. Representative Personal Account. An account indirectly representing a person oF persons is known as a representative personal account. When accounts are of a similar nature and their number is large. it is better to group them under one head and oper & fepresentative personal account. Examples of such types of accounts can be : Salaries Outstanding Account, Interest Outstanding Account, Prepaid Insurance Account ete. Salaries Outstanding Account is a personal account representing salaries payable to the staff. Tangible Real Account. Such type of accounts relates to an asset which can be touched, felt, seen and measured e.g., Machinery Account, Cash Account, Furniture Accoun!, Stock Aécount ete. Intangible Real Account. Such type of accounts relat touched physically but Gan be measured in value. For exampl Account, Trade Marks. Account, Copy Rights Account ete. ILLUSTRATION 4. Classify the following ‘accounts into personal, real and nominal: (a) Drawings Account ; (b) Bank Account ; (c) Cash Account ; (cd) Discount Accoun’ (e) Patent Account ; (9 Arlhant Industries Ltd. Account ; (g) Goodwill Account ; (9) Taeiy OSCE: Cy Bad Debts Account: Y) Capigl Account + («) Machinery Account: () Salary Outstanding Account ; (m) Unexpired (or prepaid) Insurance Account ; (m) Stock Account * (©) Bank Overdratt ; (p) Purchases A/c ; (q) Bills Receivable A/c ; () Reserve for Disc’ Creditors. SOLUTION (@) Drawings Account (©) Bank Account = Personal. It can also be real account if Bank Account shows )_ Capital Account = Personal cash at bank. Dealings with bank are (i) Machinery Account = Real to be treated as dealings with a party, ( Salary Outstanding Account 30 it is better to treat Bank Account (m) Unexpired Insurance Account Stock Account = Real Account sactions with n’s personal hich cannot be 5 to assets w! Sie Gaood Patents ie, Goodwill Account, Nominal Personal (Salaries Account ‘Nominal (@ Bad Debts Account Personal Personal as a personal account. wo (@ Cash Account = Real (0) Bank Overdraft = Personal Account (Discount Account = Nominal (p) Purchases = Nominal Account (2) Patent Account = Real Account (@) Bills Receivable Account = Real Account Reserve for Discount on Creditors (). Arihant Industries Lid. Account = Personal (7) (a) Goodwill Account = Real Qualitative Characteristics of Accounting information ‘Accounting information must possess some qualitative characteristics. These are the attributes that make the information provided in financial statement useful to users. The four main qualitative characteristics are : 4. Reliability. Accounting information must be reliable. It should be free from bias and personal influence or judgement. However, it is not possible to record all transactions in this manner. For example, an entry for the provision for doubtful debts, in this case, a provision is made for debts that are considered doubtful for recovery but the exact amount of bad debts can never be determined in advance. = Nominal Account.— we MEANING AND SCOPE OF ACCOUNTING 2. Relevance. Accounting information must be relevant to the user. Information ig relevant it mocis the needs of the user in decision making. For example, dividend pale ey" | Company in the previous year ie relevant information tor the investors. Thie ts becauey & | provides a basis for forecasting dividends in future years and also provides a review of the Past performance of the company. Thus, the acountants must study the neods of the vandne Users and determine which information Is relevant 10 the existing and potential dec makers 3. Understandabitity. Accounting information must be presented is a manner for the usere to understand. Its assumed that the usors have a basic knowledge of buses Hansactions and they devote time and effort in analysing the financial Statements, Howeee: the accountant has’a basic respansibilily to describe business transactions clearly eg concisely 4. Comparability. Accounting information is more usetul when it is comparable with similar information for the same onterprise im aifferemt periods. itis also useful When snkice information "across ‘different enterprises uring. the same period. can be comeang Comparablity’ ‘is therefore a useful quality Gt accounting. information. To semis comparability, consistency and disclosure of accounting policies are necessary, AAA A) emer i Choose the Correct Answer : (2) Recoraing of transactions and events as & when they occur and classifying them inte Suitable account heading is the subject matter of — 3 (@) Fimaneial Accounting (i). Gost Accounting | toy wail, Management Accounting (i. Book-koeping | jook-keeping is mainly concomed with the recording of financial data relating to the in Significant and orderly manner, 2 aerating Je Be t ( Business (i) Personal i Gi), Company Gy) Monetary. (©) Basic function of accounting is to | ( Record all business transactions of monetary nature ie (i) Interpret the financial date ie | (4) Assist the management in performing functions effectively. pill), Surmmarioa the data (@ There are two systems of accounting Le. cash basis system of accounting an basis system of accounting 2 pee % meee [ () Double entry (A Accruat if (ii), Dual Aspect (iy) Single Entry. | (©) The alternative to cash basis af accounting is called basis of accounting, Ba () Receipt (i) Due iy (i) Creat (iy) Accrual, } (4 The system of recording transactions based on dual aspect Concept is called | ( Double Account System (i), Double Entry System | Gi). Single Entry System (0) Actual Basis of Accounting. { (9) As per dual aspect concept () Assets = Liabiltios + Capital (i) Assets = Liabilities — Capital Ui) Assets 4 Liabilities = Capital (14 Assets + Capital = Liabilities, j (A) Llabilities of a firm are © 6,600,000 and capital of the proprietor is 7 400,000. Then tetal } assels are | (@ © 6,00,000 (i) = 10,00,000 (i) = 200,000 (4, * 4.00.00.yi13 MEANING AND SCOPE OF ACCOUNTING Ans. 10. W 12, 13. 4a, (Assets are © 10,00.000 and liabilities are 7 2,00,000. His capital would be ~ (© 10.00,000 (iy "= 12,00,000 Gi). * 8,00,000 (i) & 2.60600. Capital + Liabitiies = () Total Assets Gi) Losses Gi), Current Assets (iy) Fixed Assets. (Which of the following will be goods tor a business run by a furniture merchant ©) Electrical Appliances (i) Shoes (i) Tabios and Chairs (Pons and Pencils. (0. Which of ine following is not a business transaction ? () Rent paic to Landlord 5,000 (i) Goods purchased trom Z © 20,000 Gi). Placed an order to Chandra & Co. for purchasing the goods for £ 35,000 Gv) Received interest trom Bank © 2.000 (m) Wien of the following item is not financial in nature: () Purchase of a car on eredit Gi) Dismissing an employee from job (id) Withdrawal of cash by proprietor for his personal use (iy) Purchase of building tor cash eae owner's (r) Tolal assets of a trader are ® 4,26,000 and outside liabilities are © 1.75.00 equity will be @ © 6,00,000 1B 5 20000 ee (i © 4:28.00 GY) None of the above. an, {(2) (iv); (BY (D5 (€) Di (CD (193 (0) HD: (O45 (DOD DDG) GIDE 3 (Ay UD Wane a Define Accounting, Ust any two functions of Accounting Name the branch of commerce, which Keeps a record of monetary Deans Teock Keeping Botine Book Keeping Name three divisione of Accounting State four limitations of Accounting Write’any two advantages of Accounting. Jame any one external usar of Ascounting Information be carne ony oe ome necountng aysieme 10 record financial transactions in the books, of wnat Ip-an account 2 Name three types of accounts Give two bases of Accounting How gous a business transaction difer from an event ? What is Double Entry System 7 ECR Explain the meaning of Accounting Distinguich Book-keeping from Accounting State the main objectives of Accounting. set of ansactions in a set- : MEANING AND SCOPE OF ACCOUNTING 4. Give four funetions of Accounting. 5. Explain Accounting Equation. Describe its role. G. Describe the fundamental accounting equation. 1 rolated to it’? 7. Waar ia owner's equity ? Give an equation for calculating owner's equity? Give two exampieg at least. 8. Give two examples of Personal Accounts, Real Accounts and Nominal Accounts. 9. Explain in brief wo accounting systems. 10. What are the qualitative characteristics of accounting information ? Nase .ses) and limitations of accounting. low are revenue and expense accounts Define accounting. Explain objectives (or pure: on \ccounting. Why accounting has been called the language ot Describe the real nature of aK \ business ? | oR Define accounting and explain the steps in the accounting process. 2. Give the main classifications of accounting and discuss briefly the scope of each, 3. Discuss in detail the possible users of accounting information. ‘OR, ‘in what way is accounting information usotu fr () owners (i) managers, (i) creditors and (™) | 4. Write a note on purposes and limitations of accounting. 5S. Discuss the main bases of recording business transactions. 6. Distinguish between Cash basis and Accrual basis of Accounting. oR | Write short note on Mercantile System of Accounting, 7. Distinguish between Book-keeping and Accountancy. Define accounting and discuss its functions. 9. Discuss brietly the relationship of accounting wi -conomics (i) Stat Discuss britty ine relationshie ting with: () E« ics (i) Statistics (i) Mathematics °Ee (CHAPTER) ene Genera d Accounting Principles (Concepts and Conventions) ae [EARNING OBJECTIVES | = To learn the basic accounting concepts, principles, conventions wtlact the recording of transactions in the Books of = To understand how these principles accounts. Sean of OMe anlae ao that investors have a maximum level of consietoncy” in tne financial statements ey oem GAAP Beetse2 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONCEPTS ANP CONVENTION is plenty of room within Gaap. andards. There is plenty of room withi Te tandards. Tere, Sompany uses GAAPS, still neat” So even whey saromonts are prepared in confirm? - Accomm more reliable. The need for the comme” fen we contemplate the chang! nt wi e i follows his own principles about the i tree elas ans mre. appareh | belief or a general truth which once establisheg lon with respect to accounting which is merel does not change. It'is incorrect to apply the t cunting which i Ct to ape ament of some useful results by its applications. Sn ar! involving adaption for the att nt '¢ meaning of fundamental ‘Principle’ "as @ guide to actioi Re ee Gotined as those rules of conduct or procedure which are adopted by the Principles may be defined as th les of c Pi Hye edopted by the cee rents Universally while recording the accounting transactions eee te oye SY municating ine results of a business to the outside world. it should be Reet eee ess uniform and selentiically laid dow? principles. Some Accountants preter to eee te tenn ‘Standard: instead of using the word Principle’ but accounting principles ang Tot nie ahd the same thing. Accounting principles are Garde tor Sound accounting practices and procedures in tis and periodic performance of a business. Accounting Grente Issued by ihe government or professional ua aapects of recognition, ie in the Meaning of Accounting Principles The term ‘Principle’ refers to fundamental accounting standards are guidelines to establish sta reporting the financial stat Standards are written/policy doct Institutes or other regulatory body covering vai measurement, treatment, presentation and disclosure of accounting transaci ancial statements. Characteristics of Accounting Principles Following are the main characteristics of accounting principles : Accounting principles are man made so they do not have the authoritativeness as universal principles like the principles of physics, chemistry and other natural 7 2. Accounting principles represent the best possible guidelines based on reasons and observations and have been developed by accountants to enhance the usefulness of accountig data in an ever changing society. Accou.ting is a social science and is the natural result of economic phenomena. 3, 4. The science of accounting is not in a finished form, it is in the process of evolution. Consequently, accounting principles are fast developing. These are influenced by business practices and customs, government agencies and other business groups. The general acceptance of an accounting principle usually depends on how well it meets three criteria : relevance, objectivity and feasibility. A principle is relevant to the extent that it results in information that is useful to those 5. 6. 7. who want to know something about a certain business 8. A principle is objective to the extent that the accounting information is not influenced 9. by the personal bias of those who furnish the information. The accounting information given in the financial statements should be free from the nN -part in the preparation of such personal bias of the persons who have tat statements.CCEPTED ACCOUNTING PRINCIPLES (CONCEPTS AND CONVENTIONS) _U2-3 GENERALLY joxity OF 10. A principle is feasible to the extent that it can be applied without undue compl Accounting principies can be classitied into two categories = () Accounting concepts. and (J) Accounting conventions. Accounting Concepts Accounting concepts may be considered as postulates i.¢., basic ass\ conditions upon which the science of accounting Is based. There is no a list of these concepts but most of the concepts have fairly general support. umptions or uthoritative: Accounting Conventions The term ‘conventions’ denote circumstances or t accountant while preparing the accounting statements. Concepts and conventions are often used interchangeably. The basic alfercncs betwaun ihom le that corleepts are Concerned with maintenance of accounts WHETE2s Benvenuans are applicable while preparing financial statements /.e., Profit and Loss Account and Balance Sheet. raditions which guide the Accounting Principles — _—___$______—, Accounting Goncop' Accounting Conventions () Business Entity (Consistency (i) Money Moasurement Gp Pull Disclosure (in. Going Concern Gin. Conservatism (i) Go: (39 Materiatty (%) Qual Aspect (uv) Accounting Period (ui) Matehing (vi) Realisation (i) Objective Evidence 1) Accrual (a) Timelines The above concepts and convent (bg (@® Business Entity Concept This concept implies that a business unit is separate and dist F nis wn nis, COMeePL IMDUES InGepective of the form of organisation, a business Unt TAG whe, 28b PY caividuality as distinguished from the persons who own oF Conlin’ Ha ae Boe it ind el pe Assets = Liabilities + Capital) is an expression of the ently Sees aa e chows that the business iiself owns the assets and in turn owes to fhe various claimants. eee cic Rept separate from the proprietor so that transactions of the business. may atone Sd eth ha. In case this concept is not followed affairs of the business will be ee eee Molivate affairs of the proprievor and the true picture of the business will not Fae eee naeein ihe books of a sole trader, a firm or a limited company, only business Oe a ole. dre recorded and no note is taken of the personal transactions of the sole ansactons ne pariners of ihe firm and the shareholders of the company. But their tions are explained below nct from the persons *