Introduction to Accounting &

Accounting Concepts
Syllabus

 Basic Concepts includes Journal, Ledger & Trial Balance

 Financial Statements of Sole Proprietor
 Cost Accounting
 Short Term Business Decision Techniques: Marginal Costing
 Exercising Control: Budgetary Control & Standard Costing
Paper Pattern

1. Remembering
2. Understanding
3. Applying
4. Analysing
5. Evaluating or Creating
Introduction to Accounting

 Accounting is a systematic process of identifying,

measuring, recording, classifying, summarizing,
interpreting and communicating financial information. It
reveals profit or loss for a given period, and the value and
nature of a firm's assets, liabilities and owners' equity.
Accounting provides information on the…….

i)resources available to a firm

ii) the means employed to finance those resources,
and
iii) the results achieved through their use.

 "Cut your coat according to your cloth"

 Activities/Steps/Process covered under accounting

 Identifying the transactions and events

 Measuring the identified transactions
 Recording
 Classifying
 Summarizing
 Analyzing & Interpreting
 Communicating

IMRCSAC
Bookkeeping, Accounting and Accountancy
Bookkeeping, Accounting and accountancy

 IMRC – Book Keeping

 SAC – Accounting
 IMRCSAC – Accountancy
 Book-Keeping:
 Book-keeping is a primary and basic function in
the process of accounting and concerned with
recording and maintenance of books of accounts
only.
 Accounting:
 Accounting is the secondary function and it starts
where function of book-keeping ends.
Accountancy

 Accountancy is a broader term that acts as a

guide for the preparation of books of
accounts, summarization of information and
communicating the results to all the
concerned parties.
 Objective/Need/Purpose of Accounting

 To maintain full and systematic records of business transactions –

Language of business
human memory is limited
 To ascertain profit or loss of the business – expenses less than income
 To depict financial position of the business –
Position Statement
doctor feel pulse
 To provide accounting information to the interested parties - Apart from owner of
the business enterprise, there are various parties who are interested in accounting
information. These are bankers, creditors, tax authorities, prospective investors,
researchers, etc. , sound and realistic decision.
Scope of Accounting

 Accounting has got a very wide scope and area of application. Its use is not
confined to the business world alone, but spread over in all the spheres of the
society and in all professions.
 Scope of Accounting in personal life
 Scope of Accounting in business organizations
 Scope of Accounting in non-trading concerns –like temple, school, college,
hospital etc.
 Scope of Accounting in Government Offices – like court, govt. dept
 Scope of Accounting in professionals - like doctors, engineers, advocates, actors.
Users of Accounting Information

 Accounting information consists of sets of

financial statements which is useful for internal
users (primary users) of an organization as well as
external users (secondary users).
Internal Users (Primary Users)

 Management
 Owners/Partners 
 Employees 
External Users (Secondary Users)

 Investors
 Banks & NBFCs 
 Regulatory and Tax Authorities 
 Customers
 Suppliers
 Public
Role of Accountant

 An accountant is a person who does the basic job of maintaining accounts and
book keeping.
 The managers would always want to know the financial performance of the
business. An accountant prepares profit and loss account (the profits/losses of the
business during the accounting period), Balance sheet ( statement of assets and
liabilities of the business at a point of time).
 An accountant is a person who is formally trained and qualified for the purpose of
accounting
Role of Accountant

 Credibility
 Professionalism
 Quality of services
 Confidentiality
Branches of Accounting

 Financial Accounting
 Cost Accounting
 Management Accounting
Difference between FA/CA/MA

 Format
 Planning and Control
 Nature
 Users
 Mandatory Requirements for companies
 Monetary vs Non monetary
 Frequency of reporting
You Should Know

 Which of the following is not a feature of Financial

Accounting?
1. Ledger Posting
2. Preparing a Balance Sheet
3. Making Budgets
4. Reporting to the management
You Should Know

 Which of the following would best describe the nature of

management accounting?
1. Historical and Futuristic in nature
2. Monetary nature
3. No specific format of reporting
4. All of the above
 Concepts & Conventions
 Accounting conventions implies the customs or
 practices that are widely accepted by the accounting
Accounting concepts refers to the rules of accounting
bodies and are adopted by the firm to work as a guide in
which are to be followed, while recording business
the preparation of final accounts.
transactions and preparing final accounts.
 A method or procedure.
 A theory
 These are common practices.
 It is set by accounting bodies.
 Concerned with preparation of accounts are common
 Concerned with maintenance of accounts.
practices.
 Biasness is not possible.
 Biasness is possible.
 Accounting Principles

 Accounting principles are guidelines and standards, which have been

accepted by the accounting professionals in preparation and presentation
of accounts of the business.
 Formed by organizations like ICAI (Institute of Chartered Accountants
of India), CLB (Company Law Board) and CBDT ( Central Board of
Direct Taxes).
 These are called as Generally Accepted Accounting Principles (GAAP).
 It includes: Accounting Concept and Accounting Convention
Accounting Concepts

 The term 'concepts' includes those basic assumptions or conditions on which accounting is based.
1. Separate Entity Concept
2. Going Concern Concept
3. Money Measurement Concept
4. Accounting Cost Concept
5. Dual Aspect Concept
6. Accounting Period Concept
7. Objectivity Concept
8. Matching Concept
9. Accrual Concept
10.Revenue Recognition Concept
Accounting Conventions

 The term 'conventions' includes those customs or

traditions which guide the accountant while
communicating the accounting information.
1. Convention for Conservatism
2. Convention of Full Disclosure
3. Convention of Consistency
4. Convention of Materiality
 Important accounting concepts
 Separate Business Entity concept –
 As per this assumption, the business is separate and different from its
owners.
 For example: The cash or other assets introduced by any businessman in
the business are treated as a liability for the business though the business
belongs to the businessman. This explains the separate entity concept.
 Similarly, cash or goods withdrawn by the owner for his personal use is his
private expenditure and not expenditure of business. It is termed as
drawings.
 Going concern concept

 As per this concept, an entity will remain in business for the foreseeable
future. It will not be liquidated or dissolved in the immediate future unless
there is clear evidence of winding up in near future.
 In fact, all the business firms sell goods on credit to their customers on this
assumption.
 For example: company A buys a machine for Rs. 1,00,000 having a working
life of 5 years and a scrap value of Rs. 5,000 at end of life. It charges
depreciation accordingly for 5 years. If it assumes that the business will
come to an end in another one year then it will write off the complete value
of the machine in the same year.
 Money measurement concept
 As per this assumption, any accounting transaction is to be measured in money or
money’s worth. This money has to be common denomination like rupees, dollars etc.
 For example, Mr. A is a small vendor selling vegetables. Every morning Mr.A drives to
the wholesale market, buys vegetables. He loads them in his vehicle, drives back and
sell them at profit. While accounting Mr. A will take into account only those things
which are measurable in monetary terms ( bus fare, rental of tempo, loading-unloading
charges of vegetables, purchase price of vegetables) and not intangibles such as
inconvenience generated due to getting up early morning to go for the market, waiting
for the bus, use of negotiation skills in buying and selling, etc.
 Accounting Cost concept
 This concept requires all assets to be recorded at their cost of acquisition which includes the
purchase price, transportation and installation cost. Assets will not be recorded at the market
price. This is followed while buying new assets.
 However, for old assets, cost will mean original cost from which depreciation is subtracted.
There may be certain assets for which the business entity may not pay anything, thus it will not
appear in the books of accounts of the company.
 For example, a new machinery is brought for Rs. 1,00,000 while Rs. 2,000 is spent on
transportation and Rs. 8000 on installation. The machine henceforth will be recorded at Rs.
1,10,000 for the first year which will be its cost of acquisition.
 Henceforth, when the machine is old its cost will be original cost less depreciation. So it will be
shown at Rs. 99,000 ( Rs. 1,10,000 – Rs 11,000 depreciation say).
 This concept has certain drawbacks such as assets for which nothing is paid like brand,
reputation, etc. will not be recorded.
 Dual aspect concept
 Each financial transaction has two aspects. The recognition of these two aspects is known
as dual aspect analysis.
 For example, if goods are purchased with cash then there are two aspects of this
transaction – one goods are received and cash is paid (in case of cash transaction) or a
liability is incurred (in case of credit purchase transaction).
 This can be expressed with the following fundamental accounting equation.
 Assets = Liabilities + Owner’s Equity
 In case of double entry system, the total amount debited is always equals the total amount
of credit. Thus, it follows that at any point of time, owner’s equity and liabilities for any
accounting entity will be equal to the assets owned by that entity.
 Accounting period concept
 Though it is assumed that business will continue for a long period of time,
it is necessary to keep accounts in such a manner that the results are known
at frequent intervals.
 Entire life of the firm is divided into time intervals for ascertaining the
profits/losses are known as accounting periods.
 Accounting period is of two types – Financial Year (1st April to 31st
March) and calendar year (1st Jan to 31st Dec).
 For taxation purposes, financial year is adopted as prescribed by the
government. Companies with shares listed on stock exchange publish their
results quarterly.
 Objectivity Concept
 Objectivity implies reliability which also means that the accuracy of the
information reported can be verified.
 It states that accounting will be recorded on the basis of objective
evidence (invoices, receipts, bank statement etc.)
 This means that accounting records will initiate from the source
documents and the information is based on fact and not personal
judgments.
 For example, while recording sales - invoice, order of client, etc. are the
source documents. The accounting entry can later be verified with the
help of these evidences.
 Matching concept
 This concept is based on accounting period concept. Revenues earned during an accounting
period are compared with the expenditure incurred during the same period for earning that
revenue.
 Matching concept application consists of two steps:
 Identify all expenses incurred during the accounting period
 Measure the expenses and match expenses against revenues earned.
 The determination of profit of a particular accounting period is essentially a process of
matching the revenue recognized during the period and the expenses incurred during the
same period to obtain the revenue.
 For example, if a salesman’s commission is paid in January,2013, for sales target achieved
in November, 2012, that commission should be taken as the cost for sales in November
2012. On account of this concept, adjustments are made for all outstanding expenses,
accrued income, etc. while preparing periodic reports.
Accrual Concept
 Accrual accounting encompasses all the techniques accountants use to apply the
matching rule.
 In accrual accounting, incomes and expenses should be recognized as and when they
are earned and incurred, irrespective of whether the money is received or paid for it.
 There are two methods of accounting:
 Cash basis of accounting
 Accrual basis of accounting
 Cash basis accounting is accomplished in the following ways:
 Revenue reported when cash is received
 Expense is reported when cash is paid
 It does not match the revenues with the expenses.
 Accrual accounting is accomplished in the following ways:
 Recording revenues when they are earned
 Recording expenses when they are incurred
 For example, if goods have been delivered to customer Mr. X worth Rs. 20,000
on 4th March 2013. But Mr. X did not pay immediately but gave a commitment to
pay the amount on 15th April 2013. As per accrual concept, this will be considered
a sale in the financial year of 2012-2013, though the amount will be received in
financial year 2013-14.
 The Companies Act requires all financial statements to be made as per accrual
concept. Non company entities may follow accrual or cash method of accounting.
 Realization concept
 According to realization concept revenue is recognized when sale is made. Sale is
considered to be made at the point when the property in goods passes to the buyer and he
becomes legally liable to pay.
 This implies that revenue is generally realized when goods are delivered or services are
rendered.
 The rationale is that delivery validates a claim against the customer.
 Revenue does not have to be received in cash. There should not be any uncertainty
related to the collectability of the revenue in future.
 For example, if there are negotiations going on between the client and the firm, this will
not be recorded as revenue. However, if the goods are delivered and cash is received or a
commitment is received from the client regarding the payment in future, it will be
recorded and recognized as revenue.
 Important accounting conventions
 Convention of conservatism
 As per this convention, all prospective losses should be considered and all prospective
gains should be ignored.
 It means that revenues or gains should be recognized only when they are realized in the
form of cash or assets.
 This convention will understate rather than overstate the profits.
 It requires provision to be made for all known liabilities, expenses and losses.
 Examples– valuing the stock in trade at market price or cost price whichever is less,
making the provision for doubtful debts on debtors in anticipation of actual bad debts etc.
Convention of full disclosure
 Information relating to the economic affairs of the enterprise should be completely
disclosed which are of material interest to the user.
 Due to separation of ownership and management this convention becomes all the more
important.
 Proforma of Balance sheet and Profit and Loss Statement are prescribed by Companies
Act. These are designed to make disclosure of all material facts compulsory.
 There has to be a sufficient disclosure of information which is of material interest to
proprietors, present and potential creditors and investors.
 The practice of appending notes relative various facts or items which do not find place in
accounting statements is in pursuance to the convention of full disclosure of material facts.
 Example: Contingent liabilities appearing as a note.
Convention of consistency
 The convention of consistency specifies that the accounting practices and policies followed
by business organizations should remain consistent over the years.
 Consistency is also advisable so that the comparison of accounting figures over time is
meaningful.
 It leads to reliability and fair presentation of accounts.
Convention of materiality
 If the knowledge of any item would influence decision of investors, then it would be
considered as material.
 An item is also considered material if its omission or misstatement could distort the
financial statement such that it influences the economic decision of users taken on the basis
of financial statement.
 This convention helps prevent records to be unnecessarily being over burden with minute
details.
 If an item is material in nature, then a separate disclosure is required for the same.
 Difference between Concepts and Conventions

Basis Accounting Concepts Accounting

Conventions
Established By Law Guidelines based upon
customs or usage

Biasness No space for personal Biasness in adoption

biasness in the adoption

Uniformity Uniform adoption No uniform adoption