Unit 6 : Definition, Scope and Accounting Standards
JAIIB-AFB-MOD-B- Definition, Scope and Accounting Standards Unit – 6 : Definition, Scope and Accounting Standards Accounting is often called the language of business. Book-keeping and Accounting not one and the same – Book-keeping means recording the business Transactions. Accountancy means compilation of accounts in such a way that one is in a position to know the state of affairs of the business. Accounting is language of business. Communicate the result of business operations and its other aspects. Accounting is an 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 financial character and interpreting the results thereof. Definition & scope of book-keeping Book keeping is merely recording the business transactions in books and ledgers Accountancy is wider concept: compilation of accounts in such a way that one is in a position to understand state of affairs of business. Users of financial statements are income tax department, S.T. department, shareholders, investors, banks and FIs and so on. It is in the interest of all that financial statements reflect true and fair view of state of affairs of a business entity. Accountancy involves: Systematic classification of business transactions in terms of money and financial character. Summarizing : trial balance and b/s Interpreting the financial transactions. Financial Statements: - Manufacturing Accounting. - Trading Account - Profit & Loss Account - Balance Sheet - Funds Flow (Changes in Financial Position) - Cash Flow Statement Purpose of accountancy To keep a systematic record To ascertain the results of operations To ascertain financial position of business. To facilitate rational decision making To satisfy requirement of law and useful in many respects. Basic objective of Accountancy- to provide information to various users. Income Tax Authorities Sales Tax Authorities Share holders Investors Business Associates Directors Banks for lending purpose Purpose: - To know the Profit & Loss - To know the Financial position & Liabilities position - To interpret the Financial Position Objectives: - To keep a systematic record - To ascertain the results of the operations - To ascertain the financial position of business - To facilitate rational decision-making - To satisfy the requirements of law Advantages: - For Economic Decisions - To provide information to Investors - To compare the financial position Types of Accounting: - Financial Accounting - Cost Accounting - Management Accounting - Social Responsibility Accounting - Human Resource Accounting - Inflation Accounting
Concepts of Accountancy Cost Concept: Business transactions are recorded in books at cost price. Fixed assets are kept at cost of purchase and not at their market price. Every transaction is recorded with present value and not any future value. Unrealized gains are ignored. Cost of an asset that has long but limited life is systematically reduced by a process called depreciation. But such depreciation has no relation to market value of asset.
Money Measurement Concept: Every transaction is measured in terms of money. Viz production/sales/wages etc all converted to money. Inflation or deflation not included in value of any asset.
Business Entity Concept : This concept separates the entity of proprietor from the business transaction. Capital contributed by the owner is liability for business because business is different from owner. Any money withdrawn by prop. Is drawings. Profit is liability and loss is an asset. All entries are kept from the point of view of business and not from owner. An enterprise is economic unit separate from owner. Realisation Concept: This concept tells us when revenue is treated as realised or earned. It is treated as realized on the date when property in goods passes to buyer and he becomes legally liable to pay. No future income is considered. Goods sold on approval will be included in sales but on cost only.
Going Concern Concept: Business is a going concern and transactions are recorded accordingly. If an expense is incurred and utility is consumed during the year, then it is treated as an expense otherwise it is recorded as an asset. Reserves and provisions are created for any future liability. Deferred revenue expenditure is written off over number of years. Why loss is shown under assets side ?
Dual Aspect Concept :Every transaction has double effect. Accounting equation: assets= cap+ liability. Accounting Period Concept Business will run through long period. Hence accounts of each period is recorded. Results of operations can be known precisely only after business ceases to operate and entire assets are sold and entire liabilities paid. But one is interested in knowing periodically operating results of business say yearly or half yearly or quarterly. Hence all the expenses or income during this accounting period has to be taken into consideration irrespective of whether they are realised in cash or paid in cash.
Accounting for full disclosure Disclosure of material facts.( material and immaterial fact is matter of judgment) Contingent liability Market value of investments. Convention or Principles of Conservatism All possible losses to be taken into consideration and anticipated profits to be ignored. Creation of provision for doubtful debts. Value of stock Convention of consistency: method of depreciation.
Double Entry System Scientific system: Every transaction has two aspects. Crux of accountancy is to find out which two accounts are effected and which is to be debited and which is to be credited.
Journal Journal records each and every record. But to find out a transaction effecting a person, expenses account or asset one has to turnover all pages of journal . Hence transactions are posted from journal to particular pages of ledger. Hence journal contain a column L.F Cash Book Cash book keeps records of all cash transactions i.e cash receipts and cash payments. All receipts are recorded on right side and all payments on left side. Cash book is book of original entry.
Record keeping basis Recording: Journalising as and when transaction takes place. Journal is book of original or first entry. Classifying: all entries in journal or subsidiary books are posted to ledger account (posting) to find out at a glance the total effect of all such transactions. Ledger is book of secondary entry. Summarising: last stage is to prepare the trial balance and final accounts with a view to ascertain the profit or loss during particular period. It is customary to use to and by while posting ledger. Balancing an account means equalizing two sides. If debit side of account exceed credit side, difference is put on credit side and it is said to have debit balance and vice versa..
Adjusting and closing entries: While preparing trading and profit and loss account all expenses and income for the full period are to be taken into consideration. If expenses have been incurred but not paid during that period , liabilities for unpaid amount should be created before the accounts can be said to show the actual profit and loss. All expenses and income should properly be adjusted through accounting entries. Trial balance is prepared from the books of accounts of organization. Final accounts are the final process of accounting. Once the trial balance is prepared the books are half way closed. Now all adjusting entries passed at the time of preparing the final accounts have dual effect i.e both debit and credit. Hence all adjusting entries passed after Trial balance drawn will have two effects. One in either trading and profit and loss account and other in Balance sheet or one in trading account and other in Profit and loss account.
Some examples: Closing stock adjustment: Will be shown in asset side of balance sheet and will be shown in credit side of trading account. Goods lost by fire: Will be shown in credit side of trading account. Will be shown on debit side of profit and loss account.
Outstanding expenses: Will be shown in debit side of profit and loss account. Will be shown in liabilities side of balance sheet. Prepaid expenses: Prepaid expenses shown in Asset side ( Dr Pre paid expenses) and Credit P&L Expenditure as they do not pertain to current year. Depreciation: It is fall in value of asset due to use or passage of time. Depreciation Dr. To asset account
Accounting standards: Institute of chartered accountants of India recognising the need to harmonise the diverse accounting policies and practices constituted an accounting standards board in the year 1977. ASB formulate accounting standards so that council of ICAI may mandate such standards. Day book and GLB posting in a bank The general ledger balance is virtually trial balance of the bank on a particular day. It reflect the balances of all accounts. While preparing balance sheet and profit and loss account of branch of bank the GLB balances are taken. Balance sheet of all branches together when consolidated becomes the balance sheet of bank. Generally accepted accounting principles The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information. GAAP are imposed on companies so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes. GAAP cover such things as revenue recognition, balance sheet item classification. Companies are expected to follow GAAP rules when reporting their financial data via financial statements. That said, keep in mind that GAAP is only a set of standards. What is important that its underlying objectives are followed in true perspective. Some of the important Accounting Standards are : - AS-1 - Disclosure of Accounting Policies AS-2 - Valuation of Inventories AS-3 - Cash Flow Statements AS-4 - Contingencies and events occurring after balance sheet AS- 5 - Changes in Accounting Policies AS-6 - Depreciation Accounting etc.