accounting process and principles

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Accounting Process

&Principles


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ACCOUNTING DEFINED

Accounting is concerned with the qualification and

interpretation of past and prospective economic

transactions. It helps in preparing the financial

statements of a business, which are a fundamentalsource of financial information.

Accounting can rightly be termed as the language of

the business, through it, the results of businessoperations can be communicated to various

interested parties of the business viz, proprietors,

creditors, investors, governments, etc.

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Above all

accounting is a

base of financialmanagements

decisions.


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Definition

Accounting is the art of recording, classifying and

summarizing in a significant manner and in terms of

money, transaction and event which are a part of

financial character and interpreting the resultthereon

American Institute of Certified Public Accountants

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ACCOUNTING CHARACTERISTICS

Language of business

This is a service activity. Its function is toprovide quantitative information, offinancial performance which are intended

to be useful in making economicdecision.

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Objectives of Accounting System

1. Systematic recording of transactions

2. To process the information efficiently

3. To obtain reports quickly

4. To ensure a high degree of accuracy

5. Ascertainment of the financial positions of the business

6. Providing information to users for rational decision-

making.

7. To know the solvency position

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ACCOUNTING CYCLE

1. Analyze transaction

2. Journalize original entries

3. Post journal entries toledger

4. Balances of Ledger

transfers to Trail Balance

6. Prepare financial

statements

5. Journalize and post

closing entries

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Functions of Accounting

Recording This is the basic function of accounting. It ensures that all

business truncations of a financial character are correctly

recorded in a chronological order. The recording is done in the

book popularly known asJournal

Classifying Classification involves systematic analysis of the recoded data

with the objective of grouping transaction or entries of one nature

at one place. This work is done in the book popularly known as

Ledger

Summarizing This is concerned with presenting the classified data in a readily

understandable manner to both internal as well as external users

of accounting information. It involves preparation of the following

statements- Trail Balance, Profit and loss account, Balance sheet.

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BRANCHES OF ACCOUNTING

Financial accounting

it is mainly concerned with recoding, classifying,

summarizing, the all financial transactions or event. it

provide the information of profit and loss of a business

and as well it also helps to get the information offinancial position composition of asset and liabilities, to

all internal users and external users.

Management accounting

It provides the necessary information to themanagement for their functions like planning,

organizing, controlling, directing etc. after obtaining the

financial results through Financial accounting. So this

branch serves to internal users only.

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Limitations of Accounting

A common man presumes that an income statement shows thecorrect income or loss of the business enterprise and a balance

sheet portrays a perfectly true and fair picture of financial standing

of that enterprise. It must be recognized that accounting as a

language has its own limitations. So some of following points can

be taken as its limitations-

1. Different accounting policies for the treatment of same item add to

the probability of manipulations, through various laws, different

accounting standards.

2. A financial statement only considers those assets which can be

expressed in only monetary terms. The factors which may be

relevant in assessing the worth of the enterprise dont find place in

the accounts as they cannot be measured in terms of money, like

loyalty and skill of the personnel which may be most valuable asset

for any business.10


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3. Balance sheet shows the positions of the business on the day of

its preparation and not on the future date while the users of the

account are interested in knowing the position of the business in

the near future and also in long run on behalf of past

performance.

4. Certain accounting estimates depends on the personal judgments

of the accountant, e.g. provisions for doubtful debts, methods of

depreciation adopted, recording certain expenditure as revenue

or capital expenses, selections of methods of valuation of stock-

in- hand, period of writing off intangible assets, and list is quite

long.

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Difference between Accounting and Book keeping

1. Book keeping is a process concerned with the

recording of transactions only, but accounting is a

process deals with summarizing of recorded

transactions.

2. Book keeping is a base for accounting, but

accounting deemed as a language of the business.

3. Book keeping has no sub-filed, but accounting hasseveral sub- fields like financial accounting,

management accounting etc.

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4. Financial position of the business cannot beascertained through Book keeping records, but

accounting is way from which financial position and

financial results of a business can be ascertained.

5. From the record of book keeping, managerial

decisions cannot be taken, but accounting provides

all kind of information like profit or loss status and

financial position composition of assets andliabilities, so through this lots of managerial

decision can be taken.

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Information from Accounting

InformationInformation

Nonquantitative information Quantitative information

Accounting

information

Non-accounting

information

Operating

information

Financial

Accounting

Management

Accounting

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USERS OF INFORMATION

Owners

Management

Creditors

Government

Prospective owners and prospective

creditors

Employees Public

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ACCOUNTING PRINCIPLES


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Accounting principles can be subdivided intotwo categories:

y Accounting Concepts.

y Accounting Conventions.

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y

The term concept is used to indicate thenecessary assumptions and conditions uponwhich accounting is based.

The term convention is used to signifycustoms and traditions as a guide to the

presentation of accounting statements.

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Various types of Accounting Concepts

Business Entity Concept

Money Measurement Concept

Cost Concept

Going Concern Concept

Dual Aspect Concept

Realization Concept

Accounting Period Concept

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Accounting Conventions

Convention of Consistency

Convention of Disclosure

Convention of Conservation

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Business Entity Concept

Business is treated as a separate entity orunit apart from its owner and others.

All the transactions of the business arerecorded in the books of business from thepoint of view of the business as an entity

and even th

e owner is treated as a creditorto the extent of his/her capital.

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Money Measurement Concept

In accounting, we record only those

transactions which are expressed in terms

of money.

In other words, a fact which can not be

expressed in monetary terms, is not

recorded in the books of accounts.

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Cost Concept

Transactions are entered in the books ofaccounts at the amount actually involved.

Suppose a company purchases a car forRs.1,50,000/- the real value of which isRs.2,00,000/-, the purchase will be recordedas Rs.1,50,000/- and not any more.

This is one of the most important conceptand it prevents arbitrary values being put ontransactions.

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Going Concern Concept

It is persuaded that the business will

exists for a long time and transactions

are recorded from this point of view.

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Dual Aspect Concept

Each transaction has two aspects, that

is, the receiving benefit by one party

and the giving benefit by the other.

This principle is the core base of

accountancy.

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Dual Aspect Concept continue

For example, if there is a purchase ofRs 10,000 cash in business, then twoaccounts will come; one is purchaseaccount and next is cash account.

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Dual Aspect Concept continue

Thus, the dual aspect can be expressedas under

Capital + Liabilities = Assets

or

Capital = Assets Liabilities

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Realization Concept

Accounting is a historical record of

transactions. It records what has happened.

It does not anticipate events.

This is of great important in preventing

business firms from inflating their profits by

recording sales and income that are likely to

accrue. 28


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Accounting Period Concept

In accounting carries the financialresult of a certain period, generallyhere we take twelve month period isnormally adopted for this purpose.

This time interval is called accountingperiod.

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Accounting Conventions

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Convention of Consistency

In order to enable the management to drawimportant conclusions regarding the working

of the company over a few years, it isessential that accounting practices andmethods remain unchanged from oneaccounting period to another.

The comparison of one accounting period withanother is only possible when the conventionof consistency is followed.

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Convention of Disclosure

This principle implies that accounts must behonestly prepared and all material

information must be disclosed therein.

The contents of Balance Sheet and Profitand Loss Account are prescribed by law.

These are designed to make disclosure ofall material facts compulsory.

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Convention of Conservation

Financial statements are always drawnup on a conservative basis.

Here we assume to maintain some partof profit towards some reserves andprovision for facing somecontingencies in the future.

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