accounts _module 1 introduction to accountancy
DESCRIPTION
Account unit 1TRANSCRIPT
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Module 1
Introduction to Accountancy
Accounting for Managers
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Module 1(7 Hours)
Principle of double entry book keeping:
Importance & scope of accounting, Accounting concepts, conventions, GAAPS & accounting standards. Accounting equations, Users of accounting statements.
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Definition And Meaning Of Accounting
The American Institute of Certified Public Accountants (1941) defines ‘Accounting is the art of recording, classifying and summarising in significant
manner and in terms of money, transactions and events which are in part, at least of a financial character and
interpreting the results thereof.
Accounting As An Information Cycle
Input Process Output
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Accountancy, Accounting And Book-keeping
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IMPORTANCE OF ACCOUNTING
1. Facilitates to replace memory and comply with
legal requirements
2. Facilitates to ascertain net result of operations
and also to know the financial position
3. Facilitates the users to take effective decisions
4. It is helpful in a comparative study
5. It assists the management
6. It facilitates to have control over assets
7. It facilitates the settlement of tax liability
8. It facilitates raising of loans
9. It acts as a legal evidence
10. It facilitates ascertainment of value of business.
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SCOPE OF ACCOUNTING
• Identifying• Measuring• Recording• Classifying• Summarising• Analysing• Interpreting• Communication
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Accounting Principles
Accounting principles are a body of doctrines commonly associated with the theory and procedures and as a guide for selection of conventions or procedures where alternatives exist.
These principles are classified into two categories: 1. Accounting Concepts
2. Accounting Conventions
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TYPES OF ACCOUNTING
Accounting
Financial Accounting
Cost Accounting
Management Accounting
Social Responsibility
Accounting
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ACCOUNTING CONCEPTS
Concept means a general notion, a theory or belief held by person or group of persons. The term ‘concepts’ includes those basic assumptions or conditions upon which the science of accounting is based.
1. Business entity concept2. Money measurement concept3. Cost concept4. Going concern concept5. Dual aspect concept6. Realisation concept7. Accrual concept
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ACCOUNTING CONVENTIONS
A convention means a custom or an established usage formed or adopted by an agreement. The term ‘conventions’ includes those customs or traditions which guide the accountant while preparing the accounting statements. 1. Convention of consistency2. Convention of full disclosure3. Convention of conservatism4. Convention of materiality
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Accounting StandardsThe Accounting standards bring uniformity in the preparation and presentation of financial statements and aids in comparison of different financial statements of companies in the same or different industries.
Procedure for framing Accounting Standards
• The International Accounting Standards are issued by the IASC • These Standards are received by ICAI assigned to ASB• The Accounting standards are issued under the authority of the council of ICAI.So far the ASB of ICAI has issued 28 Accounting standards as shown below:
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Accounting
Standard Title Mandatory for
Accounting period beginning on or after
AS-1 Disclosure of Accounting Policies 1.4.1991
AS-2(Revised)
Valuation of inventories 1.4.1999
AS-3(Revised)
Cash Flow Statements 1.4.2001
AS-4(Revised)
Contingencies and Events occurring after Balance Sheet Date
1.4.1995
AS-5(Revised)
Net Profit or Loss, prior period items and changes in Accounting policies
1.4.1996
AS-6(Revised)
Depreciation Accounting 1.4.1995
AS-7(Revised)
Accounting for construction contracts 1.4.2003
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AS-8 Accounting for Research and Development
1.4.1991
AS-9 Revenue Recognition 1.4.1991
AS-10 Accounting of Fixed Assets 1.4.1991
AS-11(Revised) Accounting for the effect of changes in foreign exchange rates
1.4.1995
AS-12 Accounting for Government Grants 1.4.1994
AS-13 Accounting for Investments 1.4.1995
AS-14 Accounting for Amalgamations 1.4.1994
AS-15 Accounting for retirement benefits in the financial statements of employers
1.4.1995
AS-16 Borrowing costs 1.4.2000
AS-17 Segment reporting 1.4.2001
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AS-18 Related Party Disclosures 1.4.2001
AS-19 Leases 1.4.2001
AS-20 Consolidated Financial Statements 1.4.2001
AS-21 Earnings per share 1.4.2001
AS-22 Accounting for taxes on income 1.4.2001
AS-23 Accounting for investments in consolidated finance statements
1.4.2002
AS-24 Discounting operations 1.4.2004
AS-25 Interim financial reporting 1.4.2002
AS-26 Intangible assets 1.4.2003
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AS-27 Financial reporting of interest in joint ventures 1.4.2002
AS-28 Impairment of Assets 1.4.2004
AS-29 Provisions, Contingent Liabilities and Contingent Assets
1-4-2004
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Accounting equationsMeaning:The statement of equality between debits and credits is known as accounting equations. In other words ,statement regarding equality of assets with its corresponding liability is termed as accounting equations.
Constituents of accounting equations:
Assets: valuable things owned by the business is termed as assets. Cost of acquiring , installation and development o0f these in the value of assets is regular feature.
Liabilities: proprietor’s and creditors claim against business is termed as liabilities. Creditors for goods loan, expenses and proprietor's claim is termed as liability . In case of accounting equation the term liability is restricted to outsider’s claim.
Capital: proprietor’s claim towards business is known as capital. It includes cash introduced as capital + reserve + income + profit + interest on capital – drawings – losses – interest on drawings – expenses.
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Accounting equationsCapitals + liabilitiesCapitals + liabilities ↓Proprietors' capitals + liabilities ↓LoansBank overdraft CreditorsBills payableOutstanding expensesIncome received in advance
AssetsAssets ↓Properties and assets ↓BuildingsLandMachineryFurnitureStock in tradeDebtorsBills receivableBank cash
Every business every time has some assets and liabilities. These are always equal. So balance sheet showing the assets and liabilities is always in the form
of an equation:
Assets = Capital + Liabilities
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Accounting Equations An accounting equation is a statement of equality between the resources
and the sources that finance the resources.Resources = Sources of finances-------------- (1)
Resources means Assets & Sources of finances means Equity. If we substitute the above synonyms, the equation will be as under:
Total Assets = Total Equities------------ (2)Equities means borrowed funds, which may be funds borrowed from internal sources and those that can be from external sources. These are also called
internal equities and external equities. In that case the above equation may also be written as under:
Assets = Internal Equity + External Equity-----------(3) It is a known fact that Internal Equity means Capital and External Equity means Liability. So the above equation can be written as Assets = Capital + Liabilities---------------(4)
ORAssets – Liabilities = Capital--------------(5)
ORAssets – Capital = Liabilities------------(6)
Equations 4,5,6 are accounting equations
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USERS OF FINANCIAL STATEMENTS 1. Creditors (short term & long term) 2. Investors (present & potential) 3. Management 4. Employees 5. Tax Authorities 6. Customers 7. Government and their agencies 8. Public
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Double Entry System Of Book-keeping
The main principle involved in Double Entry system is the duality transactions i.e., for every debit, there is an equal and opposite credit.
Total Debits = Total Credits
Personal Accounts Real Accounts
Nominal Accounts
Names of individuals, firms, companies and
other entities
Expenses, losses and incomes and gains
Assets And Liabilities
Principles Of Double Entry System
Classifications of accounts under double entry system
1. Traditional classification
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Assets: Resources, things or rights or value owned by a businessLiability: Claims of others against a business / Assets owned by the business to
the outsidersExpenses:An expenditure in return for which a benefit is received.Loss: An expenditure in return for which no benefit is received.Income: Refers to the earnings of a business for the expenses incurredProfit: Refers to the earnings of a business for no expenses incurred or
proportionally meagre expenses incurred
Type of Account Debit Credit
Personal Account The receiver The giver
Real Account What comes in What goes out
Nominal Account All expenses and losses All incomes and gains
Rules for debit and credit under traditional classification
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2. Classification based on accounting equation
Rules of debit and credit for classification based on accounting equation
Type of Account Debit Credit
Asset Accounts Increase Decrease
Liabilities Accounts Decrease Increase
Capital Accounts Decrease Increase
Revenue Accounts Decrease Increase
Expenditure Accounts Increase Decrease
Asset Accounts
Liabilities Accounts
Capital Accounts
Revenue Accounts
Expenditure Accounts
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End of the Module