Introduction to Accounting
Recording, classifying, summarising business transactions and interpreting the results thereof.
It is an information system whose purpose is to identify , collect, measure and communicate information about economic units to those with an interest in the units financial affairs. To permit judgment and decisions by users of the information.
Functions of Accounting
Systematic record of business transactions.
Protecting the property of the business.
Communicating results to the interested parties.
Compliance with legal requirements.
Advantages of Accounting
Evidence in court.
Settlement of taxation liability.
Sale of business.
Assistance to various parties.
Limitations of Accounting
Records only monetary transactions.
Effect of price level changes not considered.
Historical in nature.
Personal bias of Accountant affects the accounting statements.
Generally Accepted Accounting Principles
In order to make the accounting work uniform and comparable, a set of Guidelines called as the “GAAP” have been developed by professional bodies.
ICWAI:- Institute of cost & work Accountants of India.
ICAI:- Institute of Charted Accountants of India.
AICPA:- American Institute of Certified Public Accountants.
It means the amount (in terms of money or assets having money value) which the proprietor has invested in the firm or can claim from the firm.
For the firm Capital is a liability towards the owner. It is so because the owner is treated to be separate from the business.
If an amount is due to be paid to any other person or institution other than the owner it is called as a liability.
Liabilities can be classified into following:
Long-term liabilities: These are those liabilities which are payable after a long term, (generally more than one year).
Example; Long-term loans, debentures etc.
Current liabilities: These are those liabilities which are payable in near future ,(generally within one year).
Example; creditors, bank overdrafts, bills payable, short-term loans, etc.
Any physical thing or right owned that has a money value is an asset. In other words, an asset is that expenditure which results in acquiring of some property or benefit of a lasting nature.
Assets can be classified as:
Fixed Assets: Fixed assets are those assets which are purchased for the purpose of operating the business and not for resale. E.g. land, building, machinery, furniture, etc.
Current Asset: Current assets are those assets of the business which are kept for short term for converting into cash. E.g. debtors, bills receivables, bank balance, etc.
A person who owes money to the firm, generally on account of credit sale of goods is called a debtor.
For e.g. When goods are sold to a person on credit that person pays the price in future. He is called a debtor because he owes the amount to the firm.
The term receivables is used for the amount that is receivable by the firm, other than the amount due from the debtors.
A person to whom the firm owes money is called a creditor. For e.g. Mr. M is creditor of the firm when goods are purchased on credit from him.
The term payables is used for the amount payable by the firm, other than the amount due to creditors.
It is the amount of money or the value of goods which the proprietor takes for his domestic or personal use.
It means the amount which, as a result of operations, is added to the capital. “Revenue is an inflow of assets which results in an increase in owner’s equity. E.g. sale of goods, rent income.
It is the amount spent in order to produce and sell the goods and services which produce the revenue. “Expenses is the cost of the use of things or services for the purpose of generating revenue”. E.g. payment of salary, wages, rent, etc.
It is the profit earned during a period of time. In other words, the difference between revenue and expense is called income.
Gross profit is the difference between sales revenue or the proceeds of goods sold and services rendered over its direct cost.
Net Profit is the profit made after allowing for all expenses. In case, expenses are more than revenue, it is Net Loss.
Cost of goods sold:-
It is the direct cost of the goods or services sold.
Expenditure is the amount spent or liability incurred for the value received. Expenditure may be classified into:
Revenue Expenditure: It is the amount that is incurred in current activities to purchase goods and services which are consumed during the period.
Capital Expenditure: It is the amount that is incurred in purchasing assets which will give benefit extending over a number of accounting periods.
When customers are allowed any type of reduction in the prices of goods by the businessman, that is called discount.
It is a term used to describe profit of an irregular nature, e.g. capital gains.
Transactions involving immediate receipt or payment of cash.
Transactions in which the receipt/payment of cash is postponed to a future date is called as a credit transaction.
It means assets minus outside liabilities.
Profits of a business increase net worth where as losses reduce the net worth of a business.
It means total trading income from cash sales and credit sales.
Any written document in support of a business transaction is called a voucher. It is an objective evidence in support of a transaction.