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Accounting Conceptsand Procedures:An Introduction
Chapter 1
coplete
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Accounting
ManagersManagers
OwnersOwners
ManagersManagers
OwnersOwners
InvestorsInvestors
GovernmentGovernment
InvestorsInvestors
GovernmentGovernment
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Sole ProprietorshipSole Proprietorship
Sole ProprietorshipSole Proprietorship
PartnershipPartnership
PartnershipPartnership
CorporationCorporation
CorporationCorporation
Categories of BusinessOrganizations
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Tpes of BusinessOrganizations
OwnershipOwnership Business owned by one person.Business owned by one person.
FormationFormation Easy to orm.Easy to orm.
Owner !ould lose personalOwner !ould lose personal
assets to meet obligationsassets to meet obligationso business.o business."iability"iability
ClosingClosingEnds with death o ownerEnds with death o owner
or !losing o business.or !losing o business.
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Tpes of BusinessOrganizations
Business owned byBusiness owned by
more than one person.more than one person.
OwnershipOwnership
Easy to orm.Easy to orm.FormationFormation
Ends with death o partnerEnds with death o partner
or e#it o a partner.or e#it o a partner.ClosingClosing
Partners !ould lose personalPartners !ould lose personal
assets to meet obligationsassets to meet obligationso partnership.o partnership."iability"iability
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Tpes of BusinessOrganizations
Business owned by sto!$holders.Business owned by sto!$holders.OwnershipOwnership
More dii!ult to orm.More dii!ult to orm.FormationFormation
Can !ontinue indeinitely.Can !ontinue indeinitely.ClosingClosing
"imited personal ris$."imited personal ris$.
Sto!$holders% loss is limited toSto!$holders% loss is limited totheir investment in the !ompany.their investment in the !ompany."iability"iability
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ClassifingBusiness Organizations
ServiceService businesses provide servi!es.businesses provide servi!es.ServiceService businesses provide servi!es.businesses provide servi!es.
MerchandiseMerchandisebusinesses sell produ!ts.businesses sell produ!ts.MerchandiseMerchandisebusinesses sell produ!ts.businesses sell produ!ts.
ManufacturingManufacturingbusinesses ma$e produ!ts.businesses ma$e produ!ts.ManufacturingManufacturingbusinesses ma$e produ!ts.businesses ma$e produ!ts.
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%e&nition of Accounting
&!!ounting is the pro!ess that...&!!ounting is the pro!ess that...
analy'es(analy'es(
re!ords(re!ords(
!lassiies(!lassiies(
summari'es(summari'es(
reports( and...reports( and...interprets inan!ial inormation.interprets inan!ial inormation.
&!!ounting is the pro!ess that...&!!ounting is the pro!ess that...
analy'es(analy'es(
re!ords(re!ords(
!lassiies(!lassiies(
summari'es(summari'es(
reports( and...reports( and...
interprets inan!ial inormation.interprets inan!ial inormation.
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The Accounting Infor(ation
)ste(
Inputs Processing Outputs *sers
Business Accounting +inancial In,estors
transactions principles state(ents lenders
and e,ents and procedures and reports(anagers
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*sers of AccountingInfor(ation
In,estor
/enders
)ecurit Analsts and Ad,iser
0anage(ent
(ploees and Trade *nions
)uppliers and Other Trade Creditors
Custo(erso,ern(ent and egulator Agencies
The Pulic
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0a5or Branches of Accounting
) Financial Accounting
) +or e6ternal users
) 7istorical infor(ation
) )tandardised for(at
) /a8s and con,entions
) )u((arised
) Inco(e state(ent9Balance sheet9 Casho8 state(ent9
Accounting policies
Management Accounting
For internal users
Future-oriented
Flexible format
Context-specific More detailed
Product cost statement;Standard costs; Budgets;
Variances; Performancereports
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Accounting 0easure(ent
) Accounting records the e;ect of econo(ice,ents
) Internal e,ents) 6ternal e,ents: transactions
* e6change
* one-8a transfer
) Other e6ternal e,ents* no e6change or transfer
Chapter 1
t
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enera ccepteAccounting Principles
+hese are the pro!edures and guidelines+hese are the pro!edures and guidelinesthat must be ollowed duringthat must be ollowed during
the a!!ounting pro!ess.the a!!ounting pro!ess.
+hese are the pro!edures and guidelines+hese are the pro!edures and guidelinesthat must be ollowed duringthat must be ollowed during
the a!!ounting pro!ess.the a!!ounting pro!ess.
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Institutions that InuenceIndian AAP
%epart(ent of Co(pan A;airs
The )ecurities and 6change Board of India
The Institute of Chartered Accountants of India
The Inco(e Ta6 Authorities
eser,e Ban@ of India
Co(ptroller and Auditor eneral of India
The International Accounting )tandards Board
The International +ederation of Accountants
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Preparing +inancial)tate(ents
Shah +radersShah +radersBalan!e SheetBalan!e Sheet
September ,-( --#September ,-( --#
&ssets&ssets
CashCash /s. 0(,--/s. 0(,--
+otal+otal /s. 2,(3--/s. 2,(3--
&ssets&ssets
CashCash /s. 0(,--/s. 0(,--
+otal+otal /s. 2,(3--/s. 2,(3--
"iabilities and Owner%s E1uity"iabilities and Owner%s E1uity
&!!ounts Payable /s. 3--&!!ounts Payable /s. 3--
Owner%s E1uityOwner%s E1uity
Mr. Shah%s CapitalMr. Shah%s Capital
2,(---2,(---
+otal+otal /s. 2,(3--/s. 2,(3--
"iabilities and Owner%s E1uity"iabilities and Owner%s E1uity&!!ounts Payable /s. 3--&!!ounts Payable /s. 3--
Owner%s E1uityOwner%s E1uity
Mr. Shah%s CapitalMr. Shah%s Capital 2,(---2,(---
+otal+otal /s. 2,(3--/s. 2,(3--
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Balance )heet elatedConcepts
) Accounting ntit Concepts:
A usiness is treated as an accounting
entit 8hich is distinct and separate fro( itso8ners and fro( other &r(s=
ithout the entit assu(ption the personal&nancial a;airs of the o8ners and the
acti,ities of other enterprises 8ould e(ingled the transactions of the usinessand no (eaningful &nancial infor(ationaout the usiness can e produced=
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) oing Concern Concept:
*nless there is sustantial e,idence to the
contrar it is assu(ed that the usinessis continuing enterprise or a goingconcern=
The assu(ption is ased on the fact thatthe (a5orit usiness enterprise dosur,i,e in spite of (an usiness failures=
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) 0onetar *nit Concept:
In &nancial accounting a record is(ade onl of these facts that can ee6pressed in (onetar ter(s=
Because (one pro,ides co((ondeno(inator=
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) Cost Concepts:
+or purpose of accounting all
transactions are recorded at their(onetar cost of ac?uisition=
i=e= the price paid for ac?uiring
the assets or for recei,ing theser,ices pro,ided=
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) Conser,atis( Concept:
Anticipate no pro&t and pro,ide forall possile losses=
i=e= pro,ision for ad dets
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The Accounting ?uation
&ssets are the&ssets are the
items owned byitems owned by
the business.the business.
&ssets are the&ssets are the
items owned byitems owned by
the business.the business.
E1uities areE1uities are
the !laimsthe !laims
against theagainst the
assets.assets.
E1uities areE1uities are
the !laimsthe !laims
against theagainst the
assets.assets.
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The Accounting ?uation
"iabilities are"iabilities are
the !reditor%sthe !reditor%s
e1uity.e1uity.
"iabilities are"iabilities are
the !reditor%sthe !reditor%s
e1uity.e1uity.
Owner%s e1uityOwner%s e1uity
is the rightsis the rights
o ownership.o ownership.
Owner%s e1uityOwner%s e1uity
is the rightsis the rights
o ownership.o ownership.
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The Accounting ?uation
&ssets&ssets
D "iabilities"iabilities
EOwner%sOwner%s
E1uityE1uity
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Assets = = = de&ned
Proale future econo(ic ene&ts
otained or controlled a particularentit as a result of past transactionsor e,ents=
Or
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Tpes of Assets
) Current Assets: Cash )hort-Ter(In,est(ents Accounts ecei,aleIn,entor and Prepaid 6penses
) Property, Plant & Equipment
) Long-Term Investments) Intangible Assets
) t!er Assets
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/iailities = = = de&ned
enerall = = = a(ounts usinesses to third
parties=
TYPES
Current: Accounts Paable! Accrued "iabilities!
#otes Paable
Long-Term: "ong-$erm #otes Paable! Mortgages
Paable! "ong-$erm Accrued "iabilities
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O8nerFs ?uit
) esidual interest of o8ners
) 6a(ples
* )hare capital* )hare pre(iu(
* e,enues
* 6penses
* %i,idends
* etained pro&t
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The Accounting ?uation
&. &ugust 04 Shah invested&. &ugust 04 Shah invested
/s.3(--- in !ash and /s.0-- o oi!e/s.3(--- in !ash and /s.0-- o oi!ee1uipment into the business.e1uipment into the business.
&. &ugust 04 Shah invested&. &ugust 04 Shah invested
/s.3(--- in !ash and /s.0-- o oi!e/s.3(--- in !ash and /s.0-- o oi!ee1uipment into the business.e1uipment into the business.
B. &ugust 54 Shah buysB. &ugust 54 Shah buys
oi!e e1uipment or !ash /s.5--.oi!e e1uipment or !ash /s.5--.
B. &ugust 54 Shah buysB. &ugust 54 Shah buys
oi!e e1uipment or !ash /s.5--.oi!e e1uipment or !ash /s.5--.
C. &ugust ,-4 Buys additionalC. &ugust ,-4 Buys additional
oi!e e1uipment on a!!ount /s.6--.oi!e e1uipment on a!!ount /s.6--.
C. &ugust ,-4 Buys additionalC. &ugust ,-4 Buys additional
oi!e e1uipment on a!!ount /s.6--.oi!e e1uipment on a!!ount /s.6--.
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The Accounting ?uation
Rs.8,200 = RS. 8,200Rs.8,200 = RS. 8,200
a7a7 CashCash 8/s.3(---8/s.3(--- 8/s.3(0--8/s.3(0--
a7 E1uipmenta7 E1uipment 88 0-- 0--
b7b7 CashCash ** 5-- 5--
E1uipmentE1uipment 88 5-- 5--
E1uipmentE1uipment 88 6-- 6-- 88 6--6--
a7a7 CashCash 8/s.3(---8/s.3(--- 8/s.3(0--8/s.3(0--
a7 E1uipmenta7 E1uipment 88 0-- 0--
b7b7 CashCash ** 5-- 5--
E1uipmentE1uipment 88 5-- 5--
E1uipmentE1uipment
88
6-- 6--
88
6--6--
AssetsAssets == LiabilitiesLiabilities ++OwnersOwners
EquityEquity
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)hift in Assets
+he ma$eup o the assets has+he ma$eup o the assets has!hanged( but the total o the!hanged( but the total o the
assets remains the same.assets remains the same.
+he ma$eup o the assets has+he ma$eup o the assets has!hanged( but the total o the!hanged( but the total o the
assets remains the same.assets remains the same.
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The Balance )heet
+he balan!e sheet shows the !ompany%s+he balan!e sheet shows the !ompany%s
inan!ial position as o a parti!ular date.inan!ial position as o a parti!ular date.
+he balan!e sheet shows the !ompany%s+he balan!e sheet shows the !ompany%s
inan!ial position as o a parti!ular date.inan!ial position as o a parti!ular date.
Company nameCompany nameCompany nameCompany name
9ame o the statement9ame o the statement9ame o the statement9ame o the statement
:ate:ate:ate:ate
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The Balance )heet
Mr. Shah +radersMr. Shah +raders
Balan!e SheetBalan!e Sheet
&ugust ,2( --#&ugust ,2( --#
&ssets&ssets
CashCash /s. /s. ;(2--;(2--
E1uipmentE1uipment (2-- (2--
&ssets&ssets
CashCash /s. /s. ;(2--;(2--
E1uipmentE1uipment
(2-- (2--
"iabilities and Owner%s E1uity"iabilities and Owner%s E1uity
&!!ounts Payable /s. 6--&!!ounts Payable /s. 6--
Owner%s E1uityOwner%s E1uity
Mr. Shah%s CapitalMr. Shah%s Capital 3(0--3(0--
+otal+otal /s.0(-- /s.0(--
"iabilities and Owner%s E1uity"iabilities and Owner%s E1uity
&!!ounts Payable /s. 6--&!!ounts Payable /s. 6--
Owner%s E1uityOwner%s E1uity
Mr. Shah%s CapitalMr. Shah%s Capital 3(0--3(0--
+otal+otal /s.0(-- /s.0(--
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The Accounting?uation 6panded
&n e#panded a!!ounting e1uation&n e#panded a!!ounting e1uation
in!ludes the ollowing4in!ludes the ollowing4
/evenues
E#pensesE#penses
=ithdrawals=ithdrawals
&n e#panded a!!ounting e1uation&n e#panded a!!ounting e1uation
in!ludes the ollowing4in!ludes the ollowing4
/evenues
E#pensesE#penses
=ithdrawals=ithdrawals
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The Accounting?uation 6panded
/evenues/evenues/evenues/evenues9et in!ome or9et in!ome or
9et loss9et loss
9et in!ome or9et in!ome or
9et loss9et lossD EE#pensesE#pensesE#pensesE#penses
h i i
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The Accounting ?uation6panded
BeginningBeginning
!apital!apital
PLUSPLUS
&dditional&dditionalinvestmentinvestment
BeginningBeginning
!apital!apital
PLUSPLUS
&dditional&dditionalinvestmentinvestment
9et in!ome9et in!ome9et in!ome9et in!ome =ithdrawals=ithdrawals=ithdrawals=ithdrawalsG D
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The Accounting ?uation6panded
:. September 2>,-4 Shah provided:. September 2>,-4 Shah provided
legal servi!es or !ash( /s.,(---.legal servi!es or !ash( /s.,(---.
:. September 2>,-4 Shah provided:. September 2>,-4 Shah provided
legal servi!es or !ash( /s.,(---.legal servi!es or !ash( /s.,(---.
E. September 2>,-4 Provided legalE. September 2>,-4 Provided legal
servi!es on a!!ount( /s.6(---.servi!es on a!!ount( /s.6(---.E. September 2>,-4 Provided legalE. September 2>,-4 Provided legal
servi!es on a!!ount( /s.6(---.servi!es on a!!ount( /s.6(---.
F. September 2>,-4 /e!eived /s.3--F. September 2>,-4 /e!eived /s.3--
!ash as partial payment rom previous!ash as partial payment rom previousservi!es perormed on a!!ount.servi!es perormed on a!!ount.
F. September 2>,-4 /e!eived /s.3--F. September 2>,-4 /e!eived /s.3--
!ash as partial payment rom previous!ash as partial payment rom previousservi!es perormed on a!!ount.servi!es perormed on a!!ount.
G. September 2>,- paid salaries e#pense( /s.;--.G. September 2>,- paid salaries e#pense( /s.;--.G. September 2>,- paid salaries e#pense( /s.;--.G. September 2>,- paid salaries e#pense( /s.;--.
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The Accounting ?uation6panded
?. September 2>,-4 Paid rent e#pense( /s.3--.?. September 2>,-4 Paid rent e#pense( /s.3--.?. September 2>,-4 Paid rent e#pense( /s.3--.?. September 2>,-4 Paid rent e#pense( /s.3--.
I. September 2>,-4 In!urred advertisingI. September 2>,-4 In!urred advertising
e#penses o /s.,--( to be paid ne#t month.e#penses o /s.,--( to be paid ne#t month.
I. September 2>,-4 In!urred advertisingI. September 2>,-4 In!urred advertising
e#penses o /s.,--( to be paid ne#t month.e#penses o /s.,--( to be paid ne#t month.
@. September 2>,-4 Shah@. September 2>,-4 Shahwithdrew /s.-- or personal use.withdrew /s.-- or personal use.
@. September 2>,-4 Shah@. September 2>,-4 Shahwithdrew /s.-- or personal use.withdrew /s.-- or personal use.
P i +i i l
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Preparing +inancial)tate(ents
Mr. Shah +radersMr. Shah +radersIn!ome StatementIn!ome Statement
For Month Ended September ,-( --#For Month Ended September ,-( --#
/evenue4/evenue4 "egal ees"egal ees /s.3(--- /s.3(---
Operating e#penses4Operating e#penses4
Salaries e#penseSalaries e#pense /s. ;--/s. ;--
/ent e#pense/ent e#pense 3--3-- &dvertising e#pense&dvertising e#pense ,--,-- 2(;--2(;--
9et in!ome9et in!ome /s.A(6--/s.A(6--
/evenue4/evenue4 "egal ees"egal ees /s.3(--- /s.3(---
Operating e#penses4Operating e#penses4
Salaries e#penseSalaries e#pense /s. ;--/s. ;--
/ent e#pense/ent e#pense 3--3-- &dvertising e#pense&dvertising e#pense ,--,-- 2(;--2(;--
9et in!ome9et in!ome /s.A(6--/s.A(6--
P i +i i l
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Preparing +inancial)tate(entsShah +radersShah +raders
Statement o Owner%s E1uityStatement o Owner%s E1uity
For Month Ended September ,-( --#For Month Ended September ,-( --#
Shah%s Capital( Sept. 2( --#Shah%s Capital( Sept. 2( --# /s. 3(0--/s. 3(0--9et In!ome or Sept.9et In!ome or Sept. /s. A(6--/s. A(6--
"ess =ithdrawals or Sept."ess =ithdrawals or Sept. -- --
In!rease in CapitalIn!rease in Capital A(-- A(--
Shah%s Capital( Sept. ,-( --#Shah%s Capital( Sept. ,-( --# /s. 2,(---/s. 2,(---
Shah%s Capital( Sept. 2( --#Shah%s Capital( Sept. 2( --# /s. 3(0--/s. 3(0--9et In!ome or Sept.9et In!ome or Sept. /s. A(6--/s. A(6--
"ess =ithdrawals or Sept."ess =ithdrawals or Sept. -- --
In!rease in CapitalIn!rease in Capital A(-- A(--
Shah%s Capital( Sept. ,-( --#Shah%s Capital( Sept. ,-( --# /s. 2,(---/s. 2,(---
P &t d / )t t t
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Pro&t and /oss )tate(entelated Concepts
) Accounting Period Concepts:
Hor(all the pro&t loss state(entor inco(e state(ent is prepared fora period of one ear=
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) ealization Concept:
ealization concept re,ol,es around thedeter(ination of the point of ti(e 8hen re,enues
are earned=The concept follo8ed is that re,enue is realised
8hen goods and ser,ices produced a usinessenterprise are transferred to a custo(er either for
cash or so(e other asset or for a pro(ise to pacash or other assets in future=
e,enue is earned onl 8hen the goods aretransferred or 8hen ser,ices are rendered=
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) 0atching 6penses 8ith e,enue:
This principles re?uires recordinge6penses in the sa(e accountingperiod in 8hich the re,enue 8ereearned as a result of the e6penses=
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) Accrual Concept:
*nder this concept the transactions are
recorded as soon as the ta@e placeirrespecti,e of the ti(ings of receipt orpa(ent of (one thereto=
This concept is necessar to ensure that the&nancial state(ents of an period reecte;ect of all rele,ant transactions that too@place in that period=