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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
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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
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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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