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Accountants
Financial
Event analysis & Users
Statements
recording
The major distinction between financial and
management accounting is the users of the
information.
Financial accounting serves external users.
Management accounting serves internal users, such
as top executives, management,
and administrators within
organizations.
The primary questions about an organizations
success that decision makers want to know are:
Shareholders equity
Paid-in Retained
capital earnings
Sections of the balance sheet:
Assets - resources of the firm that are
expected to increase or cause future cash
flows (everything the firm owns)
Liabilities - obligations of the firm to
outsiders or claims against its assets by
outsiders (debts of the firm)
Owners Equity - the residual interest in, or
remaining claims against, the firms assets
after deducting liabilities (rights of the
owners)
The balance sheet equation:
1- 18
Different categories of users need different
kinds of information for making decisions.
These users can be divided into :
External Users.
These are the persons who manage the
business, i.e. management at the top,
middle, and lower levels. Their requirements
of information are different because they
make different types of decisions.
The top level is more concerned with
planning; the middle level is concerned
equally with planning and control; and the
lower level is concerned more with
controlling operations. Information is
supplied on different aspects, e.g. cash
resources, sales estimates, results of
operations, financial position, etc.
All persons other than internal users come
in the group of external users. External
users can be divided into two groups:
those having direct interest; and
those having indirect interest
in a business organization.
The main sources of information for external
users are annual reports of business
organizations, which state the financial
position and performance and give the
auditors report, directors report and other
information.
Investors and creditors are the external
users having direct interest. Tax authorities,
regulatory agencies, customers, labour
unions, trade associations, stock exchanges,
investors, etc are indirectly interested in the
companys financial strength, its ability to
meet short-term and long-term obligations,
its future earning power, etc for making
various decisions.
These are economic resources of an
enterprise that can be usefully expressed in
monetary terms. Assets are things of value
used by the business in its operations.
Fixed Assets
Current Assets
Fixed Assets are assets held on a long-
term basis.
e.g. Land, Building, Machinery, Plant,
Furniture and Fixtures, etc.
Current Assets are assets held on a
short-term basis.
e.g. Debtors, Bills receivable,
Stock(Inventory), Cash and Bank
balances, etc.
These are obligations or debts that the
enterprise must pay in money or services at
some time in the future.
Long-term liabilities
Short-term liabilities
Long-term liabilities are those that are
usually payable after a period of one year.
Accounting Conventions.
Accounting principles can be subdivided into
two categories:
Accounting Conventions.
Accounting Concepts
Accounting Conventions
The term concept is used to connote
accounting postulates, that is necessary
assumptions and conditions upon which
accounting is based. The term convention
is used to signify customs and traditions as
a guide to the presentation of accounting
statements.
Accounting Concepts
Business Entity Concept
Money Measurement Concept
Cost Concept
Going Concern Concept
Dual Aspect Concept
Realization Concept
Accounting Period Concept
Accounting Conventions
Convention of Consistency
Convention of Disclosure
Convention of Conservation
Accounting Concepts
The term concept is used to connote
accounting postulates, that is necessary
assumptions and conditions upon which
accounting is based.
Business is treated as a separate entity or
unit apart from its owner and others. All the
transactions of the business are recorded in
the books of business from the point of view
of the business as an entity and even the
owner is treated as a creditor to the extent
of his/her capital.
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.
Transactions are entered in the books of
accounts at the amount actually involved.
Suppose a company purchases a car for
Rs.1,50,000/- the real value of which is
Rs.2,00,000/-, the purchase will be recorded
as Rs.1,50,000/- and not any more. This is
one of the most important concept and it
prevents arbitrary values being put on
transactions.
It is persuaded that the business will exists
for a long time and transactions are
recorded from this point of view.
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 of accountancy.
For example, the proprietor of a business
starts his business with Cash Rs.1,00,000/-,
Machinery of Rs.50,000/- and Building of
Rs.30,000/-, then this fact is recorded at
two places. That is Assets account (Cash,
Machinery & Building) and Capital accounts.
The capital of the business is equal to the
assets of the business.
Thus, the dual aspect can be expressed as
under
PERSONAL IMPERSONAL
ACCOUNTS ACCOUNTS
REAL NOMINAL
ACCOUNTS ACCOUNTS
Accounts in the name of persons are known as
personal accounts.
Eg: Babu A/C,
Babu & Co. A/C,
Outstanding Salaries A/C, etc.
These are accounts of assets or properties. Assets
may be tangible or intangible. Real accounts are
impersonal which are tangible or intangible in
nature.
Eg:- Cash a/c, Building a/c, etc are Real
Accounts related to things which we can
feel, see and touch.
Goodwill a/c, Patent a/c, etc Real Accounts
which are of intangible in nature.
These accounts are impersonal, but invisible and
intangible. Nominal accounts are related to those
things which we can feel, but can not see and
touch. All expenses and losses and all incomes
and gains fall in this category.
Eg:- Salaries A/C, Rent A/C, Wages A/C, Interest
Received A/C, Commission Received A/C,
Discount A/C, etc.
Each accounts have two sides the left side and
the right side. In accounting, the left side of an
account is called the Debit Side and the right
side of an account is called the Credit Side. The
entries made on the left side of an account is
called a Debit Entry and the entries made on the
right side of an account is called a Credit Entry.