MOD 1 PLAN

Course Code and Title: MBAC518 Accounting concepts and analysis

Module Number and Title: 1 GAAP and accounting standards

Planned Hours: 06 hrs

Learning Objectives At the end of this module student should be able to: Explain the meaning of GAAP & Accounting concepts and importance (L2) Compile various types of Journal entries (L5) Formulate & Compare various ledger accounts (L4)

LESSON SCHEDULE MOD 1

Class No. Portion covered per hour 1. Introduction Accountancy, Accounting. 2. Meaning of Accountancy, book keeping. 3. Accounting concepts and conventions. 4. Double entry system of book keeping, introduction to journals. 5. Passing the various journal entries. 6. Introduction to Ledger and passing journal entries to ledger.

Assignment 1:- On passing various journal entries.

Review Questions

1.Explain accounting concepts and conventions. 2.Explain rules of debit and credit of three kinds of accounts under English system. 3.Problem on passing the journal entries.

ACCOUNTING

ACCOUNTING

Accounting is the art of recording, classifying and summarizing in a 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.

BOOK KEEPING
Book keeping defined as an art as well as science of recording all the financial transactions and dealings systematically in a set of books. It involves clerical work of entering financial data in journals and ledgers.

Journals are the books in which the transaction are recorded in a chronological order every day. Ledger is a book which contains the classified accounts relating to the things , persons, incomes, and expenses of a business entity.

ACCOUNTING FUNCTIONS
1. Recording: Recording is the basic function of Accounting. Events and transactions, which are of financial character, either fully or partly, are recorded in an orderly manner in books of accounts. The transactions are recorded in a journal, as and when they happen or occur. 2. Classifying: All similar transactions are grouped and posted in one book, which is called a Ledger. The objective of classification is to find a summary of the entries of same nature at one place. This book Ledger contains different nature of accounts. For example, there may be separate heads of accounts such as Salaries, Traveling Expenses, Repairs, Printing and Stationery etc.

3. Summarizing: When posting is completed in the ledger, totals are made for debit and credit side in each head of account and final balance, let it be it debit or credit, is arrived. The individual accounts find a place in a summarized manner, which is called Trial Balance. Income statement (Trading and Profit and Loss account) and Balance Sheet are prepared from the Trial Balance.
4. Presentation: Presentation means setting out the financial data in a systematic manner in the statements so as to facilitate their interpretation.

5. Analysis and Interprets: This is the final and important function of accounting. It means arriving at the meaning of our understanding of the financial statements for enabling the users to form their judgments for decision making.

USERS OF ACCOUNTING
1. Creditors: Creditors are interested to know whether they would get their dues, as assured by the firm. 2. Shareholders: In case of joint stock company, shareholders know the financial results of the company only through the annual statements, sent by the company to them. 3.Government: Government is interested to know the amount of tax it can collect, based on the financial statements of the organizations. Required financial data can be collected for compiling statistics.

CONTI..
4. Investors: Those who are interested to invest their money can make their decisions based on the study of the financial statements. Potential shareholders take lot of interest in the financial statements for their decisions in investing. 5. Lenders: Those who want to lend money, financial institutions or banks, are interested to read to make their decisions, before lending. After lending, they would be able to assure themselves about the safety of the funds, after a careful analysis of the statements.

6. Management: Management is the basic user of accounts. They understand the financial results and position of the firm from the accounts. They are interested in every aspect of accounting as their uses are diverse for different purposes.

BRANCHES OF ACCOUNTING
1. Financial Accounting: Financial accounting is the original form of accounting. It is mainly limited to the preparation of financial statements i.e. Profit and Loss Account and Balance Sheet. Here, the preparation is made on historical basis i.e. after the happening of the event.

2. Cost Accounting:
Cost Accounting has developed on account of the limitations of the Financial Accounting. Cost Accounting is, basically, concerned with the estimation of costs, in advance, and their subsequent detailed analysis for the purpose of control.

3. Management Accounting:
Management Accounting is accounting for the Management. Management wants information to discharge its functions in forecasting, budgeting, control over costs and strategy formation. Persons engaged in management are not always familiar with accounts. Management Accounting helps them in the creation of the policy 4. Mechanical accounting : Mechanical accounting is the recent development in accounting. It makes use of electronic data processing systems such as computers, laptops etc for the purpose of accounting. Today, an accountant must have the operational knowledge of these machines.

ACCOUNTING PROCESS
Financial transactions

Entering into journals & day books

Postings to ledger accounts

Taking out trial balance

Preparing Trading, P & L account and B/S

NEED FOR ACCOUNTING

Creating records Creating evidence Decision making Control Prevention of frauds and losses Determination of tax liability Legal requirements

Comparative study of business

Sanctioning of loans Planning

OBJECTIVES / ADVANTAGES OF ACCOUNTING

To maintain the record of the financial transactions of a business neatly and accurately. To ascertain the profit and loss made by the business during an accounting period. To present the true and fair view of the financial position of a business (i.e value of assets , liabilities and capital). To know the amount due at each of the creditors. To know the amount receivables from each of the debtors.

CONTI..

To compute the tax liability to the government.

To supply the required financial information to the management for decision making and controlling the affairs of the business. To offer expert advice on the financial aspects of the business.
To facilitate inter-period comparison of the financial trends of the business. To enable the comparison of performances of different firms.

LIMITATIONS OF ACCOUNTING

Profit shown in Financial Accounting is not fully exact Financial Accounting does not indicate what the business will realize, if sold

Financial Accounting does not tell the whole story Accounting statements may be drawn up differently All assets are not shown in financial statements Manipulation

Impact of Inflation

SYSTEMS OF ACCOUNTING
There are two systems of accounting for recording transactionsSingle Entry System and Double Entry System. 1. Single Entry System: Single entry system sounds economical, but it is, really, costly. In fact, it is rather a lack of system. This system is adopted where the business is run on cash basis only. It is not a scientific system and final accounts can not be easily prepared on the basis of this system. Small businesses and organizations that do not require ascertainment of profit, follow this system. 2. Double Entry System: The only real system is the double entry system. Double Entry System recognizes the fundamental factor that every transactions doublesided affair. According to this system, for every debit, there is a corresponding credit. This system is universally followed in accounting. On the basis of this system, accuracy of accounting can be maintained and arithmetical correctness can easily be established. Financial statements i.e. Profit and Loss Account and Balance Sheet are easily prepared, once the concern follows the double entry system of accounting.

BASIC TERMS OF ACCOUNTING

Entity: It may be a business unit or a department of a business or a group of related businesses. A business may be regarded as an independent entity. Capital: Capital is the amount, initially, invested while commencing the business. Capital need not be in the form of cash, alone. Capital can be introduced in the form of goods or any type of assets. Capital = Assets Liabilities

Drawings: Drawings is the amount withdrawn from the business by the proprietor or partner in a partnership firm. Drawings can be, again, cash or goods. Drawings are reduced from the capital amount.

Turnover: The total amount of sales during a particular period is called Turnover. The turnover can be cash sales or credit sales or both.
Discount: The allowance or concession granted to a retailer by the wholesaler/dealer is called discount. It is of two types: (A) Trade discount (B) Cash discount 1. Trade discount: Trade discount is allowed by a dealer to the retailer or buyer to induce him to buy more from him. Trade discount is offered both on cash and credit sales. no entry is made for trade discount, separately, in books of accounts of the seller and buyer

2. Cash discount: Cash discount is allowed by the seller to encourage the customer to make early payment, before the credit period expires. Entry for cash discount is, invariably, made in the accounts of the seller as well as buyer.

Debtor or Book Debt: The person to whom goods or services are sold on credit is called Debtor. The amount due from the debtor is called Book Debt. Another name is Accounts Receivable. Creditor: The person from whom goods or services are purchased on credit, is called creditor till the payment due to him is made.

Bad Debts: Amount that cannot be recovered from a debtor is called Bad Debt. Bad debts result in reduction of profits of the firm. Equity: All claims against the assets of the firm are called as Equity. The claim of the outsiders is called creditors equity or liabilities. The claim of the proprietor is called owners equity or capital.
Assets: Assets are the properties owned by the firm. Examples of Assets are Building, Plant and Machinery, Debtors, Bills Receivable, Goodwill, Preliminary expenses etc.

Assets can be divided into two categoriesfixed assets and current assets.

Fixed assets: are the assets owned by the firm for the purpose of conducting business, using the fixed assets. Examples are Building, Plant and Machinery etc Current assets: are those assets, which are held by the firm for the purpose of carrying on business. Current assets, normally, change their form. Examples are Cash, Bank, Finished Goods, Debtors, Bills Receivable, Accrued income etc.

Liabilities: Liabilities are the amounts that are payable. Advances or loans received have to be repaid. Till date of repayment, they are liabilities. Goods or services when bought on credit are shown as creditors, which are also liabilities. Capital invested by proprietor or partner is also a liability as the business firm is independent from them, so far as accounting is concerned. This is the reason why capital is shown on the liability side in the balance sheet. Capital, loan, outstanding expenses and bills payable are some of the examples of liabilities.

Debit: The entry made on the debit side of the account is called Debit. The abridged form is Dr.
Credit: The entry made on the credit side of the account is called Credit. The abridged form is Cr. Entry: The record made in the books of accounts in respect of a transaction or an event is called an entry. Books of Account: The registers or books maintained by any business firm or institution for recording the business transactions are called Books of Account.

Solvent : Solvent is a person whose assets are equal to or more than that of his liabilities.
Insolvent: insolvent is a person whose assets are not sufficient to make payment of his liabilities in full. Goods: the term goods includes all commodities , articles or products which are purchased for the purpose of resale. Purchases: the term purchases means goods purchased for resale. Such purchases may be for cash or on credit. But any goods purchased for factory use or office use are not regarded as purchases. It may be treated as an asset or expenses.

Sales : means goods sold for cash or on credit. But it does not include sale of any asset. If the cloth merchant sells cloth from his stock then it is treated as sales.
Stock : there will remain some goods unsold at any given date. The value of such goods on that date is known as stock.

STATE WHETHER THE FOLLOWING STATEMENTS ARE TRUE OR FALSE

(i) Joint stock companies, by law, have to keep the books of accounts to meet the requirements of Companies Act.

(ii) Capital is decreased by profits and increased by losses.

(iii) The chief objective of maintaining books of accounts is to ascertain the operational results and find the financial position of the organization.

(iv) The term Book-keeping means recording the transactions and maintaining books of accounts in the prescribed manner, regularly, according to certain rules and regulations.
(v) Accounting is a science as well as an art.

(vi) Book-keeping and accounting are synonymous (inter-changeable) terms.

(vii) Accounting records transactions, which are of financial character.

(viii) Accounting is useful to record business transactions only.

(ix) Income statement (Trading and Profit and Loss account) and Balance Sheet are prepared from the Trial Balance. (x) Transactions that cannot be expressed in terms of money are also recorded in accounting books.

(xi) Balance Sheet serves as a barometer for ascertaining the financial health of a business.
(xii) Financial statements of a joint stock company are not accessible to the public. (xiii) Analysis and interpretation of financial statements are complementary to each other.

ANSWERS
(i) True (ii) False (iii) True (iv) True (v) True (vi) False (vii) True (viii) False (ix) True (x) False (xi) True (xii) False (xiii) True