Chapter 1.
Introduction to Accounting
According to the American Institute of Certified Public Accountants (AAICPA), "Accounting is the art of recording, classifying and summarizing in a significant manner and in term of money transactions or event which are in part at least of financial character and interpreting the results.
Following point of this definition are :-
1) Economic event: An economic event is known as a happening of consequences to a business organisation which consists of transactions and which are measurable in monetary terms.
2) Identification: It means determining what transaction to record i.e., to identify events which to be recorded.
Example: The value of human resources is important but none of these are recorded in books of account.
3) Measurement: it mean qualification of business transaction into financial term by using monetary unit, via rupee and paisa.
4) Recording: Once the economic event identified and measured in financial terms, these are recorded in book of account in monetary term in chronological order.
5) Communication: The economic event are identified, measured and recorded in order that the pertinent information is generated and communicated in a certain form to management and other internal and external users.
6)Organisation: Organisation refers to a business enterprise, weather for profit or not-for-profit motive. It can be a sole-proprietary concern, partnership firm, cooperative society & company.
Types of Account
1) Financial Accounting: Assists keeping a systematic record of financial transaction the preparation and presentation of financial report in order to arrive at a measure of organisational success and financial soundness.
2) Cost Accounting: Assists in analyzing the expenditure for ascertaining the cost of various products manufactured.
3) Management Accounting: Deals with the provision of necessary accounting information to people with the organisation to enable them in decision making, planning and controlling business operation.
Q. What are the limitation of accounting?
Ans.(a) Influenced by personal judgement:-
accounting is as yet as exact science and accounting has to exercise his personal judgement in respect of various item.
(b) Based on accounting concept and convention:
Accounting are prepared on the basic of a accounting concept and convention.
(c) Omission of qualitative information:-
Accounts contain only those information which can be expressed in term of money.
(d) Based on Historical Cost:-
Accounts are prepared on the basics of historical cost and as such figure given in financial statements do not shoe the efforts of changes in price level.
(e) Affected by window dressing:-
Window dressing refers to the practice of manipulating accounts, so that the financial statement may disclose a more favorable position than the actual position.
(f) Unsuitable for forecasting:-
Financial Accounts are only a record of past event. As such the financial analysis based on past event may not be much use for forecasting.
Q. What is accounting cycle?
Ans. Recording, classifying and summarizing are termed as accounting cycle or process of accounting.
IMPORTANT TERM IN ACCOUNTING:
1. Entity: Entity means a reality that has a definite individual existence.
Business entity: A specifically identifiable business enterprise.
For example: Super Bazaar, Hire Jewelers, ITC Limited, etc.
2. Transaction:A event involving some value between two or more entities. It can be a purchase of goods, receipt of money, payment to a creditor, incurring expenses, etc.
3. Assets: It gives benefit in future. Assets are items of value used by the business in its operations.
For example: , Super Bazar owns a fleet of trucks.
It is classified into four types:
[a] Current assets: They cab be converted into cash withen 1 year. [Debtors,cash]
[b] Fixed Assets: They give benefit more than one year. [land & building, furniture, etc]
[c] Tangible assets: Tangible assets are those assets which can be touched and seen.
[d] Intangible assets: Intangible assets are those assets which can only be felt.
for example goodwill
4. Liabilities: Liabilities are obligations or debts that an enterprise has to pay at some time in the future.
It are of two types:
[a] Long-term liabilities: Long-term liabilities are those that are usually payable after a period of one year, for example, a term loan from a financial institution or debentures (bonds) issued by a company.
[b]Short-term liabilities: Short-term liabilities are obligations that are payable within a period of one year, for example, creditors, bills payable, bank overdraft.
5. Goods: It refers to the products in which the business unit is dealing.
It is purchased for re-sale purpose.
For example: A furniture dealer purchase of chairs and tables is termed as goods.
6. Drawings: Withdrawal of money and/or goods by the owner from the business for personal use is known as drawings. Drawings reduces the investment of the owners.
7. Purchases: Purchases are total amount of goods procured by a business it can be in cash or credit.
8. Stock: Stock (inventory) is a measure of something on hand-goods, spares and other items in a business. It is called Stock in hand.
9. Outstanding expenses: It is a amount of expense which is due/yet to be paid. It is a current liability.
10. Pre-paid expenses: It is an expense which is already paid. It is a current assets.
11. Bank Overdraft: It is a facility given by a bank to a businessman to withdraw amount more than available in his account. It is a current liability.
12. Bad-Debt: It is a portion/amount which is not paid by the debtors. The person is known as "Insolvent".
For ex- Rs. 100,000 due from debtors
Rs. 60,000 Paid
-------------------------------
Rs. 40,000 = Bad debts.
Q. What are the Qualitative Characteristics of Accounting Information?
Ans. Following are the Qualitative Characteristics:
[a] Reliability:
Reliability means the users must be able to depend on the information. The reliability of accounting information is determined by the degree of correspondence between what the information conveys about the transactions or events that have occurred, measured and displayed.
[b] Relevance:
To be relevant, information must be available in time, must help in prediction and feedback, and must influence the decisions of users by :
(a) helping them form prediction about the outcomes of past, present or future events; and/or
(b) confirming or correcting their past evaluations.
[c] Understand ability:
Understand-ability means decision-makers must interpret accounting information in the same sense as it is prepared and conveyed to them. The qualities that distinguish between good and bad communication in a message are fundamental to the understand-ability of the message.
[d] Comparability:
The financial information is relevant and reliable at a particular time, in a particular circumstance or for a particular reporting entity.
Introduction to Accounting
According to the American Institute of Certified Public Accountants (AAICPA), "Accounting is the art of recording, classifying and summarizing in a significant manner and in term of money transactions or event which are in part at least of financial character and interpreting the results.
Following point of this definition are :-
1) Economic event: An economic event is known as a happening of consequences to a business organisation which consists of transactions and which are measurable in monetary terms.
2) Identification: It means determining what transaction to record i.e., to identify events which to be recorded.
Example: The value of human resources is important but none of these are recorded in books of account.
3) Measurement: it mean qualification of business transaction into financial term by using monetary unit, via rupee and paisa.
4) Recording: Once the economic event identified and measured in financial terms, these are recorded in book of account in monetary term in chronological order.
5) Communication: The economic event are identified, measured and recorded in order that the pertinent information is generated and communicated in a certain form to management and other internal and external users.
6)Organisation: Organisation refers to a business enterprise, weather for profit or not-for-profit motive. It can be a sole-proprietary concern, partnership firm, cooperative society & company.
Types of Account
1) Financial Accounting: Assists keeping a systematic record of financial transaction the preparation and presentation of financial report in order to arrive at a measure of organisational success and financial soundness.
2) Cost Accounting: Assists in analyzing the expenditure for ascertaining the cost of various products manufactured.
3) Management Accounting: Deals with the provision of necessary accounting information to people with the organisation to enable them in decision making, planning and controlling business operation.
Q. What are the limitation of accounting?
Ans.(a) Influenced by personal judgement:-
accounting is as yet as exact science and accounting has to exercise his personal judgement in respect of various item.
(b) Based on accounting concept and convention:
Accounting are prepared on the basic of a accounting concept and convention.
(c) Omission of qualitative information:-
Accounts contain only those information which can be expressed in term of money.
(d) Based on Historical Cost:-
Accounts are prepared on the basics of historical cost and as such figure given in financial statements do not shoe the efforts of changes in price level.
(e) Affected by window dressing:-
Window dressing refers to the practice of manipulating accounts, so that the financial statement may disclose a more favorable position than the actual position.
(f) Unsuitable for forecasting:-
Financial Accounts are only a record of past event. As such the financial analysis based on past event may not be much use for forecasting.
Q. What is accounting cycle?
Ans. Recording, classifying and summarizing are termed as accounting cycle or process of accounting.
IMPORTANT TERM IN ACCOUNTING:
1. Entity: Entity means a reality that has a definite individual existence.
Business entity: A specifically identifiable business enterprise.
For example: Super Bazaar, Hire Jewelers, ITC Limited, etc.
2. Transaction:A event involving some value between two or more entities. It can be a purchase of goods, receipt of money, payment to a creditor, incurring expenses, etc.
3. Assets: It gives benefit in future. Assets are items of value used by the business in its operations.
For example: , Super Bazar owns a fleet of trucks.
It is classified into four types:
[a] Current assets: They cab be converted into cash withen 1 year. [Debtors,cash]
[b] Fixed Assets: They give benefit more than one year. [land & building, furniture, etc]
[c] Tangible assets: Tangible assets are those assets which can be touched and seen.
[d] Intangible assets: Intangible assets are those assets which can only be felt.
for example goodwill
4. Liabilities: Liabilities are obligations or debts that an enterprise has to pay at some time in the future.
It are of two types:
[a] Long-term liabilities: Long-term liabilities are those that are usually payable after a period of one year, for example, a term loan from a financial institution or debentures (bonds) issued by a company.
[b]Short-term liabilities: Short-term liabilities are obligations that are payable within a period of one year, for example, creditors, bills payable, bank overdraft.
5. Goods: It refers to the products in which the business unit is dealing.
It is purchased for re-sale purpose.
For example: A furniture dealer purchase of chairs and tables is termed as goods.
6. Drawings: Withdrawal of money and/or goods by the owner from the business for personal use is known as drawings. Drawings reduces the investment of the owners.
7. Purchases: Purchases are total amount of goods procured by a business it can be in cash or credit.
8. Stock: Stock (inventory) is a measure of something on hand-goods, spares and other items in a business. It is called Stock in hand.
9. Outstanding expenses: It is a amount of expense which is due/yet to be paid. It is a current liability.
10. Pre-paid expenses: It is an expense which is already paid. It is a current assets.
11. Bank Overdraft: It is a facility given by a bank to a businessman to withdraw amount more than available in his account. It is a current liability.
12. Bad-Debt: It is a portion/amount which is not paid by the debtors. The person is known as "Insolvent".
For ex- Rs. 100,000 due from debtors
Rs. 60,000 Paid
-------------------------------
Rs. 40,000 = Bad debts.
Q. What are the Qualitative Characteristics of Accounting Information?
Ans. Following are the Qualitative Characteristics:
[a] Reliability:
Reliability means the users must be able to depend on the information. The reliability of accounting information is determined by the degree of correspondence between what the information conveys about the transactions or events that have occurred, measured and displayed.
[b] Relevance:
To be relevant, information must be available in time, must help in prediction and feedback, and must influence the decisions of users by :
(a) helping them form prediction about the outcomes of past, present or future events; and/or
(b) confirming or correcting their past evaluations.
[c] Understand ability:
Understand-ability means decision-makers must interpret accounting information in the same sense as it is prepared and conveyed to them. The qualities that distinguish between good and bad communication in a message are fundamental to the understand-ability of the message.
[d] Comparability:
The financial information is relevant and reliable at a particular time, in a particular circumstance or for a particular reporting entity.
I have always believed that accounting is beyond numbers. It is all about the involvement of talent.
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