Basic Accounting

  • Uploaded by: Mahmoodul Haque
  • 0
  • 0
  • June 2020
  • PDF

This document was uploaded by user and they confirmed that they have the permission to share it. If you are author or own the copyright of this book, please report to us by using this DMCA report form. Report DMCA


Overview

Download & View Basic Accounting as PDF for free.

More details

  • Words: 1,722
  • Pages: 25
BASIC ACCOUNTING What is Book-keeping ? Book-keeping simply means recording of transactions. In absence of transaction, the question of book-keeping does not arise at all. So, transactions are the basic raw materials of bookkeeping .

Some definitions of book-keeping: 





"Book-keeping is the art of recording business dealings in a set of books." - J.R.BATLIBOI "Book-keeping is the science of recording transactions in money or money's worth in such a manner that at any subsequent date, the nature and effect of each transaction and the combined effect of all the transactions may be clearly understood, and so that the accounts thus kept may show the owner of the books the true final position." - L.C.Cropper Thus ,book-keeping teaches us the correct process of keeping records of business transactions.

What is Accounting ? 

Accounting is defined by the American Accounting Association (AAA) as : "the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of the information".

Accounting and Book- keeping 



There lies important difference between Accounting and Book keeping. Accounting deals with the entire system for providing accurate and up-to -date financial information - from the design of the system through its operation to interpretation of the information that is obtained. To become an accountant, an individual must undergo years of training and chalk up a great deal of practical experiences. Book keeping, on the other hand, is the routine, day-to-day record keeping. Book keepers are responsible for obtaining financial data that the accounting system process. An accounting system cannot operate without good accurate book keeping, but a book keeper can generally be trained within a year or so.

PRINCIPLES & CONCEPTS OF ACCOUNTING Accounting is the language of business. The concepts which guide accounting practices and procedures are commonly referred to as Accounting Principles. Accounting principles are general guide -lines for sound accounting practices. The basic principles and concepts which are ground rules of accounting is called Generally Accepted Accounting Principles (GAAP).

Generally Accepted Accounting Principles (GAAP) 1. BUSINESS ENTITY CONCEPT : Accounts are kept for entities, rather than for the persons who own, operate or otherwise are associated with those entities. For example, when the Balance Sheet for the business entity is prepared, the personal assets and liabilities of owners are not considered.  2. MONEY MEASUREMENT CONCEPT : In accounting, a record is made only of those facts which can be expressed in monetary terms, i.e. all business transactions are recorded in terms of money. 

GAAP-------------3. GOING CONCERN CONCEPT : Accounting assumes that an entity or concern normally keep on going one year to the next. More specifically, the entity will continue to operate indefinitely unless there is evidence to the contrary. It treats business to create values (out put & services) on a continuing basis.  4. COST CONCEPT : Accounting is based on the cost concept. It states that accounting focuses on the cost value of assets, rather than on their market value. 

GAAP-------------

5. DUAL ASPECT CONCEPT: It states that every transaction must have two aspects, 'Debit' and 'Credit'. This concept can be written as an equation, that is, a statement that 'Something is equal to something else'. Equation is: Assets= Liability+ Equity. The Double Entry System of Accounting is based on this concept.



6. OBJECTIVE EVIDENCE: Objective evidence should be maintained in support of business transactions and data reported in the financial statements in order to claim the confidence of the people who use those statements.

GAAP-------------7. ACCOUNTING PERIOD: For the purpose of reporting to outsiders the 'Year' is the usual accounting period. It is necessary to prepare periodic reports on operations, financial position and changes in financial position of the enterprise to get the result of success or failure.  8. CONSISTENCY CONCEPT: There should be consistency in the use of accepted principles of accounting from one year to another, especially in comparing the financial statements of one year with those of a proceeding year. 

GAAP-------------

9. MATERIALITY CONCEPT : The accountant

does not attempt to record a great many events which are so insignificant that recording of them in books is not all justified by usefulness of the result. 

10.FULL DISCLOSURE : Accountants are obliged to transmit all significant financial data preferably in the body of the financial reports but also in explanatory foot notes for understanding by third parties.

GAAP-------------



11.CONSERVATISM : It means that when the accountant has reasonable choice, he usually will show the lower of two assets amounts for a given item. The concept is often stated as follows : "Anticipate no profit and provide for all possible losses.“ 12. ACCRUAL CONCEPT : The accrual concept implies that revenues are reported in the period in which they are earned, and expenses are reported in the period which they incurred in an attempt to produce revenues. The accrual basis of accounting requires the use of an adjusting process at the end of the accounting period to match revenues and expenses for the period properly.

GAAP-------------13. MATCHING REVENUE AND EXPENDITURE : The determination of periodic net income is a two-fold problem involving (a) the revenue recognized during the period & (b) the expenditure to be allocated to the period. Thus, revenues and expenditures must be matched to determine net income or net loss for the period.  14. FAIRNESS : The financial reports should be fair in the sense that they should not favour certain groups at the cost of others. The standard of fairness intends to ensure justice and equity in reporting financial events of any business entity. 

Different Types of Accounts  Account

may also be termed as a group or a class of transactions relating to a particular 'person', 'properties', 'income' 'expenditure'.

Types of Accounts In conventional method, account may be classified as follows :  Personal Account: relating to a person or institution example: Rahim A/c, BJMC A/c.  Real Account: relating to a property example: Building A/c, Furniture A/c.  Nominal Account: relating to income or expenditure, example: Salary A/c, Commission A/c.

Types of Accounts In modern method, accounts are classified into five accounts, namely :  Asset : - Properties & rights owned by an enterprise. - A valuable item that is owned or controlled by the entity. - That was acquired at a measurable cost.  Liability : - Obligations of a business entity. - The claims of the creditors to the business enterprise. - The rights of creditors represent debts of the business.

Types of Accounts Income : - The amount by which equity increased as a result of operations during a period of time. - An inflow of assets.  Expense : - An decrease in equity resulting from operations during an accounting period. - Resources used up or consumed during an accounting period. - Out flow of assets. 

Business Transactions A transaction means an exchange of value measured in terms of money or money's worth.  A transaction conducted by a trading concern is called business transaction.  A business transaction is the occurrence of an event of a condition that must be recorded. For example, payment of monthly salary of Tk.50,000/-, purchase of goods on credit worth Tk.1,00,000/- acquisition of land and building of Tk.2,00,000/- are illustrative of the variety of business transaction. 

Characteristics of Transactions Event must be measurable in terms of money.  Financial change must be brought by the events.  There must have two parties or accounts in each transaction.  Transaction must be independent. 

Double Entry System 





The system of book-keeping in which the doubly effect of each transaction is recorded is called the Double Entry System. In 1494, 'Lucas Pacioli', an Italian scholar wrote a book named as "SUMMA DE ARITHMETICA GEOMETRIA PROPORTIONIET PROPORTIONLITA" wherein a chapter on 'Double Entry System' was incorporated. Later on, that was published in the form of a book, named as 'DE COMPUTIS ET SCRUPTURIS'. The people of the present world follow the principles and methods as adopted in that book. Hence, Luca Pacioli is known as founder of modern book-keeping and Italy, birth place of book-keeping

Double Entry System 

However, Double Entry of Book-keeping has been defined by William Pickles as, "Double Entry System seeks to record every transaction in money or money's worth in its double aspect - the receipt of benefit by one account and surrender of a like benefit by another account, the former entry being to the debit of the account receiving, the later to the credit of the account surrendering.“



Simply, we can say that it refers to the necessity of recording the two-fold aspect of each transaction property. In any transaction, the account gives value is called the 'Creditor' and the account that receives the value is called the 'Debtor'. In other words, every transaction creates two effects of opposite nature and equal sum-one is 'Debit' and the other 'Credit'.

RULES FOR DETERMINING DEBIT AND CREDIT CONVENTIONAL METHOD :  Personal Account : Receiver of Value Giver of Value  Real Account : Value coming in Value going out  Nominal Account : All expenses or losses All income or gains

-

Dr. Cr.

-

Dr. Cr.

-

Dr. Cr.

MODERN METHOD 









Asset Account : Asset Increase(+) Asset Decrease(-) Liability Account : Liability Increase(+) Liability Decrease(-) Expense Account : Expense Increase(+) Ext Decrease(-) Income Account: Income Increase(+) Income Decrease(-) Owner's Equity Account: O/E Increase(+) O/E Decrease(-)

-

Dr. Cr.

-

Cr. Dr.

-

Dr. Cr.

-

Cr. Dr.

-

Cr. Dr.

SUMMARY Asset & Expense A/c.  Dr. Cr. Increase (+) Decrease (-) Liability/Income /O.E. A/c.  Dr. Cr. Decrease (-) Increase (+)

EXAMPLES 1. Bought Office Furniture for Tk.5000.00 #Furniture A/c. #Cash A/c Office Furniture A/c. Dr. Cash A/c Cr.  2. Credit of goods for Tk.4000.00 from Mr. Ali #Purchase A/c. #Ali's A/c Purchase A/c. Dr. Ali's A/c (Account Payable) Cr.  3. Paid Salaries Tk.2500.00 #Salary A/c. #Cash A/c Salary A/c. Dr. Cash A/c Cr. 

EXAMPLES  4.

Received Interest on Investments Tk.1200.00 #Cash A/c,# Int. A/C Cash A/c. Dr. Interest on Inv. A/c Cr.  5. Mr. X started business with Tk.2000.00 #Cash A/c, #X's Capital A/c Cash A/c. Dr. X's Capital A/c Cr.

Related Documents

Basic Accounting
June 2020 1
Basic Accounting
May 2020 0
Basic Accounting
June 2020 2
Accounting
May 2020 53
Accounting
November 2019 56

More Documents from ""