Basic Concepts

BASIC ACCOUNTING CONCEPTS & CONVENTIONS • Presentation By

Prof. DEEPAK TANDON

IILM Gurgaon

ACCOUNTING PRINCIPLES -related to the growth of the business Well being, solvency,earning potential Arisen from experiences,precedents,statements,

INPUT

Economic events Measured in Financial terms

PROCESS

Recording Classifying Summarising Interpreting

OUTPUT

Information to Users

PROCESS OF ACCOUNTING In order to accomplish its main objective of communicating information to the users accounting performs the following functions:

• Recording

It is concerned with the recording of financial transactions in an orderly manner,soon after their occurrence in the proper books of accounts.

• Classifying It is concerned with the systematic analysis of the recorded data so as to accumulate the transactions of similar type at one place.

• Summarising It is concerned with the preparations and presentation of classified data in a manner useful to the users. This function involves of financial statements

• Interpreting The accountant should explain not only what has happened but also (a)why it happened ,and (b) what is likely to happen under specified condition

ACCOUNTING CYCLE Step 1 : JOURNALISING Step 2: POSTING Step 3: BALANCING Step 4: TRIAL BALANCE Step 5: INCOME STATEMENT Step 6: BALANCE SHEET

CONCEPTS & CONVENTIONS • Concept=Accounting postulates:• A.Entity concept • B.Dual Aspect Concept • C.Going Concern Concept • D.Accounting period Concept • E.Money measurement concept • F.Cost concept

G.Periodic matching of the cost & revenue Concept • H. Variable Objective evidence Concept • CONVENTIONS: • --Disclosure/ Materiality/ Consistency/conservatism

BUSINESS ENTITY CONCEPT • For accounting purposes the Business enterprise and the Owner are two separate entities • Can easily applied in case of limited liability company because it is alegal entity • Togh to apply for partnership // Sole trader/ one man business • Enabled the development of responsibility accounting

CONTD • Without these no business can be started or run eg Building, plant & machinery, cash at hand • CAPITAL –Where these assets come from ? When the proprietor invests money in the business then the transaction gives rise to 2 effects –Assets of business increase and claim of proprietor on assets of business is recognized. _____DUAL CONCEPT • CAPITAL =ASSETS

THE MONETARY CONCEPT • All business transactions must be in the currency of the country • Money is common unit of recording transactions relating to assets / Liabilities/ capital • Limitation –Purchasing power ignores inflation & doesnot take in account quality of management

Contd -• Creditors – in case the capital is contributed by the proprietor is insufficient , business takes to borrowing from other parties. • Loan given by outside parties -------Increases the cash (Asset),credit facilitygranted by suppliers increases the goods-in – trade of the business • CAPITAL +LIABILITIES =ASSETS===ACCOUNTING EQUATION • DOUBLE ENTRY SYSTEM

GOING CONCERN CONCEPT • -unless and until it has entered into a state of liquidation, it will be viewed as to have an indefinite life. • A. accountant of the business does not make unnecessary assumption regarding the forced sale value of goods and assets • B.assets are depreciated on the basis of expected life rather than on the basis of market value. • FUNDAMENTAL ACCOUNTING PRINCIPLE

ACCOUNTING PERIOD CONCEPT : -Strictly speaking – net income can be measured by comparing assets of the business existing at the time of its commencement with those existing at the time of liquidation -The Balance sheet & P/Laccounts should be prepared at regular intervals which is one year beginning on a specific date and ending 12 months later.

MONEY MEASUREMENT CONCEPT -accounting every worth of recording event, happening or transaction is recorded in terms of money. -concept increases the understanding of the state of affairs of the business ---Limitation ---subsequent changes in the money value are conveniently ignored

COST CONCEPT

• -a. Asset is recorded at the price paid to acquire it ---I.e. At cost • B-This cost is the basis for all subsequent accounting for the asset • When asset is recorded at cost price ,the change in the real worth of the asset with the passage of time is ordinarily recorded in the accounts books.

• The fixed assts are recorded in the books of accounts at a price paid for them • The cost is the amount or money spent in purchasing the asset, amount spent in installing and all expenses paid in making the asset ready for use. • Record Fixed assets at historical costs as Market value costly

PERIODIC MATCHING OF COST AND REVENUE CONCEPT • A. revenue realisation-Determination of period in which the revenue will be realised is the main concern---Cash basis//sales basis//production basis • B. Matching Costs-In determining net income from the business organisation al costs which are applicable to the revenue of the period should be charged against that revenue.

ACCOUNTING CONVENTIONS

• 1.Convention of Disclosure • 2.Convention of Materiality • 3.convention of Consistency • 4. Convention of Conservatism

FULL DISCLOSURE • Full, adequate, Fair accounting information • Every financial statement should fully disclose all relevant information that affects the average investor • Honest reportings, summary of the accounting policies followed by Financial statements is appended.

MATERIALITY An item is to be considered as material (significant} if the knowledge of that item could affect the users of the financial statements in taking some decisions such as to invest or not to invest in the enterprise or to give loan or not

CONSISTENCY • Same accounting methods will be used for similar items overtime. • I.Vertical Consistency –within an inter-related group of financial statements bearing the same date • Ii. Horizontal consistency –found between financial statements from period to period thus enabling comparison of performance of `one entity with another.

CONSERVATISM (PRUDENCE) • Anticipate no gains but provide for all losses and if in doubt write them off. • Thus accountant should record not only actual losses but also those losses that are likely to occur., Provision for bad debts, premium on redemption of debentures etc.

Other forms of relationship • CAPITAL +LIABILITIES =ASSETS • NET WORTH =ASSETS-LIABILITIES • II.OWNERS EQUITY =TOTAL EQUITY – EQUITY OF THE CREDITORS • TOTAL EQUITY = TOTAL ASSETS • OWNER EQUITY = TOTAL EQUITY+REVENUE-EXPENSE – EQUITY OF THE CREDITORS

Nature Of Accounts & Rules • RULESA/cs

ANY CAPITAL ACCOUNT Dr

Having RECORD DECREASE Same Rule ANY LIABILITY ACCOUNT RECORD DECREASE REVENUE

Cr RECORD INCREASE

RECORD INCREASE Cr-

• FOR ASSETS ACCOUNTS • -Dr – means Increase • Cr—Means Decrease • FOR EXPENSE ACCOUNT • Dr –Means Increase • Cr-Means Decrease

RULES Dr

Cr

• PERSONAL -- The receiver

The Giver

• REAL -- What comes in

What goes out

• Nominal-- All Losses & Expenses

All Gains & Incomes

•