Basics Of Accounting

MANAGERIAL ACCOUNTING 

Basics of BusinessByAccounting K.G. MURALIDHARA

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       Meaning:  Accounting  has  rightly  been  termed as the language of the business.          The  basic  function  of  a  language  is to serve  as means of communication accounting also serves  this function.         It  communicates  the  result  of  business  operations to various parties who have some stake  in  the  business  namely  the  proprietor,  creditors,  investors, Government and other agencies.

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      Though accounting is generally associated with business  but it is not only business which makes use of accounting.        Persons like housewives, Government and other  individuals also make use of accounting.       For example, a housewife has to keep a record of the  money received and spent by her during a particular period.        She can record here receipts of money on one page of  her household diary, while payments for different items such  as milk, food, clothing, house, education etc, on some other  page or pages of her diary in a chronological order. 

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      Definition: “Accounting is the art  of recording, classifying and  summarizing in 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”.

Accounting:  The Language of Business 

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Many words have similar, but not same, meaning as in common English. Similar to English, some rules are definite others are not. Rules continue to evolve. XBRL (extensible business reporting language): a digital business language.

Functions of Accounting 

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 Recording: This is the basic function of accounting. It is essentially concerned with not only ensuring that all business transactions of financial character are in fact recorded but also that they are recorded in an orderly manner.  Classifying: Classification is concerned with the systematic analysis of the recorded data, with a view to group transactions or entries of one nature at one place. The work of classification is done in the book termed as ‘Ledger’.

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 Summarizing: This involves presenting the classified data in a manner, which is understandable and useful to the internal as well as external end-users of accounting statements. This leads to the preparation of the following statements: i. Trial Balance; ii. Income statement; ii. Balance sheet.       Dealing with financial transactions: Accounting records only those transactions and events in terms of money, which are of a financial character.

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 Analyzing and interpreting: The recorded financial data is analyzed and interpreted in a manner that the end users can make a meaningful judgement about the financial condition and profitability of business operations.   Communicating: The accounting information has to be Communicated to the external world

Scope of Accounting  

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 Systematic Records: Accounting is done to keep a systematic record of financial transactions. In the absence of accounting there would have been terrific burden on human memory which is most cases would have been impossible to bear.  Ascertain Profit/Loss: Accounting helps in ascertaining the net profit earned or loss suffered on account of carrying the business.

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1. Ascertain the financial position of business: The profit and loss account gives the amount of profit or loss made by the business during a particular period. 2. Protect the business properties: Accounting provides protection to business properties from unjustified and unwarranted use. Facilitate rational decision making: Accounting these days has taken upon itself the task of collection, analysis and reporting of information at the required points of time to the required levels of authority in order to facilitate rational decision making

Basic Concepts 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Money measurement. Entity. Going concern. Cost. Dual aspect. Accounting period. Conservatism. Realization. Matching. Consistency. Materiality.

ACCOUNTING CONCEPTS 

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 Separate Entity Concept: In accounting business is considered to have a separate legal existence from that of proprietor(s).  Going Concern Concept: According to this concept life of the business is likely to continue for a fairly long period of time.  Money Measurement Concept: This concept states that the accounting records only monetary aspects of a transaction. Non-monetary aspects like love, affection, and gratitude to employees do not have a place in accounting. Cost Concept: cost of acquisition of asset is recorded in accounting records and this cost is the basis for all subsequent transactions

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 Dual Aspect Concept: Each transaction has two aspects namely debit and credit. Suppose if a business is commenced with Rs.10,00,000, it means that the capital is Rs.10,00,000 and cash is also Rs.10,00,000.  Accounting Period Concept: According to this concept, the life of the business is divided into appropriate segments for studying the results shown by the business after each segment.

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 Periodic Matching of Revenue and Cost Concept: The term matching means appropriate association of related revenues and expenses. In order to ascertain profit/loss, the revenues and expenditure should be known during a particular period of time.  Realization Concept: According to this concept revenue is recognized when a sale is made. Sale is considered to be made at the point when the property in goods passes to the buyer and he becomes legally liable to pay.

ACCOUNTING CONVENTIONS 

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 Conservatism: In the initial stages of accounting, certain anticipated profits, which were recorded, did not materialize.  Full disclosure: According to this convention, accounting reports should disclose fully and fairly the information which is of material interest to proprietors, present and potential creditors and investors.  Consistency: According to this convention accounting practices should remain unchanged from one period to another. Materiality: According to this convention the accountant should attach importance to the material details and ignore insignificant details.

Journal 

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 The meaning of journal is recording transactions on a daily basis.  It is very difficult to remember the various transactions unless some records are kept.  Say for example a student is asked to furnish the details of his expenditure out of pocket money, for a week somehow he may give the account. Imagine if he is asked to furnish for 6 months or one year what may be his position? When this is the position for an individual what may be the position to an organization where the transactions are varied and multitudinous.  Obviously there is a need for maintaining records pertaining to the day’s transactions.

Points to be noted while passing Journal Entries 

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The business and proprietor  (i.e., owner) of  the  business  must  be  considered  as  two  distinct (i.e., separate) entities  (i.e., parties). While writing the name of real account or a  nominal  account,  we  have  to  add  the  word  ‘Account’  after  the  name  of  the  asset  or  expenses or income. After passing all the journal entries, the two  amount  columns  of  the  journal  should  be  totaled.

4.Whenever the proprietor of a business brings in cash or any other thing in to the business, an account called ‘Capital Account’ should be opened in the name of the proprietor 5.Whenever the proprietor invests in the business the sale proceeds of his private assets, or recorded in the books of the business as additional capital introduced by the proprietor. 6.Whenever the proprietor commences business with loan borrowed from his wife, children or friend, the two accounts that are required to be taken in to the account

7.Whenever the proprietor of a business  withdraws cash goods or any other thing  from business for his personal or domestic  use, an account called the ‘Drawings  Account’ should be opened . 8. Whenever the personal expenses of the  proprietor, are paid by the firm, those  transactions should be recorded in the  books of the business.

9. It is preferable to split the goods account in to (a)  Purchase account, (b) Sales Account (c)  Purchase Returns/return outwards, (d) Sales  return/ returns inwards, (e) opening stock  account and  (f) closing stock account. 10.Generally,  purchases  account,  sales  account,  purchase  returns  account  and  sales  returns  account are treated as real accounts, and the  rules applicable to real accounts, are applied  to  these  accounts,  while  journalizing  the  transactions.

11.If the name of supplier is mentioned, the  purchase should be considered as credit  purchase. 12. Whenever goods are purchased from a party  for cash, the two accounts involved in that  transaction are (1) purchases account and (2)  cash account  13. Whenever goods are purchased from party on  credit, the two accounts involved in the  transaction are (1) purchases account and (2)  the supplier’s (i.e., seller’s) account 

14.Whenever some investments or securities,  say, shares or debentures are sold  the two  accounts involved are (1) Cash account (2)  investments account (and not sales account  15. Cash discount allowed by the business to its  debtor at the time of receipt of money from  the debtor , for his prompt payment  16. Trade discount should not be separately  recorded at all either in the books of the seller  or in the books of the buyers. 

Ledger 

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 After journalizing the various transactions of a business concern the entries are to be posted into separate set of accounts termed as ledger.  As said earlier each transaction has two aspects. Ledger accounts are to be kept for each individual accounts.  This ledger account is maintained in T form. On the other hand it is divided into two parts namely the debit side and credit side respectively. The left hand side is debit side and the right hand side is credit side. The following is the format of a ledger account

Trial Balance 

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 A Trial Balance is a statement containing ledger balances of the accounts.  It gives the arithmetic accuracy of the books of accounts.  It is the statement through which final accounts like manufacturing account, Trading Account, Profit and Loss Account and a statement termed as a Balance Sheet are prepared to know the financial position as on a particular date.

Illustration Journalise the following transactions, post the same in  relevant ledger accounts and balance the same. 2006 June 1. Anurag commenced business with Rs.20000 2. Paid into bank Rs.5000 3. Purchased Plant worth Rs.10000 from Modi&Co 4. Purchased goods worth Rs. 5000 from Anwar 6. Goods worth Rs.4000 sold to Abhishek 8Sold Goods worth Rs.2000 for cash 10 Goods returned by Abhishek Rs.50 15 Paid rent Rs.250

June 18. Withdrawn from bank for office use  Rs.2,500 20 Paid Salaries Rs.1800 25Withdrawn for personal use Rs. 250 26 Goods returned to Anwar Rs.100 27 Paid for office furniture Rs.1,500 by cheque 28 Received Rs.3,900 cash from Abhishek and  discount allowed Rs.50 29 Paid Anwar Rs.4800 and discount allowed by  him Rs.100

Table Showing the Treatment of various adjustments in Final Accounts

Adjustment Closing Stock O/S Expenses

Prepaid Exps

O/S Incomes

Trading P&L A/C Credit side of Trading  A/c Added to the  concerned  expenditure  Deducted from  concerned  expenditure  Added to the  respective incomes  Deducted from the  concerned incomes 

Income recd. in Adv Dr side of P&L  Account Bad Debts Dr side of P&L  Account Prov. For B/D Dr side of P&L  Provision for discount  Account on drs

Treatment in Balance Sheet Assets side of the Balance Sheet To be shown under Liabilities side  of the Balance Sheet Assets side of the Balance Sheet Assets side of the Balance Sheet Liabilities side of the Balance  Sheet Deducted from S.Drs in B/S Deducted from S.Drs in B/S Deducted from S.Drs in B/S

Contd.,

Adjustment Res. For Discount on  Crs Depreciation Appreciation

Interest on Capital

Interest on Drawings

Trading P&L A/C Balance Sheet Deducted from S.Crs on the  liabilities side of the  Cr. Side of the  Balance Sheet P&L A/C Debit side of P&L  Deducted from concerned  Asset A/c Added to Concerned Asset Credit side of  P&L A/c Added to the Capital A/c on  the Liabilities side of the  Dr. side of the  Balance Sheet Profit and Loss  A/c

Credit side of the  P&L A/c

Deducted from capital on  the Liabilities side of the  Balance Sheet

Accounting Standards 9, 10, 17 and 20

AS 9 The Object of issuing AS9 is to provide a basis for recognition of revenue in the books of accounts.  Applicability: Sale of Goods, Rendering of services; and use of enterprise resources yielding interest, royalties and dividends. Not applicable: Revenue from construction contracts, Revenue from hire purchase, lease agreements, Revenue from government grants, Revenue of insurance companies. 

AS 10 

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To provide guidelines for the valuation and disclosure of certain information relating to fixed assets owned by an enterprise, in the books of accounts. Fixed assets should be shown in the balance sheet either at their historical cost or at their revalued figures. Cost consists of : Purchase price, duties and non refundable taxes, and al the other attributable costs for bringing the asset to working condition, for its intended use.

AS 17 

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To establish principles for reporting financial  information about the different types of  products and services an enterprise produces  and the different geographical areas in which it  operates. Such information helps the users of  financial statements in a better understanding  the performance of the enterprise; Better assessing the risks and returns of the  enterprise; Making more informed judgements abhout the  enterprise as a whole.

AS 20 

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To prescribe the principles for the determination and presentation of the earnings per share, which will facilitate a comparison of performance among different enterprises for the same period and among different accounting periods for the same enterprise. The focus of this statement is on the denominator in the earnings per share calculation. AS 20 requires an enterprise to clearly present the basic and diluted earnings per share for all the reported accounting periods, even if the amounts disclosed are negative ( a loss per share)