2011

ACCOUNTS

DELTA 1/1/2011

INTRODUCTION Accounting is perhaps one of the oldest, structured management information system. The accounting system is a means to provide relevant and reliable financial information to all the interest. BOOK-KEEPING Book-keeping is defined as the science and art of recording business transactions in a systematic manner in a certain set of books known as books of accounts. ACCOUNTING It is termed as language of business which records all events and transactions that are of monetary value and facilitates communication among individuals in a society. ACCOUNTANCY It refers to a systematic knowledge of accounting. It explains why to do and how to do of various aspects of accounting. It tells us why and how to prepare the books of accounts and how to summarize

the accounting information and communicate it to the interested parties.

ACCOUNTING PROCESS

It is the process of identifying the transactions and events, measuring the transactions and events in terms of money, recording them in a systematic manner in the books of accounts.

Accounting Encompasses 1. Identification 2. Measuring 3. Recording 4. Classifying 5. Summarising 6. Analysing 7. Interpreting 8. Communicating

1.

Identification This is the first step of accounting process. It defines the transaction of financial character that is required to be recorded in the books of accounts. Events of non financial character cannot be recorded even through such events may have an impact on the operational results of the firm.

2. Measuring This denotes expressing the value of business transactions and events in terms of money.

3. Recording o It deals with recording of identifiable and measurable transactions and events in a systematic manner in the books of original entry that are in accordance with the principles of accountancy.

4. Classifying It deals with periodic groping of transactions of similar nature that appear in the books of original entry into appropriate heads by posting or transfer entries.

5. Summarizing It deals with summarizing or condensing transactions in a manner useful to the users.

6. Analyzing It deals with establishment of relationship between the various items or group of items taken from income statement or balance sheet or both.

7. Interpreting It deals with explaining the significance of those data in a manner that the end users of the financial statement can make a meaningful judgment about the profitability and financial position of the business.

8. Communicating It deals with communicating the analyzed and interpreted data in the form of financial reports or statements to the users of financial information. Ex :: Balance sheet

Accounting information system:

 Accounting involves following functions & objective: Accounting helps in systematic recording of all business events or transactions. Written records are more preferable to memorizing because the latter may fade away with time. Also systematic records can be used by different persons for different decision making process. Accounting measure the financial performance of the enterprise. The results of operations are ascertained by preparing profit & loss account, balance sheet and cash flow statements. This will enable the business person to ascertain what the business owes to others. Accounting facilitates the result to both internal & external users. The management requires information for internal purpose at various levels of operations. They need to prepare various reports as production report, idle time report, cash budget report, receivable report, accounts payable, project appraisal report, capital budgeting report etc. The management report s the financial performance of the firm to external users such as shareholders, creditors,

bankers, investors, stock brokers, stock exchanges, employees, government etc. Accounting is requires to fulfill the statutory requirements of various regulatory bodies such as Registrar of Companies, SEBI ( Securities Exchange Board of India) income tax authorities and the government. Accounting helps in internal control by holding the concerned persons responsible for any errors, lapses or under performance. Equally it helps to identify the strong/ weak areas of each unit or department. Current years financial performance becomes the basis for future predictions and estimations. Preparation of budgets, cost analysis, tax planning, auditing are some of the functions of accounting. Accountants: Accountancy is the profession and the practitioners of accountancy are called accountants. Book keeping is recording of business transactions. Accounting is analyzing and reporting of financial data Distinction between Book-keeping & Accounting Book keeping It is a process of identifying, measuring, recording and analyzing the transactions in books of accounts Adopt principles of accounting for recording Book keeping is the first stage of accounting process The objective is to prepare final accounts and balance sheet in a systematic manner at the end of Accounting It involves summarizing the classified transaction, interpreting the analyzed results and communicating the information to the users of financial statement Analyzing and interpreting requires skill, knowledge and experience Accounting follows book keeping. It is the secondary stage The objective is to ascertain net results of financial operations and communicate the results to all

accounting period Accounts executives who perform this function may not require higher level of knowledge The nature of job is routine and clerical Users of Accounting Information:

stakeholders in a manner they understand. Accountants who perform this function need higher analytical skills to interpret the data and to take appropriate decisions. The nature of job is non routine but analytical

Investors: It may be broadly classified as retail investors, high net worth individuals, institutional investors both domestic & foreign. They are keen to know both the return from their investments & the associated risk. Lenders: Banks, financial institutes & debenture holders are the main lenders & they need information about the financial stability of the borrower enterprise. Regulators, Rating agencies & security analyst: investors & creditors seek the assistance of information specialist in assessing prospective returns. Equity analyst, bond analyst & credit rating agencies offer a wide range of information in the form of answering queries. Security analyst obtain valuable information including insider information by means of face-to-face meetings with the company officials, visit their premises & make constant enquiry using e-mails, teleconference & video conference. Firms build a good rapport with such type of information seekers to gain visibility in the market. Management: management needs information to review the firms short term solvency & long term solvency. It has to ensure effective utilization of its resources, profitability in terms of turnover & investment. Employees, trade union & tax authorities: Employees are keen to know about the general health of the organization in terms of stability & profitability. Trade unions use financial reports for negotiating wage package, declaration of bonus & other benefits. Tax authorities need information to assess the tax liability of the firm. Customers: customers have an interest in the accounting information about the continuation of the company especially when they have established a long term involvement with or are dependent on the company. Eg. Car owners

 Government & regulatory agencies: government & the regulatory agencies require information to obtain timely & correct information, to regulate the activities of the enterprise if any. The public: every firm has a social responsibility. Firms depend on local economy to meet their varied needs. Prosperity of the enterprise may lead to prosperity of the economy both directly & indirectly. Limitation: Though accounting system is the only source for extracting financial information of the firm, it grossly lacks qualitative elements. (eg: best products, brand image etc.) The accountants have some leeway or freedom on the methods of depreciation charged, inventory valuation etc. though the convention says consistency has to be maintained on the policies adopted, there is considerable room for bias, favourism and personal judgment. Accounting reveals the estimated position and not the real position of the firm. Financial statements are prepared on separate entity concept, conservation concept etc. which are based on the estimates that may lead to over valuation or under valuation of assets and liabilities. Accounting ignores the price level changes when financial statements are prepared on historical cost. Fixed assets are shown in the balance sheet at historical cost less accumulated depreciation and not at their replacement value. The danger of window dressing arises when the management decides to incorporate wrong figures to artificially inflate revenue or deflate losses or when there is a threat of hostile takeover. In such a situation the management fails to provide true and fair view of the financial position to the various users of the financial statement. Basic Terminologies: Transaction: Transfer of money or goods or services from one person/account to another person/account Example: Paid cash for goods purchased; Rent received for letting out services

etc., Capital: Funds brought in to start business to earn profits. Types: Fixed Capital: capital use to purchase fixed assets is called fixed capital Working Capital: The capital use for day to day affairs of business is known as working capital. Capital is a liability for the business. Share: a share in a company is one of the units into which the total capital of the company is divided. Assets: An asset is a resources legally owned by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. Fixed asset: those which are held for use in the production or supply of goods & services. Current asset: those which are held or receivable within a year or within the operating cycle of the business. Liquid asset: those which can be easily converted into cash. Fictitious asset: they are in the form of such expenses which could not be written off during the period of their incidence. Liability: it is a financial obligation of an enterprise arising from past event the settlement of which is expected to result in an outflow of resources embodying economic benefit. Current liability: it is that obligation which has to be satisfied within a year. Equity: it is the residual interest in the asset of the enterprise after deducting all its liabilities. Entity: it is an economic unit that performs economic activities. Sole Trader: A single individual owning and carrying on business with or without the help of his/her kith and kin. Partnership: it is a relationship between partners to contribute capital to start business, agree to distribute profits and losses in an agreed proportion and the

business being carried on by all or, any one acting for all. Joint Stock Company: Association of persons, collecting capital by issue of shares. Compulsorily registered under Companies Act, 1956. A company enjoys perpetual existence and an independent entity Goods: Commodities or articles purchased in a business for sale or resale Purchases: Indicate buying of goods in which the trader deals in. Sales: Transfer of ownership in goods from seller to buyer is called sale. Purchase return or return outward: goods returned by the business to its suppliers out of the purchase already made from them. Sales return or return inward: goods returned to a business by its customers out of the sales already made to them Opening stock: unsold goods lying in a business at the beginning of a year. Closing stock: unsold goods lying in a business at the end of a year. Inventory: it refers to goods held by a business for sale in the ordinary course of business or for consumption in the production of the goods or services for sale. Drawings: it refers to cash, goods or any other asset withdrawn by the proprietor from his business for his personal or domestic use. Debtor: a debtor is a person who owes money to the business. Trade debtor: it is a person who owes money to the business for the goods supplied to him on credit. A loan debtor: it is a person who owes money to the business for the loan advanced to him. Debtor for asset sold: it is a debtor who owes money to the business for any asset sold to him on credit. A debtor for service rendered: it is a debtor who owes money to the business for the service rendered to him on credit. Debt: the amount due from a debtor to the business. Good Debt: fully recoverable debt Bad Debt : irrecoverable

 Doubtful debt : recovery is doubtful Creditor: a creditor is a person to whom the business owes money Trade creditor: it is a person to whom the business owes money for goods purchased from him on credit Loan credit: it is a person to whom the business owes money for the loan borrowed from him. Creditor for asset purchased: it is a person to whom the business owes money for any asset purchased from him on credit. Expenses creditor: it is a person to whom the business owes money for any service received from him on credit. Loss: it refers to money or moneys worth given up without any benefit in return. Profit: it is a situation where the revenue of a business exceeds its expenses. Journal: it is a daily record of business transaction Ledger: it is an account book in which all the accounts are maintained. Entry: it is the record of a transaction made in any book of account. Narration: it is a brief explanation to a journal entry, given below the journal entry, with in brackets. Posting: it is the process of entering in the ledger the information already recorded in the journal or in any of the subsidiary books. Voucher: it refers to any written document in support of a financial transaction. Trial balance: a worksheet listing of all the accounts appearing in the general ledger with the dollar amount of the debit or credit balance of each, used to make sure the books are in balance total debits and credits are equal. Balance sheet: it is the financial statement , which shows the amount and nature of the business assets, liabilities and owners equity as of a specific point in time. Carried forward: it is used at the foot of a page to indicate that the total amount at the foot of that page has been c/f to the head of the next page. Brought forward: it is used at the head of the page to indicate that the total amount at the head of that page has been b/f from the foot of the previous page.

 Carried down: it is written in a ledger account at the time of its closing to indicate that the balance in that account has been carried down to next page. Brought down: it is written in a ledger account at the time of its opening to indicate that the opening balance in that account has been brought down from the previous period. Bill of Exchange : Documentary evidence in writing containing an unconditional order signed by th maker, directing a certain person to pay a certain sum of money only to, or to the order of , a certain person or the bearer of the instrument Bill payment / Bill receivable: B/P : In case of purchase of raw materials on credit the supplier or the creditor draws bill of exchange . When entity accepts it becomes B/P . B/R : On sale of goods on credit the entity draws a bill of exchange on the customer. When customer accept it becomes B/R.