MEANING OF ACCOUNTING: Accounting is the process of recording, classifying, summarizing, analyzing & communicating economic information to permit informed

judgments and decisions by user of the information.

FUNCTIONS OF ACCOUNTING : 1. RECORDING: This is the basic function of accounting .It is concerned with recording of all business transaction in a systematic manner so systematic information can easily be obtained. Recording of transaction is done in the book of Journal. This is further divided into several subsidiary books. 2. 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. 3. SUMMARISING: This involves presenting the classified data in a manner which is understandable and useful to the internal as well as external enduser of accounting statement .This process leads to the preparation of the following statement : a. Trial balance b.Trading & profit loss a/c c.Balance sheet

DEALS WITH FINANCIAL TRANSACTION: Accounting records only those transactions which are financial in nature, it means transactions which are cash transaction or can be measured in terms of money. 5. INTERPRETATION: This is the final function of accounting. The recorded financial data is interpreted in a manner that end-user can make meaningful judgments about the financial-conditions and profitability of business. This data is also used for preparing future plans. OBJECTIVES OF ACCOUNTING To keep 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. Ascertaining financial position: To ascertain strength and weakness, the financial position is ascertain by preparing a Balance-Sheet, which shows assets owned and the sources of financing these resources. Calculating results and operations: The results of an operation are ascertained by preparing a profit and loss account which shows profit or loss of business by recording all incomes and expenses. Communicating information to users: Accounting sends information to internal and external users top level management requires information for planning the external users rely on financial statement as the source of information. They are interested in the solvency and profitability of the enterprise.

ACCOUNTING CONCEPTS AND CONVENTIONS

Accounting is the language of business through which normally a business house communicates with the outside world. In order to make this language intelligible and commonly understood by all, it is necessary that it should be base on certain uniform standards. These standards are termed as accounting principles. Accounting principles may be defined as those rules of actions or conduct which are adopted by the accountants universally while recording accounting transaction. These principles can be classified into two categories: Accounting concepts Accounting Conventions
ACCOUNTING CONCEPTS: A concept term is used to denote necessary assumptions upon which accounting is based. 1. Separate entity/ accounting entity/business entity concept: In accounting business is considered to be separate entity from the proprietor. This concept is extremely helpful in keeping business affairs strictly free from the effect of private affairs of the proprietor. Thus when one person invest Rs. 10000/- into business ,it will be treated that proprietor has given that much of money to the business which will be shown as liability.

2. Going concern concept: - According to this concept it is assumed that business will continue for a fairly long time unless there is any reason to stop it. This is why the business purchase fixed assets like land and building, plant and machinery, furniture etc. If the assumption of going concern is not there, the assets would have been hired and not purchased. These assets are acquired for use and not for sale. 3. Dual aspect concept: - This concept is basis for accounting according to this every business transaction has a dual effect. For example if A start a business with a capital of Rs. 10000/- , there are two aspects of the transaction. On the one hand the business has assets of Rs. 10000/- while on other hand the business has to pay to the proprietor a sum of Rs. 10000/-, which is taken as proprietors capital. 4. Money measurement concept: - Accounting records only monetary transaction, which cannot be expressed in money do not find place in the books of accounts though may be useful for the business. For example a team of dedicated and trusted employees are definitely and asset to the business but since their money measurement is not possible, they are not shown in the books of the business.

5. Cost concept: According to this concept:a. An asset is ordinarily entered in the accounting records at the price paid to acquire it, and b. This concept is basis for all subsequent accounting for the assets. Ex. If a machine is purchase for Rs.15000 than it is recorded in the books of accounts at Rs.15000 even if its market value at that time happens to be Rs. 16000/6. Accounting period concept: - Every business man wants to know the result of business operation. Since the life of the business is assumed to be indefinite so it has been agreed that accounting record should be evaluated after a period of one year. It is called accounting period concept. In simple words, every businessman is required to prepare final accounts for a period of a one year, so that financial position of company is known to all.

7. Periodic matching of cost and revenue concept: This concept is based on accounting period concept. The main objective of business is to earn profit. In order to know actual profit of business it is necessary that revenues of the period should be matched with the cost (expenses) of the period. It means to measure actual income of a business it is necessary that revenue earned during the year is compared with expenditure incurred for earning that revenue, whether the payment is made or not. For Ex. For December 1998 commission of employee is paid in January 1999. This means revenue of December 1998 (sales) should be matched with the cost incurred for earning revenue (i.e. commission). 8. Realization Concepts: The principle tells us about when we should assume that revenue have been earned. According to accounting period concept revenue must be considered with the specific accounting period. Revenue realization can be determined on the sales, production or cash basis.

ACCOUNTING CONVENTIONS: Conventions are methods of procedure which have been recognized as common for accounting .These are the customs or traditions which guide the accountant while preparing accounting statement. 1. Conservatism: According to this convention, accountant follows the rule anticipate no profit but provide for all losses while recording all transactions. It means accountant follow the policy of playing safe. Since the future is uncertain therefore some provision should be made for future uncertainties. The practice of making provision should be made for future uncertainties. The practice of making provision for future is called conservation. Ex. (a) Making provision for bad-debts (b) Valuation of stock at cost price or market price which ever is less. 2. Consistency: According to this convention accounting practices should remain unchanged from one period to another. For Ex. If stock is valued at cost price and market price which ever is lower, than this method should be followed year after. Similarly for calculation of depreciation one method should be followed year after years.

3. Full disclosure concept: The disclosure concept implies that accounts must be honestly prepared and all important information must be disclosed there in. The notion is so important (because of divorce between capital & management) that the companies act make ample provision for disclosure of essential information in company concerns. The contents of Balance-Sheet and P & L A/C are prescribed by law. These are designed to make disclosure of all material fact compulsory. This convention states that information, which is of material interest to proprietors, Present and potential customer and investor should be disclosed. If information do not Find place in accounting statement then it should be written as notes. Ex. Contingent liabilities

4. Materiality: - According to this convention the accountant should attach importance to material details and ignore insignificant details. The term material defines by American accounting association as an item is regarded as material if the knowledge of it may influence the decision of investors. 5. Timeliness: This is one of the latest accounting convention. It means the transaction should be recorded in appropriate way as well as at proper time. The business transaction of particular day should be recorded on the same day. The delay in recording may result in manipulation, embezzlement, fraud and misplacement of vouchers. In certain cases like cash book, the principle of timeliness is strictly followed.

ACCOUNTING TERMINOLOGY 1. Capital: - capital means the amount which the proprietor has invested in the firm. It may be in terms of money, goods or property. For the firm it is liability towards the owner. 2. Assets: Assets are economic resources of an enterprise that can be express in monetary term. Those items which are used by the business in its operation are called assets. Assets can be classified in two types. (a) Fixed Assets: - fixed assets are those assets which are held on long term basis. These assets are purchased for the purpose of operating the business and not for resale. Ex. Land, building, machinery, furniture, computer etc. (b) Current Assets: - Current assets are those assets of the business which are kept for short term and are expected to be converted into cash or consumed in the production of goods. Ex. Cash, bank balance, debtor, stock. 3. Entry: whenever the transactions are recorded in the books, they are known as entry.

4. Transaction: Transaction refers to business activities involving transfer of money or goods or services between two accounts. Transaction may be cash transaction or credit transaction. When party does not give cash immediately on entering into transaction than it is called credit transaction. 5. Goods: All such things are included in goods which are purchased for resale or converted for sales. Various forms of goods are: Purchase: The goods which are purchased for selling are known as purchases. If it is purchased on credit it is known as credit purchase and in case of cash purchase it is known as cash purchase.

Sales: what ever articles are sold, they are included in sales. If it is sold on credit it is known as credit sales and in case of cash sales it is known as cash sales.
* Purchase return: If the goods once purchased are returned back then it is called purchase return or return outward. * Sales return: If goods sold are returned by purchaser then it is called sales return or return inward.

6. Liabilities: Liabilities are debts that a business has to pay to someone at sometime in the future. Ex. Creditors, loan etc. 7. Debtor: The person who takes the goods and services on credit is called the debtor.

8. Creditor: When ever the purchases are made on credit the person who supplies such goods is known as creditor.
9. Stock / inventory: The term stock means goods being unsold on a particular date. 10. Accounts: Account is a schedule, under which transactions are recorded and classified in a systematic way. Ex. Building A/C, Cash A/C etc. 11. Revenues: These are the amount earned by the business by selling of products. 12. Expenses: It is the amounts spend in order to produce (purchase) and sale goods.

13. Discount: It is a kind of concession, which is provided by the trader to its customers. It is of two types: Trade Discount * Allowed for increase in sales. * Allowed on all transaction. * Not shown in books of accounts. Cash Discount * To get quick payment (cash). * Allowed only on cash transactions. * Always shown in books of accounts.

14. Insolvent: If a person is unable to repay his loan, he is treated as insolvent. The liability of such person is more than the assets and he is not in a position to make full payments for his debt taken. 15. Bad- Debts: When a debtor become insolvent i.e. unable to pay ones debt, the entire amount due from him is not realized. This unrealized amount is loss for the business and it is called bad-debts. 16. Drawings: The amount which is taken by proprietor for his personal use is called drawings.

17. Outstanding Expenses: Outstanding expenses are related to current year but have not been paid till the year end. It means services are taken but payment is not made. This is liability of business in current year. 18. Prepaid Expenses: It means payment in advance. Prepaid expenses means payment is made during the current year but services will be taken in next year. This expense is asset of business in current year.

19. Advance / Unearned / unaccrued Income: Money received in advance. It means services are not given but payment is received. It is liability of business.
20. Accrued income: Services are given but payment is not received. It is asset for the business.

JOURNAL: A journal is a book of original entry where the transactions are first recorded. The journal is the date wise record of the transaction of a business.

Format of Journal

Date

Particulars

L.F.

Debit Amount

Credit Amount

Show the Account to be debited & Page no. date of credited as per rules of debit of ledger transaction and credit and explanation book of transaction.

TYPES OF ACCOUNTS # Personal Account: There are two types of persons i.e. natural & artificial. Accounts is related to both these types of persons. 1. Natural persons mean human beings, such as Ram, Mohan. 2. Artificial persons do not have physical constructions as human beings but they work as Person. These accounts are related to companies, institutions, factories, firms. 3. Representative personal account: - Represent a particular person and group of person, such as outstanding expense account, advance income account. Rules: - Debit the receiver. Credit the giver. # Real Account: - Real accounts are related to life less property which cannot do anything at their will. It is classified as tangible and intangible. 1. Tangible real account: - This account is related to property. It means tangible real accounts are generally those accounts which are concerned with the things which really exist. Ex. cash account, building account, furniture account, goods accounts. Rules: - Debit what comes in . Credit what goes out. 2. Intangible real account: - These real accounts are intangible that is they do not have any physical construction, form, size, shape. They can neither be seen nor touched. # Nominal account: - These accounts are related to income and expenditure or gain and losses. Ex - wages account , interest account. Rules: - Debit all expenses and losses. Credit all incomes and gains.

LEDGER: Ledger is a set of accounts. It contains all accounts of the business enterprise whether real, personal or nominal. An account is a ledger record in a summarized form of all the transaction that has taken place with the particular person or things specified. Ledger posting: - Collection of requisite information concerning a particular account and presenting them under one head is known as ledger posting.

Format of Ledger Account

Dr. Date Particulars

To -------a/c

Cr. J.F. Amount Date Particulars

By -------a/c

J.F. Amount

Balancing of ledger accounts:1. Personal a/c, assets a/c, liabilities a/c, and capital a/c balances are transferred to next year so they have opening & closing balances. Closing balances of this year is written as To balance c/d or By balance c/d which is opening balance of next year and written as By balance b/d or To balance b/d. If credit side of ledger a/c is greater than debit side than account has credit balance and difference of debit and credit side is written in debit side as To Balance c/d. If debit side of ledger a/c is greater than credit side than account has debit balance and difference of debit and credit side is written in credit side as By Balance c/d. 2. Nominal a/c balances are transferred to P & L a/c. (only indirect expenses) 3. Accounts related to goods and direct expenses are transferred to trading a/c.

TRIAL-BALANCE: Various debit and credit balances of ledger account taken down into a statement, called Trial-Balance. So, Trial-Balance is a statement, prepared with the debit and credit balances of ledger account to test the arithmetical accuracy of the books. Every transaction has two effects. Every debit has corresponding credit , so total of the debit and credit columns of the amount must tally .