ACCOUNTING NOTES - Accounting Tips AK

Double Entry Book Keeping Financial Accounting (11^th Class)

1)Introduction to Accounting

2)Basic accounting Term’s

3)Theory Base of Accounting, Accounting Standards and International Financial Reporting Standard (IFRS)

4)Basic of Accounting

5)Accounting Equation

6)Accounting Producers-Rules of Debit and Credit

§  GOODS AND SERVICE TAX (GST)

7)Origin of Transactions-Source Documents and Preparation of Vouchers

8)Journal

9)Ledger

10)Special Purpose Books I-Cash Book

11)Special Purpose Books II-Other Books

12)Bank Reconciliation Statement

13)Trial Balance

14) Depreciation

15) Provision and Reserves

16) Accounting for Bills of Exchange

17) Rectification of Errors

18) Financial Statements of Solo Proprietorship

19) Adjustments in Preparation of Financial Statements

20) Accounts form Incomplete Records-Single Entry System

21)Computers in Accounting

22) Accounting Software-Tally

LEARNING AND UNDERSTANDING

1) Introduction to Accounting

(Meaning and Objectives of Accounting and Accounting Information)

·    Meaning of Accounting

ü  Accounting is a systematic process of identifying, measuring, recording, classifying, summarising, interpreting and communicating financial information.

•  Three types of Definition of Accounting

ü   “Accounting  is the art of recording, classifying and summarising in a significant manner and in terms of money; transaction and events which are, in part at least, of a financial character, and interpreting the results thereof.”

                                                           - American Institute of Certified Public Accountants

ü   “Accounting is the science of recording and classifying business transactions and events, Primarily of a financial character, and the art of making significant summaries, analysis and interpretation of those transaction and events and communication the result to persons who must make decisions or form judgment.”

                                                                                               -Smith and Ashburne

 

ü  “Accounting is the process of identifying, measuring and communication economic information to permit informed judgments and decisions by users of the information.”

                                                                       -American Accounting Association

        Ø CHARACERISTICS OF ACCOUNTING

Ø There are Seven type of characteristics of Accounting 

·   Identification of Financial Transaction and Events:- Accounting records only those transaction and events which can be measured in terms of money. This involves identifying transaction that are considered a part of economic activity, for example, purchase of raw material or sale of finished goods by a firm.

·  Measuring the Identified Transaction: - Financial transaction and events are measured in terms of money.

· Recording: - Accounting is an art of recording business transaction in the books of account. Recording is the process od entering business transaction of financial character in the book of original entry.i.e., Journal.

    ·   Classifying: -Classification is the process of grouping transaction or entries of one nature at one place. The transactions recorded in the ‘Journal’ or the subsidiary books are classified or posted to the main book od account knows as the Ledger.

·  ·  Summarising: -  This involves presenting the classified data in a manner which is understandable and useful for internal as well as external users of accounting statement This process leads the preparation of the following statement:

(a) Trial Balance

(b) Trading and Profit & Loss Account or Statement of Profit and Loss (in case of companies) and

(c) Balance Sheet.

   There are known as Final Account or Financial Statement.

·    Analysis and Interpretation: - Analysis and Interpretation of the financial data are carried out so that the user of financial data can make a meaningful judgment of the profitability and financial statement of the business. This helps in planning for future in batter way. 

·    Communicating: - Finally, the accounting function involves communication the financial data, i.e., financial statement, to its users. The accounting information must be provided in time and presented to the user so that appropriate decisions may be taken at the right time.

         Accounting Process

Base on the attributes of accounting, the steps of accounting process are as follows: (a) Identifying Financial Transaction, (b) Recording, (c) Classifying, (d) Summarising, (e) Analysing and interpreting and (f) Communication. The accounting process may be explained by Diagram:     

                             Accounting Process

·    Financial Accounting: - Financial Accounting is that branch of accounting which records financial transaction and events, summarising and interprets them before communicating the result to the users.

 

·    Cost Accounting: - This branch of accounting is concerned with ascertaining costs of products, operations, processes of activities. It is that branch of accounting which deals with recording cost with the objective of ascertaining, reducing and controlling costs.

 

·    Management Accounting: - Management Accounting is the most developed branch of accounting. It is concerned with generating accounting information relating to funds, costs, etc., as it enables the management in decision-making.

  

                         Meaning of Book Keeping

§  Book Keeping is a part of accounting being a process of recording financial transactions and events in the books of accounting. Thus, Book Keeping involves:

1) Identifying them in terms of money

2) Measuring them in terms of money,

3) Recording the identified financial transaction and events in the books of account, and

4) Classifying the recorded transactions and events, i.e., posting them into Ledger accounts. 

ØDefinitions of book keeping with different views

·     “Book Keeping is an art of recording in the books of account the monetary aspect of commercial and financial transactions,”                                                                                                          - Northcott

·     “Book Keeping is an art of recording dealings in a set of books.”                                                                                           - J.R. Batliboi

·     “Book Keeping is the science and art of recording correctly in the books of accounting all those business transactions that results in the transfer of money or money’s worth.”                            - R.N. Carter

·     “Book keeping is the art of recording business transactions in a systematic manner.”                                            - A.N. Rose Kampff   

Ø                       Ø     Meaning of Accounting  

§  Accounting is a wider concept than book keeping. It starts where Book Keeping ends. In other words, Book keeping is a part of accounting.

                 Ø            Accountancy

§  Accountancy is a systematic knowledge of accounting. It explains how to deal with various aspects of accounting.

In the words Kohler, accountancy refers to the entire body of the theory and practice of accounting.

Ø Accounting and Accountancy

§  Accountancy is knowledge whereas accounting is the action or process. Accounting process is carried out on the rules and principles farmed by accountancy. Thus, it may be said that accountancy is knowledge of accounting is the application of accountancy.

• o  Users of accounting information may be categorised into Internal Users and External Users.

 Internal Users

(a) Owners: - Owners contribute capital in the business and thus are exposed to maximum risk Naturally, they are interested in knowing the profit earned or loss incurred by the business besides the safety of their capital.

(b) Management: - The management makes extensive use of accounting information to arrive at informed decisions such as determination of selling price, and cost controls and reduction, investment into new projects, etc.

  (C) Employees and Workers: - Employees and Workers are entitled to bonus at the year-end, which is linked to the profit earned by enterprise. Therefore, the employees and workers are interested in financial statements.

External Users

(a) Banks and Financial Institutions: - Banks and Financial Institutions ae an essential part of any business and they provide loans to business.

b) Investors and Potential Investors: - Investment involves risk and also the investors do not have direct control over the business affairs. (Therefore, they rely on accounting information available to seek the answer how safe is their investment.)

(c) Creditors: - Creditors are those Parties who supply goods and/or services on credit.

(d) Government and Its Authorities: - The government use of financial statements to compile national income account and other information. The Information available to it enables it to take policy decisions.

Government levies varied taxes such as excise duty, GST and income tax.

(e) Researchers: - Researchers use accounting information in their research work.

(f) Consumers: - Consumers require accounting information for establishing good accounting control so that cost of production may be reduced with the resultant reduction in the prices of productions they buy.

(g) Public: - They went to see the business running since it makes substantial contribution to the economy in many ways. e.g., employment of people, patronage to suppliers, etc.

o  Qualitative characteristics are attributes that make the accounting information useful to users. The qualitative characteristics are:

(a) Reliability: - Accounting information must be reliable. Reliability of information means it is verifiable, free from bias and material error.

(b) Relevance: - Accounting information must be relevant if it meets the need of users in decision-making.

(c) Understandability: - Understandability means that the information provided through the financial statements must be presented in a manner that the users are able to understand it.

(d) Comparability: - Comparability means that the user should be able to compare the accounting information of an enterprise of the period either with that of other periods, knows as inter-firm comparison or with the accounting information other enterprise, knows as inter-firm comparison.

 

o  The systems of recording transactions in the books of account are two namely;

1) Double Entry System, and

2) Single Entry System.

1) Double Entry System: - Double Entry System of accounting is a system of accounting under which both, debit and credit, aspects of accounting are recorded. A transaction are two aspects-Debit and Credit- and at the time of recording a transaction, it is recorded once on the debit side again on the credit side.

 

§  Stage of Double Entry System

o  A complete system of double entry book keeping has following three stages:

ü   Recording the transactions in the Journal.

ü   Classifying transactions in the Journal by   posting them to the appropriate ledger accounts and then preparing the Trail Balance.

ü   Closing the books and preparing the final accounts.

 

·     Advantages of the Double Entry System

(a) Scientific System: - Double Entry System is a scientific System of recording business transactions as compared to other system of Book Keeping. It helps attain the objective of accounting.

(b) Complete Record of Transactions: - Under the system, both side of a transaction are recorded. It is a complete record as it results in showing correct income or loss, assets and liabilities.

(c) Arithmetical Accuracy of Accounts is Ensured: - By the use of this system, arithmetical accuracy of the accounting work can be established through the trail Balance.

(d) Determining Profit or Loss: - Profit earned or loss incurred during a period can be determined by preparing Profit and Loss Account.

(e) Knowledge of Financial Position: - Financial position of the firm or the institution can be ascertained at the end od each period by preparing the Balance Sheet.

(f) Full Details for Purposes of Control: - The system permits accounts to be maintained in as much detail as necessary and, therefore, provides significant information for purposes of control, etc.

(g) Comparative Study id Possible: - Results of one year may be compared with those of pervious years and reasons for the change may be ascertained.

2) Single Entry System: - Account for Incomplete Records or Single Entry System of recording transactions in the books of account may be defined as an incomplete Double Entry System. In this system, all transactions are not recorded on double entry basis.