MODULE1 MEANING DEFINITIONS FEATURES OF ACCOUNTING OBJECTIVES OF

MODULE-1

� MEANING � DEFINITIONS � FEATURES OF ACCOUNTING � OBJECTIVES OF ACCOUNTING � FUNCTIONS OF ACCOUNTING � QUALITATIVE CHARECTRISTICS OF ACCOUNTING INFORMATIONS � ADVANTAGES AND LIMITATIONS OF ACCOUNTING

� USERS OF ACCOUNTING INFORMATION � BRANCHES OF ACCOUNTING � BASIC ACCOUNTING TERMS � BASIC ASSUMPTIONS � BASIC ACCOUNTING PRINCIPLES

� GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND PRACTICES-GAAP � TYPES OF ACCOUNTS � GOLDEN RULES OF ACCOUNTING � ACCOUNTING EQUATION

Accounting is a means of communicating the result of business operations to various parties interested or connected with the organization. It is the process of systematic recording and analysis of business transactions, preparation and interpretation of accounts and statements required for the ascertainment of trading results and financial positions of the organizations. Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of information. Accounting is an information system communicating accounting information to the users to enable them to make rational decisions.

According to the American institute of certified public accounts “Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events which are, at least, of financial character and interpreting the result thereof. ” American accounting association “Accounting is the process of recording, classifying, summarizing, analyzing and interpreting the financial transaction and communicating the results there of to persons interested in such information.

� Recording- It is the process of entering business transactions in a systematic manner in the books of accounts for future reference. Recording is done in a book called journal. � Classifying- It is the grouping of recorded data on the basis of common characteristics. The book containing classified information is called Ledger. � Summarizing- It is the preparation and presentation of classified data in a manner suitable to internal and external users of accounting information. It involves the preparation of income statement showing the profit and loss and position statement showing asset and liabilities of the organization.

� Analyzing- It is concerned with the establishment of relationship between the various items of income statement and balance sheet. Its purpose is to identify the financial strength and weaknesses of the enterprise. � Interpreting- It is concerned with explaining the meaning and significance of the relationship established by the analysis of accounting data. It helps to make a meaningful judgment about the financial position and profitability of the business operations. � Communicating- It is concerned with the transmission of summarized, analyzed and interpreted information to users for decision making.

The primary objective of accounting is to provide information to facilitate business decisions. Accounting has to make available the right information to the parties interested in the business and users of accounting information within the organization. The objectives of accounting can be summarized as follows 1. Facilitates maintenance of business records. 2. Ascertainment of profit and loss. 3. Ascertainment of financial position. 4. Providing information to users.

� Measurement-It measures the past performance of a firm and presents its current financial positions. � Forecasting- With the help of past data, accounting forecast the future performance and financial position of firm. � Decision making- Accounting provides information required for decision making to interested users. � Evaluation-Accounting evaluates the performance of employees and management and the financial results achieved by a firm. � Control- Accounting identifies the weaknesses of a firm and provides correct actions.

The main qualitative characteristics are as follows: � Reliability –Information considered to be reliable if it is free from bias and representative in nature. � Relevance � Comprehensibility-clarity � Comparability- facilitate comparison.

� Provides qualitative information � Helps in ascertaining financial position of the business. � Systematic recording of data is possible. � Act as an information system. � Beneficial to different interested users of accounting information.

� Its records only transactions which can be recorded in monetary terms. Qualitative aspects like managerial skill, services of experts etc are not recorded. � Accounting is a post mortem survey. � Effect of price level changes are not considered here.

There are two types of users of accounting information� Internal users – The users of accounting information having direct interest in the organization are called internal users of accounting information that are owner and management. � External users- The users of accounting information having indirect interest in the organization are called external users of accounting information that are employees, creditors, banks, investors, customers and government.

To satisfy the needs of various users of accounting information, different branches of accounting have been developed. There are mainly three branches of accounting. ACCOUNTING FINANCIAL ACCOUNTING COST ACCOUNTING MANAGEMENT ACCOUNTING

� FINANCIAL ACCOUNTING-Accounting concerned with the preparation of financial statements for the use of outsiders is called financial accounting. The main purpose of financial accounting is the ascertainment of profit or loss and the financial position of an organization during an accounting period. It provides accounting information required for decision making to outsiders. � COST ACCOUNTING- It is concerned with the ascertainment of cost of production of products manufactured or services provided. It involves recording, classification, allocation, summarization and reporting of current and prospective cost and analyzing their behaviors. It is used for internal decision making and provides tools with which management can appraise performance and cost control cost of doing business.

� MANAGEMENT ACCOUNTING- Accounting providing information to management for decision making is called management accounting. It helps the management in planning, control, evaluation of performance and decision making.

� Business transactions- the dealings of a business man with an external party, which have an impact on his business and can be expressed in monetary terms is called business transactions. � Revenue- Revenue represents the amount a business earns through sale of its products or providing services to customers. Thus, sale is the major revenue of the business. Other items of revenues are rent received, interest received, dividend received, commission, royalties etc. � Expenses- It represents the amount expended to earn revenue. They are the cost incurred in the process of revenue. example; rent , wages, salaries paid etc. � Expenditure- Expenditure represents amount consumed for the acquisition of assets, the benefit from which is derived over a period which extends beyond the accounting year. It is long term in nature. example purchase of land, building etc.

� Loss- It is the excess of expenses over revenue in an accounting year and represents reduction in owners equity. � Profit- Profit is the excess of revenue over expenses in an accounting year and represents increase in owners equity. � Income- Income is the ultimate increase in the net worth of an organization. It is a change in the wealth of a firms over a period of time. Income includes profit also. � Drawings- It represents the amount of cash on their assets withdrawn by the owners for his personal purpose.

� Assets- Assets are properties or things of value owned by a person or firm are called assets. Assets may be classified into : a)Fixed assets- Assets meant for permanent use in the business for long period are called fixed assets. It is used for the generation of income and not meant for resale. E. g. land building, plant and machinery etc. b)Current assets- Assets purchased for resale or meant for a short period are called current assets or floating assets. such assets are held in form of cash or can be converted into cash within the period of 12 months. E. g. stock, debtors, bills receivables etc. c)Liquid assets- liquid assets are also known as quick assets are current assets other than stock and prepaid expenses. Liquid assets=current assets-(stock + prepaid expenses)

d)Tangible assets- Assets having realisable value and physical existence are called tangible assets. E. g. cash at bank, machinery, furniture etc. e)Intangible assets- Assets having realisable value and no physical existence are called intangible assets. E. g. Patent, goodwill, trade mark etc. f)Wasting assets- Assets exhausted in the process of earning revenue are called wasting assets. E. g. Mines, Oil wells etc. g)Fictitious assets- Assets having no realisable value are called fictitious. These are accumulated losses or deferred revenue expenses incurred in the past but nor changed to P/L a/c. h)Contingent assets- An asset the existence, value and ownership of which depends on the occurrence or non-occurrence of a specified event or performance or non performance of a specified act is called contingent assets.

� � � Liabilities- Debts owned by a person or firm to outsiders are called liabilities. Liabilities may be divided into; a) current liabilities b) long term liabilities c) internal liabilities d) external liabilities e) contingent liabilities Capital- capital is the investment made by the owners for use in the business. It is the owners claim on the total assets of the business and is also called owners equity. Capital will be equal to total assets of the firm minus liabilities of the firm. Sales- Sales represents total revenue earned by a business through sale of goods or services to the customers. Sales includes cash sales and credit sales.

� Purchases- Purchases is an expense incurred for procurement of goods in a business. Such good s purchases may be on cash basis or credit basis. � Stock-Stock represents goods, spares and other items in the business at the close of accounting year. It includes unsold goods, raw materials and spares in hand. � Debtors- Debtors represents persons and entities who owe to the business. Such Owings come out of goods or services purchased from the business on credit.

� Creditors- Creditors are persons or entities to whom the business owes on account of credit purchases made. � Accounts receivable- It includes amount due from debtors as well as on account of bills receivable. � Accounts payable- It includes creditors and bills

Assumption constitute the foundation of accounting. They have been developed by customs, traditions, beliefs and practices by accounting practitioners. It lays down the general principles to be followed while preparing financial statements. There are 4 basic accounting assumptions. The are: 1)Accounting entity 2)Money measurement 3)Going concern 4)Accounting period

� Accounting entity- A business firm is distinct from its owner. The transactions of the business are recorded in the books of the firm and are not in the books of the owner. The owner is considered as creditor for the capital invested in the business. The owners capital is the obligation of the business and it has to be paid back to be the owner in the event of business closure. Business is treated as distinct and separate from the individual who own or manage it.

� Money measurement: Only those transactions which can be measured in terms of money are recorded in the books of account. Transactions that cannot be expressed in terms of money in the books of account. � Going concern: A firm will be continue its operations for an indefinite period of time. It is not likely to be liquidated in the near future. It has an indefinite life. The business will last for a long time.

1. 2. 3. 4. 5. 6. Accounting principles are the general rules which govern the accounting techniques. These principles shout not be contrary to the accounting assumptions. The following are the principles of accounting. Duality principle(dual aspect principles) Historical cost principle Verifiability and objectivity principle Revenue recognition principle Matching principle Full disclosure principle

� Duality principle(dual aspect principles): This principle assumes that each business transaction has two aspects, i. e. , the receiving aspect called debit and the giving aspect of a transaction is called credit. Based on the duality principle, accounting equation is developed. The system of recording transactions with its dual aspect is called double entry system. � Historical cost principle: This principle assumes that all assets are to be recorded at the total amount paid to acquire them and this cost is the basis for all subsequent accounting for those assets. It does not mean that the assets are always shown at cost, but will be reduced by the decrease in value which is called depreciation. This principle is closely related to going concern assumption.

� Verifiability and objectivity principle: This principle state that the accounting data provided in the books of accounts should be verifiable and dependable. Financial information should be free from bias. � Revenue recognition principle: Revenue is the amount which a business earns through sale of goods or services. Revenue is recorded at the time when the title of goods passes from the seller to the buyer. This is considered to be the point for revenue recognition.

There are certain guidelines and practices that are followed while recording transactions and in preparing financial statements. Such guidelines and practices has been developed on the basis of globally accepted accounting standards. Such principles are called GAAP. ACCOUNTING ASSUMTIONS � AS 1 - Accounting standard 1 - Disclosure of accounting polices- This accounting standard explains how accounting policies have to be followed in preparing and presenting financial statements. This disclosure of the policies will be useful to the users of financial statements of different enterprises.

AS 2 – Valuation of inventories – The financial statements should disclose the policies adopted in the valuation of inventories and the method of classification adopted. The term inventories includes assets-a) held for sale in the ordinary course of business. b) in the process of production for such sale or c) in the form of materials or supplies to be consumed in the production process or in the rendering of service. � AS 3 - Accounting standard 3 - Cash flow statements- This accounting standard states how various sources and applications of funds of an enterprise can be summarized and presented in the financial statements. Cash flow statements are to be classified into three, namely, operating activities investing activities and financial activities. �

AS 4 - Contingencies and events occurring after the balance sheet date- This accounting standard deals with the treatment of contingencies and events occurring after the preparation of financial statements. It does not cover contingencies relating to the liabilities of life insurances and general insurances, obligations under retirement benefit plan and commitments arising from long term lease contracts. � AS 5 -Net profit or loss for the period, prior period items and changes in accounting policies- This standard deals with the treatment of prior period item and extra ordinary items and changes in accounting policies in the financial statements. it does not deal with the tax implications of prior period items, extra ordinary items and changes in accounting policies. �

AS 6 -Depreciation accounting- This accounting standard deals with depreciation accounting and applies to all depreciable assets except-a) forests, plantations and natural resources , b) wasting assets, c)goodwill etc. � AS 7 -Accounting for construction contracts- This standard deals with accounting for construction contracts in financial statements of contractors. Such contracts may be fixed price contracts or cost plus contracts. � AS 8 - Accounting for research and development- This standard deals with the treatment of research and development cost in financial statements. But it does not deal with the accounting implications of the following specialized activities. �

a. Research and development activities conducted for others under a contract. b. Exploration of oil , gas and mineral deposits. c. Research and development activities of enterprises at the construction stage. � AS 9 - Revenue recognition - This standard deals with the basis for recognition of revenue arising in the course of ordinary activities of the enterprise from the sale of goods, the rendering of services and the use by other s of enterprise recourses yielding interest, royalties and dividends.

AS 10 - Accounting for the fixed assets- This standard deals with accounting for fixed assets, such as land, buildings, plant and machinery, furniture, goodwill, patents, trademark and designs. � AS 11 -Accounts for effects of changes in foreign exchange rates- This standard states how accounting of transactions in foreign currencies are translated in the financial statements of the business. � AS 12 - Accounting for government grants- This standard deals with government grants. They include those forms of government assistance which cannot reasonably have a value placed upon them. Government grants should not be recognized until there is reasonable assurance that �

a)The enterprise will comply with the conditions attached to them and b) The grants will be received the accounting policy adopted for government grants, including methods of presentation in the financial statements should be disclosed. 1. AS 13 - Accounting for investments- AS 13 deals with the accounting for investment in the financial statements of enterprise and related disclosure requirements. This information relating to interests, dividends, rentals earned on investment, lease income etc. should be disclosed in the financial statements.

AS 14 - Accounting for Amalgamation- Where 2 or more business entities merge together to form a new entity, it is called amalgamation. This standard deals with the accounting treatment associated with amalgamation. The prescribed standards to be followed in recording closure of books of the amalgating companies and opening of books of the resulting company is stated here. � AS 15 -Accounting for retirement benefit in the financial statements of employees- This standard deals with accounting for retirement benefits in the financial statements of employers. The term retirement benefits include the following items a) P. F b)pension c) gratuity d)leave encashment benefit on retirement f) post-retirement wealth and health schemes f) other retirement benefits. �

AS 16 - Borrowing costs- This standard deals with accounting treatment of borrowing costs which are eligible for capitalization. The borrowing costs incurred by an enterprise for the acquisition, construction or production of a qualifying asset should be capitalized as part of the cost of that asset. The amount of interest to be capitalized is decided in accordance with this standard. � AS 17 - Segment reporting- This standard is applicable to those business enterprises whose annual turnover is Rs. 50 cores or more and whose securities are listed in a recognized stock exchanges in India. Accounting information should be supplied segment wise on the basis of products, services, type of customers, geographical area etc. �

AS 18 - Related party disclosures - This standard deals with the disclosure of transactions between the enterprise and related parties. Related parties are considered to be related if at any time during the reporting period one party has the ability to control the other party in making financial and or operating decisions. � AS 19 - Leases - This standard deals with the accounting treatment for all lease transactions. Lease transactions implies acquiring assets on lease in place of purchasing it. � AS 20 - This standard deals with the principle for the determination and presentation of earnings per share. Earnings per share is computed by dividing total earnings of the enterprise by number of shares outstanding. �

� AS 21 -Consolidated financial statements- The objective of this standard is to lay down principles and procedures for preparation and presentation of consolidated financial statements are presented by a parent or holding company to provide financial information about the business activities of its group ie including that of its subsidiary companies. The relative share of the parent company and its subsidiaries should be disclosed in the consolidated financial statements.

� AS 22 - Accounting for tax on income- This standard deals with the determination of tax expenses for the related income. As per the matching principle, taxes on income are accrued in the same period as the revenue and expenses to which they relate. � AS 23 - Accounting for investments in associates in consolidated financial statements – An enterprise that presents consolidated financial statements should account for investment in associates in the consolidated financial statements in accordance with the standard.

� AS 24 - Accounting for discontinued operations- this standard lays down the principles for reporting information about the discontinued operations, with an objective of providing additional information to the users of financial statements to make projections about the cash flows, fund flows, profit generation capacity and financial position by segregating information about the discontinued operation from information about continuing operations.

� AS 25 - Interim financial reporting- This accounting standard prescribes the minimum content of an interim financial report and principles for recognition and measurement in a complete or condensed financial statements for an interim period. � AS 26 - Intangible assets – The objective of this accounting standard is to prescribe the accounting treatment for intangible assets that are not dealt with specifically in any other accounting standard.

� AS 27 - Financial reporting of interest in joint ventures- This accounting standard deals with the principles and procedures for accounting for interests in joint ventures and reporting of joint assets, liabilities, income and expenses in the financial statements of ventures and investors. � AS 28 - Impairment of assets- Under this accounting standard there is a need to value fixed assets applying proper measurement basis. In case the depreciated book value of assets is more than the valuation undertaken independently then there is a need for charging additional impairment or loss to fixed assets.

� AS 29 - Provisions, contingent liabilities and contingent assets- Under this accounting standard an attempt is made to determine the provisions to be made for contingent liabilities and assets.

Thank you….