Basic Accounts material

ACCOUNTING

The art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events which are in part at least of financial character and interpreting the results thereof.

ACCOUNT:  Account means summary of transaction.

               

ACCOUNTANCY:  Accountancy means how to put in the knowledge

ACCOUNTING:

1.            BOOK KEEPING

2.            ACCOUNTING

3.            AUDITING

BOOK KEEPING:

It is concerned with the recording of business transactions in a significant and orderly manner, which is mechanical and repetitive manner.

CONCEPTS OF ACCOUNTING :

(A)BUSINESS ENTITY CONCEPT:

This concept implies that the business is distinct from the person who owns it.  All the transactions of the business as are recorded in the books of the business from the point of view of the business as an entity and even the proprietor is treated as a CREATOR to the extent of his capital.

(B)DUAL ASPECT CONCEPT:

Every transaction has a two fold aspects

1.            Receiving the benefit

2.            Giving the benefit

For example when a firm acquires an asset (receiving the benefit) it must have to pay cash (giving the benefit).  There will be a double entry for every transaction.

                Debit     for receiving the benefit

                Credit    for giving the benefit

(C)MONEY MEASUREMENT CONCEPT:

For every transaction is recorded in terms of money or otherwise you won’t record in terms of money.  It is difficult to measured of income.  If in the business you have a cash 70000/-, Rooms 50, 80000 Raw Materials you can add up the items you cannot get meaning full information or otherwise you can expressed in terms of money, all these you can get one exact value.

(D)COST CONCEPT:

Asset is recorded at the price paid to acquire it, which is at cost.

Ex:          If the purchases of land Rs. 80000/- then its market price is 100000/-.  At the time of preparation of final accounts will not be considered the market price.

(E)GOING CONCERN CONCEPT:

This concept assumes that the business entity has a continuity of life or future of the business enterprise is to be prolonged or extended indefinitely.

(F)ACCOUNTING PERIOD CONCEPT:

According to going concept the life of the business indefinite. If the proprietor to know what is the exact position of the business, it should prepare its accounts in such interest.  Therefore businessmen choose some shorter and consequent time for the measurement of income.  12 months period is normal accepted.

(G)REALISATION CONCEPT:

According to this concept, Revenue is recognized to be made at the point when the property in goods passes to the buyer and he becomes legally liable to pay.

(H)ACCRUEL CONCEPT:

This concept is based on accounting period concept.  The paramount objective of running a business is to earn profit.  In order to ascertaining the profit made by the business during a period, it is necessary that “REVENUES” of the should be matched with the “COSTS”  (Expenses) of the period.  The term matching means appropriate association of related revenues and expenses.

In other words income made by the business during a period is compared with the expenditure incurred for earning that revenue.

ACCOUNTING CONVENTIONS:

1.CONSERVATISM CONVENTION:

In the initial stage of accounting, certain anticipated profits, which were recorded, did not materialize.  This resulted in les acceptability of accounting figures by the end users.  On account of this reason, the accountants follow the rule “ANTICIPATE NO FUTURE PROFITS BUT PROVIDE FOR ALL POSSIBLE LOSSES”

2.FULL DISCLOSURE:

According to this convention, accounting practices should disclose fully and fairly the information they purport to represent.  They should be honestly prepared and should sufficiently disclose information, which is of material interest to properties, present and potentials creditors and investors.  The companies Act 1956 not only requires that Income Statement and Balance Sheet of a company must give a true and fair view of the state of affairs of the company.

3.CONSISTENCY CONVENTION:

According to this convention, accounting practices should remain unchanged from one period to another.

Ex:

          1.   Stock is valued at “COST OR MARKET PRICE WHICHEVER IS LESS”

          2.   If depreciation is charged on fixed assets according to diminishing balance method, it should be done so for the year.

4. MATERIALITY:

According to this convention, the accountant should attach importance to material details and ignore insignificant details.  This is because otherwise according will be unnecessarily over-burdened with minute details.

EXPENSES:         

Consumption or use of the goods and services in order to earn revenue is an expense.

EXPENDITURE:

The money value of the sacrifice made in order to acquire any benefit.  Expenditure is the price of any benefit acquired.

LOSSES:

Sacrifices interms of money against which no benefit has been received.  The excess of expenses over a revenue of a particular accounting period is known as loss.

TRANSACTION:

Business event occurs which can be measured and expressed in terms of money and must be recorded in the books of accounts it is called as “TRANSACTION”.

ACCOUNT:

Summary of Transaction relating to particular person, thing, expenses or income.

CASH TRANSACTION:

It is one where cash receipt or payment is involved in the exchange.

CREDIT TRANSACTION:

It is one give rise to debit or credit relationship.

NON-CASH TRANSACTIONS:

It is a transaction where the question of

                            

JOURNAL:

Journal is a complete and chronological record of business transactions.  It is recorded in a systematic manner.

EX: 

         When we take up the purchases.  There are 3 documents such as purchase requisition, purchase order and goods received note.  They are called vouchers.  A voucher is documentary evidence in support of transaction in the books of accounts.  From the voucher extend in the journal.                      

LEDGER:

The book, which contains the various accounts, is known as the ledger.

TRAIL BALANCE:

Trail balance is a statement which is prepared in a separate set of papers by taking up all the ledger account balances on a particular date in order the verify to arithmetical accuracy of the accounts in the ledger and putting the debit in one side and credit in another.

                               

1.            TOTAL METHOD

2.            BALANCE METHOD

3.            COMPOUND METHOD

ERRORS:

1.ERRORS OF OMMISSION:

A transaction entirely ommitted from record in the original books.

2.ERRORS OF COMMISSION:

Wrong posting either wrong amount or wrong side posting or wrong account or an error in casting the subsidiary books.

3.ERRORS OF PRINCIPLE:

Wrong classification of expenditure or receipt.

4.COMPENSATING ERRORS:

One error oppset by another error.

                                                1, 2, 4 CAN ALSO BE CLERICAL ERRORS.

CASH DISCOUNT:

When goods are purchased on credit, payment will be made at a future dates as agreed by the parties.  If there is an incentive to pay it promptly as agreed upon, the payment made in time, so, a discount by way of incentive is allowed by the seller to the buyer.  The discount is cash discount.

TRADE DISCOUNT:

Which reflects gross profit or loss.  Means difference between selling price – cost price of goods before deduction of any expenses incurred in selling goods.

PROFIT AND LOSS ACCOUNT:

It is the profit that remains after deducting all expenses from the gross profit.  It represents the real gain of business.

BALANCE SHEET:

The balance sheet shows the financial position of a business concern at a particular point of time.

BALANCE SHEET IS MARSHALLING:

Marshalling means the sequence of Balance Sheet items.

1.  Liquidity:        It is an order, which is converted into cash, is taken first.

               

2.  Permanence:  It is an order, which is the item, is permanent nature taken first.

               

CASH BOOK:

The book, which keeps all cash transaction.

NEGOTIABLE INSTRUMENT:

NEGOTIABLE:     Transferable by delivery

INSTURMENT:   written document by which a right is created infavour of some persons.

               

Sec 13(1) of the negotiable Instrument Act a Negotiable Instrument means a promissory not, bills of exchange or cheque.

                                               

Grace period is 3 days.

               

CAPITAL TRANSACTION:

The transaction which provides benefits of supply services to the business unit for more than one year or one operating cycle of the business are known as capital transaction.

CAPITAL EXPENDITURE:

Capital expenditure consist of those expenses the benefit of which is carried to the several accounting periods or in other words the benefit which is not consumed within one accounting period.

REVENUE EXPENDITURE:

Revenue expenditure consists of expenditure the benefit of which is not carried over to the several accounting periods.

REVENUE TRANSACTION:

The transactions, which provide benefits or supply services to a business unit for one accounting period, only are known as revenue transaction.

DEFFERRED REVENUE EXPENDITURES:

Heavy revenue expenditure the benefit of which may be extended over a number of years and not for the current year only is called deferred revenue expenditure.

 Ex: 

         1.            PRELIMINARY EXPENSES

         2.            ADVERTISEMENT

         3.            BROCKERAGE.

CAPITAL RECEIPTS:

The amount received by issue of shares long-term loan taken from a bank.

REVENUE RECEIPT:

All the receiving income, which a business earns during normal course of its activities.

OPENING ENTRIES:

When the assets and liabilities are taken from the previous year to current year the same is to be passed through “JOURNAL PROPER”.

CLOSING ENTRIES:

In order to ascertain the profit and loss for the year all the revenue accounts relating to incomes or expenditures are taken from to either Trading account or Profit and Loss account.

DEBTORS:

The sum total or aggregate of the amounts, which the customers owe to the business for purchasing goods on credit, is known as debtors.

BAD DEBTS:

The debts, which cannot to realize at all, are called bad debts.

TYPES OF DEPRECITAION:

                               

1.            STRAIGHT LINE METHOD

2.            WRITTEN DOWN METHOD

3.            SUM OF YEARS DIGITS METHOD

4.            ANNUNITY METHOD

5.            SINKING FUND METHOD

6.            MACHINE HOUR RATE METHOD

7.            DEPLETION METHOD -- FOR USING MINES AND QUERIES.

CLOSING STOCK:

Normally goods purchased are debited to purchases account and goods sole are credited to sales account and there is no account to show how much of the goods are still lying in the godowns.  Normally, therefore, the trail balance does not disclose the value of closing stock on hand.  Thus, in order to arrive at the true profit, the closing stock must be valued and an entry passed at the end of the year.  The entry is

               

                STOCK A/C     Dr

                                 To TRADING A/C

STOCK A/C is an asset appears in the balance sheet.

 Some concern prefers to pass the following entry.

                               

                                                STOCK A/C                          Dr

                                                   To PURCHASE A/C

In this case, PURCHASES A/C will appear at lower figure.  The TRADING A/C will not, in this case be credited with the closing stock.  The closing stock in this case will appear in the trail balance and will go to Balance Sheet.

USERS OF ACCOUNTING INFORMATION NEEDS:

1.            Internal Management.

2.            Outsiders

OUTSIDERS:

a.            Investors

b.            Employees

c.             Lenders

d.            Suppliers and other creditors

e.            Customers

f.             Government and other agencies

g.            Public

SUB FILEDS OF ACCOUNTING:

1.            Book keeping

2.            Financial accounting

3.            Management accounting

4.            Social Responsibility accounting

BASIC ACCOUNTING PROCEDURES:

                Equity                   +             liabilities               =             Assets

                Increase in one asset     --             Decrease of other assets

                Increase in one asset     --             Increase of liability

                Decrease of asset            --             Decrease liability

                Increase of Liability         --             Decrease in other liability

EQUITY PARTICIPANTS:

                In term equity participants means

1.            Share holders in case of a Company

2.            Proprietor in case of proprietorship

3.            Partners in case of partnership

SUBSIDIARY BOOKS:

                ADVANTAGES:

1.            Division of work

2.            Specialization and efficiency

3.            Saving of time

4.            Availability of information

5.            Facility of checking.

RECTIFICATION OF ERRORS:

a.   Before preparing trail balance

b.   After preparing trail balance but before balance sheet (suspense a/c)

c.   After final accounts.

FUNDAMENTAL ACCOUNTING ASSUMPTIONS:

1.            Going concern

2.            Consistency

3.            Accrual

PAYMENT OF DIVIDEND                                Transfer to General Reserve.

10% to 15%                                                         2.5% of current profits

15% to 17.5%                                                        5% of current profits

17.5% to 20%                                                     7.5% of current profits

20% and above                                                 10% of current profits

TYPES OF PREFERENCE SHARES:

1.            Convertible

2.            Non Convertible

3.            Redeemable

4.            Irredeemable

5.            Participating

6.            Non-Participating

7.            Guaranteed

EXTRAORDINARY ITEMS IN FINAL ACCOUNTS:

It means an item, which is capable to change profit or loss.  Even distinct from general item.  It must be separately disclosed in profit and loss account.

               

CONCEPT OF FUND:

Interpreted in the sense of financial resources purchase or spending power of at a particular item.

BANK RECONCILIATION STATEMENT:

As on a particular date to know the position clearly and to be sure that no mistakes have been committed, there must be a statement to explain why there is a difference between the balance shown by the pass book and that shown by the cash book.

DELCREDERE COMMISSION:

For the ordinary commission that the consignee gets, the consignee does not guarantee that all those who buy on credit will pay up.  I.e. consignee not responsible for Bad debts.  It is useful, however, to make the consignee responsible bad debts by giving him an additional commission on total sales.  The additional commission for which the consignee guarantees debts is called del-credere commission.

CAPITAL RESERVES:

These reserves are built out of capital profits.  In case of a limited company the following are capital profits:

1.            Profit prior to incorporation.

2.            Profit on redemption of debentures.

3.            Premium on issue of shares or debentures.

4.            Amount utilized out of profits to redeem redeemable preference shares

5.            Profit on forfeiture of shares

6.            Profit on sale of fixed assets.

7.            Profit on revaluation of fixed assets or liabilities.

SEC 78 PREMIUM ON SHARES CAN BE UTILISED FOR THE FOLLOWING:

1.            Issue of bonus shares to the member of the company.

2.            Writing off the preliminary expenses

3.            Writing off discount on issue of debentures or shares

4.            Providing for the premium payable on the redemption of debentures or redeemable preference shares.

SECRET RESERVES:

These reserves, which are not known to the numbers of the company.  When secret reserves exist, the financial position of the company is better than what appears from the balance sheet.

THE FOLLOWING ARE WAYS FOR SECRET RESERVES:

1.            Writing off excessive depreciation

2.            Charging capital expenditure to profit and loss account

3.            Under valuation of closing stock

4.            Suppression of sales

5.            Showing a contingent liability as an actual liability

6.            Showing an asset as a contingent asset.

7.            Crediting revenue receipts to an asset.

(Rent receiving is credited to Building account)

GENERAL RESERVE:

A Portion of profits in a particular year may be transferred to a reserve designed to meet any unforeseen contingency in future such as trading losses or financial stringency or to be utilized for expansion of business.

SPECIFIC RESERVES:

If a reserve is credited with some definite purpose it is called specific reserve.  A reserve may be created to equalize dividends and for this purpose a sum is transferred to “DIVIDEND EQUALISATION FUND” so fund will be utilized to keep the dividend up.

SINKING FUND:

A sinking fund is a fund built up by regular contribution and the interest received by investing the amount so contributed and the interest itself.  The purpose of sinking fund may be either payment of a liability on a certain day in future or accommodation of funds to replace a wasting asset.

GOODWILL:

A business builds up some reputation after it has continued for some time.  If the reputation is good, it will come to acquire a fixed clientele – in the sense that a number of customers will automatically make their purchases from the firm they like.  The firm then does not make special efforts to make sales to such customers.  This is very valuable asset even if one cannot touch or feel or see it.  The asset is “INTANGIBLE BUT NOT FICTITIOUS”.

VALUATION OF GOODWILL:

1.            Average profits basis.

2.            Super profits basis.

3.            Capitalization method.

                     PROFIT                            X 100     

Reasonable Return or Normal Return

HIRE PURCHASE:

Hire purchase means a transaction where goods are purchased or sold with the stipulations that

1.            Payment will be made by installments

2.            Each installment will be treated as hire.

If default is made in the payments of even last installment the seller will be entitled to take away the goods without compensating the hire purchaser in any way.  The property in the goods does not pass to the purchaser till the final installment is paid.

COMPONENTS OF TOTAL COST:

1.  PRIME COST:         Consists of material, direct labour and direct expenses.

2.  FACTORY COST:   Prime cost + Factory Overheads or Works include indirect material,                                                     labour and expenses.

3.  OFFICE COST OR COST OF PRODUCTION:

                              If office and administration costs are added to factory cost, office cost arrived at called as cost of production.

4.  TOTAL COST OR COST OF GOODS SOLD:

                    Selling and distribution overheads added to total cost of production to get the total cost or cost of sales.