Fundamentals of accounting with questionaire
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This document discusses the importance of financial accounting for non-accountants, arguing that understanding financial statements is essential for making informed business decisions. It outlines key accounting concepts such as the business entity concept, money measurement concept, and the going concern concept, highlighting their significance in recording transactions and evaluating a business's financial health. Additionally, it addresses accounting conventions and includes terminology, principles, and examples to illustrate the application of these concepts in real-world scenarios.
Fundamentals of accounting with questionaire
- 3. • Students who take this course do not plan to be accountants. If I’m not going to be an accountant, why do I need to know accounting?
- 4. Harold Geneen-Former Chairman of IT&T • “To be good at your business, you have to know the numbers” • Success in any business comes back to the numbers. You will rely on them to make decisions, and managers will use them to evaluate the performance. That is true whether your job involves marketing, production, management or IT.
- 5. a) Share prices of a company are affected by its financial statement so a manager must know accounting b) Accountant will make the financial statement but a manager should be good at interpreting the numbers c) To value firms(investment bankers), understanding financial statement is must.
- 6. d) Manager has to evaluate financial health of a business, analyze financial reports and make critical decisions based on financial statements. e) Start up entrepreneurs should know accounting so that they can manage accounting and finance of their business.
- 7. Accounting Accounting is often called the language of business. It is common language used to communicate financial information in the world of business. It provides information which is useful in making business and economic decision, for making choices among alternative so that optimum utilization of scarce resources takes place.
- 8. Is accounting necessary? Yes without any doubt !! If an restaurant’s menu is Italian , a customer should know Italian to be able to make sense of the recipe. In the same manner a decision maker who wish to use accounting information should have a fair understanding of accounting
- 10. Users of Accounting Information • Investors • Lenders • Analysts and Advisors • Suppliers and Trade Financiers • Customers • Government and Regulatory Authorities Externa l Users
- 11. Users of Accounting Information • Managers • CEO • Trade Unions Interna l Users
- 12. Accounting Concepts • Business entity concept • Money measurement concept • Going concern concept • Accounting period concept • Accounting cost concept • Duality aspect concept • Realization concept • Accrual concept • Matching concept 12
- 13. Business entity concept • This concept assumes that, for accounting purposes, the business enterprise and its owners are two separate independent entities. Thus, the business and personal transactions of its owner are separate. • For example, when the owner invests money in the business, it is recorded as liability of the business to the owner. Similarly, when the owner takes away from the business cash/goods for his/her personal use, it is not treated as business expense. • Thus, the accounting records are made in the books of accounts from the point of view of the business unit and not the person owning the business. • This concept is the very basis of accounting. 13
- 14. Significance • This concept helps in ascertaining the profit of the business as only the business expenses and revenues are recorded and all the private and personal expenses are ignored. • This concept restraints accountants from recording of owner’s private/personal transactions. • It also facilitates the recording and reporting of business transactions from the business point of view. 14
- 15. Money measurement concept • This concept assumes that all business transactions must be in terms of money. Thus, as per the money measurement concept, transactions which can be expressed in terms of money are recorded in the books of accounts. • The transactions which cannot be expressed in monetary terms are not recorded in the books of accounts. For example, sincerity, loyalty, honesty of employees are not recorded in books of accounts because these cannot be measured in terms of money although they do affect the profits and losses of the business concern. 15
- 16. Significance • This concept guides accountants what to record and what not to record. • It helps in recording business transactions uniformly. • If all the business transactions are expressed in monetary terms, it will be easy to understand the accounts prepared by the business enterprise. • It facilitates comparison of business performance of two different periods of the same firm or of the two different firms for the same period. 16
- 17. GOING CONCERN CONCEPT • This concept states that a business firm will continue to carry on its activities for an indefinite period of time. • Simply stated, it means that every business entity has continuity of life. Thus, it will not be dissolved in the near future. • It should be noted that “going concern concept” does not imply permanent continuance of the enterprise. It rather presumes that the enterprise will continue in operation long enough to charge against income, cost, liabilities and to meet the contractual commitments. 17
- 18. Significance • This concept facilitates preparation of financial statements. • On the basis of this concept, depreciation is charged on the fixed asset. • It is of great help to the investors, because, it assures them that they will continue to get income on their investments. • In the absence of this concept, the cost of a fixed asset will be treated as an expense in the year of its purchase. • A business is judged for its capacity to earn profits in future. 18
- 20. Accounting period concept • All the transactions are recorded in the books of accounts on the assumption that profits on these transactions are to be ascertained for a specified period. This is known as accounting period concept. • Thus, this concept requires that a balance sheet and profit and loss account should be prepared at regular intervals. • This is necessary for different purposes like, calculation of profit, Financial position, Tax computation etc. • Further, this concept assumes that, indefinite life of business is divided into parts. These parts are known as Accounting Period. It may be of one year, six months, three months, one month, etc. 20
- 21. Significance • It helps in predicting the future prospects of the business. • It helps in calculating tax on business income calculated for a particular time period. • It also helps banks, financial institutions, creditors, etc to assess and analyse the performance of business for a particular period. • It also helps the business firms to distribute their income at regular intervals as dividends. 21
- 22. Accounting cost concept • Accounting cost concept states that all assets are recorded in the books of accounts at their purchase price, which includes cost of acquisition, transportation and installation and not at its market price. • It means that fixed assets like building, plant and machinery, furniture, etc are recorded in the books of accounts at a price paid for them. • This cost is also known as historical cost. 22
- 23. Significance • This concept requires asset to be shown at the price it has been acquired, which can be verified from the supporting documents. • It helps in calculating depreciation on fixed assets. • The effect of cost concept is that if the business entity does not pay anything for an asset, this item will not be shown in the books of accounts.23
- 24. Duality aspect concept • Dual aspect is the foundation or basic principle of accounting. It provides the very basis of recording business transactions in the books of accounts. • This concept assumes that every transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides. • Therefore, the transaction should be recorded at two places. It means, both the aspects of the transaction must be recorded in the books of accounts. • For example, goods purchased for cash has two aspects which are (i) Giving of cash (ii) Receiving of goods. These two aspects are to be recorded. 24
- 25. Significance • This concept helps accountant in detecting error. • It encourages the accountant to post each entry in opposite sides of two affected accounts. 25
- 26. Realization concept • This concept states that revenue from any business transaction should be included in the accounting records only when it is realised. • For example: “A” places order with “B” for supply of certain goods yet to be manufactured. On receipt of order, “B” purchase raw materials, employs workers, produces the goods and delivers it to “A”. “A” makes payment on receipt of goods. In this case the sale will be presumed to have been made not at the time of receipt of order for the goods but at the time when goods are delivered to “A”. • The term realisation means creation of legal right to receive money. Selling goods is realisation, receiving order is not. 26
- 27. Significance • It helps in making the accounting information more objective. • It provides that the transactions should be recorded only when goods are delivered to the buyer. 27
- 28. Accrual concept • The meaning of accrual is something that becomes due especially an amount of money that is yet to be paid or received at the end of the accounting period. • It means that revenues are recognised when they become receivable though cash is received or not received and the expenses are recognised when they become payable though cash is paid or not paid. • Both transactions will be recorded in the accounting period to which they relate. Therefore, the accrual concept makes a distinction between the accrual receipt of cash and the right to receive cash as regards revenue and actual payment of cash and obligation to pay cash as regards expenses. 28
- 29. Significance • It helps in knowing actual expenses and actual income during a particular time period. • It helps in calculating the net profit of the business. 29
- 30. Matching concept • This is based on the Accounting Period Concept. The paramount objective of running a business is to earn profit. • In order to ascertain the profit made by the business during a period, it is necessary that “revenues” of the period should be matched with “expenses” of the period. • The matching concept states that the expenses incurred to earn the revenues must belong to the same accounting period. • So once the revenue is realised, the next step is to allocate it to the relevant accounting period. This can be done with the help of accrual concept. 30
- 31. Significance • It guides how the expenses should be matched with revenue for determining exact profit or loss for a particular period. • It is very helpful for the investors/shareholders to know the exact amount of profit or loss of the business. 31
- 32. Accounting conventions • To make the accounting information useful to various interested parties, the basic assumptions and concepts discussed earlier have been modified. These are called as convention, they are as under: • Cost Benefit • Materiality • Consistency • Prudence • Full Disclosure 32
- 33. Cost Benefit conventions • This convention states that the cost of applying a principle should not be more than the benefit derived from it. • If the cost is more than the benefit then that principle should be modified. 33
- 34. Materiality conventions • The materiality convention requires all relatively relevant information should be disclosed in the financial statements. • Unimportant and immaterial information are either left out or merged with other items. 34
- 35. Consistency conventions • The aim of consistency principle is to preserve the comparability of financial statements. The rules, practices, concepts and principles used in accounting should be continuously observed and applied year after year. • Comparisons of financial results of the business among different accounting period can be significant and meaningful only when consistent practices were followed in ascertaining them. • For example, depreciation of assets can be provided under different methods, whichever method is followed, it should be followed regularly. 35
- 36. Prudence (Conservatism) conventions • Prudence principle takes into consideration all prospective losses but leaves all prospective profits. The essence of this principle is “anticipate no profit and provide for all possible losses”. • For example, while valuing stock in trade, market price or cost price whichever is less is considered. 36
- 37. Full Disclosure • According to this convention accounting reports should disclose fully and fairly the information they represent. • They should be honestly prepared and sufficiently disclose information which is of material interest to proprietors, present and potential investors and creditors. 37
- 38. Few Terminology • Revenue/Sales • Expenses • Net Income and Net Loss • Assets (Fixed Assets and Current Assets) • Liability • Equity • Capital • Drawings • Accounts Receivable(Debtor) and Accounts Payable (Creditor)
- 39. Accounting Equation • It shows the relationship between the economic resources of a business and the claims against those resources. Economic Resources = Claims Assets = Liabilities + Equity
- 40. Assets • What you Own
- 41. Liabilities • What you Owe
- 42. Equity • What is Left over
- 43. Analyze the effect of business transactions March 1. Suresh began business with cash Rs.50,000 March 2. Took a loan from Manish Rs.20,000 March 3. Bought for cash a computer Rs.58,000 March 4. Bought computer supplies on credit Rs.6,000 March 19. Received payment for software sales Rs.12,000 March 21. Paid creditors for supplies Rs. 2,000 March 29. Paid salaries Rs.4,000 and office rent Rs.12,000 March 30. Sold software on credit Rs.8,000 March 31. Withdrew cash for personal use Rs. 3,500
- 44. • Assets= Liabilities + Equity • Equity = Capital + Revenue-Expenses-Drawings - Dividends • Assets= Liabilities + Capital + Revenue- Expenses-Drawings - Dividends
- 45. Quiz 1 Identify the concept Assets are normally shown at cost price in the balance sheet, and the cost is the basis for all subsequent accounting for the asset.
- 46. 2. Which accounting assumption does the comment below refer to? Everything is recorded in terms of money. Items which cannot be recorded in terms of money are ignored and not included. It follows that the financial statements only give a partial picture of the state of a business.
- 47. 3. Which accounting concept does the comment below refer to? Profit is the difference between revenue and expenses not cash received and paid. Expenses are matched to revenues, for example if rent has been set as a percentage of sales (a turnover rent), then the rent is accrued in the accounts is the same period as the sales and not when the rent is actually paid.
- 48. 4. Which accounting concept does the comment below refer to? There are two sides to accounting, one represented by the assets and the other represented by the liabilities against them.
- 49. 5. Which accounting assumption does the comment below refer to? Accounting assumes the business will continue.
- 50. 6. Which accounting assumption does the comment below refer to? For accounting purposes the business is treated as a separate entity from the owner. The accounting records show transactions of the business not the owner
- 51. 7. Which accounting concept does the comment below refer to? • Profit is earned (realized) at the time the goods or services are passed to the customer and the customer incurs liability for them.
- 52. 8. Which concept is violated • Xylon’s CEO purchased a yacht for personal use and charged it to the company expenses.
- 53. 9. Which concept is violated • Inventory with a cost Rs. 186400 is reported in Balance Sheet at its market value of Rs. 235600