Accountancy - Mr. Kailash Gururani
Meaning of Accounting :
Accounting is an information system that provides accounting information to the users for correct decision-making.
‘‘Accounting is 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.’’
The American Institute of Certified Public Accountants
ACCOUNTING CYCLE :
Transaction (identification) Journal/Subsidiary books (Recording) Ledger (Classifying) Trial Balance (Summarizing)
Final Accounts (Results) Analysis (Interpretation)
Objectives of Accounting :
Interested Users of Information :
There are number of users interested in knowing about the financial soundness and the profitability of the business.
Users Classification Information the user want Internal Owner return on their investment, financial health of their company/business Management to evaluate the performance, to take various decisions External Investors and potential Investors safety and growth of their investments, future of the business Creditors Assessing the financial capability, ability of the business to pay its debts Lenders Repaying capacity, credit worthiness Tax Authorities assessment of due taxes, true and fair disclosure of accounting information Employees Profitability to claim higher wages and bonus, whether their dues (PF, ESI etc.) deposited regularly.
Others Customers, Researchers etc. may seek different information for different reasons.
Qualitative Characteristics of Accounting Information :
Accounting information is useful for interested users only if it possess the following characteristics :
- Reliability: Means the information must be based on facts and be verified through source documents by anyone. It must be free from bias.
- Relevance: To be relevant, information must be available in time and must influence the decisions of users by helping them form prediction about the outcomes.
- Understandability: The information should be presented in such a manner that users can understand it well.
- Comparability: The information should be disclosed in such a manner that it can be compared with previous years’ figures of business itself and other firm’s data.
Limitations of Accounting :
The accounting information suffers from the following limitations:
- Based on historical data
- Biasness
- Qualitative information not shown
- Ignores price level changes
BASIC ACCOUNTING TERMS :
Transaction : An economic activity that affects financial position of the business and can be measured in terms of money e.g. sale of goods, paying for expenses etc.
Voucher : The documentary evidence in support of a transaction is known as voucher. For example, if we buy goods for cash we get cash memo, if we buy on credit we get an invoice, when we make a payment we get a receipt and so on.
Capital : Amount invested by the owner in the firm is known as capital. It may be brought in the form of cash or assets by the owner.
Assets : Assets are economic resources of an enterprise useful in its operations. Assets can be broadly classified into two types :
1. Fixed Assets are assets used for normal operations and held on a long-term basis, such as land, buildings, machinery, plant, furniture and fixtures etc.
2. Current Assets are assets held for a short-term and converted into cash within one year such as debtors, stock etc.
Liabilities : Liabilities are obligations or debts that an enterprise has to pay at some time in the future. Liabilities can be classified as :
1. Long-term liabilities are those that are usually payable after a period of one Year e.g. a long term loan from a financial institution.
2. Short-term liabilities are obligations that are payable within a period of one year, for example, creditors, bills payable, bank overdraft etc.
Sales : Sales are total revenues from goods sold or services provided to customers. Sales may be cash sales or credit sales.
Revenues : Revenue means the income from any source. It should be of regular nature. For example sales of goods/providing services to customer, commission, interest, dividends etc.
Expenses : Costs incurred by a business for earning revenue are known as expenses. For example rent, wages, salaries, interest etc.
Expenditure : Spending money or incurring a liability for acquiring assets, goods or services is called expenditure. The expenditure is classified as
- Revenue expenditure : If the benefit of expenditure is received within a year it is called revenue expenditure e.g. rent, interest etc.
- Capital expenditure : If any expenditure lasts for more than a year, it is treated capital expenditure such as purchase of machinery, furniture etc.
Profit : The excess of revenues over its related expenses during an accounting year is profit.
Profit = Revenue- Expenses.Gain : A non-recurring profit from events or transactions incidental to business such as sale of fixed assets, appreciation in the value of an asset etc.
Loss : The excess of expenses of a period over its related revenues its termed as loss. e.g., cash or goods lost by theft of fire etc. Loss = Expenses - Revenue
Discount : Discount is the rebate given by the seller to the buyer. It can be classified as :
- Trade discount : The purpose of this discount is to persuade the buyer to buy more goods. It is Offered at an agreed percentage of list price at the time of selling goods. This discount is not recorded in the account books as it is deducted in the invoice/cash memo.
- Cash discount : The objective of providing cash discount is to encourage the debtors to pay the dues promptly. This discount is recorded in the account books.
Goods : The products in which the business deal in. The items that are purchased for the purpose of resale not for use in the business are called goods.
Drawings: It the owner withdraw money and/ or goods from the business for personal use it is known as drawings.
Purchases: The term Purchases is used only for the goods procured by a business for resale. In case of trading concerns it is purchase of final goods and in manufacturing concern this is purchase of raw materials. Purchases may be cash purchases or credit purchases.
Closing Stock: It is the value of the goods lying unsold at the end of accounting year. Closing stock of one year becomes the opening stock of next year.
Debtors Debtors are persons and/ or other entities to whom business has sold goods and services on credit and amount has not received yet. These are assets of the business.
Creditors: If the business buys goods/ services on credit and amount is still to be paid to the persons and/ or other entities, these are called creditors. These are liabilities for the business.
CBSE Accountancy Class XI ( By Mr. Kailash Gururani )
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