5/5/2025

RBBL - Level 4 (Accounting: Introduction & Principle)

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Accounting

Definitions of Accounting
"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 a financial character and interpreting the result thereof".
American Institute of Certified Public Accountant, Committee on Terminology

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"Accounting is the science of recording and classifying business transaction

and events primarily of a financial character and the art of making significant
summaries, analysis and interpretation of these transactions and events and
communicating the result to person who must make decision of form
judgments."
Smith Ashbourne

So it refers to an integration or bundle of process which includes identifying,

measuring, recording, summarizing, analyzing, interpreting and reporting of
financial information to stake holders.

It always conduct based on accounting principles and concepts concerned

rules and regulations relevant act etc which helps to make effective and
efficient accounting system.
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Accounting system

Input Process Output

- Financial transactions - Journal Voucher - Financial Statement
- Relevant financial documents - Ledger - Financial Performance and
- Concerned Rules and Situations
- Trial balance
Regulations - Financial Analysis
- Accounting policies, - Budget Formulation
guidelines and Concept - Policies and Decision

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Scope of Accounting
The scope of accounting indicates the field or area where accounting is used.
The scope of accounting is very wide.
a. Accounting for business organizations: Business organizations are the
largest field of accounting activities established for earning profits.
Accounting is useful for determining profits or losses of such organizations.
b. Accounting for non-trading organizations: Non-trading organizations are
established to provide services to the general public. Hospitals, clubs,
societies, educational institutions, etc. are the examples of non-profit
organizations.

c. Accounting for government organizations: Government has the biggest

responsibility for providing welfare, services, peace, security, justice, etc., to the
people. For this, government uses several financial resources. Therefore,
government needs accounting for the proper use and control of financial
resources. Accounting system, which is used in government organizations is
known as 'Government Accounting'.
d. Accounting for professionals and individuals: Accounting is also useful to the
professionals and individuals to exhibit their professional and personal
efficiency. Professionals are engaged in the job of specialized knowledge and
skills, called professional skills such as medical, engineering, accounting,
research, etc. Similarly, individuals are also engaged in financial activities for
maintenance of life. Professionals need accounting to measure their accounting
activities and for tax purpose, while individuals need accounting for personal
financial decisions.

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Branches of Accounting
Financial Accounting
Financial accounting is mainly concerned with the preparation of financial
statements and communicating them to various users. Financial statements are
prepared to know the results of business operations during a period and the
financial position on a particular date.
Cost Accounting
Cost accounting is mainly concerned with recording, analyzing and reporting costs of
a business. It is developed to overcome the limitations of financial accounting.
Financial accounting fails to provide information relating to the cost of individual
jobs, products, units and departments which is needed for the making decisions such
as price fixation and controlling costs.

Management Accounting
Management Accounting is primarily concerned with providing financial
information to the management. It enables management to discharge its
functions properly, mainly related to forecasting and budgeting, control over
costs and revenues decisions.
Human Resource Accounting
Human resource accounting is a process of identifying and measuring data about
human resources and communicating to interested parties. Hence, it is an
accounting for people as an organizational resource. It involves measuring the
costs incurred by organizations on human resources as well as the economic
value by it to the organization.

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Objectives of Accounting
Accounting has the following main objectives:
a. To keep complete and systematic records: The first objective of accounting is
to keep the proper records of all the past transactions specified rules, for
future references.
b. To ascertain profit or loss: The second objective of accounting is to ascertain
operating result i.e., profit or loss of a business for a period.
c. To depict the financial position: A concern, whether trading or non-trading,
should know its true financial position. For this purpose, it prepares a
balance sheet at the end of every year, which informs about its position of
assets, liabilities and capital and reflects financial strengths and weaknesses
of business.

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d. To analyse and interpret the financial information: Accounting analyses and

interprets the results of the business to draw conclusions. With the help of
such conclusions, the parties/users concerned in the business can have full
information about its profitability and financial position to make the
financial decision.
e. To help in determination of tax liability: Business has to pay different types
of tax to the government. Accounting provides financial information to the
tax authorities to determine tax liability.

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Accounting Concepts
 Rules, guidelines and assumptions need to be considered while
preparing books of Accounts.
 Developed/ implemented to ensure uniformity and easy
understanding of Accounting information.

Characteristics of Accounting Concepts

 Generally accepted
 Man-made evolved during a period
 Flexible

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Accounting Concepts
 Going Concern Concept
 Consistency Concept
 Accrual Concept
 Business Entity Concept
 Money Measurement Concept
 Accounting Period Concept
 Full Disclosure Concept
 Prudence/ Conservatism Concept
 Materiality Concept
 Matching Concept
 Historical Cost Concept
 Revenue Recognition Concept
 Cost Concept
 Dual Aspect Concept

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Going Concern Concept

Accounting principles that states that a business entity will continue
running its operations in the foreseeable future and will not be
liquidated or forced to discontinue operations for any reason any
soon

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1. The business is capable of running the daily operations and has
capital and raw materials to do so.
2. A business has the ability to pay off the debt during the accounting
period.
3. There should be demand in the market for the products or services
offered by the company.
4. There should be no changes in the law governing the business.

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Consistency Concept
Accounting Principle that states business should maintain the same
accounting methods or principles throughout the accounting periods
for the financial transaction or event.
Accounting practices once selected and followed should be applied consistently
year after year.
Change in accounting practices impact comparability, trust ability.
Accounting practices can be changed
* If change in law/Accounting standards
* It makes better preparation and presentation of Financial
statements

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Accrual Concept
It is based on the concept that transactions are recorded as and when
they occur regardless of when payment for the same is received or
made.
It helps the businesses in realizing the true profit by providing a more
realistic representation of the business.

Businesses that use an accrual basis of accounting are seen as more

reliable than those using a cash basis method.

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Business Entity Concept

Accounting concepts that states that business and the owner are two
separate entities and therefore, should be considered separate from each
other.
As per the concept, the financial transactions pertaining to the business
entity should be recorded separately from the business owners
transactions.
Also known as the Economic Entity Concept.

Therefore, any transactions or events that impact the business will be

recorded and events that impact any other entities apart from the business
will be considered as irrelevant and not be entertained.

It helps to ascertain the actual financial performance and financial position

of the business.

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Money Measurement Concept

Accounting concepts that states the company should be recording only
those transactions that can be measured or expressed in monetary
terms on the financial statement.

Also known as Measurability Concept

Those transactions should not be recorded which cannot be expressed

in terms of monetary value.

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Accounting Period Concept

Accounting concepts that states the company all accounting transactions
of a business should be divided into equal time periods, which are
referred to as accounting periods.

By following this concept, a company is able to determine the result of

business transactions during the period.
The following types of accounting period can be seen in accounting:
1. Calendar Year
2. Fiscal Year
Calendar Year: The companies that follow the calendar year, their accounting
period starts from 1st Baisakh to 31st Chaitra of the same year.

Fiscal Year: For companies that follow the fiscal year, the accounting period
starts from 1st Shrawan to 31st Asad

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Full Disclosure Concept

This concept suggests that a business should report all the necessary information
in their financial statements, so that the users of financial information are in a
better position to make important decisions regarding the company.
This Concept makes it easier to external users to determine how a company is
functioning.
Major Components of Disclosure of Information
1. Any change in accounting standards or principles.
2. Accounting policies that are followed
3. Presenting all financial statements in detail
4. Details on the level of inventory of the business.
5. The nature of relationship between the business and related party/parties of the
organisation.
6. Disclosing the nature of non-monetary transactions.

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Prudence/ Conservatism Concept

Concept in accounting which refers to the idea that expenses and
liabilities should be recognised as soon as possible in a situation where
there is uncertainty about the possible outcome and in contrast record
assets and revenues only when they are assured to be received.
Prospective profit should not be recorded but all prospective losses
should immediately be recorded.
The objective is not to overstate the profit of the enterprise and portray
the realistic picture of the company.
Eg:- Valuation of closing stock, provision for doubtful debts, provision
for guarantee

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Historical Cost Concept / Accounting Cost Concept

The accounting cost concept states all the business assets should be written
down in the book of accounts at the price assets are purchased, including the cost
of acquisition, and installation.
The assets are not recorded at their market price.
It implies that the fixed assets like plant and machinery, building, furniture, etc
are recorded at their purchase price which comprising the cost of acquisition and
all the expenditure incurred for making the assets ready to use.
Matching Concept
This accounting concept states that all the expenses incurred by an enterprise
during an accounting period are matched with the revenue recognized during
the same period.
All revenues of the period need to be matched with the expenses of that period to
determine true and fair view of the Financial profitability and financial position
of the business.
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Revenue Recognition Concept

The term realization concept states that revenue earned from any business
transaction should be included in the accounting records only when it is
realized irrespective of cash received or not.
In other words, the revenue concept states that revenue is realized when the
right to receive cash on the sale of goods or services or both have been created.

Dual Aspect Concept

The dual aspect concept indicates that each transaction made by a business
impacts the business in two different aspects which are equal and opposite in
nature.
This concept form the basis of double-entry accounting and is used by all
accounting frameworks for generating accurate and reliable financial statements
The accounting equation used in this concept is :
Assets = Liabilities + Equity
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