Basics of Accounting
- 1. Basics of Accounting By Chef Devashish Pandey Certified Culinary Instructor
- 2. DEFINATION • Accounting is a system meant for measuring business activities, processing of information into reports and making the findings available to decision-makers. The documents, which communicate these findings about the performance of an organisation in monetary terms, are called financial statements.
- 3. Accounting system operates in business and how the flow of information occur People make decision Business transactions occur Accountants prepare reports to show the results of business operations
- 4. DEVELOPMENT OF ACCOUNTING DISCIPLINE Accounting records can be traced back to the ancient civilizations of China, Babylonia, Greece and Egypt. Accounting was used to keep records regarding the cost of labour and materials used in building great structures like the Pyramids. During 1400s, accounting grew further because the needs for information of merchants in the Venice City of Italy increased.
- 5. • With the passage of time, the corporate world grew. In the nineteenth century, companies came up in many areas of infrastructure like the railways, steel, communication, etc. It led to a rapid growth in accounting. As the complexities of business grew, ownership and management of business was divorced. As such, managers had to come up with well-defined, structured systems of accounting to report the performance of the business to its owners.
- 6. • Government also has had a lot to do with more accounting developments. The Income Tax brought about the concept of ‘income’. Government takes a host of other decisions, relating to education, health, economic planning, for which it needs accurate and reliable information. As such, the government demands stringent accountability in the corporate sector, which forces the accounting process to be as objective and formal as possible.
- 7. Golden rules • Debit – Receiver- (what comes in) • Credit – Giver- (What goes out) • Debit – expenses and losses , Assets • Credit- income and gains , Liabilities • Debit – left side of an account • Credit- right side of an account
- 9. AN ACCOUNTANT’S JOB PROFILE: FUNCTIONS OF ACCOUNTING • A man who is involved in the process of book keeping and accounting is called an accountant. With the coming up accounting as a specialized field of knowledge, an accountant has a special place in the structure of an organization, because he performs certain vital functions.
- 10. JOB OF AN ACCOUNTANT • An accountant is a person who does the basic job of maintaining accounts as he is the man who is engaged in book keeping. • An accountant prepares profit and loss account which reports the profits/losses of the business during the accounting period • Balance Sheet, which is a statement of assets and liabilities of the business at a point of time, is also proposed by all accountants
- 11. CONTINUE.. • Tax planning is an important area as far as the fiscal management of a company is concerned. An accountant has a suggestive but very specific job to do in this regard by indicating ways to minimize the tax liability through his knowledge of concessions and incentives available under the existing taxation framework of the country.
- 12. UTILITY OF ACCOUNTING • Individuals may use accounting information to manage their routine affairs like operating and managing their bank accounts, to evaluate the worthwhileness of a job in an organization, to invest money, to rent a house, etc. • Business Managers have to set goals, evaluate progress and initiate corrective action in case of unfavourable deviation from the planned course of action. Accounting information is required for many such decisions—purchasing equipment, maintenance of inventory, borrowing and lending, etc.
- 13. • Investors and creditors are keen to evaluate the profitability and solvency of a company before they decide to provide money to the organization • Government and Regulatory agencies are charged with the responsibility of guiding the socio-economic system of a country in such a way that it promotes common good
- 14. • Central and State governments levy various taxes. The taxation authorities, therefore, need to know the income of a company to calculate the amount of tax that the company would have to pay. • Employees and trade unions use the accounting information to settle various issues related to wages, bonus, profit sharing,
- 15. TYPES OF ACCOUNTING • The financial literature classifies accounting into two broad categories, viz, Financial Accounting and Management Accounting. Financial accounting is primarily concerned with the preparation of financial statements whereas management accounting covers areas such as interpretation of financial statements, cost accounting, etc. Both these types of accounting are examined in the following paragraphs
- 16. 1.Financial accounting • Financial accounting deals with the preparation of financial statements for the basic purpose of providing information to various interested groups like creditors, banks, shareholders, financial institutions, government, consumers, etc. Financial statements, i.e. the income statement and the balance sheet indicate the way in which the activities of the business have been conducted during a given period of time
- 17. The significance of financial accounting • The information provided by financial accounting is consolidated in nature. It does not indicate a break-up for different departments, processes, products and jobs. As such, it becomes difficult to evaluate the performance of different sub-units of the organisation
- 18. CONTINUE… • Financial accounting does not help in knowing the cost behaviour as it does not distinguish between fixed and variable costs. • The information provided by financial accounting is historical in nature and as such the predictability of such information is limited.
- 19. 2.Management accounting • Management accounting is ‘tailor-made’ accounting. It facilitates the management by providing accounting information in such a way so that it is conducive for policy making and running the day-to-day operations of the business. Its basic purpose is to communicate the facts according to the specific needs of decision-makers by presenting the information in a systematic and meaningful manner
- 20. Cost accounting- Management Accounting • Cost accounting makes elaborate cost records regarding various products, operations and functions. It is the process of determining and accumulating the cost of a particular product or activity. Any product, function, job or process for which costs are determined and accumulated, are called cost centres. • The basic purpose of cost accounting is to provide a detailed breakup of cost of different departments, processes, jobs, products, sales territories, etc., so that effective cost control can be exercised
- 22. Keywords • Accrual: Recognition of revenues and costs as they are earned or incurred. It includes recognition of transaction relating to assets and liabilities as they occur irrespective of the actual receipts or payment. • Cost: The amount of expenditure incurred on or attributable to a specified article, product or activity.
- 23. • Expenses: A cost relating to the operations of an accounting period. • Revenue: Total amount received from sales of goods/services. • Income: Excess of revenue over expenses. • Loss: Excess of expenses over revenue. • Capital: Generally refers to the amount invested in an enterprise by its owner. • Fund: An account usually of the nature of a reserve or provision which is represented by specifically Ear Market Assets. • Gain: A monetary benefit, profit or advantage resulting from a transaction or group of transactions
- 24. • Investment: Expenditure on assets held to earn interest, income, profit or other benefits. • Liability: The financial obligation of an enterprise other than owners’ funds. • Net Profit: The excess of revenue over expenses during a particular accounting period.
- 25. MEANING AND FEATURES OF ACCOUNTING PRINCIPLES • Accounting principles have been defined by the Canadian Institute of Chartered Accountants as “The body of doctrines commonly associated with the theory and procedure of accounting serving as an explanation of current practices and as a guide for the selection of conventions or procedures where alternatives exists. Rules governing the formation of accounting axioms and the principles derived from them have arisen from common experience, historical precedent statements by individuals and professional bodies and regulations of Governmental agencies”.
- 26. • The general acceptance of an accounting principle usually depends on how well it meets the following three basic norms: (a) Usefulness; (b) Objectiveness; and (c) Feasibility.
- 27. MEANING AND FEATURES OF ACCOUNTING PRINCIPLES • The American Institute of Certified Public Accountants (AICPA) has advocated the use of the word “Principle” in the sense in which it means “rule of action”. It discuses the generally accepted accounting principles as follows: • 1)- Accounting concepts • 2)- Accounting conventions
- 28. ACCOUNTING CONCEPTS • Necessary assumptions which are base of accounts
- 29. Accounting Concept • 1) Business Entity Concept- The existence of business is different from owner. Both transactions are different. • Eg- owner property and transactions are not a property and transactions of company.
- 30. • 2) Going Concern Concept- Business will be always continuously running . • It is kind of forecasting or Predictions
- 31. • 3. The cost concept- all assets and liabilities are recorded as actual cost. • For Example- The machine is purchased with 50 thousand and the same cost will be recorded in financial transaction. • To know the exact position of business.
- 32. • 4) Dual aspect concept- each transaction in business has debit and credit aspect. • If we purchased one machine then it will be recorded in credit and debit both. • Accounting equation – Assets= capital liability
- 33. • 5. Money Measuring concept – all financial accounting will be recorded as Money. • Those transactions which are not recorded in money cannot be count in accounting.
- 34. • 6. Accrual Concepts- • Those transaction in which product or goods are sold as credit but money has not been received that time (debtors) . • These transactions are recorded in financial transaction whether money is not received but in future it is expected to come. • 7. Matching concepts- all expenses and revenues are matching in this concept.
- 35. • 8. Periodicity Concept- Accounting period concepts explain that every organization should select a specific time period to complete their accounting cycle. Generally, the period of the accounting cycle is considered as one year but based on the organizational requirements, they can select an accounting cycle suitable for the organization. • 9. Realization concept- revenue is only recognized when it is realized. The concept of realization states that revenue is realized at the time when goods or services are actually delivered. In short, the realization occurs when the goods and services have been sold either for cash or on credit. It also refers to inflow of assets in the form of receivables.
- 37. ACCOUNTING CONVENTIONS Accounting conventions are the traditions , usage and customs which are in use since long time • 1) convention of disclosure • 2) convention of consistency • 3) convention of conservatism • 4) convention of Materiality
- 38. • 1) convention of disclosure- Information which need to be disclose in financial statements – for example- (customer, creditor) • 2) convention of consistency- All rules regulation and methods which was there in last year will be in this year and so on. it will make easy comparison of financial statement. Comparison of last records ( Assets and liabilities)
- 39. • 3) Convention of conservatism- future prediction about profit and loss. If prediction about loss is there then it should be recorded and necessary steps would be taken to avoid loss. • 4) Convention of Materiality – Only those transactions in financial statements will recorded which are useful. It will help to avoid lengthy and complicated statements. • Only Material transaction will be recorded. ( sale of assets, financing, merger)
- 40. ACCOUNTING PRINCIPLES • Accounting principles are the rules and guidelines that companies must follow when reporting financial data. The Financial Accounting Standards Board (FASB) issues a standardized set of accounting principles in the U.S. referred to as generally accepted accounting principles (GAAP).