F.A. Module 1
F.A. Module 1
1
ACCOUNTING: AN INTRODUCTION
Unit Structure
1.1 Accounting: the language of business
1.2 Accounting: an information system.
1.2.1 Definitions
1.2.2 Objectives of accounting
1.2.3 Function of accounting
1.3 Users of accounting information:
1.4 Branches of accounting
1.5 Book-keeping
1.5.1 Accounting cycle
1.5.2 Basic accounting terms
1.2.1 DEFINITIONS
Definition of Accounting
Definition by the American Institute of Certified Public Accountants
(Year 1961):
"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".
Definition by the American Accounting Association (Year 1966):
"The process of identifying, measuring and communicating economic
information to permit informed judgments and decisionsby the users
of accounting".
To Providing Information
The primary objective of accounting is to provide useful
information for decision-making to stakeholders such as owners,
management, creditors, investors, etc. Various outcomes of business
activities such as costs, prices, sales volume, value under ownership,
return of investment, etc. are measured in the accounting process.
Ascertainment of Results
is a core accounting measurement. It is measured
by preparing profit and loss account for a particular period. Various
other accounting measurements such as different types of revenue
expenses and revenue incomes are considered for preparing this profit
and loss account. Difference between these revenue incomes and
revenue expenses is known as result of business transactions identified
as profit/loss.
To assist in decision-making:
To take decisions for the future, one requires accurate financial
statements. One of the main objectives of accounting is to take right
decisions at right time.Thus, accounting gives you the platform to
plan for the future with the help of past records.
iii) Lenders: They are interested to know whether their loan- principal
and interest will be paid when due.
iv) Supplier and Creditors: They are also interested to know the
ability of the enterprise to pay their dues that helps them to decide
the credit policy for the relevant concern, rates to be charged and so
on. Sometime, they also become interested in long term continuation
of the enterprise if their existence becomes dependent on the survival
of the business. Suppose, small ancillary units supply their products
to a big enterprise, if the big enterprise collapses, the fate of the small
units also becomes sealed.
1.5 BOOK-KEEPING
Book-Keeping Accounting
Output of book-keeping is an Output of accounting permit
input for accounting. informed judgments and
decisions by the user of
accounting information.
Purpose of book-keeping is to Purpose of accounting is to find
keep systematic record of results of operating activity of
transactions and events of business and to report financial
financial character in order of its strength of business.
occurrence.
Book-keeping is a foundation of Accounting is considered as a
accounting. language of business.
Trial Balance: After taking all the ledger account closing balances,
a Trial Balance is prepared at the end of the period for the preparations
of financial statements.
Meaning :
Financial statements are plain statements based on historical
records, facts and figures. They are uncompromising in their objectives,
nature and truthfulness. They reflect a judicious combination of recorded
facts, accounting principles, concepts and conventions, personal
judgments and sometimes estimates.
2. Balance Sheet:
Balance sheet shows the financial position of a business as on a
particular date. It represents the assets owned by the business and the
claims of the owners and creditors against the assets in the form of
liabilities as on the date of the statement.
5. Schedules:
Schedule explains the items given in income statement and balance
sheet. Schedules are a part of financial statements which give detailed
information about the financial position of a business organization.
Income statement
Income statement summaries the incomes /gains and expenses /losses
of a Business for a particular financial period. The format of Income
statement explains in detail the items to be included in the statement. It is
presented in the traditional T Format and also in the vertically statement form.
Manufacturing Trading and Profit and Loss Account For the year
ending
Dr. Cr.
To Dividend
To Balance c/f
Particulars Rs. Rs.
Gross Sales xxx
Less : Sales returns xxx
Sales tax / Excise duty
Net Sales xxx
Less : Cost of goods sold
(Materials consumed + xxx
Direct Labour + xxx
Manufacturing Expenses) xxx
Add / Less : Adjustment for change in stock xxx xxx
Gross Profit xxx
Less : Operating expenses xxx
a. Office and administration Expenses xxx
b. Selling and distribution Expenses xxx xxx
Add : Operating Income xxx
Operating Profit xxx
Add : Non Operating Income xxx
Less : Non Operating expenses (includinginterest) xxx
Balance sheet:
It is one of the major financial statements which presents a
company's financial position at the end of a specified date. Balance sheet
has been described as a "snapshot" of the company's financial position
at a moment for e.g. the amounts reported on a balance sheet dated March
31st, 2016 reflects that all the transactions throughout December 31st have
been recorded. The balance sheet provides information related to the
assets, liabilities and the equity of the company as on a
specific date.