INTRODUCTION OF ACCOUNTS

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SECTION –1
  1. Definition:-

ACCOUNTING is the art of  :

(1) Recording;  (2) Classifying and (3) Summarizing.

– of all the transactions of a financial character.

– in a significant manner.

– and to interpret the results thereof.

Accounting is different from Book-Keeping. Book-Keeping is merely recording of the transactions and maintaining the records WHEREAS  Accounting means to analyse these results. Accounting begins where Book-Keeping ends.

  1. Meaning of Accountancy

Accountancy

The knowledge of how to make accounting is called accountancy. Accountancy tells us how to maintain various books of account, how to prepare them and how to communicate accounting information to the parties interested n them. Thus, Accounting is a systematic knowledge like other academic subjects such as Economics, Physics, Chemistry, etc., and puts such knowledge into practice.

.3. Users

There are many users of Accounting information :

  1. Owners : To know Profitability and financial soundness of business.
  2. Investors : To know about their money’s safety.
  3. Prospective Investor : To know how safe it would be to invest.
  4. Creditors : To know credit worthiness of business.
  5. Employees : To demand Profits/Bonus.
  6. Government : For collecting Taxes.
  7. Researchers : For researches into business or industry as a whole.

 

 

  1. Fundamental accounting assumption as per AS-1

            Fundamental accounting assumptions underlie the preparation and presentation of financial statements. They are usually not specifically stated because their acceptance and use are assumed. Disclosure is necessary if they are not followed. The Institute of Chartered Accountants of India issued Accounting Standard (AS-1) ‘Disclosure of Accounting Policies” according to which the following have been generally accepted as fundamental accounting assumptions:

  • Going concernThe enterprise is normally viewed as a going concern, i.e. as continuing operations for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessary of liquidation or of curtailing materially the scale of the operations.
  • Consistency It is assumed that accounting policies are consistent from one period to another.
  • Accrual – Guidance Note on Terms used in Financial Statements defines accrual basis of accounting as “the method of recording transactions by which revenue, costs, assets and liabilities are reflected in the accounts in the period in which they accrue.” The accrual ‘basis of accounting’ includes considerations relating to deferrals, allocations, depreciation and amortizsation. Financial statements prepared on the accrual basis inform users not only of past events involving the payment and receipt of cash but also of obligations to pay cash in future and of resources that represent cash to be received in the future. Hence, they provide the type of information about past transactions and other events that is most useful to users in making economic decisions. Accrual basis is also referred to as mercantile basis of accounting.

 

  1. Accounting words (Terminology) :
  2. Capital –        Amount invested by owner in the business.
  3. Liability –        Amount to be given to the outsiders.
  4. Assets –        Things owned by the business.
  5. Debtors –        Persons from whom business has to take money.
  6. Creditors –        Persons to whom business has to pay money.
  7. Proprietor –        Owner of business.
  8. Drawings –        Money or Goods used by proprietor for personal use.
  9. Transaction –           Any business event to be recorded.
  10. Entry –        Record to be made in books for any transaction.
  11. Stock –        Goods lying unsold with the business on a particular date.
  12. Expense –        Amount spent to produce and sell the goods.

                              THREE GOLDEN RULES OF ACCOUNTANCY

 

(1) DEBIT THE RECEIVER CREDIT THE GIVER

(For all personal A/c’s like Ram, Shyam, Mohan, Sita, Geeta, etc.)

(Can See, Can Touch, Can Talk)

 

(2) DEBIT WHAT COMES IN CREDIT WHAT GOES OUT

(For all Real A/c’s like Cash, Table, Plant, Furniture, Building, etc.)

(Can see, Can Touch, CANNOT TALK)

(3) DEBIT ALL EXPENSES AND LOSSES, CREDIT ALL INCOME AND GAINS

(For all Nominal A/c’s like Profit, Loss, Salary, Rent, Depreciation, etc.)

(CANNOT SEE, CANNOT TOUCH, CANNOT TALK)

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