Вы находитесь на странице: 1из 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA.

UMRAKH
SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA Accounting Systems:There are three following known systems of keeping accounts: (1) Deshi Nama System or Indian System (2) Single Entry System (3) Double Entry System (1) Deshi Nama System: This is the oldest system of keeping accounts used in India. It is also known a s Bahi khata System. This system has been used in India since the time when trade, commerce and industries had not developed as in the present age and transactions were limited. Under this system, two main books of account are Rojmel and Khatavahi(ledger). The pages are not ruled-but are blank in both these books. Each page is divided into eight parts(known as sal) of which four sals are meant for Jama side and four sals are used for Udhar side. Now days these books are ruled as in double entry and kept blank. (2) Single Entry System: It is a system in which all transactions are not completely recorded in books of account. Particularly, small traders do not need to keep complete records. They keep records accordingly to their bare requirements, because they cannot afford to keep complete accounts. Hence, accounts are not complete. All transactions are not recorded in their two told effect. Most of the transactions are given only one effect. Hence it is popularly known as single entry. It is also used in some government departments. The main feature of this system is that, of the two accounts involved in each transaction, entry is made in only one account. In case of certain transactions, entries are made in both the accounts also. A cash book is kept as a book original entry and only personal accounts are kept in the ledger. Records are not made in impersonal accounts. Hence this system is considered to be incomplete and defective system of keeping accounts. In fact, it is only incomplete double entry system. All data for preparing final accounts are not available from such incomplete records. Hence, this is an unscientific method. (3) Double Entry System: This is the best and the most scientific method of keeping accounts. Here, both the aspects of every transaction are entered in the books. Something which receives the benefit is debited and something which gives the benefit is credited. Thus two fold effects of all transactions are completely recorded in the books. Hence, when a summary of accounts is prepared, the totals of two sides are always equal. This proves that accounts are arithmetically correct. On the basis of this summary, trading account is prepared to know the gross profit and profit and Loss Account is prepared to ascertain the net profit.

SEM: II

Forms of Business Organization:Financial accounting is used by a wide variety of organizations, including businesses organized to earn a profit, nonprofit organizations, and governmental entities. This book focuses on profit-oriented enterprises, which can be organized in one of the four ways described next. (1) Sole Proprietorships: Sole proprietorships are businesses that are owned by one individual and usually operated by that individual. They are not separate legal entities apart from the owner, and no special legal steps are required to launch or operate this form of business. Example is, if you decided to earn money by mowing lawns during the summer, your business would probably be organized as a sole proprietorship. Because no legal procedures are needed to begin operating sole proprietorships, their primary advantage is ease of formation. The major disadvantage is unlimited legal liability. Because owners are not legally distinct from their businesses, any claims against sole proprietorships are also claims against the owners personal assets. Although sole proprietorships are not separate legal entities, they are separate accounting (or economic) entities. The entity assumption indicates that the actions of the owner, serving as an agent of the business, can be separated from the personal affairs of the owner. Based on this distinction, information about the transactions of the business can be accumulated via the financial accounting process. This enables the owner to assess the status and performance of the business on a stand-alone basis.

Page 1 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA
(2) Partnerships: Partnerships are very similar to sole proprietorships, except that partnerships have more than one owner. Partnerships are not separate legal entities apart from their owners, but they are separate accounting entities. They are almost as easy to form as sole proprietorships, yet because of multiple owners, care must be taken to specify the rights and responsibilities of each owner. This is usually done in a partnership agreement, which is a legal contract among the partners. (3) Corporations: Corporations differ substantially from sole proprietorships and partnerships because they are separate legal entities. They are granted their right to exist by the individual states. A corporation must develop bylaws governing its operation, issue stock to its owners (shareholders) to represent their ownership interests, elect a board of directors who are responsible for the management of the corporation, pay taxes, and adhere to a variety of laws and regulations. Most large and many smaller businesses are organized as corporations. As might be expected, forming a corporation is a relatively cumbersome and expensive process. Costs include filing fees paid to the state of incorporation, legal fees, and amounts paid for corporate records, such as stock certificates, bylaws, and so on. Corporations, unlike sole proprietorships and partnerships, must pay income taxes. Moreover, shareholders are also taxed on any dividends paid to them. Thus, corporations are subject to double taxation. Because sole proprietorships and partnerships are not separate legal entities, they do not pay income taxes; sole proprietors and partners include the income of their businesses on their individual income tax returns. The corporate form of organization has certain advantages that can outweigh the costs. Perhaps the primary benefit is the limited liability offered to shareholders. Because the corporation is a legal entity, the corporation itself is responsible for its actions. Although shareholders risk losing their investment, their personal assets are protected from claims against the corporation. Such is not the case for sole proprietorships and partnerships.

SEM: II

Types of Transaction:Only certain types of transactions are recorded in the books of account and certain types of transactions cannot be recorded, e.g. If we invite a friend to a dinner, it cannot be recorded in books of account of business. Thus there are two types of transactions: (1) Those transactions which are entered in the books of account are called economic transactions or monetary transactions: while (2) Those transactions which cannot be recorded in the books of account are called non-economic or nonmonetary transactions. Forms of Economic Transaction: The transactions which are recorded in books of account take following forms: Forms of Economic Transactions

Exchanged of Cash for

Exchanged of Goods for

Exchanged of Debts for

(1) (2) (3) (4)

Goods Services Assets Debts

(1) Assets (2) Services

(1) Debts

(1) Economic Transaction: Those transactions in which money is exchanged or such things or services are exchanged which can be measured in terms of money are called economic transactions, e.g. if we invite a friend to a dinner, it is not economic transaction, because the cost of dinner is not to be recovered from the friend. In other words, if in a transaction, cash is exchanged against cash or against goods or services or against assets, then such transaction is called economic transaction. If such transactions take place in business, they are business transactions and are recorded in the books of account of the business.

Page 2 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA SEM: II

(2) Non-economic Transaction: Those transactions in which money is not exchanged or there is an exchange of such things which cannot be measured in money are called non-economic transactions. If we are writing the books of account of the business, then personal transactions or social transactions of the proprietor are not recorded in the books of account, because they are not business transactions.

Meaning of Accounting:An Account is a summary of all business transactions, relating to one person or item, divided into two parts, recorded at one place to distinguish it from other transactions. Accounting is a process of systematically recording the monetary transactions of a person or a business relating to a definite time period in the books of accounting. The definition makes it clear those only economic transactions which can be measured in terms of money and which finally results into money dealing are recorded in the books of account. These transactions which cannot be measure in terms of money are not recorded in accounts, e.g. a manager may be highly intelligent. But his intelligence cannot be valued in terms of money and hence it is not recorded in accounts. A more accurate and scientific definition is as follows: Carter writes Book-keeping is the science and art of correctly recording in books of account all those business transactions that result in the transfer of money or moneys worth. According to the definition of Carter, book-keeping is both an art and a science. Transactions are recorded according to definite rules. To that extent book-keeping is a science. Making entries systematically requires skill on the part of the writer. So it is an art also. American Institute of Certified Public Accountants has defined accounting as follows: Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transaction, and events, which are in part at least if financial character and interpreting the reasons thereof This definition suggests that: (i) Accounting records only such transactions which are wholly or partly of financial character. i.e. which can be valued in money. (ii) The records are made in terms of money. The changes in the value of money taking place year after year, are not taken into account. (iii) The entries are made in the books specially kept for the purpose. (iv) Before making entries, the transactions are classified, e.g., whether it is a cash transaction, a transaction relating to a person or relating to any expenses or income. (v) The records are summarized at the end of the year. On that basis a profit and loss account is prepared and profit or loss is ascertained. (vi) On the basis of accounting records, important conclusions are drawn, i.e., they are interpreted. This gives an idea of the defects or irregularities of business which can be corrected. The American Accounting Association defined accounting in 1966 as: The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information. This is an important definition because: a) It recognizes that accounting is a process: that process is concerned with capturing business events, recording their financial effect, summarizing and reporting the result of those effects, and interpreting those results. b) It is concerned with economic information: while this is predominantly financial, it also allows for non-financial information. c) Its purpose is to support informed judgments and decisions by users: this emphasizes the decision usefulness of accounting information and the broad spectrum of users of that information. In other words, it is a two-sided statement, which records a group of similar transactions relating to one person, one kind of property or one class of expenses or incomes. The account is divided into two parts. The left hand side is known as Debit side and the right hand side is known as Credit side.

Page 3 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA Accounting Records:Generally, a transaction is recorded in a waste book immediately when it takes place. Thereafter, till the final accounts are prepared at the end of the year, the whole processes of accounting are as follows: (1) Waste Book: Sometimes, we note down the household expenses or our pocket expenses in a waste book. Similarly in a business also, the accountant would record the transactions in a waste book, so that entries can be made in books of account leisurely. (2) Journal: The entries in a waste book are no part of accounts. They are to be systematically recorded. If all transactions are recorded in two parts, it will lead to useful conclusions. Hence all transactions are recorded in a book in which amounts are recorded in two parts. In Deshi Nama we call this book a Rojmel. Whereas in double entry system, the book in which such day to day transactions are recorded is called a Journal. (3) Subsidiary Books: Whenever transactions take place, they are recorded in a book called Journal. But when transactions are numerous, it is inconvenient to record all transactions in one book only. Hence, for recording certain types of transactions, separate books are kept which are called subsidiary books, e.g. sales book, purchase book, cash book etc. (4) Ledger: If all transactions taking place daily are recorded together on a single page, it will not give us clear idea about the position of various accounts. For example, if on a particular day, cash is received, cash is paid, some goods are purchased, some goods are sold, and salary or rent is paid. If all these transactions are recorded in Journal together, it will not give us any idea about cash balance at the end of day or total sales or purchases made during a day or during a month. Hence, a separate book has to be kept, in which a separate page is kept for each type of transactions, e.g. a separate page is kept for recording only cash receipts and payments, a separate page for purchase transactions and a separate page for sales transactions etc. Whenever cash is received, it is recorded on one side of a separate page kept for cash transactions. When cash is paid, it is recorded on another side of a separate page. Thus we can see at a glance, how much cash is paid and how much cash is received and what the cash balance is. Similarly, when goods are purchased and are recorded on a separate page kept for it, it gives an idea as to how much purchases are made in business. The book in which such entries are made is called a ledger. In any system of book-keeping, a ledger is always kept, as it is the most important book of account. (5) Trial balance: Every businessman wants to know profit or loss at the end of the year. In the ledger, all details about sales are separately recorded, purchases are separately recorded etc. On the basis of all these, we find out profit or loss. But before ascertaining profit or loss, it is necessary to check the arithmetical accuracy of the account. For this purpose, a list of accounts is prepared, which is called a trial balance. If the totals of two sides of this list are equal, we feel sure that the accounts written are arithmetically correct. (6) Trading and Profit and Loss Account: From the balances of trial balance, we prepare one account. On one side of that account, we write down total purchase made as well as expenses of purchases. On the other side we write down the total sales made. The difference between the two sides is called Gross Profit. The account that shows gross profit is known as Trading Account. If administrative expenses and selling expenses are deducted from Gross Profit, we get Net Profit. The account which shows Net Profit is known as Profit and Loss Account. (7) Balance Sheet: A statement which shows assets on one side and liabilities and capital on the other side is known as balance sheet. Generally assets and amounts receivable are shown on the right hand side and liabilities and capital are shown on the left hand side. Thus it shows the value of assets owned by the business on the last day of the year. It also shows debts payable, the amount to be received from customers and the amount payable to suppliers and others. It thus shows the financial position of the business.

SEM: II

Page 4 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA
If this process is shown by way of a chart, it will appear as follows: Transactions

SEM: II

Book-keeping:

1. Recorded in Journal and Subsidiary books

2. Transferred to Ledger

Accountancy:

3. Trial Balance is prepared

4. Final Accounts, i.e. trading and P&L A/c and Balance sheet are prepared

Characteristics of Accounting:The following characteristic are made clear by the above definitions: (1) It is an Art: Accounting is an art. The writer of books of account must use his skill. The rules of accounting cannot be used mechanically. Systematic accounting records help management in taking important decision. (2) It is a Science: Accounting is a science also. Science is a systematic knowledge, which has definite rules. Similarly, there are rules and established principles in accounting. Transactions are recorded on the basis of these rules. Hence, it is a science also. (3) Only Financial Transactions: In accounting, only financial transactions are recorded. If they cannot be valued in money or moneys worth, they are not recorded in books of account, e.g., a good character certificate was issued to the accountant who has left the job. This event cannot be valued in money. Hence, it is not recorded in accounts. The transactions must be at least, partly of financial nature, e.g., if a friend is invited to a dinner. This is not a business transaction, neither has it any financial character. (4) Recorded in Terms of Money: The transactions are recorded in terms of money only. For example, if there are 6 chairs and 3 tables in the office, we have to convert them in terms of money value and then only they are recorded in books of account. (5) Recorded in Special Books: The transactions to be recorded are first classified, e.g. cash transactions. Sales transactions, purchase transactions etc. Special books are kept for each type of transactions and they are recorded in their respective books only. (6) Records made with particular objective: Records made in books of account are summarized from time to time and important conclusions are drawn, e.g., what is the amount of sales, total purchases, expenses and incomes earned during the year and what is the profit made or loss incurred during the year. Thus, books of account are written with a particular objective in mind. (7) Records are correctly made: The records made must be correct arithmetically. And there should be no error of principle. (8) Records are continuous: The business transactions are continuously recorded in order of dates. They are recorded in separate books according to the nature of transactions. Hence, no transaction is left out unrecorded. (9) Even service transactions recorded: Not only transactions relating to goods are recorded, but even service transactions are recorded, e.g. fees are paid to a lawyer for legal advice. Here the lawyer has given services and in exchange money is paid to him. Such transactions are therefore, recorded in books of account.

Page 5 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA Advantages of Book-Keeping:Accounting is the language of business. We may say that it is a mirror of business in which the real image of business can be seen. It is a weather guide for the business, a log chart of the past, a barometer of the present and a forecast of the future. One author has gone to the extent of saying that what fresh air is to the human being for living, the accounting is to the business. The utility of accounting may be stated as follows: (1) Information about business transactions: It maintains complete record of all business transactions. The businessman need not remember all the details. It gives us information about all transactions that have taken place in business. (2) Information about expenses and incomes: Accounts kept properly will give us information about various expenses, like type of expenses, the amounts. Similarly information for income is obtained. (3) Gross Profit is known: We are able to know the total purchase and total sales during the year, which helps us to determine the gross profit made. (4) Net Profit is known: We know the gross profit and information is obtained about various expenses and incomes. So we are able to calculate the net profit. (5) Comparison with the past: We can compare the profit of the current year with that of the previous year and can know the change taking place. We are able to know from accounts only which expenses are increasing and which incomes are decreasing. We can take corrective steps to improve profits. (6) Financial position is known: It is known from accounts what are various assets and what are their values, what are our receivables and payables. This will enable us to know the financial position of business. We also know what the capital is and how it has changed. (7) Useful for comparison: Our accounts can be compared with those of other firms. This will help us to take important decisions, e.g. if another company in our industry is spending more on advertisement and its sale is increasing, we may also take decision to increase advertisement to increase our sales. (8) Tax Liability can be determined: With the help of accounts it is possible to determine the exact amount of income tax, sales tax and other taxes. (9) Control over employees: If accounts are systematically written, the possibility of errors and frauds is reduced. There will be a moral check on employees. (10) Useful to outsiders: There are certain outsiders who are interested in firms business, e.g. creditors, employees, banks, competitors, government etc. If the bank wants to give loan, it will ask for the accounts and go through them to decide whether loan should be granted. The government may take decision to impose tax or give subsidy to a particular industry on the basis of accounts. (11) Useful for policy decision: If accounts are properly kept, it will give very useful information to management. On the basis of this information, they will be able to take important policy decisions, e.g. the accounts will give information about whether proper return on capital employed is obtained.

SEM: II

Limitation of Book-Keeping:Book-keeping as such, does not posses any disadvantages. Accounts written scientifically with intention result in advantages only. If however, it is not properly used or if accounts are written carelessly or dishonestly, it can do more harm than good. From this point of view, the limitations of accounting are as follows: (1) If the original transaction is incomplete or unclear, proper accounting record cannot be made. After all, accounting is based on transactions. (2) If records are made in books of account without properly understanding it, it will give misleading results. Such accounts are not only useful but are positively harmful. (3) Book-keeping cannot provide protection against dishonesty or untruth. If the original transaction itself is not genuine, then the records will also be faulty. For example, if purchases are not made and yet if the fictitious

Page 6 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA SEM: II

purchases are recorded, the accounts will not show true state of affairs. That is why, it is insisted that written accounts must be audited, so that errors or dishonest records can be detected. (4) Accounting does not present the true financial picture in times of inflation, e.g. building bought for Rs.2 lacs ten years ago is shown even today at Rs. 2 lacs less depreciation, though its present value may have risen to Rs. 10 lacs due to inflation. (5) Accounting does not give the complete picture of the position of business. e.g. the manager of business may be very intelligent, the business may have a monopoly in respect of some commodity, the purchasing power of customer may have increased considerably and companys sales may be increasing. All these things are not disclosed by accounting. If any one analyzes all the transactions, he/she find that all transactions can broadly be divided into three parts: Transactions affecting persons, Transactions affecting goods and other assets and Those affecting expenses or incomes. If each type of transactions is separately recorded as discussed above, it is possible to get information relating to each person, each asset or each expenses and income.

Branches of Accounting:The concept of accounting that it only records business transactions in books of account and prepares profit and loss account and balance sheet at the end of the year is old and out dated. There has been fundamental change in this concept. Now this function of accounting is only that of financial accounting. The demand of trade and industry on accounting has increased. And new branches have come into existence. One of the new branches of accounting helps the manufacture in scientifically determining the cost of production. This branch is known as Cost Accounting. Besides due to huge investments made in business, a branch of accounting has developed which guides the management in taking important policy decision. This branch is known as Management Accounting. Thus there are three main branches of accounting as under: (1) Financial Accounting (2) Cost Accounting (3) Management Accounting (1) Financial Accounting: What we discussed in this chapter about accounting is nothing but financial accounting. Accounting is a system of recording financial transactions of business in books of account for a specified period. This definition of accounting stresses only recording aspect of business transaction. Thus, suggests that accounting is financial accounting. Financial accounting deals with recording business transactions in books of account and preparing profit and loss account at the end of the year to show results of trading. It also consists of preparing balance sheet to show the financial position of business at the end of the year. Accounting is a collection of systems and processes used to record, report and interpret business transactions. Accounting provides an account an explanation or report in financial terms about the transactions of an organization. It enables managers to satisfy the stakeholders in the organization (owners, government, financiers, suppliers, customers, employees etc.) that they have acted in the best interests of stakeholders rather than themselves. This is the notion of accountability to others, a result of the stewardship function of managers that takes place through the process of accounting. Stewardship is an important concept because in all but very small businesses, the owners of businesses are not the same as the managers. This separation of ownership from control makes accounting particularly influential due to the emphasis given to increasing shareholder wealth (or shareholder value). Accountability results in the production of financial statements, primarily for those interested parties who are external to the business. This function is called financial accounting. (2) Cost Accounting: The system of cost accounting has developed to determine the cost of production per unit of goods manufactured. This system is useful not only in determining the cost of production but also in reducing the cost. It helps in controlling and reducing the cost of raw materials, wages and other indirect expenses. The financial accounting discloses only total expenditure incurred in production, but cost accounting will give details of this cost per unit. It also shows cost per process, per job or per contract. Cost accounting also gives cost of providing service, e.g. in electricity company, in passenger transport company etc.

Page 7 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA SEM: II

(3) Management Accounting: It is the branch of accounting, which presents the accounting information before management so as to guide them in policy making and in its implementation. Management Accounting includes all those services which an account renders to top management and other departmental heads in decision making, in its implementation, in controlling them and in evaluating them. Thus Management Accountancy is such a branch of accounting which is useful to management. The accounting data is presented at regular intervals and in a prescribed form before the management. The accounting information is so analyzed in these reports that it guides the management in managing the business and important policies are decided on the basis of this data. Planning, decision-making and control are particularly relevant as increasingly businesses have been decentralized into many business units, where much of the planning, decision-making and control is focused. Managers need financial and non-financial information to develop and implement strategy by planning for the future (budgeting); making decisions about products, services, prices and what costs to incur (decision-making using cost information); and ensuring that plans are put into action and are achieved (control). This function is called management accounting.

Other Types of Accounting:Another type of accounting deals with non-business organizations. These organizations do not attempt to earn a profit and have no owners. They exist to fulfill the needs of certain groups of individuals. Non-business organizations include: 1. Hospitals, 2. Colleges and universities, 3. Churches, 4. The federal, state, and local governments, 5. Many other organizations such as museums, volunteer fire departments, and disaster relief agencies. Non-business organizations have a need for all the types of accounting we have just reviewed. For example, a volunteer fire department might need to borrow money to purchase a new fire truck. Its banker would then require financial accounting information to make the lending decision. Non-business organizations are fundamentally different from profit-oriented firms: They have no owners and they do not attempt to earn a profit. Because of this, the analysis of the financial performance of business and non-business organizations is considerably different. This text addresses only business organizations. Most colleges and universities offer an entire course devoted to the accounting requirements of nonbusiness organizations.

Page 8 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA Book keeping and accountancy:
Book-keeping: Book-keeping is a process of using business transactions in books of account. It includes entering the transactions in books of original entry like journal or other subsidiary books, posting them into the ledger and preparing a trial balance at the end of a specified period. Accountancy: Accountancy is something more than book-keeping. It includes preparing final accounts after the accounts are written, analyzing and interpreting them, rectifying the errors etc. Accountancy is therefore, used at the higher level of management. It assists the management in taking important policy decision. Accountancy is a science and it includes book-keeping. Thus Accountancy is wider in its scope than book-keeping. The following are important points of distinction between Book-keeping and Accountancy:

SEM: II

Points 1. Definition

Book-keeping Book-keeping is a process of recording day to day business transactions in books of original entry and posting them. The basis of book-keeping is a transaction.

Accountancy Accountancy is an art and science of preparing summary statements and interpreting the results thereof. The basis of Accountancy is bookkeeping. The work of Accountancy starts after the work of bookkeeping is over. It includes preparation of trial balance and final accounts. The scope of Accountancy is wide and includes book-keeping and goes further than recording transactions. As Accountancy involves analysis and interpretation, it requires special skill and expert knowledge on the part of the persons doing Accountancy work. As Accountancy analyses and interprets accounts, it can draw useful conclusion from it. This guides management in making policy decision for the future and also helps in making any change in policies, if necessary.

2. Basis

3. Scope

The book-keeping is limited in scope and includes steps up to preparation of trial balance only. As the work of book-keeping is of routine nature, it does not require skill or expert knowledge. Any person who knows the rules of double entry can writable books of account. Book-keeping is not useful to management in its policy making function. Because it includes nothing more than mere writing books of account.

4. Requires special skill

5. Useful for policy decision making

Page 9 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA Types of Accounts:SEM: II

Accounts

Personal Accounts

Impersonal Accounts

Real Accounts

Nominal Accounts

A) Personal Accounts: The accounts relating to living individuals are personal accounts. But even accounts relating to partnership firm, a company, a club or a co-operative society are also considered personal accounts. These are all non-living things and are artificial persons. They exist in the eyes of law. Personal accounts include accounts of debtors and creditors, i.e. some persons are givers and some persons are receivers. Here a person means one who can file a suite and who can be sued. He can buy assets or sell assets. Joint stock companies, co-operative societies which are established under some law, are persons in the eyes of law. They are legal persons. They are treated as persons by law. Thus sole proprietor, partnership firm, a joint stock company, a cooperative society, insurance company, bank etc. are treated as persons. The following accounts are treated as personal accounts: (1) A nil Desais Account (2) Ahmedabad Municipal Corporation Account (3) Bhagyoday Stores Account (4) Gujarat Electricity Boards Account (5) Life Insurance Corporations (LIC) Account (6) Prashant Co.Ltd.s Account (7) Capital Account (8) Drawings Account (9) Bank of Barodas Account (10) Gujarat Law Societys Account. B) Real Accounts: The accounts relating to goods and other property are known as Real accounts. Goods Accounts, i.e. the accounts of commodities in which the businessman deals are Real Accounts, e.g. if the dealer in furniture purchases furniture. It is recorded in Goods Account. Of course, a businessman does not prepare only one Goods Accounts but divides it into Purchase Account, Sales Account, and Goods Return Account etc. But when he purchases some asset which helps in carrying on of business, they are treated as business assets. Thus real accounts relate to goods and other assets. An asset is that which can be converted into cash or which itself is cash which can be given in exchange of a debt. Some of the real accounts are: (1) Building Account (2) Machinery Account (3) Furniture Account (4) Cash Account (5) Motor Car Account (6) Investment Account (7) Sales Account (8) Purchases Account (9) Stock Account (10) Bills Receivable Account (11) Shares Account. Real accounts can be grouped into two parts: (1) Accounts relating to Goods and (2) Accounts relating to other assets. Goods accounts are also classified into different accounts according to the purpose for which the goods come in or go out, e.g. (1) Sales Account (2) Purchase Account (3) Sales Return Account (4) Purchases Return Account (5) Goods burnt by fire (6) Goods distributed as samples Account (7) Goods stolen Account. (8) Goods withdrawn for personal use Account.

Page 10 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA SEM: II

Accounts of other Assets include (1) Accounts relating to fixed assets like Machine account, Furniture Account, etc. and (2) Accounts relating to current assets like Cash Account, Bills Receivable Account (3) Accounts relating to loans and advance, e.g. Loan Account (4) Investment Accounts, e.g. Arvind Mills Shares Account, 9% Government Loan Account etc. C) Nominal Accounts: They are the accounts relating to incomes or gains and expenses and losses. They include income accounts like: (1) Rent Received Account (2) Interest Account (3) Dividend Received Account etc. The expenses accounts include: (1) Salary Account (2) Wages Account (3) Rent Account (4) Commission Account (5) Postage and Telegram Account (6) Depreciation Account (7) Insurance Premium Account (8) Advertisement Account (9) Carriage Account (10) Railway Freight Account (11) Customs and octroi Account (12) Repairs Account (13) Factory Power Account (14) Office Electricity Account (15) Printing and Stationary Account (16) Bad debts Account (17) Discount Allowed Account (18) Salesmans Salar y Account (19) Commission Account (20) Bank Interest Account (21) Bank Charges Account (22) Legal Expenses Account. Other Accounts are as under: There are four types of accounts: Assets: things the business owns. Liabilities: debts the business owes. Income: the revenue generated from the sale of goods or services. Expenses: the costs incurred in producing the goods and services. The main difference between these categories is that business profit is calculated as Profit = income expenses While the capital of the business (the owners investment) is calculated as Capital = assets liabilities

Page 11 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA SEM: II

FIGURE: Business events, transactions and the accounting system Rules of Debit and Credit:The name double entry itself suggests that every transaction has two effects. One debit effect and the other credit effect, i.e. in every transaction one account are debited and the other account is credited. For each transaction, both the effects cannot be given on one side. If one effect is given on the debit side, then the other effect must be given on the credit side. While recording a transaction one has to think of: (1) In which two accounts the effects must be given and (2) In which account the debit effect must be given and in which account credit effect must be given. As far as the second question is concerned, there are certain rules according to which one account is debited and the other account is credited. The general rule for all types of accounts is that an account which receives the benefit must be debited and an account which gives the benefit must be credited. But to be more specific, different rules are framed for different classes of accounts. We have divided all accounts into three groups and for each group; there is a separate rule of debit and credit. These rules are the bases of the structure of double entry book-keeping. Before using these rules, it must be decided as to which two accounts are involved and what types of accounts they are. Then these rules of debit and credit must be applied. These rules are below given:

Page 12 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA
A) Rule for Personal Accounts: The account of the person who receives the benefit is debited and the account of the person who gives the benefit is credited. In other words, if in any transaction an individual, a firm or a company has received cash or any asset or some service, then the account of that person is debited. Conversely, if any such person has given cash, any other asset or some service, and has not received anything in return, then the account of that person is credited. The rule of Personal Accounts can be stated as follows:

SEM: II

Debit the Receiver and Credit the Giver


Some Examples are: (1) Paid Rs.500 to Vipul on account. This is a transaction with a person named Vipul. Vipul receives Rs. 500. He is the receiver of benefit against which he does not give anything in this transaction. Hence Vipuls Account will be debited. (2) Commission has become due from Kapoors Rs. 400. Kapoor receives our services in this transaction. Perhaps we have sold goods on his behalf. He has still not given cash for it. Hence, he becomes the receiver and so, Kapoors Account is debited with Rs. 400. (3) Bought goods from Navin on credit Rs. 2,000. Navin gives us goods in this transaction, but he does receive anything in return. Hence, he is the giver of the benefit and his account will be credited. (4) Paid into the bank Rs. 5,000. Here, bank receives cash. According to the rule of personal accounts, Bank Account is debited. B) Rule for Real Accounts: When there is an exchange of any asset or property in a transaction, the following rule applies to it. When an asset comes into the business, the asset account is debited, because the asset gets the benefit. Similarly, when an asset goes out of business, the asset account is credited because it gives the benefit. The rule of Real Accounts can be stated as follows:

Debit what comes in and Credit what goes out


Some Examples are: (1) Rs. 300 is paid to Mr. B in cash. Here cash goes out and according to the above rule, credit what goes out. So Cash Account will be credited. (2) Sold goods to Pragnesh Rs. 1,500. In this transaction, goods go out and so Goods Account will be credited. Pragnesh receices the benefit and so Pragneshs Account will be debited. (3) Bought goods for cash Rs. 400. In this case, goods come into the business and so Goods Account is debited. Cash goes out and according to the rule credit what goes out. Hence, Cash Account is credited. (4) Purchased furniture Rs. 5,000. In this transaction, an asset-furniture comes in and according to the rule debit what comes in. So Furniture Account is debited. C) Rule for Nominal Accounts: The following rule applies to accounts of expenses and incomes involved in a transaction. When expenses or losses are incurred, their accounts must be debited. Whenever, the incomes are received, the income account must be credited. The rule of Nominal Accounts can be stated as follows:

Debit Expenses and Losses and Credit Incomes and Gains Page 13 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA
Some Examples are: (1) Paid salaries Rs. 800. Here two accounts affected are Cash Account and Salaries Account. Cash account is a real account and it goes out. So cash account is credited. Salaries Account is a nominal account and it is an expense. So Salaries Account is debited. (2) Received for commission Rs. 200. Here commission is an income and so Commission Account is credited. (3) Paid rent Rs. 350. Two accounts affected in this transaction are Cash Account and Rent Account. Rent is an expense and according to the rule debits the expenses. Hence Rent Account is debit ed. Remember here that though the landlord receives money, his account is not debited, because we pay him rent for the services of the house that he has provided. The landlord does not become our debtor. So his account cannot be debited. Thus in any case, when we pay money to a person for the services that he has rendered, the personal account cannot be debited, but the Service Account is debited (Salary, rent etc) (4) Paid salary to accountant Shaileshbhai. Here though Shaileshbhai receives money, his account is not debited. We pay for his services. So Salary Account which is an expense is debited. Cash goes out and according to rule of the Real Accounts, Credit what goes out. So Cash Account is credited.

SEM: II

Some Accounting Terms:For a careful study of accounting, some terms used in accounting terminology must be studied. Some of such terms are discussed below, which are frequently used in the study of accounting. (1) Entry: Entry means record of a transaction in books of account. Under double entry, every transaction has two effects: One debit and the other credit effect. When a transaction is recorded in journal or other subsidiary books, it is said that an entry is made. A transaction, when it takes place, is immediately entered in a book of original entry. (2) Transaction: A transaction is an exchange of goods, service and cash between persons. It is an event and it gives rise to an entry to be made in the books of account. There are two types of transaction: economic transactions (or financial transaction) and non-economic (or non-financial) transactions. Only economic transactions are recorded in books of account, e.g. sold goods to A on credit is an economic transaction, while inviting a friend to a dinner is a noneconomic transaction. (3) Voucher: It is a document supporting a business transaction, which has been entered in the books of account. e.g. if a customer has made payment to us, we have issued a receipt to him. This receipt is a voucher. For purchase of goods, an inward invoice sent by the supplier is a voucher. A pay in slip is a voucher for money paid into the bank. (4) Debit: It is a left hand side of an account. The word Debit is derived from the latin word Debitum meaning receivable or a thing owned. It suggests that a benefit is received. In double entry the receiver of benefit is debited. To debit means to write on the debit side of an account. (5) Credit: It is right hand side of an account. The word Credit is derived from the latin word credere. It means to give. It suggests that the account has given the benefit. In accounting, an account which gives the benefit is credited. To credit means to write on the credit side of an account. (6) Journal: It is a book of original entry in double entry book-keeping. It is a book in which a transaction is first entered immediately when it takes place. The columns kept in this book are for date of transaction, the name of the account debited and name of the account credited and amounts debited and credited. A short description of the transaction is also written. The entry made in this book is called journal entry. (7) Subsidiary Books: In a business where a large number of transactions takes place daily, all transactions can not be entered is one book called journal. It will involve lot of time and labor. So separate journals are kept for particular types of transactions, which are called subsidiary books, e.g. for recording all credit transactions relating to purchase of goods, a Purchase Book is kept.

Page 14 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA SEM: II

(8) Account: An account is a summarized record of the transaction at one place relating to one person, one kind of property or one class of expenses or incomes. Only transactions relating to a particular account is recorded in that account. Each account is divided into two parts. The left side is called a debit side and a right hand side is called a credit side. (9) Ledger: It is a main book of account. It is a book in which all accounts relating to persons, property and incomes and expenses are prepared. An account is a summary of transactions relating to a particular head only and divided in two parts. A ledger is a book in which such accounts are kept. (10) Posting and to post: To post is an act of transferring an entry made in the book of original entry into a ledger. The process of transferring such entry is called posting. (11) Balance: The difference between the totals of debit side and credit side of an account opened in a ledger for a specified period is called balance. The balance can be either a debit balance or a credit balance. When the totals of debit side are more, it is called debit balance. If the total of credit side is heavier, it is called credit balance. If the totals of both sides are equal, there is no balance and the account is said to have balanced. Generally, the accounts are balanced at the end of the year. But balances can be taken out at any time during the year, if need arises. (12) Goods: The word goods is used for those articles in which the business deals. In other words goods are those things which are bought by a businessman for resale to make profit, e.g. radios are goods for a dealer in radios, machinery is goods for a machine dealer, and cloth is goods for a cloth merchant. If however, a cloth merchant purchases furniture, it is not a purchase of goods, because he does not purchase furniture for resale. Furniture is goods for a dealer in furniture, because he makes profit out of purchase and sale of furniture. (13) Stock: It is a balance of goods lying unsold with business of any day. The balance of goods on the last day of accounting year is known as closing stock while balance of goods on the opening day of the year is known as opening stock. Closing stock of one year, becomes the opening stock of the next year. (14) Debtor: A debtor is a person who owes debt to business. If goods are sold to a person on credit, or if we have rendered services to a person for which he has not made payment, or if we have lent money to a person, such person is called a Debtor. In short, if a person has received any benefit from business and has not given anythin g in return, he becomes a debtor, For example, if we sell goods of Rs. 2,000 to A on credit or if we give a loan of Rs.2, 000 to A, then A becomes our debtor. Rs.2, 000 is receivable from him by business. (15) Creditor: A creditor is a person to whom debt is owed by business. He is a person to whom we have to pay money because we have purchased goods from him or credit or he has given us services or we have borrowed money from him. It is liability or debt of business to be paid in future. For example, if we have purchased goods of Rs.2,000 from B on credit or if we have taken a loan of Rs. 2,000 from B, then B is our creditor. (16) Liabilities: They are the debts which a business owes to others. They re amounts payable by business for goods purchased or for loan taken or for services rendered to the business. Such liabilities are creditors, bank overdraft, loan borrowed, bills payable etc. In short, Liabilities =Assets-Capital. From the view point of business, capital of the proprietor is also a liability but it is known by the name capital. It is also called owners equity. In accounts, it is shown on liabilities side. Liabilities are present obligations of the firm. They are probable future sacrifices of economic benefits (usually cash) that arise as the result of past transactions or events. Common examples of liabilities are notes payable (written obligations), accounts payable (obligations to suppliers arising in the normal course of business), and taxes payable. Two aspects of the definition of liabilities need elaboration. First, as with assets, the term probable is used. This is an important part of the definition. Although in some instances, the existence of a liability is virtually certain (as when one arises from obtaining a bank loan), other situations are less clear. For example, consider a firm that has been sued. At the inception of the suit, the outcome may be highly uncertain, but as the litigation proceeds,

Page 15 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA SEM: II

it may seem more likely (but not certain) that the firm will be forced to pay some amount. Accountants need to exercise judgment in determining the existence of a liability. They do so by assessing whether a potential future sacrifice is probable. Types of Liabilities: a) Accounts payable: Usually represents debts that the firm incurs in purchasing inventories and supplies for manufacturing or resale purposes. Accounts payable also includes amounts that the firm owes for other services used in its operations, such as rentals, insurance, utilities, and so on. Accounts payable are often called trade debt because they represent debt that occurs in the normal course of any trade or business. b) Notes payable: The next current liability is more formal current liabilities than the accounts payable. A note may be signed on the borrowing of cash from a local bank. The note represents a legal document that a court can force the firm to satisfy. c) Warranty obligations: Represent the firms estimated future costs to fulfill its obligations for repair or refund guarantees. These obligations refer to any products sold or services provided prior to the balance sheet date. Unlike accounts and notes payable, the exact amount of the firms obligations for warranties cannot be determined by referring to purchase documents, formal contracts, or similar evidence. Instead, the amount reported for the warranty obligation is based on managements judgment about future claims for repairs and refunds that may arise from past sales. d) Accrued expenses: The next item listed among Sample Companys current liabilities is accrued expenses, which represent liabilities for services already consumed but not yet paid for or included elsewhere in liabilities. These accrued liabilities usually constitute only a minor part of current liabilities. Taxes payable comprise the final account listed among the current liabilities of Sample Company. e) Taxes payable: Represents unpaid taxes that are owed to the government and will be paid within a year. Taxes payable may include employee withholding taxes, unemployment taxes, employer income taxes, or any number of other taxes that are incurred in the normal course of operations. Taxes payable are typically a relatively minor portion of current liabilities because governmental units require that taxes be paid on a timely basis. The current liabilities of Sample Company are a representative sample of many short-term liabilities. Businesses engage in many credit-based transactions; most sales to businesses involve accounts receivable, and most purchases by businesses correspondingly involve accounts payable. As a result, the largest of the current liabilities usually consists of trade accounts payable. The other liability items, although less significant in dollar amount, also represent common business transactions and circumstances. f) Non-current Liabilities: Non-current liabilities generally have longer maturities than the current liabilities discussed in the preceding section. Their maturity date is more than one year. Most non-current liabilities represent contracts to repay debts at specified future dates. In addition, these borrowing agreements often place some restrictions on the activities of the firm until the debt is fully repaid. g) Bonds payable: Is a major source of funds for larger business firms? They represent liabilities that the firm incurs by selling a contract called a bond. A bond contains the firms promise to pay interest periodically (usually every six months) and to repay the money originally borrowed (principal) when the bond matures. The amount of money that the firm receives from investors for its bonds depends on investors views about the risky ness of the firm and the prevailing rate of interest. Investors rely on the ability of the firm to generate sufficient cash flows from its operations to meet the payments as they become due. h) Mortgage payable: Is similar to bonds payable because firms must also make principal and interest payments as they are due. Unlike most bonds, a mortgage represents a pledge of certain assets that will revert to the lender if the debt is not paid. The simplest example of a mortgage is that of a bank holding title to your house until your loan is fully paid. If the loan is not paid, the bank can sell the house and use the proceeds to pay off the debt. Mortgages on factories and hospitals are very similar. The problem in such cases is that there are often very few buyers of specialized assets such as factory buildings and equipment. In such cases, possible mortgage default represents more risk and higher costs to lenders. It also indicates that most lenders will cooperate

Page 16 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA SEM: II

with borrowers to find alternative solutions to avoid defaults. From an analytical perspective, the analyst or manager must make sure that mortgage terms are Being satisfied and those payments have been promptly remitted. For both bonds and mortgages, analysts will try to discern whether cash flows from operations are sufficient to pay the interest and principal. (17) Assets: Assets are those things or rights which are owned by the business and have monetary value. They are properties which help to run the business. They include amounts due to business from others, e.g. cash, machinery, stock, furniture, debtors etc. are all assets. Business liabilities can be paid with the help of assets. Assets are of two types: (a) Fixed assets are those which are not purchased for resale, which help running of the business and whose benefit is available for a long time, e.g. building, machinery, furniture etc. (b) Current Assets are those assets which are constantly converted into cash or other assets and whose values go on changing every day, e.g. stock, debtors, cash etc. Assets can also, be classified as (i) Tangible Assets and (2) Intangible Assets. Tangible assets are those which have physical existence i.e. which can be seen and touched, e.g. machinery, vehicles, stock etc. Intangible assets have no physical existence, i.e. they cannot be seen or touched but they have monetary value, e.g. goodwill, patents, copyrights etc. There are Fictitious Assets also. They are not really assets and they do not fetch any value. They are simply debit balances. Some large expense incurred sometimes, may be temporarily treated as an assets, e.g. sometimes in order to introduce a new product into the market, heavy expenditure is incurred on advertisement. The benefit of such expenditure will be available for many years to come. Hence it is not treated as expenses during one year only but is spread over a number of years. A part of it is treated as expenses of the current year, the balance is treated as an assets. This is a factitious Asset, because it can not be sold and cannot fetch any value. Such assets are preliminary expenses, advertisement campaign expenses, development expenditure etc. Those assets which are constantly converted into cash or which are in the form of cash are called Liquid Assets, e.g. stock, debtors, cash, bank balance etc. Types of Assets: a) Prepaid expenses: The final category of current assets represents unexpired assets such as insurance premiums. Insurance policies, for example, are frequently paid ahead on an annual basis. The unexpired portion, the portion of the policy paid for but not yet used, is shown as part of prepaid expenses, which are interpreted as current assets. Prepaid are usually minor elements of the balance sheet, and, in the usual course of events, prepaid will not be converted or turned into cash. Instead, the rights to future benefits will be used up in future periods. b) Goodwill: Is a general label used by accountants to denote the economic value of an acquired firm in excess of the value of its identifiable net assets (assets minus liabilities). Goodwill reflects the adage that the value of the whole differs from the sum of its parts. This economic value is largely due to factors such as customer loyalty, employee competence and morale, management expertise, and so on. In other words, the value of a successful business firm is usually much greater than the total values of its individual assets. c) Cash and cash equivalents: It includes currency, bank deposits, and various marketable securities that can be turned into cash on short notice merely by contacting a bank or broker. These amounts are presently available to meet the firms cash payment requirements. Note that only securities that are purchased within 90 days of their maturity dates, or are scheduled to be converted to cash within the next 90 days, may be classified as cash equivalents. d) Accounts receivable: It represents credit sales that have not been collected yet. They are converted into cash as soon as the customers or clients pay their bills (their accounts). Accounts receivable should turn over, or be collected, within the firms normal collection period, which is usually 30 or 60 days. A slower accounts receivable turnover embodies more risk to the organization because the probability of nonpayment usually increases as turnover decreases.

Page 17 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA SEM: II

e) Inventory: It represents items that have been purchased or manufactured for sale to customers. That is, inventory can either be created through the manufacturing and assembly efforts of the organization or be acquired from others and held for resale. Inventory is the stuff of commerce dating back to merchants on camels and pirates raiding the high seas looking for bounty. Inventory can be as prosaic as black tea or salt, or it can be as glamorous as gold bullion or silver coins. Today, inventory is often high tech,such as silicon wafers, memory chips, or disk drives. Should the company discover that some of its inventory is unsalable, or marketable only at a greatly reduced price, the reported value of the inventory should be reduced accordingly? f) Prepaid expenses: It the final category of current assets, represents unexpired assets such as insurance premiums. Insurance policies, for example, are frequently paid ahead on an annual basis. The unexpired portion, the portion of the policy paid for but not yet used, is shown as part of prepaid expenses, which are interpreted as current assets. Prepaid are usually minor elements of the balance sheet and, in the usual course of events, prepaid will not be converted or turned into cash. Instead, the rights to future benefits will be used up in future periods. g) The Operating Cycle and Liquidity: Manufacturing and merchandising firms operating cycles include turning inventory into cash. Using three of the current assets discussed earlier, the operating cycle evolves from the purchase of inventory, to the exchange of inventory for a promised payment by a customer (an account receivable), and finally to the conversion of the receivable into cash. Operating cycles may vary in length from just a few days (in the case of food retailers) to months (consumer appliance sellers) or even years (defense contractors). h) Non-current Assets: Non-current assets are long-term assets that are used in the conduct of the business. Whereas current assets are liquid and turn over in relatively short time periods, non-current assets usually turn over very slowly, on the order of once in several years. In other words, while the operating cycle for current assets is usually less than a year, the replacement cycle for non-current assets is longer than a year. In a high-tech organization, however, some non-current assets may be replaced more frequently. All non-current assets are recorded on the balance sheet at their historical acquisition costs. The disadvantage of this is that as time passes the historical costs of many non-current assets become out of date relative to their current market values. Consequently, they indicate little about the market value of the organization and about the future resources necessary to replace the assets. However, the historical costs listed on the balance sheet do represent the costs of these assets that will eventually be consumed by future operations. i) Property, plant, and equipment: These assets are widely referred to as fixed assets Property usually represent the land on which the firms offices, factories, and other facilities are located. In most cases, property is a relatively minor portion of the total non-current assets, yet in some cases, such as firms engaged in mining, logging, or oil and gas exploration, property constitutes a major operating asset. Property is also valued on the balance sheet at its historical acquisition cost, and because property is usually one of the oldest assets held by an organization, its recorded historical cost is often the most out of date in terms of current market values. j) Buildings or plant: It may be office, retail, or factory buildings; warehouses or supply depots; or hospitals or health clinics. Equipment includes office desks and chairs, tools, drill presses, robots, computers, x-ray and other scanners, podiums, and so on. In other words, buildings and equipment are the primary productive assets of many organizations. Whether widgets or rings are produced, whether knowledge or health is improved, buildings and equipment are necessary to produce most goods and services.

Page 18 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA SEM: II

(18) Bank Loan: Navin Sapariya realizes that his new business needs more cash than the Rs. 50,000 he invested. The firm applies for and is granted a Rs. 20,000 bank loan. The loan carries an interest rate of 8%, and both principal and interest are due on January 1, 2001. This transaction increases cash and liabilities by $20,000. Liabilities increase because Navin Sapariya is obligated to repay the loan in the future; this constitutes a virtually certain sacrifice of future economic benefits. Additionally, the obligation has arisen as the result of a past transaction (having obtained the cash on January 1, 2000). The liability item that increases is notes payable. Banks usually require borrowers to sign written promises to repay loans, and the word notes indicate that Navin Sapariya has a written obligation to repay the loan. (19) Adjustments: At the end of January, Harry Jacobs wishes to prepare a balance sheet and an income statement. Before doing so, several adjustments must be made to the accounting records. These adjustments are necessary because certain events do not have normally occurring source documents, such as sales tickets or checks, to trigger their account. While (1) the creditors claims increase and (2) the owners claims decrease. Also note that expenses do not necessarily equal cash outflows. Goods and services can be consumed to generate revenue without cash out flowing recognition. At the end of each period (usually each month or year), the accountant undertakes a deliberate search to identify and record these items (20) Interest: As previously mentioned, on January 1, 2000, Navin Sapariya borrowed Rs. 20,000 at 8% interest (on an annual basis). Although the interest payment is not required until January 1, 2001, Navin Sapariya has incurred interest expense during January 2000. During that month, Navin Sapariya has consumed a resource: the use of the money. The utilization of that resource has enabled Navin Sapariya to operate and to generate revenues. Accordingly, an expense has been incurred, and it must be reflected in the accounting records before the financial statements are prepared. The interest charge for January is calculated as: Interest expense = Principal* Rate * Time = Rs. 20,000 * 0.08 * 1/12 = Rs. 133 (rounded) The principal is the amount borrowed, in this case, Rs. 20,000. The annual interest rate is 8%. Stated in decimal form, it is .08. Because the interest rate is stated on an annual basis, the time period must be expressed similarly. Given that one month has elapsed, the time period is 1/12 of a year. The general form of the analysis is similar to the earlier utility bill situation. Because the banks services (use of the banks money) have been consumed, Navin Sapariya has an additional obligation (interest payable) in the amount of Rs. 133. Further, because assets have remained constant and liabilities have increased, owners equity must decrease. (21) Depreciation: On January 1, Navin Sapariya purchased equipment for $25,000. As you recall, this transaction increased the asset equipment. Assume that the estimated life of the equipment is 10 years, at which time it will be worthless. Because the service potential of the equipment will be consumed over the course of its 10-year life, the cost of the equipment should be charged as an expense over that period. This expense is referred to as depreciation. (22) Capital: The amount invested by the proprietor in a business is called Capital. The owner of business may bring not only cash but some other assets also by way of capital, e.g. if the proprietor brings furniture, goods etc. they are all a part of Capital. Thus only cash brought in is not the capital. But value of all assets including goods brought into the business by the proprietor is called Capital. A businessman brings capital when he starts business and he may also bring additional capital whenever more money is needed in business. When profit is made in business, the capital increases and loss is incurred, capital is reduced. The amount of capital is credited to a separate account called capital Account. Generally, a business does not withdraw more money than his ca pital, and so Capital Account generally shows a credit balance.

Page 19 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA SEM: II

(23) Drawing: It is the value of cash or goods or any other asset withdrawn from business by a proprietor for his personal or domestic use. When the proprietor withdraws money, his capital is reduced. A businessman is a person. He is considered a different entity from business. So when he withdraws money from business, he receives the benefit and so his personal account is debited. This personal account of the proprietor is called Drawings Account. At the end of the year Drawings Account is closed and is transferred to Capital Account, thereby reducing the Capital. (24) Solvent: A person is said to be solvent when his assets are more than his liabilities. He is able to pay his debts to the third parties in full, because he has more assets than his debts. (25) Insolvent: If a persons liabilities are more than his assets, he is called insolvent He is not able to pay his debts in full, because the value of his assets is not enough to pay the debts. Legally, such a person is called insolvent only when he is declared insolvent by a competent court. (26) Bad Debts: A person who owes debts to the business is a debtor. If out of the amount receivable from a debtor, some amount is not received, then it is a loss of business. Such loss is known as bad debts. It reduces the profits of business. Bad debts occur when the financial position of a debtor becomes weak or debts could be recovered due to provisions of some law. (27) Discount: If the businessman agrees to receive some amount less than the printed price or the amount shown in the invoice, the difference is called discount. Generally, there are two types of discount: (1) trade discount and (2) cash discount. (1) Trade Discount: When a producer or a wholesaler allows some deduction on the catalogue price to the retailer, it is called trade discount. This discount enables the retailer to sell at the printed price and yet earn some profit, after meeting expenses. This discount is also allowed for purchasing in bulk. It is directly deducted while preparing invoice and invoice is prepared for the net amount. The seller and purchaser both make entries in books of account for the net amount in the books of account. Trade discount is not shown in books of account. (2) Cash Discount: Cash discount is an allowance made by the receiver of cash to the payer for making prompt payment. When a customer makes payment immediately after purchases of within a specified time, known as period of credit, then such discount is allowed. Cash discount is allowed in addition to trade discount. It is a loss for the receiver of cash and is an income of the person who pays cash. Cash discount is always recorded in the books of accounts while trade discount is not recorded. (28) Allowance: At the time of settlement of debt, some amount is allowed by the receiver to the payer, which is known as allowance. There are no rules for allowances, just as in case of discount, e.g. if a customer owners Rs 1,005 to business and he settles his account by paying Rs. 1,000 then Rs 5 is the allowance. It is a loss for the receiver and gain for the payers. It is recorded in the books of account, as in case of cash discount. (29) Profit or Gain: During a specified period, if the total income is more then the expenses, the difference is called profit. Profit of business is ascertained at the end of the year. When in an individual transaction, the amount realized is more than the cost, the difference is called gain. (30) Loss: If during a specified period, the expenses are more tha n the income, then the difference is called Loss. Generally, at the end of the year, the difference is called loss. (31) Gross Profit or Gross Loss: When the sales are more than the purchase price of goods plus purchase expenses, then the difference is the Gross Profit. In short, sales-Cost of sales=Gross Profit. Conversely, if the sale proceeds are less than the purchase price plus expenses, the difference is the gross loss. In short Gross Loss=Cost of Sale-Sales. (32) Net Profit or Net Loss: Net profit is a surplus left after deducting all expenses from Gross Profit and adding other incomes to it. If however the expenses exceed the gross profit and other incomes, then the difference is the net loss.

Page 20 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA SEM: II

(33) Loan: Any amount borrowed or lent is called loan. If money is borrowed it is debt of business and if loan is given, it is receivable for the business. (34) Bills Receivable: When a debtor puts his signature, on a document drawn by his creditor asking him to pay money after a specified time, the document is called Bill Receivable for the creditor. This is because he has to receive money against this document in future. It is an asset for the receiver. (35) Bills Payable: The document which is written by a creditor and on which the debtor puts his signature and accepts to pay the amount, mentioned therein within a specified time period, it is a bill payable for the debtor. If the businessmen have accepted the bill, it is his liability.

Some Accounting Concepts:A number of principles and concepts are used in accounting. (1) Dual Aspect Concept (2) Separate existence or Entity Concept (3) Continuity Concept or Going Concern Concept (4) Objectivity Concept (5) Periodicity Concept (6) Realization Concept (7) Matching Concept (8) Conservatism Concept (9) Cost Concept (10) Stable Money value Concept (11) Consistency Concept (12) Accrual Concept (13) Materiality Concept (1) Dual Aspect Concept: Every business transaction has two effects: one, debit effect and the other credit effect. In other words, one effect is about the receiving of benefit and the other effect is above giving of benefit. Thus will be made clear if we examine some business transactions: (i) When we buy goods for cash, the two aspects involved are like this. One aspect is of receiving the goods and the second aspect is of making payment in cash. In the first aspect, goods come in i.e. the goods account receives the benefit and so goods account is debited. The second effect is giving cash, cash account gives the benefit and so cash account is credited. (ii) In case of credit purchase, one effect is about goods coming in and the second effect is of creating a Liability. (iii) When salary is paid we get the services of an employee, which shows that benefit is received, so salary account is debited. Secondly, cash is paid and cash account gives the benefit, so cash account is credited. Thus the base of double entry system is the two fold effect of every transaction. Entries must be made in the account, recognizing the two fold effects of every business transaction. In each transaction, the two effects are equal and in opposite directions e.g. goods of Rs. 10,000 are sold for cash. Here the owner effect is that cash comes in and cash account gets the benefit. So cash account is debited. On the other hand, goods go out. This has the effect in the opposite direction of the first effect, but is of equal amount. Goods account gives the benefit, and so goods account is credited. Thus the two effects or two aspects of every transaction is recognized in accounts.

Page 21 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA SEM: II

The effect of these double effects is that the total of all amounts debited is equal to the total of all amounts credited. Hence, if balances of all accounts are found out and a list of debit and credit balances is prepared, then the total of debit balances and the total of credit balances will always be equal. This helps checking the arithmetical accuracy of the accounts written. Dual aspect effect on Accounting Equation: We know that the funds employed in business are provided by two parties, one, the owners of business, which we call Owners, Funds and which is credited to Capital Account. It is represented in accounting equation as C (C=Capital). The second partly supplying funds to business are the creditors, which we call liabilities. They are known as Debit Funds. Thus there are two types of funds employed in business: Owners, funds and Debit funds. These funds are employed in various properties which we call Assets (represented by A). On this basis we prepare the following simple equation showing the two equal and opposite aspects. Capital + Liabilities = Assets C+L=A [Some authors use the word E (Equity = capital + profit and reserves); they call it owners, equity in place of C. Meaning of both is the same). This is called simple Accounting Equation or Balance Sheet Equation. According to dual aspect concept, whenever one side of the equation is affected due to some transaction, the other effect is on the opposite side of the equation or the other effect may be on the same side of the equation but in the opposite direction. For example, A trader commenced business with Rs. 50,000 cash. Here, his capital (C) is Rs. 50,000 and his asset (A) which is cash is also Rs. 50,000. So the equation is (Capital (C) Rs. 50,000=Asset (A) Rs. 50,000. If he borrows from some friend Rs. 30,000 as a loan, then his asset (A) cash will increase to Rs. 80,000 and the second effect will be creation of a liability (L) of Rs. 30,000. This the equation becomes. C+L=A 50,000 + 30,000 = 80,000 Let us take another illustration. Suppose he now purchase goods for cash Rs. 40,000. Here goods come in and the asset i.e. goods increases by Rs. 40,000. On the other hand, another asset cash decreases by Rs. 40,000. Thus the second effect of this transaction is on the same side, but in the opposite direction. If we prepare a balance sheet, it will show the following position: Balance Sheet Rs. Capita Friends Loan 150,000 30,000 80,000 Cash (80,000 -40,000) Stock of goods Rs. 40,000 40,000 80,000

Page 22 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA
(2) Entity Concept: According to this concept, it is assumed that the business, distinct from its proprietor. The business has a personality separate from that of its owners. Accounting records must take note of the dealing between the business and its owners just like dealing with outsiders. The accounts of business are written and not of the proprietor. Joint stock companies and co-operative societies have legal existence or entity, but legally there is no entity for sole trader or partnership. However, accounting will distinguish the business from the owners in all cases. Thus even sole trader and partnership firms also are separate accounting entities. Thus in accounting, the owner of an enterprise is always considered to be separate and distinct from the business which he owns. All the transactions of the business are recorded in the books of the business from the view point of the business. (1) The fact that capital is shown as a liability in the balance sheet of business, shows that business is separate from its owners. The owner becomes the creditor of business when he brings capital in the business. This amount is credited to his Capital Account. (2) Similarly when the owner withdraws money from business, his Drawings Account is debited. The concept of business entity is applicable to all forms of business organizations such as Sole-trader, Partnership, Joint-stock Companies, Co-operative Societies etc. Thus if husband and wife carry on a retail business in partnership, then all expenses and incomes relating to that business will be recorded in the books of account of the firm, but their family expense on food, clothing etc. should not be recorded in the books of the firm. Legally, there is no distinction between money in the business and their personal money. They belong to the same persons. But from the accounting point of view, money in the shop is the money belonging to business entity and is different from couples personal money. Because of this concept (1) when the owner brings capital, it is shown as a debt of business. (2) When the owner withdraws money for personal use, it is debited to his drawings account. (3) When any personal expense is paid from business, it is also debited to his drawings account. (3) Going Concern Concept or Continuity Concept: This accounting concept is based on the assumption that the business operations are to be carried on for a very long period in future. In other words, continuity activity and not liquidation, is the normal business process. Except the undertaking of a particular venture, it is assumed that business will last for a long time. It is due to this assumption, that: (1) The fixed assets are usually stated in balance sheet at cost less depreciation. Its realizable value is not taken into account. If accounts are written on the assumption that business is to be closed, then the fixed assets will be shown at realizable value. This will show the amount that will be realized from assets, if business is closed. But that is not done in practice. (2) When depreciation is calculated on fixed assets, it is presumed that the asset will be used in business for so many years in future. If the accounts are written on the assumption that the business is to continue for a long time in future, then only the whole of depreciation can be recovered in future years. (3) The deferred revenue expenditure and patents and trade marks also suggest that business is going to continue for an indefinite period. Then only these assets are written off in future years. E.g. when advertisement is done on large scale, it is presumed that the benefit of it will be available for say 5 to 7 years. Here, there is a presumption that the business will continue for a longtime. (4) When provision is made for contingent future liability (e.g. gratuity for employees), there is a presumption that the business will continue for along time. (5) The work in progress is valued on the basis of expenses so far incurred on it. Here again it is presumed that these goods will be completed in future and will be sold when they are converted into finished goods. (6) This concept does not suggest that the business will never be closed or that it will continue indefinitely. It only means that the business will continue for a petty long time. When the accountant writes accounts, he does not think of dissolution of business nor does he write accounts thinking about legal rights and liabilities. (7) While estimating amount likely to be received from debtors also, the assumption is there that in future certain amount will be realized. Provision for bad debts is made. Here again, there is no estimate of how much amount will be obtained by legal means, but it is presumed that the business is to continue in future and so much amount will be collected. Giving definition of Going -concern Kohler has said, It is any enterprise which is expected to continue operating indefinitely in the future; hence, its collective assets, liabilities, revenues,

SEM: II

Page 23 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA SEM: II

operating costs, personal, policies and prospectus. It is a basic axiom of accounting, useful in valuation of intangible assets and for charging depreciation on tangible and intangible assets. (4) Periodicity Concept (Accounting Period Concept): It is directly related to the going concern concept. Though the business is going to continue for long, the financial statement showing profit and loss of business is prepared at periodic intervals. The period is generally one year. A profit and loss account is prepared at the end of every year to know the profit or loss of business, which shows the results of years trading. A balance sheet is also prepared at the end of each such period (of one yea r), which shows the financial position of business. Generally a period of one year is selected as a discounting period, because it covers all types of seasons, like periods of high demand and low demand (may be winter for Ice-cream business and summer for woolen cloth merchants. This gives a correct idea of sales of different periods. In fact, the continuity concept suggests that the business has a long life. True profit can be ascertained only when the business is closed down. The capital at the commencement of business is compared with capital when the business is closed. The difference between the two will show the profit or loss during the lifetime of business. But this time period is too long and one has no patience to wait for such a long period to know the results of business. Besides, it will be too late to take corrective steps, if necessary. One will get no idea as to how business is going. No information about the losses if any will be available. Hence, this long period of the whole life-span of business is divided into certain years and accounts are prepared at the end of every year. This accounting assumption also suggests that the net business income can be determined at the end of each accounting period. The business has to take into account two things while preparing periodic accounts: one, what incomes are due but not received and which expenses are due but not paid. Second, certain expenses are divided into two parts, one part written off during the current year and the other part carried to next year (e.g. depreciation on fixed assets). Another aspect raised by this concept is the division of expenses between revenue expenses and capital expenses. Revenue expenses are such that they are exhausted within a single accounting period e.g. rent. But capital expenditure is spread over more than one accounting year e.g. expenses incurred on purchase of machinery is capital expenditure. If its useful life is estimated to be 10 years then this expenditure is spread over ten years and is debited to profit and loss account every year in the name of depreciation. The accounting period is generally of one year. It may be calendar year from 1 January to 31 December or a st Vikram Samvat year from 1 of Kartik sud to Amas of Aso vad. Accounting to the Indian Income-tax law, the st st accounting year must be a period starting on 1 April and ending on 31 March. (5) Objectivity Concept: Objectivity means impartiality and dependability. If objectivity or independence of accounts is to be maintained, they must be written not according to the personal opinion of some person or according to whims of some persons but they must be impartiality and dependable. They must be based on some evidence which can be verified by an outsider like an auditor. They must be prepared with accuracy and there must be some documents as evidence supporting the entry made in the accounts, which are generally called vouchers e.g. (1) If cash is paid into the bank, there must be a pay-in-slip with the stamp of the bank as an evidence. (2) If money is paid to someone, there must be a receipt given by the receiver and an accounting entry must be based on that receipt. (3) If goods are purchased on credit from a supplier, the supporting evidence must be the bill (invoice) issued by the supplier. In certain cases, evidence or receipts cannot be obtained from persons concerned. E.g. no vouchers can be received for rickshaw charges. In such cases, the firm will prepare the voucher and the signature of the person who has paid money is received on it. Signature of a responsible officer is also obtained sanctioning the payment. The concept also suggests that if two different persons draw conclusions from the accounts prepared by the account, they must be identical. The fixed assets are shown at their costs in the balance sheet because of this concept. If the assets are shown at market values, then different persons may suggest different values and they become subjective. If the assets are shown at cost, then the question of personal opinion or bias will not arise, because the purchase invoice becomes the conclusive evidence for the price of the asset.
st st

Page 24 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA SEM: II

In certain cases, there is bound to be some element of personal opinion. E.g. the estimate of useful life of an asset and its salvage value are both based on personal opinion. Similarly the amount of bad debts reserve is also based on personal opinion. The period over which patents and trademarks are written off is also dependent on personal opinion. The estimate of market value for the purpose of valuing closing stock is to a certain extent dependent on personal opinion. However, while writing accounts, the element of personal opinion must be reduced to the minimum and the accounts must be as far as practical based on facts. (6) Realization Concept: This concept suggests that revenue (income) and expenses must be recorded in the books at such time, when they are said to be realized. Income should be entered in the books when it becomes due. Expenses must be recorded in the books when it is said to be incurred. Revenue is said to be realized, when a new asset(cash or debtors) comes into the business in place of services rendered or an existing asset (like stock) e.g. when goods are sold, an asset in the form of goods goes out and in return another asset in the form of cash comes in. If it is a credit sale, then cash does not come in, but the buyer becomes our debtor, so a new asset in the form of debtors comes in. Thus in case of sale, revenue (income) is said to arise (to be realized) when the ownership of the goods change. So sales revenue must be recorded in the books only at that time. Sometimes, it may happen that goods have been sold, but delivery of goods has not been made to the buyer. The goods are still lying in the go down of the seller. Even in this case, the sales revenue is said to be realized and sales must be recorded in the books of account. In case of services received, the payment may be made in the form of cash. In that case an asset goes out, or if it is not paid, a liability in the name of Unpaid Salary arises and the salary expenses is said to have realized. It must record in the books of account. The American Accounting Association has said Realization may be said to occur when a change in an asset or liability has become sufficiently definite to warrant recognition in accounts. This principle is related to objectivity concept. It means that incomes and expenses are not recorded in the books according to the sweet will of the accountant. A transaction is recorded only when there is an objective evidence of revenue or expense having occurred. This principle is very strictly followed in case of income or revenue. But in case of expenses, there is some latitude e.g. expense may not have occurred, but when there is a probability that it will have to be paid in future, then a provision is made for it. This is due to concept of conservatism in accounts. When is Revenue said to be recognized: In case of services, revenue is said to be recognized in the period in which services are rendered. In case of sale, revenue is recognized not when we receive the order, not when a contract for sale is signed, not when production of goods is completed, but only when goods are delivered to customers. That is when ownership of goods is changed from seller to buyer. This is because (i) The revenue is made certain independently. (ii) There is no certainty before sales, what price the product would realize and whether the goods could be sold at the fixed selling price. Let us try to understand this with the help of an illustration. For example, a trader sells goods for cash Rs. 1,000. Here the two things take place at the same time, viz. goods are delivered and cash is received. The income is said to have realized at the time of sale. Now suppose, the trader sells goods of Rs. 5,000 to a customer on credit and sends him the invoice. Here the income is said to arise immediately when goods are dispatched to the customer. Of course, cash is not received against it. Thirdly, suppose a trader has received an order for supplying goods along with some advance. Here, the goods are not sent nor is the invoice sent. So income is not said to have been realized. Incomes like interest, rent etc. are generally time-based. They are said to arise on completion of a certain period, st whether it is received or not e.g. due date for debenture interest is say, 31 December. Here the interest is st generally paid in January, but it has become due on 31 December, when it is said to have realized. In certain cases, revenue is said to be recognized even before the sale or after the sale. (i) In case of some commodities, income is said to have realized, immediately when its production is completed. E.g. gold is a standard item and its sale is certain and it would sell at a certain price. Thus revenue from gold is said to be recognized during the period when its production is completed, and not when

Page 25 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA SEM: II

it is sold. In other words, in case of standard articles like gold, whose sale is certain and which can be sold in organized markets, its sales income is recorded when its production is complete. (ii) Sometimes, the revenue is said to arise even before production is complete. E.g. in case of big contracts for construction of dams, bridges, big buildings etc. if revenue is considered to be realized when the construction is complete, then a strange situation will arise. If it is done so, the profit of one year may be a very large one, and earlier years will show losses. Hence in such cases, income is said to be realized every year as the construction work progresses. (iii) When it is doubtful whether the money due on account of credit sales will be realized, the income is not considered as realized, even after the sale is made. This is so when accounts are kept on cash basis. Income is said to arise only when cash is received. Professionals like doctors, lawyers, chartered accountants etc. do not record the income of fees in the books of account unless they actually receive them. (7) Matching Concept or Matching Cost with Revenue: When result of years trading is to be ascertained, the expenses incurred in order to earn income during that period must be recorded (matched) against it. Thus recording expenses against the income of a particular period is called matching cost with revenue. During a given period, when revenue is recogni zed as being earned, the expenses or costs incurred in earning that revenue must be debited to it; so that the net income of that period is ascertained, It can thus, be seen that the principle of matching cost with revenue is related to Periodicity concept. (1) When the net income of particular type of transaction is to be determined, then the expenses incurred to earn that revenue must be determined and deducted from it. Certain expenses are direct expenses of a particular income. E.g. cost of goods sold and salesmans commission are expenses directly related to sales. Such expenses can be directly debited to the income. (2) But all business expenses are not direct expenses. Some expenses are time based e.g. salaries, rent, insurance etc. Such expenses are charged to the period during which they are incurred. E.g. during 1999, a firm paid 11 months. Salary of Rs. 55,000 at Rs. 5,000 per month and one months salary is outstanding. Here total salary of 12 months Rs. 60,000 must be debited to the income of that year. (3) Some expenses are not time based, yet they are also not directly related to particular income. E.g. bad debts. Such expenses must be debited against the revenue of that period only. (4) When cost is to be matched with revenue, it is necessary that costs expenses must be divided into revenue expenses and capital expenses. Net profit of a particular period can be determined only when it is known as to which revenue expenses are and which capital expenses are. Revenue expenses can be charged against the income of that period, and they are not to be carried to next year. In short, revenue expenses are those which are incurred for a particular accounting period only. Capital expenditure is that whose benefit will be available not only during the current year, but also during the future years. It is to be written off over the years for which the benefit will be available. An asset is acquired when capital expenditure is made. Its useful life is estimated and it is written off over its useful life in the form of depreciation. Thus the whole of capital expenditure is not written off against the revenue of a single year. This principle also calls for considering certain other points: (1) Some income may be received, which does not relate to the current accounting period, but to next year. Such incomes must be carried forward. (2) Such situation may be for expenses also. Some expenses may be paid during the year, but the whole of it cannot be charged against the revenue of that year. In that case, a part of it is carried forward to next year as expenses paid in advance. (3) Deferred revenue expenditure should be spread over a number of years. (5) Some abnormal types of losses, which are not related to the performance of business, must be charged against the income of the year, during which the loss has occurred. E.g. Loss by fire, loss by theft etc. If the amount of such loss is a big one, it may be written off over some years, instead of in a single year.

Page 26 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA
(8) Conservatism Concept: The practice of conservatism is widely used in accounting. It suggests that provision must be made for all likely losses but no credit must be taken for probable income or profit. The assets may be understand but not overvalued. Thus great care must be taken while writing accounts and provision must be made for all probable losses. This is what is suggested by conservatism concept. It means anticipate no profit and provide for all conceivable losses. According to this principle, profits and assets are under estimated. Closing stock is valued at cost or market price whichever is lower. Provision is made for bad debts on debtors. i.e. bad debts reserve is created. The concept is generally applied in case of current assets and not to fixed assets. Of course, the use of this concept beyond a reasonable limit is a misuse. Provision against losses should not exceed the likely loss. If excessive depreciation is provided on assets or more than reasonable amount of bad debts is created, then it results in creation of secret reserve. This is against the principle of full disclosure in accounts. It also goes against the principle of matching cost with revenue and also against the consistency concept. The principle of conservation should be very carefully used. Here is some instance of use of conservation in accounts: (1) A provision of reserve for discount on debtors is made on the basis of conservatism concept. (2) Assets like stock and investment are shown at cost or market price whichever is lower. (3) Intangible asset like goodwill is gradually written off from books. (4) Joint life policy is shown at its surrender value. (5) No provision is made for discount on creditors. (6) The doubtful interest on loans granted is credited by bank to Interest Suspense Account and not to Interest Account. (7) The professional persons create reserve for fees not received. (8) Creating investment fluctuation fund, repairs and renewal reserve etc. (9) Cost Concept: According to this concept, in accounting all transaction and events are recorded at their monetary cost of acquisition i.e. actual amount of money paid for the acquisition of asset or for receiving the services provided. Accounting should make a record of the transactions on objective basis. The personal views of the people are not considered as proper but the views of two independent persons together would be a better base. The personal views of the owners should be subject to evidence that is available. E.g. If A Purchases a piece of land from B for Rs. 1, 00,000, then both A and B should record the transaction at Rs. 1, 00,000 even if both the parties consider them to be lucky, A thinking that land is worth Rs. 2,00,000 while B considers that he is fortunate to get more and estimating the value of land at Rs. 70,000 only. Thus in this transaction, the objective evidence that both A and B agreed that land is worth Rs. 1, 00,000 should be the figure at which transaction must be recorded. If we elaborate this concept, it means that if an asset does not cost anything i.e. no money is paid for its acquisition, then such transactions would not be recorded in the books of account. Thus the knowledge and skill that is built up as business operates, the teamwork that grows up within the organization, a favorable location that becomes increasingly important as time goes by a good reputation with its customers-none of these appears as in the accounts of the company. However if the goodwill of another business is purchased at a price, then according to cost concept, it will be recorded at a price paid for it and the goodwill would appear as an asset in the balancesheet. (10) Stable Money Value Concept: According to this concept only such transactions and events which can be expressed in terms of money are recorded. In other words, transactions and events on which money value cannot be put will not be recorded in books of account even though the events may be extremely important, e.g. the manager of a company retries after a long and meritorious service. The account will record the gratuity and other benefits payable to him bur he will not record the probable effect of his retirement on the companys fortune. To take an extreme case, suppose that several key executives are killed in a place accident. To the extent the real value of the company will change immediately, and this will be reflected in the market price of the companys stock, which reflects investors appraisal of value2. This type of event, how so important it may be, will not be recorded in the accounting books.

SEM: II

Page 27 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA SEM: II

In spite of the mentioned limitation of money measure concept, if still remains indispensable. The main advantage of expressing events in monetary terms is that money provides a common denominator by means of which heterogeneous facts of a business can be expressed in terms of number that can add and subtracted. This concept can be better explained by talking the following example: A business owns the following assets: Cash Rs. 500, bank balance of Rs. 5,000, one table, four chairs, one cupboard, one scooter, and stock of 10,000 meters of cloth and book debts of Rs. 10,000. In the absence of money measurement concept, these different units of measurement cannot be added to provide a meaningful information; but if they are expressed in monetary terms, they will reveal the total assets of the business as under: Cash Rs. 500 Bank balance Rs. 5,000, Table Rs. 1,000, Four chairs Rs. 600, Cupboards Rs. 700, Scooter Rs. 3,000, Stock-in-trade Rs. 80,000, Book Debts Rs. 10,000. Now we can add up the assets and it is useful for comparison and other purpose. When transactions and events are recorded and expresses in terms of money, there is an implied assumption that the real value of money or the purchasing power of money is constant. This stable money value is not true and the value of money varies considerably from time to time. Accounting however fails to take care of the change in the value of money and therefore recording of transactions and presentation of accounts are inaccurate. The figures given therein do not represent current economic values. E.g. If a building is purchased for Rs. 1,00,000 in 1986 and the value of the building has increased substantially in 1998, it will still be shown in balance sheet of 1998 at Rs. 1,00,000 less provision for depreciation. Thus the stable money value concept has given rise to an important problem of treatment of changes in price level in accounting i.e. Inflation Accounting. Accordingly, may accountants have made proposal for changing current accounting practice. But so far no acceptable alternative to the existing accounting principles based on historical cost is available and hence transactions are recorded on the basis of stable money value concept. (11) Consistency Concept: According to principle of consistency, the same accounting procedure and method should be continuously followed from year. They should not be changed frequently. If the same accounting principles and procedure are applied consistently from year to year, then accounting statements would be comparable. E.g. it would be improper to value stock according to one method (say FIFO) in one year and according to another or method (say LIFO) in the next year. If such a change in principle or method becomes necessary, then such change made and its effect should be clearly stated e.g. If a business has changed method of providing depreciation from straight line to diminishing balance method, then the fact of the change of method and its effect should be clearly disclosed in the annual financial statements. (12) Accrual Concept: Closely connected with matching concept is the Accrual Concept, wh ich is based on Accrual System or Mercantile System of Accounting. There are two systems of accounting: One, cash system and the other mercantile system or Accrual System. In Cash system, revenue is recognized only when it is received in cash. It is recorded in books of account at that time only. But in accrual system, revenue is recognized when it accrues, whether received in cash or professionals like doctors, lawyers, solicitors etc. prepare their accounts on cash basis. But businessmen use mercantile system, in which income is recognized and recorded, when it accrues and expenses are also recorded when they accrue. According to accrual concept (1) Revenue is recognized not when it is actually received in cash, but when it accrues and becomes due. Similarly, expenses are also recorded when they become due, and not when they are actually paid. (2) According to this concept. Certain adjustments are made at the end of the year while preparing Profit and Loss Account. E.g. income due but not received, expenses due but not paid. (3) If accounts are prepared on cash basis, they are not according to generally accepted accounting principles. (4) The concept of periodicity is also used in accrual concept. (5) Income relating to next year, if received is shown in balance sheet as Liability.

Page 28 of 29

VIDYABHARTI TRUST COLLEGE OF BBA & BCA. UMRAKH


SUBJECT: COMPUTERIZED FINANCIAL ACCOUNTING COURSE: BCA
(13) Materiality Concept: This concept states that if an item is not important, it should not be separately shown in accounts. The principle of materiality states that if an item is immaterial relative to the context in which it appears, it may be treated in the 1 most expedient manner available . The accountant need not record events which are trivial and the work of recording them is not justified by the usefulness of the results. E.g. A new lead pencil is an asset of the business. Every time when pencil is used, its value decreases. If an attempt is made to find out how much pencils are partly used everyday and to find out depreciation on pencils used, then time and money involved for insignificant matter will be huge and no sensible accountant would think of doing this exercise. Materiality is a relative concept. To a small business, extension of building of Rs. 10,000 would be material but for a giant company extension to building of Rs. 10,000 would be quite immaterial. Moreo ver, the materiality is not merely a matter of amount but also of importance. An item is considered material if it is large or sufficient enough to influence the judgment or decision based on accounting reports.

SEM: II

Page 29 of 29

Вам также может понравиться