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Contents

Double entry system Meaning and definition of accounting Users of accounting Branches of accounting Management accounting Difference between management and financial accounting
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Double entry system

Double entry system

It is a common system of book-keeping whereby the two aspects of every transaction i.e., It is based on the dual aspect concept . This method of writing every transaction in two different accounts on opposite sides for equal value is known as the double entry system of book keeping. This is the most accurate, complete and scientific system of accounting. 2

Advantages of double entry system


It keeps a complete record of business transactions. It provides complete information concerning the business . It provides a check on the arithmetical accuracy of books of accounts. It discloses the operating results . It makes possible a meaningful comparison of operating and financial performance over a period of time and enable the businessman to evaluate the progress of his business. It also enables a business man to plan and control his operations. It reduces the chances of committing fraud. 3

What is accounting

The language of business. A means to communicate financial information. A way to convey information about a business to users Accounting is the art of identifying, recording, classifying and summarizing in a significant manner and in terms of money transactions and events which are, in part at least of a financial character and interpreting the result thereof.
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Definition

The American Institute of Certified Public Accountants defines accounting as the art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events, which are, in part at least, of a financial character, and interpreting the results thereof . A business house must necessarily keep a systematic record of its day-to-day transactions to enable stakeholders to get a complete financial picture of the company and to take stock of its financial position on a periodic basis. Stakeholders include the 5

Classification of accounts
1) Personal accounts ( Natural Person & Legal Person) 2) Impersonal accounts A) Real account (Business asset) B) Nominal account (Business exp., Losses, Gains)
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Users of accounting
Who uses accounting information? Owners Managers Investor Creditors Government (tax assessment) Regulators Customers
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Accounting is an art- Art is that part of knowledge which helps us in attaining our aim. Accounting helps us in attaining our aim of ascertaining the financial results by showing the best way of recording, classifying and summarizing the business transaction. Recording, Classifying and summarizing- It provides information about all the transactions of financial in nature, recorded in journal, classifying in forms of ledgers, preparation of trial balance for checking the accuracy of accounts. In terms of money- Only those transaction are recorded which are in 8

Characteristics of financial accounting

Objectives or functions of accounting


Knowledge of sales and purchase Providing information of closing stock Knowledge of financial position Information related for working capital Knowledge of profit & loss of the business Provide information to various parties Provide Information about misappropriation & frauds Evidence in court.
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Accounting Process

Recording of transaction (Journal entry) Classification (Ledger Posting) Summarizing (Trial balance) Interpreting (Income &position statement) Analysis of transactions
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Branches of Accounting

Financial Accounting:- It is concerned with recording and processing the financial transactions which affect the financial position of the business. It leads to the preparation of income statement & position statement of the business. Cost accounting:- is concerned with the recording, classifying and appropriate allocation of expenditure for the determination of the cost of products or services and for the presentation of suitably arranged data for purposes of control and guidance of the management. Management accounting It is concerned with the collecting systematically and regularly all such information as will help 12 management in discharging its functions of

Generally Accepted Accounting principles (GAAP) / Concepts and conventions of accounting The accounting practice is based on certain standard concepts, which enable accountants to convey meaningful information to all stakeholders. These concepts are as follows Business Entity Concept Going Concern concept Dual Aspect Concept Cost concept Money measurement Concept Accounting period Concept Matching Concept 13

Business entity concept

Business is treated as a unit or entity apart from its owner. The owner of an organization is always considered to be separate and distinct from the business which he controls. that is why, the capital of the owner is always entered in liability side of balance sheet. It is considered as the creditor of the business.
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Cont.

Going concern concept It is assumed that the business will exist for the foreseeable future and transactions are recorded from this point of view. It should continue to operate at its present scale in the foreseeable future. Dual Aspect Concept Financial accounting has dual aspect of recording. Every debit has its corresponding credit & every credit has its corresponding debit. The modern accounting system basically
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Cont.

Money measurement concept The money concept underlines the fact that in accounting every worth recording event, happening or transaction is recorded in terms of money. In other words, a fact or a happening which cannot be expressed in terms of money is not recorded in the accounting books.
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Cost concept

The transactions are recorded at the amounts actually involved. For instance, a piece of land may have been purchased at Rs.1,50,000, whereas the company considers it to be worth Rs.3,00,000. The land is recorded in the books of accounts at Rs.1,50,000 only. Thus, an arbitrary valuation of the companys assets is avoided by recording the value at the actual amount involved. Since this amount would have been mutually agreed upon by both the parties
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Accounting period concept Accounts choose some shorter and convenient time for the measurement of income. Twelve- month period is normally adopted for this purpose. this time interval is called accounting period. Matching concept It is based on the determination of the profit & loss of a particular accounting period is the process of matching the revenue earned during the period and the 18

Cont

Cont.
Accounting conventions

Conventions are the customs and traditions that act as a guide to the preparation of the financial statements. Following these conventions leads to clear and meaningful financial statements. The conventions followed to prepare accounting statements are the :

Convention of Consistency (Consistency in rules and formats) 19 Convention of Full disclosure

Convention of Consistency

The convention of consistency aims at making the financial statements more comparable and useful. The convention holds that in accounting processes, all concepts, principles and measurement approaches should be applied in a similar or consistent way from one period to another period. To build business strategies the management of a company needs to arrive at important conclusions and take important decisions from the financial statements over a period of years. The 20

Convention of Full Disclosure

The accounting convention of full disclosure implies that accounts should make a full disclosure of all monetary or financial information that can impact decision making of different parties. This accounting information is of interest to the management, current and potential investors and current and potential creditors of the business. This convention specifies that there should be complete and understandable reporting in the financial statements of all significant information relating to the economic affairs of the entity. All 21 information which is of material interest to

Convention of Materiality

The convention of materiality proposes that while accounting for various transactions, only those transactions should be considered which have material impact on the profitability or the financial status of the organization. For example, for a business that buys and sells stationery items, the pens lying unsold at the end of the accounting period are material items for the business. These will be recorded in the books of account. On the other hand, for a business that manufactures cars, the unused pens are not material items and will not be recorded in the books of account. 22 Similarly, insignificant transactions or

Management accounting

Management accounting includes the methods and concepts necessary for effective planning for choosing among and for control through the evaluation and interpretation of performance The objective of Management accounting is to Provide relevant data , analyze and interpretation facilitates overall control and provide qualitative decision making.
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Difference between management & financial accounting Management Financial


accounting

accounting

Subject Matter Its concerned with Its related with various departments organization as a whole Objectives Its designed to provide Its designed to provide information to internal information to external parties parties Nature
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Type of data used It uses the statistical,It makes use of the data descriptive, subjectivewhich is historical, and relates to the future quantitative, Monitory and objective

Accuracy Approximations are Accurate figure are used considered Compulsion It is optional It is absolutely compulsory to prepare for various purposes like, for various users and taxation 25

Difference between cost and Management accounting Purpose Cost Management


accounting accounting
Objective Ascertaining the cost of Aims presentation of goods and services cost data and some other information for taking decision It uses the past data rather future It predicts future on past data for present happenings

Time factor

Information coverage It relates information It uses cost data as well relating to cost incurred as some other or budgeted , standard information also. costing, variances etc. Rules for preparation Based on ICWAI of reports Change according to requirements.
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BOOKKEEPING is the recording of business data in a prescribed manner. A bookkeeper may be responsible for keeping all the records of a business or only a minor segment, such portion of customer accounts in department store. Much of the work of the bookkeeper is critical in nature and increasingly being accomplished through the use of mechanical and electronic equipment. ACCOUNTING is primarily concerned with the design of the system of records, the preparation of reports based on the recorded data, and the interpretation of the reports. Accountants often direct and review the work of bookkeeper. In event, 27

BOOKKEEPING AND ACCOUNTING

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