Accounting Chapter 1 (BBA Semester 1)

ACCOUNTING

CHAPTER 1

ACCOUNTING; art of recording, classifying, summarizing and interpreting the business transactions.

TRANSACTION; exchange of money and money worth between two or more persons.

BUISNESS; any legal activity which is undertaken for earning profit. Modes of business are sole property ship, partnership, and Joint Stock Company.

 FINANCIAL ACCOUNTING; it refers to the information describing the financial resources, obligations and activities of an economic entity, or organization.

        TERMS USED IN FINANCIAL ACCOUNTING

1.GOODS; things purchased for resale purposes for company profit are good. The goods when purchased are called purchases, the goods when sold are called sales.

  Both the purchases and sales are of three types;

      Goods purchased by paying cash immediately are called CASH PURCHASES. While goods sold        by receiving cash immediately are CASH SALES.

     Goods purchased by paying cash after sometime are CREDIT PURCHASES, while goods sold by receiving cash after sometime are CREDIT SALES.

     Returning back the purchased goods due to some defect is PURCHASE RETURN (RETURN OUTWARD), while receiving back the goods sold by us due to some defect is SALE RETURN (RETURN INWARDS).

2.      DISCOUNT AND ALLOWNCE;

 Reduction in price due to personal relations or bulky quantities is termed as discount.

 Reduction in price due to some defects or due to being used is termed as allowance.

 Discount has two categories; 1^stcategory includes discount received (discount while    purchasing) and discount allowed(discount while selling)

The 2nd category includes trade discount (expressed in terms of %, on cash transactions, no accounting record), and cash discount (expressed in 2/10 n/30, on credit transactions, having accounting record.

3.      CREDITORS AND DEBTORS; all those people to whom business is payable to, are creditors, and all those who are payable to business are debtors.

4.   ASSET AND LIABILITIES; economic resources of an organization for the future profit are assets, e.g., furniture in a restaurant, fans in grocery stores etc. while any obligation of a business or any payment to be made is liability, e.g., all the creditors, electricity bills etc.

5.   EXPENSE; any cost, through which benefit has already been availed, like after using electricity bill and its payment, the electricity is expense.

6.   REVENUE; total amount earned in a business.

7.   NET INCOME/NET PROFIT; amount remained after excluding the expense.

8.   CAPITAL AND DRAWINGS; money or money worth invested in a business is capital. Amount withdrew from business for personal use by the owner is drawings.

ACCOUNTING CONCEPTS

1.      SEPARATE ENTITY CONCEPT; records should be kept for entities distinguished from the persons related to those entities.

2.      GOING CONCERN CONCEPT; it is assumed that an entity is going to operate for an indefinite period and there is no intention to liquidate the business venture in near future,

3.      MONEY MEASUREMENT CONCEPT; in financial accounting a record is made only of those information that can be expressed in monetary terms.

4.      COST CONCEPT; an asset is ordinarily recorded at the price paid to acquire it.

5.      DUAL ASPECT CONCEPT; every transaction has dual impact on accounting records. E.g., for every debit there is credit.

6.      ACCOUNTING PERIOD CONCEPT; for financial reporting purpose, the life of a business is divided into a series of short equal time periods, and after each period, income statement and balance sheet is prepared for disclosing profit or loss.

7.      MATCHING CONCEPT; in measuring net income for a period, revenue should be offset by all the expenses incurred in providing that revenue.

8.      REALISATION CONCEPT; revenue can only be recognized once the underlying goods or services associated with the revenue have been delivered or rendered respectively.

ACCOUNTING CONVENTIONS

1.      CONSERVATISM; it states that anticipate for no profit but provide for all possible loses while recording business transactions.

2.      FULL DISCLOSURE; users of financial statements are informed of any facts necessary for proper interpretation of statements, in body of financial statements.

3.      CONSISTENCY; once an entity has decided on one method, it should use same method for all subsequent events for at least one period.

4.      MATERIALITY; accounts should be maintained for those things that might influence the decision of users of financial statement.