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Unit 1 - Introduction
- Definition of Accounting
- Accounting Concepts and Conventions
- Accounting Rules
- Accounting Standards
- Meaning of Double entry system
- Journal
- Ledger
- Subsidiary books
- Trial balance
- Rectification of errors
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Definition of Accounting
The American Institute of Certified Public Accountants (AICPA) 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 financial character, and interpreting the results thereof."
Accounting Concepts and Conventions
Accounting Concepts and Conventions.
Accounting concepts are fundamental principles that guide the preparation and presentation of financial statements in India. These concepts help ensure that financial statements are reliable, consistent, and comparable across different organizations. Here are some of the key accounting concepts in India:
1. Business Entity Concept: This concept states that the business is separate from its owners and other entities. Therefore, transactions are recorded from the business's perspective and not from the owner's or shareholder's perspective.
2. Going Concern Concept: This concept assumes that the business will continue to operate in the foreseeable future. Therefore, financial statements are prepared with the assumption that the business will continue to operate as a going concern.
3. Money Measurement Concept: This concept states that only transactions that can be expressed in monetary terms should be recorded in the financial statements.
4. Cost Concept: This concept states that assets should be recorded at their historical cost rather than their current market value.
5. Dual Aspect Concept: This concept states that every transaction has two aspects - a debit and a credit. The total of debits must always equal the total of credits in a transaction.
6. Accounting Period Concept: This concept states that the financial statements should reflect the results of the business's operations over a specific period, usually a year.
7. Matching Concept: This concept requires that expenses should be matched with the revenues that they helped generate. For example, the cost of goods sold should be matched with the revenue from the sale of those goods.
8. Accrual Concept: This concept requires that transactions should be recorded when they occur, not when the cash is received or paid. This ensures that the financial statements reflect the true financial position of the business.
9. Consistency Concept: This concept requires that accounting policies and procedures should be consistent from one period to another. This helps ensure that the financial statements are comparable over time.
10. Materiality Concept: This concept requires that only significant transactions and events should be recorded in the financial statements. This ensures that the financial statements are not cluttered with immaterial items that could distract users from important information.
Types of Accounts and their Rules
There are three types of Accounts and it is the basic of Accounts. The types of accounts as follows :
1. Personal Account
2. Real Account
3. Nominal Account
The Rules of the Above account are
1. PERSONAL ACCOUNTS
Debit the Receiver
Credit the Giver
2. REAL ACCOUNT
Debit What comes in
Credit What goes out
2. NOMINAL ACCOUNT
Debit All expenses and Losses
Credit All Incomes and Gains
Accounting Standards
Accounting Standards in India refer to the set of guidelines and principles that are formulated by the Institute of Chartered Accountants of India (ICAI) for the preparation and presentation of financial statements of companies. These standards ensure that the financial statements of companies are prepared in a consistent and transparent manner, enabling investors and other stakeholders to make informed decisions.
The accounting standards cover various aspects of financial reporting, including the recognition, measurement, presentation, and disclosure of financial information. They also provide guidance on specific areas such as revenue recognition, accounting for inventories, fixed assets, leases, and contingencies.
Meaning of Double entry System
The double entry system is a method of recording financial transactions in which every transaction is recorded in at least two accounts - a debit account and a credit account. This system ensures that the accounting equation (Assets = Liabilities + Equity) is always in balance.
In the double entry system, every transaction has two effects - a debit and a credit. A debit entry represents an increase in assets or a decrease in liabilities or equity, while a credit entry represents a decrease in assets or an increase in liabilities or equity
Journal
Journal is a chronological record of all financial transactions that a business or organization undertakes. It is also known as a book of original entry.
The journal is the first step in the accounting process, where all transactions are initially recorded before they are transferred to the ledger. It serves as the primary source document for all accounting entries, providing a complete audit trail of each transaction.
Each entry in the journal includes the date of the transaction, the accounts affected, the amounts debited or credited, and a brief description of the transaction. These entries are then posted to the ledger accounts, which are used to prepare financial statements such as the balance sheet, income statement, and cash flow statement.
Ledger
Ledger is a record-keeping system used to track and summarize all the financial transactions of a company. It contains individual accounts for each type of asset, liability, equity, revenue, and expense.
Ledgers provide a detailed, chronological record of all financial transactions that have taken place during a specific period of time, usually a fiscal year. They are used to create financial statements such as the balance sheet, income statement, and cash flow statement, which are essential for monitoring the financial health of a company and making strategic decisions.
Subsidiary Books
Subsidiary books are a type of accounting book or record used to keep track of specific types of transactions. They are usually maintained in addition to the general ledger and serve to provide more detailed information about the transactions that take place in a business. Some of the commonly used types of subsidiary books in financial accounting include:
1. Cash book: This book is used to record all cash transactions, including cash receipts and cash payments.
2. Purchases book: This book is used to record all credit purchases of goods or services.
3. Sales book: This book is used to record all credit sales of goods or services.
4. Purchase returns book: This book is used to record all returns of goods purchased on credit.
5. Sales returns book: This book is used to record all returns of goods sold on credit.
6. Journal proper: This book is used to record all other transactions that are not recorded in the above subsidiary books.
Trial Balance
A trial balance is a financial statement that summarizes all the balances of a company's general ledger accounts at a specific point in time. The purpose of a trial balance is to ensure that the total debit balances of all accounts equal the total credit balances of all accounts, which is necessary for accurate financial reporting.
The trial balance lists all of the company's accounts, along with their balances, and is usually prepared at the end of an accounting period, such as a month or a quarter. It includes the name of each account, its account number, and the balance in the account. Accounts with debit balances are listed in one column, and accounts with credit balances are listed in another column.
The trial balance is not a financial statement in itself, but it is an important tool used in the preparation of financial statements such as the income statement and balance sheet. If the trial balance is not in balance (i.e., the total debits do not equal the total credits), it indicates that there are errors in the accounting records that must be corrected before the financial statements can be prepared.
Rectification of Errors
In accounting, rectification of errors refers to the process of correcting mistakes made in the recording of financial transactions. Errors can occur due to a variety of reasons such as human error, incorrect calculation, misunderstanding of accounting principles, or errors in source documents.
There are four types of errors that can occur in accounting:
1.Errors of Omission: These are errors that occur when a transaction is not recorded in the books of accounts. For example, a purchase of goods on credit may be missed out in the books of accounts.
2. Errors of Commission: These are errors that occur when a transaction is recorded incorrectly in the books of accounts. For example, recording a sales transaction with the wrong amount or recording it in the wrong account.
3. Errors of Principle: These are un errors that occur when accounting principles are not followed. For example, recording an expense as an asset.
4. Errors of Compensation: These are errors that occur when two or more errors cancel each other out. For example, over-valuation of assets and under-valuation of liabilities.
