Unit-I

Accounting has rightly been termed as the language of the business. The basic
function of a language is to serve as a means of communication. It communicates
the results of business operations to various parties who have some stake in the
business viz., the proprietor, creditors, investors, Government and other agencies.
The main purpose of accounting is to ascertain profit or loss during a specified
period, to show financial condition of the business on a particular date and to have
control over the firm's property.

Definition of Accounting: -
“Accounting is 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’’
Elements of Accounting: -

1) Recording: It is concerned with the recording of financial transactions in an

orderly manner, soon after their occurrence in the proper books of accounts.
2) Classifying: It Is concerned with the systematic analysis of the recorded data so
as to accumulate the transactions of similar type at one place. This function is
performed by maintaining the ledger in which different accounts are opened to which
related transactions are posted.
3) Summarizing: It is concerned with the preparation and presentation of the
classified data in a manner useful to the users. This function involves the preparation
of financial statements such as Income Statement, Balance Sheet, Statement of
Cash Flow.
4) Money measurement: It refers only those elements are to be recorded which are
evaluated in terms of money like assets, plants, furniture etc. Those elements are
not recorded which cannot be evaluated in terms of money. Like feelings,
relationship etc.
5) Interpreting: The accountants should interpret the statements in a manner useful
to action. The accountant should explain not only what has happened but also (a)
why it happened, and (b) what is likely to happen under specified conditions
6) Communication: After the analysis and Interpretation of record it must be
maintain properly so that to communicate the books of account to the end-users like,
management, creditors, investors, bankers, government etc.
 Objective of Accounting
1) To keeping systematic record: It is very difficult to remember all the business
transactions that take place. Accounting serves this purpose of record keeping by
promptly recording all the business transactions in the books of account.
2) To ascertain the results of the operation: Accounting helps in ascertaining
result i.e., profit earned or loss suffered in business during a particular period. For
this purpose, a business entity prepares either a Trading and Profit and Loss
account or an Income and Expenditure account.
3) To ascertain the financial position of the business: In addition to profit, a
businessman must know his financial position i.e., availability of cash, position of
assets and liabilities etc. This helps the businessman to know his financial strength.
4)To protect business properties: Accounting provides up-to date information
about the various assets that the firm possesses and the liabilities the firm owes, so
that nobody can claim a payment which is not due to him.
5) To facilitate rational decision – making: Accounting records and financial
statements provide financial information which help the business in making rational
decisions about the steps to be taken in respect of various aspects of business.
6) To satisfy the requirements of law: Entities such as companies, societies,
public trusts are compulsorily required to maintain accounts as per the law governing
their operations such as the Companies Act, Public Trust Act, Sales Tax Act and
Income Tax Act.

Advantages of Accounting
1) It helps in having complete record of business transactions.
2) It gives information about the profit or loss made by the business.
3) It provides useful information for making economic decisions,
4) It facilitates comparative study of current year’s profit, sales, expenses etc., with
those of the previous years.
5)It supplies information useful in judging the management’s ability to utilise
enterprise resources effectively in achieving primary enterprise goals.
6) It helps in complying with certain legal formalities like filing of income-tax and
sales- tax returns. If the accounts are properly maintained, the assessment of taxes
is greatly facilitated.
 Limitation of Accounting
1)Accounting is historical in nature. It does not reflect the current financial position or
worth of a business.
2) Transactions of non-monetary nature do not find place in accounting. Accounting
is limited to monetary transactions only. It excludes qualitative elements like
management, reputation, employee morale, Labour strike etc.
3) Cost concept is found in accounting. Price changes are not considered. Money
value is bound to change often from time to time. This is a strong limitation of
accounting.
4)Accounting statements do not show the impact of inflation.
5) The accounting statements do not reflect those increase in net asset values that
are not considered realized.

Accounting Concepts and Conventions

Accounting Concepts Accounting Conventions
1) Separate Business Entity Concept 1) Convention of full disclosure
2) Money Measurement 2) Concept Convention of Materiality
3) Dual Aspect Concept 3) Convention of Conservatism
4) Going Concern Concept 4) Convention of consistency
5) Accounting Period Concept
6) Cost Concept
7) Matching Concept
8) Accrual Concept
9) Realization Concept
10)Objective Evidence Concept

1) Business Entity Concept: Business entity concept implies that the business
unit is separate and distinct from the persons who provide the required capital
to it. This concept can be expressed through an accounting equation, viz.,
Assets = Liabilities + Capital. The equation clearly shows that the business
itself owns the assets and in turn owes to various claim.

2) Money Measurement Concept: In accounting all events and transactions are

recode in terms of money. Money is considered as a common denominator,
by means of which various facts, events and transactions about a business
can be expressed in terms of numbers.

3) Going Concern Concept: Under this concept, the transactions are recorded
assuming that the business will exist for a longer period of time, i.e., a
business unit is considered to be a going concern and not a liquidated one.
Keeping this
 in view, the suppliers and other companies enter into business transactions with
the business unit.

4) Dual Aspect Concept: According to this basic concept of accounting, every

transaction has a two-fold aspect, Viz., 1. giving certain benefits and 2.
Receiving certain benefits. The basic principle of double entry system is that
every debit has a corresponding and equal amount of credit.

5) Periodicity Concept: Every businessman wants to know the profit or loss of

a business so that as per the requirement of its own and end-users so that
account may be prepare for three months, six months, one year or two year
and also it can be prepared as per the nature of account like, construction
work, sugar mills, woolen industries etc.

6) Historical Cost Concept: It means that the asset is recorded at cost at the
time of purchase but it may be methodically reduced in its value by way of
charging depreciation.

7) Matching Concept: The essence of the matching concept lies in the view
that all costs which are associated to a particular period should be compared
with the revenues associated to the same period to obtain the net income of
the business.

8) Realization Concept: This concept assumes or recognizes revenue when a

sale is made. Sale is considered to be complete when the ownership and
property are transferred from the seller to the buyer and the consideration is
paid in full.

9) Accrual Concept: Accrual concept ensure that the profit or loss shown is on
the basis of full facts relating to all the expenses and income. Accrual refers to
those expenses and income which have not been derived in terms of cash.
The income-pay in advance, the out-standing expenses these terms are not
entered into cash book because there is no flow of cash.

10)Objective Evidence Concept: This concept ensures that all accounting must
be based on objective evidence, i.e., every transaction recorded in the books
of account must have a verifiable document in support of its, existence like
cash receipts, cash memo, invoice bills etc.

Accounting Conventions
1) Consistency: - The accounting practice and method should remain
consistent from one accounting period to another. Whatever accounting
practice is followed by the business enterprise, should be followed on a
consistent basis from year to year.
 2) Full Disclosure of Accounts: - The convention of disclosure stresses the
importance of providing accurate, full and reliable information and data in the
financial statements which is of material interest to the user’s and readers of
such statements.

3) Conservatism: - This convention follows the policy of caution or playing safe.

It takes into account all possible losses but not the possible profits or gains.
Accountant should always be on side of safety.

4) Convention of Materiality: - Only those transaction, important facts and

items are shown which are useful and material for the business. The firm
need not record immaterial and insignificant items.

Users of Accounting

1) Owners: The owners provide funds or capital for the organization. A business is
done with the objective of making profit. Its profitability and financial soundness are
therefore, matters of prime importance to the owner.

2)Management: The management is interested in financial accounting to find

whether the business carried on is profitable or not. The financial accounting is the
eyes and ears of management.

3)Employees: Payment of bonus depends upon the size of profit earned by the
firm. The more important point is that the workers expect regular income for the
bread. The demand for wage rise, bonus, better working conditions etc. For these
reasons, this group is interested in accounting.

4)Creditors: Creditors are the persons who supply goods on credit, or bankers or
lenders of money. It is usual that these groups are interested to know the financial
soundness before granting credit.

5)Investors: The prospective investors, who want to invest their money in a firm, of
course wish to see the progress and prosperity of the firm, before investing their
amount, by going through the financial statements of the firm. This is to safeguard
the investment.

6)Government: Government keeps a close watch on the firms which yield good
amount of profits. The state and central Governments are interested in the financial
statements to know the earnings for the purpose of taxation.

7)Consumers: These groups are interested in getting the goods at reduced price.
Therefore, they wish to know the establishment of a proper accounting control, which
in turn will reduce to cost of production, in turn less-price to be paid by the
consumers.
8)Research Scholars: Accounting information, being a mirror of the financial
performance of a business organization the researcher uses the financial information
for analysis and interpreting the financial statement of the concern.

INDIAN ACCOUNTING STANDARD (IND AS)

In India, the institute of Chartered Accountants of India (ICAI) has worked towards
convergence by considering the application of IFRS in Indian corporate environment
of Indian Accounting Standard with IFRS, ICAI constituted a task force to examine
various issues involved.

Indian Accounting Standards (Ind AS) are IFRS converged standard issued by
the Central Government of Indian under the supervision and control of
Accounting Standards Board (ASB) of ICAI and in consultation with National
Advisory Committee on Accounting Standards (NACAS).

International Accounting Principles and Standards

International Accounting Standards (IAS) are older accounting standards that were
replaced in 2001 by International Financial reporting Standards (IFRS), Issue by the
International Accounting Standards Boards Board (IASB), an independent
International standard setting body based in LONDON.

Understanding International Accounting Standards (IAS)

International Accounting Standards (IAS) were the first international accounting

standards that were issued by the International Accounting Standards Committee
(IASC), formed in 1973. The goal then a it remains today was to make it easier to
compare business around the world, increase transparency and trust in financial
reporting and foster global trade and investment.

Moving Toward New Global Accounting Standards

There has been significant progress towards developing a single set of high-quality
global accounting standards since the IASC was replaced by the IASB. IFRS have
been adopted by the European Union leaving the U.S., Japan and China as the only
major capital markets without an IFRS mandate. As of 2018, 144 jurisdictions require
the use of IFRS for all or most publicly listed companies and a future 12 jurisdictions
permit its use.

Global comparable accounting standards promote transparency, accountability, and

efficiency in financial markets around the world
 Matching of Indian Accounting Standards with International
Accounting Standards

[Link] Basis IFRS INDIAN GAAP

1 Meaning of International Financial Reporting The Indian version of Generally
the Standard Accepted Accounting Principles
abbreviation
2 Developed by International Accounting Standards Ministry of Corporate Affairs
Board (IASB) (MCA)
3 Disclosure A company that is complying with When a company is said to
IFRS needs to disclose as a note follow the Indian GAAP, it’s
that their financial statements presumed that It’s complying
comply with the IFRS with it and showing a true &
fair view of its financial affairs
4 Adopted by Companies in 110+ countries have Indian GAAP is only adopted by
adopted IFRS. More a n d m o r e Indian companies
countries are making the shift as
well
5 How to adopt IFRS provides clear instruction on Indian GAAP doesn’t give any
it for the first how to adopt IFRS for the first time type Instruction on the first-time
time? adoption
6 Usage of When the financial statement is There’s no question of using
Currency in not presented in the function exchange rat e since Indian
the currency, then the assets and GAAP is only used in the
presentation liabilities of the balance sheet are Indian context.
transmuted by
the exchange rate
7 Consolidated If the companies don’t come under As per the Indian GAAP the
Financial the exemption criteria mention companies should prepare
Statements under IAS 27 (Para 10) the individual financial statements.
companies need to prepare There’s no requirement of
consolidated financial statements preparing consolidated
statements.
8 What The companies following IFRS Indian companies following
financial needs to prepare the balance Indian GAAP needs to prepare
statements sheet and the income statement the balance sheet, profit & loss
need to be account, and cash flow
prepared? statements.
JOURNAL

Journal is a historical record of business transactions or events. The word journal comes from
the French word "Jour" meaning "day". It is a book of original or prime entry written up from the
various source documents. Journal is a primary book for recording the day-to-day transactions
in a chronological order i.e., in the order in which they occur. The journal is a form of diary for
business transactions. This is also called the book of first entry since every transaction is
recorded firstly in the journal. The format of a journal is shown as follows:
Date Particular J.F Dr. Amount Cr. Amount
th
7 Jan 2024 Machinery A/c Dr. 50,0000

To Cash 50,000

Ledger

Ledger The mechanics of collecting, assembling and summarizing all transactions of similar
nature at one place can better be served by a book known as 'ledger' i.e. a classified head of
accounts. Ledger is a principal book of accounts of the enterprise. It is rightly called as the 'King
of Books'. Ledger is a set of accounts. Ledger contains the various personal, real and nominal
accounts in which all business transactions of the entity are recorded. The main function of the
ledger is to classify and summaries all the items appearing in Journal and other books of
original entry under appropriate head/set of accounts so that at the end of the accounting
period, each account contains the complete information of all transaction relating to it. A ledger
therefore is a collection of accounts and may be defined as a summary statement of all the
transactions relating to a person, asset, expense or income which have taken place during a
given period of time and shows their net effect.
Date Particular J.F Amount Date Particular J.F Amount
Dr Cr

Subsidiary

Subsidiary books are books of original entry used to record transaction before they are posted
to the general ledger. The following are the different types of subsidiary books used in
accounting by various organization:
 Ledger: A bookkeeping record of all financial transactions made by a company. This
includes sales, purchases, receipts, and payments.
 Cash Book: A book of original entries in which all cash receipts and payments are
recorded.
 Trial Balance
 General Journal
 Sales Journal
 Purchases Journal
 Receipts Journal
 Payments Journal