- BASIC ACCOUNTING CONCEPTS 2
FOR NET UGC COMMERCE
( UNIT 2)/MANAGEMENT UNIT IV
- ACCOUNTING CONVENTIONS
- ACCOUNTING CONVENTIONS MEANS CUSTOMS OR TRADITIONS ESTABLISHED AFTER A
LONG USAGE TO GUIDE THE PREPARATION AND PRESENTATION OF ACCOUNTING
STATEMENTS. ACCOUNTING CONVENTIONS ARE MORE FLEXIBLE AS COMPARED TO
ACCOUNTING CONCEPTS. THE FOLLOWING ARE THE IMPORTANT ACCOUNTING
CONVENTIONS:-
- CONVENTION OF CONSERVATISM
- CONVENTION OF CONSISTENCY
- CONVENTION OF MATERIALITY
- CONVENTION OF FULL DISCLOSURE
- CONVENTION OF OBJECTIVITY
- CONVENTION OF CONSERVATISM
- IT MEANS THE ACCOUNTANTS SHOULD FOLLOW THE RULE OF “ ANTICIPATE NO
PROFITS BUT PROVIDE FOR ALL PROBABLE LOSSES. THIS CONVENTIONS REQUIRES
THAT PROFIT SHOULD NEITHER BE OVERSTATED NOR ANTICIPATED. ACCOUNTANT
SHOULD FOLLOW THE POLICY OF PLAYING SAFE.
- WHEN WE ANTICIPATE OUT OF 10% OF
DEBTORS OUT OF CREDIT SALE MAY NOT PAY US WE SHOULD MAKE A PROVISION FOR
BAD DEBT BUT WHEN WE ESTIMATE THAT PARTICULAR TRANSACTION IF DONE WILL
GIVE US A PROFIT OF 10,000 AND THEN IT SHOULD BE RECORDED WHEN WE ACTUALLY
MAKE THE PROFIT.
- CONVENTION
OF CONSISTENCY
- THIS CONVENTION EMPHASIZES THE USE OF UNIFORM ACCOUNTING PRACTICES FROM
ONE PERIOD TO ANOTHER. IT MEANS THAT SAME ACCOUNTING METHODS WILL BE USED
FOR SIMILAR ITEMS OVER A PERIOD OF TIME. ONLY WHEN THE ACCOUNTING
PRACTICES ARE FOLLOWED CONSISTENTLY FROM YEAR TO YEAR, THE RESULTS
DISCLOSED IN THE FINANCIAL STATEMENTS WILL BE COMPARABLE.
- LIKE IN CASE OF DEPRECIATION IF WE FOLLOWING STRAIGHT LINE METHOD BUT
NOW WE SWITCHING TO WRITTEN DOWN VALUE METHOD THEN THERE SHOULD BE SOME
LOGIC BEHIND IT.
- CONVENTION
OF MATERIALITY
- ONLY MATERIAL SIGNIFICANT DETAILS ARE TO BE DISCLOSED AND INSIGNIFICANT
DETAILS ARE TO BE IGNORED. MATERIALITY IS HOWEVER A SUBJECTIVE
CONCEPT.MOREOVER AN ITEM MAY BE MATERIAL FOR ONE PURPOSE OR IMMATERIAL FOR
ANOTHER.
- CONVENTION
OF FULL DISCLOSURE
- IT REQUIRES THAT FINANCIAL STATEMENT SHOULD REVEAL ALL THE RELEVANT AND
RELIABLE INFORMATION FULLY AND FAIRY. ACCOUNTANT SHOULD NOT CONCEAL ANY
FACTS WHICH THEY HAVE TO REPRESENT.
- IT SHOULD GIVE A TRUE AND FAIR
VIEW OF THE FINANCIAL POSITION OF THE ORGANIZATION.
- CONVENTION OF OBJECTIVITY
- EACH RECORDED TRANSACTION IN THE BOOKS OF ACCOUNT HAVE SUFFICIENT
EVIDENCE TO SUPPORT IT. THE TRANSACTIONS ARE TO BE RECORDED ON THE BASIS
OF VOUCHERS,RECEIPTS AND MEMO ETC.
- BRANCHES OF ACCOUNTING
- FINANCIAL ACCOUNTING: IS CONCERNED
WITH RECORDING,CLASSIFYING AND SUMMARIZING OF FINANCIAL TRANSACTION FOR AN
ACCOUNTING PERIOD TO KNOW PROFIT
AND LOSS AND FINANCIAL POSITION. THE PURPOSE OF THIS BRANCH OF ACCOUNTING IS TO KEEP SYSTEMATIC
RECORDS TO ASCERTAIN FINANCIAL PERFORMANCE AND FINANCIAL POSITION AND TO
COMMUNICATE THE ACCOUNTING INFORMATION TO THE INTERESTED PARTIES.
- COST ACCOUNTING:-IS CONCERNED
WITH IDENTIFICATION,CLASSIFICATION MEASUREMENT,RECORDING AND SUMMARISATION
OF COST OF PRODUCING GOODS /SERVICES FOR THE PURPOSE OF COST ASCERTAINMENT
AND COST CONTROL.
- MGMT ACCOUNTING:-IT IS THE
APPLICATION OF ACCOUNTING TECHNIQUES FOR PROVIDING INFORMATION DESIGNED TO
HELP ALL LEVELS OF MANAGEMENT IN PLANNING AND CONTROLLING THE ACTIVITIES
OF BUSINESS ENTERPRISE AND IN DECISION MAKING. THE PURPOSE OF THIS BRANCH
OF ACCOUNTING IS TO SUPPLY ANY AND ALL INFORMATION TO MANAGEMENT FOR
TAKING DECISIONS. IT IS NOT CONFINED TO COST ACCOUNTING BUT ALSO COVERS
OTHERS AREA SUCH AS CAPITAL EXPENDITURE,DECISIONS,CAPITAL STRUCTURE
DECISIONS ETC.
- SOCIAL RESPONSIBILITY ACCOUNTING:- IT IS THE
PROCESS OF IDENTIFYING ,MEASURING AND COMMUNICATING THE SOCIAL EFFECTS OF
BUSINESS DECISIONS TO PERMIT INFORMED JUDGEMENT AND DECISIONS BY THE USERS
OF THE INFORMATION. IT IS ACCOUNTING FOR SOCIAL RESPONSIBILITY ASPECTS OF
BUSINESS. MANAGEMENT IS HELD RESPONSIBLE FOR WHAT IT CONTRIBUTES TO THE
SOCIAL WELL BEING AND PROGRESS. ACCOUNTING FOR ENVIRONMENT AND ECOLOGY IS
PART OF SOCIAL RESPONSIBILITY ACCOUNTING.
- ACCOUNTING
- PROPRIETOR/OWNER:-THE PERSON WHO
TAKE THE INITIATIVE TO SET UP BUSINESS AND ALSO BEAR THE RISK. HE INVEST
MONEY AND IN KIND. IN SOLE PROPRIETOR HE IS THE OWNER AND IN PARTNERSHIP
ALL THE PARTNERS ARE THE OWNERS. AND IN THE COMPANY FORM THE OWNER AND
MANAGEMENT AND OWNERSHIP IS IN SEPARATE HANDS.
- ENTITY: AN ENTITY MEANS AN ECONOMIC UNIT THAT PERFORMS ECONOMIC ACTIVITIES.
LIKE BIRLA INDUSTRIES,RELIANCE INDUSTRIES ETC.
- TRANSACTION: IS AN
EXCHANGE IN WHICH EACH PARTICIPANT RECEIVES OR SACRIFICE VALUE( PURCHASE
OF GOODS ON CASH OR CREDIT) IT IS AN EVENT INVOLVING TRANSFER OF MONEY OR
MONEY’S WORTH
- VOUCHER: IS A DOCUMENT WHICH SERVES AS AN EVIDENCE OF A TRANSACTIONS. IN CASE
OF CASH PURCHASE,CASH MEMOS AND IN CASE OF CREDIT PURCHASE VOUCHERS, THE
VOUCHERS ACT AS SOURCE DOCUMENT ON THE BASIS OF WHICH TRANSACTIONS ARE
RECORDED IN THE BOOKS OF ACCOUNT.
- ENTRY: ENTRY IS THE RECORD MADE IN THE BOOKS OF ACCOUNTS IN RESPECT OF
TRANSACTIONS OR EVENT. ANY ENTRY IS PASSED ON THE BASIS OF VOUCHERS
- ASSETS:-IMPLIES THE ITEMS OF PROPERTY OWNED BY THE BUSINESS. RESOURCE
CONTROLLED BY THE ENTERPRISE. ASSETS REFER TO TANGIBLE OBJECTS OR
INTANGIBLE RIGHTS OF AN ENTERPRISE WHICH CARRY PROBABLE BENEFITS.
- FIXED ASSETS: WHICH ARE OF
PERMANENT NATURE AND WHICH ARE NOT FOR THE PURPOSE OF RESALE.TANGIBLE
ASSETS ARE THOSE ASSETS WHICH HAVE PHYSICAL EXISTENCE LIKE LAND AND
BUILDING,MACHINERY ETC AND INTANGIBLE WHICH IS NOT PHYSICAL IN NATURE LIKE
GOODWILL ,PATENTS,TRADEMARKS,COPY RIGHT ETC
- CURRENT ASSETS:-WHICH ARE
PURCHASED FOR THE PURPOSE OF RESALE AND COULD BE CONVERTED INTO CASH LESS
THAN ONE YEAR.LIKE CASH,STOCK,BILL RECEIVABLE,PREPAID EXPENSES ETC
- FICTITIOUS ASSETS:-WHICH DO NOT
HAVE PHYSICAL FORM AND ALSO DO NOT HAVE REAL VALUE. KNOWN AS DEFERRED
REVENUE EXPENDITURE. ALSO INCLUDE PRELIMINARY EXPENSES,ADVERTISEMENT SUSPENSE,LOSS ON THE ISSUE OF SHARE ETC
- LIABILITIES:-WHICH BUSINESS OWES TO SOMEBODY.LIABILITIES REFERS TO
FINANCIAL OBLIGATIONS OF AN ENTERPRISE OTHER THAN OWNER’S FUND.
- LONG TERM LIABILITY:-WHICH IS DUE
FOR MORE THAN ONE YEAR. EXAMPLES ARE LONG TERM DEBT,DEBENTURES ETC
- CURRENT LIABILITIES:-ARE TO BE
PAID IN LESS THAN ONE YEAR. FOR EXAMPLE TRADE CREDITORS,BILLS PAYABLE,OUTSTANDING EXPENSES ETC
- CONTINGENT LIABILITIES: WHICH MAY
BECOME LIABILITY ON THE HAPPENING OF CERTAIN EVENT
- CAPITAL :- AN AMOUNT INVESTED BY THE OWNER IS KNOWN AS CAPITAL AND THAT IS LIABILITY OF THE
BUSINESS. CAPITAL CAN BE BROUGHT IN THE FORM OF CASH OR IN KIND OR BOTH.
- DRAWING:- AN AMOUNT OF CASH OR GOODS WITHDRAWN BY THE OWNER FOR PERSONAL USE
IS CALLED DRAWING.
- GOODS/MERCHANDISE:-GOODS INCLUDE
ONLY THOSE ARTICLE IN WHICH HE DEALS. IF FURNITURE DEALER DEALS IN
SELLING AND BUYING OF FURNITURE. THEN FURNITURE WILL BE GOODS
- PURCHASES: REFERS TO THE TOTAL AMOUNT OF GOODS OBTAINED BY AN ORGANIZATION FOR
THE PURPOSE OF RESALE OR FOR USE IN THE PRODUCTION. IT CAN BE CASH OR ON
CREDIT. BUT IT DOES NOT INCLUDE FIXED ASSETS FURNITURE,BUILDINGS ETC
- ACCOUNTING TERMINOLOGY
- ASSETS = CAPITAL PLUS
- EXPENSE:-COST RELATING TO PARTICULAR ACCOUNTING PERIOD THE BENEFIT OF WHICH
WILL NOT EXTEND BEYOND THAT PERIOD .EXAMPLE ARE SALARIES,RENT ETC.
EXPENSES ARE OUTFLOW OF DEPLETION OF ASSETS OR INCURRENCE OF LIABILITY
THAT DECREASE INTERNAL EQUITY
- EXPENDITURE:-AN EXPENDITURE
TAKE PLACE WHEN AN ASSET OR SERVICES IS ACQUIRED. IT MAY BE ON THE
CASH/CREDIT/BY EXCHANGE OF THE ASSET.
- EXPIRED COST( EXPENSE):- EXPENSE IS THAT
PORTION OF THE EXPENDITURE WHICH HAS BEEN CONSUMED DURING THE CURRENT
ACCOUNTING PERIOD. IT IS OF TWO TYPES:-
- UTILIZED COST:IS THAT PORTION OF EXPIRED COST WHICH BENEFITS THE ENTERPRISE IN PRODUCING REVENUE AND INCLUDES COST OF MERCHANDISE SOLD OR
SERVICE RENDERS, FOR EXAMPLE
COMMISSION ON SALES,ADVERTISEMENT EXPENSES
- LOST COST:-WHICH DOES NOT CONTRIBUTE TO REVENUE AND IS REGARDED AS
LOSS. LOSS OF UNINSURED ASSETS DUE TO FIRE
- UNEXPIRED COST:WHICH HAS NOT
BEEN CONSUMED TILL THE END OF THE CURRENT ACCOUNTING PERIOD. DOES NOT
REDUCE EQUITY. PRESENT UNEXPIRED COST BECOMES FURTHER UNEXPIRED COST
BECOMES FURTHER EXPIRED COST OVER A LONG PERIOD.
- GAINS:-GAINS ARE INCREASE IN EQUITY ( NOT ASSETS) FROM INCIDENTAL TRANSACTIONS
AND OTHER EVENTS AND CIRUCUM STANCES AFFECTING THE ENTITY DURING THE
ACCOUNTING PERIOD EXCEPT THOSE THAT RESULT FROM REVENUE OR INVESTMENT BY
EQUITY
- PROFIT ON THE SALE OF FIXED ASSETS IS NON OPERATING
- PROFIT ON THE SALE OF GOODS IS OPERATING INCOME
- LOSSES:DECREASE IN EQUITY ( NOT ASSETS) FROM INCIDENTAL TRANSACTIONS AND
OTHER EVENTS AND CIRUCUM STANCES AFFECTING THE ENTITY DURING THE
ACCOUNTING PERIOD EXCEPT THOSE THAT RESULT FROM EXPENSE OR DISTRIBUTION BY EQUITY
- LOSS ON THE SALE OF FIXED ASSETS IS NON OPERATING LOSS,WRITING OFF BAD
DEBT IS OPERATING LOSS
- SALES: REFERS TO THE TOTAL AMOUNT OF GOODS SOLD BY AN ORGANIZATION ON CASH OR
CREDIT... BUT IT DOES NOT INCLUDE
SALE OF FIXED ASSETS FURNITURE,BUILDINGS
- PURCHASE RETURN/ RETURN OUTWARD:_GOODS
PURCHASED WHICH ARE NOT UP TO MARK DEFECTIVE ETC ARE RETURNED BACK TO
SUPPLIER. A DEBIT NOTE IS PREPARED
- SALES RETURN/RETURN INWARDS- WHICH ARE
RETURNED BY THE BUYER TO US BEING DEFECTIVE.
- SUNDRY DEBTORS:-THE PERSON
WHO MONEY TO THE
- SUNDRY CREDITORS:-TO WHOM THE
BUSINESS OWES
- STOCK :-GOODS ARE THE PURCHASED FOR RESALE BUT AT THE END OF THE YEAR SOME
GOODS REMAIN UNSOLD. UNSOLD GOODS ARE CALLED STOCK. STOCK OF RAW
MATERIAL,STOCK OF WORK IN PROGRESS AND STOCK OF FINISHED GOODS
- CLASSIFICATION OF EXPENDITURE:-
- CAPITAL EXPENDITURE:-NON RECURRING
IN NATURE AND BENEFIT OF WHICH IS TAKEN FOR MANY YEARS.
- REVENUE EXPENDITURE:- IT IS RECURRING
IN NATURE AND BENEFIT IS TAKEN IN THAT ACCOUNTING YEAR IN WHICH THEY ARE
PURCHASED. SALARY,RENT ,INSURANCE ETC
- DEFERRED REVENUE EXPENDITURE:-A HEAVY
EXPENDITURE OF REVENUE NATURE THE BENEFIT OF WHICH IS LIKELY TO EXTEND
BEYOND CURRENT YEAR. LIKE ADVERTISEMENT
- LOSS:-UNWANTED BURDEN ON THE BUSINESS WHICH DOES NOT GENERATE ANY REVENUE
- NORMAL LOSS
- ABNORMAL LOSS: RESULT IS
MISHAPPENING OR CARELESSNESS
- LOSS WHEN REVENUE IS LESS THAN COST
·
REVENUE:-RECEIPT FROM THE SALE OF GOODS OR SERVICES .
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