Subject Financial/Business Accounting

UNIT-1st
Meaning and Scope of Accounting: Objectives and nature of Accounting, Definition and
Functions of Accounting, Book Keeping and Accounting, Interrelationship of Accounting with
other disciplines, Branches of Accounting, Limitation of Accounting.
Accounting Principles and Standards: Accounting Principles, Accounting Concepts and
Conventions, Meaning and relevance of GAAP, Introduction to Accounting Standards issued by
ICAI.

>>
---Accounting basics
What is Accountancy?—Accountancy is a statement of Account.
It is a language of business.
For Example- Pocket Money

Accounting is based on all data and information.

Lots of others people use this data and information.

Users

Internal Users External Users

M---Management C-Creditors B-Banks I-Investors

E—Employees G-Government

O—Owners R-Researcher

P-Public C-Consumers

Conclude: Why we study Accountancy: There is a standard format based on country wise and it
is useful for different users.

Scope of Accounting Information

1) Internal users:-The persons who are inside the enterprise & the business
Like, management or owners.

2) External users:- Those who are outside the enterprise.

 Like, creditors, labour unions, Govt., Lenders, etc.

>>
Book Keeping Accounting Accountancy

It is a daily basis transaction

Example-Dominos
Basically- in simple words
Interpretation
—recording &
Recording Classification Summary Analysis

Analyse
Why? Organizing Revenue

Expenses
Future reference Meaningful way
can be taken out profit/Loss
in timely manner

BOOK- KEEPING
“ Book keeping is concerned with the function of recording the business transactions &
this is governed by the principle of double entry system”.

ACCOUNTANCY
“ Accountancy is the knowledge of accounting process & principles on which accounting
process rests”.

DEFINITION OF ACCOUNTING
1. “Accounting is the art of recording, classifying & summarising in a significant
manner & in terms of money, transactions & events which are in part at least, of a financial
character & interpreting the results there of.”

Transactions:- A transaction is any event which involves an exchange between two or more
persons. The transactions which has a financial character is also known as ‘business
transaction.’
Events:- A event is any occurrence, happening or change.

Recording:- Writing down reasonably the transactions of financial nature soon after their
occurrence.

Classifying:- Grouping of recorded information under appropriate Accounts.

Summarising:-Bringing together a number of items & expressing them in a single Item. Like,
Debtors, Creditors, etc.

Significant:- Information recorded is useful for making decisions or for assessing the
performance of some organization or person.

Interpretation:- Providing financial statements & reports in a manner beneficial to the users &
enable them to make meaningful judgments about the profitability & financial position of an
the enterprise.
Like, comparisons, Ratios, Analysis of trends, Cash-flow statement, etc.

2.“Accounting is the collection, measurement, recording, classification, & Communication of

economic data relating to an enterprise for the Purpose of reporting, decision making &
control.”

3.“Accounting is service activity, its function is to provide quantitative information, primarily

financial in nature about, economic entities, that is intended

to be useful in making economic decisions, in making reasoned choices among alternatives

courses of actions.”

>>Objectives of Accounting

1. To keep systematic record of business transactions.

2. To calculate profit and loss.

3. To ascertain financial position.

4. To check the progress of Business.

5. To provide information to various parties.

Objectives of Accounting

The following are the important objectives or purpose of Accounting

1. Maintaining Records
The most important objective of accounting is to record financial information systematically.
Since the number of transactions that takes place in a business is large, it is impossible to keep
all the details in memory. An unscientific recording does not serve any useful purpose, as the
information will not be readily available when it is needed. It is essential that the businessman
is able to refer to the details of relevant information from time to time while running the
business. Systematic accounting involves preserving the business information on the basis of
well defined rules, which enables maintaining large volume of data in a easily accessible format.

2. Estimating Profit or Loss

Profit is the aim of any business. The businessman should have clear information regarding the
result of his business activity. If there is accurate measure of profit of loss, the businessman will
take blind actions that will ultimately fail.

3. Presenting the Financial Position

Financial position of the business is presented in the form of Balance Sheet. This is an essential
statement sought by banks, creditors and prospective investors to find out exactly what the
business owns and what owes.

>>Advantages of Accounting

1. Financial Information about business.

2. Assistance to Management.

3. Replace Memory.

4. Facilitates Comparative Study.

5. Facilitates Settlement of Tax Liability.

6. Facilitates Loans.

7. Evidence in Court.

Advantages

1. Availability of information
Systematic recording enables easy retrieval of information. Modern business required quick
and accurate decisions. Proper accounting information helps management decision making at
the right time.

2. Identify the strength and weakness of business

Accounting helps the management to identify the strength and weakness of the business by
analyzing past performance. Management can focus on areas that are crucial and thereby
maximize profit.

3. Enables comparison
Proper accounting enables the business to compare results of different periods. Comparison
can be made between different branches of the business and between different businesses in
the same industry.

4. Evidence in the court of law

In the event of a legal dispute the audited accounts are recognized as the primary source of
financial information. This helps fair settlement of disputes and prevents a lot of interference
bu the authorities. This also enables recovery of debts from defaulted customers, prevents
undue claims by creditors.

5. Payment of tax
Income tax is paid on the basis of profit earned by the business. Proper accounts help accurate
estimate of tax due to Government. Moreover it enables the business to claim all legal rebates
and deductions allowed in the tax law.

6. Helps in realisation of debts

Accounting helps to prove debts. Accounting statements and convenient record of transactions
which can be convince the debtor in the first place and the court of law in case the matter is
referred in there.

>>Limitations of Accounting
1. Accounting is not fully exact.

2. Unrealistic Information

3. Accounting ignores the Qualitative Elements

4. Accounting ignores the effect of Price Level Changes.

5. Accounting may lead to window dressing.

Limitations

1. Financial accounting is not absolutely exact

Accounting information is not necessarily exact. Lot of information presented in the books of
account are based on personal judgment. There cannot be absolute guarantee of accuracy
when assumptions are based on personal opinion.

2. Financial accounting does not show the exact worth of business

The values of most of the assets in the books are presented on the basis of their purchase price,
which is known as historic figures. Their present market values or realizable values are usually
quite different. In other words the books of accounts fail to show the exact value of assets or
liabilities.

3. Problem of window dressing

Balance sheet figures are often modified to make it look better. This process conceals many
weaknesses of the business. Thus the accounting information becomes unreliable for accurate
judgment.

4. Worthless assets often shown in the balance sheet

Several worthless items can appear in the balance sheet as asset. This will project a wrong
picture of the business.

5. No effect of inflationary trends

Currency is not a stable unit of measurement of value. Inflation can make the value of currency
itself different. Measurement with this “elastic tape” can give conflicting results.

>>Branches of Accounting
Branches of Accounting

--Financial Accounting

--Cost Accounting

--Management Accounting
Financial Accounting:- It is concerned with recording of business transactions & the periodic
preparation of financial statements for outsiders & owners.

Cost Accounting:- It is concerned to ascertain the costs incurred for carrying out various
business activities & for cost control determination.

Management Accounting:- It is concerned with the analysis, reporting & discussion of

accounting information to guide the managements in its functions like, decision making, future
planning, control, etc.
Tax Accounting:- It is concerned for calculation of taxable income & also for sales fax purposes.
Deleted

>>Qualitative characteristics of Accounting

1. Reliability

2. Relevance

3. Understandability
 4. Comparability

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION

1) Usefulness:- The Accounting information must be useful to most of the people who
want to use it. Preparing that useful information must not be costly & time-consuming process.
2) Understandability:- The accounting information must be presented in such a manner
that the user understand the same.
3) Relevance:- The Accounting information must be capable of making difference in
decision , & it must have a bearing on decision by helping the user to evaluate past, present &
future events.
4) Reliability:- Accounting information must be presented faithfully. It must be factual.
5) Timeliness:- Accounting information must be communicated within reasonable time
period.
6) Verifiability:- Accounting information captained in financial statements must be
capable of being verified with the source documents.
7) Neutrality:- Accounting information should be free form bias i.e, personal judgments.
8 ) Completeness & Consistency :-Accounting information should complete in all respects
& the procedures of preparing that should not change frequently.
9) MATERIALITY:- All the material information necessary to influence the decision by the
users must be provided.

>>Is Accounting an Art or Science?

Art--It is a technique to achieve desired results.

Science—Science is a systematic body of knowledge certain rules and principles having

universal application.

>>Accounting Principles

The set of rules which defines the way of Accounts should be prepared are known as
Accounting principles.

They are generally/ rules known as “GAAP”[Generally accepted accounting principles]

Characteristics of Accounting Principles:-

 There are uniform similar set of rules framed to ensure uniformity.

 These are manmade and derived from experiences.
 These are not static and change with passage of time.
Two Types of Accounting Principles:-

Concepts/Assumptions Principles

Accounting Concepts
Concepts means provide foundation for accounting process.
It is assumed that economy enterprises

1. The going Concern Concept/Assumption:- Under this assumption, it is assumed

that the enterprise has neither the intention nor the necessity of liquidation or of
curtailing materially the scale of operations”. So the fixed assets are recorded at
their cost & depreciated over the number of years.

2. Accrual Concept:- Revenue & Expenses are recognized only when they are earned or
incurred irrespective of receipt or payment.

3. Consistency Concept- Accounting principles policy will remain consistent one year to
another year.

Principles

1.Business Entity Principles:- Under this principles, an accounting hold to be “ separated &
distinct from its owners”. It is applicable to all types of business. However it is not separate
legal entity in some case, i.e., for sole trader & partnership firm.

2.The Money Measurement Principles:- Under this Principles, only those transactions &
events are recorded in accounting which can be expressed in monetary unit or terms. The
limitation of principles is that it does not record other valuable transactions which cannot be
expressed in monetary terms & it also does not consider the purchasing power of money.

3 The Accounting Period Principles:- For ascertaining the profit or loss, financial position, etc of
the business, financial statements are prepared periodically, such period is called accounting
period.

4.Full Disclosure Principle: - It implies that there should be complete & understand le reporting
of the financial statements of all significance information related to the economic affairs of the
entity.

5.Historical Cost Principle:: - According to this principles an asset should be recorded in books
of accounts at the price at which it was acquired.
6.The Matching Principle:- This principle provides the guide lines as to how the expenses be
matched with revenue. It requires that costs should be recognized as expense in the period in
which revenue is realised, this principle is based on accrual system of Accounting.

7.The Dual Aspect Principal:- This holds that every transaction entered into have two aspects,
it is based on the principle of accounting equation.

BASIC ACCOUNTING PRINCIPLES OR CONCEPTS

Basic accounting principles are the general rules which are used as a guide in
accounting & as a basis of practice.

1. The Revenue Principle:- Under this principle, the revenue is recorded only when the
property in goods is transferred to the customer irrespective of delivery of goods or receipt of
cash, However there are some exceptions to this rule.
Like, long term contract, Ready market, uncertainty i.e. Hire purchase sale.

2.Cost Principle:- Expenses are the using or the consuming of goods & services in the process of
obtaining revenues. So, under this Principle, expenses or cost are recognized not when cash is
paid but when assets or services have been used to produce revenue during a period.
Cost is recognized on the following basis.
I. The principles of associating cause & effect:-
Direct Costs
II. The principle of systematic & Rational allocation:
Indirect cost or period cost i.e. Rent, etc.
III. The principle of immediate recognition:- It applies to costs
that provide no clear future benefits, i.e., Costs expire without generation and
revenue like, lost by fire, theft, rain, etc.

THE BASIC CONVENTIONS

A convention is defined as a custom or generally accepted practice based on general
consent or general agreement between parties.
1 Materiality- An item should be recognized as material if there is reason to believe that
knowledge of it would influence the decision of the informed investor.

2 Consistency:- It means that accounting procedures or practices should remain same

from one year to another.

3 Conservatism (Prudence):- It provide that anticipate no profit but provide for all
possible losses.
 4 Timeliness:- The financial information given to the interested parties should be
current.

5 Industry Practice:- These are the rules & practices which are opted conventionally in
such industry.

Accounting Standard

An accounting standard is a standardized guiding principle that determines the policies and
practices of financial accounting. Accounting standards not only improve the transparency of
financial reporting but also facilitates financial accountability.

An accounting standard is relevant to a company’s financial reporting. Some common examples

of accounting standards are segment reporting, goodwill accounting, an allowable method for
depreciation, business combination, lease classification, a measure of outstanding share, and
revenue recognition.

The Generally Accepted Accounting Principles (GAAP) is the primary accounting standard
adopted by the U.S. Securities and Exchange Commission (SEC). GAAPs were designated in the
United States and form the basis of accepted accounting standards for preparing and reporting
financial statements across the world.

The International Accounting Standards Board (IASB) provides rule-based and principle-based
accounting guidelines for international companies that are based outside the U.S. The
International Accounting Standards (IAS) are intended to achieve the uniformity of approach
and identity of meaning. Accounting standards of a specific country are strongly influenced by
its governance arrangement and tax policy.

Summary

An accounting standard is a policy that defines the treatment of an accounting transaction in

financial statements.

Accounting standards provide guidance for companies to prepare and report useful financial
statements in an accurate fashion.

The U.S. Generally Accepted Accounting Principles (GAAP) is the bedrock of accounting
standards, which now differ by country.
History of Accounting Standards

Before the development of accounting standards, each company developed and used their own
approach to prepare and report financial information. In the 1930s, following the stock market
crash, the American Institute of Accountants, in partnership with the New York Stock Exchange
(NYSE), formed the Committee on Accounting Procedure (CAP), which recommended five broad
principles of accounting.

To improve accounting practices, the Institute’s membership introduced an additional principle,

making six in total. Progressively, the institute enacted the Securities Act of 1933 and the
Securities Exchange Act of 1934, which saw the creation of the Securities and Exchange
Commission (SEC). The SEC was charged with reviewing periodic filings of companies to ensure
they adhered to its requirements, especially for full disclosure, adherence to proper accounting,
and comparability.

Accounting standards exist to define the manner in which economic events are recorded and
reported. They are also valuable to external stakeholders – such as shareholders, banks, and
regulatory institutions – to ensure that relevant information is reported accurately. The
technical conventions provide the boundaries between measures of financial reporting, as well
as facilitate transparency and accountability.

IFRS vs. U.S. GAAP Accounting Standards

The International Financial Reporting Standards (IFRS) specifies how international companies
should manage and report their financial statements and define different types of transactions
with financial implications. It is a principle-based accounting standard whose foundations set
the ground for investors and businesses to analyze financial records and make a decision.

The IFRS aims to ensure that the international markets across the globe follow a common set of
standards for transparency, efficiency, and accountability. The element of openness that IFRS
advocates for is important for businesses, as it enables investors to invest in companies with
transparent business practices.

The standard IFRS requirements cover a wide range of financial statements, including the
statement of cash flows, the statement of comprehensive income, the statement of financial
position, and the statement of changes in equity.

The U.S. GAAP Accounting Standards allow foreign public companies to be listed on the U.S.
stock exchange without reconciling with the IFRS and the U.S. Generally Accepted Accounting
Principles. The application and use of the initial set of accounting standards were credited to
the American Institute of Certified Public Accountants (AICPA)’s Accounting Principles Board.
However, in 1973, the role was taken over by the Financial Accounting Standards Board (FASB).
The SEC requires companies to meet all the provisions of the U.S. GAAP Accounting Standards
to qualify for listing on the U.S stock exchange.

The SEC’s standard requirement facilitates the comparability of financial statements from
different companies. Accounting standards also ensure credibility and robust economic policies
based on credible and consistent information.

Financial Accounting Standards Board (FASB)

The Financial Accounting Standards Board (FASB) is a private non-profit organization that is
responsible for creating and interpreting financial accounting standards in the United States. Its
role extends to public and private companies. The organization is recognized as the principal
party that sets accounting standards for public companies.

The FASB is headquartered in Norwalk, Connecticut, and it is run by a team of seven full-time
board members. The chairman to the board is appointed by the Financial Accounting
Foundation, which also performs an oversight function on the FASB.

The organization’s mission is to create and improve financial accounting practices for credible
and accurate information to investors and other users. Also, it is mandated to educate
stakeholders on how to comprehend and implement accounting standards effectively.