The Meaning and Scope of Accounting | Financial Accounting Notes |Theoretical Framework| B.Com 1st Sem Notes 2022-23

Financial Accounting Notes
B.Com 1st Sem CBCS Pattern


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FINANCIAL ACCOUNTING NOTES



    Description of bookkeeping

    Accounting is the work of recording financial data related to the operation of a business in an important and systematic way.

    According to R.N carter keeping is the science and arts of correctly recording in the book of accounts all those business transactions that result in the transfer of money or money’s worth ”.

    We can therefore say that it is an art to record business transactions in an orderly manner in a business book.

    Bookkeeping Features

    a) Bookkeeping is the science and art of recording business transactions.

    b) Includes recording of pecuniary activities (Related or involving money).

    c) Recording of transactions is done on a set of relevant documents.

    d) Bookkeeping keeps books of various assets and liabilities in an orderly manner that helps to determine the financial position.

    e) Assists in budget planning, budgeting and forecasting.


    Bookkeeping Objectives: An entrepreneur records a book set activity to verify the following:

    a) Owning permanent records for each business transaction.

    b) Demonstrate the financial impact on the business of each recorded employee.

    c) Assisting in the preparation of financial statements which assists the performance of the company.

    d) To help determine the financial position of a business on specific data.

    e) Identify and prevent fraud and errors by keeping records of all transactions in an orderly manner.

    Definition of Accounting

    Accounting is the analysis and interpretation of bookkeeping records. It involves not only the keeping of financial records but also the preparation of financial statements that assist in the analysis and interpretation of business activities and events.


    According to the American Center for Guaranteed Public Accounts "The art of recording, classifying and summarizing in a significant way and in financial transactions and events that in part, at least in the financial chart and interpreting the result there".


    According to R.N. Anthony, "Accounting is the process of collecting, summarizing, analyzing and reporting business information."


    Accounting Features:


    a) It is the art of recording practice.

    b) A key aspect of Accounting also separates all business activities.

    c) Summary of business activity by adjusting the trial balance.

    d) It helps to explain the financial results.


    The general objectives of accounting are as follows:

    a) Maintaining accurate and accurate records of all business transactions.


    b) Ensuring all profits or losses incurred as a result of managing the business by setting up a profit and loss account.


    c) To verify the financial position of the business on a particular date by adjusting the balance.


    d) Determining the business tax debt.


    e) Assist management in making various important management decisions.


    The main benefits of accounting are outlined below:

    a) Accounting helps maintain an orderly and permanent record of business transactions and events.

    b) Accounting information is used by management to make various management decisions.

    c) Indicates the financial status of the business in a particular data.

    d) Accounting data accepted by tax authorities as accurate and reliable. They can therefore be used as a basis for tax evasion.

    e) An accounting provides financial data accepted by an insurance company as a reliable amount to pay for an insurance claim.

    The following are the limits of accounting:


    a) According to the records only those amounts can be measured in monetary terms. There may be activities that are not important monitoring but not recorded.


    b) Accounting information is historical and does not provide timely information.


    c) The effects of price changes are not taken into account when preparing the financial statements.


    d) The accountant's personal bias affects the accounting statement.


    e) The accounting details are in a nutshell and detailed analysis of financial transactions over a period of time is not possible. 


    Accounting Services:

    a) Record Keeping Function: The main function of accounting is to record, organize and summarize financial activities - Reporting, submission, and preparation of final statements. This helps to know the results of performance and financial positions.


    b) Management function: The decision-making process is greatly assisted by accounting. Management and decision-making processes, without accounting, can be misleading.


    c) Legal Needs Work: Auditing is mandatory if there are registered companies. Research is not possible without accounting. Accounting is therefore mandatory to comply with legal requirements.


    d) Business Language: Accounting is the language of business. Various transactions are informed about accounting. There are many club owners, debtors, government, employees etc., who are interested in knowing the results of the firm and this can only be said about accounting.


    Accounting Procedure / Steps

    Accounting begins with the identification of business transactions and events and ends with the analysis, interpretation and communication of the financial statements. A brief summary of the accounting process is provided below:


    a) Identification of business activities and business events.


    b) Measurement of identified activities and events in terms of funding.


    c) A recording of everything the business does in the journal.


    d) The planning of the activities recorded in the journal by preparing the lecturers for each part of the transaction.


    e) Summarize the ledgers in the trial balance to check for statistical accuracy and financial statements i.e., profit and loss account and balance sheet to determine efficiency and financial position.


    f) Analysis and interpretation of financial statements to identify financial strengths and weaknesses of the business unit.


    g) Last but not least; submit financial statements after analysis and proper interpretation to the appropriate person. 


    Difference Between book keeping and accountancy

                                 

    Basis of Difference

    Book –  Keeping

    Accountancy

    a.     Functions

    Its function is to identify and record  business transaction.

    The function of accounting is the  recording, classifying, summarizing, interpreting business transaction and  communicating result.

    b.   Transactions

    Recording of transactions in books of  original entry in done in case of book keeping.

    In accountancy, these recorded  transactions are examined in order to find out their accuracy.

    c.     Analysis and  interpretation

    Analysis and interpretation of  business transactions in not required in case of book keeping.

    Analysis and interpretation of  financial statements are done to judge the financial strength and weakness of  the business unit.

    d.   Income  Statement and Balance Sheet

    Preparation of trading, Profit &  loss account and balance sheet is not possible in book keeping.

    Preparation of trading, profits and  loss account and balance sheet is included in it.

    e.   Special skill  and knowledge

    It does not require special skill  and knowledge.

    It requires special skill and  knowledge.

    Users of accounting information:

    Users of Financial Statements 

    Users of accounting information may be divided into: (1) Internal Users; and (2) External Users.


    (1) Internal Users:


    (i) Owners: Owners invest heavily in business and are always at risk. Because of the risks involved, the owners are always interested in knowing the company's profitability and financial viability.


    (ii) Management: Managers have a responsibility not only to protect the owner's investment but also to increase the value of the business. The financial statements help management to determine the efficiency and effectiveness of the business as a whole and the department. It helps them to make decisions as well as to control and evaluate themselves.


    (iii) Employees and Employees: Employees and employees are entitled to receive a bonus at the end of the year without pay and salaries directly related to the profit of the business. Therefore, employees and employees are interested in the financial statements.

    (2) External Users:

    (i) Banks and Financial Institutions: Banks and Financial Institutions provide loans to businesses. They monitor business performance to ensure security and access to improved loans.


    (ii) Investors and Potential Investors: Investors use financial statements to assess the entity's earnings and ensure the safety of their investments.


    (iii) Debtors: Debtors provide goods and services on credit. Prior to issuing a loan, Debtors are satisfied with the suitability of the business. The financial statements help them to carry out that audit.


    (iv) Government officials: Government uses financial statements to consolidate national revenue accounts and other information. The information contained in it enables government officials to check the company's tax liability.


    (v) Consumers: Customers who are interested in information about business continuity, especially if they have a long time with the business. Sometimes, the prices of certain products are fixed by the government, so you need accounting information to adjust the fair values ​​so that consumers and manufacturers are not exploited.

    Mathematical Information - Definition, Symbols and Quality Types Statistical Information is a set of financial data that reflects organizational resources, revenue, liabilities or expenses. 

    Accounting information should have the following quality characteristics:

    a) Reliability: Reliability means users should be able to rely on information.


    b) Eligibility: In order to be relevant, the information must be available in a timely manner, it must be helpful in estimating and responding.


    c) Understanding: Understanding means that decision makers must interpret the accounting information in the same way that it is prepared and passed on to them.

    d) Comparison: Users of financial information should be able to compare different aspects of the business at different times with other businesses.


    e) Time: Time is the way information is readily available to users of accounting information. When the time comes (which leads to old knowledge), a little more useful information to make decisions. Timeliness is important for accounting knowledge because it competes with other information.


    Types of accounting information

     Accounting information is presented in the following form:

    a) Income statement (trading account with profit and loss)

    b) Statement of Position (Balance Sheet)

    c) Statement of Changes in the Financial Statement (Statement of cash flows)

    d) Additional Vale Statement.

    e) Public performance report etc.


    Transactions and Events

    Activity: Activity means the exchange of money or the amount of money moving from one account to another. Events such as the purchase and sale of goods, the acquisition and payment of cash for services or personal accounts, losses or gains in transactions, etc., are duties ”. An economic activity of an entity that causes a change in the financial position of an organization or the total amount, resulting from normal business activity.

    The following are the functional aspects.

    a) There should be two sides to the trade.

    b) Events must be financially sound.

    c) An event involves the transfer of goods or service.

    d) The event must charge for the financial status of the individual or institution.

    e) Change can be by quality or quantity.

    Types of jobs: Tasks can be divided into the following conditions:

    a) On the basis of payment method:

    1. Money trading

    2. Credit

    3. Paper transactions

    b) On a commercial basis:

    1. Exchange transaction

    2. Non-exchange function

    c) On the basis of the business involved:

    1. External transactions

    2. Internal transactions.

    Event: An event that takes place that reflects a business transaction that requires the approval of a journal writing. Only financial events are considered activities. Therefore, all transactions are transactions although all transactions are not transactions.


    Difference between transaction and event

    Transaction

    Event

    1. It is the consequence of exchange.

     

    2. It can be internal as well as external.

     

    3. It is an economic activity.

     

    4. All transactions are events.

     

    5. It can involve more than two parties.

    1. It is consequence of occasion.

     

    2. It is always internal activity.

     

    3. It is a historical activity.

     

    4. All events are not transactions.

     

    5. Only one party is involved.

    Source Documents – Meaning, Features and Types 

    A source document is a written document that provides details of the transaction and proof of transaction.


    Source Document Features: Source documents contain the following information:

    • Date of transaction.
    • Names and addresses of business partners.
    • Description of goods or services.
    • The amount involved.
    • Terms and conditions relating to trade discounts, rebates and other information related to delivery.
    • Signature of the parties involved


    Types of Source Document: 

    Invoice, Credit Note, Debit Note, Payment Voucher, Check counterfoil Paper, Bank Statement, Memo

    The branches of accounting are:


    a) Accounting;

    b) Cost calculation; and

    c) Financial management.

    a) Accounting: It is the first type of accounting. It focuses on preparing financial statements for use by outsiders such as debtors, credit card holders, investors and financial institutions.


    b) Cost Accounting: This is the accounting department responsible for the collection and distribution of historical costs in product and departmental units, primarily for the purpose of stock measurement and profit measurement.


    c) Financial Management: It is the accounting of management that is, the accounting that provides the information required by management to perform their functions.

    Assets and Liabilities and Their Types

    Assets: Any material or intellectual property with a monetary value is an asset. In other words, property is those costs that lead to the acquisition of a particular area or the benefits of a sustainable environment. Goods can be broadly divided into three types:


    a) Fixed Goods

    b) Current Assets

    c) False Goods

    a) Immovable property is a long-term asset that is usually kept for more than one year, such as land, buildings, equipment, machinery, furniture and buildings. These assets are used for normal business activities. Fixed assets are further divided into three categories:


    Intangible assets: Refers to those intangible and visible assets. For example, car, machinery and equipment, machinery. etc.


    Intangible assets: Refers to those intangible and recognizable assets. For example, favor, trademark, copyright, copyright etc.


    Damage to Goods or Derecognition of assets: Refers to those assets that have depreciated in the form of depreciation. For example, oil well, coal mines.


    b) Current Assets are assets that are short-term assets such as creditors (receivables), securities (receivables), stock (assets), temporary securities for sale, cash and bank balances.


    c) Unrealistic assets: Refers to those assets that do not have a tangible nature and the amount that can be affordable such as initial costs, discount on stocks etc.

    Debts: Means the amount of money a company owes to outsiders without the owners. In the words of Finny and Miller, “Debt is debt; they are debtors' debtors; thus the claims of those who have not eaten the owners are called debts ”. In simple terms, debts paid to outsiders by a business are known as debts. Debts are classified as

    a) Long-term debt or Debt Debt

    b) Short-term liabilities or current liabilities

    c) Contingent liabilities.

    a) Long-term loans are those that are usually repaid over a period of one year, for example, long-term loans from a financial institution or deposits issued by the company.

    b) Short-term loans are obligations that are repaid over a period of one year, for example, debtors, debt repayments, bank overdraft.

    c) Contingent liabilities are those that may or may not be repaid in the future. For example, pending financial cases, guaranteed guarantees, reduced bank debt etc.


    Accounting System


    1. Single Entry 

    2. Double Entry


    1. Single Entry: It is an incomplete program to record business transactions. The business entity maintains only the ledger and personal accounts of creditors and debtors. Therefore a complete transaction recording cannot be performed and the trail balance cannot be adjusted.

    2. Double Entry: Double Entry is a calculation system that records the results of activities and other events in at least two accounts with equal debts and credits. Under this system all accounts namely, personal, real and personal accounts are maintained. It is a complete program for recording business transactions.

    Benefits of Double Entry System

    a) Science program: This program is the only science system for recording business transactions. It helps to achieve the objectives of accounting.

    b) Complete transaction record: This system maintains a complete record of all transactions.

    c) Checking the Accuracy of Accounts: With the use of this system the accuracy of the accounting book can be established by Trail balance.

    d) Proof of profit or loss by adjustment of Profit and Loss Account.

    e) Information on the financial position of the business with a balance sheet adjustment.


    Disadvantages of Double Entry System


    a) Requires expert knowledge: Bookkeeping requires specialized information, so it cannot be prepared by an insignificant person.


    b) It is a very long process: As it records transactions in two stages namely. journalism and ledgering, requires a large amount of literature.

    c) Expensive: Expensive because a specialist will be hired for this Purpose. Therefore, it involves additional costs.

    d) Performance errors: If the function is left to be recorded in the ledger, it cannot be detected by the dual input system because it does not affect the trial balance.

    BASES OF ACCOUNTING 

    There are three bases of accounting in common usage which are:


    1. Cash basis

    2. Accrual or Mercantile basis

    3. Mixed or Hybrid basis.


    Accounting on ‘Cash basis’: Under cash basis of accounting, entries are recorded only when cash is received or paid. No entry is passed when a payment or receipt becomes due. Government system of accounting is mostly on cash basis.


    Accrual Basis of Accounting or Mercantile System: Under accrual basis of accounting, accounting entries are made on the basis of amounts having become due for payment or receipt. Incomes are credited to the period in which they are earned whether cash is received or not. Similarly, expenses and losses are detailed to the period in which, they are incurred, whether cash is paid or not. The profit or loss of any accounting period is the difference between incomes earned and expenses incurred, irrespective of cash payment or receipt.


    Mixed or Hybrid Basis of Accounting: When certain in items of revenue or expenditure are recorded in the books of account on cash basis and certain items on mercantile basis, the basis of accounting so employed is called ‘hybrid basis of accounting’.  

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