TyroCity: Accountancy 11 Notes

Basic concepts of accounting

Accountancy 11 Notes — Sun, 08 Apr 2012 05:41:42 +0000

Accounting concept refers to the basic assumptions and rules and principles which work as the basis of recording of business transactions and preparing accounts. There are eight basic concepts in accounting.

1. Business entity Concept
This concept assumes that, for accounting purposes, the business enterprise and its owners are two separate independent entities. Thus, the business and personal transactions of its owner are separate. For example, when the owner invests money in the business, it is recorded as liability of the business to the owner. Similarly, when the owner withdraws cash/goods from the business for his/her personal use, it is not treated as business expense. Thus, the accounting records are made in the books of accounts from the point of view of the business unit and not the person owning the business. This concept is the very basis of accounting.

2. Going Concern Concept
This concept states that a business firm will continue to carry on its activities for an indefinite period of time. Simply stated, it means that every business entity has continuity of life. Thus, it will not be dissolved in the near future. This is an important assumption of accounting,

3. Money measurement Concept
Money measurement concept states that only financial transaction are recorded in the books of accounts of the business firm which can be expressed in the form of monetary terms such as rupees, dollar, yen etc.

4. Accounting period Concept
All the transactions are recorded in the books of accounts on the assumption that profits on these transactions are to be ascertained for a specified period. Further, this concept assumes that, indefinite life of business is divided into parts. These parts are known as Accounting Period. It may be of one year, six months, three months, one month, etc.

5. Realization concept
This concept states that revenue from any business transaction should be included in the accounting records only when it is realized. Revenue is said to have been realized when cash has been received or right to receive cash on the sale of goods or services or both has been created.

6. Matching Concept
The matching concept states that the revenue and the expenses incurred to earn the revenues must belong to the same accounting period. So once the revenue is realized, the next step is to allocate it to the relevant accounting period.

7. Cost Concept
Cost concept states that all assets are recorded in the books of accounts at their purchase price, which includes cost of acquisition, transportation and installation and not at its market price. It means that fixed assets like building, plant and machinery, furniture, etc are recorded in the books of accounts at a price paid for them.

8. Dual concept
Dual aspect is the foundation or basic principle of accounting. It provides the very basis of recording business transactions in the books of accounts. This concept assumes that every transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides. Therefore, the transaction should be recorded at two places. It means, both the aspects of the transaction must be recorded in the books of accounts. Thus, the duality concept is commonly expressed in terms of fundamental accounting equation:
Assets = Liabilities + Capital

Accounting

Accountancy 11 Notes — Sun, 08 Apr 2012 05:41:42 +0000

The meaning of accounting is broader than of book keeping. The book keeping is the first step of accounting. So, accounting hold book keeping in its fold. Accounting is the process of identifying, measuring, recording, classifying, summarizing, analyzing, interpreting the financial transaction and lastly, communicating to obtained result to is staffs.

Book Keeping

Accountancy 11 Notes — Sun, 08 Apr 2012 05:41:42 +0000

Book keeping is an art of keeping systematic and permanent record of day to day financial transaction of business firm performed by them in a set of books in chronological order. It is a science of keeping systematic and regular records of business transactions so that they can be located whenever required.

Definition of book keeping by R.N Charter, “Book keeping is a science and art of correctly recording in the books of accounts, all those business transactions that result in the transfer of money and money’s worth”.

Objectives or functions of book keeping are as listed below:

1. To identify financial transaction
Business firm performs various financial and non-financial transactions during the course of business operation. Book keeping helps in identifying the financial transaction in order to keep their records.

2. To keep permanent record
Book keeping keeps the permanent records of financial transactions that take place in the business during an accounting period in a systematic manner.

3. To classify transactions
Book keeping records all the identified transactions in journal entries simultaneously it classifies them into personal account, real account and nominal account through ledger.

4. To prepare statement
The motive of establishing the business organization is to earn profit. Thus, the main objective of book keeping is to find out the result i.e. Profit and Loss.

Objectives or Functions of Accounting

Accountancy 11 Notes — Sun, 08 Apr 2012 05:41:42 +0000

1. Maintenance of record of business transactions

The maintenance of systematic record of all financial transaction in the book of account is the primary objective of accounting. Even the most brilliant manager or executive cannot remember all the various transaction carried out in the business firm such as purchases, sales, receipts etc. thus, the complete and systematic record is maintained.

2. Calculation of profit and loss

The owners of the business are keen to have some idea about the profit and loss of their organization. Thus, the accounting helps to find out profit and loss of business firm by calculating total income and deduction it with total expenses of the accounting year which is the net profit of that year if income is higher than expenses.

3. Providing accounting information to its users

The accounting information is generated by the accounting process which is communicated in the form of report, statement, graph, and chart to the users who need it for decision-making purpose.

Scopes of accounting

Accountancy 11 Notes — Sun, 08 Apr 2012 05:41:42 +0000

1. Business
Accounting is widely applicable in the business sector. Today, in the modern world, most of the people are engaged in business sector and all businessmen follow Generally Accepted Accounting Principle (GAAP) to find out profit, loss and financial position of business firm.

2. Government organizations
Though, Government organizations do not follow Generally Accepted Accounting Principle (GAAP), its keep systematic records of all transactions in order to find the position of public fund.

3. Non-Government organizations
Non-government and service organizations such as NGOS, INGOs, Red Cross Society, SOS etc which plays a vital role in the development of nation also uses accounting. The accounting system used in these organizations are called fund accounting.

4. Individuals
Individuals also perform economic activities to earn their livelihood. They also perform some form of accounting to draw financial information for making personal economic decision.

Possible Questions for NEB

Define Book keeping and briefly explain its objectives.
Define accounting. Explain its objectives.
Explain briefly the scopes of accounting.
Mention any two accounting concepts and briefly explain it.

Accountancy XI Notes

Accountancy 11 Notes — Sun, 08 Apr 2012 05:41:42 +0000

Book-Keeping and Accounting Concept