Introduction to Accounting Principles

• Accounting is the art of recording, classifying, and summarizing transactions/events in monetary terms, and interpreting the results.
• The main goal of accounting is to find an organization's net results and financial status, in order to communicate to interested parties.
• Accountancy is systematic knowledge of accounting principles used to prepare and summarize books of accounts, and communicate info to interested parties.
• Accounting is recording day-to-day business transactions.
• Accounting is identifying, measuring, and communicating economic information for users to make informed judgments/decisions.

Accounting as a Language

• Accounting serves as a communication system for business's financial info.
• It's recording, classifying, and summarizing transactions/events in money terms and interpreting their results.
• Accounting is science because it's organized knowledge based on basic principles.

Key Aspects of Accounting

• Events (economic/non-economic)
• Identification, Measurement, Recording, Communication
• Organization (formal/informal)
• Interested Users of Information (internal/external)

Economic Events

• These are events of an organization measured in money, like buying/transporting a machine, or site preparation.
• External events are transactions between an outsider and an organization, such as purchasing from suppliers or paying rent.
• Internal events occur entirely within a company, like raw material supply or wage payments.

Identification, Measurement, Recording, and Communication

• Identification determines transactions to record, involving observing activities and selecting events of financial character.
• Measurement means quantifying business transactions into financial terms using monetary unit.
• Recording involves recording the economic events in books of account in monetary terms once they're identified/measured.
• Communication is so that the economic events are identified, measured and recorded, and the pertinent information is generated and communicated in a certain form to management and other internal and external users.

Organization

• This refers to a business enterprise, whether for profit or not.
• This can be a sole-proprietorship, partnership, cooperative society, company, local authority, or any association.

Interested Users of Information

• Many users need financial information to make important decisions.
• Internal users include Chief Executive, Financial Officer, Vice President, Business Unit Managers, Plant Managers, Store Managers, Line Supervisors, etc.
• External users include Investors, Creditors, Tax Authorities, Stock Exchange and Customers, etc.

Branches of Accounting -

• Financial accounting keeps record of financial transactions so that: (a) profit/loss is worked out, (b) financial position is ascertained, and (c) info is available.
• Cost accounting analyzes expenditure to ascertain product costs and fix prices and helps control costs/provide costing information.
• Management accounting assists management in rational policy decisions and evaluating impacts.

Qualitative Characteristics of Accounting Information

• Reliability: Info must be verifiable and based on facts.
• Relevance: Info must be timely to help users forecast.
• Understandability: Accounting information is presented so users understand it in the organization's intended sense.
• Comparability: The same reporting/accounting principles should be used so users can effectively compare reports.

Objectives of Accounting

• Maintenance of Records of Business Transactions helps an organization to record and maintain its record
• Depiction of Financial Position helps an organization depict its position for the accounting year with financial statements.
• Calculation of Profit and Loss finds loss sustained and profit earned during the financial year.
• Providing Accounting Information to its Users is providing relevant organization data, for management, employees, investors, creditors, banks, financial institutions.

Advantages of Accounting

• Maintains Records of Business Transactions
• Calculates Profit and Loss
• Depicts Financial Position
• Provides Accounting Information to users

Limitations of Accounting

• Accounting Information may be Unrealistic because it is based on accounting principles/conventions/concepts,
• There is a Possibility of Window Dressing of the Financial Position as organizations may present wrong info by manipulating books.
• Does not Consider Qualitative Elements as it only considers monetary values.
• Accounting Records are not Fully Correct so If there's a mistake in these sources, the books will be inaccurate.

Difference Between Accounting and Accountancy;

• Accounting involves recording, classifying, summarizing, and interpreting financial data. Accountancy helps in measuring, processing, and recording non-financial and financial statements.
• Accounting is narrower in scope, accountancy is wider.
• Accounting depends only on bookkeeping, while accountancy depends on accounting and bookkeeping.
• Accounting is practical, accountancy includes theoretical and practical parts.
• Accounting is based on accountancy knowledge. Accountancy is the source of accounting.
• Accounting focuses on recording daily transactions. Accountancy focuses on broader principles.
• Accounting is used to understand net income/financial position. Accountancy involves knowledge-based decision-making.
• Financial statements are accounting tools. Techniques/principles are accountancy tools.
• Financial statements are provided in the financial statements for internal and external users

Role of Accounting in Business

• Accounting evaluates business performance through financial statements, helping plan future tasks accordingly.
• It helps create profitable future projections and evaluate business trends to keep operations profitable.
• Accounting maintains financial statements for tax purposes and helps businesses easily handle scenarios and achieve their goals.
• It ensures legal compliance by validating the accounting system, and easily deal with liabilities.

Key Accounting Terms

• Business covers actions done in order to earn income or profit.

• Trade is purchase and sale of goods/services to earn profit.

• Profession is skilled work for profit that needs training/education.

• Proprietor is the owner who invests capital and gets profits/losses.

• Capital is the cash, goods, or assets initially invested by the proprietor.

• Assets are valued business resources that help earn profit and have future value.

• Fixed assets (non-current) are used long-term beyond a year.

• Current assets are used up yearly or easily converted to cash within a year.

• Liabilities is what the business owes and is obligated to pay.

• Long-term liabilities are due after a year, such as Financial Institution loans.

• Short-term liabilities are payable yearly, like creditors or overdrafts.

• Drawings is when an owner withdraws cash/goods for personal use, reducing capital.

• Goods are things bought/sold, written as purchases; sold, it's sales, and if unsold, it is stock.

• Purchases are goods bought for resale.

• Sales are when purchased goods are sold with the intention of making a profit.

• Purchase return are the returned goods from the purchaser to the seller following a purchase, due to some reason.

• Sales return are returned goods sent back to the company by a consumer, due to some reason.

• Stock is the goods unsold at year-end and are called closing stock; they're opening stock at year's start.

• Revenue is the amount received from selling goods/services, like rent, interest, commissions, dividends, etc.

• Expenses is the cost of producing goods/services or using services, including wages, salaries, freight, advertisement, rent, insurance.

• Expenditure is investment that increases profit earning abilities

• Income increases capital.

• Loss occurs when expenses exceed revenue, reducing capital.

• Gain is a monetary result of business transactions.

• Cost totals all direct/indirect expenses to produce goods/services.

• Discount is a seller's concession/rebate, that may be trade or cash discount.

• Trade discount is a reduction from the list price; not in the books, but is in the invoice.

• Cash discounts rewards quick cash or check payments and is recorded with encouragement

• Debtor is a person owings money/services in a company from any transaction.

• Creditor is person/organization lending goods/services/money to the company.

• Receivables is the amount due to be received.

• Payables totals obligations.

• An entry records a transaction in business books.

• Turnover describes total credits and credits for a given period.

• Insolvent refers to the incapability to cover debt from financial limitations and greater assets than debt.

• Bad Debt means the inability to recover any debt due to insolvency or disability to pay

• Vouchers are written documents that support business transaction and are recorded in books.

• Accounts lists transactions tied to an individual.

• Debit and credit represent the left and right, also known as Dr. and Cr.

• Business commission remunerates an action.

Theory Base of Accounting

• GAAP (Generally Accepted Accounting Principles) maintain uniformity and consistency.
• GAAP is influenced by legal, social, and economic changes.

Basic Accounting Concepts

• Business Entity Concept
• Business is separate from its owners.
• Capital is invested as a liability to the owner.
• Withdrawals reduce owner's capital.
• Money Measurement Concept
• Only transactions in money are recorded.
• Records are kept in monetary units.
• Going Concern Concept
• Operations continue in the future.
• The business is able to pay debt.
• There should be demand.
• Accounting Period Concept
• Financial statements are prepared at end of a timeframe to learn the statuses
• Cost Concept
• Assets are recorded at purchase price, not market value.
• Dual Aspect Concept
• Every credit has a matching debit.
• Assets = Liabilities + Capital
• Revenue Recognition Concept
• Record income when earned, not received.
• Offers an accurate financial event presentation.
• Matching Concept
• Pair expenses with revenues when experienced.
• Income/expenses recorded on accrual base.
• Full Disclosure Concept
• Material info must be disclosed.
• No misappropriating significant information.
• Consistency Concept
• Accounting principles function over time.
• Inter-stage financial statements can be compared.
• Conservatism Concept
• Id expenses/liabilities ASAP.
• Identify revenues/assets when secure of being received.
• Materiality Concept
• Record/disclose significant facts.
• Ignore insignificant information.
• Objectivity Concept
• Statements independent and without biases.
• They are intended to show the financial position properly

System of Accounting

• Double Entry System
• Conventional recordings.
• Every accounting affects two accounts.
• System tracks nominal and personal, real accounts.
• Easier fraud detection.
• Single Entry System
• Non-standard and only keeps track of cash through cash books, that is simple.
• The accounting records personal business through minimal data.
• You can calculate the basic profit/loss.

Basis of Accounting

• Cash Basis recognizes revenue in cash form and applies to smaller businesses.
• Accrual Basis recognizes revenue and expenses, so use it and audited financial statements.

Accounting Standards

• Accounting standards are written policy documents covering the aspects of recognition, measurement, treatment, presentation and disclosure of accounting tranasction in financial statements.
• Accountants aim to bring uniformity and eliminate financial differences for realibile financial statements.

Need For Accounting Standards

• Accountants are needed to to enhance the reliability financial information and consistency to transactions
• It should also ensure transparency, consistency and comparability in financial data

Benefits of Accounting Standards

• Financial are more relatable
• Accounting conflicts are simple
• Reliable and comparable
• Reduce manipulations and fraud

Applicability

• Sole Proprietorship unit
• Partnership firm
• Societies
• Trusts
• Hindu undivided family
• Cooperative societies
• Companies
• Association of persons

International Financial Reporting System

• It aims to refer to global standards that require more constistency, and should comply by the requirements, so to have easy access to the global capital markets
• They provide easy comparisons and provide uniformity and financial reporting, and ensure that they stay true to valuation of assets
• It makes committing fraud easier and manipulation more difficult

Goods and Services Tax

• Abbreviated GST, is a single direct that unifies all taxes, improves economics and deals with it all much easier There a re three types:
  • CGST: is intrastate tax, additional taxes include duty fees.
  • IGST: refers to tax paid for exports between 2 states
  • SGST: this acts on state taxas, such as the given income

Business Transactions and Source Documents

• A Business Transaction is a movement of money involving at least two parties, like creating a starting document that records important details.
• An essential element of an accounting voucher is to mention good quality and name of firm that is organized by serial number along with prepared and authorized signatures

Accounting Equation

• A = L + C is a fundamental relationship so named as the Balance Sheet.

Rules of Debit and Credit in Accounts

• Debit/credit use different rule based on what type of account

Books of Original Entry

• Record books that maintain debits and journalizing while tracking indiviudal posts along principal

• Journal Proper is organized by journal, journal and sales journal

• Journal is a first book for all transactions that maintains cronology and are credited for entries which leads to posts

• Ledgers follow folio and forwards for what is very similar

Compound Entries

• They create a sample to find out if there are any theft losses

Ledgers

• Accounts exist with transations for an accurate total

Ledger vs. Journal

• Subsidiary ledgers and the journal contain details around each post

Bank Reconciliation records balancs from different postings

Reconciliation Statement Types

• Balance from Bank shows to to increase and decrese
• Caused differences by time and error

Item which incrase or decrase in banking or balancing

• Cheques and their interest
• Error types due to bank amounts and double charges

Trial Balance and Rectification of Errors

Detections of errors and trial balances

• You must recheck
• Keep close watch on what happened
• Understand, correct These steps help and you may need an accountant because balances need not equal, accountant may be used

Detections of errors and trial balances

• You must recheck
• Keep close watch on postings and ensure no errors, correct, and reach-check if the number one is close These steps help and you may need an accountant because balances need not equal, accountant may be used

Trial Balance

• It is a statement of accuracy that achieves specific objectives such as accuracy testing to see if debits and credits remain on par
  • Limitation come in what it doesn't show if accounts are prepared right

Balance

• Can be made with credits in the Debit trial

Classification of Errors and Omission

• Commission causes a wrong number to be written

• These have principles that are not applied right, and make them

• The main way to handle them is to seek help

The Accounting and Errors

• Do not come from affects , are not from accounts and have certain restrictions and effects on various categories

Depreciation, Provision and Reserve decreases value

The amounts

• Depend on usable Account has to be kept for cash expenses
• Terminology
• Causes: include where use, expire or change of assets and markets

The need to create and affect records

• Methods help do this and it all boils down to accuracy

Provision:

• Definition is set for expected events There are certain terms used in the process of setting values

Disposal:

• Values must be accurate and clear, should there be the case that certain accounts could have been applied

In summary, this ensures what should be tracked, what should not, and that clear distinctions for assets can be known

Reserves cover known

• Liabilities The reserves are more for creating a profit for certain amounts and are not always for financial stability

Difference should be paid close attention to for what types may be applied

• When and where it goes is something that needs consideration