Accounting (Unit 1) Part 1 PDF

Accounting:- Accounting, which is often just called "accounting," is the process of measuring, processing, and sharing financial and other information about businesses and corporations. Accounting is the process of keeping accurate, detailed financial records, then analyzing and interpreting those...

Accounting:- Accounting, which is often just called "accounting," is the process of measuring, processing, and sharing financial and other information about businesses and corporations. Accounting is the process of keeping accurate, detailed financial records, then analyzing and interpreting those records to draw conclusions about your past and future financial decisions. Accounting is the process of keeping track of all financial transactions within a business, such as any money coming in and money going out. It’s not only important for businesses in terms of record keeping and general business management, but also for legal reasons and tax purposes. Accounting is like a powerful machine where you input raw data (figures) and get processed information (financial statements). The whole point is to give you an idea of what’s working and what’s not working so that you can fix it. Components of Basic Accounting 1. Recording The primary function of accounting is to make records of all transactions that the firm enters into. For the purpose of recording, the accountant maintains a set of books. Their procedures are very systematic. Nowadays, the computer has been deployed to automatically account for transactions as they happen. 2. Summarising Recording of transactions creates raw data. Sentences of road 8000 of little used to in organization for decision making. Pages and pages of raw data are of little use to an organization for decision making. For this reason, the accountant classifies data into categories. 3. Reporting Management is answerable to the investors about the company’s state of affairs. The operations that are being financed with the money of owners, it needs to be periodically updated to them. For this reason, there are periodic reports annually summarising the performance of all four quarters which are sent to them. In the form of financial statements reporting is done. To ensure that there is no misleading financial reporting, these financial statements are also regulated by government bodies. 4. Analyzing Lastly, accounting entails conducting an analysis of the result. After results have been summarised and reported, a meaningful conclusion needs to be drawn. Management must find out its positive and negative points. Accounting helps in doing so by means of comparison. It is common factors to compare profit, cash, sales, and assets, etc. with each other to analyze the performance of the business. Thus accounting is a language of business. It communicates the performance of the business with various end-users who are interested to know about the business. Accounting provides quantitative information of financial nature to both management and other users so that they can take a proper decision about the business. Main Characteristics of Accounting: The following attributes or characteristics can be derived from the definition of accounting: 1. Reliability: Reliability can be defined as the ability to trust. Accounting helps in providing reliable information to businesses. Reliable information should be free of errors and distortions, and should correctly represent what it purports to represent. To ensure some reliability, the published facts should be credible, neutral, and verifiable through unbiased events using an identical measurement approach. 2. Relevance: Relevant information is recorded and presented in the process of accounting. For relevant information, facts must be available in a timely manner, they must assist in forecasting and feedback, and should influence customer choices by: (a) helping them form a prediction about the outcome of a past, current or future event; and b) confirming or correcting the previous ratings. 3. Clarity: Accounting helps in providing clear information about all business transactions. It is an art of recording, classifying, and summarising accounting information. 4. Comparability: With proper accounting, records relating to various costs, sales, gross and net profit, etc., can be compared. As such, accounting helps in inter-company and intra-company comparisons. Advantages of Accounting The main benefits of accounting include: 1. A complete and systematic record: Accounting is based on generally accepted principles and a scientific way of presenting business transactions in books of accounts. Accounting as such is the complete and systematic recording of all business transactions. The limitation of people not being able to remember all transactions can be overcome by accounting because every business transaction can be recorded and analysed through it. 2. Determination of the selling price: The main function of management is decision- making. Accounting helps and guides management in making decisions about setting the selling price, deducting costs, increasing sales, etc. 3. Valuation of the enterprise: In the case of the sale of a business or conversion of one business to another, the actual and fair value of the business is calculated. Through accounting, the correct picture can be displayed on the balance sheet, and thus the purchase price can be determined. A balance sheet shows the value of a business’s assets and liabilities, which can be used to calculate its net worth. 4. It helps in obtaining a loan: For further expansion, the business must have sufficient funds. Sometimes due to lack of funds, the business cannot do well. In these cases, additional funds can be obtained by borrowing from some financial institutions, like banks, IDBI, ICICI, etc. These financial institutions lend money based on the profitability and reliability of the business. Profitability and reliability can be measured using the Profit and Loss Statements and the Balance Sheet, the final results of the accounting process. 5. Evidence in court: Business transactions are recorded in accounting books supported by certified documents, viz. vouchers, etc. Accounts can thus be used as evidence in court. 6. In accordance with the law: Every business has to deal with various government departments, like Income Tax, Sales Tax, Customs and Excise, etc. Various regular returns need to be filed with these departments. Accounting helps in the preparation and filing of such returns. 7. Inter-company or intra-company comparison: A trading account and a profit and loss account show the net profit or net loss incurred by the business. With proper accounting, records relating to various costs, sales, gross and net profit, etc., can be compared. As such, accounting helps in inter-company and intra-company comparisons. Comparing the accounts of two different companies for the same year is known as inter-company comparison and comparing two different periods for the same company is known as an intra-company comparison. The company’s performance is then compared with predetermined goals, and any deficiencies can be corrected accordingly. 8. Facilitates auditing: Depending on the size, nature, and type of business, certification of the books of account, known as an audit, is mandatory. The audit certificate issued by the accounting auditor is a clean document of the organisation, which proves that there are no irregularities in the organisation. 9. Effective management: Accounting facilitates proper management feedback. As such, it helps the management in planning as well as controlling the various activities of the enterprise. It also helps the management to evaluate the performance of the company and take timely measures to eliminate management deficiencies. 10.Helps in Calculating Tax Liabilities: Tax departments or authorities rely on accounting data for calculating income tax, value-added tax, and direct and indirect tax. This data provides insight into planning and making decisions like tax-deduction strategies or tax-saving options. 11.Preparation of Financial Statements: Proper recording of all transactions helps create financial statements, like balance sheets, income statements, and cash flow statements. This information is important for understanding the financial position of a business. Accounting also ensures that all financial statements adhere to accounting standards so investors and stakeholders uniformly accept them. 12. Evaluation of Business Performance and Growth: Accounting information allows businesses to assess their performance by analyzing financial statements using key financial indicators and measures. It provides a clear idea of a company’s finances and helps compare how its financial position has changed over time. In addition, when financial statements follow the same standard rules, it’s easier to compare one company to another in the same industry. This way, businesses can see how they’re doing compared to others. Disadvantages of Accounting 1. Does not guarantee accuracy: Accounting records all financial transactions with past value. It does not take into account the fair or market value of assets and liabilities. Values are easy to manipulate. 2. Actual value of items: Financial account does not show the actual value of assets. It shows the past value of assets. Depreciation can be charged in any way and at any rate. 3. Accounting ignores the qualitative element: It records all financial transactions that are in monetary form but doesn’t consider qualitative factors, i.e., emotions, employees, relationships and public relations. 4. Accounts can be manipulated: Accounts can be manipulated to avoid tax and show a false position to investors. By making small changes to the account, the financial statements can be manipulated. 5. Costly for a small business: A small business does not have a lot of finances, so it is very expensive for them to get proper accounting tools, and get it audited by a chartered accountant. 6. Business Privacy: There is no privacy for those who prepare the accounts, as they have to show it to the general public including your competitors. 7.Time-Consuming: Accounting can be slow because it involves carefully recording, organizing, and analyzing financial transactions. It leads to disadvantages for businesses that need quick decision-making. 8. Based on Personal Estimates: Even though recording all transactions is based on evidence, sometimes, few financial records involve subjective judgments or estimates. Therefore, it is not accurate to consider data based on estimates and can lead to false interpretations. Accountants may use different valuation methods, and the account data may be biased. Objectives of Accounting: Following are the objectives of accounting: 1. Record: The basic role of accounting is to maintain a systematic, complete, accurate, and permanent record of all business transactions that can be searched and checked at any time. Reliable financial records are the backbone of any accounting system, without which all other accounting objectives will be compromised. 2. Planning: Organisations must plan how they intend to allocate their limited resources (eg, cash, labour, materials, machinery, and equipment) for competitive needs in the future. An effective way to do this is to use different forms of budgets. Budgets allow organisations to plan ahead by anticipating business needs and resources. Budgeting helps in coordinating various segments of the organisation. 3. Decision: Accounting helps managers make a number of business decisions and create policies to make organisational processes more efficient. Examples of management decisions that are based on accounting information include: What price should be charged for products and services to achieve maximum profit; Which products should be produced when resources such as cash, labour, or materials are scarce to maximise profit, etc. 4. Performance: Accounting helps determine how well a business is doing by summarising financial information into quantifiable indicators (e.g., sales revenue, profit, costs, etc.). It is important for organisations to have a reliable source for measuring their KPIs so that they can improve by comparing their past performance and their competition. 5. Liquidity: Poor cash management is often the reason for the failure of many businesses. Accounting helps businesses determine how much cash and other liquid resources they have available to pay their financial obligations. This information is essential for working capital management and helps organizations reduce the risk of bankruptcy by early detection of financial bottlenecks. 6. Financing: Accounting information is necessary to secure finances. Whether an organisation is applying for a bank loan or shareholder investment, it will need to provide historical financial records (e.g., profit or loss for the last five years) as well as financial projections (e.g., projected sales for the next 3 years). 7. Management: One of the key objectives of an accounting system is to place sufficient internal controls in an organisation to protect its valuable resources. Business assets (e.g., cash, buildings, inventory, etc.) are susceptible to loss due to theft, fraud, error, obsolescence, damage, and mismanagement. Accounting ensures that these risks are reduced to an acceptable level by implementing various controls across the organisation. For example, an organisation’s accounting policy may require that payments above a certain threshold be approved by a senior member of management to ensure accuracy and minimise the risk of fraudulent payment. 8. Responsibility: Accounting provides a basis for evaluating the performance of a business over a period of time, which promotes accountability at several levels of the organisation. Shareholders can ultimately hold directors accountable for the overall performance of their company based on the accounting information disclosed in the financial statements. 9. Users: The role of accounting is not limited to the informational needs of the company’s employees and investors. Accounting today fulfils the information needs of a diverse group of stakeholders, each with their own information requirement. Process/ Functions of Accounting/ Accounting Cycle: 1.Identifying the transactions & events: Accounting identifies transactions & events of a specific entity. Accounting transactions are financial activities such as sales, expenses, debt payments & cash receipts. A event is a happening of consequence to an entity such as use of raw materials for production, etc. 2.Measuring the identified transactions & events: Accounting measures the transactions & events in terms of a common measurement unit i.e. the ruling currency of country. In India, these transactions & events are measured in rupees before recording them. 3.Recording: This is the basic function of accounting. Recording in accounting refers to the process of capturing and documenting financial transactions and events in a systematic and chronological manner. It is essentially concerned with not only ensuring that all business transactions of financial character are recorded but also that they are recorded in an orderly manner. The work of recording is done in the book termed as- Journal. 4.Classifying: Classifying in accounting refers to the process of categorizing and grouping financial transactions and accounts into meaningful categories to facilitate analysis, reporting, and decision-making. The work of classification is done in the book termed as- Ledger. 5.Summarising: Summarizing in accounting involves consolidating and condensing financial data into a concise and meaningful format, providing an overview of financial performance and position. This process leads to the preparation of Trial Balance. 6.Analysing: Analyzing in accounting involves examining and interpreting financial data to identify trends, patterns, and relationships, providing insights for informed decision- making. 7.Interpreting: Interpreting in accounting involves understanding and explaining the meaning of financial data, ratios, and trends to support informed decision-making. 8. Communicating: Communicating in accounting involves conveying financial information, analysis, and recommendations to stakeholders, both internal and external, in a clear and concise manner. Accounting Concepts/Assumptions: Accounting concepts are fundamental principles that guide accounting practices, ensuring consistency, accuracy, and reliability in financial reporting. Accounting concepts define the assumptions on the basis of which financial statements of a business entity are prepared. Concepts are those basic assumptions and condition which form the basis upon which the accountancy has been laid. 1.Going concern concept: Accountants assume that a business will continue operating for the foreseeable future when preparing financial statements. The going concern concept is an accounting principle that assumes a business will continue to operate for the foreseeable future, typically at least 12 months from the balance sheet date. For example, the plant and machinery was purchased by a company of Rs. 10 lakhs and its life span is 10 years. According to the Going concept, every year some amount of assets purchased by the business will be represented as an expense and the balance amount will be shown as an asset in the books of accounts. Thus, if an amount is incurred on an item that will be used in business for several years ahead, it will not be proper to charge the amount from the revenues of that particular year in which the item was purchased Only a part of the purchase value is shown as an expense in the year of purchase and the remaining balance is shown as an asset in the balance sheet. 2. Business Entity Concept/Separate Entity Concept: This concept assumes that the organization and business owners are two independent entities. Hence, the business translation and personal transaction of its owner are different. For example, when the business owner invests his money in the business, it is recorded as a liability of the business to the owner. Similarly, when the owner takes away from the business cash/goods for his/her personal use, it is not treated as a business expense. Thus, the accounting transactions are recorded in the books of accounts from the organization's point of view and not the person owning the business. Example: Suppose Mr. Birla started a business. He invested Rs 1, 00, 000. He purchased goods for Rs 50,000, furniture for Rs. 40,000, and plant and machinery for Rs. 10,000 and Rs 2000 remained in hand. These are the assets of the business and not of the business owner. According to the business entity concept, Rs.1,00,000 will be assumed by a business as capital i.e. a liability of the business towards the owner of the business. Now suppose, he takes away Rs. 5000 cash or goods for the same worth for his domestic purposes. This withdrawal of cash/goods by the owner from the business is his private expense and not the business expense. It is termed as Drawings. Therefore, the business entity concept states that the business and the business owner are two separate/distinct persons. Accordingly, any expenses incurred by the owner for himself or his family from business will be considered as expenses and it will be represented as drawings. 3. Money Measurement Concept: The money measurement concept assumes that the business transactions are made in terms of money i.e. in the currency of a country. In India, such transactions are made in terms of the rupee. Hence, as per the money measurement concept, transactions that can be expressed in terms of money should be recorded in books of accounts. For example, the sale of goods worth Rs. 10000, purchase of raw material Rs. 5000, rent paid Rs.2000 are expressed in terms of money, hence these transactions can be recorded in the books of accounts. 4. 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 realised, the next step is to allocate it to the relevant accounting period. This can be done with the help of accrual concept If the revenue is more than the expenses, it is called profit. If the expenses are more than revenue it is called loss. This is what exactly has been done by applying the matching concept. 5. Dual Aspect: The dual aspect is the basic principle of accounting. It provides the basis for recording business transactions in the books of accounts. This concept assumes that every transaction recorded in the books of accountants is based on dual concepts. This implies that the transaction that is recorded affects two accounts on their respective opposite sides. Hence, the transaction should be recorded at dual places. It implies that both aspects of the transaction should be recorded in the books of account. For example, goods purchased in exchange for cash have two aspects such as paying cash and receiving goods. Therefore, both the aspects should be registered in the books of accounts. The duality of the transaction is commonly expressed in the terms of the following equation given below: Assets = Liabilities + Capital The dual concept implies that every transaction has a similar effect on assets and liabilities in such a way that the value of total assets is always equal to the value of total liabilities. 6.Accounting Cost Concept: The accounting cost concept states all the business assets should be written down in the book of accounts at the price assets are purchased, including the cost of acquisition, and installation. The assets are not recorded at their market price. It implies that the fixed assets like plant and machinery, building, furniture, etc are recorded at their purchase price. For example, a machine was purchased by ABC Limited for Rs.10,00,000, for manufacturing bottles. An amount of Rs.2,000 was spent on transporting the machine to the factory site. Also, Rs.2000 was additionally spent on its installation. Hence, the total amount at which the machine will be recorded in the books of accounts would be the total of all these items i.e. Rs.10, 040, 00. This cost is also termed as historical cost. 7. Accrual Concept: The term accrual means something is due, especially an amount of money that is yet to be paid or received at the end of the accounting period. It implies that revenue is realized at the time of sale through cash or not whereas expenses are recognized when they become payable whether cash is paid or not. Therefore, both the transactions are recorded in the accounting period in which they relate. In the accounting system, the accrual concept tells that the business revenue is realized at the time goods and services are sold irrespective of the fact when cash is received for the same. For example, On March 5, 2021, the firm sold goods for Rs 55000, and the payment was not received until April 5, 2021, the amount was due and payable to the firm on the date goods and services were sold i.e. March 5, 2021. It must be included in the revenue for the year ending March 31, 2021. Similarly, expenses are recognized at the time services are provided, irrespective of the fact that cash paid for these services are made. For example, if the firm received goods costing Rs.20000 on March 9, 2021, but the payment is made on April 7, 2021, the accrual concept requires that expenses must be recorded for the year ending March 31, 2021, although no payment has been made until this date though the service has been received and the person to whom the payment should have been made is represented as a creditor of business firm. In brief, the accrual concept states that revenue is recognized when realized and expenses are recognized when they become due and payable irrespective of the cash receipt or cash payment. 8. Realization Concept: The term realization concept states that revenue earned from any business transaction should be included in the accounting records only when it is realized. The term realization implies the creation of a legal right to receive money. Hence, it should be noted that selling goods is considered as realization whereas receiving order is not considered as realization. In other words, the revenue concept states that revenue is realized when cash is received or the right to receive cash on the sale of goods or services or both have been created. 9. Accounting Period Concepts: Accounting period concepts state that all the transactions recorded in the books of account should be based on the assumption that profit on these transactions is to be ascertained for a specific period. Hence this concept says that the balance sheet and profit and loss account of a business should be prepared at regular intervals. This is important for different purposes like calculation of profit and loss, tax calculation, ascertaining financial position, etc. Also, this concept assumes that business indefinite life is divided into two parts. These parts are termed accounting periods. It can be one month, three months, six months, etc. Usually, one year is considered as one accounting period which may be a calendar year or financial year. The year that begins on January 1 and ends on January 31 is termed as calendar year whereas the year that begins on April 1 and ends on March 31 is termed as financial year. Accounting Conventions: Accounting conventions are certain restrictions for the business transactions that are complicated and are unclear. Although accounting conventions are not generally or legally binding, these generally accepted principles maintain consistency in financial statements. While standardized financial reporting processes, the accounting conventions consider comparison, full disclosure of transaction, relevance, and application in financial statements. Four important types of accounting conventions are: 1.Consistency: The convention of consistency means that same accounting principles should be used for preparing financial statements year after year. A meaningful conclusion can be drawn from financial statements of the same enterprise when there is comparison between them over a period of time. But this can be possible only when accounting policies and practices followed by the enterprise are uniform and consistent over a period of time. If different accounting procedures and practices are used for preparing financial statements of different years, then the result will not be comparable. 2. Full disclosure: Convention of full disclosure requires that all material and relevant facts concerning financial statements should be fully disclosed. Full disclosure means that there should be full, fair and adequate disclosure of accounting information. Adequate means sufficient set of information to be disclosed. Fair indicates an equitable treatment of users. Full refers to complete and detailed presentation of information. Thus, the convention of full disclosure suggests that every financial statement should fully disclose all relevant information. Let us relate it to the business. The business provides financial information to all interested parties like investors, lenders, creditors, shareholders etc. The shareholder would like to know profitability of the firm while the creditor would like to know the solvency of the business. In the same way, other parties would be interested in the financial information according to their requirements. This is possible if financial statement discloses all relevant information in full, fair and adequate manner. 3. Materiality: The convention of materiality states that, to make financial statements meaningful, only material fact i.e. important and relevant information should be supplied to the users of accounting information. The question that arises here is what is a material fact. The materiality of a fact depends on its nature and the amount involved. Material fact means the information of which will influence the decision of its user. 4. Conservatism: This convention is based on the principle that “Anticipate no profit, but provide for all possible losses”. It provides guidance for recording transactions in the books of accounts. It is based on the policy of playing safe in regard to showing profit. The main objective of this convention is to show minimum profit. Profit should not be overstated. If profit shows more than actual, it may lead to distribution of dividend out of capital. This is not a fair policy and it will lead to the reduction in the capital of the enterprise. Thus, this convention clearly states that profit should not be recorded until it is realised. But if the business anticipates any loss in the near future provision should be made in the books of accounts for the same. For example, valuing closing stock at cost or market price whichever is lower, creating provision for doubtful debts, discount on debtors, writing off intangible assets like goodwill, patent, etc. The convention of conservatism is a very useful tool in situation of uncertainty and doubts. Difference between Accounting Concept and Convention: Basis Accounting Concepts Accounting Conventions 1.Meaning Accounting concepts form the Accounting conventions foundation for the final accounts that set the foundation for the need to be prepared by the accounting preparation of financial firm. statements. 2.Biasness There are no chances of biasness in There are high chances of accounting concepts as they are biasness in accounting universal. conventions. 3. Preparation Accounting concepts help in the Accounting conventions of accounts preparation of accounts. help in the preparation of financial statements. 4. Restrictions Accounting concepts are less Accounting conventions restrictive. are more restrictive. 5. Legality Accounting concepts are legally Accounting conventions binding. are not legally binding. 6. Uniform Accounting concepts are uniformly It is up to the organisation if adaption accepted by organisations throughout they want to accept the the world. accounting conventions or not or to what extent. 7. Includes Business entity concept, cost, dual- Conservatism, aspect concept, going concern consistency, full concept, consistency, matching disclosure, materiality, etc. concept, money-measurement concept, etc. Qualitative Characteristics of Accounting Information:- The qualitative features of accounting are the characteristics that make financial information useful & relevant for decision making. The features are; (i)Relevance: Information is relevant if it influence decisions or confirms expectations. (ii)Reliability: Information is reliable if it is accurate, unbiased, and free from errors. (iii)Comparability: Information is comparable if it is presented in a consistent manner, allowing for easy comparison. (iv)Consistency: Information is consistent if it is presented using the same methods and principles over time. (v) Accrual accounting: Information is recognized when earned or incurred, regardless of cash flow. (vi) Materiality: Information is material if its omission or misstatement could influence decisions. (vii)Timeliness: Information is timely if it is available when needed for decision-making. (viii)Understandability: Information is understandable if it is clear, concise, and free from unnecessary complexity. (ix)Neutrality: Information is neutral if it is unbiased and free from manipulation. (x)Completeness: Information is complete if it includes all necessary information for decision-making. *Bookkeeping Vs. Accounting: Basis Bookkeeping Accounting 1.Meaning Bookkeeping is primarily concerned with Accounting focuses on financial data entry and record keeping. financial analysis and interpretation. 2.Part It is just a part of accounting process. It is the entire part of accounting process. 3.Stage It is the primary stage of the whole It is the second or final stage accounting process. of the whole accounting process.  4.Involves It involves data entry, journalizing & ledger It involves summarizing, maintenance. analysis, interpretation & communicating or presenting financial data. 5.Concerned It is concerned with accuracy, It is concerned with completeness & timeliness of financial understanding financial with data. trends, risks & opportunities. 6.Provides It provides a chronological record of It provides insights into financial activities. financial performance, position & cash flows. 7. Perform by Typically performed by bookkeepers or Typically performed by accounting clerks. accountants or financial analysts. 8.Users Only internal users i.e, owner, manager & Used by both internal & employees. external users. 9. Objective To maintain systematic records of financial To ascertain the net result & transactions. financial position. 10.Special It is mechanical in nature and thus require It requires skills such as ability special skill. to analyse & interpret. Skills Basic Accounting Terms: 1.Capital: It refers to the amount invested by the proprietor in a business enterprise. For example: Pawan started a business with cash of Rs. 1,00,000. 2.Drawing: Any cash or value of goods withdrawn by the owner for personal use or any private payments made out of business funds is called drawings. For Example: Renu took furniture from the business for her personal use. 3.Expenses: Expense is the cost incurred in producing and selling the goods & services. 4.Income: Excess of revenue over expenses is called income. 5.Profit: It is the excess of total revenue over total expenses of a business enterprise for an accounting period. 6.Gain: Gains arise from events or transactions that are incidental to business such as the sale of fixed assets. 7.Loss: When total expenses exceed the total revenue of a business enterprise then it is termed as loss. 8. Trade Receivable: It refers to the amount of receivables on account of the sale of goods or services rendered by the company. Trade receivables include debtors and bills receivable. 9.Debtors: It represents those persons or firms to whom goods have been sold or services rendered on credit & payment has not been received from them. 10.Bills Receivable: A bill of exchange becomes a bill receivable for the person who draws it (drawer) and gets it back after its acceptance from the drawee. 11. Trade Payable: Trade payables are the amount payable on account of goods purchased or services taken in the normal course of business. Trade payables include creditors & bills payable. 12.Creditors: It represents those persons or firms from whom goods have been purchased or services procured on credit & payment has not been made to them. 13.Bills Payable: A bill of exchange becomes a bill payable to the person who accepts it (drawee) and returns it to the drawer. 14. Voucher: A voucher is a document based on which transactions are first recorded in the books. 15. Bad debts: It is the amount that has become irrecoverable from a debtor. 16.Insolvent: A person or an enterprise that is not in a position to pay its debts is known as insolvent. 17.Solvent: A person or an enterprise which is in a position to pay its debts. 18. Revenue: These are the amount received by a business for selling goods or services. This amount is received from day to day business activity in the form of rent, interest, commission, discount, dividend etc. 19.Turnover: Turnover means total sales made in a particular period. The total amount of cash and credit sales during a particular period is called turnover. 20. Purchase return: Goods once purchased by the business, are returned back due to any reason is called purchase return or return outwards. 21. Sales return: Goods once sold to the customer when are returned back by them due to any reason then such goods are called as sales returns or return inwards. 22. Expenses: The cost which business incurs for producing goods and services or for using services is called expenses. These include payments made for wages, salaries, freight, advertisement, rent, insurance etc. In other words, we can say that the cost of earning revenue is an expense. 23. Account: An account is the systematic presentation of all the transactions related to a particular head. An account shows the summarized records of transactions related to a concerned person or thing. For Example: when the entity deals with various suppliers and customers, each of the suppliers and customers will be a separate account. An account may be related to things which can be tangible as well as intangible. For example – land, building, furniture, etc. are things. An account is expressed in a statement form. It has two sides. The left-hand side of an account is called a Debit side whereas right-hand side is called as Credit side. The debit is denoted as ‘Dr’ and credit is denoted as ‘Cr’. Classification/Types of Accounts in Accounting i)Personal Account: These accounts types are related to persons. These persons may be natural persons like Raj’s account, Rajesh’s account, Ramesh’s account, Suresh’s account, etc. a) Artificial Personal a/c: These persons can also be artificial persons like partnership firms, companies, bodies corporate, an association of persons, etc. For example – Rajesh and Suresh trading Co., Charitable trusts, XYZ Bank Ltd, C company Ltd, etc. b) Representative Personal a/c: There can be personal representative accounts as well. For example – In the case of Salary, when it is payable to employees, it is known how much amount is payable to each of the employee. But collectively it is called as ‘Salary payable A/c’. c) Natural Personal a/c: For Example – Goods sold to Suresh. In this transaction, Suresh is a personal account as being a natural person. His account will be debited in the entry as the receiver. ii) Real Accounts: These account types are related to assets or properties. They are further classified as Tangible real account and Intangible real accounts. For example – Building A/c, cash A/c, stationery A/c, inventory A/c, Goodwill, Patent, Copyright, Trademark, etc. iii) Nominal Account: These accounts types are related to income or gains and expenses or losses. For example: – Rent A/c, commission received A/c, salary A/c, wages A/c, conveyance A/c, etc. 24. Asset: An asset is a resource owned or controlled by a business, expected to generate economic benefits or reduce expenses in the future. Types of Assets: i)Fixed Assets/Non-Current Asset: A fixed asset is a long-term asset, that holds for many years (more than a year). These fixed assets include factories, plants, business offices, equipment, machines, etc. However in accounting, the value of his assets tends to fall with time due to depreciation, however, the cost of land on which these fixed assets are installed tends to increase with time. a) Tangible assets: Tangible assets are physical items that add value to your company. Some examples of tangible assets include: Cash, Equipment, Land, Inventory, Bonds, Stocks. Tangible assets depreciate over time. When you depreciate an asset, you spread its cost over a certain number of years. b) Intangible assets: Intangible assets are the opposite of tangible assets. Non-physical items that add value to your business are intangible assets. Unlike tangible assets, you cannot easily convert intangible assets into cash. Intangible items include things like: Logos, Patents, Trademarks, Copyrights, Customer lists, Business licenses, etc. ii) Current Assets: Current assets are assets that are expected to be converted into cash or used up within one year or within the company's normal operating cycle, whichever is longer. Examples of Current Assets: Cash, Accounts Receivable (AR), Inventory, Prepaid Expenses, Short-term Investments, Notes Receivable, Marketable Securities, Short-term Loans Receivable, Unused Raw Materials, etc. iii) Fictitious/Fake/Imaginary Asset: A fictitious asset is an accounting entry that represents a cost or expense that has been incurred, but does not have any real value or tangible existence. These are particularly those part of expenses/losses which are not written off during the year of incidence. Examples of Fictitious Assets: Preliminary Expenses (incurred before business startup), Organization Expenses (incurred to establish a corporation), Goodwill (excess purchase price over net asset value), Research and Development (R&D) Expenses, Start-up Costs, Advertising Expenses, Discount on Issue of Shares. 25. Liability: Liabilities are financial obligations or debts that a business or individual must pay or settle in the future. Types of Liabilities i)Current Liabilities: Current liabilities are those liabilities that are due and need to be paid within an accounting period (which is usually a year or 12 months). Current liabilities are also known as short-term liabilities due to the relatively short turnaround time. Current liabilities need to be closely monitored by the management of a company as a company needs to have sufficient liquidity in the form of current assets in order to pay off the current liabilities. Current liabilities have a direct impact on the working capital and also on the liquidity of the business. Some of the examples of current liabilities are: Interest Payable, Accounts Payable, Short term loans, Accrued Expenses, Bank overdraft, outstanding expenses. ii)Non-Current/Fixed Liabilities: Non-current liabilities, which are also known as long term liabilities are financial obligations that are due in over a year’s time. Long term liabilities play an important role in the long term financing of the business. These liabilities help businesses acquire capital assets by providing the required capital. Businesses can also invest in new capital projects using the funds obtained from long term debts or liabilities. Long term liabilities are an important indicator of the solvency of the business. A company which is unable to pay off long term liabilities as and when they become due, indicates a solvency issue with the business or it signals a crisis within the business. Investors always look at the long term liabilities of the business before investing. Some examples of long term liabilities are: Deferred tax liabilities, Bonds payable, Capital leases, Debentures, bank loan, etc. iii) Contingent liabilities: Contingent liabilities are a special type of liability that may occur during the course of a business, depending on the outcome of an event that may take place in the future. In accounting standards, contingent liabilities are recorded as potential or probable liabilities only if they have a 50% chance of occurring and when the amount of liability can be estimated properly. 26. Expenditure: Amt. spent/incurred for getting long term benefits for the business is known as expenditure. Expenditure Types i)Capital Expenditure: Capital expenditure is the amount spent by a business to acquire or upgrade its long-term assets, such as property, plant, and equipment (PP&E), intangible assets, or investments. Examples of Capital Expenditures: Purchasing new equipment or machinery, Constructing or acquiring new buildings, Developing or acquiring software, Acquiring patents or licenses, Investing in research and development projects, Upgrading or replacing existing infrastructure, Purchasing vehicles or aircraft, Acquiring or developing intellectual property. Types of Capital Expenditures: a. Expansion CapEx: Increases production capacity or expands business operations. b. Replacement CapEx: Replaces existing assets to maintain current operations. c. Modernization CapEx: Upgrades existing assets to improve efficiency. d. Research and Development (R&D) CapEx: Invests in new products, services, or technologies. ii) Revenue Expenditure: Revenue expenditure is the amount spent by a business to maintain its existing operations, generate revenue, and ensure continuity. Examples of Revenue Expenditures: Employee salaries and benefits, Rent and utilities, Marketing and advertising, Insurance premiums, Office supplies and equipment, Travel and entertainment expenses, Repairs and maintenance, Software subscriptions, Professional fees (e.g., accounting, legal), Utilities (e.g., electricity, water). Types of Revenue Expenditures: a. Operating Expenses: Salaries, wages, rent, utilities. b. Selling Expenses: Advertising, sales commissions, travel. c. Distribution Expenses: Transportation, storage, packaging. d. Maintenance Expenses: Repairs, maintenance, upkeep. e. Administrative Expenses: Office supplies, insurance, professional fees. iii) Deferred Revenue Expenditure: Deferred revenue expenditure is an advance payment made by a business for goods or services that will be received or used over a period of time, typically exceeding one year. Types of Deferred Revenue Expenditures: a. Prepaid Rent b. Prepaid Insurance c. Prepaid Advertising d. Prepaid Software Subscriptions e. Prepaid Professional Fees f. Deferred Maintenance Costs g. Deferred Research and Development (R&D) Costs