ADVANCED ACCOUNTING NOTES
Meaning & definition of Accounting
In 1941, The American Institute of Certified Public Accountants (AICPA) had
defined accounting as the art of recording, classifying, and summarising in a
significant manner and in terms of money, transactions and events which
are, in part at least, of financial character, and interpreting the results thereof’.
With greater economic development resulting in changing role of accounting,
its scope, became broader. In 1966, the American Accounting Association
(AAA) defined accounting as ‘the process of identifying, measuring and
communicating economic information to permit informed judgments and
decisions by users of information’.
📝 Objectives of Accounting
As an information system, the basic objective of accounting is to provide useful
information to the interested group of users, both external and internal.
1.Maintenance of Records of Business Transactions
Accounting is used for the maintenance of a systematic record of all financial
transactions in book of accounts.
2.Calculation of Profit and Loss
The owners of business are keen to have an idea about the net results of their
business operations periodically, i.e. whether the business has earned profitsor incurred losses.
3.Depiction of Financial Position
Accounting also aims at ascertaining the financial position of the business
concern in the form of its assets and liabilities at the end of every accounting
period
4.Providing Accounting Information to its Users
The accounting information generated by the accounting process is
communicated in the form of reports, statements, graphs and charts to the
users who need it in different decision situations.
BASIC ACCOUNTING TERMS
🔰Basic Accounting Terms🔰
1.Business Transactions
The dealings of a business man with an external party, which have an impact on his business and can be expressed in monetary terms is called business transactions.
2.Revenue
Revenue represents the amount a business earns through sale of its products in or providing service to customers.
3.Expenses
Expenses represent the amount expended to earn revenue. They are the cost incurred in the process of earning revenue.
4.Expenditure
Expenditure represents amount consumed for the acquisition of assets, the benefit from which is derived over a period which extends beyond the accounting year. It is long term in nature. For example, amount spent on the acquisition of land, building, plant etc. In common parlance, expenditure is classified into capital expenditure and revenue expenditure.)
5.Loss
It is the excess of expenses over revenue in an accounting year and represents reduction in owners' equity.
6.Profit
Profit is the excess of revenue over expenses in an accounting year, and represents increase in owners' equity.
7.Income
Income is the ultimate increase in the net worth of an organization.
8.Drawings
Drawings represent the amount of cash on other assets withdrawn by the owner for his personal purpose.
9.Assets
Assets are properties and things of value owned by the business which can be expressed in monetary terms.
Fixed assets are assets held on a long term basis by the company, such as buildings, machines, plant etc. These are meant for long term use, not for resale.
Current assets are assets held on a short term basis, for example, debtors, bill receivables, closing stock, short term investments, cash in hand and at bank etc.
Physical or real or tangible assets
Tangible assets can be touched, seen and felt. E.g. machines, buildings, furniture, stock of goods, cash, plant etc.
Intangible assets
Intangible assets are assets which cannot be touched, seen and felt for example, good will, trademarks etc.
10.Liabilities
Liabilities are the obligations which an enterprise owes. These represent amounts payable by the business in the future
11.Capital
Capital is the investment made by the owners for use in the business.
12.Sales
Sales represents total revenue earned by a business through sale of goods or services to customers Sales include cash sales and credit sales.
13.Purchases
Purchases is an expense incurred for procurement of goods in a business. Such goods purchased may be on cash basis) basis or credit basis.
14.Stock
Stock represents goods, spares and other items in the business at the close of the accounting year. It includes unsold goods, raw-materials and spares in hand.
15.Debtors
Debtors represents persons and entities who owe to the business.
16.Accounts Receivable
It includes amount due from debtors as well as on account of bills receivable.
17.Creditors
Creditors are persons or entities to whom the business owes on account of credit purchases made.
18.Accounts Payable
It includes creditors and bills payable.
📌Accounting Equation🔰
The accounting equation forms the basis of accounting process. The accounting equation states that the assets will be equal to the total equity.
Assets = Equity
Assets(A) = Capital(C) + Liabilities (L)
This equation can take the
following forms
A=C+L
or,
A-C =L
C=A-L
A-C= L
A-C-L=0
The accounting equation is also called as the Balance sheet equation as it gives the fundamental relationship among the components of a Balance sheet - assets, liabilities and capital.
🛑RULES OF DEBIT AND CREDIT
An account is a classified summary of transactions relating to a change in a particular item during a particular period. We thus, prepare a summary of transactions relating to assets, liabilities, incomes and
expenses.
The effect of rules of debit and credit on various types of accounts are given as follows -
1. Increase in asset is debit and decrease in asset is credit.
2. Increase in liability is credit and decrease in liability is debit.
3. Increase in capital is credit and decrease in capital is debit.
4. Increase in expense is debit and decrease in expense is credit.
5. Increase in revenue is credit and decrease in revenue in debit.
LEDGER
A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance, would record transactions as either a debit or credit in separate columns and the ending or closing balance.
POSTING
The process of recording the transaction in the ledger account by referring to the journal, is called they posting."
Objectives
The following are the important objectives of preparing a trial balance.
1. To verify the arithmetical accuracy of the ledger accounts.
A trial balance is prepared to see that all debits and credits are properly entered in the ledger accounts.
2. To find out mistakes and rectify them
If the trial balance does not agree, it means that there exists definitely some error either in posting or extraction of balances.
3. To provide a basis for preparing financial statements (Trading and Profit & Loss account and Balance sheet)
The financial statements are prepared with the balances of ledger accounts. Therefore, the accountant should make it sure that all the accounts are correctly prepared.
🔰🔰Trial Balance may be prepared under two methods.🔰🔰
1. Total Method
2. Balance method
1. Total Method
Under this method, the totals of debit sides of all the accounts are placed in the debit column of the statement and the totals of the credit sides of all accounts are placed in the credit column.
2. Balance Method
Under this method, the balance of ledger accounts are shown in the trial balance. The accounts having debit balance are entered in the debit column of the trial balance. Similarly, accounts showing credit balance are written in the credit column.
TRAIL BALANCE FORMAT
🛑HOMEWORK 01 ( ANSWER TRIAL BALANCE TOTAL 349255)
🛑HOMEWORK 02
🛑HOMEWORK 03
🛑FINANCIAL STATEMENTS 🛑
🛑HOMEWORK 04
🔰TRADING ACCOUNT🔰
HOMEWORK 05
🛑MEMORANDUM TRADING ACCOUNT
Profit and Loss Account
The Trading Account shows only the gross profit or gross loss.Profit and Loss Account is prepared to ascertain the net profit or net loss of the business for an accounting period.
🛑QUESTION
🛑HOMEWORK 06🛑
🛑BALANCE SHEET
balance sheet is a statement showing the assets, liabilities and capital of a business on a particular date. It is prepared to know the financial position. Hence, it is also known as 'Position Statement'.
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