MEANING OF ACCOUNTING

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MEANING OF ACCOUNTING:

MEANING OF ACCOUNTING Accounting, as an information system is the process of identifying, measuring and communicating the economic information of an organization to its users who need the information for decision making.

Activities covered under Accounting :

Activities covered under Accounting Identifying the transaction and events – e.g. purchase of raw material, use of raw material for production, sale of goods etc. Measuring the identified transactions and events in the terms of common measurement unit, that is the ruling currency of a country

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Summarising the classified transactions in a manner useful to the users. This function involves the preparation of Financial Statements such as Income Statement, Balance Sheet, Statements of Changes in Financial Position, Statement of Cash Flow etc. Analysing the data derived from Income Statement and or Balance Sheet for the purpose of identifying the financial Strengths and weaknesses of the enterprise

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Interpreting – It is concerned with explaining the meaning and significance of the relationship so established by the analysis. Nowadays, the first six functions are performed by electronic data processing devices and the accountant has to concentrate mainly on the interpretation aspect of accounting

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The accountants should interpret the statements in a manner useful to the users, so as to enable the users to make reasoned decisions out of alternative course of action. The accountant should explain – not only what has happened but also why it happened, and what is likely to happen under specified conditions.

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Communicating the summarized, analyzed and interpreted information to the users to enable them to make reasoned decisions.

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Accounting is an information system which communicates the accounting information to the users (whether internal or external) to enable them to make reasoned decisions. As an information system, accounting may be viewed as under –

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Input ----------  Process --------  Output | | | Economic events Recording Communicating measured in financial Classifying Information terms Summarising to Users Analysing Interpreting

Primary Objectives of Accounting:

Primary Objectives of Accounting | | | | To maintain To calculate To ascertain To communicate Accounting the results of the financial the information Records operations position to the users

BASIC ACCOUNTING TERMINOLOGY :

BASIC ACCOUNTING TERMINOLOGY Entity / enterprise / organization – means an economic unit that performs economic activities e.g. Birla Industries, Reliance Industries, Bajaj Auto. Event – An event is a happening of consequences to an entity. For example – use of raw material in production

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Transaction – is an exchange in which each participant receives or sacrifices value. It involves exchange of goods or services on cash or credit basis. It is an event involving transfer of money or money’s worth. Voucher – is a document which serves as an evidence of a transaction. i.e. cash purchases – cash memos, credit purchases – purchase invoice. The vouchers are source documents for recording business transactions in the books of accounts.

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Entry – is the record made in the books of accounts in respect of a transaction or event. An entry is passed on the basis of vouchers. Assets – refer to tangible objects or intangible rights of an enterprise which carry probable future benefits

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Current Assets – Cash, Stock of - Raw Materials (R/M), Work-in-Progress (WIP), Finished Goods, Debtors (Drs), Bills Receivables (B/R). Fixed Assets – are the assets held for purpose of producing goods or providing services and those are not held for resale in the normal course of business. Fixed assets classified into

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Tangible fixed assets which can be seen and touched e.g. Land and Building, Plant and Machinery, Furniture and fixture (ii) Intangible fixed assets – which cannot be seen and touched. E.g. Goodwill, Patent, Trademark, Copyrights etc

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Liabilities – refer to financial obligations of an enterprise other than owner’s funds/equity. (a) Current liabilities – refer to those liabilities which fall due for payment in a relatively short period (normally not more than 12 months from the date of B/S). e.g. Bills Payable (B/P), Trade Creditors, outstanding expenses, bank overdraft etc. (b) Long –term liabilities – refer to those liabilities which do not fall due for payment in a relatively short period. E.g. Long term loans, Debentures etc.

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Capital – is the excess of assets over external liabilities. It refers to the amount invested in an enterprise by the owners. This amount is increased by the amounts earned and amount of additional capital introduced and is decreased by the amount of losses incurred and the amount withdrawn. It is owner’s claim / equity/net assets/net worth.

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Drawings – an amount of cash or goods withdrawn by the proprietor / partner for personal use. Purchases – the total amount of goods obtained by an enterprise for resale or for use in the production of goods or rendering of services in the normal course of business. Sales – The term ‘sales’ refer to the amount for which the goods are sold or services are rendered.

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Stock / Inventory- The term ‘stock’ refers to tangible property held for sale in the ordinary course of business or for consumption in the production of goods or services for sale. Trade Debtors – The term ‘Trade Debtors’ refers to the person from whom the amounts are due for goods sold or services rendered on credit basis

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Trade Creditors – are the persons to whom the amounts are due for goods purchased or services rendered on credit basis. Receivables – include both the trade debtors and Bills Receivable.

Bill of Exchange:

Bill of Exchange is an unconditional order in writing given by the creditor to the debtor to pay on demand or at a fixed or determinable future time, a certain sum of money to or to the order of a specified person or to bearer. This bill of exchange is known as Bills Receivable for creditor.

Payables:

Payables The term ‘Payable’ include both the trade creditors and Bills Payable. The Bills of Exchange is known as Bills Payable for the debtors.

Expenditure:

Expenditure Expenditure are the costs incurred in acquiring an asset or service in the form of outflow or depletion of assets or incurrence of liability. Cost is the measure of expenditure. It may be expired or unexpired. (a) Expired Cost (or Expense) – Expense is that portion of the expenditure which

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has been consumed during the current accounting period. It decreases equity. Expired cost is of following two types: (i) Utilized Cost – is that portion of expired cost which benefits the enterprise in producing revenue and includes cost of merchandise sold or services rendered. E.g. commission on Sales, Advt. Expenses.

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(ii) Lost Cost – is that portion of expired cost which does not contribute to revenue and is regarded as loss. E.g. Loss of uninsured asset due to fire. (b) Unexpired Cost (or Asset) – is that portion of the expenditure which has not been consumed till the end of current accounting period. It does not reduce equity.

Income:

Income Income is increase in economic benefits during an accounting period in the form of (a) inflow of assets, or (b) decrease of liabilities, that result in increase in internal equity.

Expenses:

Expenses Expenses are decrease in economic benefits during an accounting period in the form of (a) outflow or depletion of assets or (b) incurrence of liabilities, that result in decrease in internal equity.

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Gains - are increase in equity. Losses - are decrease in equity. Revenue – refers to the amount charged for the goods sold or services rendered. Net Profit – means the excess of revenue over expenses. Net Loss – means the excess of expenses and losses over revenue.

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