Accounting Standards

Introduction:-

Bookkeeping is the art of keeping account records in a daily and regular manner and in a systematic way. This means that the firm has to keep the ongoing record of the events so that when any need arises to see the account book it is already ready to show and form a picture-perfect frame. If we purchase machinery worth ₹10 lakhs and stationary worth ₹5 both have the same events and the accountant has to record both the transaction. A systematic record of both whether big events or small has to be recorded for future reference.

The word bookkeeping and accountancy both mean the same where we have to record the transaction when it is due but the only difference between both of them is accountancy contains higher-order work.

Accounting is an art of a person how they record, classification and summarising in an effective manner and in terms of money, transactions, and event which are, in part at least of financial features and interpretation of the results thereof.
Accounting is the science of recording and classifying events, transaction, and the making of summaries.

Basic accounting concepts:-

  • 1) Business entity concept
  • 2) Monetary measurement concept
  • 3) Cost concept
  • 4) Going concept
  • 5) Dual aspect concept
  • 6) Realisation concept
  • 7) Accrual concept
  • 8) Matching concept

1- Business entity concept:-

The work of every accountant is to treat a business in a different and modern manner from the person who owns it, it then becomes possible for an accountant to handle the transaction of the business with all due respect. This concept is now being extended to accounting separately for various divisions for a firm in order to ascertain the result.

2- Monetary measurement concept:-

The term monetary means where there is an involvement of money the transactions where money matters have to be recorded in a complete format this concept is known as monetary measurement concept. It should be remembered in all cases that money does the work of everything in the business transaction. The use of a building or any other equipment can be aggregated only through money values and not in other terms.

3- Cost concept:-

Every transaction when happened or appearance is done need to be entered in the books of account at the moment actually involved. Let’s take up if a firm purchases a piece of land for ₹100,000/- but considers it as the worth of ₹200,000/- the purchase of land will be recorded in the transaction and journal entry will be passed with the amount of ₹100,000/- If we take the example of machinery the amount of depreciation has to be deducted from the actual amount of machinery each year in respect of the machine.

4- Going concern concept:-

It is said that the business will only exist in the future if the accountant records every day every month and a full-year transaction. It is necessary to distinguish the income and expenditure of the business. Of course, if it is certain that the business will exist only for a particular period of time the accounting record will be kept till the expected time.

5- Dual aspect concept:-

Each transaction has two aspects; if a business has acquired an asset, it must have resulted in one of the following:-

  • 1)some other asset has been given up
  • 2)obligation to pay for it has arisen
  • 3)proprietor has contributed money for the possession of the asset

The reverse is also true. If for instance there is an increase in money owned to others, there must have been an increase in assets or a loss. At any time

Assets=Liabilities + Capital Or Capital=Assets – Liabilities

6- Realisation concept:-

Accounting is done to keep the historical record of every transaction; it records what has happened who has done when and where it took place the actual amount etc. This is of great importance in stopping business firms from inflating their profits by recording sales and incomes that are more likely to accrue unless money has been realized.

7- Accrual concept:-

When an event takes place or any transaction is recorded the consequences are bound to be followed together.  For example if Mr A. Borrows ₹100,000/- @15% per annum at the end of the year ₹15,000/- will become due as interest. If the interest amount with the principal amount is paid then it will certainly show in it. This must be brought into account. The accrual concept demands that all the transaction has to be recorded which are dealing in cash whether paid or not paid.

8- Matching concept:-

It is based on periodic postulate. The primary objective of every business carried in the market is to make a profit.  Therefore more often the accountant is hired to calculate the profit of the business.  In order to measure the profits for the period, revenues should be matched with all the expenses done in that period of time. The marching concept also requires the application of personal judgment in making the estimate for bad and doubtful debts, discounts, etc.

Capital expenditure:-

  • ☆It is incurred for acquiring fixed assets
  • ☆These are incurred in increasing the value of a fixed asset over a period of time
  • ☆They increase the earning capacity of the business
  • ☆The benefit of such expenditure extends to more than one year
  • ☆They are shown in the balance sheet
  • ☆These expenses are non-recurring in nature

Revenue expenditure:-

  • ☆It is incurred for running the business activity
  • ☆They do not increase the value of a fixed asset
  • ☆They are incurred to maintain the earning capacity of the business
  • ☆The benefits is limited to one year only
  • ☆They are shown in trading account and profit & loss account
  • ☆These expenses are recurring in nature

Objectives of financial statements:-

  • 1)To provide financial information about economic resources and obligations of a business entity
  • 2)To provide other needed information about changes in economic sources.
  • 3)To provide reliable information about charges arising out of business activities
  • 4)To disclose other information related to the financial statements that is relevant to the needs

Types of financial statements:-

  • 1)Balance sheet
  • 2)Profit and loss a/c
  • 3)Statement of changes in owners accounts
  • 4)statement of changes in a financial position

Balance sheet:-

The balance sheet is one of the most important documents depicting the financial strength of the organization. It has two sides. On the left-hand side, Liabilities are placed and on the right-hand side, assets are placed. The asset side shows all the owned assets of the company while the liability side shows all the creditors of the company. The companies act, 1956 has prescribed a particular format for showing the asset and liability side. These companies also required the last financial years and current financial years balance sheets with their number of figures.

Profit and loss a/c:-

An income statement is prepared to determine the actual position of the entity. The statement shows revenue earned during the financial year and expenses incurred during one financial year. If there is an excess revenue over expenditure then it will show a profit while on the other hand if vice versa happens it will show a loss. The income statement is generally made for a particular year only. The income statement may be prepared in the form of a manufacturing account to find out the cost of production, in the form of a trading account to determine gross profit or gross loss, in the form of a profit and loss account it shows the net profit or net loss occurred during the year.

Statement of changes in owners account:-

The term ownership lies in the hand of the equity shareholder. They are the owners of the company and against all the assets of the firm. It consists of two elements:-

  • (i)paid-up share capital
  • (ii)retained earnings

The net profit during the current year is added to the balance sheet while net loss is deducted from the balance sheet. On the debit side, appropriations like interim dividend paid, proposed dividend on equity share capital, the amount transferred to debenture redemption fund, etc. There cannot be appropriations without profits.

Statement of changes in financial position:-

The basic financial statements i.e the balance sheet, and the profit and loss account or income statement of a business reveal various transactions on the operational and financial position of the company. The

statement of changes in financial position may take any of the following two forms:-

  • [I]Funds flow statement
  • [II]Cash flow statement

Closing entries in respect of trading account:-

(i)For transferring the accounts on the debit side of the trading account

  • Trading account          Dr
  • To opening stock a/c
  • To purchases a/c
  • To sales return a/c
  • To factory fuel and power a/c
  • To freight and carriage a/c
  • To manufacturing expenses a/c

(ii)For transferring the account on the credit side of the trading account:-

  • Sales account a/c     Dr
  • Purchase return a/c  Dr
  • Closing stock a/c      Dr
  • To trading account

(iii)Trading account revealing gross profit or gross loss:-

For transferring gross profit:-

  • Closing stock a/c   Dr.
  • To profit and loss a/c

For transferring gross loss:-

  • Profit and loss account    Dr
  • To trading account

Closing entries in respect of profit and loss account:-

The gross profit and loss is transferred to the profit and loss account and thus profit and loss account is opened by gross profit or gross loss

Where there is gross profit:-

  • Trading account       Dr
  • To profit and loss account
  • ☆Where there is gross loss:-
  • Profit and loss account      Dr
  • To trading account

The profit and loss account is credited with miscellaneous income accounts. For transfer of various incomes, the following entry is passed

  • Various incomes account Dr
  • To profit and loss accounts

The results of the accounts are either net profit or a net loss. The profit and loss account is closed by transferring the net profit or net loss to capital a/c

When there is net profit:-

  • Profit and loss a/c     Dr
  • To capital a/c

When there is net loss:-

  • Capital account     Dr
  • To profit and loss a/c

Balance sheet:-

The balance sheet and trial balance both are statements and are prepared by almost all enterprises. In spite of differences, they resemble in the following:-

  • 1) Both contain cash balance
  • 2) Both are prepared from the ledger
  • 3) Both are not accounts but statements
  • 4) Accounts having no balance do not appear in either of the two

Important adjustments:-

Closing stock:-

  • Closing stock a/c      Dr
  • To trading account

Outstanding expenses:-

  • Salary a/c       Dr
  • To outstanding salary a/c

Prepaid expenses:-

  • Prepaid insurance a/c    Dr
  • To insurance a/c

Accrued incomes:-

  • Accrued interest a/c      Dr
  • To interest a/c

Income received in advance:-

  • Rent a/c     Dr
  • To unearned rent a/c

Depreciation:-

  • Depreciation a/c      Dr
  • To machinery a/c

Interest on capital and drawings:-

  • (i)Interest on capital a/c    Dr   To capital a/c
  • (ii)Capital a/c     Dr   To interest or drawings a/c

Reserves for bad and doubtful debts:-

  • Bad debts a/c    Dr
  • To concerned debtor

(Being adjustment entry passed for irrecoverable debts)

Doubtful debts:-

  • Profit and loss a/c    Dr
  • To provision for doubtful debts

(Being a provision is made towards doubtful debts)

Reserve for discount on debtors and creditors:-

When discount is allowed, following journal entry is passed:-

  • Discount a/c     Dr
  • To debtor’s personal a/c

Following entry is passed to create a provision for discount on debtors.

  • Profit and loss a/c      Dr

To provision for discount

  • on debtors a/c

The discount allowed will be transferred to the provision for discount on debtors account bypassing the following entry:-

  • Provision for discount on debtors a/c     Dr
  • To discount a/c

Such provision will be shown on the debit side of profit and loss a/c. The provision will be shown by way of deduction from sundry debtors(after deduction of further bad debts and provision for doubtful debts) on the asset side of the balance sheet.

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