INTRODUCTION TO FINANCIAL ACCOUNTING AND ITS TERMS.
“Financial Accounting is the language of business” — Warren Buffett
DEFINITION OF ACCOUNTING
Accounting is defined as “the art of recording, classifying, and summarising in terms of money transactions and events of a financial character and interpreting the results thereof”.
OBJECTIVES OF ACCOUNTING
The objectives of the term ‘accounting’ can be stated as follows:
(a) To maintain records of a business.
(b) Depiction of financial position.
(c) Calculation of profit or loss.
(d) To make information available to various groups and users.
CONCEPTS OF ACCOUNTANCY
Accounting is the language of business. The financial transactions are recorded and reported by means of financial statements to a number of interested parties.
Following is a list of accounting concepts agreed to by accountants:
Following is a list of accounting concepts and its terms agreed to by accountants:
BUSINESS ENTITY CONCEPT :
According to this concept, business is treated as a unit or entity apart from its owner, creditor, managers and others’. This concept is applicable to all forms of business organisations.
DUAL ASPECT CONCEPT:
According to this principle of accounting, every transaction has a dual aspect, i.e., two fold effect. Every receiver is also a giver and every giver is also a receiver. Receiving and giving aspects are the two aspects of every business transaction. This principle is called double entry system of book-keeping. As per dual aspect, total assets and total liabilities must be equal. This equality is called ‘Balance sheet equation or accounting equation. It can be stated as:
Liabilities = Assets
Capital + Liabilities (outside) = Assets
Capital = Assets – Liabilities.
GOING CONCERN CONCEPT:
According to Kohler’s Dictionary for Accountants, a going concern is defined as “any enterprise which is expected to continue operating indefinitely in the future”. This concept assumes that a business entity will continue to operate in definitely. Indefinitely existence means that the business enterprise will not be wound up within the for sable future and therefore would be able to meet its contractual obligations and use its resources according to the plans and predetermined goals. This concept forms the basis for depreciation
ACCOUNTING PERIOD CONCEPTS:
Life of business is indefinitely, so, the measurement of income is not possible for a very, very long period. At frequent intervals properietor has to know “how things are going”. Therefore, accountants choose some shorter and convenient time for the measurement of income. Normally, twelve month periodis adopted for this purpose. The time interval is called “Accounting period.”
MONEY MEASUREMENT CONCEPT:
The money measurement concept underlines the fact that is terms of money. A fact or a happening which cannot be expressed in terms of money is not recorded in the account book. As general health condition of the chairman of the company quality of products introduced by the enterprise etc. cannot be expressed in terms of money and thus are not recorded in the books.
Accrual means the recognition of events and conditions as they occur, rather than in the period of their incurrence, receipts or payments. Also the partial recognition of an item of revenue or expense and its related asset or liability: the result of the lack of coincidence of the accounting period and the contractual or benefit period.
The idea of cost assumption in that:
(i) asset is recorded at the price paid to acquire it-that is, at cost;
(ii) this cost is the basis for all subsequent accounting for the asset.
The cost concept implies that if nothing as been paid for acquiring something, it not be shown is the accounting books as an asset.