INTRODUCTION TO FUNDAMENTALS OF ACCOUNTING

 

UNIT STRUCTURE

1. Learning Objectives
2. Introduction
3. Concept of Accounting


1. Difference between Accountancy and Accounting
2. Accounting Science or Art
4. Scope and Functions
5. Accounting Principles

1. Meaning of Accounting Principles
2. Generally Accepted Accounting Principles
3. Characteristics of Accounting Principles
4. Need of Accounting Principle
5. Classification of Accounting Principles
6. Accounting Concepts
7. Meaning of Accounting Standard

1. Definition of Accounting Standards
2. Benefits of Accounting Standards
8. Recognition and Measurement of the elements of Financial Statement
9. Let Us Sum Up
10. Answers to Check Your Progress
11. Further Readings
12. Possible Questions.

LEARNING OBJECTIVES

 
After going through this unit, you will be able to:
discuss the concept of Accounting
describe the scope and functions of Accounting
identify the accounting principles and concepts
learn accounting standard
learn recognition and measurement of the elements of Financial Statement
discuss financial statements

identify the components of Financial Statements
measure the elements of Financial Statements

INTRODUCTION


In this unit we will be discussing on the various concepts, meaning of accounting, about accounting principles, concepts and standard.

Accounting is the measurement, statement or provision of assurance about financial information primarily used by managers, investors, tax authorities and other decision makers to make resource allocation decisions within companies, organizations, and public agencies. The terms derive from the use of financial accounts.

Accounting is a service activity. Its function is to provide quantitative information primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions, and in making reasonable choices among alternative courses of action.
 

CONCEPT OF ACCOUNTING



Meaning of accounting :
Accounting is a social science. It caters to the needs of the society as well as business. A society is always changing, so also the form of business organization. In order to meet the changing needs of the society, the science of accounting also has changed. For the purpose of ascertaining the amount of profit earned (or loss incurred), in the enterprise a complete and systematic record of business transactions are required to be maintained.

Accounting helps a business in having a complete and systematic record of its business transactions, reporting the results of its operation and interpreting such results for the purpose of effective control of future operations or activities.

Definitions of Accounting:

The term accounting has been defined by different authors as under:

According to R.N Anthony, “nearly every business enterprise has accounting system. It is a means of collecting, summarizing, analyzing and reporting in monetary terms, information’s about business”.

According to Smith and Ashburne, “accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events, which are, in part at least, of a financial character and interpreting the result thereof”.

In whatever way the term accounting is defined, its universally accepted objective is to record all the transactions in monetary units and to report them to its users in useful manner in the form of financial statements. These financial statements provide accounting information which is used by various interested parties for decision making. We will discuss on financial statement in the sec 1.8

Differences between Accountancy and Accounting


The term ‘Accountancy’ and ‘Accounting’ are often considered as synonymous. However, there are some fundamental differences between the two.

‘Accountancy’ is profession while ‘Accounting’ is methodology. The term ‘Accountancy’ refers to a systematic knowledge of accounting with the principles and techniques of application in accounting. It provides rules, principles methods, concepts and conventions for recording, classifying and summarizing of financial transactions and accounting information in a systematic manner. Accountancy also tells us the methods, procedures and ways how to communicate with the interested parties.

According to Eric L. Kohler “Accountancy is the theory and practice of accounting: its responsibilities, standards, conventions and activities.”
According to F.W. Pixley, “Accountancy is the science which deals with recording of monetary transactions of every description”.

Thus, accountancy is regarded both as a science and as an art; this will be discussed in the following sec i.e. Sec 1.3.2. It is the subject which speaks about the principles and practices of Accountancy. Again, accounting is the art of recording, classifying and summarizing the financial transaction in a systematic manner and interpreting the results to achieve predetermined objectives.

Accounting is based on the rules, principles and technique of application formulated by the subject, accountancy.



Is Accounting a Science or an Art?


A question arises is whether Accounting is a science or an art? Before deciding whether it is a science or an art or both, it is better to go through the meaning of the two terms - science and art.

Science may be defined as a systematized body of knowledge based on certain principles which have universal application. It establishes the relationship of cause and effect about any occurrence or happening. Scientific knowledge is based on observation, experiments and testing of facts.

As, on the other hand, are the application of knowledge comprising of some accepted theories, principles, rules, concepts and conventions. It helps to achieve the goals and tells us the manner in which we may attain our objectives in the best possible way. The more an art is practiced, the more expert one becomes in it.

Accounting is considered as science because recording, classifying and summarizing of business transactions is done on the basis of certain principles such as principle of double entry system which have universal application. However, in accounting, the relationship of cause and effect is not studied which is a basic feature of pure sciences. It may, therefore, be said that accounting is a science but not a pure science.

Since accounting has to be applied in different organizations and varied situations, it has not been possible to develop principles which have universal applicability. Accounting is based on certain concepts and conventions called Generally Accepted Accounting Principles, (which will be discussed in sec 1.5.2) and are subject to some limitations. It may be influenced by bias and personal judgment of the accountant. The more a person is involved in accounting work, the more proficient he becomes in it. From this point of view, accounting is still an art. It tells us the manner in which some special objectives such as ascertaining the trading results of an entity for a particular period and the financial position of the entity on a particular date can be ascertained.

From the above discussion, it may be concluded that accounting is both a science and an art.


Features of Accounting


An analysis of the definitions of accounting brings out the following as features of accounting:

(i) Accounting is an art: Accounting is considered as an art because it requires the application of some special knowledge comprising of some accepted theories and principles.

(ii) Identification of financial events: In course of daily activities, a number of events takes place. Accounting is concerned with only those events which are of financial nature. These events are termed as economic activities. In other words, only those events which can be measured in terms of money, called business transactions and are identified for the purpose of recording.

(iii) Recording of business transactions: Only the business transactions are recorded according to some specified rules in the books of accounts. Books of accounts to be maintained depend on the nature and size of the business. Only those transactions and events which are of a financial character are recorded in accounting. There are a number of events in the business which are very important for business but which cannot be measured and, expressed in terms of money and hence such transactions will not be recorded.

For example, the quarrel between the Production Manager and the Sales Manager, resignation by an able and experienced manager, strike by employees and starting of a new business by the other competitor etc. Though these events affect the earnings of the business adversely but as not one can measure the effect of such events in terms of money, these will not be recorded in the books of the business.

(iv) Classifying the business transactions: Classification is the process of grouping the transactions or entries of the same type or similar nature in one place. This is done by opening accounts in the ledger. In the ledger, the transaction involving a particular account is recorded in that account only.

(v) Summarizing the information: Summarizing involves the preparation of reports and statements from the classified data (ledger) in a manner understandable to the user of accounting information. This involves the balancing of ledger accounts and the preparation of Trial Balance with the help of such balances. Final Accounts, which include Trading and Profit & Loss Account and a Balance Sheet, are prepared with the help of Trial Balance.

(vi) Recording in terms of money: Each and every transaction is recorded in the books of account in terms of money only. For example, if a businessman purchases 30 Chairs and 5 Tables, their values in terms of money will be recorded in the books. Similarly, if a business possesses Rs. 5,000 in Cash; Land measuring 1,000 Square Meters; 2 Machines; 5 ton of raw materials; 30 Chairs; 5 Tables, and so on, then in the absence of money measurement these different types of assets cannot be added up and hence cannot give any useful information. Bit if they are expressed in terms of money, they will immediately provide useful information such as, Cash Rs. 5,000; Land Rs. 80,000; Trucks Rs. 2,00,000; Machines Rs. 60,000; Goods Rs. 40,000; Furniture Rs. 20,000 (30 chairs and 5 tables together).

(vii) Interpretation of the results : In Accounting, the results of the business are presented in such a manner (i.e., by preparing Trading and Profit & Loss Account and Balance Sheet) that the various parties interested in the business such as proprietors, managers, employees, bank, creditors, etc. can have full information about the profitability and the financial position of the business.




SCOPE AND FUNCTIONS

Scope of accounting:

The scope of modern accounting is indeed very wide, it is not merely concerned with record-keeping, but is also concerned with a whole range of activities involving:

a. Planning;
b. Control;
c. Decision making;
d. Problem-solving;
e. Performance measurement
f. Co-ordination and directing;
g. Auditing;
h. Tax-determination and planning;
i. Cost accounting
j. Management accounting
k. Financial Accounting.
Functions of Accounting:

The following are the main objectives or functions or utilities of accounting:

(a) To keep systematic record of business transactions :

The main objective of accounting is to keep a complete record of business transactions of the entity. This record is required to be maintained according to specified principles and rules. Keeping of complete record of business transactions helps to avoid the possibility of omission and fraud. For this purpose, all the business transactions are recorded first in Journal or Special Purpose Books and then posted into Ledger.

(b) To ascertain the result of operation:
Another objective of accounting is to ascertain the result of operation carried on by the business during an accounting period. The result of operation may be either profit earned or loss suffered. A Trading and Profit & Loss Account of the business is prepared at the end of each accounting period to ascertain profit or loss. In the profit and loss account, the revenue of the business is matched with the expenses incurred.

(c) To ascertain the financial position of the business :
The financial position of the business is ascertained by preparing a statement called Balance Sheet. In this statement, the values of all the assets and liabilities of the business are shown. For a businessman, merely ascertaining the profit or loss of the business in not enough, he must also know the financial health of the business. For this purpose, after preparing the Profit & Loss Account a statement called ‘Balance Sheet’ is prepared which shows the assets and their values on the one hand and the liabilities and capital on the other.

(d) To provide information to various parties :
Another main objective of accounting is to communicate the accounting information to various interested parties like owners, investors, creditors, banks, employees and government authorities etc. This information helps them in taking sound and judicious decisions about the business entity.

CHECK YOUR PROGRESS


Q1. What do you mean by Accounting

Q2. Write down the features of Accounting

Q3. Write down the functions of Accounting

Q4. Fill in the blanks:

a) The financial position of the business is ascertained by preparing a statement called …………………………………………
b) The main objective of accounting is to keep a complete record of ………………………………… of the entity.
c) Each and every transaction is recorded in the books of account in terms of ……………………………………
d) According to F.W. Pixley, “Accountancy is the science which deals with …………………………………… transactions of every description”.


ACCOUNTING PRINCIPLES

 

Meaning of Accounting Principle

Principle means a general law or rule adopted or professed as a guide to action ‘a settled ground or a basis of conduct or practice’. The word ‘Principle’ when applied in accounting may have different meanings in different contexts. It is not used in the sense of a fundamental accounting truth – it connotes a guiding influence or an accepted rule of action or conduct.

Accounting principles have been defined as the body of doctrine, commonly associated with the theory and procedure of accounting, serving as an explanation of current practices and as a guide for the selection of conventions or procedures where alternative exist.

In simple words, ‘Accounting Principles’ may be defined as those rules of conduct or procedure which are adopted by the accountants universally for recording and reporting of financial data. These principles bring about uniformity in the practice of accounting.

 

Generally Accepted Accounting Principles (GAAP)


Accounting is a practical activity. Historically, the accounting professionals have not been very much concerned about the theoretical base of their profession. But gradually their job has been regarded as supplier of financial information for use by the economic decision makers. With the growth in business and financial activities, this job of an accountant is being put under scrutiny. They have to satisfy all the users of their financial statements. They have to apply certain concepts, conventions and postulates while preparing and presenting accounting information for the assistance of decision makers. The consensus view of the persons engaged in the accounting profession relating to:
a. which economic resources and obligations should be recorded as assets and liabilities in financial accounting,

b. which changes in assets and liabilities should be recorded,
c. when these changes should be recorded,
d. how the assets and liabilities and changes in them should be measured,
e. what information should be disclosed;
f. how it should be disclosed; and
g. which financial statement should be prepared.

This are referred to as Generally Accepted Accounting Principles (GAAP). GAAP’s thus helps to bring about uniformity in the reporting of financial events of the entities across the industry.

Generally Accepted Accounting Principles (GAAP) is a guide to the accounting profession in the choice of accounting techniques for the purpose of recording, preparing and presenting the financial statements.
 

Characteristics / Features of Accounting Principles


The characteristics of Accounting Principles are:

a. Accounting principles are made and developed by men (accountants) and, as such, they do not have the authoritativeness of universal principles, like other natural sciences, viz. Physics, Chemistry, Mathematics etc. It is en empirical science i.e. based on what is experienced or seen.

b. The general acceptance of an accounting principle usually depends on how well it satisfies three criteria: Relevance, Objectivity and Feasibility. The word ‘relevant’ implies that the information will be useful to the users. The word ‘objectivity’ implies that the recorded data are reliable and verifiable. The word ‘feasibility’ implies that the implementation of the principle in practice will be without much complexity and cost.

c. Accounting principles cannot be validated /proved by reference to natural laws, as in the case of physical sciences. They are the best possible suggestions based on practical experiences, reasons and observations which have been developed by the persons/authorities engaged in the accounting profession over the years.

d. Accounting principles are developed for common usage to ensure uniformity and understandability.

e. Accounting principles are in the process of evolution, i.e., they are not in their finished form. On the other hand, they are fast developing.

f. They are not rigid.



Need / Importance of Accounting Principles


(a) Uniformity of Accounting: Accounting is considered as the language of business. Accounting as a language, to be understandable to all, must follow certain principles uniformly all over the world. Therefore, accounting principles bring about the uniformity in accounting practices.

(b) Comparability of accounting information: Accounting principles, if consistently followed, will make the accounting information comparable over a number of periods. Therefore, accounting information must satisfy the criteria of comparability so that it can be useful to the users.

(c) Reliability of Accounting Information: Financial statements show operational results and financial position for the users. Therefore, this information must be uniform and reliable for any decision making purposes. Accounting principles make the financial statements more reliable and non-biased.

(d) Neutrality in Accounts: Financial information is required by different classes of users having conflicting interests. Accounting principle help to maintain neutrality in presenting the financial information and leave little scope for statements becoming biased to a particular class of users.

(e) Guidelines to Accountants: Accounting principles provides guidelines to the accountants in preparing and presenting financial statements in different situations. Thus the scope of personal choice is reduced to the minimum.

Classification of Accounting Principles


Traditionally, accounting principles were classified into two categories:


(a) Accounting Concepts; and (b) Accounting Conventions

The International Accounting Standards (IAS – I) has classified the accounting principles into (A) Fundamental Accounting assumptions (Concepts), and (B) Accounting Policies (Conventions).


ACCOUNTING CONCEPTS


Accounting is the language of business. The affairs of a business unit are communicated to others as well as to owners, managers, etc. through accounting information which has to be suitably recorded, classified, summarized and presented. If the language is to be understood by all, it must contain certain concepts which are universally understandable. So, the accountants have agreed upon a number of concepts which they try to follow in accounting. These are explained in short as below:

1. Business Entity Concept :
Accountants treat a business as a distinct entity, separate from the persons who own it. Thus, it becomes possible to record the transactions of the business with the proprietor also. If the businessman introduces cash into the business, he becomes a creditor of the business, and his contribution is recorded as capital. Thus business affairs are not mixed up with the private affairs.

2. Money Measurement Concept :
Accounting records only those transactions which are expressed in monetary terms. Non-monetary events are ignored, even if they are otherwise important, thus, the purchase of furniture will be recorded in the books of accounts while the death of a very efficient manager will be ignored though it may greatly affect the business.

3. Cost Concept :
Transactions are recorded in the books of account at the amounts actually involved. No arbitrary values, put on transactions, are considered. Thus, if a plot of land in Guwahati is purchased for Rs.10, 000 though it is in word Rs.1, 00,000 will be recorded in the books. However, in some cases estimated values are taken into consideration, e.g. depreciation, etc.

4. Going Concern Concept :
It is assumed that the business will exist for a long time and transactions will be recorded with that end in view. This concept classifies expenditure into capital and revenue. Expenditure that will render benefit over a long period is called capital expenditure while the expenditure which will be exhausted quickly, say, within a year, is termed as revenue expenditure. The purchase of a building is a capital expenditure because it will render benefit over a long period while purchase of stationery is revenue expenditure because stationery will be consumed in a short period, say, in a year.

5. Dual Aspect Concept:
Each transaction has two aspects. If a business has acquired an asset, it must have resulted in any one of the following:

(a) Some other asset has been given up; or
(b) Obligation to pay for it has arisen; or
(c) There has been a profit, which the business owes to the proprietor; or
(d) The proprietor has contributed for the acquisition of the asset.

The reverse is also true. So the equation is –
Assets = Liabilities + Capital.
Or
Capital = Assets – Liabilities.
The above equation is called the accounting equation which is explained later on.

6. Realization Concept:
Accounting is a historical record of transactions. It records what has happened but does not record anticipated events. It means legal transfer of goods and services either in cash or on credit creating a legal obligation to pay in future. However, adverse effects of events that have already occurred are usually recorded. Thus, cash realized or a legal obligation to pay is recorded in the books.

7. Accrual Concept:
If an event has occurred, its consequence will follow. If a transaction is not settled in cash, nevertheless it is proper to record the event in the books. Thus expected future cash receipts and payments are considered in accounting. As for example; unpaid salaries and wages, prepaid rent etc. are taken into account.

8. Matching Concept:
Though the business is a continuous affair, its continuity is artificially split into several accounting years for determining the periodical results. Thus, expenses of a particular period are compared with the revenues of that period to determine the net operational results of that accounting period. As for example; rent for twelve months whether paid or not is matched against the revenues earned during these twelve months.

In addition to these, legal position of transactions should be considered while recording such transactions e.g. Hire Purchase transactions.

CHECK YOUR PROGRESS


Q1. Write down the meaning of Accounting Principle.

Q2. What do you mean by GAAP?

Q3. What are the two types of Accounting principles?

Q4. Write the different Accounting Concepts?

MEANING OF ACCOUNTING STANDARD


The word ‘standard’ in accounting literature is of a recent origin. Standard is generally known as principle till 1969. At the end of 1969, the British introduced the term ‘Standard’ when they set up their ‘Accounting Standard Streering Committee’ and the Americans adopted the same term ‘Standard’ in 1973 by creating ‘Financial Accounting Standards Board.’ In India, the term became popular when the Institute of Chartered Accountants of India formed ‘Accounting Standard Board’ (ASB) in April, 1977.


Definition of accounting standard


The term ‘Accounting Standards’ may be defined as written statements issued from time to time by the institutions of accounting profession.

Littleton defines standards as follows: “A standard is an agreed upon criteria of what is proper practice in a given situation; a basis for comparison and judgment; a point of departure when variation is justifiable by the circumstances and reported as such. Standards are not designed to confine practice within the rigid limits but rather to serve as guide-posts to truth, honesty and fair dealing. Again they are not accidental but intentional in origin; they are expected to be expressive of the deliberately chosen policies of the highest types of business and the most experienced accountants. They direct a high but attainable level of performance, without precluding justifiable departures and variations in the procedures employed.”

According to Bromwich, accounting standards are uniform rules for financial reporting. They standard sellers seek to prescribe a preferred accounting treatment from the available set of methods for treating one or more accounting problems. They deal with financial measurements and disclosures used in financial statements. They draw the boundaries within which acceptable conduct lies. They reflect society’s changing corporate behaviour. They are vehicles in social and political monitoring and control of the enterprise. They provide flexible and realistic working guidelines for accounting practitioners.

Thus Accounting Standards (AS) is standardized accounting practices formulated by a recognized professional body such as Accounting Standard Board (ASB) in India. These standards are observed by the accountants in order to harmonize the operating results and to bring about uniformity in accounting practices.


Benefits of Accounting Standards


Accounting standards are now a days regarded as a major component in the framework of accounting and reporting practices. They help the accountants to apply these practices as the most suitable for some give circumstance. Following are the benefits:

1. Credibility of Financial Statements:
Standards when used in accounting make the financial statements fair to all the groups of users. They imply that among the various alternatives, the most suitable one has been adopted in a given situation. Standards make the statements conform to a particular model for the sake of comparability. Thus they improve the credibility and reliability of financial statements.

2. Benefits to Accountants and Auditors:
Standards provide guidelines for accounts and auditors in the performance of their duties. They can resort to these standards as a shield against any prosecution for alleged lapse of duties such as discovered frauds, etc. Moreover, they are used as controlling techniques by the chartered institutes for the functioning of their members.

3. Measuring Managerial Accountability:
Standards facilitate in determining specific corporate accountability and regulation of the company. They measure managerial skill and improve the profitability of a company. They ensure consistency and comparability of financial statements. They reduce the manipulation of accounts.

4. Reforming Accounting Theory and Practice:
Standards help in the development of accounting theories and in the improvement of existing practices by rectifying their defects where there is any. They make us aware of alternative possibilities for defining and measuring financial performance.

RECOGNITION AND MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENT

The end product of the financial accounting process is set reports that are called ‘financial statements’. The following generally constitute the financial statements:



(1) Profit and Loss A/c.
(2) Balance Sheet.
(3) Statement of changes in Financial Position (SCFP)

Profit and Loss account, also known as income statement, presents the results of operation of a business enterprise for a period of time. This statement shows net profit or net income of an entity for a period of time. Net profit or income is the difference between revenue and expenses. The profit and loss account indicates how successful a business enterprise has been in achieving its profit goal for a given time span. It also gives the sources and amounts of revenue earned and the different types and amounts of expenses. Net profit indicates an enterprise’s accomplishments (expenses) in pursuing its operating activities. When expenses exceed revenue for a period, a business enterprise incurs a net loss.

Balance Sheet shows the financial position of a business on a certain date. For this reason, it is often called the ‘statement of financial position’. Balance sheet indicates the inventing and financial activities of a business enterprise at a point of time and shows a firm’s assets, liabilities, and equity capital usually at the close of the last day of a month or a year.

Assets are economic resources and provide future benefits to a firm such as cash, inventories, debtors, building, plant, patients, goodwill etc. Liabilities are creditors or outsider’s claims on the assets of a business enterprise such as creditors, accounts payable, salaries payable, income tax payable, debentures. Liabilities include shareholder’s equity as well as which are in the form of ordinary shares, preference shares, and retained earnings. Shareholder’s equity is the shareholder’s or owner’s claim on the asset of a firm. The shareholders have claims against the assets of a company only after all creditors’ claims have been met.

A statement of changes in financial position (SCFP) shows where the financial resources (funds) have come from (sources) and where they have gone (uses). SCFP is generally prepared on working capital basis and cash basis. Working capital – based SCFP explains increase or decrease in working capital for a specified period of time. It reports:

(a) Amount of changes in working capital associated with the operating activities of a firm.
(b) Long term financing or other sources that cause an increase in the working capital
(c) Long term investment activities or other uses that causes a reduction in the working capital.

The cash basis SCFP is popularly known as the ‘Cash Flow Statement’. Cash is considered as the business lubricant. This statement summarizes the flow of cash in and out of the firm over a period of time. It focuses on various items which bring out changes in the cash balance between two balance sheet dates. A cash flow statement covers all items which increase or decrease the cash of a business enterprise. In USA, a statement of cash flows is legally required to be prepared by US companies along with Income Statement and Balance Sheet.

Among the above statements, balance sheet is considered as a status or stock report and the other two statements – Income Statements and Statement of changes in Financial Position – are known as flow reports. Balance sheets, as shock reports, show the information about the resources of an organization at a specified moment of time. The income statement and statement of changes in financial position (working capital and cash basis) as the flow reports, show the activities of the enterprises for a period of time, say for a year, half-year, or a quarter summarizes the information provided by the financial statements.



Fig 1.3 : Information provided by the Financial Statements



LET US SUM UP

We have learnt the following things in the unit.

The objective of accounting are:
  • To record all the transactions in monetary units and
  • To report them to its users in useful manner in the form of financial statements.
Accounting is both science and art
The characteristics of accounting are:
  • Identification of financial events
  • Recording of business transactions
  • Classifying the business transactions
  • Summarizing the information
  • Recording in term of money
  • Interpretation of result
The functions of accounting are
  • To keep systematic record of business transactions
  • To ascertain the result of operation
  • To provide information to various parties
  • To ascertain the financial position of the business
Accounting Principles are those rules of conduct or procedure which are adopted by the accountants universally for recording and reporting of financial data.
Generally Accepted Accounting Principles (GAAP) is a guide to the accounting profession in the choice of accounting techniques for the purpose of recording, preparing and presenting the financial statements.
Accounting principles were classified into two categories:

The following are the various concept of accounting are:
  • Entity Concept
  • Money Measurement Concept
  • Cost Concept
  • Going Concern Concept
  • Dual Aspect Concept
  • Realization Concept
  • Accrual Concept
  • Matching Concept


Financial statements generally constitute the following

ANSWERS TO CHECK YOUR PROGRESS

 
 

CHECK YOUR PROGRESS: 1

1. Accounting is the measurement, statement or provision of assurance about financial information primarily used by managers, investors, tax authorities and other decision makers to make resource allocation decisions within companies, organizations, and public agencies.

2. a) Accounting is an art b) Identification of financial events b) Recording of business transactions c) Classifying the business transactions d) Summarizing the information e) Recording in terms of money f) Interpretation of the results

3. a) To keep systematic record of business transactions b) To ascertain the result of operation c) To ascertain the financial position of the business d) To provide information to various parties

4. a) Balance Sheet b) Business transactions c) Money d) Recording of money.

 

CHECK YOUR PROGRESS: 2

1. ‘Accounting Principles’ may be defined as those rules of conduct or procedure which are adopted by the accountants universally for recording and reporting of financial data.

2. Generally Accepted Accounting Principles (GAAP) is a guide to the accounting profession in the choice of accounting techniques for the purpose of recording, preparing and presenting the financial statements.

3. (a) Accounting Concepts; and (b) Accounting Conventions

4. a) Entity Concept Money b) Measurement Concept c) Cost Concept d) Going Concern Concept e) Dual Aspect Concept f) Realization Concept g) Accrual Concept h) Matching Concept


FURTHER READING


1. Financial Accounting, Ashis Bhattacharya, Prentice hall of India Pvt. Ltd, New Delhi.

2. Financial Accounting, S. N. Maheshwari, Vikash Publishing House Pvt. Ltd., New Delhi.

3. Theory and Practice of Financial Accounting, B. B Dam and H C Gautam, Capital Publishing Company, Guwahati

4. Advance Accountancy, R. L. Gupta and M. Radhaswamy, Sultan Chand & Sons, New Delhi.

5. Jain & Narang, Accounting Theory and Management Accounting, Kalayani Publishers.



POSSIBLE QUESTIONS


Q1. Define Accounting and the scope of accounting.

Q2. Briefly explain the functions of Accounting.

Q3. What do you mean by ‘Accounting Concepts’?

Q4. What are accounting conventions? Explain them?

Q5. Explain briefly the underlying principles:-

a) A business unit is normally considered as having an indefinite life. Discuss.
b) Recognize all losses, anticipate no gain.

Q6. Mention the advantages and disadvantages of Money-Measurement Concept.

Q7. What are the golden rules of accounting?

Q8. Explain in details as how recognition and measure measurement of the elements of Financial Statements take place