Dr. R.A.N.M ARTS AND SCIENCE COLLEGE�Affiliated to Bharathiar University , Accredited with “ B+” NAAC
Mrs. R.Christy Priyanka M.Com(CA)
Assistant Professor,
Department of Commerce (CA)
Course Name : Financial Accounting I
Welcome You All
INTRODUCTION:
All of you at one point of time would have visited a grocery shop or a medical shop. You might have wondered how the business person maintains the record of all the transactions done during a particular period of time say a year. You might have also thought why he or she has to maintain a record, how is it beneficial and whether it is mandatory or not? As against this, imagine the role of a business organization. They provide goods that might range from simple safety pin to fighter air crafts. Those who are in service industry provide various services such as transportation services, hospitality services, developing complex software programmes etc.
Importance of Accounting Concepts
Entity Concept/Business Entity Concept
Entity means something that has real separate existence. In other words, entity refers to status or personality. The business has separate existence from its owner or proprietor. For instance Mr. X has been conducting business under the title Ganesh Medicals for last so many years. Here in this case Mr. X and Ganesh Medicals are different from each other. The business unit is separate from its owner is the basic meaning of entity. Under this concept sole trading concern and sole proprietor are treated as two different entities. According to this concept only business transactions are recorded in the business book of accounts. Proprietor’s personal transactions are not recorded in the books of accounts e.g.: Half of the building is used for business office and other half of the building is used for the residence of the proprietor. If the total rent of the building is ` 50,000 then only ` 25,000 will be deducted as drawings from proprietor’s capital.
Money Measurement Concept
There is a need to express transactions in common unit of measurement, Every transaction is recorded in terms of money. In India all the accountants use only Indian currency i.e., ‘Rupee’ (`) Because of this concept only monetary items are recorded. In accounting, everything is recorded in terms of money. Events or transactions, which cannot be expressed in terms of money, are not recorded in the books of accounts, even if they are very important or useful for the business. Purchase and sale of goods, payment of expenses and receipt of income are monetary transactions which find place in accounting. Death of executive, resignation of a manager are the events which cannot be expressed in money. Thus, they are not recorded in the books of accounts. E.g., A businessman owns following properties; Land 2000 Sq. Mtrs. Cost ` 5,00,000, Building 40 Rooms, Cost ` 9,00,000, Raw Material 8 Tonnes, Cost ` 4,00,000 Here total assets will be recorded by common unit of money measurement and will be valued at ` 18,00,000 in the books of accounts.
This concept does not recognise the realisable value, the replacement value or the real worth of an asset. Thus, as per cost concept. (a) An asset is ordinarily recorded at the price paid to acquired (got/purchased) it i.e. At its cost, and (b) This cost is the basis for all subsequent accounting for the asset. For Example: If a plot of land is purchased for ` 1,00,000 &It is recorded in the books at ` 1,00,000. In case market value goes to ` 2,00,000 or ` 60,000 it will not be considered.
Cost Concept
Going Concern Concept
It is the basic assumption that business will continue for a quite long time, it will go on and on and will not be closed down or stopped for a quite long time. Business is not to be closed at its early stage but should give a long life. This principle helps may investors to invest, many suppliers to give credit, many workers or employees to give services. e.g. A stall for marketing of any product or introduction of new product of any business has to be closed immediately after the exhibition is over. But once the business is set up, it continues for a long time.
Realisation Concept
Income is recorded only when it is realized i.e. either it is received or earned. Revenues are recorded only when sale are affected or the services are rendered. Sales revenues are considered as recognized when sales are effected during the accounting period irrespective of the fact whether cash is received or not.
e.g. (i) A company gets an order for sale of goods ` 1,00,000/- in May 2014 goods of only ` 60,000/- are sold and delivered in June 2014. Cash is received for ` 60,000/- in Sept., 2014. As per the principle of realisation, sale is to be recorded in June 2014.
Accrual Concept Dual Concept
It implies recording of revenues (Incomes) and expenses of a particular accounting period, whether they are received or paid in cash or not. Income is recorded when it accrues (earned) and expenses are recorded when they accrue (become payable) All expenses and revenues related to the accounting period are to be considered irrespective of the fact, the revenues (Incomes) are received in cash or not or expenses are paid in cash or not. Outstanding expenses & outstanding incomes are entered in the books of Account due to accrual concept. e.g. A company invested ` 2,00,000 with a bank for one year on 1st July, 2009, Bank has to pay interest at 10% p.a. on it maturity i.e. 30th June, 2010. As per principal of accrual Interest of 6 months is ` 10,000 to be shown in income statement as Interest receivable during financial year 1/1/2009 to 31/12/2009.
Dual Aspect Concept
Every business transaction has two effects and involves exchange of benefits. Benefit received and benefit given both the aspects should be recorded in the books. The system which records such dual aspects in the books is known as Double Entry System. This principle also considered as the concept of debit & credit. The account where the benefit comes in is debited and the account where benefit goes out is credited. e.g.: A proprietor invested ` 1,00,000 into the business. At one side business gets asset (Cash) ` 1,00,000/- and the other side business owes ` 1,00,000/- as capital to the proprietor. Thus, all the debit in the ledger will be equal to all the credits.
Revenue Recognition Principle
This principle is mainly concerned with the revenue, being recognised in the Income Statement of an organization. Revenue is the gross inflow of cash receivables or other considerations arising in the course of ordinary activities. e.g. Sale of goods, rendering of services and use of resources by other, yielding interest, royalties and dividends. It excludes the amount collected on behalf of third parties such as certain taxes. In an agency relationship the revenue is the amount of commission and not the gross inflow of cash receivable or other consideration. Revenue is recognized in the period in which it is earned irrespective of the fact whether it is received or not received during that period.
Matching Concept
This concept is very important for determination of profit or loss correctly. According to this concept, the profit of the business is calculated by matching total revenue earned during the year with total expenses incurred during the same period. The difference between the two represents profit or loss. Excess of revenue over expenses is profit while Excess of expenses over revenue is a loss.
Following points should be considered
Accounting Period Concept
A business organisation is a going concern. It has continuous life. The correct results cannot be ascertained unless the business is closed down. The proprietor cannot wait indefinitely till the closure of business to know the financial results. Hence, the life span of an organisation is divided into the periods of 12 months which is known as accounting year or accounting period. It is also known as fiscal or financial year. It is essential to measure financial health of an organisation periodically to enable the stakeholders to take right decision. Hence, financial results are ascertained every year. All the organisations therefore, prepare financial statements every year.
Objective Evidence Concept
According to this concept all accounting transactions must be supported by proper documentary (paper) evidence. This document includes bills, contracts, pass book, copy of receipt, vouchers etc. This documentary evidence helps the auditor (C.A.) to check the entries in the books of account with their supporting papers. Thus, for each and every entry in the books of account there should be documentary evidence. Similarly, for each and every documentary evidence of monetary nature there should be entry in the books of account.
Methods Of Depreciation
Straight Line Method (or) Original Cost Method (or) Fixed Installment Method:
Under this method a fixed percentage is calculated on original cost and written off as depreciation every year during the life time of the assts.
Depreciation Amount = Original cost – Scrap value
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No. of years or Life of the assets
Depreciation Rate = Depreciation Amount
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Cost of the Assets.
= Answer X 100
Diminishing balance method (or) Reducing balance method (or) Written downvalue method
Under this method depreciation is charged at fixed rate on the reducing balance (cost depreciation) every year.
Annuity method
Under this system the amount of total depreciation is determined by adding the cost of the asset and interest there on at an expected rate. The annual amount of the depreciation is determined with the help of annuity table.
Depreciation fund method:
Under this system, the amount written off as depreciation should be debit aside and invested in government securities. The securities accumulate. When the life of the asset expires, the securities are sold and a new asset is purchased with the help of sale proceeds. So, this system incorporates the advantages of deprecating the asset as well as accumulating the necessary amount for its replacement.
Insurance policy method:
Under this method the business takes a policy form an insurance company. The objective is to replace the asset when it is workout. Every year premium is paid (equal to the amount of depreciation) to the insurance company. On the date of maturity, the insured sum will be received from the insurance company, with this sum, new asset will be purchased.
Revaluation method:
According to the method assets are revalued at the end of each year. The difference between the past estimated (as per the past balance sheet) and at the present estimated value represents depreciation. It is followed in the case of small items such as loose tools etc.,
Depletion method:
This method is applied in recording the extraction of natural resources. It is used in case of mines, quarries etc., where an estimates of total quantity of output likely to be calculated. Illustration: It a mine is purchased for Rs. 2,00,000 and it’s estimated that quantity taken from the mine is 50,000 tonnes. Cost of the mine Depreciation = Total quantity 2,00,000 Depreciation = 50,000 = 4
Sum of years digit method:
In this method, the amount of depreciation goes no decreasing in the future years. The rate of depreciation is determined by the fraction, where the denominator (it does not change) is the sum of the digits representing the life of the asset and the numerators are individual digits used in the life of the asset taken in the reverse order.
Machine hour method:
This method taken into consideration the life time of the asset in terms of machine hours for the purpose of calculating the amount of depreciation.
Depreciation per service hour Cost of the asset – Scrap value = No. of hours
Thankyou