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Note for Accounting Process and Principles - APP By Raghav Talwar

  • Accounting Process and Principles - APP
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An accounting process is a complete sequence of accounting procedures which are repeated in the same order during each accounting period. Therefore, accounting process involves the following steps : i) Identification of Transaction : In accounting, only financial transactions are recorded. A financial transaction is an event which can be expressed in terms of money and which brings change in the financial position of a business enterprise. Example 1.Placed an order with Sen & Co. for goods for Rs. 5,000. It is not a transaction, because it does not change the financial position of the business. 2.Opened a Bank account by depositing Rs. 4,000. It is a transaction, because it changes the financial position of the business. Bank balance will increase by Rs. 4,000 and cash balance will decrease by Rs. 4,000 2. Recording the transaction : Journal is the first book of original entry in which all transactions are recorded event-wise and date-wise and presents a historical record of all monetary transactions. Journal may further be divided into subjournals as well. 3.Classifying : Accounting is the art of classifying business transactions. Classification means statement setting out for a period where all the similar transactions relating to a person, a thing, expense, or any other subject are grouped together under appropriate heads of accounts. 4.Summarising : Summarising is the art of making the activities of the business enterprise as classified in the ledger for the use of management or other user groups i.e. sundry debtors, sundry creditors etc. Summarisation helps in the preparation of Profit and Loss Account and Balance sheet for a particular financial year. 5.Analysis and Interpretation : The financial information or data is recorded in the books of account must further be analysed and interpreted so to draw meaningful conclusions. Thus, analysis of accounting information will help the management to assess in the performance of business operation and forming future plans also. 6.Presentation or reporting of financial information : The end users of accounting statements must be benefited from analysis and interpretation of data as some of them are the "share holders" and other one the "stake holders". Comparison of past and present statements and reports, use of ratios and trend analysis are the different tools of analysis and interpretation Classification of Accounts 1. Personal Accounts : Accounts which are related to individuals, firms, companies, co-operative societies, banks, financial institutions are known as personal accounts. The personal accounts may further be classified into:

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(i) Natural Personal Accounts : Accounts of individuals (natural persons) such as Akhils' A/c, Rajesh's A/c, Sohan's A/c are natural personal accounts. (ii) Artificial Personal Accounts : Accounts of firms, companies, banks, financial institutions such as Reliance Industries Ltd., Lions Club, M/s Sham & Sons, Punjab National Bank, National College are artificial personal accounts. iii) Representative Personal Accounts : The accounts recording transactions relating to limited expenses and incomes are classified as nominal accounts. But in certain cases (due to the matching concept of accounting) the amount on a particular date, is payable to the individuals or recoverable from individuals. Such amount (i) relates to the particular head of expenditure or income and (ii) represents persons to whom it is payable or from whom it is recoverable. Such accounts are classified as representative personal account e.g., Wages outstanding account, Pre-paid insurance account etc. 2. Real Accounts : Real accounts are the accounts related to assets/properties. These may be classified into tangible real account and intangible real account. The accounts relating to tangible assets (which can be touched, purchased and sold) such as building, plant, machinery, cash, furniture etc. are classified as tangible real accounts. Intangible real accounts (which do not have physical shape) are the accounts related to intangible assets such as goodwill, trademarks, copyrights, patents etc. 3. Nominal Accounts : The accounts relating to income, expenses, losses and gains are classified as nominal accounts. For example Wages Account, Rent Account, Interest Account, Salary Account, Bad Debts Accounts, Purchases; Account etc. fall in the category of nominal accounts. RULES OF DEBIT AND CREDIT Basically, debit means to enter an amount to the left side of an account and credit means to enter an amount to the right side of an account. In the abbreviated form Dr. stands for debit and Cr. stands for credit. Both debit and credit may represent either increase or decrease depending upon the nature of an account. The Rules for Debit and Credit are given below : Types of Accounts Rules for Debit Rules for Credit (a) For Personal Accounts Debit the receiver Credit the giver (b) For Real Accounts Debit what comes in Credit what goes out (c) For Nominal Accounts Debit all expenses Credit all incomes and and losses gains

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Opening Entry A journal entry by means of which the balances of various assets, liabilities and capital appearing in the balance sheet of previous accounting period are brought forward in the books of the current accounting period. While passing an opening entry, all assets accounts (individually) are debited and all liabilities accounts (individually) are credited. Excess of assets over liabilities) is credited to Proprietor's Capital Account. Excess of credit balance is debited to goodwill account • On Ist April 2006, Singh's assets and liabilities stood as follows : Assets : Cash Rs. 6,000; Bank Rs. 17,000; Stock Rs. 3,000; Bills Receivable Rs.7,000; Debtors Rs. 3,000; Building Rs.70,000; Investments Rs. 30,000; Furniture Rs. 4,000 Liabilities : Bills payable Rs. 5000, Creditors Rs. 9000, Ram's Loan Rs. 13000 Pass an opening Journal entry.

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Accounting Accounting has rightly been termed as the language of the business. The basic function of a language is to serve as a means of communication Accounting also serves this function. It communicates the results of business operations. Though accounting is generally associated with business but it is not only business which makes use of accounting. It is useful for the various parties who have some stake in the business viz., the proprietor, creditors, investors, Government and other agencies. For example, a housewife has to keep a record of the money received and spent by her during a particular period. She can record her receipts of money on one page of her "household diary" while payments for different items such as milk, food, clothing, house, education etc. on some other page or pages of her diary in a chronological order. Such a record will help her in knowing about : (i) The sources from which she received cash and the purposes for which it was utilised. (ii) Whether her receipts are more than her payments or vice-versa? (iii) The balance of cash in hand or deficit, if any at the end of a period.3 In case the housewife records her transactions regularly, she can collect valuable information about the nature of her receipts and payments. She can find out the total amount spent by her during a period (say a year) on different items say milk, food, education, entertainment, etc. Similarly She can find the sources of her receipts such as salary of her husband, rent from property, cash gifts from her relatives, etc. Thus, at the end of a period (say a year) she can see for herself about her financial position i.e., what she owns and what she owes. This will help her in planning her future income and expenses (or making out a budget) to a great extent. Need for accounting is more great for a person who is running a business. He must know : • What he owns? • What he owes? • Whether he has earn a profit or suffered a loss on account of running a business? (iv) What is his financial position i.e. whether he will be in a position to meet all his commitments in the near future or he is in the process of becoming a bankrupt.

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