The important users of financial statements d. Basic assumptions of financial statements e. Important terms in financial accounting Introduction: Accounting basics will introduce you to some of thefundamentalAccounting principles, concepts, and Terminology. Basically, the main purpose of Financial Accounting is to provide useful Financial information to people or groups both inside and outside of companies often called external users.
Who Uses Financial Accounting? The ultimate goal of financial accounting is to compile business transactions and other input documents like invoices and sales receipts in the form of general purpose financial statements that can be understood by external users.
The key concept here is that external users must be able to understand and use this financial information when they are making decisions about the company. They will participate in the profits and losses of the company. Participation in the losses might be limited or unlimited depending upon the type of organisation. They do not possess any ownership rights.
However, they would lend money at some interest rate. To be precise, accounting is about tracking a business. The end product of the financial accounting process is a set of reports that are called financial statements. To begin with, lets us understand some basic Accounting Terms.
Basic Accounting Terms: In order to understand the subject matter clearly, one must grasp the following common expressionsalways used in business accounting. The aim here is to enable the student to understand with theseoften used concepts before we embark on accounting procedures and rules.
The event can be measured in terms of money and changes the financialposition of a person e. Transaction could be a cashtransaction or credit transaction. When the parties settle the transaction immediately by makingpayment in cash or by cheque, it is called a cash transaction.
In credit transaction, the paymentis settled at a future date as per agreement between the parties. Profit: The excess of Revenue Income over expense is called profit. It could be calculated for eachtransaction or for business as a whole. Loss: The excess of expense over income is called loss.
It could be calculated for each transactionor for business as a whole. Asset: Asset is a resource owned by the business with the purpose of using it for generating futureprofits. Assets can be Tangible and Intangible. Tangible Assets are the Capital assets which havesome physical existence.
The capital assets whichhave no physical existence and whose value is limited by the rights and anticipated benefits thatpossession confers upon the owner are known as intangible Assets.
Liability: It is an obligation of financial nature to be settled at a future date. It represents amountof money that the business owes to the other parties. It may be in the form of cash, goods,or any other asset which the proprietor or partners of business invest in the business activity.
Frombusiness point of view, capital of owners is a liability which is to be settled only in the event of closureor transfer of the business. Hence, it is not classified as a normal liability. For corporate bodies, capitalis normally represented as share capital. Debtor : The sum total or aggregate of the amounts which the customer owe to the business forpurchasing goods on credit or services rendered or in respect of other contractual obligations, isknown as Sundry Debtors or Trade Debtors, or Trade Payable, or Book-Debts or Debtors.
In otherwords, Debtors are those persons from whom a business has to recover money on account of goodssold or service rendered on credit. Creditors are generally classified as Current Liabilities. Capital Expenditure : This represents expenditure incurred for the purpose of acquiring a fixed assetwhich is intended to be used over long term for earning profits there from. At times expenditure may be incurred forenhancing the production capacity of the machine.
This also will be a capital expenditure. Capitalexpenditure forms part of the Balance Sheet. Revenue expenditure : This represents expenditure incurred to earn revenue of the current period. The benefits of revenue expenses get exhausted in the year of the incurrence. The revenue expenditure results in reduction in profit orsurplus. It forms part of the Income statement. Business usually prepares 3 reports. A statement of financial position referred to as balance sheet 2.
Income statement 3. Statement of cash flows. In this module, we can just concentrate on the income statement and Balance sheet. Balance Sheet : It is the statement of financial position of the business entity on a particular date. It lists all assets, liabilities and capital. It is important to note that this statement exhibits the state ofaffairs of the business as on a particular date only. It describes what the business owns and whatthe business owes to outsiders this denotes liabilities and to the owners this denotes capital.
Profit and Loss Account or Income Statement : This account shows the revenue earned by thebusiness and the expenses incurred by the business to earn that revenue.
This is prepared usuallyfor a particular accounting period, which could be a month, quarter, a half year or a year. The netresult of the Profit and Loss Account will show profit earned or loss suffered by the business entity. A lot of events affect the business, like receiving cash from customers, making payment to suppliers, tax payments, buying and selling on credit etc.
Therefore, to have identical understanding of transactions, Accounting adopts the following four major measurement assumptions: a. Reporting Entity: The primary assumption here is that the Firm is different from its owners and other firms.
It has an existence of its own. Owners might come and go. But the organisation exists. Therefore, the financial statement of the firm shall show the financial position of the firm alone and does not include the financial transaction of any other individual or entity. Reporting entity is also defined by the purpose and the context of financial reporting. For e. A company might have different subsidiary or group companies; Some businesses might want to reports based on segment of business like based on type of products or Geographical segment etc.
This assumption is extremely important to understand, as the businesses go through difficult and successful periods of time. However, they will be able to meet their commitments to the stakeholders in spite of seemingly difficult position. Usually cost commitments, the assets that the firm owns and the ability of the organisation to generate revenue in the foreseeable future will determine if it is a going concern or not.
Periodicity: As we assume that the organisations continue to exist under the going concern assumption, the stake holders of the firm may want to find out the results of the operation every now and then. To satisfy this condition, firms have to report to its stake holders, on their financial performance and financial position based on an artificial time period.
This is usually a year. However, the current practices also make it mandatory to report once a quarter. Money measurement: Under this assumption, financial transactions are recorded and Financial statements are always expressed in terms of money for the ease of understanding.
If a transaction or activity cannot be measured in terms of money, such things cannot find a place in the accounting records. However, the type of unit of money i. The important assumption here is that money is a stable measure in the same way as Kg is a stable measure for weight. Employees are residual claimants of the profits of the business, i.
Who among the following would be interested in a company's financial information for the sake of resource allocation, formulation of taxation policies and investigation of corporate crimes? What does the accounting assumption 'reporting entity' mean? What does the accounting assumption 'historical cost' mean? The concept of double entry system b. The content of a Balance Sheet c.
The Accounting equation d. The effect of a transaction on the accounting equation Double Entry System: Double entry is a simple yet powerful concept each and every one of a company's transactions will result in an amount recorded into at least two of the accounts in the accounting system.
Every transaction has two fold aspects, i. Then at the end of the year, try to track what the business has earned or what the business has lost to be given to its owner John or the investor.
The first transaction that John will record for his company is his personal investment of Rs. Accounting process and principles, financial, cost and management accounting author University of Mumbai Source: University of Mumbai 4.
Cost Accounting Books: 6. Financial and Management Accounting Books: Environmental Accounting Books: Here ends our selection of free Accounting books in PDF format. We hope you liked it and already have your next book! Do you want to read about another topic? Art and Photography. Alternative Therapy. Business and Investment. Food and drinks. Mystery and Thriller. Self Improvement. Various topics. Classic Authors.
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