Professional Documents
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Accounting is the process of identifying, recording, classifying, summarizing, analyzing the business transactions and communicating financial information to users. Accounting is a service-based profession that provides reliable and relevant financial information useful in making decisions.
i) to maintain accounting records. ii) to calculate the result of operations. iii) to ascertain the financial position. iv) to communicate the information to users
Identifying Recording
Input
Process
Identifying Recording Classifying Summarizing Analyzing Interpreting Communicating
Output
Information to users
Every identified business transaction is recorded in the books of account following THREE GOLDEN PRINCIPLES of Accounting.
Golden Principles of Accounting
1)
2)
: Debit all expenditure and losses and credit all income and gains
Accounting Assumptions
1. Accounting Entity: business is treated as a unit or entity apart from its owners, creditors and others.
2. Money Measurement; business transactions and events which are of financial nature are recorded.
3. Accounting Period: The users of financial statements need periodical reports to know the operational result and the financial position of the business concern. Hence it becomes necessary to close the accounts at regular intervals
4. Going Concern : As per this assumption, the business will exist for a long period and transactions are recorded from this point of view. There is neither the intention nor the necessity to wind up the business in the foreseeable Future.
Accounting Concepts
1. Dual Aspect: Dual aspect principle is the basis for Double Entry System of book-keeping. 2. Revenue Realization: According to this concept, revenue is considered as the income earned on the date when it is realized. Unearned or unrealized revenue should not be taken into account. 3. Historical Cost: Under this concept, assets are recorded at the price paid to acquire them. For example, if a piece of land is purchased for $5,00,000 and its market value is $.8,00,000 at the time of preparing final accounts the land value is recorded only for $.5,00,000. Thus, the balance sheet does not indicate the price at which the asset could be sold for. 4. Matching: Matching the revenues earned during an accounting period with the cost associated with the period to ascertain the result of the business. 5. Full Disclosure: Accounting statements should disclose fully and completely all the significant information. 6. Verifiable and objective evidence :This principle requires that each recorded business transactions in the books of accounts should have an adequate evidence to support it.
Income : All revenues of a business or an Establishment (ex: Sales, fees, Investment income, etc)
Expenses : All expenditures of a business or an establishment (ex: purchases, Admin exp, selling exp. etc) Assets: are the economic resources, a business uses to accomplish its main goal increasing the owners' wealth. (Fixed Assets, Building, Plant & Machinery etc. Current Assets: cash, trade debtors, Stock etc.)
Liabilities: are debts and obligations of a company (Loans, trade creditors, bills Payable etc.)
Capital: is what the owner brings in as Initial Investment
Investors (i.e., owners), who use accounting information to make buy, sell or keep decisions related to shares, bonds, etc. Creditors (i.e., suppliers, banks), who utilize accounting information to make lending decisions. Taxing authorities, who need accounting information to determine a company's tax liabilities. Customers, who may need accounting information to decide which products to buy from which companies.
A company's senior and middle management, who use accounting information to run the business. Employees who use accounting information to determine a company's profitability and profit sharing.
Accounting
Financial Accounting
Cost Accounting
Managerial Accounting
Investors
Creditors
Management
Employees
Customers
Taxing Authorities
The central means of external financial reporting is a set of financial statements. Following are the generalpurpose financial statements:
Income Statement Balance Sheet
An income statement presents revenues and expenses and resulting net income or net loss for a period of time. An income statement is also called a Statement of Operations, an Earnings Statement, or a Profit and Loss Statement (P/L). A balance sheet presents assets, liabilities and owners' equity on a specific date. A balance sheet is also called a Statement of Financial Position. A statement of changes in equity shows all changes in owners' equity for a period of time. This statement is also called an Owners' Equity Statement. A cash flow statement summarizes information about cash outflows (payments) and inflows (receipts).
Notes to the financial statements are another important aspect of reporting. Notes can be found in most financial statements and are required to be included in the financial statements of publicly traded companies. Notes include, among other things, additional information about the financial condition and performance of a company. The information presented in the notes may differ greatly from one company to another.
All financial statements consist of classes or categories known as elements. There are ten elements:
assets liabilities equity contributed capital Revenue Expenses Distributions net income Gains
losses
Transactions
Journal
Trading account
Trial Balance
Ledger
To promote world-wide uniformity in published accounts, the International Accounting Standards Committee (IASC) has been set up in June 1973 with nine nations as founder members. The purpose of this committee is to formulate and publish in public interest, standards to be observed in the presentation of audited financial statements and to promote their world-wide acceptance and observance. IASC exist to reduce the differences between different countries accounting practices. This process of harmonization will make it easier for the users and preparers of financial statement to operate across international boundaries.
In our country, the Institute of Chartered Accountants of India has constituted Accounting Standard Board (ASB) in 1977. The ASB has been empowered to formulate and issue accounting standards, that should be followed by all business concerns in India.
From the following Trial Balance of XYZ Trading Company, prepare trading and profit and loss account for the year ending on 31st March 2011 and the balance sheet as on the date: Trial balance as at 31/03/2011 Particulars Opening Stock (1.4.2010) Purchases Discount allowed Wages Sales Salaries Travelling expenses Commission Carriage inward Administration expenses Trade expenses Interest Building Furniture Debtors Creditors Capital Cash Total Stock as at 31 March 2011 was $6,000 Debit ($) 5,000.00 16,750.00 1,300.00 6,500.00 30,000.00 2,000.00 400.00 425.00 275.00 105.00 600.00 250.00 5,000.00 200.00 4,250.00 2,100.00 13,000.00 2,045.00 45,100.00 45,100.00 Credit ($)
Indian Financial/Accounting year - April to March ICAI - Prime Accounting body of India Accounts are required to be maintained as per Accounting Standards Manual book keeping system is widely practiced and followed in India in most of the small and medium sized business entities. VAT is applicable for goods Compulsory audit of accounts by a certified Chartered Accountant under section 44AB OF Indian Income Tax Act For Business establishments : when annual turnover exceed Rs. 60 lakhs in prior year For Professional Service: when annual turnover exceed Rs. 15 lakhs in prior year
VAT :The standard rate of VAT is 12.5%. There are reduced rates of 4% and 1% on certain transactions. The minimum annual turnover for VAT registration is INR 500,000. VAT returns are filed on a monthly or quarterly basis with the State Governments Sales tax of 2% is imposed on transfer of goods between Indian states. Service Tax: is imposed on a defined group of services provided in India as follows: advertising services, consultancy services, banking, insurance and more. The tax imposed is 10.3% including CESS. Service tax is paid monthly/quarterly. Returns are filed each half year. India Wealth Tax The tax is imposed in India on assets specified in the law such as houses, vehicles, plots of land. Individuals and companies are liable for the tax. The tax is not imposed on productive assets or income producing assets. The tax, at the rate of 1%, is imposed only on assets with a value in excess of INR 3 million. India Dividend Distribution Tax Domestic companies paying dividends are subject to tax. The effective rate of the dividend distribution tax is 16.609%. Income Tax For Individuals, Corporate, Trusts, etc. Federal tax system Tax Assessment year April to March Filing of e tax returns yearly Slab tax rates applicable
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