Professional Documents
Culture Documents
Inception of Business
Factors affecting selection of the form of business firm/ Organization: Risk appetite of the owner
Scale of operation
Amount of capital Owners desire for control
It carries out some economic activity for profit- making purpose. Economic Activity Money Centered, Done with money and done for money to earn money.
Different Activities :
Trading, Manufacturing, and Service (Banking, Insurance, Transportation etc.)
Sole Enterprise
Unlimited liability if business property is not sufficient to repay the external liabilities of business , the personal property can be utilized to pay off the business liabilities.
Partnership
A large number of contributors who contribute towards the capital for business purpose. The capital contribution is in the form of shares. Subject to the provision of Companies Act Separation of Ownership and Management The owners/shareholders are not involved directly in the management of a company Appoint a board of directors responsible for management of the company.
Promoted by 2 promoters Can not have more than 50 shareholders Can not issue shares/ debentures through public issue Can raise the capital by issuing the shares/ debentures through private placements or rights issues only These shares are not freely transferable
Promoted by seven promoters Can raise the capital by issuing securities shares and debentures through public issue.
Share is the smallest unit in which the total capital of a company is divided into. Can commence business only after obtaining a Letter of Commencement of business from ROC
Chairman/Managing Director
President/ Vice President/ General Manager Middle level Management(Zonal managers/ Area managers) Executive Level (Managers/ Executives/ supervisors)
Separation of Ownership and management Necessity of apprising the owners about the financial performance of company.
It is mandatory to publish financial statements in the form of annual report every year. Annual Report To communicate the financial performance as well as policies and strategies of the company.
Annual Report discloses a host of information about the company, which includes the following:
Companys Vision Statement - Chairmans Speech and Report - Auditors Report - Directors Report - Management Discussion and Analysis - Abstract of Audited Financial Statements - Standalone as well as Consolidated Financial Statements - Accounting Policies - Corporate Governance Report - Segment Reporting
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Annual report is considered to be a multi utility document Equity shareholders get apprised about the profitability position Lenders/ Debenture holders come to know about the long term solvency of the business entity Short term creditors/ suppliers understand about the liquidity position of the business Employees also get an idea about the financial health and policies as well as the future course of action of the company.
According to Indian Accounting Standard , Complete set of Financial statements should include:
A Balance Sheet as at the end of the period A Statement of Profit and Loss for the period A Statement of Cash Flows for the period Notes comprising of significant accounting policies A balance sheet as at the beginning of the year.
Introduction to Accounting
Necessity of Accounting:
Assess the present position or the results of business i.e. profit or loss. Represent the financial stability of the business stating the position of its assets and liabilities.
Decision Makers
Management:
Finance Production Marketing Human Resource Information System Those who have Direct Financial Interest: Investors Creditors
Those who have Indirect Financial Interest: Tax Authorities Government Unions Customers Economic Planners
Branches of Accounting
Financial Accounting:
Management Accounting:
The methods/system which help the management to predict the future and in formulating future policies. It ensures evaluation and analytical interpretation of accounting data.
Cost Accounting:
It is the process of determining and accumulating the cost of product or activity. It is a process of accounting for the incurrence and the control of cost. It also covers classification, analysis, and interpretation of cost.
Bases of Accounting:
Accrual system of accounting focuses on both the cash transaction and credit transaction, including accruals. Entering the monetary transaction in the elementary books of accounts. Both cash and credit transactions are recorded in the elementary books of accounts.
Preparation of Trial Balance to check the mathematical accuracy of the ledger accounts.
1. Type of transaction
Both cash and credit transactions are recorded in the books of accounts.
2. Completeness of Records
3. Suitability
Does not suit in all type Suits in every type of of business organizations. business organizations.
Shareholders are interested to know about the financial performance of the organization at a regular interval. Every business enterprise finalizes its books of accounts at a regular interval of twelve months..
To maintain uniformity and consistency in preparing and maintaining books of accounts, certain rules or principles have been evolved. These rules/principles are classified as concepts and conventions. These are foundations of preparing and maintaining accounting records.
Accounting Concepts
Business Entity, Money Measurement, Going Concern, Accounting Period, Cost Concept, Duality Aspect concept, Realization Concept, Accrual Concept and Matching Concept.
Business Entity
The owner of the business is always separated from business/ enterprise Business is treated as a separate entity
All business records reports are developed separately and must be apart from their owner.
Shareholders are not liable for the enterprises debt beyond the capital. Shareholders may transfer their shares without dissolving the business.
Money Measurement
All transactions happening during an accounting period Change in financial position of a company
Going Concern
A business firm will continue to carry on its activities for an indefinite period of time. A firm is said to be going concern when there is neither the intention nor necessary to wind up its affairs. Since business is to continue, fixed assets will be shown at cost less depreciation basis.
The going concern concept also implies that existing liabilities will be paid at maturity.
Cost Concept
An asset will be recorded in the books at a cost i.e. a price paid or to be paid for it. The acquisition cost may be greater or less than the fair market price. The assets are used in producing goods or services , its cost expires Depreciation. The cost of an asset is therefore allocated over the estimated economic life of the asset.
For every debit, there is a credit". Every transaction should have two sided effect to the extent of same amount.
For example, if A starts a business with a capital of `10,000. On the one hand the business has assets of ` 10,000 while on the other hand the business has to pay to the proprietor a sum of ` 10,000 which is taken as proprietor's capital.
Realization Concept
Emphasizes that profit should be considered only when realized. At what stage profit should be deemed to have accrued? - at the time of receiving the order or - at the time of execution of the order or - at the time of receiving the cash? The revenue is earned only when the goods are transferred. It means that profit is deemed to have accrued when possession of goods passes to the buyer, viz., when sales are made.
Accrual Concept
Accrual is something that becomes due especially an amount of money that is yet to be paid or received at the end of the accounting period. Revenues are recognized when they become receivable though cash is received or not received The expenses are recognized when they become payable though cash is paid or not paid.
Matching Concept
Convention of Disclosure:
The disclosure of all significant information to the reader. disclosure does not imply that all information that any one could desire is to be included in accounting statements.
Convention of Materiality:
It refers to the relative importance of an item or event. Events or items having a significant bearing are recorded . Accounting will be not be unnecessarily over burden with minute details. No formula in making a distinction between material and immaterial events. It is a matter of judgment and it is left to the accountant for taking a decision.
Convention of Consistency:
Accounting practices should remain uncharged from one period to another. E.g. if depreciation is charged on fixed assets as per reducing balance method, it is to be followed every year.
Convention of Conservatism:
Uncertainties and risks inherent in business transactions should be given a proper consideration. The possibility of loss, consider at the earliest and a prospect of profit, ignored up to the time it doesnt materialize. Follow the rule 'anticipate no profit but provide for all possible losses'.
E.g. the inventory is valued 'at cost or market price whichever is less. In case market price has gone down then provide for the 'anticipated loss' but if the market price has gone up then ignore the 'anticipated profits.'
Process of Accounting
Types of Accounts
Natural
person Account
Institution
Representative Person Account
Capital Account,
Tangible
and felt.
and felt.
E.g. Goodwill, Trademarks and Patents
Personal account Debit the receiver Credit the giver Real account Debit what comes in Credit what goes out Nominal account Debit all expenses and losses Credit all incomes and gains
Account to be Account to be debited credited Cash Goods Furniture Capital Cash Cash
Goods Cash
K Goods
Real Real
Personal Real
Cash
K advertisement
Goods
Goods Cash
Account to be Account to be debited credited Salaries Wages Rent Cash Cash Cash
Purchased computer
Proprietors house rent paid Carriage paid
Computer Cash
Drawings Cash Carriage Cash
Real Real
Personal Real Nominal Real
Computer
Drawings Carriage
Cash
Cash Cash
Machinery Mr. B
Real Personal
Machinery
Mr. B
Journal
Types of Journals
Cash book
Purchase Book
Sales Book Purchase Return Book Sales Return Book Bills Receivable Book/ Debtors Bills Payable Book/ Creditors
Format of Journal
Date Particulars L/F Amount Amount Debit Credit Rs. Rs.
Dr. 1,00,000 1,00,000
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