Fundamentals of Accounting ~ Introduction to Accounting Traditions! Defintion:*Aecounting fe an art of recording, clesslying and summarizing in & “Significant manner nd in terms of money, transactions end events which are, in part atleast of financial character, and interpreting the result thereof.” Modern Definition: “Accounting Is the process of Identitying, measuring andl communicating {econome information to permit informed judgments and decision by users of accounts.” “Recording: All business transections of @ financial cherecter, a2 evidenced by some documents such as sales bil, purchase bil, bank pass book etc. are recorded in books of, account, ¥ Classitying: Classitietion of the recorded transactions ae to group the transactions of similar type at one place. This is performed by maintaining the ledger in which different ‘accounts like rent, salary, printing etc. are opened to which related transactions are brought to one place by posting. Summarizing: Summarization of the classified transactions in a manner useful f0 the users. It Involves the preperstion of Financiel Statements such as Income Statement, Balance Sheet, Cash flow statement. Analyzing: I means methodical classification ofthe date given in the financial statements. For example all tems related to current assets are put together in such # manner thet ‘establishes relationship between profit and loss account and balance sheet, which provide ‘basis for interpretation. Interpreting: Explaining the meaning and significance ofthe relationship so estabshed by the analysis. The accountant should interpre the financial statement in a manner useful to the users, £0 as to enable them to make meaningful judgment about profitability and fancial condition. Communicating: Transmission of summarized, analyzed and interpreted Information 0 end-user to enable them to make rational decisions. This ie dome through preparation and ‘leiribution of secounting report, which includes prof and lose account, balance sheet, ‘cash flow and adetional information.Fundamentals of Accounting ~ Introduction to Accounting ‘As an information system, counting may be viewed as under: anon | Saas oe aor Siem, a sical ‘Svea saci, > Objectives of Accounting: Systematic recording of transaction : Book keeping ‘Ascertainment of result of above recorded transactions: Profit and Loss account. ‘Ascertainment of financial position of the business: Balance Sheet Providing Information to the users for rational deciston making: Financial Results To know the solvency position: Abily to meet liabillies in short run and fong run oaeRs v ‘Meaning of Book-keeping: Book keeping is 2 part of accounting and is concemed with record keeping or ‘maintenance of books of accounting, covers folowing four actWities: 4. Idemtitying the transactions and events. 2. Measuring the identified raneactions and events ina common measuring unt 3. Recording the identified and measured transactions and events in proper books of ‘accounts, 4 Classifying the recorded transactions and events in the ledger Book Keeping ‘ecounting This process of identiying, measuring. ‘recording and clessiying the transactions. ‘Riza process of eummerizing, analyzing of the recorded transactions. Communicating the interpreted information to the interested parties. T consitutes as abase for accounting. | Ils considered as « language ofthe | business. Financial statements are prepared Ia thls process on the basis of Bookkeeping records. Financial statements de not form part of iis process. ‘Financial position ofthe business cannot be ascertained and Managerial decisions ‘cannot be taken with the hep ofthese. records as besic objective is to maintain Financial position ofthe business ‘ascertained on the basis of the accounting Teparts. Management takes decisfon on the basis of these records. systematic records. ‘has several sub-eld fke financial accounting, Management accounting ot. ‘There s no sub-feld of book-keeping Reletionship between Accounting and book keeping can be viewed dlagrammaticaly Subsfelds of Accounting: 1. Financial Accounting: Preparation of Balance-sheet and Profit and Loss account, determination of net result and forthe period and financial postion as on given det. 2. Managerial Accounting: The different ways of grouping Information and preparing reports for Planning, control and decision meking.Fundamentals of Accounting ~ Introduction to Accounting 3. Cost Aecounting: The process of accounting for cost which begins with the recording of ‘Income and expenditure or the bases om which they are calculeted and ends with the preparation of perioiea! statements and reports for ascertaining and controfing costs 4 Social Responsiifty Accounting: Concerned with accounting for social cost incurred by {the enterprise and social benetits create. 5. Human Resource Accounting: An attempt to identity, quantity and report investment made ‘In human resources of an organization > Users of Accounting Information Users of accounting information Include present and potential investors, management, employees, lenders, suppliers and other trade credtors, customers and government agencies and public Users ‘eed for Information ‘Short form To determine whether their dues willbe paid when due and whether creditors they should extend, maintain or restrict the flow of credit t firms ‘Long-term To determine whethor thei principals and interest thareof will be paid creditors when die and whether they should extend, maintain or restrict the fow oferedlt. Tvestors To judge prospacis ofan enterprise and te determine whothor thoy should buy, hold or sell the shores. Wanagement | To review firms Short term and long term solvency, Activity, Profabitty In relation to turn aver and investment ‘Employees To assess the abilty ofthe enterprise fo pay remuneration, retirement _benefits and to provide promotion opportunities. Customers To know information about continuation of firm, especially when thoy Ihave established a long term involvement with or are dependent on the frm. Government | Agencies including tax authorities need information to assess the fax | agencies ‘Mabiities and to regulate activities ofthe frm. Pablc To know functioning ofthe firm as it may make a substantial contribution o the local economy In many ways including number of ope and thei 19 local suppliers > Advantages of Accounting Accounting Faciitates in folowing ways: To comply with legal requirements ‘To ascertain Financial Performance & Position of fim. Users and management to take Decisions. Making a Comparative study. Control over assets, ‘Settlement of tax Habilties ‘Ascertainment of value of Business RRatsing of Finance for business, ‘Acts a8 Lege! evidence Limitations of Accounting: 1. Ignores the Quelitative Elemente: Since accounting ls confined to the monetary matters ‘nly, the elements ike qually of management, quality of Tabor force et. are ignored. 2. Not ree rom Blas: In many situations, accountant can choose method of depreciation, ‘method of stock valuation based on his personal jadgment. 3. Ignores Price level changes: Since financial statements are prepared on historical cost {and not on replacement value which is generally higher in case of assets, analysis of nancial statements wil not yield strictly comparable result as price level changes are not ‘considered.Fundamentals of Accounting ~ Introduction to Accounting 4. Estimated position and not rel postion: The Financial stetements are prepered on going concern basis. Hence, they report only estimated periodic results, re results can be ascertained only on the liquidation of frm. 5. Danger of window dressing: when the management decides to enter wrong fgures to ‘artiitaly inflate or deflate the figures of profi, assets end Mabilites, Profit and Loss and Balance sheet fails fo provide true and fir view ofthe financial performance and position. > Basis of Accounting: A. Accrual basis of Accounting ‘Accrual basis of accounting ls @ method of recording transactions by which Revenue, (Cost, Assets and Liabilties are recognized during the accounting period In which they 1B. Cash basis of Accounting Cash basis of accounting fe method of recording transactions by which Revenues, Cost, ‘Assets and Liabilities are recognized during the peried in which Actual recelpts and Actual ‘payments takes place ©. Hybrid basis of Accounting [tle a combination of Accrual and Cash basis of accounting. Under this method, Incomes ‘are recorded on cash basis and expenses are recorded on accrual basis. 1. Book Keeping is maint concerned with 2 Recording of Financial data 1b. Designing the systems In recording, classifying and summarizing the recorded data Interpreting the data for Internal and external users 3. None of the above 2. Accounting covers only the following activites: ‘8. Recording and clessitying '. Recording, Clessitying, Summerising end Analysing © Summarising, Analysing and Interpreting 4 Ieenttying, Measuring and Communication 3. The basle objective of accounting is {fo maintain systematic records of fnancial transactions . to ascertain tnancial performance © to ascertain nancial postion 4. allofthe above 4. Allof te folowing are functions of accounting except ‘Decision making ‘c Forecasting 2. Mensurement 4. Ledger posting 5. Users of Accounting Information includes 2. Creditors! suppliers . Customers Lenders a. Anorine above 6. Financial statements do not consider 2. Assets expressed In monetary ferme 1. Liabties expressed in monetary terms © only assets expressed in monetary terms Assets and lebliies expressed In non-monetary terms 7. Which of the following Is not a sub-flela’Branch of Accounting Cost Accounting ‘¢ Social responsibly accounting 'b. management accounting. book-keeping ANSWERS: (a 2(d 34a Aa 5a 6d 718Fundamentals of Accounting ~ Accounting Principles ACCOUNTING PRINCIPLES “TazoRy oF AccOUNTING AND RACTES ARE FOUNDED ON CONCEPIS, PANCIPLES 0 CONVENTIONS: > Accounting Principles: Accounting cnciples are body of dactrines commonly assoleted withthe theory and practices of Accounting Based on eal assumptions, simple, understandable and exlanatry to uses and followed consist. they shoul be able to reflect future prediton and inerational to users > Accounting Concepts: Tne wor Concepts mors Hea. Concepts are baie asumpton and candkion ypen which accountancy hat been aid, Une physical clence Accounting concep are result of broad consensus. The accounting concepts lay the foundation fr formulation of accountng princi. ACCOUNTING IS BASED ON VARIOUS ACCOUNTING CONCEPTS: Conse Business enterprie fs seperate Idenety apart fom its owner, Accountants should treat business as date ‘rom ts owner. vines transactone ae ecordein the Busnes: books f accounts and aus traneaton® inhi persona books of eccounts Money Measurement concent “os conceptrequies that those transactions alone that are capable of blng measured in terms of money be only tobe recorded inthe books of accounts Tansitons, even if, they affect the rete ofthe business Imateraly, ae not recorded if they are nt convertbein monetary terms eve concent ‘Accordng to ths concept, accounts shouldbe prepared ter every period and not atthe end ofthe Me of entity. Usual ths period is one calendar your fom 1 Apa of 3 year to 31” Match of the immediately “allowing yer 4. Matching concent In this concept all expenses matched with the revenue ofthat period should be taken into consideration. lo the faecal staternents ofthe organization if any revenue fs recognized then expenses related to eam that ‘ever should ela be recognized. By tis concept, tho vlue of an asst I to be determined on the bas of stork cost, nether words, atquistion cost Although there ae vious measurement bases, secountats retinal prefer thi concept inthe interest of objec 4. Reslston concept ‘ay change fn value ofan asst I tobe recorded only when the busines reabtes i. Accountants anticipate decrease a valu they count but theres lnceas in valu, they gnrelt uni realaed Dual aspect concent Twisconcep isthe core of double entry book keeping Every transaction o event has dua aspect 1. increases one Asse end decease other Aeset 2. tinereases an Asset and simultaneously nereasesUsbty 5 Itdecrenses one Asset, increases other Aset 4. tedeereases one Asset, decreases a lbiiy, h Mateainy Accotdng 19 Material prince, ll the tems having signicant econo effet onthe busines ofthe tnterrise shouldbe delored nthe franca statements and any lgniicant em which wll ot be evant te the vers need svould not be declared nthe financial statementFundamentals of Accounting ~ Accounting Principles Consors Conservatism states thatthe eccountat should not anticipate income and should rowde for all osses. The golden rule of erent eset vlutin "ost oc mathe price whichever slower” ongnated Wom tis concept, Isp acount unreslied gain tt desabieto guard asin all pose loses, 41 Prudence: Judgment bout the posse future losses ond gains 2. Neutrality: Unbiased outook Is required to Wenefy and record such possible losses as wall 5 to ‘ecude uncertain gai. 23. Fathul epresenttion of alternate vues, ‘Going concen Fundomental Accounting Assumption] “Tn ancl stetemens ae normal prepared onthe ssungton that an enterprise 3 golng concern and ‘wl ontouein operation forthe fresceable futur. Hence, ts assumed that the enterise has nlther the intention nr the necesshy of gidation or curtalng materially Rs sale of operations Consistency Fundamental Accounting ASSUNpON Wel assumed that accountng poles are consistent from one period to another. Whatever accounting patties are selected fra guen category of tansactios, they shouldbe flowed on ahorzontal bas fom ‘one acounting ered to another achieve compatbty. |. accrual (Fundamental Accounting Assumtion) Under accrual concept, the effect of tansction and ther evens are ecdgizedon mercantile baie. when they occur. Financial statements prepared on the acrual bass nfarm urs not of pat event involving the payments an recaps of cash but ao of ablations to pay cash in thefuture ado sources that represent ‘ath tobe received inthe utr ACCOUNTING CONVENTION: Emerge out of secounting proctices, commonly known 38 princes adopted by various organization over period of time, dered by usope and practice. The eccountany Bods keep changing the convention f2 Improve quality of accountng information ‘Qualitative Charactvisic of Financial Statements Understandably: emus be really understandable by vers Relevance: Information must be relevant to the decison making needs of uses Relabty: infomation rust be liable means ee om mate errand bis Comporabity User must be able to compare the fant statements ofan enteredce tough tine in cert identify trends in its fnancalpostion, performance and cah-lows. 5. Matera Information i maton ffs mistatemant could Influence the aconomie decitons of users taken onthe basis of the ancl information, 6. Falthfl Representation: Fnandal statements should represent faithfully the twansactions and other ‘vents that results in ssets, lattes and enity of the entero 7. Sobetance over form ef necessary that final transactions are accounted for and presented In accordance with thet substance and econome realty and nt rey tel legal frm. 4 Neatly The information sontined in inane statements must be autal har free om bias. 9. Prudence! Uncertainties of future events regarding business transactions ae recognized bythe dasure oftheir nature aed extent and bythe exercise of prudence in the prepration of financial statements, 10 Ful for and adequnte daclosure: The fnonclstetoments must close al the reliable and relevant Infocmaton about the business enterpis to the management and also to thelr external users fr which they re meant 11 completeness: The information nancial statements must be complete within the hounds of materiality sndeostFundamentals of Accounting ~ Accounting Principles Mca: 1 Two primary qualtatve characterises of ancl statements are Understandably and materiality ¢.Neutralty and understandably ._lowance andralaby 4 mtaenty andrea 2. Revenve rom sale of products enerally, realized inthe period in which 2. Cashiscllected ‘Products are mnuactred Bb. Salesemade ‘none of above | Personal wansactions ae distinguished from business Wansuctios of an accountng pei in accordance wth 2 acounting period principe «Meney measurement prncple Accounting entty principe a None ot tase 4 Valuation ofthe cropsat market ae isin accordance with— 2. Matching prince Cost prince 1. Revenue recognition prince Wtlone of above 5. Met yalued the inertoyon FiO basis during 2015 ad on LIFO bask during 2016. he hs Wate 23. Conservatism Cost concopt . Matenalty ‘4 Conatency 6. Mex has purchased a building for AS le but atthe end of accounting perio, the market value of bul isR.5 lacs. He eelesed the bulking at 5 as inthe financial statement, He has vile Conservatism ost concept Matera ‘Consistency 7. Subject wolved in cost concept sezoinog ent concept 1b. Moneymessurement Prudence 8. Alot these clad as fundamental accountng assumptions except— Consistency Going concem Bb. Busines erty Accrual 9. Theconcep of conservatism when apple tothe balance shoot resutsin Understatement af asete © Overstatement of capt b.Overtatement ofassets understatement of spl ANSWERS:1(b 2[b 3b 4(d 5d 6(C 7(4 8. 9aFundamentals of Accounting ~ Accounting Standards Accounting Standards > Meanina of counting Standard Accounting standord sa selected st of accountng policies or broad guidelines regarding the principles ‘and methods te chosen out of several alternatives. Standards canform to applicable lows, custom usage and business environment. So there i no universally acceptable set of standard > Objective of Accounting Standard ‘The main objective of accounting onda to harmenize the averse accountng policies and proctices «at present in use in Indi. Accounting standards standaraze diverse accounting polices with a view to: 1. Eliminate the nor-comparoilty of financial statements and thereby improving the reliably of ‘Fnancal strements 2. Providea set of standard accounting police, valuation norms and disclosure requirements Accounting standards reduce the gcéountng alternatives inthe preparation of financiol statements of different enterprises. > The adoption and aopication of accounting stander ers uniformity, comparability and qualitative Improvement inthe preparation and presentation of financial statements. > Advantage of setting Accounting tondards 1. Stondard reduces toa reasonable extent or eliminate altogether confusing variations inthe ‘counting treatments used to prepare financial statements 2. There are certain areas where important information isnot statutorily reared to be disclosed. Stondards may col for disclosure beyond thot requied by law. 3. The application of accounting standard would, toa hited extent, focftate comparison of {Foncal statements of companies sitvated in different parts ofthe werd and also of different ‘companies stvated inthe some country. However, it should be note in this respect thot tifferences inthe stitutions, traditions and legal ystems from one country to another aie rise to cifferences in accounting standards adopted indifferent counties. ‘Alternative solutions to certain accounting problems may eoch have argument to recommend them. Therefore, the choice between diferent alternative accounting treatments may become diffe. 2. There moy be trend towards rigidity and away rom flexibiey in appying the accounting standards. 3. Accounting standards cannot override the statute. The standards ore requited to be framed within che ombitofpreviting statutes, > Accounting Standards Board of Inda(ASB) Formarion of accounting Standard boord-— The institute of Chortered Accountants of no, recognizing the need to harmonize the diverse accounting policies and practices at present in use in Inka, constituted an accounting stondord Board (ASB) on April 21,1977. > Procedure for issuing Accounting Standards. Step 1 Determine the broad areas in which accounting standard need to be formuloted and the Driorty in egord to the selection thereof. Step 2 Hold a dialog with the representatives ofthe government, public sector undertakings, ‘industry and other organizations for ascertaining ther viewsFundamentals of Accounting ~ Accounting Standards se Step 32 Prepare and issue exposure draft ofthe standard for comments by members ofthe institute ‘ond public at lara. ‘step 4> Finale the draft of proposed standord after toking into consideration the comments received. ‘Step 5 Submit the final aro to counc ofthe institute Step 6> The coundl will consider the final draft and medfy the same in consultation with ASB. The Accounting Standort onthe relevant subject will be issued under the outhority of council, > Accounting Standards issued so far: ‘So, | Tite ‘Mandatory or | Effective ot from: ‘AS_| Discosure of Accounting Patcies ‘mandatory | 1.4.98 ‘AS.2__| Valuction of nventories-evsed ‘mandatory | 1.4.98 ‘AS3_| Cash flow starement-revised ‘mandatory | 1.4.2008 “AS-4_| Contingencies and events occuring afer Balance Sheet date~ | mandatory | 1.4.98 revised ‘AES_| Net profit or ss or Fe period rior period Wes ond Trandoioy | 2196 ‘changes in Accounting policies. AS6_| Depreciation Accounting —revised ‘mandotory | 4.4.95 ‘AS7_| Accounting for constuction cont oets — evsed ‘mandatory | 3.12003 ‘AS-8_| Accounting for research and develonrent withdiew ‘rd included in S26 ‘AS-9_| Revenue Recognition ‘Mandatory 114.98 "AS-I0 | Accounting for Fixed Asses ‘Mandatory | 1.4.93 AS-11| The effects of changes in Foreinn Exchange ates ‘Mandatory [14.2008 "AS-12 | Accounting for Government Grants ‘Mandetory (1.434 ‘AS-13 | Accounting for Investments ‘Mandatory | 14.95 ‘AS.14 | Accounting for Amolgamations ‘Mandatory | 1.4.98 AS-15| Employee Benefits Mandatory | 1.4.95 ‘AS-16 | Borrowing Costs ‘Mandatory | 1.42000 AS-I7 | Segment Reporting ‘Mandatory | 44.200 ‘AS-18 | Related Party Disclosure ‘Mandatory | 1.4.2001 ‘AS-19 | Leases ‘Mandatory | 1.42001 ‘A520 | Farnings per share ‘Mandatory | 1.42001 ‘AS-21 | Consolidated Financial Statements ‘Mandatory | 1.42001 ‘AS-22 | Accounting for Taxes on income ‘Mandatory | 1.42001 “AS-23 | Accounting for Investments in associates in consolidated | Mandatory | 1.42002 Financiol Statements "AS24 | Discontiuing Operations ‘Mandetory | 242000 ‘S25 | interim Financial Reporting Mandatory | 14.2002 (AS25 | Intangible Assets ‘Mandatory | 1.42003 ‘AS-27 | Financial Reporting of Interest in join vente ‘Mandatory [34.2008 ‘AS-28 | Impairment of Assets ‘Mandatory | 1.42008 ‘45.23 | Provisions, Contiogent Ubiles and Contingent Assets ‘Mandatory [44.2008 ‘AS-30| Financial instrument: Recognition & measurement Recommended | 14,2011 14,2009 ‘AS. | Fanciol instrament: Presentation Recommended | 14.2011 14.2009 “AS-32 | Flnondil instrument: Disiosure ‘Recommended | 142012 14.2009Fundamentals of Accounting ~ Accounting Standards > International Financia! Reporting Standards(FRS The IFRS foundation is an independent, not for profit private sector organization working inthe public interest having folowing objectives 1. Develop single set of high quai, understandable, affordable and alobally accepted Intemational financial reporting stondarc(lERSs) though is stondord setting body, International accounting standard board(AS®) 2. Promote the use and rigorous apolication of those standards. 5 Take account ofthe faancial reporting needs of emerging economies and small nd medium sized entities 4. Bring about convergence if national accounting standards ond IFRS thigh quafty solutions. > Advantage of IFRS: 4. Growth in International Business: As international Business and investment mutiles, ‘accountng in international dmension broods. 2. Globalization of Copital markets: Companies ae going alobal these doys ond raising Funds thr ADRs, GDRs ei IFRS helps international investor to analyze the accounts 3 Investor: Investors who wants invest outside thelr county, IFRS hes them to compare and anayze and understand the accounts. 4. Muttintional companies: Due to diversity in accounting standards from country to country, MIC firm faces lot of accountng requirement fom the countries in which they operate. Due to ‘adoption of IFRS, there would be fewer burden on ther financial reporting structure and consolidating subsidiaries in diferent countries, ‘5. Internationl Auditing Fs: These fms conserve with ther expertise in diferent countries with adoption of RS, > TERS im india ‘naa has not adapted IFRS standards, Inc has adopted indian Accounting Standards (id AS) thot ‘ore based on and substantially converged with IFRS standards as sued by the Boor. All companies, including unlisted companies, are permitted to use in AS for accounting periods ‘beginning on or fter Api 2015. Ind AS is beng phased infor listed campanies (other than those ‘on SME Exchange) and large unlisted companies in 2016 and 2017. ica: 41 Accounting Standards in dia are issued by Centro! Government Institute of Chartered Accountants of Inala b. State Gove 4. Reserve Bank of Indio 2. Accounting standards {Harmonize counting poties '._ Eliminate the non-comparabit of nancial statements Improve the reabilty of Fnancil Statements 4. Allofthe above 3. How many accounting stondords hove Been Issued by ICAI? 225 20 62 a2 4. tis essential to standardize the accounting principles and polices n order to ensure 1 Transparency b. Consistency Comparability. Allof the above 5. Allof the folowing ore lnittions of Accounting Standards except 2. The choice between different alternative ocounting treatment is dficut (There may be trend towards raiity Accounting Standards connot override the statute 4. Alloftheabove ANSWERS: 1(C 2(0 3c 4(d 5/4Fondant of Aco Aeceuting Plan se Meaning: Accounting Policies refer to specifi accounting principles and methods of applying these ‘Principles adopted by enterprise in preparation and presentation of financial statements > Examples of some ofthe ars in which diferent accourting pls re opted by enters tnd of depreciation Valuation ofnveteies ‘Valuation of vestments ‘Valuation of Fited Assets “reatnent of contingent abies ‘Treaimont of xpendtue dung constuction pore’ Conversion or tansaton of frsgn curency tems ‘Treaimeot of ooo Treatment cf rtement bona 10, Recogniton of proton ng tam contacts. > Selection of Accounting Pcie / ‘The eto consieraion govgring selector and pplication of accountng poles ae 9 unde eR Ro os ea ee ecm ronnie ; 4 a 2 i 4 ye > change in Aecounting Policies. ‘change nr Acxning Pokces snl be made in follwing conditions: 2." teqared by same sau oro captance vith Resour Standards Change wou result m more appropiate of areal statement, Nea 1. Tho aroas wherin diferntaccouring polices can be adopted are 1 Proving Depeciston Valuation of Investments 1 Vatiaton efter sat apove| 2. Aecountng Poles rferto specie accountng a Pincples Both (a ana) Bb Method of anphing those pinciles d Nane ofthe bone 3. The mar considraton govonng tho slocton and appcaton of accountng polos re 2 Pridence, conssteney and materi 1 Prudence’ going concem and mately € Atctal, Subsanco over om and matty 4 Prudente, Substance over fom and matory 4 Which accountng grin alowed in adopting accounting oly of provision of doubt Sets eDE% 8 Prudence «Substance over fom Matera 4 Alortreso, 5. Selocion efnapprepista accounting pty daciion may 1 Overstae the perfomance and hencil positon os business ety D. OversiateAunderstFundamentals of Accounting ~ Accounting Policies | Undarsttofrancial postion a business catty, ANSWERS 11d 2(¢ 3(4 41a 50Fundamentals of Accounting ~ Accounting as a Measurement Discipl se ACCOUNTING AS A MEASUREMENT DISCIPLINE Meaning of Measurement: Prof. RJ.Chamber dflned measurement as ‘Assignment of umber 19 object and events according to rules specifying the property to be measured, the scale to be used andthe dimension ofthe unit” Objects or Events to be measured: 1 Past and present objec or events can be measured with some dagres of accuracy 2. Future objects or events are only predicted but not measured 3. Aldhough decision makers noed past present and futuro information but gonorlly tho past information is communicated tothe external users Standard or Seale of Measurement: 4 Tn accounting, money i the scale of measurement. 2 Money asa measurement scale has no universal application because it takes the shape of ‘currency ruling in a country which differs from one reporting country to another reporting country. Dimension of Measurement Seale: 1. Anidea measurement scale should be stable overtime 2, Money as ascale of measurementis not stable in the dimension for comparison over time because the same quantity of money may not have the ability to buy same quantity of identical goods a different dates. Accounting asa measurement discipline A. Accounting s not exact measurement discipline because accounting measures information ‘mostly in money terms whichis a. Not astable scale Not having universal applicability Notstable in dimension or comparison over the time 2. Though measurement isan important part of accounting discipline but a set of theorems \whieh govern the measurement system such as Going Concern, Consistency and Accrual should be carefully understood fo kaow how the cogs of accounting wheal work. 3 Although quantitative information is also required in many eases but suc information is only supplementary to monetaryFundamentals of Accounting ~ Accounting as a Measurement Discipl > Valuation Principles ‘valuation Priiles Historicalcost | | CurrentCost | | Realsable valve Present Value L. Historical Cos: a. The ascets are recorded atthe amount of cash or cash equivalent paid or incurred or fair value ofthe assets atthe time of acquisition Liabilities are recorded atthe amt of proceeds received in exchange forthe obligation. 2 Current Cose- a. The asoots are recorded atthe amount of cash or cash equivalent that would have to be ppd ifthe same or am equivalent asset was acquired currently ». Liabilities are recorded at the undiscounted amount of ash or cash equivalents that ‘would be required to settle the obligation current. 4% Realizable Valu: a. Theassets are recorded acthé amount of cath or cash equivalent that could currently be ‘obtained by selling tho assots In an orderly disposal , Liabilities are recorded atthe undiscounted amount of cash or cash equivalents ‘expressed to be paid to satisty the labilties in the normal course of business. 4 Present Value: a. Anassetis recorded atthe present discounted value ofthe future net cash inflows that ‘tem is expected to gonerate in the normal course of busines. b, Liabilities are racorded atthe present discounted value of future net cash outflow s that ae expected to be raquired to settle the liabilities in the normal course of business, > Measurement and Valuation 1. Ineconomics, the value ofan object, ability or idea is the utility of economic resources to ‘he person contemplating or enjoying its use, Economists use ordinal scale to indicate ‘the level of satisfaction. 2. Inaccounting, the value ofan objec, ability or daa is always measured in terms of| ‘money. Accountants use only cardinal sales > Accounting Estimates Meaning: Tho measurement of cortain assets and liabilities is based on estimates of uncertain future events A 3 result ofthe uncertainties inherent in business activities, many financial statement items cannot be measured with precision but can only be estimated Chango in estimatos: means differences arising btwoen certain parametars estimated earlier and re-estimated during the current period or difference between earlier estimates and actual result during the current period. Revision in estimates: If changes occur regarding circumstances on which the estimate \was based or asa result of new information, more experience or subsequent developments, Beamples Change inthe amount of doubtful debts '. Change in useful life of depreciable asset Change in estimated residual value ofthe depreciable asset.Fundamentals of Accounting ~ Accounting as a Measurement Discipline McQ: |. Measurement discipline deals with Identification of objact and events Selection scale Evaluation of dimension of measurement scale ‘Alor the above 2. Allof the following are valuation principles except Historical cost « Realizable value ‘Current cost ‘Future value b. 3. Chango in accounting estimates means ». @ Difference arising between certain parameters estimated earlier and re-estimated ‘during the current period Differences arising between certain parameters estimated earlier and actial results achieved during the current period, Difforoncos arising betwoon certain paramotorS roestimated during the current period. ‘and actual results achieved during the current patiod. Both (a) and () ANSWERS: 1d 24 3.PUaU ACTA eta ‘The elotonshp of Ase wt that of Lables ond Owners Eyuty a Equation ors own as Accounting Eauation. In simple words, when we tort any business, we bing assets for runing actives ou of ou own resourcesorborewed one but tata of resources employed would be equal to al assets. Le te, ES = Anset= obi This equation is fundamental tht ges foundation to the double entry ook keeping system. ‘Theres any change in ene ie of eqn, theres bound tbe ilar change on othe se Double Entry System recognizes and records both aspects (Debit and ret of Transactions [Temes fier & TT 1p bangin | eee 2ton om Bana eat 9 eas ba ao 0 a. i ae 5 icant tp tae os ra Pans aarti hata es ak ra we ea 7 af eat | st mm no es a Per amt oer | Dn ao noah 1 Fama per vane car Devens ee “Fomor of penser Beacase Cah Demers 1 boo burnt inaeae Dae tao "3 awpifaerane ae ak re Te neal cot teed [as seed ee Ione 5 Tacme reed in advonee | ecase Gath P| ereose nara eto — eee oe al Be psa cee Co cane TE Conde dwayne Bec noc ae Houde tahoe ceca Se Rowen Serene Oot D tecenorFundamentals of Accounting ~ Accounting Equation 5 Which ofthe following represents the occounting equetion( ACA) 1. Income Statement. « Sttement of Cosh low. 1 folance Sheet “btone ofthese Which of he following is tve? 1. Cosing Cantal ~ Op. Catal +Adalianal Copal Prof - Drawing 1 Gosing Cant = Op. Capital» Adin! Coptl- Drowings + Prot © Goxing Cankol=Op Capital -Adaltono Coptok Drowings” Loss None ofthese (me shankor hos asses off. 10,000/- and ibis of R.2,000/ Hi capital would be 2 RSIO00/- b RSI2O0Y/ & RRBODY- J None ofthese. Goode std on ered tan exorple of: crease in Ascet & Outs Lal, ‘ecreasn Ase! & Opes ably Increase in tabity & Dane Lab Decreoze nbs &Inereare in Owner Labi. Increase nobles & Decrease in rer Lib. ‘Goods destroyed by fire lan example of: ‘nochange in Owne’s uty. Increase in Ate & Oune’s Eau ‘Decrease in iby & Owners Equly. None ofthese. ed writen off an example of: 1. Inceose in Asset & Owe’ ibily. (Decrease mSsset & Owner iit. {Increase in iby & Owners iby. Decrease n Lob & inerease in Owner’ bit. € Increos in ibility & Decrease in Owner's ibility repo insurance ion excmple of: 1, Ineeose in Asset & Decregsein Owners Lob Increase in iby & Dscrecee i Owner's ty © Decrease n Lob & Decrease in One's aby 4 Inreasen Asser & Inereasein Ouner stabi. Answers: 1b 218 3(e Ae S{0 8b 118Fundamentals of Accounting ~ Journal, Posting and Balancing Journal, Posting & Balancing Transactions inthe lournal are recorded onthe basis of rules of Debit and Cred: > Debit Or.) means enter the amount of transaction on left side of an account and Cre (Cr) ‘means enter the amount on right side of account. > Both Debit and Credit represent ether increase or decrease depending upon nature of A/c > Debit in relation to Assets A/c and Exp A/crepresents an increase but in relation to Lisbities Al, Capital Aicand Revenue Afc represent decrease. > Creditin elation to Assets A/c and Exp A/c represents decrease but in relation to Liabilities Ae, Capita Ae and Revenue A represents as increase, For the purpose of recording the transactions are classified in three groups. [Personal Accounts ‘Real Accounts. ‘Nominal Accounts Relstesto Natural persons (ag. | Relates Tangle Assets [eg | Relates to Ravenve, Expenses, Shankar A) ata legal | | Land, Builing, Machinery, Cash | Gains, Losses ete ike Sales Ve, persons eg M/sMahedev & Co} | ete andinangible Assets eg | Salary A/c, Commision red Af, and Represeneaive porsons(ag. >| Goodall af the fm but not debe, | Loss by Fre A/c Expenses Payable) DBI he Recebor DEBIT what comesin DEBI all expenses and losses CREDIT the Ger (REDT all incomes and gine Related to Owner Capital AJe. Felsied to Income Revenve Ae Having Or aot Asset Af Related vo Expenses Exp Ale Having Cal: abilities Af Journal ‘Journals called subsidiary book in which transactions are recordedinthe order of occurrence. Recording ‘wansactlon called Joutnalising(pasing journal ett) SOURNAL Page ny [Date Perteulers ER [ eb. [erect ‘es 2016 | ABC Ale aE 25,000.00, Bank Ale © 5.90000 (cha. sued to MISABC) Stops in Journalsng Ascertsin the accounts involved in transaction Ascertain whieh re of Debit and Credit is applicable, Record the date of transaction date column. \Write the name of account to be debited and amount in Debit colum and write name of account tobe credited in next ine and amount incre column, \Write narration i. bof description of the transaction, {6 Ledger Fol column i filed during posting (transfer of transaction) into the ledger, Advantage of Journal: Chronologleal order, Explanation of Transaction & Recording ofboth sepects LUmitations of Journal: Time taking (delayed) and Cost consuming, No internal Check and voluminous.Fundamentals of Accounting ~ Journal, Posting and Balancing ve Posting: ‘fer ecording the transaction inthe jounal, next steps ansfrof transaction to respective aecounts pened in edger called posting. edge principal book which contain all accounts, Ladger account has ‘wo sides Debit and Credit, each of Debit and Credit has four columns. ‘Abc ACCOUNT br ce a yee 2016 [By Bank |W 275008 00 Posting Rules: 1 Separate accounts opened inledgar book fr each account and entries posted from journal 2. While posting transaction imledger, words To’ for debit side of transaction and ‘By is used for credit side of transaction. 3. Ledger of the concemed account debited in journal shouldbe debited with same amount and reference of page no. of journal i recorded i folio column and reference page 0. of Ledger Folio written in LF, column in Journal, Same process i flowed for credit side. Balancing: > Balance of account isthe ference between tot of debits and total of res appeating in account whieh sgl net effect of al arsactions posted in acount during the petod > ot effect maybe ‘debit balance or ‘credit balance’ or nil balance’ depending on debtor credit side is higher. > ITtho debit side of total exceeds the credit ota diference called debit balance is written in credit colurm as" By Balance cf o if credit side of total exceeds the debit balance, difference Called crit balance is written in debit column as To Balance ce taken a closing balances, > While stating ledger with new petid, closing balance of earlier period is carted forward by iting “To balance bin debit column being opening balance or new period in case of debit balance and By balance bj in cred column in case of credit balance, 1L_Attho end ofthe accounting year all the nominal accounts ofthe ladger book are ‘a. Balanced but not transferred to Profit and loss account, Not balanced and also the balance is not transferred to profit and loss account. Balanced and balance i transferred to Balance sheet. 14. Not Balanced and their balances transferred to proft and loss account. 2 credit means a, increase in Asset decrease in Asset increase in Liability 4 decrease in pronrietor's equityFundamentals of Accounting ~ Journal, Posting and Balancing ve 3. Ledger book is popularly known as a. Secondary Book « Principal Book bb Subsidiary Book None ofthese ‘4. While balancing an account, the balance ofan account is recorded onthe side which fs— a. Shorter Equal by Hither none of these 5. Outstanding salary accounts a. Personal alc «Nominal /e b. fealafe None of these 6. Accrued interest account is a. Personal a/e Nominal afe b. Real afe None ofthese 7. Goodwill Account i a. Personal a/c {Nominal 2/e b, Reala/e d. None ofthese Investments Shares is a. An Assets afe © ARevenue afe b. Auabity afc An Expenses Account. 9. withdrawal of goods from business by proprietor should be credited to: a. Drawings afc capital afc Purchase afe bles afc 10, Retuim of Goods by a customer should be debited to a, ‘Return outward account. Carriage inward account Customer's account dl Return inward account Answers: 14d 24b 3c Ala Sia 6a 7b 82 Ob 1048Fundamentale of Accounting - Cashitook CasH Book ‘The Cash Book I 8 book of egal entry sa type of subsidiary book but treated as rnp Book Csh book I designed in form of Ledger and records cash receipt on debit side and records cash payment on ced side ash hak both journal ond edge. Types of Cosh Book “Specfe Transaction tobe recorded ‘Sige Column Cash Book Gash Transaction Cash ook with dicount olan Cosh ond discount wontons ‘sh book with Banka decount column | Cath, Bank and dicount tranectone ty cash book ety Cash ansetons 1 Single column Cash Book Thishes one amount column on each side Debit side ‘Single Column Cash Book Credit side Dae paar Tr [ames [ose | Paar Te [an 2. Double eotumn Cash Book: Cash book with scout column has two amunt columns, on for cash and cotter for dcount on each side Al cash acl nd cash count allowed are recorded on te debit side Sndallash payments and cash Assount rceveda ecorded onthe ced ie, Debit ie ase Gon ah Book ‘eis Date [Paiaders [UF | DucIRs | CaonRs [ote | Partculers [UR | Diels | Gan Taree column Cash Book: Cas has tree amount eolumn, one for cash, one for bank and one for ttecounton each id, Al cash eceps, Deport nto bank andeash scum allowed are recorded on the Hebi side anal ash payment, utthraunls fram bank and cash dscount received ae fecorded onthe ‘ret side Tis cash serves the purpose of Cash acount and Bank account, hence thet no need to ‘open ban book account inthe leer Debit side Thee Clunin Cash Book ret side a (os [ins | ws [te | ie ah t 9080 | ak wowed PE ‘06 fomban ee | on « some fcse | cam cepaitt | 000 oes rotaFundamentale of Accounting - Cashitook ‘Posting from main Cash Book ash Book is actualy the cash aezount an the hank alam Bank aecount. Discount columns are memorandum harms which provides information about the tata sour alowed and total discount received. The vious items appearing on the debit side and cred side of the cash book are posted as flows: hems appearing on Debit side > allthe recep appearing onthe det side are posted tothe credit ofthe respective ledger accounts by writing "By Cash/Bar nthe parla. > allindsidual entries discount alowed column ate posted to the cred of respective personal accounts boy wrting'9y Discount lowed fe > The total of scout slowed cour on debit sie posted to Expenses ledger namely ‘isount allowed B/C by wing To sundrosas per cash boon partici hems appearing on Debit side: >> Allthe payments appearing onthe cred side are posted tothe debit ofthe respective ledger accounts by writing To CashBan nthe particular. > allindstdual enres i dicount eecetved column ate posted yo the debt of vespectnve personal accounts boy wing "To Discount reewed fe > The total of dscount eceved column eesti posted to Income ledger mary ‘iscount recsived /¢ by wing By sundriosas per cash bot” nparectlrs hems appearing as contra on both side: > Allens of hich debt an crest espect aro simultaneously recorded nthe cash bock are called Conte Entries eg csh deposited Into the bank ox cash withdrawn from bank are noced whe posting om ‘sh book to edger as bath aspect of debit and credit are recoded in cash bck sel as shown in frat. 4 yeah Bake Tie Bonk aed by pi ao coring payments aden ate The oat ct py Cat ook may be eed act toh ramen tte res. Howe, te snpe Fermiseven sow fecsipt Payment aie | Parr | Cast Tt Date Baier | Voor Te = tr [cor | ea a 2] glo foie mo | #8 ull Fd ?al i £2 | 85/83/52] 23/28 Posting from Pets Cash Book: > the amount of ash received fromthe main cath book recorded on the receipt side clu. > the petty ash expenses are recorded onthe payment side cf book. > allthe column expenses ar totale periodically an poste to debit ide of espctve edger account by rting To suns as por ptt cash book. > Under imprest system, The Petty Cashier receives relmbursement of expenses totled parol fom ‘ain aah, ence his cach balance remains same in begining of period > Under non imprest system, The Pety Cashier recclves ad-hoc amount equivalent to his pedo expenses toyend of very period and balance cre forwardFundamentale of Accounting - Cashitook mca 1. Cath Book ea typeof buttoned aa of acount, 2 Subsiiry Book, pincpa ook Pineal book, Substiar book 1 Subsidiary nook, subsidiary Boole 4 prncpa book pring bok 2. Which offllowing sa kindof cash book? 2. Simple colin cash bk «Double colin esh book b.Tvee column cash book 4. Allo above 3. Which of followings nat column of hee column cash Book 3. Cash cole Pty cash ech Bonk cokmn {4 Diseot coir 4. Which centered bi side cath bod Trade discount aloes fade discount received Cosh discount allowed cash scount recone 5. Which f the fllingtranstion is posted in ger 2. Cash deposited into bank Cath withdrawal fom bank 1b. Cashathdrawal for personal use, When a cheque retums dshonoured It recorded in cash colin an credit de cash column on debi side Bonk coum on cet side Bllsecevabe book Bills payable book b. Journal proper ‘d. None of theseFundamentals of Accounting ~ BRS Bank Reconciliation Statement Reconeiliaton isthe process of ensuring that two sete af records (usualy the Balances of wo accounts) aren agreement in accounting books. Bank Reconeliation statement (BAS) isa statement which racondles the bank balance as per Cash Book with the balance as pr Bank Pass Booki/Statement (ledger copy issued by bank to customers as recorded in thelr books) showing eauses of al differences between two. Some entries may have been recorded in Cash Books but do not appear in Bank passbook/statement and vice versa. Hence, ‘on a particular date balance as per Bank and Cash Book may not tall. Sallont features of BRS: > ill show up any delays or timing difference on part of Bank or Cashier in passing entries > twill bring out any errors or omission that may have been committed either in cash book or in Bank Pass Book. > twill Show up actual fund positon of Firm, Major Causes of differences: A. Timing diference Difference in ting may arise in tiking entsios ebooks on account of folowing. 1. Cheques issued but not presented for payment: Entry in bank column of Cash book is ammediately mad on sent by cha, however, entry appears in bank oniy is nt and leared by bank ues deposited into bank but not eleared: Entry in cash book is made junt only when cha. is cleared by issuers ers arrange payment rectly to firm's bank 2 entsy is made in fms account on rement/passbook intrest on dopositsfbalance to customers ‘on rogular intervals, However, entry is made i firms account on receipt a intimation or entry in bank statement/passhook, ©, Interest and dividend collected by bank: These days interest and dividend on investments are directly credited to bank account. However, entry is made in firms account on receipt of intimation or entry in bank statement/ passbook, 7. Direct Payment by Bank: Standing instruction for direct debits to bank account on ‘monthly/quarteriy/annual payment are given incase of repayment of oan, insurance premium, IP et. However, entry is made in firms account on receipt of intimation or entry in bank tatement/passbook 8, Dishonourof ils discounted with the bank: fbankis not able to receive payment of bill discounted with them, will dab amount of ill with charges to firms account. However, entry is made in firs account on receit of intimation or entry in bank statement/passbook 9. Bills collected by bank on behalf of firm: In some case documents are sent thru bank for goods sold, Bank credit the amount of ils on receipt of payment from firm's customer However entry is made i fms account on receipt of intimation ar entty in bank statement/passbook