Basics Of Accounting And Finance: Financial Accounting

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Monday, February 8, 2016

Financial Accounting.Principles- Concepts and conventions of Accounting, Meaning, Definition and objectives of Accounting

Accounting- Meaning and Definition

Accounting is a process of communicating the results of business operations to various parties who are interested or connected with the business, which includes the owners, investors, creditors, government, bank and other financial institutions etc. Accounting is associated with everybody who is interested to keep the accounts of finance or monetary transactions.

The American Institute of Certified Public Accountants has defined accounting as ''the art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events which are in part at least, of financial character, and interpreting the results thereof". The above mentioned definition shows the following aspects of accounting.

Accounting involves both art and science.
This includes recording, classifying and summarizing of business transactions.
This records the transactions in terms of money.
It records the financial things and events only.
Accounting is the process of interpreting the results of financial operations.
This communicates the results of analysis and interpretation to the management or to the concerned party.

Main Objectives of Accounting

The main objectives of accounting is as follows:-

To evaluate the operating results of the enterprise.
To disclose the financial position of the business
To ensure necessary control over the operation as well as the resources of the business.

Accounting Principles

Accounting principles are the norms or rule of actions adopted while recording business transactions which will ensure the uniformity, clarity and understanding of business. The accounting principles are mainly classified in to two categories. They are Accounting Concepts and Accounting Conventions.

1. Accounting Concepts

Accounting concepts are basic assumptions or conditions which the accounting system is based. The important accounting concepts are Business Entity Concept, Going Concern concept, Dual Aspect Concept, Cost Concept, Money measurement Concept, Realization Concept, Accrual Concept and matching Concept.

Business Entity Concept- Business entity concept states that the business and business man are two separate entity. Under this, business is treated as a separate unit distinct from its owner. The transactions between the proprietor and the business will be recorded separately in the books of business and shown separately under the heading 'Capital account'.
Going Concern concept- As per this concept business unit has a perpetual succession or a continued existence and the transactions are are recorded from the point of view. The concept says that the business will continue in operation long enough to charge the cost of fixed assets over the useful life time against the income from business.
Dual Aspect Concept- Under this concept each business transaction has two aspects they are receiving aspects and giving aspects. The receiving aspect is known as Debit aspect and the giving aspect is known as the Credit aspect of the business.
Cost Concept- Cost Concept is based on the Going concern concept. According to this concept, assets purchased will be entered in the business book as per the cost price in which they are purchased and this will be the base for further accounting of assets.
Money measurement Concept- This concepts states that, the transactions which will treat only in the terms of money.
Realization concept- According to this Revenue is recognized only when the sale is made.
Matching Concept- This matches the cost along with the revenue.

2. Accounting Conventions

This is method or custom in which the accountants are following for the preparation of accounting statements. This includes mainly three types of conventions. They are as follows:-

Convention of conservatism
Convention of consistency
Convention of material Disclosure.

These all are the accounting concepts and conventions.

Meaning and Types of accounting Errors and procedure for rectifying accounting errors.

Accounting Errors

Accounting errors are those mistakes which occurs in the book keeping or accounting, relating to a routine activity or relating to the principle of accounting. The Accounting errors happens in entering the transactions in journal or subsidiary books or at the time of posting of entries in to the ledger. The accounting errors may happen because of the omission, commission, principle or as a compensating of errors.

Classification of Accounting errors

Accounting errors are classified in to four types on the basis of nature of Errors. They are (1) Errors of Omission, (2) Errors of Commission, (3) Errors of Principles and (4) Compensating Errors.

(1) Errors of Omission

The Errors of Omission will occur when a transaction is not recorded in the books of accounts or omitted by mistake. The Errors of Omission may happen as partial or complete.

The partial errors may happen in relation to any subsidiary books. This is the result of when a transaction is entered in the subsidiary book but not posted to the ledger. For example, cash paid to the suppliers has been entered in the payment side of the cash book but it will not be entered in the debit side of the suppliers account.

The complete omission may happen the transaction is completely omitted from the books of accounts. For example, an accountant fails to enter a specific invoice from the sales day book.

(2) Errors of Commission

When a transaction is entered in the books of accounts in wrongly, this may be entered as partially or incorrectly. This kind of errors are known as Errors of Commission. The Errors of Commission may happens because of ignorance or negligence of the accountant. This may be of different types, the main reasons are Errors relating to subsidiary books and Errors relating to ledger.

(3) Errors of Principles

This kind of errors are occurs when the entries are made against the principle of accounting. These Errors are made because of the following reasons:-

1. Errors happens due to the inability to make a distinction between the revenue and capital items.

2. Errors happens due to the inability to make a difference between the business expenses and personal expenses.

3. Errors happens because of the inability to make a distinction between the productive expense and nonproductive expenses.

(4) Compensating Errors

Compensating Errors are those errors which compensates themselves in the net results of the business. This means, if there are over debit in one account which will be compensated by the over credit in some account in the same extent of the business. Like that, if there is a wrong debit in one account which will be neutralized by some wrong credit in the same extent of the business.

The accounting errors will hardly affect the accuracy of trial balance of the business because the trial balance is the final proof of the books of accounts. There are some of the methods to rectify the accounting errors happened in the books of accounts. The important two methods for rectifying the accounting errors are as follow.

àStriking of the wrong Entry.

àMaking appropriate entries to correct the errors.

Procedure for rectifying Accounting errors.

There are mainly three steps to rectify the accounting errors in the books of accounts.

a. Ascertain the error occurred

b. Identify the correct record of transaction which has to be done.

c. Decide the rectification entry.

These all are the different kinds of accounting errors and the methods to rectify those errors.

Systems of Accounting : single entry and double entry system of Accounting

Systems of Accounting

There are mainly two kinds of system of accounting for recording business transactions. They are Cash System of accounting and Mercantile system or Accrual system of Accounting.

1. Cash System of Accounting

Under the cash system of accounting, only actual cash transitions are recording in to the account. That means actual cash received and cash paid are recoded properly and no entry for any due of receipts and outstanding expenses.

2. Mercantile system or Accrual system of Accounting

Under Mercantile system of accounting, all the cash transactions and credit transactions of the business are recorded in the books of accounts. This will create the entries not only for actual cash receipts and payments but also for amount due and outstanding expenses. This is the system which all the commercial business organizations are follows.

Along with the above shown systems of accounting we can record the business transactions in two other important systems also. They are Single Entry System and Double entry systems.

3. Single Entry System

Single Entry System is a system which records only the personal and cash aspects of the business. Under this system of recording ignores impersonal aspects of transactions. This is not based on the Dual aspect Concept so it will be incomplete account or inaccurate account.

4. Double Entry System

This is a dual aspect concept of business transactions that is receiving aspects (debit) and giving aspects (credit) are recorded in the books of accounts. This is the most common system of book keeping used for recording every business transactions. Double entry system is the method of making all transactions in the account in an opposite side for equal value. This system of accounting provides more accurate data with scientific system of accounting.

Difference between Single Entry System and Double Entry System of Accounting are as follows:-

1) In Double Entry System of Accounting, the double aspects of the transactions are recorded. But in the case of Single Entry System, only single aspects is recorded.

2) In Double Entry System of Accounting, For every debit aspect will have an equal amount of credit aspect. But in the case of Single Entry system, there will have a debit without a corresponding credit and vice versa.

3) In Double Entry System of Accounting, there are personal and impersonal accounts (ie, real and nominal accounts). But in the case of Single Entry System, there are personal and cash accounts only.

4) Under Double Entry System of Accounting, a trial balance can be prepared to check the accuracy of accounts While in the single entry system, it cannot prepare the trial balance.

5) Under Double Entry System of Accounting, the Trading, profit and loss account and balance sheet can be prepared directly. But the single entry system those statements cannot prepared directly.

6) In double entry system we can directly calculate actual net profit of the business. But in the case of single entry system it is not easy to calculate actual net profit of the business directly.

7) In Double Entry System of Accounting, it involves more clerical labours, But there are only less numbers of clerical labours in the case of Single entry system.

These all are the difference between Single entry system of Accounting and Double entry system of accounting.