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Accounting Theory Notes
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Accounting Theory Notes
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ACCOUNTING CYCLEThe Series of business transactions which occur from the beginning of an accounting period
to the end of an accounting period is referred any specific period of time for which a
summary of business’s transaction is prepared.
Steps in Accounting Cycle:-
1. Journalizing (Recording)
2. Posting to Ledger (Classifying)
3. Final Account (Summarizing)
Now Explain Steps:-
1 Recording:- This is the basic function of accounting. All business transaction, as
evidenced by some documents such as Sale bill, Pass book, Salary Slip ect are recorded in
the books of account. This is called recording process.
2. Classifying:- All entries in the Journal or books of Original Entry should be posted to the
appropriate ledger accounts to find out at a glance the total effect of all such transactions in
a particular account.
3. Summarizing:- It is concerned with the preparation and presentation of the classified
data in a manner useful to the Internal a well as the external users of financial statements.
This process leads to the preparation of the following financial statements:-
a) Trial Balance
b) Profit & Loss Account
c) Balance Sheet
d) Cash flow Statement.
DIFF. BETWEEN BOOK KEEPING AND ACCOUNTING
BOOK KEEPING ACCOUNTING
1. It is a Process concerned with recording 1. It is a process concerned with Summarizing of
of transaction. the recorded transaction.
2. It is the basic of accounting. 2. It is the basic for business language.
3. Person responsible for book-keeping are called 3. Personal responsible for accounting are
book keeper. called accountant.
4. It does not required any special skill or 4. It required special Skill & knowledge.
Knowledge.
5. Personal Judgment of the accountant is
5. Personal judgment of the book-keeper is not essential.
required.
6. Financial statement are prepared from
6. Financial statement are not prepared from accounting record.
,book-keeping record. 7. It gives the complete picture of the financial
conditions of the business unit.
7. It does not give the complete picture of the
financial condition of the business unit. 8. Legal formalities can be complied with help of
accounting.
8. It does not help complying with legal
formalities. 9. It provides Information for talking managerial
9. It does not provide any information for talking decision.
managerial decision.
10. It has no Branches. 10. It has several branches like Financial
accounting, cost accounting, Management
accounting ect.
, DOBULE ENTRY SYSTEM
Under this system a proper and full record of all transaction is made every transaction has
a double or dual aspect. It is based upon the principal that every receiver implies giver and
every giver implies receiver. This method writhing every transaction in two accounts is given
debit side and the other account is given credit with an equal amount. Thus, on any date,
the total of all debits must be equal to the total of all credit because every debit entry has a
corresponding credit.
For example, ram purchased goods from Kewal, of Rs.5000. here ram is receiver of
goods and hence, debtor of Kewal, who is the giver of goods, that is, he is the creditor of
Ram. Similarly, Salary paid to manager is in lieu of the benefit received by the business, in
terms of the service rendered ect. Thus, all transaction will have two aspect and a proper
record of the transaction is necessary for this, it has to be recognized that.
1.) Each transaction is to be dealt with as standing alone having no preceding ar
succeeding connection, and
2.) A business is regarded as a separate entity quite distinct from its proprietor and the
exchange in transaction takes place between the business and the outsider.
ACCOUNTING CONCEPT
Accounting Concept defines the assumptions on the basis of which Financial
Statements of a business entity are prepared. Certain concepts are received assumed and
accepted in accounting to provide a unifying structure and internal logic to accounting
process. The word concept means idea or nation, which has universal application. Financial
transactions are interpreted in the light of the concepts, which govern accounting methods.
Concepts are those basis assumption and conditions, which form the basis upon which the
accountancy has been laid. Unlike physical science, Accounting concepts are only results of
broad consensus. These accounting concepts lay the foundation on the basis of which the
accounting principals are formulated.
Now we shall study in detail the various concept on which accounting is based. The
following are the widely accepted accounting concepts.
1.) Entity Concept:- Entity Concept says that business enterprises is a separate identity
apart from its owner. Business transactions are recorded in the business books of accounts
and owner’s transactions in this personal back of accounts. The concept of accounting entity
for every business or what is to be excluded from the business books. Therefore, whenever
business received cash from the proprietor, cash a/c is debited as business received cash
and capital/c is credited. So the concept of separate entity is applicable to all forms of
business organization.
2.) Money Measurement Concept:- As per this concept, only those transactions, which
can be measured in terms of money are recorded. Since money in the medium of exchange
and the standard of economic value, this concept requires that these transactions alone that
are capable of being measured in terms of money be only to be recorded in the books of
accounts. For example, health condition of the chairman of the company, working conditions
of the workers, sale policy ect. do not find place in accounting because it is not measured in
terms of money.
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