Accounting Steps, Principles, and Concepts Explained
Steps in Accounting
- Identification: Recognizing transactions with financial impact.
- Recording: Entering transactions in books or software.
- Classification: Sorting transactions into appropriate accounts.
- Summarization: Preparing trial balances and financial statements.
- Analysis: Interpreting financial statements for insights.
- Interpretation: Extracting meaningful information for decision-making.
- Reporting: Presenting financial data in reports.
Scope of Accounting
- Identifying: Recognizing and capturing financial transactions.
- Measuring: Quantifying the financial impact of transactions.
- Classifying: Categorizing transactions into relevant accounts.
- Summarizing: Aggregating data for financial statements.
- Analyzing: Interpreting financial information for decision-making.
Definition of Accounting
Accounting is the systematic process of identifying, recording, classifying, summarizing, interpreting, and communicating financial information about an economic entity to aid decision-making and facilitate accountability.
Qualitative Characteristics of Accounting Information
- Relevance: Information should be pertinent to the decision-making needs of users.
- Reliability: Information must be trustworthy and free from bias.
- Comparability: Users should be able to compare financial information across different periods or entities.
- Consistency: Similar transactions and events should be treated consistently within an entity over time.
- Understandability: Financial information should be presented in a clear and concise manner.
- Timeliness: Information should be provided in a timely manner.
- Verifiability: Different knowledgeable and independent observers should be able to reach a consensus.
- Neutrality: Information should be free from bias or undue influence.
Ind AS
Converged with IFRS, mandated by the Ministry of Corporate Affairs (MCA) in India.
IFRS
Globally recognized accounting standards developed by the International Accounting Standards Board (IASB).
Cash Basis
Records transactions when cash moves.
Accrual Basis
Records transactions when events occur.
Why Journals are Subdivided
Efficiency and organization; specialized journals streamline recording.
Depreciation
Systematic allocation of the cost of a tangible fixed asset over its useful life.
Distinguishing from Depletion, Amortization, and Obsolescence
Depletion: Primarily used for natural resources.
Methods
- Straight-Line: Equal amounts yearly.
- Declining Balance: Faster depreciation initially.
- Units of Production: Based on actual usage.
Matching Costs
Against revenue means recognizing expenses in the same period as the associated revenue.
Issuing Accounting Standards in India
Agenda Setting, Research and Analysis, Exposure Draft, Public Consultation, Revision and Finalization, Approval, Publication and Implementation, Monitoring and Updates.
Straight-Line Method
Formula: Depreciation = Cost – Residual Value / Useful Life.
Declining Balance Method
Formula: Depreciation = Book Value × Depreciation Rate.
Accounting Principles
- Consistency: Ensures uniform reporting.
- Reliability: Builds trust in financial information.
- Transparency: Enhances clarity in financial statements.
- Comparability: Facilitates effective analysis and comparison.
- Accuracy: Ensures precise recording of transactions.
- Compliance: Aligns with legal and regulatory requirements.
- Decision-Making: Provides a foundation for informed choices.
- Investor Confidence: Instills trust in investors and stakeholders.
- Audit Assurance: Supports external auditors in evaluating financial accuracy.
- Global Comparisons: Enables international assessment using standardized principles.
Fixed Assets
Definition: Long-term assets like buildings and machinery.
Current Assets (Floating)
Definition: Short-term assets like cash and accounts receivable.
Fictitious Assets
Definition: Non-physical assets like preliminary expenses.
Liquid Assets (Liquid Investments)
Definition: Easily convertible investments like treasury bills.
Wasting Assets
Definition: Assets that decrease in value over time like oil wells.
Joint Venture
Definition: Collaboration for a specific project.
Consignment
Definition: Goods sent for sale, ownership retained.
Partnership
Definition: Joint business ownership.
Cost of Goods Sold (COGS)
Definition: Direct costs of goods sold to customers.
Cost of Goods Produced
Definition: Total cost of manufacturing finished goods.
Profit and Loss Account (Income Statement)
Summarizes revenues and expenses to calculate net profit or loss.
Balance Sheet
Presents assets, liabilities, and equity to illustrate financial position.
Single-Entry System
Simple, one-sided recording suited for small businesses.
Double-Entry System
Comprehensive, two-sided recording providing a complete financial picture.
Objectives of Keeping Branch Accounts
Performance Evaluation, Profitability Analysis, Cost Control, Risk Management, Financial Reporting.
Accounting Concepts
- Conservatism Concept: Be cautious and anticipate losses.
- Consistency Concept: Maintain uniform accounting methods over time.
- Full Disclosure Concept: Disclose all material information for transparency.
- Materiality Concept: Focus on material items that impact user decisions.
- Going Concern Concept: Assume the business will continue its operations.
- Accounting Period Concept: Divide economic activities into distinct reporting periods.