ACCT102 ACCOUNTING FUNDAMENTALS

Accounting concepts
Separate entity

Activities of the owner and the business are to be kept separate from each other.
Business related activities such as paying electricity, wages are business related whilst paying for
owners childrens school fees is a private activity of the owner.
These would be shown separately in the financial records of the business

Going concern

Business would continue to operate indefinitely in the future

Provided the business has a strong financial position
Its products and or services are accepted by the customers
Business strategies to tackle financial, marketing and customer issues are solid

Money measurement

All items of value belonging to a business have to be expressed in monetary terms

If a farmer has 200 cows, 5 tractors, 6 ploughs (hal), 10 buffaloes, 2 houses, 3 sheds, 3 vehicles.
The above would have to be expressed in monetary terms to indicate their value so that decisions could
be made.

Cost

All moveable and immovable assets of high values are to be recorded at the date of their purchase.
All long term borrowing are also to be recorded at the date the debt was taken

Double entry accounting

All financial details would have to be recorded in double entry.

If Rs10,000 had been withdrawn from the bank then a record has to be kept for what the Rs10,000 was
paid for.

Period

Business are required to prepare financial reports after a calendar year (12 months) have concluded

Matching

Firms are required to compute the Total Revenues for the 12 months and subtract with the Total
Expenses and the result would either be a NET PROFIT or a (NET LOSS)

Realisation

Revenue is realised for a firm as soon as the customer receives the goods or is provided the services,

Classification of Accounting Major Terms

Major Term
ASSETS

Classification
Current Assets

Examples

Cash at bank
Closing stock
Prepaid expenses
Income due
Debtors
Cash on hand

Land
Buildings
Furniture
Equipment
Motor vehicles
Plant & machinery
Fixtures & Fittings

Non-Current Assets

Intangible Assets

Goodwill
Patents/Trademarks

Current Liabilities

Creditors
Bank overdraft
Expenses due
Income received in advance

Non-Current Liabilities

Loan
Mortgage
Debentures

PROPRIETORSHIP

Capital
Drawings
Net Pofit(Net Loss)
Additional Capital

REVENUES

Sales, Fees received

Commission received
Interest received, Rent
received, Discount received

EXPENSES

Office Salaries and wages

Advertising
Stationery, electricity,
Telephone, repairs and
maintenance
Legal fees, audit fees,
Depreciation, bad debts,
discount allowed, interest paid,
insurance, commission paid,
Rent paid, purchases
Sales man salaries, Delivery

LIABILITIES

van expenses

Accounting Equation
ASSETS

LIABILITIES

In equation form it can also be written as

PROPRIETORSHIP

A=L+P

Changing the order we can also write it as: P = A - L

GAAP Generally Accepted Accounting Principles

It shows how accounting reports have to be prepared.

These principles are relatively the same for all countries , subject to minor changes but the main reports
such as a firms Balance sheet and Profit and Loss account would be the same for all countries.
These principles are set and designed by an Accounting Body such as the International Accounting
Standards Board.
All countries are to adopt the standards when preparing financial reports, so as to promote transparency
and uniformity.

Indian versus the US GAAP

Indian firms have their own version of the GAAP and does not conform to the original GAAP in certain
aspects.
Financial reports are prepared to suit the businesss own needs and only if the reports are to be
submitted overseas, then these are designed according to GAAP
This is the main reason why SATYAM prepared fictitious and fraud accounts and got listed on the New
York Stock exchange and only after tough investigations, this company was expelled from USA.
Even in Indian text books and in schools and colleges, the format of preparation of financial
statements being taught is questionable as compared to what students learn in overseas.
The USA follows the GAAP very strictly since they have implemented it and expect the world to adopt
and follow these especially if they are to have any dealings with US companies.

IFRS International Financial Reporting Standards

These includes various requirements that have to be fulfilled when preparing financial reports and also
includes strict regulations to be followed and standards to be adopted while providing information
which may be used by various interested parties when studying these reports.