Bca Fam Unit 1
Bca Fam Unit 1
Bca Fam Unit 1
Accounting process:
(1) Identification: It is the process of identifying and analysing business transactions.
(2) Recording: For recording, we use ‘Journal’ or Subsidiary Books.
(3) Classification of transactions: Classification means segregation of transactions on the
basis of nature and posting them in a format known as Ledger Account.
(4) Summarisation: It includes preparation of Trial Balance and Financial Statements.
(5) Analysis & Interpretation: It includes an assessment of the financial reports and making
some meaningful conclusions.
(6) Communicating information to the users: It includes sharing the financial reports and
interprets results to the users of financial statements.
Objectives of Accounting
(i) Systematic Recording of Transaction
(ii) Ascertainment of Results of above Transactions
(iii) Ascertain the Financial Position of Business
(iv) Providing Information to the Users for Rational Decision-making
BOOK-KEEPING
As defined by Carter, ‘Book-keeping is a science and art of correctly recording in books-of
accounts all those business transactions that result in transfer of money or money’s worth’.
Book-keeping is an activity concerned with recording and classifying financial data related to
business operation in order of its occurrence
Book-keeping is a mechanical task which involves:
Advantages of Accounting
Disadvantages:
Accounting concepts
Accounting concepts are basic rules, assumptions and conditions that define the parameters
and constraints within which the accounting operates.
Various concepts are given below
1 Business Entity Concept: The concept of business entity assumes that business has a
distinct and separate entity from its owners. It means that for the purposes of accounting,
the business and its owners are to be treated as two separate entities. Keeping this in view,
when a person brings in some money as capital into his business, in accounting records, it is
treated as liability of the business to the owner.
2 Money Measurement Concept: The concept of money measurement states that only
those transactions and happenings in an organisation which can be expressed in terms of
money such as sale of goods or payment of expenses or receipt of income, etc., are to be
recorded in the book of accounts. All such transactions or happenings which
3 Going Concern Concept The concept of going concern assumes that a business firm would
continue to carry out its operations indefinitely, i.e. for a fairly long period of time and
would not be liquidated in the foreseeable future. This is an important assumption of
accounting as it provides the very basis for showing the value of assets in the balance sheet.
4 Accounting Period Concept Accounting period refers to the span of time at the end of
which the financial statements of an enterprise are prepared, to know whether it has
earned profits or incurred losses during that period and what exactly is the position of its
assets and liabilities at the end of that period
5 Cost Concept The cost concept requires that all assets are recorded in the book of
accounts at their purchase price, which includes cost of acquisition, transportation,
installation and making the asset ready to use. To illustrate, on June 2005, an old plant was
purchased for ` 50 lakh by Shiva Enterprise, which is into the business of manufacturing
detergent powder. An amount of ` 10,000 was spent on transporting the plant to the factory
site. In addition, ` 15,000 was spent on repairs for bringing the plant into running position
and ` 25,000 on its installation. The total amount at which the plant will be recorded in the
books of account would be the sum of all these, i.e. ` 50,50,000.
6 Dual Aspect Concept Dual aspect is the foundation or basic principle of accounting. It
provides the very basis for recording business transactions into the book of accounts. This
concept states that every transaction has a dual or two-fold effect and should therefore be
recorded at two places. In other words, at least two accounts will be involved in recording a
transaction.
7 Revenue Recognition (Realisation) Concept With this concept, accounts recognise
transactions (and any profits arising from them) at the point of sale or transfer of legal
ownership - rather than just when cash actually changes hands. For example, a company
that makes a sale to a customer can recognise that sale when the transaction is legal - at the
point of contract. The actual payment due from the customer may not arise until several
weeks (or months) later - if the customer has been granted some credit terms.
8. Accrual Concept: According to this concept Items and Events are recoded when they are
earned/expended and not received/paid. Because of this concept Outstanding/ Prepaid
items arise in the financial statement. The general concept of accrual accounting is that
economic events are recognized by matching revenues to expenses (the matching principle)
at the time when the transaction occurs rather than when payment is made or received.
9. Matching Concept: Here, it is ascertained that every cost incurred to earn the revenue
should be recognised as an expense in the accounting period when revenue is earned. In a
given accounting period, expenses are matched with the revenue earned.
10. The verifiable objective concept: The verifiable objective concept states that accounting
should be free from personal bias.
Accounting Conventions
Four important types of accounting conventions are:
1. Conservatism: It tells the accountants to err on the side of caution when providing
the estimates for the assets and liabilities, which means that when there are two
values of a transaction available, then the always lower one should be referred to.
2. Consistency: A company is forced to apply the similar accounting principles across
the different accounting cycles. Once this chooses a method it is urged to stick with
it in the future also, unless it finds a good reason to perform it in another way. In the
absence of these accounting conventions, the ability of investors to compare and
assess how the company performs becomes more challenging.
3. Full Disclosure: Information that is considered potentially significant and relevant is
to be completely disclosed, regardless of whether it is detrimental to the company.
4. Materiality: Similar to full disclosure, this convention also bound organizations to
put down their cards on the table, meaning they need to totally disclose all the
material facts about the company. The aim behind this materiality convention is that
any information that could influence the person’s decision by considering the
financial statement must be included.
Accounting Standards (AS)
Accounting Standards (AS) are basic policy documents. Their main aim is to ensure
transparency, reliability, consistency, and comparability of the financial statements. They do so
by standardizing accounting policies and principles of a nation/economy. So the transactions of
all companies will be recorded in a similar manner if they follow these accounting standards.
These Accounting Standards (AS) are issued by an accounting body or a regulatory board or
sometimes by the government directly. In India, the Indian Accounting Standards are issued by
the Institute of Chartered Accountants of India (ICAI).
Accounting Standards mainly deal with four major issues of accounting, namely
1. Transparency,
2. Reliability,
3. Consistency, and
4. Comparability
Management Accounting
Definition of Management Accounting
The Institute of cost and Management Accountants, London, has defined Management Accounting
as, "the application of professional knowledge and skill in the preparation of accounting information
in such a way as to assist management in the formulation of policies and in planning and control of
the operation of the undertaking."
According to R.N Anthony, " Management Accounting is concerned with accounting information
that is useful to management
1. To formulate Planning and policy Planning involves forecasting on the basis of available
information, setting goals; framing polices determining the alternative courses of action and
deciding on the program of activities. It facilitate the preparation of statements in the light of past
results and gives estimation for the future.
5. To provide report Management accounting keeps the management fully informed about the
latest position of the concern through reporting. It helps management to take proper and quick
decisions. It informs the performance of various departments regularly to the top management.
(i) Mainly concerned with future : Planning is the process of looking ahead by taking the
reference of the past. The process of management accounting is driven towards the
future course of action with proper planning based on the analytical financial details
other past. It considers the budgets to forecast the future revenue and expenditure and
inflow and out follow of funds.
(ii) Recent origin: Management accounting has been well recognized in the modern
business houses due to increasing customer base and market complexity. Modern
managerial decisions need much quantitative organized information rather traditional
form of financial statements for making effective decisions.
(iii) Management need oriented: Management Accounting is highly personalized service
and Subjective in nature. It is basically intended for the use of internal managerial
decisions. It provides necessary information as per the need of the management in the
required format and ensures that the information’s are sufficient to make effective
decisions.
(iv) Information as per Management need: There is no hard and fast rule in the preparation
of management reports and statement, it always as per the situational requirement of
the management and based on the availability of the data for analysis and
interpretation.
(v) Provides data and not the decisions: Management accounting discipline is not an
replacement of management. It provides just information to the managerial decisions. It
facilitates decisions since majority of the decisions are made considering the facts and
figures provided by the management accountants. But at the same time these data itself
cannot form the decisions of the management.
(vi) Objective oriented: Management accounting present data in such a way that it enables
the management to formulate policies and programme so as to achieve the managerial
or organizational goals in most efficient and effective manner.
(vii) Financial and cost accounting information: Management accounting is all about the
analysis and interpretation of financial and cost accounting data, to generate such
reports and statements which can prove useful to management in decision making.
(viii) Increases efficiency: Management accounting is concerned with providing, the needed
information to the Management in the proper manner and assisting in the policy
formulation and managerial control. This enables the management to increase efficiency
of its operation and ensures the optimum profits with minimum operational risk
1. Data Dependency Management accounting derives information from Financial accounting, Cost
accounting and other sources. So, the conclusions arrived at by management accountants depend to
a large extent on the accuracy of these two (Financial accounting and Cost accounting) records.
Therefore, if the past data which are collected from the financial and cost records are found
inaccurate, the decisions suggested by the management accountants, on the basis of the above, also
will be inaccurate.
2.Does not give the decision Management accounting cannot replace the decisions. It can just assist
the management in its operations through providing necessary analytical statements and advises
management for better and efficient managerial functions.
3. Costly affair Installation and maintenance of Management accounting system is suitable for
those concerns which has significant amount of transactions generally large establishments. before,
small concerns cannot afford to adopt this system.
6. Needs human involvement for interpretation Management accounting involves people to make
final reports or interpretations, due to which the interpretation may be of the personal opinion of
the person Who has prepared it. It creates differences in the interpretations and becomes more
subjective rather than objective in the analysis