FUNDAMENTALS OF ACCOUNTING (BBA 101) Jaipur National University Directorate of Distance Education _________________________________________________________________________________ Established by Government of Rajasthan Approved by UGC under Sec 2(f) of UGC ACT 1956 (Recognised by Joint Committee of UGC-AICTE-DEC, Govt. of India) FUNDAMENTALS OF ACCOUNTING Accounting: Meaning, scope, need and objectives. Accounting Principles: Concepts and conventions, Accounting equation. Journal: Rules of debit and credit, compound journal entry and subsidiary books. Ledger: Rules regarding posting.. Depreciation: Concepts of Depreciation, Methods of accounting for depreciation. Provisions: provisions for Bad debts and discount on bad debts and Reserves: Reserve for discount on creditors, Rectification of Errors. Trial Balance: Meaning, objectives & preparation. Errors: Types of Errors and, rectification. Self – Balancing and Section Balancing system Final Accounting: Trading account, Profit & Loss account, Balance sheet and Adjustment entries. Book of Original Record: Journal; Rules of debit and credit; compound journal entry; Opening entry; Relationship between journal and Ledger, Rules regarding posting. Partnership Accounts: Problems Relating to Admission, Retirement, Death and Dissolution of a Firm Accounting of Non Profit Organization: Accounting for insurance, Incomplete Records – Meaning, method of Preparation of Accounts from Incomplete Records. Issue of Shares and Debentures: Meaning, Types, Methods of issue, forfeited of shares and reissue of forfeited shares, treatment of interest on debentures. Redemption of Preference Shares and Debentures: Meaning, Legal provision and methods of redemption, preparation of balance sheet after redemption. Financial Statements: Meaning, Capital Expenditure, Revenue expenditure and Deferred Revenue Expenditure. Analysis of Accounting Information: Financial statement analysis and application, Statement of cash flow, preparation and interpretation. Accounting for Insurance Claim: Loss of Stock and consequential loss. Accounting principles; Accounting Standards in India. CONTENTS Unit-1: Accounting 1-13 1.1 Need of Accounting 1.2 Objectives of Accounting 1.3 Basics of Accounting 1.4 Accounting Terms 1.5 Conceptual Framework 1.6 Accounting Conventions 1.7 Accounting Equation 1.8 Balance Sheet 1.9 Profit and Loss Account for Non Corporate and Corporate Entities 1.10 Summary 1.11 Keywords 1.12 Self Assessment Questions 1.13 Review Questions Unit-2 Journal 14-26 2.1 Concept of Journal 2.2 Rules of Debit And Credit 2.3 Compound Journal Entry 2.4 Ledger 2.5 Trial Balance 2.6 Summary 2.7 Keywords 2.8 Self Assessment Questions 2.9 Review Questions Unit-3 Depreciation 27-39 3.1 Concepts of Depreciation 3.2 Methods of Accounting for Depreciation 3.3 Tax Depreciation 3.4 Summary 3.5 Keywords 3.6 Self Assessment Questions 3.7 Review Questions Unit-4 Provisions 40-52 4.1 Provision of Bad Debts Accounting 4.2 Provision for Discount on Debtors 4.3 Summary 4.4 Keywords 4.5 Self Assessment Questions 4.6 Review Questions Unit-5 Reserves 53-64 5.1 Types of Reserves 5.2 Reserve for Discount on Debtors 5.3 Reserves for Discount on Creditors 5.4 Rectification of Errors 5.5 Summary 5.6 Keywords 5.7 Self Assessment Questions 5.8 Review Questions Unit-6 Trial Balance 65-77 6.1 Meaning of Trial Balance 6.2 Objectives of Trial Balance 6.3 Types of Errors 6.4 Rectification of Errors 6.5 Sectional and Self Balancing System 6.6 Summary 6.7 Keywords 6.8 Self Assessment Questions 6.9 Review Questions Unit-7 Final Accounting 78-91 7.1 Trading Account 7.2 Profit and Loss Account 7.3 Balance Sheet 7.4 Adjustment Entries 7.5 Summary 7.6 Keywords 7.7 Self Assessment Questions 7.8 Review Questions Unit-8 Book of Original Record 92-105 8.1 Journal 8.2 Rules of debit and credit 8.3 Compound Journal Entry 8.4 Opening entry 8.5 Relationship between journal and Ledger 8.6 Rules regarding posting 8.7 Summary 8.8 Keywords 8.9 Self Assessment Questions 8.10 Review Questions Unit-9 Partnership Accounts 106-117 9.1 Problems Relating to Admissions 9.2 Retirement 9.3 Death and Dissolution of a Firm 9.4 Summary 9.5 Keywords 9.6 Self Assessment Questions 9.7 Review Questions Unit-10 Accounting of Non Profit Organization 118-130 10.1 Accounting for Insurance 10.2 Meaning of Incomplete Records 10.3 Method of Preparation of Accounts from Incomplete Records 10.4 Summary 10.5 Keywords 10.6 Self Assessment Questions 10.7 Review Questions Unit-11 Issue of Shares and Debentures 131-143 11.1 Meaning of Share and Debenture 11.2 Types of Share and Debenture 11.3 Methods of Issues of Share and Debenture 11.4 Forfeited of Shares and Reissue of Forfeited Share 11.5 Treatment of Interest on Debenture 11.6 Summary 11.7 Keywords 11.8 Self Assessment Questions 11.9 Review Questions Unit-12 Redemption of Preference Shares and Debentures 144-153 12.1 Meaning of Shares 12.2 Debentures 12.3 Legal Provision and Methods of Redemption 12.4 Summary 12.5 Keywords 12.6 Self Assessment Questions 12.7 Review Questions Unit-13 Financial Statements 154-166 13.1 Meaning of Financial Statements 13.2 Capital Expenditures 13.3 Revenue Expenditure 13.4 Deferred Revenue Expenditures: 13.5 Summary 13.6 Keywords 13.7 Self Assessment Questions 13.8 Review Questions Unit-14 Analysis of Accounting Information 167-179 14.1 Financial statement analysis and application 14.2 Statement of cash flow 14.3 Preparation and interpretation. 14.4 Summary 14.5 Keywords 14.6 Self Assessment Questions 14.7 Review Questions Unit-15 Accounting for Insurance Cl 180-194 15.1 Loss of Stock and Consequential Loss 15.2 Accounting Principles of Insurance Accounting 15.3 Accounting Standards in India 15.4 Summary 15.5 Keywords 15.6 Self Assessment Questions 15.7 Review Questions 1 Accounting CONTENTS Objectives Introduction 1.1 Need of Accounting 1.2 Objectives of Accounting 1.3 Basics of Accounting 1.4 Accounting Terms 1.5 Conceptual Framework 1.6 Accounting Conventions 1.7 Accounting Equation 1.8 Balance Sheet 1.9 Profit and Loss Account for Non Corporate and Corporate Entities 1.10 Summary 1.11 Keywords 1.12 Self Assessment Questions 1.13 Review Questions Objectives After studying this chapter, you will be able to: Explain the need of accounting Understand the objectives of accounting Understand the basics of accounting Define the terms in accounting Discuss conceptual framework of accounting Understand the accounting conventions Define accounting equation and balance sheet Explain about the profit and loss account for non corporate and corporate entities Introduction Every profit or nonprofits business entity requires a reliable internal system of accountability. A business accounting system provides this accountability by recording all activities regarding the creation of monetary inflows of sales revenue and monetary outflows of expenses resulting from operating activities. The accounting system provides the financial information needed to evaluate the effectiveness of current and past operations. In addition, the accounting system maintains data required to present reports showing the status of asset resources, creditor liabilities, and ownership equities of the business entity. In the past, much of the work required to maintain an effective accounting system involved extensive manual effort that was tedious, aggravating, and time consuming. Such systems relied on individual effort to continually record transactions, to add, subtract, summarize, and check for errors. The rapid advancement of computer technology has increased operating speed, data storage, and reliability, accompanied by a significant cost reduction. Inexpensive microcomputers and accounting software programs have advanced to the point where all of the posting, calculations, error checking, and financial reports are provided quickly by the computerized system. Financial accounting is concerned with the recording of financial transactions and analyzing the effect of such transactions to assist in the development of business decisions. Hospitality management accounting is concerned with providing specialized internal information to managers who are responsible for directing and controlling operations within the hospitality industry. Internal information is the basis for planning alternative short- or long-term courses of action and the decision as to which course of action is selected. Specific detail is provided as to how the selected course of action will be implemented. 1.1 Need of Accounting Accounting is very much connected with our personal lives in so far as it is in respect of every business. We all with intent or unknowingly generate accounting ideas in a way when we plan what we will do with money. We need to plan how much money will be spent whilst how much of it will be kept back. What is through this activity is a budget gets prepared. And we all are familiar with this concept - which is universally acceptable, that money must be spent cautiously. The same is true of a business. It is therefore imperative for a business to know about the inflow and out flow of economic resources and their results. Thus, accounting is the very need of a business to provide the information which is useful for sound economic decision making process and owing to the diversification between ownership and management. Being known as ―The Language of business‖, accounting is the basic need of a business organization to find out where it stands. It is of great essence to provide the basis for planning and budgeting while dealing with measurement of economic activities and communicating financial information to the users for decision making. Accounting is also meant for protecting the properties of business and communicating the results obtained from the financial statements to the intended parties like share holders, debtors, creditors, and investors while meeting the legal requirements. Accounting is included in those fields that are growing faster in this era. It is dynamic at the present time and meets the growing demands of trade, commerce and industry. It is appropriate to mention here that the advent of industrial revolution and technological advancements have given rise to widen more business prospects at the same time as bringing about change in the domain of accounting by which it has now begun to be known as a tool of management for planning and controlling process. Thus, it can be rightly said, in the present day and age, no economic activity can be carried out successfully with no thought of accounting. Scope of Accounting Accounting has got a very wide scope and area of application. Its use is not confined to the business world alone, but spread over in all the spheres of the society and in all professions. Now-a-days, in any social institution or professional activity, whether that is profit earning or not, financial transactions must take place. So there arises the need for recording and summarizing these transactions when they occur and the necessity of finding out the net result of the same after the expiry of a certain fixed period. Besides, this is also the need for interpretation and communication of that information to the appropriate persons. Only accounting use can help overcome these problems. Nature of Accounting We know accounting is the systematic recording of financial transactions and presentation of the related information of the appropriate persons. The basic features of accounting are as follows: 1. Accounting is a Process: A process refers to the method of performing any specific job step by step according to the objectives, or target. Accounting is identified as a process as it performs the specific task of collecting, processing and communicating financial information. In doing so, it follows some definite steps like collection of data recording, classification summarization, finalization and reporting. 2. Accounting is an Art: Accounting is an art of recording, classifying, summarizing and finalizing the financial data. The word ―art‖ refers to the way of performing something. It is a behavioural knowledge involving certain creativity and skill that may help us to attain some specific objectives. 1.2 Objectives of Accounting Objectives of accounting are given below: To Keep Systematic Records Accounting is done to keep a systematic record of financial transactions. In the absence of accounting there would have been terrific burden on human memory which in most cases would have been impossible to bear. To Protect Business Properties Accounting provides protection to business properties from unjustified and unwarranted us. This is possible on account of accounting supplying the information to the manager or the proprietor. To Ascertain the Operational Profit or Loss Accounting helps is ascertaining the net profit earned or loss suffered on account of carrying the business. This is done by keeping a proper record of revenues and expenses of a particular period. The profit and loss account is prepared at the end of a period and if the amount of revenue for the period is more than the expenditure incurred in earning that revenue, there is said to be a profit. In case the expenditure exceeds the revenue, there is said to be a loss. 1.3 Basics of Accounting Accounting is a very old science which aims at keeping records of various transactions. The accounting is considered to be essential for keeping records of all receipts and payments as well as that of the income and expenditures. Accounting can be broadly divided into three categories: 1. Financial Accounting aims at finding out profit or losses of an accounting year as well as the assets and liabilities position, by recording various transactions in a systematic manner. 2. Cost Accounting helps the business to ascertain the cost of production/services offered by the organization and also provides valuable information for taking various decisions and also for cost control and reduction.