Fundamental Of Accounting

Book-keeping

The first in the accounting process is identifying and recording of transactions in the books of accounts. This is necessary for any business as the transactions happening in a business entity must be recorded so that the information is available for further analysis.

Advantages of Book-keeping

Book-keeping has the following advantages:

Transactions are recorded systematically in chronological order in the book of accounts.
Book-keeping is useful to get the financial information
It helps to have control over various business activities.
Records provided by business serve as a legal evidence in case of any dispute.
Comparison of financial information over the years is possible. Also comparison of financial information of different business units is facilitated.
Book-keeping is useful to find out the tax liability.

Limitations of book-keeping

Book-keeping has the following limitations:

Only monetary transactions are recorded in the books of accounts.
Effects of price level changes are not considered.
Financial data recorded are historical in nature, i.e., only past data are recorded.

Accounting Principles

Business entity concept

This concept implies that a business unit is separate and distinct from the owner or owners, that is, the persons who supply capital to it.

Based on this concept, accounts are prepared from the point of view of the business and not from the owner’s point of view. Hence, the business is liable to the owner for the capital contributed by him/her.

Money measurement concept

This concept implies that only those transactions, which can be expressed in terms of money, are recorded in the accounts.

Example: A business has 5 computers, 2 tables and 3 chairs, the assets cannot be added to give useful information, unless, they are expressed in monetary terms `1,00,000 for computers, ` 10,000 for tables and ` 1,500 for chairs.

Going concern concept

It is the basic assumption that business is a going concern and will continue its operations for a foreseeable future. For example, assets are generally valued at historical cost. Any increase or decrease in the value of assets in the short period is ignored.

Cost concept

In an inflationary situation, when prices of commodities increase, valuing the assets at historical cost may not represent the true position of the business.
The results of business units established at different dates are not comparable if assets are recorded on historical basis.
Assets which do not have acquisition cost such as human resources are not recognized under this concept

Dual aspect concept

According to this concept, every transaction or event has two aspects, i.e., dual effect. For example, when Arun starts a business with cash ` 5,00,000, on the one hand, the business gets cash of ` 5,00,000 and on the other hand, a liability arises, that is, the business has to pay Arun a sum of ` 5,00,000.

Periodicity concept

This concept deals with preparing accounts for a particular period. As the proprietors ,investors, creditors, employees and the government are interested in knowing the performance of the business unit periodically, it becomes necessary to select a particular period, normally one year for measuring performance.

Matching concept

All expenses paid during the period are not considered, but only the expenses related to the accounting period are considered.

Realisation concept

According to realisation concept, any change in value of an asset is to be recorded only when the business realises it. When assets are recorded at historical value, any change in value is to be accounted only when it realises.

Objective evidence concept

Objective evidence concept requires that all accounting transactions recorded should be based on objective evidence. The objective evidence includes documentary evidence like cash receipts, invoices, etc.

Accrual concept

According to accrual concept, the effects of the transactions are recognised on mercantile basis, i.e.