Accounting
•Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions. Put more simply, accounting is the “language of business.”
•“Accounting is the art of recording, classifying and summarizing, in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof”
Users of Accounting Information
Types of Business Organizations
Financial Statements
Elements of Income Statement
The Income Statement and Terms
Elements of Balance Sheet
Reporting Financial Position: The Balance Sheet and Related Terms
| Term | Definition | Reported on the |
| Asset | A resource of a business | Balance sheet |
| Liability | An obligation of a business | Balance sheet |
| Equity | The difference between assets and liabilities | Balance sheet |
| Contributed Capital | Equity resulting from contributions from owners | Balance sheet |
| Retained Earnings | Equity resulting from profitable operations | Balance sheet and statement of shareholder’s equity |
| Revenue | An increase in assets resulting from selling a good or providing a service | Income Statement |
| Expense | A decrease in assets resulting from selling a good or providing a service | Income Statement |
| Dividend | A distribution of profits to owners | Statement of shareholder’s equity |
Principles Used to Measure Economic Information
| Principle | Definition | Ramification |
| Accrual | Incomes and expenses are recorded as and when they are accrued irrespective of payment or receipt of cash. | The receipt of cash is not required to record transactions |
| Revenue Recognition | Revenues are recorded when they are earned. | The receipt of cash is not required to record a revenue. |
| Matching | Expenses are recorded in the time period when they are incurred to generate revenues. | For many assets, the cost of the asset must be spread over the periods that it is used. |
| Cost | Assets are recorded and maintained at their historical costs. | Except in a few cases, market values are not used for reporting asset values. |
Assumptions Made When Communicating Economic Information
| Assumption | Definition | Ramification |
| Economic entity | The financial activities of a business can be accounted for separately from the business’s owners. | We have to worry that the financial information of the owner is mixed with the financial information of the business. |
| Monetary unit | The rupee, unadjusted for inflation, is the best means of communicating accounting information in the India. | All transactions in foreign currencies are converted to rupees. |
| Time period | Accounting information can be communicated effectively over short periods of time. | Most businesses prepare quarterly and annual financial statements. |
| Going concern | The company for which we are accounting will continue its operations indefinitely. | If an entity is not selling its assets, then the cost principle is appropriate. |
Qualitative Characteristics of Accounting Information
| Term | Definition | Ramification |
| Understandability | Accounting information should be comprehensible by those willing to spend a reasonable amount of time studying it. | Users must spend a reasonable amount of time studying accounting information for it to be understandable. |
| Relevance | The capacity of accounting information to make a difference in decisions. | Information should have predictive or feedback value and should be timely. |
Qualitative Characteristics of Accounting Information
| Term | Definition | Ramification |
| Reliability | The extent to which accounting information can be depended upon to represent what it purports to represent, both in description and in number. | Information should be free from error, a faithful representation, and neutral. |
| Comparability | The ability to use accounting information to compare or contrast the financial activities of different companies. | Entities must disclose the accounting methods that they use so that comparisons across companies can be made. |
Qualitative Characteristics of Accounting Information
| Terms | Definition | Ramifications |
| Consistency | Accounting information should be comparable across different time periods within a company. | An entity should use the same accounting methods year to year and disclose when they change methods. |
| Materiality | The threshold over which an item could begin to affect decisions. | When an amount is small enough, normal accounting procedures are not always followed. |
Qualitative Characteristics of Accounting Information
| Terms | Definition | Ramifications |
| Conservatism | When uncertainty exists, accounting information should present the least optimistic alternative. | An entity should choose accounting techniques that guard against overstating revenues or assets. |
Qualitative Characteristics of Accounting Information
| Terms | Definition | Ramifications |
| Conservatism | When uncertainty exists, accounting information should present the least optimistic alternative. | An entity should choose accounting techniques that guard against overstating revenues or assets. |
NOTE: In case of any query, please feel free to contact me on this email enquiry@overallaccounting.com
