Accounting 1st Session

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ACCOUNTING

PRINCIPLES


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Definition of Accounting art of recording, classifying, summarizing in a

significant manner and in terms of money,transactions and events, which are in part, at least, offinancial character and interpreting the result thereof

- American Institute of Accountants

the language ofbusiness


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Accounting and Bookkeeping

Accounting - the process of identifying,

measuring, recording, and communicating

economic information about an organization or

other entity, in order to permit informedjudgments by users of the information.

Bookkeeping - encompasses the record-keeping

aspect of accounting and therefore provides

much of the data to which accounting principlesare applied in the preparation of financial

statements and other financial information.


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Importance of Accounting:

1. Provide information for decision making

2. Helps in planning e.g. Budgets

3. Helps in evaluation of the organization

4. Accounts make tax assessments easy

5. May be a regulatory requirement6. Eases monitoring of debtors and creditors


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Types of Accounting

Financial AccountingCost Accounting

Management AccountingGovernment Accounting

Taxation AccountingAuditing & Assurance Services

International Accounting


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ENTITY CONCEPT- states that the item or

activity (entity) that is toreceive an accounting mustbe clearly defined, and that

the relationship assumed toexist between the entity and

external parties must be


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GOING CONCERN ASSUMPTION

- states that it is

expected that the entitywill continue to operateindefinitely


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HISTORICAL-COST PRINCIPLE- states that economic resources be

recorded in terms of the amounts of

money exchanged; when a transaction

occurs, the exchange price is by its nature

a measure of the value of the economic

resources that are exchanged


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REALIZATION CONCEPT- states thataccountingtakes placeonly foq those

economic eventsto which theentity is a

paqty. This


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MATCHING PRINCIPLE- states thatincome iscalculated bymatching a

peqiod'sqevenues, suchas the amount

of meqchandise


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ACCRUAL PRINCIPLE- defines revenues and expenses

as the inflow and outflow of all

assetsas distinct from the flow

only of the cash assetin the

course of operating the enterprise


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CONSISTENCY CRITERION- states that the accountingprocedures used at a giventime should conform with theprocedures previously used for

that activity. Such consistencyallows data of differentperiods to be compared


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DISCLOSURE PRINCIPLE- requires that financial

statements present the mostuseful amount of relevantinformationnamely, all

information that is necessary inorder not to be misleading


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SUBSTANCE-OVER-FORM STANDARD- emphasizes the economic substance of an event eventhough its legal form may suggest a different result. Anexample is the practice of consolidating the financialstatements of one company with those of another inwhich it has more than a 50 percent ownershipinterest


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DOCTRINE OF ACCOUNTING

CONSERVATISM- applies to a situation in which a company appears to beheaded for a financial loss. The accountant confers with

management to determine whether this loss is probable or onlypossible. In cases where the loss is deemed probable, theaccountant and management then seek to estimate the likelyamount of the loss. If the loss can be estimated, then thenegative effect of the loss will be reflected in the companysfinancial statement even though the loss has not yet actuallyoccurred


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TRADITIONAL TYPES OF

FINANCIAL STATEMENTS1. Balance Sheet

2. Income Statement

3. Statement of Cash Flows -presents the sourcesand the uses of the enterprise's cash by classifyingeach type of cash inflow and cash outflowaccording to the nature of the type of activity, suchas operating activities, investing activities, and

financing activities. The statements operatingactivities section identifies the cash generated orused by operations. Investing activities include thecash exchanged to buy and sell long-lived assetssuch as plant and equipment. Financing activities

consist of the cash proceeds from stock issuancesand loans and the cash used to a dividends to


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Diagram of Accounting Procedure

Business transactions

Journal

General Journal Cash Book Sales Book Purchase Book

Ledger accounts

Balance sheet

accounts

Income sheet

accounts

Balance sheet Income statement


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3.Trial Balance

4. Adjustments

2.General Ledger

1. Journaling

7. Balance Sheet

6. Financial Statements

5. Adjusted Trial Balance

BOOKKEEPING & ACCOUNTING CYCLE


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BOOKKEEPING & ACCOUNTING CYCLEStep 1. Recording a transaction in a journal marks

the starting point for the double-entrybookkeeping system. In this system the financial

structure of an organization is analyzed asconsisting of many interrelated aspects, each ofwhich is called an account (for example, thewages payable account). Every transaction isidentified by its two or more aspects or

dimensions, referred to as its debit (or left side)and credit (or right side) aspects, and each of theseaspects has its own effect on the financialstructure.


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BOOKKEEPING & ACCOUNTING CYCLE Step 2. The amounts that appear in the various journals are transferred

to the organization's general ledgera procedure called posting. Aledger is a book having one page for each account in the organization'sfinancial structure. The page for each account shows its debits on theleft side and its credits on the right side, so that each accountsbalancethat is, the net credit or net debit amountcan bedetermined. In addition to the general ledger, a subsidiary ledger is used to provide

information in greater detail about the accounts in the general ledger. Forexample, the general ledger contains one account showing the entireamount owed to the enterprise by all its customers; the subsidiary ledgerbreaks this amount down on a customer-by-customer basis, with a separatesubsidiary account for each customer. Subsidiary accounts may also be keptfor the wages paid to each employee, for each building or machine ownedby the company, and for amounts owed to each of the enterprise's creditors.


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BOOKKEEPING & ACCOUNTING CYCLEStep 3. Posting data to the ledgers is followed by

listing the balances of all the accounts andcalculating whether the sum of all the debit

balances agrees with the sum of all the creditbalances (because every transaction has beenlisted once as a debit and once as a credit). Thisdetermination is called a trial balance. This

procedure and those that follow it take place at theend of the fiscal period. Once the trial balance hasbeen prepared successfully, the bookkeepingportion of the accounting cycle has


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BOOKKEEPING & ACCOUNTING CYCLEStep 4. Once bookkeeping procedures have been completed, the

accountant prepares adjustments to recognize events that, althoughthey did not occur in conventional form, are in substance alreadycompleted transactions. The following are the most commoncircumstances that require adjustments: accrued revenue (for example,interest earned but not yet received); accrued expense (wage costincurred but not yet paid); unearned revenue (earning subscriptionrevenue that had been collected in advance); prepaid expense(expiration of a prepaid insurance premium); depreciation(recognizing the cost of a machine as expense spread over its usefuleconomic life); inventory (recording the cost of goods sold on the basis

of a period's purchases and the change between beginning and endinginventory balances); and receivables (recognizing bad-debt expenseson the basis of expected uncollected amounts).


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BOOKKEEPING & ACCOUNTING CYCLE

Step 5. Once the adjustments are

calculated and entered in theledger, the accountant preparesan adjusted trial balanceone

that combines the original trialbalance with the effects of the

adjustments.


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BOOKKEEPING & ACCOUNTING CYCLEStep 6. With the balances in all the

accounts thus updated, financialstatements are then prepared (stepsix). The balances in the accounts

are the data that make up theorganization's financialstatements.


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BOOKKEEPING & ACCOUNTING CYCLEStep 7. The final step is to close

noncumulative accounts. This procedure

involves a series of bookkeeping debits andcredits to transfer sums from income-statement accounts into owners' equityaccounts. Such transfers reduce to zero the

balances of noncumulative accounts so thatthese accounts can receive new debit andcredit amounts that relate to the activity ofthe next business period.

Accounting 1st Session

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