Accounting Concepts

Some Accounting Concepts: 

Accountancy vs Accounting

    Accountancy is the main subject whereas Accounting is one of its branches e.g bookkeeping, taxation, costing, auditing.  Accounting is the process of identifying, measuring, and communicating economic information for decisions to the users of the information i.e Internal and external users.

Branches of Accounting

    Financial Accounting

    The main function of financial accounting is to find the true result of a business entity during a specified period. 

    Cost Accounting

    It is that branch of accounting that is concerned with determining the cost of goods manufactured and sold. It also helps management to control costs.

    Managerial Accounting

       The purpose of managerial or management accounting is to provide relevant information periodical basis to take suitable decisions in the best interest of the business.

Forms of Business Organization

there are mainly three forms of business organizations:

Sole Proprietorship

    This is the simplest form of business organization. Only one person is the owner and responsible for the overall business operations and as such enjoys all the profits and in event of loss, he is the only one who suffers all loss.

Partnership

    In this form of business organization, at least two persons join to form a business. They invest capital in the business and share profits or losses as per agreed ratio and operate their partnership business as per agreement i.e. partnership deed.

Joint Stock Company

    This form of business is formed under the Companies Ordinance 1984. It is owned by many persons. It has a legal right to act as a person. it can buy and sell it is own name. It is managed by a board of directors formed through resolutions passed by its owners. its owners are known as shareholders. it has various types e.g private limited company, public limited company, etc.

Goods or Merchandise

    An item that is purchased or manufactured with an intention to resale it as the main purpose for which the business is set up is called goods or merchandise. For example "toys" are the goods for a toy shop, "medicine' are the goods for the medical store, and "furniture" are the goods for the furniture outlet.

Purchases

    When "goods" i.e resalable items are bought in by a business then in accounting terminology it is called "purchases" is made. Purchases are of two types: a. Credit Purchases and b. Cash Purchases.

    Credit Purchases

    When goods are bought for which the payment is to be made to the vendor in some future time, it is called credit purchases. it is also called purchases on account.

    Cash Purchases

    When goods are bought for which the payment is made to the vendor at the spot, it is called Cash Purchases.

   Purchases Returns

    When some of the purchased items are returned to the vendor due to any reason, it is called purchases return. it is also termed as Return Outwards.

Purchase Discount

    When some concession is given by the vendor to the buyer, it is termed as "discount". Such discount from the viewpoint of the buyer is called a "purchase discount" and from the viewpoint of the seller/vendor is called a "sales discount". Both Purchase Discount and Sales Discount are recorded in the accounting recording. Purchase discount is an income item to the purchaser and an expense item to the seller.

Trade Discount

    It is a discount that is allowed by a wholesaler or manufacturer to the retailer on catalog price or listed price as a custom of trade through bargaining at the spot. Trade discount is not recorded in the accounting record.

Cash Discount

    It is a concession given by the creditor ( supplier) to the debtor (customer) on payment made before the due date. It is an expense item from the viewpoint of the seller and an income item from the viewpoint of the buyer.

Allowance

    Sometimes a purchaser when receiving the delivery of goods finds that some goods have minor defects or are not as per specifications of the purchaser. In this situation, a reduction is allowed by the seller to the buyer in the value of the goods on the condition to keep the goods as it is. Allowance is an income item to the buyer and an expense item to the seller.

Sales

    When "goods" i.e resalable items are sold out by a business then in accounting terminology it is called "sales" is made. Sale is of two types: a. Credit Sales and b. Cash Sales.

Credit Sales

        When goods are sold for which the payment is to be received from the buyer in some future time, it is called credit sales. it is also called Sales on the account.

Cash Sales

        When goods are sold for which the payment is received from the buyer at the spot, it is called Cash Sales.

Sales Return

        When some of the sold items are returned by the buyer due to any reason, it is called sales return. it is also termed as Return Inwards.

 Debtors

    Debtors are the customers to whom the goods are sold or services are provided on a credit basis and from whom the payment is to be received in some future time. Debtors are current assets of the business and are shown in the balance sheet under the heading current assets. Debtors are also called  "Accounts Receivable".

Creditors

     Creditors are the persons or suppliers from whom the goods are purchased or services are received on a credit basis and to whom the payment is to be made in some future time. Creditors are current liabilities of the business and are shown in the balance sheet under the heading current liabilities. Creditors are also called  "Accounts Payable".

Capital

    Amount invested by the owner/owners in the business is called capital. Capital is also known as Equity or Owner's Equity.

     It is also of two types i.e. a. Internal Equity b. External Equity.

   

Internal Equity

    Amount invested by the owners in the business is called Internal Equity.

External Equity

    Part of Equity that belongs to outsiders is termed as External Equity e.g Long term Loan obtained from a bank and invested in the business or amount raised by issuing debentures and invested in the business.

Assets 

    Economic resources e.g building, furniture, machinery, plant, vehicles, account receivable, a stock which has certain value owned by a business and are expected to benefit for the future operations of the business are called assets.  Assets are valuables to companies that expect to provide future benefits. This can reduce costs, generate cash flow, or improve business sales. Companies report assets in their balance sheet.

Types of assets include fixed, current, liquid, and prepayments. Assets may be long-term resources such as buildings and tools. Current assets include those assets that a company intends to use or sell within one year. Liquid assets can be easily converted into cash in a short period of time i.e within a year. Prepayments include prepaid payments for goods or services that a company will use in the future.

    Assets are mainly of two types i.e a. Fixed Assets b. Current Assets

    Fixed Assets

       These are the assets whose life is for many years i.e Building, Machinery, Office Equipments, Vehicle. They are also called Long term Assets.

Current Assets

    These are assets that are convertible in cash in a short period within a year e.g accounts receivable, the stock is called current assets. They are also called short-term assets.

Liabilities

    Debts or obligations of a business are called liabilities. It is the amount which a business is legally bound to pay to the outsiders e.g creditors, bills payables, accounts payables, bank loan, etc

    Liabilities are further divided into short-term and long-term liabilities.

   Short term Liabilities

    These liabilities are payable normally within one accounting period e.g rent payable tax payable, salaries payable, insurance premium payable, etc

Long term Liabilities

Long Term liabilities are payable after more than one year e.g long term loan from a bank, debentures, etc

Accounting Period

   

The accounting period is a duration or a span of time for which financial statements are prepared and released to internal and external parties. The accounting period should remain consistent so that different users of financial statements analyze the performance of the business over time by comparing different accounting periods. Accounting cycle track accounting events i.e transactions within given accounting periods.

Revenue

The amount which a business charges to its customers for goods sold to them or services provided is called revenue of the business e.g Sales, Fee earned, rent earned, a commission earned, etc.

Expenses

    These are the costs of the goods and/or services used up in earning revenue e.g salaries expense, rent expense, interest expense, utility expenses, etc.

Net Income

    It is the amount of revenue that exceeds the expenses of the business i.e Revenue- Expenses. It is also called Net Profit.

Net Loss

    It is the amount of expense that exceeds the revenue of the business i.e Expenses-Revenue.

Cash basis Accounting 

   Cash basis accounting only records those businesses transactions that acquire or pay cash for goods and services. This method of operation is related to income and expenses. 

Accrual Basis Accounting

 Accrual basis accounting deals with expected costs and revenue by combining receivable accounts with payable accounts. In contrast, cash basis accounting focuses on immediate costs and revenue and does not register for any transaction until the company pays or receives cash.

Most people find that accounting for money is easy, but it does not provide an accurate description of the organization's health as an accrual basis accounting.

 Accruals:

   It is a record-keeping adjustment. Accrual recognizes expenses and revenues before cash changes hands. Accruals are those expenses and revenues not yet recorded in accounting records. Accruals affect a business's profits and must be accounted for while preparing financial statements. Accrued rent, Accrued salaries, accounts receivable/payable are examples of accruals.

Internal Control

               Internal control is the process designed to confirm reliable financial reporting, effective and well-organized operations, and compliance with appropriate laws and regulations.  Protecting assets against theft and illegal use, acquisition, or disposal is also of internal control.

  Control environment, the management style, and the anticipations of upper-level managers, particularly their control policies, determine the control environment.  An effective control environment consists of independent oversight provided by a board of directors and, philosophy; a defined organizational structure with knowledgeable and responsible employees; and the assignment of authority and responsibility.

Introduction to Accounting

Accounting is the language of business. It is a system for recording, summarizing, and analyzing the financial transactions of an economic entity. Successful communication with this information is key to the success of all businesses.

Users of Financial Statements

Those who rely on financial information include internal users, such as corporate executives and employees, and external users, such as banks, investors, government institutions, financial analysts, and trade unions. 

Accounting Answers the following questions:

• Is the company profitable?

• Is there enough money to meet the wage needs?

• How much is the company's debt?

• How much is the company's revenue compared to its budget?

• How much money is left for customers?

• Does the company always pay dividends?

• How much does each part cost?

• Should a company invest in growth?

 

Accountants should present the organization's financial information in clear, concise reports that help make questions like the above easier to answer.

Accounts Receivable

It is the opposite of Accounts Payable. It refers to the amount which is receivable by the business from outside parties e.g from customers for the goods being sold or services being provided. It is a current asset that is shown on the asset’s side of the balance sheet. Accounts receivable are normally converted into cash in a short period of time.

Accounts Payable

    

Accounts payable means the amount that is payable by a business to its suppliers, creditors, and vendors for the goods or services that have been purchased on a credit basis.. it is a current liability appearing on the liabilities portion of a business’s balance sheet. it is to be paid in a short period of time to avoid default. It is like an IOU to other parties outside the business.

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