Introduction to Accounting

Document Sample
Introduction to Accounting Powered By Docstoc
The basic purpose of accounting is to provide financial information about a business
organization to various parties. Accounting communicates financial information to the
decision makers. Hence there should be a complete uniformity in the preparation of
financial statements. If every organization follows its own principles there will be a
complete confusion. In order to have consistency accounting operates within the
framework of Generally Accepted Accounting Principles {GAAP}. The term GAAP is
used to describe rules, guidelines which are called concepts, conventions, principles etc.
This is also referred to as the theory base of accounting. Yorston, Smith and Brown
define accounting principles as the body of doctrines commonly associated with the
theory and procedure of accounting serving as an explanation of current practices and as
guide for the selection of conventions and procedures where alternatives exist.
          The GAAP are the pillars on which the structure of accounting rests. If these
principles are removed; the whole structure will come down.


“ACCOUNTING         IS    AN    ART      OF    RECORDING,        CLASSIFYING        AND
                              COMPANY PROFILE

ACC Limited is India’s foremost manufacturer of cement and ready mix concrete with a
countrywide network of factories and marketing offices. Established in 1936, ACC has
been a pioneer and trend-setter in cement and concrete technology. ACC’s brand name is
synonymous with cement and enjoys a high level of equity in the Indian market. It is
among first companies in India to include commitment to environment protection as a
corporate objective. ACC's operations are spread throughout the country with 14 modern
cement factories, more than 30 Ready mix concrete plants, 20 sales offices, and several
zonal offices.

ACC's research and development facility has a unique track record of innovative
research, product development and specialized consultancy services. ACC has won
several prizes and accolades for environment friendly measures taken at its plants and
mines. The company has also been felicitated for its acts of good corporate citizenship

The company's various businesses are supported by a powerful, in-house research and
technology backup facility-the only one of its kind in the Indian cement industry. This
ensures not just consistency in product quality but also continuous improvements in
products, processes, and application areas.

ACC has rich experience in mining, being the largest user of limestone, and it is also one
of the principal users of coal. As the largest cement producer in India, it is one of the
biggest customers of the Indian Railways, and the foremost user of the road transport
network services for inward and outward movement of materials and products.

ACC has also extended its services overseas to the Middle East, Africa, and South
America, where it has provided technical and managerial consultancy to a variety of
consumers, and also helps in the operation and maintenance of cement plants abroad.
                              STAFFING PATTERN

ACC has a large workforce of about 10,032 people, comprising experts in various
disciplines assisted by a dedicated workforce of skilled persons and also a countrywide
distribution network of over 9,000 dealers. ACC employees, referred to as the ACC
Parivar, come from all parts of the country and belonging to a variety of ethnic, cultural
and religious backgrounds. ACC employees display a strong sense of loyalty to the
Company and their special stellar qualities as ‘value-adding’ human capital are well
known in the industry.

Salient points of the latest survey of employees:

      People are treated fairly regardless of religion and gender
      ACC is a safe place to work
      Management is competent in running business
      Employees feel good about what we do for society
      Proud to tell others I work here
      Management thinks positively
                         ACCOUNTING PRINCIPLES

The dictionary meaning of the term principle is a fundamental truth implying uniformity
of an acceptance everywhere. However, when applied to accounting, it gives different
meanings in different contexts.
Accounting principles is a guiding influence or an accepted rule of action or conduct. In
other words accounting principles are those rules of action or conduct which are adopted
by the accountants universally in recording accounting transactions.        It has been
developed over the years from experience, reason, usage and necessities. Hence they
accepted accounting principles.


               ACCOUNTING                                     ACCOUNTING
                CONCEPTS                                      CONVENTIONS

             Entity concept
             Dual aspect concept
             Going concern concept
             Money measurement
             Cost concept
             Accounting period
              Accrual concept
              Realization concept
              Periodic matching
               Of cost and revenue

For accounting purpose the business is stated as a separate entity from the proprietors. It
may be sound to absurd that one can sell goods to himself, but all transactions are
recorded in the books of business as per this point of view. This concept helps in keeping
private affairs of the proprietor away from the business affair.

Accounting entity concept enables to record transactions between business and the
proprietor. It ensures that accounting records reflect only the activities of business. It
separates business transactions from personal transactions of the proprietor.

This concept is applicable to all forms of business organizations. Although in the eyes of
law a sole trader and his business over the partners and their business are one and the
same, for accounting purposes they are regarded as separate entities. It is the business
with which we are concerned.

This is the basic concept of accounting. As per this concept, every business transaction
has a dual effect.
According to Dual Aspect Concept, every transaction has two aspects.
   a) It increases one asset decreases other asset.
   b) It increases an asset and simultaneously increases liability.
   c) It decreases an asset, increases another asset.
   d) It decreases one asset, decreases a liability.
Accounting standard 1 implies that the enterprise normally viewed as a going concern
that is as continuing in operation for the foreseeable further. It is assumed that the
enterprise has neither the intention nor the necessity of liquidation or of curtailing
materially the scale of the operation. It is assumed that the business concern will continue
for fairly long time, unless and until it has entered into a state of liquidation. It does not
imply permanent existence but simply stability and continuity for a period sufficient to
carry business plans. It is assumed that the activities will continue at least for a span of
time necessary to meet its present contractual obligations. It implies that the assets are
acquired for utilization and not for sale. It is as per this assumption, that the accountant
does not take into account the forced sale values of asset while valuing them. Similarly,
depreciation of assets is provided on basis of expected lives of the assets rather than on
their market values.
Since the concern is to be kept continuously alive for a long period of time, financial and
accounting policies are directed towards maintaining such continuity of activity.


This concept basically means that everything in accounting is recorded in terms of
money. It means that every event which can be expressed in terms of money can be
recorded in the books of accounts. Example: Sale or purchase of goods, expenses
incurred etc.
Apart from these events there are many other events that take place every year. These
events are death of an executive, resignation of an employee etc. these events affect the
business materially but cannot be expressed in terms of money. Therefore we can not
record these events in the books of accounts.
ACC Company believes that
Though our balance sheet’s model
of what balance sheets should be;
Typed and ruled with great precision in a type that all can see;
in a type that all can see;
Though the grouping of the assets
is commendable and clear;
And details which are given
more than usually appear;
Though investments have been valued
at the sale price of the day;
And the auditor’s certificate
shows everything O.K.;
One asset is omitted – and its worth
They want to know;
That asset is value
Of the men, who run the show?
Thus we can say that ACC considers human resource as a valuable asset but it cannot be
expressed in terms of money. Thus to follow accounting standards do not calculate it in
the books of account.

This concept does not recognize the realisable value, the replacement value or the real
worth of an asset. Thus, as per cost concept.
     a) An asset is ordinarily recorded at the price paid to acquire it i.e. at its cost, and
     b) This cost is the basis for all subsequent accounting for the asset.
  The cost concept does not mean that the asset will always be shown at the cost. It only
 means that cost becomes the basis for all subsequent accounting for the asset. Thus the
 assets recorded at cost at the time of purchase may systematically be reduced by the
 process of depreciation. These assets ultimately disappear from the Balance Sheet when
 they have been fully depreciated [and sold as scrap]. The cost concept also implies that
 if nothing has been paid to acquire an asset, it cannot be shown as an asset in the books
 of accounts.
       Cost concept brings objectivity in the preparation and presentation of financial
 statements. It implies that the figures shown in the accounting records should be based
 on objective evidence and not on subjective views of a person.
 The accrual system is a method whereby revenue and expense are identified with
 specific periods of time like a month, half a year or a year. It implies recording of
 revenues and expenses of particular accounting period whether they are received paid in
 cash or not under cash system of accounting the revenues and expenses are recorded
 only if they are actually received paid in case irrespective of the accounting period to
 which they belong. But under accrual method, the revenues and expenses relating to that
 particular accounting period only are considered. The accountant records revenues as
 they are earned and expenses as they are incurred not necessary when case changes
 hands. Under this concept, to a specific accounting period.
     From this concept of accounting, one chief problem arises viz, the segregation of
‘capital ’and ‘revenue’ items. Any increase in the owners Equity resulting from business
operations ‘revenue’ and any decrease is called ‘expense’. Therefore, excess of revenues
over expenses is called ‘income’ and if expenses exceed revenues it is called ‘lost’.
Expenses and revenues related to period may be paid or unpaid.

The only way to know whether the business has operated successfully is to close down its
doors, sell all its assets, pay the liabilities and returns any leftover cash to the owners.
Obviously, it is not practical for accountants to measure business income in this manner.
Instead of this business need periodic report on their progress. Accountants slice time into
small segments and prepare financial statements for specific periods. Accounting period
is the spam of time at the end of which financial statements are prepared to throw light on
the results of business during relevant period. An accounting period is the interval of time
at the end of which the Income Statement and Balance Sheet are prepared to know the
results and resources of business. Although shorter periods are frequently adopted for
purpose of comparative studies, the normal accounting period is twelve months. This is
because life of business is considered to be indefinite, the measurement of income and
study of financial position of business after a long time would not help in taking
appropriate steps and also distribution of income to proprietor.
   The splitting of life of business in small periods is due to various reasons:
      a) To compute and disburse periodic rewards to owners at regular intervals.
      b) To comply with requirements under laws applicable to the organization.
      c) To settle liabilities towards the state.
A business organization can make its accounts every day by pressing few keys on
computer. Companies prepare financial statements for interim period less than one year.
Managers want financial statements frequently for decision making.

According to this concept profit should be accounted for only when it is actually realized.
Revenue is recognized only when sale is effected or the services are rendered. Sale is
considered to be made when the property in goods passes to buyer and he is legally liable
to pay. However to recognize the sale receipt is not essential. Even credit sale is result in
realization as it creates a definite asset called ‘Account Receivable’. However there are
certain exceptions to the concept: contract accounts, hire purchases etc. Similarly
incomes like commission, interest, rent etc. are shown in P&L account on accrual basis
though may be not realized in cash on date of preparing.
  Revenue is recognize at the time of production when product can be mandated easily at
an objectively determined price. In the case of long term contracts the contractor may
elect to take up revenue as ended on the basis of percentage of work completed during
particular period.

This concept is based on the accounting period concept or Accrual concept. Making
profit is the most important objective that keeps the proprietor engaged in business
activities. That is why most of accountants time is spent in evolving techniques for
measuring the profitability of the concern. To ascertain the profit made during the period,
it is necessary to match ‘revenues’ of the period with the ‘expenses’ of that period.
Income gained by the business during the period can be measured only when revenue
earned during period earned is compared with the expenses incurred to earn that revenue.
The question arises when payment made/received is irrelevant. Therefore, as per this
concept, adjustments are made for all outstanding expenses, prepaid expenses, accrued
incomes, unearned incomes etc.The matching principle directs to identify all expenses
incurred during accounting period, to measure the expense and match all expenses
against revenue earned during that span of time. To match expenses against revenues
means to subtract expenses from the revenues in order to compute net income or net loss.
Match expenses against revenue earned during the period.


                       ACCOUNTING CONVENTIONS
Conventions are the customs or traditions guiding the preparations of accounting
statements. They are adopted to make financial statements clear and meaningful. They
represent usage or methods generally accepted and customarily used. These are
statements or rules of practice employed or followed with common consent. These exist
in the cases where there are different alternatives, which are equally logical and some of
these are generally accepted having consideration of cost, time, habit or convenience.
Compilations of such conventions take the form of Generally Accepted Accounting
Practices or Procedures. Some areas of convention relate to methods of depreciation,
stock valuation, method of accounting etc.

The accountant should attach importance to material details and ignore insignificant
details. If this is not done accounts will be overburdened with minute details. As per the
American Accounting Association, an item should be regarded as material, if there is
reason to believe that knowledge of it would influence the decision of informed investor.
Therefore, keeping the convention of materiality in view, unimportant items are either
left out or merged with other items. Some items are shown as footnotes like: contingent
liabilities, market value of investments etc. The decision to regard any information as
material should be taken objectively.
However, any item may be material for one purpose but immaterial for another, material
for one concern but immaterial for another or material one year but immaterial for next
year. Practical considerations assume more importance than theoretically correct way of
recording information.

The comparison of one accounting period with the other is possible only when the
convention of consistency is followed. It means accounting from one accounting period
to another should be on the same basis. For example: A company may adopt a straight
line method, written down value method, or any other method of providing depreciation
on fixed assets. But is expected that the company follows a particular method of
depreciation consistently. Similarly, if stock is valued at cost or at market price
whichever is less, this principle should be followed every year. Any change from one
method to another would lead to inconsistency. However, consistency does not mean non
flexibility.   It should permit introduction of improved techniques of accounting.
Consistency also means that different businesses are using the same kind of accounting
principles and materials in maintenance of accounts and preparation of financial
statements. This is ensured by GAAP.

It refers to the policy of “Playing safe”. As per the convention all prospective losses are
taken into consideration but not all prospective profits. In other words “anticipate no
profit but provide for all possible losses”. However, this convention is being criticized on
the ground that it goes not only against the convention of full disclosure but also against
the concept of matching costs and revenues. It encourages creation of secret reserves by
making excess provision for depreciation, bad and doubtful debts etc. some degree of
conservatism is inevitable where objective data is not available.

Following are some examples of application of conservatism:
    1. Making provision for doubtful debts and discount on debtors
   2. Not providing for discount on creditors
   3. Valuing stock in trade at cost or market price whichever is less

In the case of uncertainty it should be the philosophy of life to have conservatism.
Conservatism does not justify deliberate understatement of profits. With the development
of corporate form of organization conservatism is using much of its significance

                            ACCOUNTING STANDARDS

Accounting Standards are issued by ICAI after an elaborate procedure. Accounting
Standard plays a very important role in today’s competitive business environment to
facilitate better comparisons between different enterprises. Non-compliance of
Accounting Standard is today looked upon as a negative aspect of the financial
statements and the creditability of the enterprise not complying with Accounting
Standard is also doubted.

Some of the Accounting Standards that ACC uses are discussed below:

This Accounting Standard deals with the disclosure of significant accounting policies
followed in preparation and presentation of financial statements. Such disclosure is
necessary since accounting policies followed vary or differ from enterprise to enterprise.
If the significant accounting policies of the enterprise are not disclosed, the results of the
enterprise i.e., its profit or loss for the year cannot be compared easily with another
enterprise’s results. This Accounting Standard also seeks to promote better understanding
of financial statements by establishing an AS on the same. Disclosure of accounting
policies as required by this standard would also facilitate a more meaningful comparison
between financial statements of different enterprises.
As ACC has already completed 72 yrs, they have a better understanding of financial
statements and also various concepts like Dual Aspect concept, depreciation accounting,

Depreciation is defined as a measure of wearing out, i.e., wear-n-tear consumption or
other loss of value of a depreciable asset arising from use, efflux of time or obsolescence
through technology and market changes. When the cost of a depreciable asset is spread
over or allocated over its useful life, it is nothing but depreciation.
In a Profit and Loss account, depreciation is one of the main items of expenditure
and has a significant effect in determining the profitability of an enterprise. There
are two methods of calculating depreciation:

       1. Straight Line Method:
          Straight Line Method means depreciation is calculated on the principal amount
          and amount of depreciation remain the same every year.

       2. Written Down Method (Reducing Balance Method):
          Reducing Balance Method means depreciation is calculated on the written down
          value where the amount of depreciation is not fixed.

ACC uses both the methods i.e. Straight Line Method (SLM) and Written Down Value
Method (WDV). Straight Line Method (SLM) of depreciation is followed in Butibori unit
and Written Down Value Method (WDV) of depreciation is followed in Kalwe, Kymore
and Madukkarai when the goods are transferred to and fro. But since the company has
come into existence, they are using SLM only.

(AS-9)Revenue Recognition:
It is the gross inflow of cash, receivables or other considerations arising in the course of
ordinary activities of the reporting entity from sale of goods, rendering services, and from
the use of entities resources by other yielding interest, dividend and royalties.
      Realized capital gains arising out of disposal of non-current assets.
       Eg: Appreciation in the value of fixed assets.
      Unrealized holing gains in the value of current assets. Eg: increase in the market
       value of stock in trade.
      Natural increase in the herds of livestock agricultural and forest products.
      Realized/ unrealized gains arising out of fluctuations in the foreign exchange rate
       and translation of foreign currency financial statements.
      Realized gain from discharge of an obligation at a lesser amount than carrying of
      Unrealized gains resulting from restatement of the carrying amount of the

Fixed assets are held by the enterprise for use in the production of supply of goods or
services. They are expected to be used for more than one accounting period. Fixed assets
are not held for sale in the normal course of business.
      Forest, plantations etc.
      Wasting assets
      Expenditure on real estate development
      Livestock

Shared By: