snm accounting principles - unit 1 ch ii
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Introduction Financial Accounting End Products
Balance Sheet
Profit and Loss Account
Statement of Changes in Financial Position
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Generally Accepted Accounting
Principle (GAAP) These are certain norms and standards
on which financial accounts are
prepared. Based on experience, usage, reason,
convention and necessity.
Ensures uniformity so that financialreports can be understood properly andcommunicated effectively.
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GAAP - Principles Money Measurement Concept
Expression of facts in monetary terms.
Monetary terms provide a common denominator. Different costs have different units
Labor Hours, Electricity units, RM Kgs
Fact that cannot be expressed in monetary terms
is excluded. Transactions recorded at their value at the time
they take place. No effect of changes inpurchasing power of money.
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GAAP - Principles Business Entity Concept
Business has a separate entity from its
owners.
All transactions recorded from theviewpoint of the firm and not owners.
Enables to judge performance of themanagement.
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GAAP - Principles Going Concern concept
Business will continue to operate in future
and will not cease doing business.
Value of assets historical value and notresale value.
Asset will be used in creating future outputvalues.
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GAAP - Principles The Cost Concept
Asset is shown at cost and not current
market value or current worth.
It provides objective basis of accounting.
Cost based system is more feasible.
Difficulty in estimating market value.
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GAAP - Principles The Duality concept
Financial Accounting based on double entry
system.
There are two aspects for each transaction.
Cash put into business: Rs. 100,000.
Cash = 100,000 ; Capital = 100,000Assets = Liabilities + Equity
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GAAP - Convention Conservatism
Anticipate no profit; provide for all possible
losses. Profit to be accounted only when realised
but expenses to be accounted actual as
well as anticipated.
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GAAP - Convention The Accrual concept the matching
concept
Expenses recognised in a particularaccounting period should be matched withrevenues recognised in that period.
Determine revenues for the particularaccounting period and then determineexpenses associated with it.
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GAAP - Convention The Full Disclosure concept
Honestly and sufficiently disclose information to allstakeholders Internal as well as External
Stakeholders Shareholders, Employees,Suppliers Creditors, Government, Stock Exchange,Society
The Materiality concept Attach importance to material details and ignore
insignificant details. Rounding to nearest Rs. 1000. Clubbing of small item expenditure.
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Accounting Standards Board Established in 1977 by The Institute of
Chartered Accountants of India.
To formulate the Accounting Standards.
Consists of representatives from CAG,CBDT, ICWA, ICSI, FICCI, CII, RBI,
SEBI, Financial Institutions etc.
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Accounting Standards Twenty nine definitive standards
(Pg. 1.27)
Compliance with Accounting Standardsis mandatory.
However, they do not overrideprovisions of the Law, if there is anynon- conformity with the Law.
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AS 1: Disclosure of Accounting
Policies Fundamental Accounting Assumptions
Going Concern
ConsistencyAccrual concept
Accounting Policies
Prudence Substance over form
Materiality
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Systems of Book - Keeping Single entry system
Double Entry system
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Difference between Double and
Single Entry system Single Entry
Dual aspect is notfollowed. Some
transactions may not berecorded.
Only personal A/csmaintained.
No Trial Balance. Rough P&L and B/S
Very small Businesses.
Double Entry
Dual aspect completelyfollowed.
All A/cs maintained.
Trial balance must.
Accurate P&L and B/S.
All other entities.
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Systems of Accounting Cash system of Accounting
Accounting entries made only when cash is receivedor paid.
Government system of Accounting is mostly on thissystem.
Mercantile or Accrual system of Accounting
Accounting entries are made on the basis of amountshaving become due for payment or receipt.
Example: Rent on page 1.34
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Contents of Balance Sheet Fixed Assets: Retained on long - term basis
Tangible and Intangible Fixed Assets
Intangible Assets: Reflect Rights of the firmCurrent Assets
Cash
Marketable Securities
Accounts Receivable
Notes/ Bills Receivable
Inventory
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Contents of Balance Sheet
(Contd) Liabilities
Claims of outsiders against the firm.
Current Liabilities Trade Credit
Short term Bank Credit
Tax Payable
Accrued Expenses Outstanding Wages,Salaries
Deferred Income Receipt of income inadvance
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Contents of Balance Sheet
(Contd) Long- term liabilities
Long term borrowings
Debenture, Bonds, Mortgages
Term loan
Owners Equity
Preference Shareholders Ordinary Shareholders
Paid - up Capital + Retained Earnings
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Contents of Profit and Loss
Account Profit and Loss Account
Portrays the operations over a particular period
of time. Reports results of operations in terms of
income, net profit for the year.
Presented broadly in two forms:
Usual account form
Step - form
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Contents of Profit and Loss
Account (Contd) Net Income/Profit
Revenues Expenses = Profit/Loss
Appropriation
Provision for Dividends etc.
Retained Earnings
This retained earnings is transferred toReserves and Surplus Account which isreflected in the Balance - sheet
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Assignment Test Questions Objective and Essay
type Pg. 1.35.
No Practical Problems.