KEY TERMS in Accounts & Differences

7/25/2019 KEY TERMS in Accounts & Differences

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KEY TERMS used in Accounting


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Sl Terminology Meaning

1 Accounting The process of identifying measuring and

communicating economic informationto permit informed judgements anddecisions by the users of information.

!inancialaccounting

The art of recording" classifying andsummarising in a significant mannerand in terms of money transactionsand e#ents $hich are at least in part ofa financial character and interpretingthe results.

% Managementaccounting

The presenting of accounting information insuch a $ay as to assist managementin the creation of the policy and &n theday to day operation of theunderta'ing.

( Accountingprinciples

Rules of action or conduct adopted by theaccountants uni#ersally $hilerecording accounting transactions.

) Accountingconcepts

*asic assumptions or conditions upon$hich the science of accounting isbased.

+ Accountingcon#entions

,ustoms and traditions $hich guide theaccountants $hile preparing theaccounting statements.

- ,ash system of

accounting

A system in $hich accounting entries are

made only $hen cash is recei#ed orpaid.


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Mercantilesystem ofaccounting

A system in $hich accounting entries aremade on the basis of amounts ha#ingbecome due for payment or receipt. &tis also termed as Accrual system of

accounting.

/ 0ournal A boo' containing a chronological record ofbusiness transactions. &t is the boo' oforiginal records.

1 ,ompound0ournalentry

A 0ournal entry recording more than onebusiness transaction occurring on thesame day" the nature of transactionbeing the same.

11 2ominalaccounts

These are accounts opened in the boo'ssimply to e3plain the nature of thetransaction. They include accounts ofall incomes4gains and e3penses andlosses.

1 5pening journal

entry

A journal entry passed for bringing for$ard

balances of assets and liabilities of thepre#ious period to the current period.

1% 0ournali6ing The process of recording transactions in thejournal.

1( 7ersonalaccounts

These are accounts of persons $ith $homthe business deals.

1) Real accounts These are accounts of tangible objects or

intangible rights o$ned by anenterprise and carrying probablefuture benefits.

1+ 8edger A boo' containing different accounts of anentity.


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1- 7osting Transferring the debit and credit items fromthe journal to the respecti#e accountsin the ledger.

1 Trial balance A statement containing the #arious ledgerbalances on a particular date.

1/ 9oucher system A plan and method of procedure for the#erifications" recording and paymentof all items:other than items to be paidfrom petty cash;$hich re


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of a specific type.


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Accommodationbill

A bill dra$n and accepted for pro#idingfunds to a friend in need.

/ *ills of e3change An instrument in $riting containing an

unconditional order signed by themar'er" directing the said person topay a certain sum of money only to orto the order of a certain person or tothe bearer of the instrument.

% ,he


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% ,urrent assets ,ash and other assets that are e3pected tobe con#erted into cash or consumed inthe production of goods or renderingof ser#ices in the normal course of

business.

%/ ,urrent liabilities 8iabilities payable $ithin a year from thedate of *alance Sheet either out ofe3isting current assets or by creationof ne$ current liabilities.

( !i3ed assets Assets held for the purpose of pro#iding orproducing goods and ser#ices and notheld for resale in the normal course of

business.

(1 !ictitious assets Assets not represented by tangiblepossession or property.

( !i3ed liabilities All liabilities other than current liabilities

(% 8iabilities The claims of outsiders :other than o$ners;against the firm?s assets.

(( 8i


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( ,ompensatingerrors

Errors $hich compensate each other.

(/ Errors of

omission.

Errors committed because of complete

omission of a transaction from theboo's of accounts.

) Errors ofcommission

Errors on account of $rong balancing of anaccount" $rong posting" $rong carryfor$ard" $rong totaling etc.

)1 Errors of7rinciple

Errors committed because of failure to ma'ea proper distinction bet$een re#enueand capital items.

) Suspenseaccount

An account to $hich the difference in thetrial balance has been put temporarily.

)% Amorti6ation The process of $riting off the intangibleassets.

)( >epletion The portion of the cost of the naturalresources recogni6ed as an e3pensesfor each period.

)) >ilapidation >amage done to a building or other propertyduring the tenancy.

)+ >epreciation The portion of the cost of tangible operatingassets :other than land; recogni6ed asan e3pense for each period.

)- >epreciationaccounting

A system of accounting $hich aims todistribute the cost or other basic

#alues of tangible capital assets:lesssal#age" if any;o#er the estimateduseful life of the asset in a systematicand rational manner.

) Accounting ratio &t is the relationship e3pressed inmathematical terms bet$een t$oaccounting figures related $ith each


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other.


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)/ *alance sheet A statement of financial position of businessat a specified moment of time.

+ *alance sheet

ratios

Ratios calculated on the basis of figures of

balance sheet only.

+1 ,omposite ratios Ratios based on figures of profit and lossaccount as $ell as the balance sheet.They are also 'no$n as inter@statement ratios

+ !inancialanalysis

,ritical e#aluation of data gi#en in thefinancial statements.

+% !inancial ratios Ratios disclosing the financial position orsol#ency of the firm. They are also'no$n as sol#ency ratios.

+( !inancialstatement

An organi6ed collection of data according tological and consistent accountingprocedures con#eying anunderstanding of some financialaspects of a business firm.

+) &nterpretation E3plaining the meaning and significance ofthe financial data.

++ 7rofitability ratios Ratios $hich reflect the final results ofbusiness operations.

+- Turno#er ratios Ratios measuring the efficiency $ith $hichthe assets are employed by a firm.They are also 'no$n as acti#ity orefficiency ratios.

+ !unds &t refers to $or'ing capital of a business.

+/ !unds flo$statement

A statement summari6ing inflo$s andoutflo$s of funds from any businessacti#ity.

- or'ing capital &t refers to the e3cess of current assets o#er


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current liabilities.


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-1 ,ash &t stands for cash and ban' balances.

- ,ash flo$analysis

A techniirect labour 8abour $hich ta'es acti#e and direct part inthe production of a particular

commodity.

- >irect material Material $hich becomes an integral part ofthe finished product and $hich can becon#eniently assigned to specificphysical units.

-/ !i3ed cost A cost that remains constant $ithin a gi#enperiod of time and range of acti#ity inspite of fluctuations in production.

8ife cycle costing The practice of obtaining o#er theirlifetimes" the best use of physicalassets at the lo$est total cost to theentity.

1 Material The substance from $hich the product is


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made.


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5#erhead4&ndirect cost

The e3penditure on labour" materials orser#ices $hich cannot beeconomically identified $ith specificsaleable cost unit.

% Semi@#ariablecost

A cost containing both fi3ed and #ariablecomponents and $hich is thusaffected by fluctuations in the le#el ofacti#ity.

( 9alue addedconcept

&t is the $ealth generated by an enterprisethrough its operations

) 9ariable cost A cost $hich tends to #ary indirect

proportion to the le#el of acti#ity.

+ Bistorical cost of&n#entories

&t is the aggregate of cost of purchase" costof con#ersion and other costs incurredin bringing the in#entories to theirpresent locations and conditions.

- &n#entory Tangible property to be consumed inproduction of goods or ser#ices orheld for sale in the ordinary course of

business.

2et reali6able#alue

The estimated selling price in the ordinarycourse of business less costnecessarily to be incurred to ma'e thesale.

/ 7eriodicin#entorysystem

A system of in#entory accounting $here the


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/1 *udget A financial and4or


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11 ,urrent standard A standard fi3ed for a short period.

1 Estimated cost An estimate of $hat the cost is li'ely to beduring a gi#en period of time.

1% &deal cost A cost $hich should be incurred during aperiod under ideal conditions.

1( Standard cost A careful pre@determination of $hat the costshould be.

1) Standard costing A costing system in#ol#ing the preparationand use of standard costs" theircomparison $ith actual costs and the

analysis of #ariances as to theircauses and points of incidence.

1+ >irect labour cost#ariance

&t is the difference bet$een the standarddirect $ages specified for the acti#ityachie#ed and the actual direct $agespaid.

1- >irect labourefficiency

#ariance

&t is that portion of direct labour cost#ariance $hich is due to the difference

bet$een standard labour hoursspecified for the acti#ity achie#ed andactual labour hours e3pended.

1 >irect labour rate#ariance

&t is that portion of direct labour cost#ariance $hich is due to the differencebet$een the standard rate of payspecified and the actual rate paid.

1/ >irect material

cost#ariance

&t is the difference bet$een the standard

cost of direct material specified for theoutput achie#ed and actual cost ofdirect material used.

11 >irect materialmi3#ariance

&t is that portion of direct material usage#ariance $hich is due to the differencebet$een the standard and actual


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composition of mi3ture.


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111 >irect materialprice#ariance

&t is that portion of direct material usage#ariance $hich is due to the reasonsother than change of mi3.

11 >irect materialusage#ariance

&t is that portion of direct cost #ariance$hich is due to the difference bet$eenthe standard


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4loss at different le#els of sales #olume$ithin a limited range.


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11 ,ash brea' e#enpoint

The le#el of acti#ity $here there is neither acash profit nor a cash loss.

1 ,ost brea' e#en

point

The le#el of acti#ity $here the total costs

under t$o alternati#es are the same.

1% ,97 analysis A management tool sho$ing the relationshipbet$een #arious ingredients of profitplanning #i6." cost" selling price and#olume of acti#ity.

1( >ifferentialcosting

A techniecision ma'ing A process of choosing among alternati#ecourses of action

1/ >ifferential cost The difference in total bet$een alternati#escomputed to assist in decisionma'ing.

1% Rele#ant cost The cost pertinent to specific managementdecision.


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DIFFERENCES BETWEEN MANAGEMENT ACCOUNTING AND

FINANCIAL ACCOUNTING

Point of Difference Financial accounting Management accounting

Objectives It is designed to supply

information in the form of

profit and loss account

and Balance Sheet to

external parties lieshareholders! creditors!

bans! investors and

"overnment

It is designed for the

internal use by the

management#

$naly%ing

performance

It portrays the position of

business as a &hole# 'he

financial statements

sho&s the overall

performance or status of

the business

It directs it attention to the

various divisions!

departments of the

business and reports about

the profitability!

performance etc# Itprovides detailed

analytical data for these

purposes#

Data used It is concerned &ith the

monetary record of past

events# It a post(mortem

It is an accounting for

future and therefore! it

supplies data both for


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analysis of past activity

and therefore out of date

for management action#

present and future duly

analy%ed and in detail in

the management language#

Monetary

measurement

Only economic events

that is &hich can bedescribed in terms of

money is measured

'he management is

e)ually interested in non(monetary economic

events vi%# technical

innovations! personnel in

the organi%ation! time

value of money etc

Periodicity of

reporting

'he income statement and

balance sheet are usually

prepared yearly or in

some cases half(yearly#

Management re)uires

information at fre)uent

intervals and therefore

financial accounting fails

to cater to the needs to themanagement#

Precision Information is more

precise as it is for the

external use

Information is *ess

precise

$s it is for the internal

use#

+ature It is more objective It is more subjective

because it is based on

judgment rather than on

measurement#*egal compulsion It is more or less

compulsory for every

business on account of the

legal provisions of one or

the other#

'he management is free to

install or not to install a

system of management

accounting#

Differences bet&een Single ,ntry and Double ,ntry system of Boo(

eeping

Point of Difference Double ,ntry System Single ,ntry System

-ecording of

transactions

'he dual aspect is

completely follo&ed

&hile recording

In case of some

transactions both the

aspects are recorded!


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business transactions &hile for some only one

aspect is recorded!

&hile in case of some

other transaction no

recording is done at all#Maintenance of boos .arious subsidiary

boos vi%# sales boo!

purchases boo and

returns boo! cash boo

etc are maintained#

+o subsidiary boos

except cash boo is

maintained

Maintenance of boos

of account

$ll major accounts real!

nominal and personal

accounts are maintained

Only personal accounts

are maintained

Preparation of trial

balance

'rial balance is

prepared to checarithmetical accuracy of

the boos of account

'rial balance cannot be

prepared hence it is notpossible to chec the

accuracy of the boos

of accounts#

$ccuracy of profits and

financial position

'rading and profit and

loss account gives the

true profit of the

business &hile balance

sheet sho&s the true

and fair financialposition of the business#

Only a rough estimate

of profit and loss can be

made# 'he statement of

affairs prepared does

not sho& the true

financial position of thebusiness#

/tility *arge business units

should compulsorily

adopt double entry

system

It is used by very small

business units#

Differences bet&een 0ournal and *edger

Point of Difference 0ournal *edger

Boo of ,ntry It is the boo of first or

original entry

It is the boo of second

and final entry


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System of record It records transactions

in a chronological order

It records transactions

in a analytical order

-eliability 0ournal is more reliable

since entry is first made

here

It is less reliable as

entry from the records

of journal is simplyposted here#

process 'he process of

recording transactions

is termed as

journali%ing

'he process of

recording transactions

in the ledger is called as

Posting#

Difference bet&een a 'rial and Balance sheet

Point of Difference 'rial Balance Balance Sheet

Meaning It is a statement

containing various

ledger balances on a

particular date

It is a statement of

various assets and

liabilities of the

business on a particular

date#

Objective It is to chec thearithmetical accuracy of

the boos of account of

the business

'he objective is toascertain the financial

position of the business

Item covered It contains all items

relating to incomes!

expenses! assets and

liabilities

It incorporates only

assets and liabilities#

Preparation It is prepared before

preparation of the

balance sheet

It is prepared not only

on the basis of trial

balance but also of any

additional information

&hich may not have

been incorporated in

trial balance#

/se It is meant only for $ balance is prepared


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internal use both for internal as &ell

as external use#

DIFF,-,+1, B,'2,,+ F/+DS F*O2 S'$',M,+' $+D I+1OM,

S'$',M,+'

POI+' OF

DIFF,-,+1,

F/+DS F*O2

S'$',M,+'

I+1OM,

S'$',M,+'

F/+DS It deals &ith the

financial resources

re)uired for running the

business activities# it

explains ho& &ere thefunds obtained and ho&

&ere they used

I' DIS1*OS,S '3,

-,S/*'S OF '3,

B/SI+,SS

$1'I.I'I,S# I, 3O2

M/13 3$S B,,+,$-+,D $+D 3O2

I' 3$S B,,+ SP,+'

M$'13I+" It matches the 4funds

raised5 and 4funds

applied5 during a

particular period# 'he

sources and

applications of fundsmay be of capital as

&ell as of revenue

nature#

It matches th6 incomes

of a period &ith the

expenditure of that

period &hich are both

of a revenue nature#

SO/-1,S Sources are many

besides operations such

as share capital!

debentures !sale of

fixed assets etc#

$n income statement

&hich discloses the

results of operations

cannot even accurately

tell about the funds

from operations alone

because of non(funditem being included

therein#

Difference bet&een cash flo& analysis and funds flo& analysis


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Point of difference 1ash flo& analysis Fund flo& analysis

Position It is concerned only

&ith the change in cash

position

It is concerned &ith

change in &oring

capital position bet&een

t&o balance sheet dates#-ecord It is merely a record of

cash receiptsand

disbursements#

2hile studying the

short term solvency of a

business one is

interested not only in

cash balance but also in

the assets &hich can be

easily converted into

cash#

Periodicity It is more useful to the

management as a toolof financial analysis in

short periods as

compared to funds flo&

analysis# It has been

rightly been said that

shorter the period

covered by the analysis

greater is the business

can meet its obligationsmaturing after 78 years

from no&

Differences bet&een Boo 9eeping and $ccounting

Point of Difference Boo 9eeping $ccounting

-ecording It is a mere recording of

business transactions in

appropriate accountboos#

It denotes the recording

of business transactions

in proper boos ofaccounts as &ell as the

preparation and analysis

and interpretation of

financial statements

Scope +arro& scope 2ider scope


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Maintenance of

accounts

It maintains information

about a business in the

boos of accounts

It analyses and

interprets the

information maintained

in the boos of accounts

Base Boo eeping serves asthe basis for recording

transaction for the first

time

$ccounting starts &hereboo eeping ends

Purpose Boo eeping practices

the principles of

accounting

$ccounting professes

i#e# lays do&n the

principles of

+ature of &or 'he &or of

booeeping is of

routine nature and so it

does not re)uire anyspecial no&ledge and

sill

'he &or in accounting

is of complicated nature

and so it re)uires

special no&ledge andsill

Person in charge 'he boo eeping &or

is usually performed by

boo eepers or account

clers

$ccounting &or is

done by )ualified

accountants

Differences bet&een "oods and $ssets:

"oods $ssets

It refers to things in &hich a

business deals

It refer to things &ith &hich a

business deals

'hey are meant for resale It is meant for use in the business

"oods does not include assets and

therefore it is narro& in sense

'he scope of the term assets is &ider

than that of the term goods and

includes goods

"oods are tangible $ssets may be tangible and

intangible

"oods are the items of trading

account#

$ssets are the items of balance sheet


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Differences bet&een $ssets and *iabilities:

$ssets *iabilities

$ssets refer to properties or things

o&ned by a business and amountsdue to a business from others#

*iabilities refer to amounts due from

a business to others#

'hey are useful to a business *iabilities are a burden to a business

$ssets such as debtors! bills

receivable! outstanding incomes!

prepaid expenses! loans given to

others etc mae others indebted to a

business

$ll liabilities mae a business

indebted to others

$ concern must necessarily have

some assets

$ concern may or may not have

liabilities

If the amount of assets of a businessis more than the amount of its

liabilities the financial position or

strength of the business &ill be

stronger

If the amount of liabilities of abusiness is greater than the amount

of it s assets the financial position of

the business &ill be &eaer

$ccounts of assets sho& debit

balances

$ccounts of liabilities sho& credit

balances

Differences bet&een debtors and 1reditors:

Debtors 1reditors

$ debtor is a person &ho o&es

money to business

$n creditor is a person to &hom the

business o&es money

$ person becomes a debtor of a

business &hen he has received some

benefit from the business

$ person becomes a creditor of a

business &hen he has given some

benefit to the business

Debtors constitute assets for a

business

1reditors constitute liabilities for a

business

$ccount of debtors sho& debit

balances

$ccounts of creditors sho& credit

balances#

Differences bet&een Debit and 1redit


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Debit 1redit

It refers to the amount of charge

given to an account for some benefit

received by that account

It refers to the amount of discharge

or re&ard given to an account for

some benefit given by that accountDebit is given to an account &hen

that account has received some

benefit

1redit is given to an account &hen

that account has given some benefit

'he entry for the debit given to an

account is made on the left(hand side

of that account

'he entry for the 1redit given to an

account is made on the right(hand

side of that account

Debit results in increase in the

amount of an asset! decrease in the

amount of liability! decrease in the

amount of o&ner;s capital! andincrease in the amount of an expense

or decrease in the amount of an

income#

1redit results in decrease in the

amount of an asset! increase in the

amount of liability !increase in the

amount of o&ner;s capital! decreasein the amount of an expense or

increase in the amount of an income

Differences bet&een 0ournal and a *edger

0ournal *edger

It is a boo of first! original or prime

entry as all transactions are recorded

first in the journal#

It is a boo of final entry as the

transactions are recorded finally in

the ledger

'he journal is a subsidiary boo!

because it does not provide the final

accounting information relating to

the business#

It is a principal boo of accounts

because it is from this boo that a

trader can obtain final information

relating to this business#

'he journal is only an original record

and not a permanent record#

$ ledger is the permanent record of

various accounts

'he journal is a daily record and so

the transactions are entered in the

journal daily#

But posting from the journal to the

ledger is done periodically< say!

&eely! fortnightly! monthly or

)uarterly according to the

convenience and re)uirements of the


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business concern#

In journal the information relating to

a particular account is not found in

one place

In ledger it is found in one place

0ournal does not provide fullinformation about a person! an asset!

an expense or an income

*edger provides full informationabout a person!an asset!an expense or

an income#

'he unit of entries in the journal is a

transaction

'he unit of entries in the ledger is an

account

$s legal evidence journal has greater

&eight than ledger

1onsidered as a secondary document

only

-ecording of transactions in the

journal is called journali%ing

-ecording of transactions in the

ledger is called posting

,ach entry in the journal sho&s both

the aspects of a transaction

,ach entry in a ledger account sho&s

only one aspect of a transaction+arration is &ritten in the journal +o narration is &ritten in the ledger

.ouchers! receipts! invoices and

debit and credit notes help the

recording of transactions in the

journal

0ournal helps the recording of

transactions in the ledger

0ournal may be avoided by a

business concern

*edger is a must for every business

concern#

0ournal is totalled but not balanced $ ledger is balanced

0ournal has debit and credit columns

it does not have debit and credit

sides#

But a ledger has debit and credit

sides

In the journal! ledger folio is &ritten In the ledger! journal folio is &ritten

$ trial balance cannot be prepared

from the entries in the journal

$ trial balance can be prepared from

the balances in ledger accounts#

Final accounts cannot be prepared

from the journal entries

Final accounts can be prepared from

the ledger account balances#

Differences bet&een 0ournalising and Posting

0ournali%ing Posting

It means recording a transaction in It means recording a transaction in


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the journal the ledger

0ournali%ing is the first stage of

recording a transaction

Posting is the second stage of

recording a transaction

It is done then and there that is soon

after a transaction has taen place

Posting is generally not made then

and there0ournali%ing of transactions is done

in the order of dates &ithout any

other considerations

Posting is made according to the

nature of the transactions

It is made in one place Posting of an entry in the journal is

made in t&o different places in the

ledger#

It is done &ith the help of vouchers!

receipts! invoices! debit notes and

credit notes

Posting to the ledger is done &ith the

help of the entries in the journal#

Differences bet&een a Debit +ote and a 1redit +ote:

Debit note 1redit note

It is prepared by the person &ho

returns the goods and is sent to the

seller of goods#

It is prepared by the person &ho

receives the goods returned and is

sent to the buyer of the goods#It serves as an intimation for the

goods returned

It serves as intimation for the receipt

of the goods returned#

It indicates that the account of the

person to &hom the goods are

returned is debited

It indicates that the account of the

person by &hom the goods are

returned is credited#

$ debit note is prepared first $ credit note is prepared after the

receipt of the debit note#

It serves as the basis for the entries in

the purchases returns boo of the

sender of the goods#

It serves as the basis for the entries in

the sales returns boo of the receiver

of goods#

Differences bet&een capital expenditure and revenue expenditure


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1apital expenditure -evenue expenditure

It is incurred for ac)uiring fixed

assets intended for use in the

business and not for resale#

It is incurred for ac)uiring or

producing goods meant for sale#

It is incurred for extending orimproving the existing fixed assets It is incurred for maintaining thefixed assets in a good &oring order

It adds to the revenue(earning

capacity of a concern

It does not add to the revenue(

earning capacity of a concern

It &ill increase the value of net assets It &ill decrease the value of the net

assets

'he benefit of capital expenditure

extends to more than one year#

'he benefit of revenue expenditure is

confined to only one year#

It is not a loss to the concern It is a loss to the concern

It &ill go to the balance sheet# It &ill go the trading account or

profit and loss account#

Differences bet&een capital receipts and revenue receipts

1apital receipts -evenue receipts

It represents the capital received

from the proprietors! loans or

deposits received! sale proceeds ofinvestments and fixed assets and

non(recurring receipts such as

legacies! life membership fees etc#

It represents the incomes! such as

sale proceeds of goods! interest

received! commission received etc#

1- are of non(recurring nature# In

other &ords! they are not received

repeatedly

-evenue receipts are of recurring

nature# In other &ords! they are

received repeatedly or regularly#

Some of the capital receipts such as

loans and deposits received are

liabilities

-evenue receipts are not liabilities

$s some of the capital receipts are

liabilities! they have to be repaid

$s revenue receipts are not

liabilities! they need not be repaid#

1apital receipts are not incomes to

the concern

-evenue receipts are incomes to the

concern

1apital receipts &ill go to the

balance sheet of the concern

-evenue receipts &ill go to the

revenue account of the concern#


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Difference bet&een management accounting and financial accounting

Point of difference Financial accounting Management accounting

Objectives It is designed to supply information in

the form of profit and loss a=c andbalance sheet to external parties lieshareholders! creditors! bans!

investors and government#

It is designed principally for

internal use by the management#

$naly%ing

performance

It portrays the position of business as a

&hole# 'he financial statements lie

income statement and balance sheetreport on overall performance or status

of the business#

Financial accounting deals &ith the

aggregates and therefore cannot reveal

&hat part of the management action isgoing &rong and&hy#

It directs its attention to the

various divisions!departments of

the business and reports aboutthe profitablility!performance etc

of each of them#

Management accounting

provides detailed analytical data

for these purposes#

Data used It is concerned &ith the monetary

record of past events# It is a post(

mortem anaysis of past activity andtherefore out of date for management

action#

I' is an accounting for future

and therefore it supplies data

both for present and future dulyanaysed and in detail in the

management language so that it

becomes basis for management

action#

Monetary

measurement

In financial accounting only such

economicevents find a place &hich

can be described in money#

It is e)ually interested in non(

monetary economic events vi%#

technical innovations! personnelin the organi%ation! changes in

the value of money etc# theseevents affect the management;s

decision and therefore

management accounting cannotafford ignore them#

Periodicity of

reporting

'he period of reporting is much longer

in financial accounting as compared tomanagement accounting# it is usually

prepared yearly Or in some cases half(

yearly

Management re)uires

information at fre)uentintervals #in management

accounting there is more

emphasis on furnishinginformation )uicly and at

comparatively short intervals as

per the re)uirements of themanagement#

Precision 'here is more emphasis on precision i 'here is less emphasis onprecision#

+ature It is more objective It is more subjective#


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*egal compulsion It is more or less become compulsory

for every business on account of thelegal provisions of one or the other

act#

'he business is free to install or

not to install a system ofmanagement accounting#

Fundamentals of Book keepn!

Defnton and Meann! of Book "eepn!

In the &ords of $#3 #-osenampff! 4Boo eeping is the art of recording

business transactions in a systematic manner5#

Boo eeping is the art and science of recording business transactions in

appropriate boos of accounts in accordance &ith the principles of

accountancy for the purpose of ascertaining the profit or loss and financial

position of the business#

In short! boo eeping means the recording of business transactions in a set

of account boos#

O#$e%ts of Book "eepn!&

7# 'o have a permanent record of all the transactions of a business for

future references#

># 'o ascertain the net result ?i#e# the net profit or the net loss@ of the

business for future reference#


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A# to no& the exact reasons leading to the net profit or the net loss

6# 'o ascertain &hat amounts are due to the business and from &hom the

amounts are due#

# 'o ascertain &hat amounts are due from the business and to &hom the

amounts are due#

C# 'o no& the exact financial position of the business as on a particular

date#

# 'o no& the progress of the business from year to year#

E# 'o minimi%e errors and frauds by facilitating their )uic detection#

# 'o eep control over the properties and the activities of the business#

78# to have valuable information for legal and tax purposes

77#'o have necessary information for future planning#

Is #ook keepn! an a't o' a s%en%e(

$n art! generally! refers to action or actual doing# Boo eeping involves

actual doing ? i#e# the actual recording of business transaction in account

boos@# So! boo eeping is an art# $ Science! usually! refers to any subject

&hich has a set of accepted principles or rules for application in practice#

Boo(eeping has a set of accepted principles or rules for application &hile

recording the business transactions# So! boo eeping is also a science#

Defnton and meann! of A%%ountn!

'he $merican Institute of 1ertified Public $ccountants has defined

accounting as 4the art of recording! classifying and summari%ing! in a

significant manner! and in terms of money! transactions and events &hich

are! in pat at least! of a financial character! and interpreting the results

thereof#5

In short! accounting is the recording! classifying and summari%ing of

business transactions and interpreting the results thereof#

Essental aspe%ts o' featu'es of a%%ountn!&

7# -ecording: it is the first essential aspect of accounting# it refers to the

entering of business transactions as and &hen they occur either in a

single boo called the journal or in several boos called the subsidiary

boos or special journals#


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># 1lassifying: It is the second important aspect of accounting# It refers

to the grouping of transactions or entries of lie nature into

appropriate heads by posting or transferring the entries from the

journal or subsidiary boos to the appropriate accounts in the ledger#

A# Summari%ing: It is third essential aspect of accounting# It means the

preparation and presentation of financial statement#

6# $nalysis and Interpretation: It is the last essential aspect of

accounting# It means the dra&ing of conclusions from the data found

in the financial statements about the profitability and the financial

position of the business#

B'an%)es of A%%ountn!

In order to satisfy the needs of different groups of people interested in the

accounting information! different branches of accounting has been evolved#

'here are three branches of accounting# 'hey are:

7# Financial accounting

># 1ost $ccounting

A# Management accounting

Fnan%al A%%ountn!&

It is concerned &ith the recording of business transactions in a set of boos

and the periodic presentation of the financial data recorded in the boos of

accounts! through financial statement s lie the profit and loss account andbalance sheet to outsiders lie creditors! shareholders! employees etc#

Cost A%%ountn!&

It is that branch of accounting &hich is mainly concerned &ith costing

information &hich is useful to the management for purpose of cost

ascertainment and cost control#


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Mana!ement A%%ountn!*mana!e'al a%%ountn!&

It is the art or techni)ue of analysis and interpretation and presentation of

facts! results and information revealed by financial accounting! cost

accounting and other boos and records ept by the business for the benefit

of persons &ho are in charge of managing the business# In short!

management accounting is the accounting &hich provides necessary

information to the management for discharging its functions such as

planning! organi%ing! directing and controlling more efficiently#

A%%ountn! %on%epts and Con+entons&

'o mae the language of business or accounting clear to the different groups

or persons! a number of rules or principles have been agreed upon andfollo&ed by accountants in the &riting up of accounts and in the presentation

of financial statements# 'he general rules or principles adopted in accounting

are called accounting standards or accounting principles#

$ccounting principles can be divided into :

I $ccounting 1oncepts

II $ccounting 1onventions

A%%ountn! Con%epts&

It means the assumptions upon &hich accounting is based# 'hey have been

developed by accountants to mae accounting convey the same meaning to

all people as far as practicable# 'here are a number of accounting concepts:

,- Mone. Measu'ement Con%ept o' Common Denomnato'

Con%ept&


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In accounting a record is made only of those transactions or

events &hich can be expressed in terms of money# +on(monetary events

lie the retirement of the managing director of a concern! team &or in

the organi%ation! good )uality of products or services in the organi%ation

are not recorded#

/- Busness Entt. Con%ept o' Sepa'ate Entt. Con%ept&

In accounting every business undertaing &hether it is a sole(

trading concern or a partnership firm or a joint stoc company is considered

as a distinct entity from the persons &ho o&n it# $s the business and the

proprietors &ho o&n the business are regarded as t&o separate entities the

transactions of the business are distinguished from those of the proprietors

and in the boos of the business! accounts are ept only for the transactions

of the business and not for those of the proprietors#

0- Gon! Con%e'n %on%ept o' %on%ept of %ontnut.&

In accounting an enterprise is considered as a going concern? i#e#

a concern that &ill continue to operate for a fairly long time@ and it is

from this point of vie&! its transactions are recorded in its boos#

1- Cost Con%ept&

$ccording to this concept! an asset ac)uired by a concern is

recorded in the boos of accounts at cost ?i#e at the price actually paid for

ac)uiring the asset@# 'he maret price of the asset is ignored! and it is its cost

price that forms the basis for all subse)uent accounting for that asset#

# Dual aspe%t %on%ept& E2uaton o' a%%ountn! e2uaton %on%ept&

,very business transaction al&ays results in receiving of some

benefit of some value and giving of some other benefit of e)ual value# For

example! &hen a business purchases goods for cash! it receives goods of

some value and gives cash of e)ual value# 'hus! every business transaction

involves dual or double aspect of e)ual value# So in accounting a record is

made of the dual or t&o aspects of each transaction# ,ach transaction &illal&ays result in e)uality of assets and liabilities and at any point of time< the

total assets of the concern &ill be e)ual to its total liabilities plus the

proprietor;s capital#

$ssets G *iabilities H Proprietor;s capital

$ssets ( *iabilities GProprietor;s capital

$ssets( Proprietor;s capitalG *iabilities


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3- A%%ountn! 4e'od Con%ept&

For measuring the financial results of the business or the &oring

life of the business is split into convenient periods of time# Such a period

often! is called as accounting period# 'he length of the accounting period

depends on the nature of the business and the objective of the proprietor

of the business!# 'he accounting period may be three months! six months!

one year or even t&o but! usually! one year is regarded as the ideal

accounting# 'he one year accounting period is also recogni%ed by la

5- O#$e%t+e e+den%e %on%ept&

'his concept means that all accounting entries should be

evidenced and supported by business documents such as invoices! vouchers

etc#'his concept also implies that evidences must be completely objective ? that

is! must state the facts as they are &ithout bias or fraud@ and must be subject

to verification by auditors#

6- Mat%)n! %on%ept o' pe'od%al mat%)n! %on%ept

,very business man invests money in the business &ith the main

objective of earning profit# 'he business demands the details of all revenues

and all expenses# Detailed information about all the items of revenue and all

the items of expenses and losses in necessary! because right business

decision in the right direction can be taen only &hen detailed information

all items of revenue and expenses are available# 'o no& the net profit and

net loss and the details of all revenues and expenses every business prepares

and presents a statement account no&n as Income statement or the profit

and loss account# 'hus! the net profit or loss of a business is determined by

matching the expenses and losses &ith the revenues#

# -eali%ation concept or -evenue -ecognition concept:

$ccording to this concept! revenue is recogni%ed or considered as

being earned on the date on &hich it is realised# -evenue is considered as

being realised not &hen goods are manufactured or &hen order is received

or contract is signed but on the date on &hich goods or services are


41/43

transferred to the customer and the customer become legally liable to pay for

them#

78#$ccrual 1oncept:

'he accrual concept suggests that &hen a transaction has been

entered into its conse)uences &ill certainly follo So all the transactions

must be brought into record! &hether they are settled in cash or not# It

suggests that an accountant is re)uired to treat as revenues all that items for

&hich there are the legal right to receive although cash might not have been

received for them# 'hat means! if revenue is earned! but no payment is

received the same should be recorded as revenue#

77#*egal $spect concept:

'his concept means that the accounting records and boos should

reflect the legal position# 'his concept also means that the accounting

records and statements should conform to legal re)uirements# 'hat is! the

accounting records should be ept and the statements should be prepared in

the manner provided by la 'hat is by the relevant acts#

A%%ountn! Con+entons&

It refers to the customs! traditions! usages or practices follo&ed by the

accountants as a guide in the preparation of financial statements# 'hey are

adopted to mae the financial statements clear and meaningful#

Con+enton of Mate'alt.&

'his convention means that a detailed record is made only of those business

transactions &hich are material ?i#e# important@# +o detailed record is made

of transactions &hich are trivial ?insignificant@! as the &or of recording the

minute details of such transactions is not justified by the usefulness of the

result#

Con+enton of Conse'+atsm&

'he convention of conservatism means the convention of caution! prudence

or the policy of playing safe# In other &ords! it means that! in the accounting

records and the financial statements of a business# $ll the prospective losses!

riss and uncertainties should be taen note of and provided for! but


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prospective profits should be ignored# In short! 4provide for all possible

losses! but anticipate no profits5 is the implication of this convention# It is on

account of this convention that provision for doubtful debts! provision for

discount on debtors! provision for fluctuations on any investments etc are

made#

Con+enton of %onssten%.&

It signifies that the accounting practices and methods should remain

consistent from one accounting year to another# for instance! &hen once a

particular method of depreciation is adopted for a particular fixed asset the

same method should be follo&ed for that asset year after year#

Con+enton of full Ds%losu'e&'he convention of full disclosure means that the material facts must be

disclosed in the financial statements# For instance! as regards the

investments! not only the various securities held by a concern should be

disclosed but also the mode of their valuation should be stated#

It has been given recognition by the companies act#


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Documents

KEY TERMS in Accounts & Differences