Basis for Accounting

There is how many elementary concept in accountancy you which must comprehend, because will very assistive you in course of accounting system later. Among other things as follows.

1. Cash Basis Accounting: All incomes are considered earned and all expenses considered expended only when they are actually received or incurred. The difference between total income and expenses represent profit. No adjustments are needed for outstanding and prepaid expenses. Similarly, accrued incomes and incomes received in advance are also not adjusted. Thus, income is recognized only when cash is received. Expense is recognized only when cash is paid. Government system of accounting is mostly on cash basis. Professionals like doctors, lawyers, brokers also prefer cash basis accounting.
2. Accrual Basis Accounting: This is also known as ‘Mercantile Basis Accounting’. In this system, accounting entries are made on the basis of amounts having become due for payment or receipt. Incomes are credited to the period in which they are earned, whether cash is received or not. Similarly, expenses and losses are debited to the period in which they are incurred, whether cash is paid or notThe profit or loss for any accounting period is the difference between the aggregates of incomes earned and expenses incurred, for that period, irrespective of cash payments or receipts. All outstanding expenses and prepaid expenses, accrued incomes and incomes received in advance are adjusted while finalizing the accounts for a relevant period. This method was initially followed by merchants, trade and industry and was therefore known as the ‘Mercantile System’.

3. Mixed or Hybrid Basis: As the name suggests, certain items are recorded on a Cash basis and others on accrual basis. For example, a trader may choose to record certain categories of sales on a Cash basis while following the Accrual system for everything else. However, the treatment of the items on Cash basis and Accrual basis must be decided upfront and followed on a strict basis.

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Introduction Basic of Accounting

"Modern Accounting is the language of business.”

A businessman invests capital in a business with the objective of making profits and increasing his resources. He incurs various expenses like salaries, rent, power and stationery to operate his business. He receives income from different sources like commission, interest and discount in the course of his business operations. He buys and sells goods or services on cash or credit basis. He acquires and disposes of properties and assets such as land and building, plant and machinery and furniture and fixtures for producing and selling goods and services to generate revenue. He borrows money from various sources like banks, financial institutions and private money-lenders for financing the business.

In effect, a business:

* Owns Assets such as land & building, plant & machinery and furniture & fixtures
* Owes Liabilities such as Capital (lent by business promoters), Loans & Borrowings raised from banks, financial institutions and the market

* Receives income from different sources sales (of goods), commission, interest and discount
* Incurs expenses towards purchase (of goods), salaries, rent, power and stationery


Effective management of business requires control over expenses to reduce the cost of operation and optimize the profitability of business. Assets must be properly maintained to increase their productivity. Liabilities have to be repaid in due time. Dealings with customers and suppliers have to be managed properly to keep them satisfied. In order to maintain assets in good condition, to repay debts and other liabilities in time, to reduce the expenses and to increase income from sales and other sources, the businessman requires complete information about his business transactions at any point in time especially on:

* What it (his business) owns?
* What it owes?
* How much income it has earned?
* How much expenses it has incurred?
* What is the profit made?
* What his financial position is?


To help businessmen in finding the required information on the status of his business at any point in time, Accounting was developed. Financial Transactions relating to business are recorded in the form of accounting entries through generally accepted principles of accounting so that income and financial position may be stated fairly. Accounting is thus a device for recording, classifying and summarizing financial transactions and interpreting its results for evaluating financial performance of business by stake-holders-proprietors, managers, creditors and investors.

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Objectives, Advantages and Limitations of Accounting

There is a few about objectives, advantages and limitations of accounting to do, in the following is the several things which often people use.
Why do we need Accounting?

* Maintenance of financial records - the basis of accounting function
* Ascertainment of Profit and Loss - net results of operations
* Depiction of financial position - a true and fair view
* Providing information - on resources utilization for decision

What are the advantages of maintaining accounts?


* Systematic record keeping
* Assessment of progress
* Tool for SWOT analysis (Strengths Weaknesses Opportunities Threats)
* Aid in decision making
* Statutory compliances
* Information to interested groups
* Legal evidence
* Taxation compliance
* Acquisitions and Mergers (of enterprises)


What are the limitations of accounting?
Accounting,

* Ignores transactions which cannot be expressed in terms of money
* Cannot measure qualitative aspects of products, policies, management and workers
* Cannot quantify morale and motivation of human resources
* Relies on estimates and forecasts in valuations of investments, inventory and useful life of assets employed
* Relies on historical data on valuation of assets ignoring price level changes and inflation

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Methods of Accounting

The methods of accounting there’s a few concept about it and especially in method which often used.
one of them is accounting methods can be classified into:
1. Single Entry System:
An accounting method in which transactions are recorded as a single entry, rather than as both a debit and a credit as in double-entry bookkeeping. Personal accounts are maintained i.e. Cash books, Books for Debtors and Creditors. When using single entry bookkeeping, income is just the difference between cash expenses and cash receipts over the relevant time period. Single entry accounting tends to be suitable only for small companies with simple financial statements

2. Double Entry System:
Double-entry accounting system is the standard practice for recording financial transactions. This provides the underlying foundation for a system of accounting, which accumulates and organizes the raw data into useful information. The system is based on the concept that a business can be described by a number of different variables or accounts, each describing an aspect of the business in monetary terms. Every transaction has a 'dual effect'.

This method of accounting records two aspects of each financial transaction - the Debit and the Credit (or the plus and the minus.)
Benefit receiving aspect or income aspect – known as ‘Debit’ - Due for that - ‘Dr.’
Another, benefit giving aspect or outgoing aspect - known as ‘Credit’ - Due to that - ‘Cr.’

Double entry provides checks and balances to ensure that your books are always in balance. Debits must always equal credits. Because debits equal credits,double-entry accounting prevents some common bookkeeping errors. Errors that aren't prevented are easier to find. Double-entry accounting is the basis of a true accounting system.
Advantages of Double Entry System:

1. Complete, systematic and accurate record keeping of financial transactions
2. Ascertainment of Profit or Loss of a business operations for a given period
3. Knowledge of financial position
4. Check on the accuracy of the accounts-Every debit has a corresponding credit
5. Limitations on scope for frauds and misappropriations
6. Better statutory, regulatory and tax compliances
7. Receivables (on credit sales) and Payable (on Credit purchases) management
8. Inter-firm, intra-firm comparative studies on annual results

Personal accounts are those that are related to any person or firm. For example, accounts for Customers, Suppliers, Owners, Lenders etc. A personal account would be used when anything is given or received from or to a person by way of a loan or a credit.
Accounting Rule:

* Debit the receiver
* Credit the giver

Real accounts refer to fixed and current assets such as Cash, Building, Plant & Machinery, Vehicles, Stock of Goods etc. An asset has been described as anything that is used to further the course of business. Assets have been classified into fixed and current. Although termed as ‘fixed’, this category of assets refers to long term assets (assets of which the value is derived from for more than a year.) Similarly current assets are short terms assets what are usually used within a year. For example, for a confectionary shop, the shop building owned by the business is a fixed asset whereas the stock of chocolates is an example current asset.
Accounting Rule:

* Debit what comes in
* Credit what goes out

Nominal accounts relate to Expenses and Incomes such as Rent, Electricity, Interest Received, Depreciation etc.
Accounting Rule:
Debit all expenses and losses
Credit all incomes and gains

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