Introduction to Accounting (2)

Fundamentals of Accounting
UNIT – 1 INTRODUCTION TO
ACCOUNTING
STRUCTURE
1.0 Objectives
1.1 Introduction
1.2 Definition and Scope
1.3 Objectives of Financial Accounting
1.4 Accounting v/s Book Keeping
1.4.1 Terms used in accounting
1.4.2 Users of accounting information
1.4.3 Limitations of Financial Accounting
1.5 Accounting Concepts
1.5.1 Principles and Conventions
1.6 Accounting Standards
1.7 Brief review of Accounting Standards in India
1.8 Accounting Policies
1.9 Accounting as a measurement discipline
1.10 Valuation principles and Accounting estimates
1.11 Let Us Sum Up
1.12 Key Words
1.13 Some Useful Books
1.14 Answer to check your progress
1.15 Terminal Questions
1.0 OBJECTIVES
After studying this unit, you will be able to:

• Describe the scope of accounting
• Identify objectives and functions of accounting
• state the significance of accounting principles, concepts and
conventions
• To have a Brief review of Accounting Standards in India
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Fundamental of accounting
1.1 INTRODUCTION
Accounting is the system of recording financial transactions with both

numbers and text in the form of financial statements. It provides an
essential tool for billing customers, keeping track of assets and liabilities
(debts), determining profitability, and tracking the flow of cash. The
system is largely self-regulated and designed for the users of financial
information, who are referred to as stakeholders: business owners, lenders,
employees, managers, customers, and others. Stakeholders utilize
financial statements to help make business, lending, and investment
decisions.
Accounting has several specialized fields and roles. Private (internal)
accounting generally refers to accountants who work within a single
business entity. Small business accountants may assume general roles
which require preparing the records (bookkeeping) and performing bank
reconciliations. Accounting professionals are generally divided into three
fields: tax, audit, and advisory. The tax field focuses on federal, state, and
local tax filings. Audit roles test the validity of financial statements and
internal controls. Advisory services perform general financial
consulting. Public accounting firms have several different clients,
whereas private accounting refers to working for one specific business
entity.
1.2 DEFINITION AND SCOPE
Accounting is the process of recording financial transactions pertaining

to a business. The accounting process includes summarizing, analyzing,
and reporting these transactions to oversight agencies, regulators, and tax
collection entities. The financial statements used in accounting are a
concise summary of financial transactions over an accounting period,
summarizing a company's operations, financial position, and cash flows.
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Accounting is one of the key functions of almost any business. It may be
handled by a bookkeeper or an accountant at a small firm, or by sizable
finance departments with dozens of employees at larger companies. The
reports generated by various streams of accounting, such as cost
accounting and managerial accounting, are invaluable in helping
management make informed business decisions.
The financial statements that summarize a large company's operations,
financial position, and cash flows over a particular period are concise and
consolidated reports based on thousands of individual financial
transactions. As a result, all accounting designations are the culmination
of years of study and rigorous examinations combined with a minimum
number of years of practical accounting experience.
In simple words, accounting can be defined as keeping rec ords of
all financial transactions related to an individual or an entity. And
then there are pre-defined rules and procedures in the way a
transaction should be accounted for. This is what we call debit or
credit, income or expenditure, asset or liability. There are then rules
on whether it would be an asset or an expenditure and so on.
A proper definition of accounting is that it is the process of

recording, summarizing, analyzing, and reporting the financial
transactions related to a business. It explains how a business
organization records, organizes and reports these transactions to
regulators and other parties. It helps to translate the working of
business intangible reports for the process of tracking assets,
liabilities, expenses, income, and equity. Basic knowledge of
accounting is important to understand the financial terms and to
participate in the business world.
Everyone uses accounting in their own way like individuals may use
accounting to maintain their personal budget, reconcile their
monthly credits, and balance their checkbooks for future
consistency. Whereas, a business entity may use accounting
methodologies to analyze its income and expense items and to
determine its financial position and performance throughout the
period/s. Although the scope and methods of accounting may differ
from entity to entity.
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Definition
According to A. W. Johnson; “Accounting may be defined as the
collection, compilation and systematic recording of business transactions
in terms of money, the preparation of financial reports, the analysis and
interpretation of these reports and the use of these reports for the
information and guidance of management”.
According to the American Institute of Certified Public Accountants

[AICPA]; “Accounting is the art of recording, classifying and
summarizing in a significant manner and terms of money, transactions and
events, which are, in part at least, of a financial character and interpreting
the result thereof”.
According to the American Accounting Association [AAA]; “Accounting

refers to the process of identifying, measuring and communicating
economic information to permit informed judgments and decisions by
users of the information”.
According to Weygandt, Kieso, and Kimmel; “Accounting is an

information system that identifies records and communicates the
economic events of an organization to interested users”.
In the light of the above discussion and definitions of Accounting, a

comprehensive and meaningful definition of Accounting can be given as
such;
Accounting is a discipline, well-equipped with techniques and methods

through which all types of transactions measurable in terms of money or
money’s worth, can be recorded, classified and summarized properly and
systematically.
It helps to present and explain income, expenditure, profit-loss, and assets-

liabilities of a particular period and helps the management and investors
to be provided with necessary information and statements.
So we can say that;
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• Accounting is an art and science of tracking monetary events.
• Accounting systematically records business transactions in terms
of money.
• The accounting process prepares financial reports and investigates
them for making decision making easier.
• Accounting is a continuous process for giving interested users
information.
So we can say; accounting is defined as an information system that

maintains the process of identifying and measures the quantitative
financial activities and communicate these financial reports to the
decision-makers or the interested users of any organization.
Accounting is just a tool to measure the financial position of any entity

involving economic activity. Accounting is an aid to management.
It is a system that keeps a record of financial events and analyzes them for
presenting reports of the financial result and position of an economic
entity.
The accounting process gives the management body the information

necessary for making a decision. This information is needed for the
interested parties; inside or outside of the organization.
The information that accounting gives is very important to running it,

That’s why accounting is also known as “BUSINESS LANGUAGE”.
Scope of Accounting
The scope of Accounting is wide and extends in business, trade,
government, financial institutions, individuals and families and every
other arena. The accounting principle is used in every step. Many think the
accounting scope is only limited to financial transactions of a business
concern but in fact, it is not true. Accounting is essential for all types of
business organizations, even for individuals and families.
Financial transactions occur all along in business organizations with a

government office, non-trading concerns, and professionals.
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The functions of Accounting are to keep accounts of those financial
transactions. Even accounts are to be kept in case of individuals and
families. All financial activities of individuals, business concerns, non-
trading concerns, government, semi-government organizations, doctors,
advocates, accountants, and other professionals come under the scope of
accounting.
In fact, where financial transactions occur there is the importance of

accounting. But the necessity of Accounting is felt sharply in keeping
accounts of business concerns.
Businessmen, executives, accountants, hospitals, administrators, heads of

educational institutions and politicians, etc. including the people and
organizations of various stages can discharge their responsibilities if they
have a clear concept about accounting information systems.
R. J. Bull has presented the following diagram of the scope of Accounting.
Fig 1.1 scope of Accounting
Therefore,
From the above diagram, it is not difficult to realize that accounting data
are processed collecting and preparing data adapting methods of various
processes.
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In a later stage, the report is prepared to evaluate accounting data. This
report is prepared for external and internal uses. Roughly the areas where
accounts are kept are described below in short.
The scope of Accounting in personal life
The financial transactions which occur in the individual life of a person

are recorded properly in the books of accounts with a view to ascertaining
receipts-payments and assets-liabilities.
The scope of Accounting in business organizations
The account is rightly called ‘Language of Business’.
The prime objective of a business is to earn a profit. Financial transactions

of a business concern are recorded in the books of accounts to ascertain
operating results and financial position.
Besides accounts of financial transactions’ of a business concern are kept

properly to fulfill other objects also.
The scope of Accounting in non-trading concerns
Keeping accounts for non-trading concerns like, school,-college, hospital,

madrasa, mosque, temple, church, club, association, etc. is essential
because financial transactions occur in these institutions also.
The scope of Accounting in Government Offices
The system of accounts is prevalent in govt. offices, courts and state-

owned organizations for determining income-expenditure and proper
running of the administration.
In preparing national planning and budget, accounting information is

needed and reasons for national progress or regress can be known through
interpretation and evaluation of accounting data.
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The scope of Accounting in professionals
Professionals like doctors, engineers, advocates, actors, actresses earn by

their professions.
They also maintain their accounts of income and expenditure. It is

mandatory for them to maintain accurate accounts of income and
expenditure as they are to pay income tax.
From the above discussion it is very much clear that the fields of
Accounting are very wide, that is, it spreads in all walks of social life.
Trade and commerce are rapidly changing and developing with changes
of everything in this dynamic world. The application of accounting has
achieved a new shape with the development of technology.
The advancement of accounting is continuing with the multifarious

development of science and technology, factory and industry and trade and
commerce.
1.3 OBJECTIVES OF FINANCIAL

ACCOUNTING
Objectives of accounting in any business are; systematically record

transactions, sort and analyzing them, prepare financial statements,
assessing the financial position, and aid in decision making with financial
data and information about the business.
The main object of Accounting is to ascertain the results of the financial
transactions of a business concern.
Objectives of Accounting
We have identified 13 objectives that accounting serves.
1. Identification and recording of transactions
The primary object of accounting is to identify the financial transactions
and to record these systematically in the books of accounts. As a result,
the true nature of each and every transaction is known without much
exercise of memory.
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With this end in view, the transactions are primarily recorded in general
and in a special journal and later on permanently various accounts are kept
in the ledger.
2. Ascertainment of results
Every business concern is interested to know its operating results at the
end of a particular period.
The amount of profit or loss for a particular period of a business concern
can be ascertained by preparing an income statement with the help of
ledger account balances of revenue nature.
Surplus or deficit of revenue for a particular period of a non-trading
concern can also be ascertained by preparing income and expenditure
account or statement.
3. Ascertainment of financial affairs
Ascertainment of debts-liabilities, property, and assets i.e. total financial
affairs of an organization at a particular date is another important object of
Accounting.
Financial affairs of concern at a particular date can be ascertained by
preparing a balance sheet.
The balance sheet is the statement of assets and liabilities of concern at a
particular date.
4. Keeping accounts of cash
Cash book is a prominent book of the books of accounts.
Cash receipts and cash payments are accounted for in this book. A number
of daily cash receipts, payments, cash in hand and cash at the bank can be
known from this book.
Fraud, forgery, and misappropriation of money are reduced by keeping
cash book scientifically and accurately.
5. Control over assets and liabilities
For running a business successfully a businessman is to acquire various
assets like land, building, machinery, etc.
He is to face various debts and liabilities like accounts payable, notes
payable, loan, bank overdraft, etc. side by side with die acquisition of
assets.
The actual position of these debts-liabilities, property, and assets can be
ascertained through the proper keeping of accounts.
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A businessman can take the right steps for controlling the quantity of
assets decrease and liability increase.
6. Controlling money defalcation and cost
Prevention of money defalcation through fraud and forgery and controlling
the cost of concern are also the main objects of Accounting.
Prevention of money defalcation and cost control become easier if
accounts are kept scientifically.
7. Providing economic data
Another noble object of accounting is to provide the concerned parties
with all economic information preparing financial statements and reports
etc. in time.
8. Helping tax fixation
Accounts prepared on the basis of accepted accounting principles in
considered reliable to the income tax and VAT authorities for easy
determination and settlement of tax and VAT.
9. Determination and evaluation of policy
The object of accounting is to help the management in determining and
evaluating the management policies in running the business
successfully by supplying necessary, information, interpreting and
analyzing the financial statements.
10. Testing the arithmetical accuracy of accounts
One of the main objects of scientific methods of accounting is to make
sure that accounts have been kept in a proper way. The arithmetical
accuracy of accounts kept in the ledger can be assured by preparing a trial
balance.
Agreement of a trial balance is the proof of the arithmetical accuracy of
accounts. The advantage of taking loans due to the insufficiency of capital,
borrowing capital from outsiders is felt necessary to run a business.
Loan givers are not willing to give a loan without knowing the financial
position of a business. The financial statement of a business concern
reflects the solvency or loan repayment capability of that concern.
11. Acceptability to others
Banks or financial institutions are interested to know the accurate financial
position of business concern for sanctioning loans.
On the other hand, the government or other authorities may also ask about
the financial position of business concern for various reasons.
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In these cases, the accounts maintained in a disciplined way become easily
acceptable to the interested institutions or authorities.
12. Creation of values and accountability
The object of accounts maintained in an acceptable way is to create higher
values among individuals and organizations and thereby creating
awareness in preventing money defalcation, misappropriation of fund and
cost control by ensuring transparency and accountability.
13. Following legal bindings and prohibition
As all kinds of business organizations have to abide by some legal
bindings and prohibitions, they are to maintain their accounts accurately.
For example;
Partnership law, income tax law, and company law, etc. compel business
organizations to maintain their accounts in an appropriate manner.
The main objectives of accounting are maintaining a complete and
systematic record of all transactions and analyzing the financial position
of a business.
Every individual or a business concern is interested to know the results of
financial transactions and their results are ascertained through the
accounting process.
A businessman can ascertain the operating results and financial position
of his business at any time through Accounting.
Need for Accounting
Often, when we start any work or to learn, we think, what is the need to
do the work or learn specific skill. Whether you are learning about
computers or any practical thing, you will also ask the same question. The
same thing applies to accounting.
Accounting is essential need of business. Business can not survive without
accounting. Accounting provides the information on the performance of
business. If you have invested your capital at the beginning of the year,
what is the value of capital at the end of the year. Difference is the
performance of your capital. You can decrease your capital or you can
increase your capital. Accounting will provide the information of net profit
or net loss. So, when we receive this information, we can change so many
past decisions. For example, if our capital has decreased by 40% due to a
loss in business. We can find the reason through accounting information.
For example, products C and D are performing bad. So, we will stop to
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investing our money in such bad-performing products. By doing this, our
cost will decrease, and by stabilizing our other product growth, we can
gain in next year. Accounting provides not only net profit or net loss
information but it provides the information of financial position. That is
the reason, it is a very important skill which every businessman should
learn. When we see the balance sheet, which is main part of financial
statements of accounting, we can know our liabilities and assets. If we
invest our capital in bad assets, our financial position will be down first.
Good businessmen see this position and start to solve the problem by
disposing of bad-performing assets. All those who do not keep accounting
records will never get out of this trap because when they suffer losses, they
start to get loans at a high rate of interest. So, losses will increase and
interest and loans will increase. One day, whole business will destruct due
to this. So, all intelligent people keep accounting. Nowadays a day,
accounting is useful for calculating best selling prices, best future cost of
product or production and tax administration. Moreover, accounting will
be important for maintaining the records of all your employees through
payroll accounting management real time system. If I talk about my
personal aspects. In my family, I am so lazy to keep accounting record of
my personal money. But my father is so careful to record each day's
personal expenses transactions. Sometimes, I suffer, lack of money
because of expenses than what I think. But my father's budget is so strict.
If you make accounting as a part of your personal life, you will never face
the lack of money because your daily expenses record will guide to you to
do more expenses or not.
Functions of Accounting
Systematic record-keeping
The first and foremost function of accounting is the systematic record-
keeping of the financial transactions, on a regular basis.
Facilitating rational decision making:
Another important function of accounting is to communicate the results,
i.e. the net profit or loss to the users, with the help of financial statements,
so as to help the interested parties in rational decision making.
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Legal compliance
The accounting statements must be prepared, keeping in mind the
compliance with the relevant laws.
Protection of business assets
Accounting not only keeps a record of all the business assets but also
ensures no unauthorised use of assets or property belonging to the
enterprise.
Determination of Profit/loss
Accounting plays a very important role in the ascertainment of profit
earned or loss sustained by the enterprise in an accounting period. This is
possible only when a proper record of all the business transactions,
revenues and expenses are maintained.
Ascertaining the profitability, liquidity and solvency of the entity
With the help of the financial statement, i.e. Balance sheet and profit and
loss account, the financial position of the enterprise can easily be
ascertained.
The fundamental objective of accounting is to keep complete records of
the business transactions, so as to determine the financial performance and
position of the enterprise and convey the information to the user groups
such as shareholders, employees, creditors, suppliers, government and
other groups.
What is the Role of Accounting
The purpose of accounting is to provide financial information to the
stakeholders of the business: management, investors and creditors.
Accounting measures and summarises the activities of the company and
communicates the results to management and other interested parties.
Accounting can be classified into two forms: management and financial.
Management accounting helps to run the business, while financial
accounting reports on how well it’s running.
Internal Management Accounting
Managerial accounting produces internal reports that are designed for
management and are used for decision-making. These reports are modified
and adapted to the specific purposes and needs of individual managers and
are not usually released to parties outside the company.
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A few examples of management accounting reports are aging of accounts
receivable, inventory levels, monthly sales and status of accounts payable.
Internal accounting reports are also used for the preparation of budgets and
forecasts.
Accounting Data for Decision-Making
Running a business requires accurate data about the company’s assets,
liabilities, profits and cash position. Accounting provides this crucial
information. Accounting plays a significant role in evaluating the viability
of investments. Proper consideration of investment demands a careful
analysis of costs and projections of expectations for future cash flows.
Certain criteria, such as determining hurdles to return on investment, must
be met.
Consider the decision managers often face of whether to invest in a new
plant or expand the existing facilities. A choice might be to invest $1
million in a new production facility or spend $300,000 to expand a
production line. Each alternative will have different cash outflows in the
beginning and varying future cash inflows. Each approach will have a
different return on investment. So, which one should management choose?
The company’s accountants will analyse the figures for each investment,
calculate the rate of return for each project and present their findings to
management.
This is a situation where accounting procedures produce the relevant
financial data that management needs to make intelligent decisions. They
also have to explore the various ways to finance these investments.
Decisions must always be backed up with valid facts and figures.
Competing Demands
Accountants often face conflicts between upholding values central to their
profession and the demands of the real world. Balancing these competing
demands speaks to the very heart of being a professional in contrast to
simply having a job or performing a function. Professionals are expected
to exercise professional judgment in performing their roles so that when
times get challenging, they do not undertake actions that will result in the
profession losing the public’s trust as protectors of public interest.
Ethical codes for professional accountants globally compels professional
accountants, regardless of the roles that they perform, to uphold values of
integrity, objectivity, professional competence and due care,
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confidentiality and professional behaviour. However, competing pressures
can put professional accountants in challenging and often difficult
situations. These conflicts revolve around ethics, commercial pressures
and the burden of regulation.
Situations may occur where professional accountants in businesses are
expected to help the organisation achieve certain financial outcomes. In
some of these cases, the required action may risk compromising
compliance with accounting and financial reporting rules. Professional
accountants in businesses encounter tension in these situations. As an
example, accountants in organisations may face pressures to account for
inventories at higher values or select alternative accounting methods
which are more financially favourable to the company. However, these
actions may be contrary to what are allowable in the accounting standards
or to what the professional accountant may feel comfortable with.
Accounting for Government Regulations
Businesses must comply with government regulations and pay taxes on
corporate income, Social Security taxes and sales. Accountants make sure
the filings are accurate and on time. Any mistakes made when reporting
income can result in fines and penalties.
Accounting for Planning
Successful organisations create plans to achieve their objectives. These
plans include cash flow projections, sales planning, purchases of fixed
assets and projecting inventory levels. Accounting analysis of historical
data will provide the basis for making forecasts and developing plans to
meet those targets.
Using Accounting Data for Budgeting
Budgets are essential to running a successful business. Accounting uses
historical data to form the basis for future budgets and cost controls. With
this information, managers can prepare overhead expense budgets and
sales plans and create cash flow projections. Then they monitor the regular
accounting reports to make sure costs stay within the budgets.
Cost Accounting for Products
Manufacturing companies use cost accounting to calculate the cost of
making products, determine break-even sales volumes and set optimum
inventory levels. Managers need to know how much it costs to make their
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products to develop pricing strategies that allow the company to make a
reasonable profit.
An important responsibility of management is to control costs. However,
to do this, managers must have predetermined standard costs of operations
to use as yardsticks for measurement.
Take, for example, a company that manufactures yellow widgets. The
company’s accountants have determined that manufacturing costs for this
product include $2.57 in materials, $8.38 in labour and applied production
overhead of $3.16 per unit. The total cost of production for a yellow widget
is $14.11. The selling price is $23.51, giving the company a gross profit
margin of 40 per cent.
With these figures in hand, management can monitor production costs on
a weekly or monthly basis to make sure the costs of production do not
exceed these standards. If accounting reports show a discrepancy above
the intended cost of manufacturing, then management knows to step in,
find the cause of the problem and take corrective action.
Accurate accounting of manufacturing costs for each product is essential
to the development of a sales plan and a projected product mix. More than
likely, each product will have a different gross profit contribution, and
management must establish sales goals for each item to reach the overall
gross profit level needed to cover overhead and produce the target net
profit.
Protectors of the Public Interest
A description of the multifaceted role of professional accountants in
business is not complete without discussing the duty that the profession
owes to the general public, as a profession that has been bestowed a
privileged position in society, the accountancy profession as a whole deals
with a wide range of issues that has a public interest angle. In the case of
professional accountants in business, not only must they maintain high
standards, but they also have a key role to play in helping organisations to
act ethically.
Closely linked to the protection of public interest is the notion that public
accountants need to be trusted to provide public value. Accountants will
lose their legitimacy as protectors of public interest if there is no public
trust. The accountancy profession has a wide reach in society and global
capital markets. In the most basic way, confidence in the financial data
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produced by professionals in businesses forms the core of public trust and
public value.
Ratio Analysis Based on Financial Data
Financial ratios are vital metrics used to gauge the performance of all
aspects of a company’s condition and operations; accounting provides the
data required to construct these ratios. The current and quick ratios
measure a company’s liquidity. Profit margins and expenses are reported
as percentages of sales and compared to budgeted benchmarks. Financial
leverage is a ratio of total debt to capital investment.
What-If Strategies
Managers often meet with department heads to discuss possible changes
in strategies and operations. They explore various “what-if” ideas. For
example, what would happen if the company decided to improve profits
by cutting administrative salaries? Would that be a good idea? Probably
not. Employees don’t like cuts in their wages.
But what if the managers chose to stimulate sales by lowering the selling
prices of the products? Profits per unit would go down, but the increased
sales volume would more than make up the decrease. Accounting analysis
and projection would help clarify the results of this decision and determine
if that strategy would be a wise move.
Check Your Progress- 1
1. Define the term Accounting
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2. State the scope of accounting in Government offices
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3. Explain two functions of Accounting
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1.4 ACCOUNTING V/S BOOK KEEPING
In financial parlance, the terms bookkeeping and accounting are almost

used interchangeably. However, these concepts are different. While
bookkeeping is all about recording of financial transactions, accounting
deals with the interpretation, analysis, classification, reporting and
summarization of the financial data of a business.
What is Bookkeeping?
Bookkeeping is the process of systematic recording and
classification of financial transactions of an organisation.
Bookkeeping is said to be the basis of accounting, whereas
accounting forms a part of the broader scope in finance.
The most important focus of bookkeeping is to maintain an
accurate record of all the monetary transactions of a business.
Companies use this information to take major investment
decisions.
The bookkeeper maintains bookkeeping records. Accurate
bookkeeping is critical for business as it gives a piece of reliable
information on the performance of a company.
Bookkeeping process consists of the following steps:
✓ Identifying a financial transaction
✓ Recording a financial transaction
✓ Preparing a ledger account
✓ Preparing trial balance
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Accounting is the systematic process of recording, measuring and
communicating information about the financial transaction taking
place in a business. Accounting helps in determining the financial
position of a firm and present the same to stakeholders.
It helps a business in the short and long term decision making and
also conveys the credibility of a company to the market.
It is also known as the language of business.
The purpose of accounting is to provide a clear view of financial
statements to its users, which includes investors, creditors,
employees, and government.
Bookkeeping Accounting
Definition
Accounting refers to the process of

Bookkeeping deals with
summarising, interpreting and
identifying and recording
communicating the financial data of an
financial transactions only
organisation.
Decision making
Data provided by Management can take important

bookkeeping is not sufficient decisions based on the data obtained
for decision making from accounting
Preparation of Financial Statement
Not done in the case of Financial statements are a part of the

bookkeeping accounting process
Analysis
No analysis is required in the Accounting analyses the data and creates

bookkeeping insights for the business
Persons Involved
The person concerned with

The person concerned with accounting is
bookkeeping is known as a
known as an accountant
bookkeeper
Determining Financial Position
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Bookkeeping does not show Accounting helps in showing a clear
the financial position of a picture of the financial position of a
business business
Level of Learning
High-level learning required for

No high-level learning
understanding and analysing accounting
required
concepts
1.4.1 Terms used in accounting

1. Accountant
An accountant is a person skilled in the recording and reporting of
financial transactions. Depending on the company’s need, the person may
be required to have specific certifications as proof of expertise.
Example: A company employs a college graduate with an accounting
degree to document its financial activity.
2. Accountants’ report
An accountants’ report is a financial document prepared by an
independent accountant including financial statements, review reports,
agreed-upon procedures reports, compilation reports and attestation
reports. An accountants’ report is not produced as the result of an audit.
Example: A business reviews an accountants’ report to help determine the
company’s financial health..
3. Accounting
Accounting tracks a business's financial records. It also reports, analyzes
and summarizes financial information for tax, investment and other
official purposes.
Example: A real estate company using accounting to prepare financial
statements for its investors.
4. Accounts payable
Accounts payable consists of all unpaid business expenses. It is the debt
the company owes and is recorded under liability on its balance sheet.
Example: A restaurant receives lettuce on credit from its supplier and is
billed for the amount owed.
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5. Accounting period
An Accounting period refers to a span of time reported in a financial
statement.
Example: A stakeholder summary includes quarterly financial statements.
They cover three months of the business’s financial activities.
6. Accounts receivable
Account receivable represents money others owe to a business. It is
recorded under assets on the firm's balance sheet and is a source of short-
term cash.
Example: A lettuce supplier bills a restaurant for delivered produce.
7. Accrual
An accrual is an expense or revenue that has occurred but has not yet been
recorded.
Example: An insurance company’s employees earned bonuses in 2020,
but they will not be paid out until 2021.
8. Accrual basis accounting
Accrual basis accounting is the process of recording financial transactions
when they occur rather than when the buyer pays.
Example: A company pays a sales tax before it receives the cash for a
sale.
9. Accrued expense
Accrued expense describes a business expense that has not been paid. The
accrual method of accounting recognizes expenses when they are incurred,
not when they are paid.
Example: An art store adds a delivery of pen and paper to its stocks before
it pays for the shipment.
10. Allocation
Allocation is a term that represents the process of assigning funds to
different accounts or periods.
Example: A clothing manufacturer gives a certain amount of its
advertising budget to multiple departments or divisions.
11. Asset
An asset is any company possession with monetary value. Assets can
reduce expenses, generate cash flow or improve sales. Asset types include
fixed, current, liquid and prepaid expenses. Liquid means how quickly a
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business can convert the asset into spendable revenue without losing value.
The most liquid asset is cash while land is the least.
Example: A company considers its equipment, inventory and advance
payments for supplies as assets.
12. Auditors
Auditors are professionals who assess an entity's financial condition by
examining the accuracy of its financial accounts and records.
Example: A business hires an auditor to review its financial records to
ensure their accuracy for shareholders.
13. Balance sheet
A balance sheet is a financial report that summarizes all of a firm's assets
(possessions), liabilities (debts) and shareholder or owner equity. It
follows the equation: asset + liabilities + equity. It is one of the two most
common financial statements prepared by accountants.
Example: A manufacturer may use a balance sheet as a financial
statement to show the company’s worth.
14. Bank statement
A bank statement is a periodic report a bank sends to an account holder
showing the monthly balance in the account.
Example: A company receives a bank statement each month documenting
deposits, withdrawals and account balance.
15. Book value
The book value shows the original value of an asset minus its accumulated
depreciation or liability. It shows how an asset loses value.
Example: A business has $100 million in total assets and $80 million in
total liabilities. Thus, the company’s book value is $20 million.
16. Budgeting
Budgeting involves creating and maintaining a financial plan to control
cash flow.
Example: A company hires an accountant to create a budget for travel
expenses so salesmen know their spending limits.
17. Business entity
Business entity refers to the legal structure of a business. Company
business structures include partnership, S corporation, C corporation,
limited liability company and sole proprietor. Each legal entity has distinct
tax and legal requirements.
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Example: Two business people form a partnership, a business entity with
specific rules and regulations.
18. Capital
Capital is a financial asset or its value, including goods or cash. Working
capital, which refers to the business’s liquid capital, is calculated by
subtracting current assets from current liabilities.
Example: A monogram shop uses its working capital to pay for day-to-
day or ongoing expenses.
19. Cash basis accounting
Cash basis accounting is one of the most common methods of business
accounting. Since it focuses on cash transactions, it doesn’t recognize
accounts payable or receivable.
Example: A business pays cash for office supplies, recording it as a
business expense and reduction in its cash balance.
20. Cash flow
Cash flow is the expense or revenue a company expects to generate from
its business activities over a certain period. Net cash flow refers to the sum
of all money a business makes. Cash flow statements include all the cash
a business receives from its operations, investments and financing.
Example: A car dealership shares its cash flow statement with investors
to show money made through its operations, investment and financing.
21. Certified Public Accountant (CPA)
A Certified Public Accountant is an accounting professional who has
passed a standardized exam by the American Institute of Certified Public
Accountants and has the ability to audit public companies and sign tax
returns.
Example: Susan recently completed CPA certification testing, earning her
a job promotion.
22. Chart of accounts
A chart of accounts (COA) is an index of the the financial accounts in a
company’s general ledger.
Example: A publishing company uses a chart of accounts to organize
financial information for investors.
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23. Closing the books
Closing the books describes the process by an accountant to close, or zero
out, a business’s revenue, expense and income summary reports. It occurs
usually at the end of the year. It is the same as a “closing date.”
Example: An advertising company accountant closes the books to signal
the beginning of a new fiscal year.
24. Cost of goods sold (COGS)
Cost of goods sold is an accounting term that describes the expenses
incurred to produce goods or services that a business sells. They are
considered direct costs. When COGS are subtracted from revenue, it helps
determine a company’s gross profit. The value may include the cost of raw
materials and labor.
Example: A company sells widgets online. It can list the widget’s raw
materials as part of its COGS, which helps reduce the company’s taxable
income.
25. Credit
Credit is an accounting entry on the right column of a firm's balance sheet
that increases or decreases its liabilities and equities. It is one of the two
entries (the other is debit) on a double-entry accounting method.
Example: Every two weeks, the company pay its employees with cash,
reducing its cash balance on the asset side of the balance sheet. A decrease
on the asset side of the balance sheet is a credit.
26. Debit
A debit is an accounting entry on the left column of a company's balance
sheet that shows either an increase or decrease in the firm's assets or
liabilities. It is one of the two entries (the other is credit) on a double-entry
accounting method.
Example: When a company pays its employees with cash, it’s a decrease
(credit) on the asset side of the balance sheet. This requires the company
to show the salary expense as a debit on the income statement. Remember,
every credit must be balanced by an equal debit.
27. Departmental accounting
Departmental accounting is a term for financial records showing the
income, expenses and net profit of individual departments.
Example: A department store has several areas of sale such as cosmetics,
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groceries and medicine. Departmental accounting shows the profit and
loss for each sales area.
28. Depreciation
Depreciation is the decrease in the value of an asset over time. Only assets
with substantial value can be depreciated. Depreciation is recorded as an
expense under an income statement and is considered a non-cash expense.
Example: A delivery company buys a new truck for $50,000 to use for
five years. It estimates the truck will depreciate by $20,000 each year.
29. Diversification
Diversification is a risk-reducing investment strategy that allocates a
company's or individual’s capital across diverse assets. A mix of assets
and investments help limit the risk of any single asset or risk. This way,
the performance of individual assets will not affect the results of others.
Example: A group of investors want to diversify their holdings, so they
buy real estate, stocks, bonds and treasury bills.
30. Dividends
Dividends are profits returned to a corporation's shareholders. They are
distributed as part of the company’s earnings and issued as cash payments,
stock shares or even property.
Example: Company XYZ had a profitable year selling widgets. It
declared $1 dividend for each share. Bob owns 100 shares, so he receives
$100.
31. Double-entry bookkeeping
Double-entry bookkeeping is an accounting method that requires entries
of credits and debits for each financial transaction. This method relies on
the accounting equation of Assets = Liabilities + Equity.
Example: A shoe manufacturer buys new software for $100,000. The
$1,000 amount is entered as debit to increase the company’s expense
account and the same amount is listed as a credit to decrease the cash
account.
32. Enrolled agent
Enrolled agent is a professional accounting title assigned to individuals
who have passed and demonstrated expertise in personal and business tax
practices. Enrolled agents help companies file taxes in compliance with
Internal Revenue Service rules.
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Example: Anna's accountant is an enrolled agent and represents her floral
shop during an IRS audit.
33. Equity
Equity is assets minus liabilities. Owners' equity refers to the percentage
of stock that represents a person's ownership interest in a corporation.
Equity is owned by business owners and shareholders.
Example: A regional chain of convenience stores hired an enrolled agent
to prepare its tax returns and represent the chain if there is an audit or other
tax-related concern.
34. Expense
Expense is the amount spent on a specific item or for a particular purpose.
Example: A billboard company gives its accountant a record of money
spent for advertising, printing and supplies for tax preparation.
35. Fixed asset
Fixed asset is an asset used for a long period, such as buildings and
equipment.
Example: ABC Produce Company sells produce to local groceries. The
delivery trucks it owns are uses are fixed assets.
36. Fixed cost
Fixed cost is one that remains constant regardless of the volume of sales.
Salary and rent are examples of fixed costs, as opposed to variable costs,
which change according to production levels.
Example: When two veterinarians considered opening a second clinic,
they had to figure in the fixed costs for rent, salaries, insurance, loan
interest and other monthly costs.
37. Generally accepted accounting principles (GAAP)
Generally accepted accounting principles are rules accountants must
follow while performing their duties. The principles provide a
standardized framework for assessing an entity's financial reports.
Example: The chief financial officer (CFO) at Company XYZ follow
GAAP standards when preparing financial reports for the national
company.
38. General ledger
A general ledger is a complete record of the financial transactions over a
company's life. Transactions are posted into individual sub-ledger
accounts according a company chart of accounts.
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Example: A restaurant’s accountant used details from the general ledger
to produce a trial balance, income statement, balance sheet and cash flow
statements.
39. Gross margins
Gross margins describe a company's profitability after subtracting the cost
of goods sold. It is calculated by dividing the same period of gross profit
by revenue for the same period.
Example: A company reported a quarterly gross margin of 35%, meaning
that it retained 35 cents from each dollar of generated revenue.
40. Gross profits
Gross profits represents a company's profitability without adding overhead
expenses. It is calculated by deducting the cost of goods sold (COGS) from
revenue for the same period.
Example: Sue’s Sewing Supplies has $10,000 in revenue and $4,000 in
COGS. The company’s gross profit is $6,000.
41. High-low method
The high-low method in accounting is a common and simple way to
separate variable costs from fixed costs. It involves taking the highest level
of activity and the lowest level of activity and comparing the total costs at
each level.
Example: Will’s Widgets sells widgets for 12 months. It sold the most—
125 in October for $5,550—and the least—50—in August. The accountant
used the high-low method to determine the total costs for each level.
42. Income statement
An income statement is a financial statement that shows the difference in
revenue, expenses, gains and losses over a specific time span. The data is
used to determine a company’s net income.
Example: The accountant at Company XYZ prepares an income
statement using the equation of (Revenue + Gains) - (Expenses + Losses).
43. Inflation
Inflation is the rising costs of goods and services over time.
Example: When Bee’s Bonnets sold its first hat in 1980, it cost $10 to
make and sold for $25. Twenty years later, it costs $100 to make and sell
for $2,500 due to inflation.
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44. Insolvency
Insolvency is when a business or individual cannot meet debt obligations
with lenders. There are two forms of insolvency—cash-flow insolvency
and balance-sheet insolvency. Cash-flow insolvency can usually be solved
by negotiation while balance-sheet insolvency may end with bankruptcy.
Example: Tom’s company owns a warehouse and two trucks, but it did
not have enough cash on hand to pay salaries. When Bee’s Bonnets sold
its first hat in 1980, it cost $10 to make and sold for $25. Twenty years
later, it costs $100 to make and sell for $2,500 due to inflation.
45. Insured account
An insured account is an account at a bank, savings and loan association,
credit union or brokerage firm covered by a federal or private insurance
organization.
Example: A company deposits its money in a bank insured by the Federal
Deposit Insurance Corporation (FDIC) in case of bank failure or theft.
46. Internal audit
An internal audit is an audit performed by a company’s staff rather an
independent CPA).
Example: Management at 123 requested an internal audit to review its
organization’s finances. The company deposits its money in a bank insured
by the Federal Deposit Insurance Corporation (FDIC) in case of bank
failure or theft.
47. Inventory
Inventory describes a company's assets that it intends to sell to clients.
Example: When the shoe store checked its inventory before a sale, it
found there were only 40 pairs of slippers in stock.
48. Invoice
An invoice is a document that shows the amount of money payable for
goods or services that a company provides clients.
Example: A company asks for a new invoice template that includes
company name, address and contact information and room for customer
information, description of charges, date of sale, amount charged and total
amount owed.
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49. Journal entry
Journal entry is the process of changing or updating a business' financial
records. It includes a unique identifier, a date, an amount, an account code
to show which account is being altered and a debit/credit designation.
Example: When a company makes a sale on credit, a journal entry for
accounts receivable is debited and the sales account is credited.
50. Last in, first out (LIFO)
Last in, first out is an accounting method for valuing inventory where the
costs of the last goods acquired are the first costs charged to expense
records.
Example: Company X has 10 widgets that cost $100 each and arrived five
days ago. Five more arrived the next day and cost $200 each. Based on the
LIFO method, the last ones received are the first to be sold.
51. Ledger
A ledger is a book of accounts containing summaries of debit and credit
entries. Ledger accounts are essential to preparing a company’s financial
statement.
Example: The accountant’s ledger for ABC Building provides data
regarding assets, liabilities and revenue sources.
52. Liability
Liability describes the debts a company has yet to pay. Liabilities include
accounts payable, loans and payroll.
Example: Like most businesses, a local bookstore organizes liabilities on
its balance sheet under two separate headings: current liabilities (debts to
pay in 12 months) and long-term liabilities (debts not due for more than
12 months).
53. Liquidity
Liquidity describes how quickly a business can convert something into
cash without losing value. In accounting and financial analysis, a
company’s liquidity is a measure of how easily it can meet its short-term
financial obligations.
Example: A company’s balance sheet shows asset liquidity from most to
least, starting with cash, stocks and bonds and finally property, plant and
equipment (PP&E).
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54. Materiality principle
Materiality principle describes the information that can influence a
company's decision-making process. The information, size, and nature of
transactions are considered material if the omission or error of it could
potentially lead to decisions by its users. In accounting practices, a
business must disclose all material considerations in its financial reports.
There is no rule available to determine the materiality of an amount.
However, most accountants consider an amount immaterial if it is less than
2 or 3 percent of net income.
Example: A large company has a building destroyed in a hurricane and
after insurance reimbursement, it reports a loss of $10,000. Since the
company has a net income of $10 million, the loss is immaterial since the
loss is only .1% of its net come.
55. Net income
Net income is the amount earned in profits. It is revenue minus taxes,
expenses, depreciation and interest.
Example: A floral wholesaler has revenues of $1 million and expenses of
$900,000. Using the equation above, the accountant determines the
business has a net income of $100,000.
56. Net margin
Non-operating income is a percentage of a company's profit relative to its
revenue. It is also called “net profit margin.” Net margin is calculated by
dividing net income by total revenue and multiplying by 100 to yield a
percentage of income that remains after all expenses.
Example: A large manufacturer has $61 billion in revenue and $13.8
billion in net income. Using the formula above, its net profit margin is
23%. For every dollar generated in sales, the company keeps $0.23 as
profit.
57. Non-operating income
On credit is income not generated from the sale of a company's product or
services.
Example: A printing company sells old machinery for $20,000. That
amount is considered non-operating income.
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58. On credit/on account
Overhead or “on account” describes a purchase that will be paid later but
that the buyer can use immediately.
Example: Tony’s Taco Truck buys produce on credit. He uses the lettuce
and tomatoes but doesn’t pay for them until 30 days later.
59. Overhead
Payroll refers to a business' running costs, including rent and salaries.
Example: In addition to paying for raw materials to make its cakes, ABC
Bakery has monthly overhead costs such as rent, administrative costs,
utilities and insurance.
60. Payroll
Profit is an account that records employee salaries, wages, bonuses and
deductions.
Example: John’s first duty on Fridays is to prepare the payroll. ln addition
to paying for raw materials to make its cakes, ABC Bakery has monthly
overhead costs such as rent, administrative cost, utilities and insurance.
61. Present value
Reconciliation describes the present value of an asset. Present value
assumes inflation makes cash lose value over time. In other words, it
compares the buying power of cash in the future to the purchasing power
of today.
Example: Gurmit has a choice: receive $1,000 today or $1,000 in five
years. He decides to take the money now based on interest/return rate and
inflation/purchasing power.
62. Profit
Report release date is is a term that often describes the financial gain a
business receives when revenue surpasses costs and expenses. It is
calculated by this formula: total revenue - total expenses = profit.
Example: Frances wants to know how much she has earned with her dog
walking business. Her total revenue is $10,000 and total expenses are
$1,500. Using the profit equation, Frances determines that her business has
made a profit of $8,500.
63. Profit and loss statement
Retained earnings (P&L) is a financial statement that summarizes a
company's performance and financial status by reporting its revenues,
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expenses and net profits over a specific period. It is synonymous with an
income statement.
Example: Frank’s company issues a P&L quarterly and annually along
with its balance sheet and cash flow statement.
64. Receipt
A Return on investment is a document that proves a buyer has paid for a
product or service. In addition to the receipts consumers typically receive
from vendors and service providers, receipts are also issued in business-
to-business dealings and stock market transactions.
Example: Daily Spa has a strict customer refund policy: no receipt, no
refund.
65. Reconciliation
Revenue is the balancing of an account as long as the credits and debits
are equal.
Example: A company’s accountant verifies that the firm’s checkbook
balance reconciles with its bank statement.
66. Report release date

Single-entry bookkeeping is the date that a company releases its financial
statements.
Example: Company ABC releases its quarterly financial statements on
the first Monday of every fourth month.
67. Retained earnings

tax describe the remaining cash after paying all outstanding bills and
distributing shareholder dividends. The formula is Retained earnings =
Beginning retained earnings + Net income or loss - Dividends.
Example: Bee Logistics begins a new accounting period with $7,000 of
retained earnings. These are the retained earnings that have carried over
from the previous accounting period. The company then brings in $5,000
in net income and makes a total payment of $2,000 in dividends. Using the
formula above, the company has retained earnings of $10,000 for this
period.
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68. Return on investment
Taxable earnings (ROI) measures the financial performance of an
investment. It is calculated by subtracting the initial value of the
investment from the final value of the investment (which equals the net
return), then dividing this new number (the net return) by the cost of the
investment, and, finally, multiplying it by 100.
Example: John invested $1,000 in You Bake Corp. in 2017 and sold the
shares for $1,200 one year later. To calculate the return on his investment,
he divided the net profits ($1,200 - $1,000 = $200) by the investment cost
($1,000), for a ROI of $200/$1,000, or 20%.
69. Revenue
Taxable income is the actual amount of money a business generates over
a set period. Income is a term often used in place of revenue. The money
generally comes from sales, service revenues, fees earned, interest revenue
and interest income. Revenue = price of product or service x number of
units sold. Calculating revenue, particularly sales revenue, can help a
company determine if it made a profit or incurred a loss.
Example: ABC Doorknobs Ltd. sells a doorknob for $100 but it only costs
$25 to make one. The company’s gross revenue is $100 for the month. If
ABC Doorknobs sells 2,000 knobs for $100 each, the revenue would be
$200,000. However, if 400 are returned, the net revenue would $100 x
(2,000 - 400) widgets or $160,000.
70. Single-entry bookkeeping

Trial balance is an accounting method that records financial transactions
on one entry rather than the debit and credit entries used in double-entry
bookkeeping. This is a cash-based bookkeeping method that tracks
incoming and outgoing cash in a journal, making it useful for new
businesses or those with few or uncomplicated transactions.
Example: IC Snow Cones uses single-entry bookkeeping to record
income and expenses. A cash book is maintained to record transaction
dates, descriptions, value (debit or credit) and a running balance.
71. Tax
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A Turnover is an amount levied by a governmental entity on income,
consumption, wealth or other basis. There are basically three types of
taxes: taxes on what is earned, taxes on what is bought and taxes on what
is owned.
Example: Alice wants to buy a smartwatch that costs $300. The sales tax
in her area is 5%. Therefore, she will pay $300 for the watch, plus $15 in
taxes.
72. Taxable earnings

Unearned income are the amount of an employee’s earnings subject to a
tax. Taxable earnings may include wages, salary, tips, bonuses and
commission, net self-employment income, alimony payments. Employees
pay taxes to federal, state or local agencies based on their wages,
withholding preferences and tax filing status
Example: Company A’s cost of sales for the month is $400,000 and it
carries $100,000 in inventory. The turnover rate is 4, meaning the
company will sell its entire inventory four times each year.
73. Taxable income

Value is the portion of a person’s gross income that’s subject to taxation.
Deductions, such as student loan payments or individual retirement
account (IRA) contributions,,are subtracted from gross income to
determine taxable income.
Example: Joe Smith earns $50,000 in wages in $10,000 from investments.
His gross income is $60,000. He claims deductions of $15,400, making
his taxable income $44.600. He will pay taxes on that amount.
74. Trial balance

Variable cost is a report listing the ending balance in all a general ledger’s
accounts, including debit and credit balances for assets, liabilities, equity,
revenue, expenses, gains and losses. When balanced, the debits must equal
the credits.
Example: A company’s accountant explains to the owner that a trial
balance only shows account totals, not each separate transaction, and helps
detect mathematical errors in the general ledger.
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75. Turnover
worksheet describes the number of times a product is sold and restocked
during a fixed span of time. It also describes how quickly a company
collects payments compared to its credit sales which is called “accounts
receivable turnover.” Inventory turnover is the rate of products sold
compared to the inventory kept on hand.
Example: A company’s accountant explains to the owner that a trial
balance only shows account totals, not each separate transaction, and helps
detect mathematical errors in the general ledger.
76. Unearned income

write-off is income for services that have not yet been performed or
delivered. It also describes income from investments and other sources
unrelated to employment.
Example: Joe and Mary file a joint tax form that includes their wages as
taxable income and their stock investments as unearned income.
77. Value
Value is how much money something is worth. In accounting, value is the
monetary worth of an asset, business, goods sold, services rendered or
liability/obligation acquired.
Example: Joe owns an air-conditioning repair service with assets of
$2,000. However, since he brings in a revenue of $100,000, the business
is valued much higher than just its assets.
78. Variable cost

Variable cost is one of two main types of costs that a company incurs when
it produces goods or services. Variable costs vary with the amount of
production and may include labor, commissions and raw materials. Fixed
costs, however, remain the same regardless of production and may include
lease payments, insurance and loan interest.
Example: Lettuce and More produce company lists changing prices for
lettuce as a variable cost. It has no control over the amounts of produce
available.
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A worksheet is a type of working paper used by an accountant as a
preliminary step for preparing a financial statement. It helps bookkeepers
and accountants complete the accounting cycle and prepare year-end
reports like adjusting trial balance and financial statements.
Example: Alex uses an accounting worksheet to prepare year-end
accounting. It helps him maintain accuracy and track errors before final
reports are compiled.
80. Write-off
A write-off is an action that businesses use to account for unpaid loan
obligations, receivables or losses on stored inventory. It basically is an
action to help lower an annual tax bill.
Example: Metro Hospital accountants knew certain accounts would never
be paid, so they decided to write them off.
1.4.2 Users of accounting information:

Accounting is the language of business, it brings life to the otherwise
lifeless business activities. It acts as a bridge between users of the
information and the day to day transactions that occur inside a
business. Users of accounting information may be inside or outside a
business.
Qualitative characteristics of accounting information such as

identifying, measuring, recording and classifying financial transactions
help businesses with decision making, analysis, target setting, budgeting,
pricing, forecasts, etc.
There are primarily two types of users of accounting information;

Internal users (primary users) – If a user of the information is part of the
business itself then he/she is considered as one of the internal or primary
users of accounting information.
For example, management, owners, employees, etc. The branch of
accounting which deals with internal users is called management
accounting.
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External users (secondary users) – If a user of the information is an
external party and is not related to the business then he/she is considered
as one of the external or secondary users of accounting information.
For example, potential investors, lenders, vendors, customers, legal and
tax authorities, etc.
Internal Users of Accounting Information – (Primary)

Following are the primary users of accounting information:
1. Management – Organization’s internal management includes all junior

and senior business managers.
They use it for
1. Budgeting, forecasting, analysis & take important financial decisions.
2. Investment decisions, identification of warning and opportunity

signals.
3. Taking informed & evaluated decisions.
4. Compliance with all statutory, regulatory, and any other external

body.
2. Owners/Partners – Owners are the legal stakeholders of the business

and the ultimate signing authority.
They use it for
1. Tracking their investment and monitoring their return on investment.
2. Observing their capital invested and evaluating its upward or

downward move.
3. Keeping an eye on the overall well-being of the business.
3. Employees – Full-time & part-time workers. They are essentially on the

company’s payroll.
They use it for
1. Checking the overall financial health of the company as it affects

their remuneration and job security.
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2. Decision making in case of shares based payment such as ESOPs
offered by the employers.
3. Examining if the employer is depositing all required funds to the

appropriate authorities such as the provident fund, 401(k), etc.
External Users of Accounting Information – (Secondary)

Following are the secondary users of accounting information:
1. Investors – They may be current investors, minority stakeholder,

potential future investors, etc.
They use it for
1. Checking how the management is utilizing the equity invested in the

business.
2. Decisions related to an increase in investment or to divest from the

business.
3. Analyzing their present investment in the business or the overall

financial health in case of a potential investor.
2. Lenders – Banks and Non-banking financial companies which provide

loans in the form of cash or credit are termed as lenders.
They use it for
1. Evaluation of short-term and long-term financial stability of a

business.
2. An insight into the liquidity, profitability, etc. with the help of ratio
analysis
3. Assessment of the creditworthiness with the help of financial

ratios and scrutiny of the three main financial statements in
accounting.
3. Regulatory and Tax Authorities – Regulatory bodies such as the stock

exchange & authorities include the govt. along with various statutory and
tax departments.
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They use it for
1. To keep a check and ensure that the firm is following all required
accounting principles, standards, rules & regulations.
2. The ultimate intent is to protect business integrity & safeguard

investors.
3. Tax department as one of the users of accounting information assures

accurate tax calculation by the companies.
4. Customers – Are buyers of goods or services and may exist at any stage
of a business cycle. They may be producers, manufacturers, retailers, etc.
They use it for
1. Checking the continuous inflow of stock and the pace of overall

production.
2. Assessing the financial position of its suppliers which is essential to

maintain a stable source of supply.
5. Suppliers – Are the sellers of goods and services.
They use it for
1. Inspecting the credibility of their customers by evaluating their

repayment ability.
2. Setting up a credit limit & payment terms with their customers.
6. Public – The general public is also among users of accounting

information. They are keen to know the financial health of a business to
get a fair idea of the firm’s niche market, business environment, and
economic atmosphere of the country.
1.4.3 Limitations of Financial Accounting
Despite accounting’s huge advantages, there are limitations of accounting

that every accountant, businessmen, student must be aware of.
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In the modem age in all spheres of the society, the importance and
necessity of Accounting are felt deeply.
Accounting has already achieved wide acceptability as a critical applied

branch of knowledge. Despite its huge advantages, one should have a clear
concept of its limitations.
9 limitations of accounting are;

1. Recording only monetary items.
2. Time value of money.
3. Recommendation of alternative methods.
4. Restrain of accounting principles.
5. Recording of past events.
6. Allocation of the problem.
7. Maintaining secrecy.
8. The tendency for secret reserves.
9. Importance of form over substance.
These limitations are stated below;
1. Recording only monetary items

As per accounting principles, only the events measurable in terms of
money are recorded in the books of accounts. But events of great
importance, if not measurable in terms of money, are not accounted for.
For that reason, recorded accounting information fails to exhibit the exact
financial position of a business concern.
2. Time Value of Money

Under the accounting system, money value is treated constantly.
But the value of money always changes due to inflation. Under existing
accounting systems, accounts are maintained considering historical cost
ignoring current changed value.
As a result, the accounts maintained fail to exhibit the exact financial
position of a business concern.
3. Recommendation of alternative methods
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There exists an application of alternative methods in determining
depreciation of assets and valuation of stock etc.
Information regarding the activities of the business is expressed in a
misleading way if an alternative method is used to achieve a particular
object.
4. Restrain of Accounting Principles

Exhibited accounting information cannot always exhibit a true and fair
picture of a business concern owing to limitations of the accounting
principles used.
For example,
Fixed assets are shown after deducting depreciation. In the case of
inflation, the value of fixed assets shown in the accounts does not
correspond to the real position.
5. Recording of past events

Accounting past events are accounted for. But naturally, there is no system
of recording events that may occur in the future.
6. Allocation of problem
The allocation process is an important problem in the accounting system.
The value of fixed assets is exhausted, charging depreciation for the
allocated period.
The useful life of fixed assets is fixed up hypothetically, which does not
stand accurately in most cases.
7. Maintaining secrecy
Secrecy cannot be ensured for the involvement of many employees in
accounting work, although maintaining secrecy is very important.
8. The tendency for secret reserves

Often management creates secret reserves intentionally by increasing or
decreasing assets and liabilities for which the total financial picture of an
organization is not reflected.
9. Importance of form over substance

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At the time of preparing accounts for a particular period, the emphasis is
laid on the form, table, etc. instead of giving importance to an exhibition
of substantial information.
As per Company Act, preparation of the balance sheet in the prescribed
form is mandatory.
Although there are some limitations in the present accounting system,
accounting in the present-day world has generally been accepted as a
recognized profession.
Efforts are on throughout the world to overcome these limitations.
Economic activities of any society without accounting are neither possible
nor legal.
1.5 ACCOUNTING CONCEPTS
Accounting principles are the rules and guidelines that companies must
follow when reporting financial data. The Financial Accounting
Standards Board (FASB) issues a standardized set of accounting
principles in the U.S. referred to as generally accepted accounting
principles (GAAP).
The ultimate goal of any set of accounting principles is to ensure that a
company's financial statements are complete, consistent, and comparable.
This makes it easier for investors to analyze and extract useful
information from the company's financial statements, including trend data
over a period of time. It also facilitates the comparison of financial
information across different companies. Accounting principles also help
mitigate accounting fraud by increasing transparency and allowing red
flags to be identified.
Accounting Concepts and Accounting Conventions

In India, there are several rules which need to be followed while walking
or driving on the road as it enables the smooth flow of traffic. Similarly,
there are accounting rules that an accountant should follow while
recording business transactions or recording accounts. They may be
termed as accounting concepts. Hence, it can be said that:
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“The term accounting concepts refer to basic rules, assumptions, and

principles which act as a primary standard for recording business
transactions and maintaining books of accounts”.
What are the Objectives of the Accounting Concept?
• The primary aim of accounting is to maintain uniformity and
regularity in the preparation of accounting statements.
• Accounting concepts act as an underlying principle that helps

accountants in the preparation and maintenance of business
records.
• It aims to understand the business rules and regulations that are

required to be followed by all types of business entities, and hence
simplifying the detailed and comparable financial information.
What are the Different Accounting Concepts?
Following are the different accounting concepts that are widely used all
around the world and hence are termed as universally accepted accounting
rules. The different accounting concepts are:
Business Entity Concept
This concept assumes that the organization and business owners are two
independent entities. Hence, the business translation and personal
transaction of its owner are different. For example, when the business
owner invests his money in the business, it is recorded as a liability of the
business to the owner. Similarly, when the owner takes away from the
business cash/goods for his/her personal use, it is not treated as a business
expense. Thus, the accounting transactions are recorded in the books of
accounts from the organization's point of view and not the person owning
the business.
Example:
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Suppose Mr. Birla started a business. He invested Rs 1, 00, 000. He
purchased goods for Rs 50,000, furniture for Rs. 40,000, and plant and
machinery for Rs. 10,000 and Rs 2000 remained in hand. These are the
assets of the business and not of the business owner. According to the
business entity concept, Rs.1,00,000 will be assumed by a business as
capital i.e. a liability of the business towards the owner of the business.
Now suppose, he takes away Rs. 5000 cash or goods for the same worth
for his domestic purposes. This withdrawal of cash/goods by the owner
from the business is his private expense and not the business expense. It is
termed as Drawings.
Therefore, the business entity concept states that the business and the
business owner are two separate/distinct persons. Accordingly, any
expenses incurred by the owner for himself or his family from business
will be considered as expenses and it will be represented as drawings.
Accrual Concept
The term accrual means something is due, especially an amount of money

that is yet to be paid or received at the end of the accounting period. It
implies that revenue is realized at the time of sale through cash or not
whereas expenses are recognized when they become payable whether cash
is paid or not. Therefore, both the transactions are recorded in the
accounting period in which they relate.
In the accounting system, the accrual concept tells that the business
revenue is realized at the time goods and services are sold irrespective of
the fact when cash is received for the same. For example, On March 5,
2021, the firm sold goods for Rs 55000, and the payment was not received
until April 5, 2021, the amount was due and payable to the firm on the date
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goods and services were sold i.e. March 5, 2021. It must be included in the
revenue for the year ending March 31, 2021.
Similarly, expenses are recognized at the time services are provided,

irrespective of the fact that cash paid for these services are made. For
example, if the firm received goods costing Rs.20000 on March 9, 2021,
but the payment is made on April 7, 2021, the accrual concept requires that
expenses must be recorded for the year ending March 31, 2021, although
no payment has been made until this date though the service has been
received and the person to whom the payment should have been made is
represented as a creditor of business firm.
In brief, the accrual concept states that revenue is recognized when

realized and expenses are recognized when they become due and payable
irrespective of the cash receipt or cash payment.
Accounting Cost Concept
The accounting cost concept states all the business assets should be written
down in the book of accounts at the price assets are purchased, including
the cost of acquisition, and installation. The assets are not recorded at their
market price. It implies that the fixed assets like plant and machinery,
building, furniture, etc are recorded at their purchase price. For example,
a machine was purchased by ABC Limited for Rs.10,00,000, for
manufacturing bottles. An amount of Rs.2,000 was spent on transporting
the machine to the factory site. Also, Rs.2000 was additionally spent on
its installation. Hence, the total amount at which the machine will be
recorded in the books of accounts would be the total of all these items i.e.
Rs.10, 040, 00. This cost is also termed as historical cost.
Dual Aspect
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The dual aspect is the basic principle of accounting. It provides the basis
for recording business transactions in the books of accounts. This concept
assumes that every transaction recorded in the books of accountants is
based on dual concepts. This implies that the transaction that is recorded
affects two accounts on their respective opposite sides. Hence, the
transaction should be recorded at dual places. It implies that both aspects
of the transaction should be recorded in the books of account. For example,
goods purchased in exchange for cash have two aspects such as paying
cash and receiving goods. Therefore, both the aspects should be registered
in the books of accounts. The duality of the transaction is commonly
expressed in the terms of the following equation given below:
Assets = Liabilities + Capital
The dual concept implies that every transaction has a similar effect on
assets and liabilities in such a way that the value of total assets is always
equal to the value of total liabilities.
Going Concepts
The Going concept in accounting states that a business activities will be

carried by any firm for an unlimited duration This simply means that every
business has continuity of life. Hence, it will not be dissolved shortly. This
is an important assumption of accounting as it provides a base for
representing the asset value in the balance sheet.
For example, the plant and machinery was purchased by a company of Rs.
10 lakhs and its life span is 10 years. According to the Going concept,
every year some amount of assets purchased by the business will be
represented as an expense and the balance amount will be shown as an
asset in the books of accounts. Thus, if an amount is incurred on an item
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that will be used in business for several years ahead, it will not be proper
to charge the amount from the revenues of that particular year in which the
item was purchased Only a part of the purchase value is shown as an
expense in the year of purchase and the remaining balance is shown as an
asset in the balance sheet.
Money Measurement Concept
The money measurement concept assumes that the business transactions

are made in terms of money i.e. in the currency of a country. In India, such
transactions are made in terms of the rupee. Hence, as per the money
measurement concept, transactions that can be expressed in terms of
money should be recorded in books of accounts. For example, the sale of
goods worth Rs. 10000, purchase of raw material Rs. 5000, rent paid
Rs.2000 are expressed in terms of money, hence these transactions can be
recorded in the books of accounts.
Accounting Period Concepts
Accounting period concepts state that all the transactions recorded in the
books of account should be based on the assumption that profit on these
transactions is to be ascertained for a specific period. Hence this concept
says that the balance sheet and profit and loss account of a business should
be prepared at regular intervals. This is important for different purposes
like calculation of profit and loss, tax calculation, ascertaining financial
position, etc. Also, this concept assumes that business indefinite life is
divided into two parts. These parts are termed accounting periods. It can
be one month, three months, six months, etc. Usually, one year is
considered as one accounting period which may be a calendar year or
financial year.
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The year that begins on January 1 and ends on January 31 is termed as
calendar year whereas the year that begins on April 1 and ends on March
31 is termed as financial year.
Realization Concept
The term realization concept states that revenue earned from any business
transaction should be included in the accounting records only when it is
realized. The term realization implies the creation of a legal right to
receive money. Hence, it should be noted that selling goods is considered
as realization whereas receiving order is not considered as realization.
In other words, the revenue concept states that revenue is realized when
cash is received or the right to receive cash on the sale of goods or services
or both have been created.
Matching Concepts
The Matching concept states that revenue and expenses incurred to earn
the revenue must belong to the same accounting period. Hence, once
revenue is realized, the next step is to assign the relevant accounting
period. For example, if you pay a commission to a salesperson for the sale
that you record in March. The commission should also be recorded in the
same month.
The matching concept implies that all the revenue earned during an
accounting year whether received or not during that year or all the
expenses incurred whether paid or not during that year should be
considered while determining the profit and loss of the business for that
year. This enables the investors or shareholders to know the exact profit
and loss of the business.
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1.5.1 Principles and Conventions

Accounting conventions are certain restrictions for the business
transactions that are complicated and are unclear. Although accounting
conventions are not generally or legally binding, these generally accepted
principles maintain consistency in financial statements. While
standardized financial reporting processes, the accounting conventions
consider comparison, full disclosure of transaction, relevance, and
application in financial statements.
Four important types of accounting conventions are:

• Conservatism: It tells the accountants to err on the side of caution
when providing the estimates for the assets and liabilities, which
means that when there are two values of a transaction available,
then the always lower one should be referred to.
• Consistency: A company is forced to apply the similar accounting
principles across the different accounting cycles. Once this
chooses a method it is urged to stick with it in the future also,
unless it finds a good reason to perform it in another way. In the
absence of these accounting conventions, the ability of investors to
compare and assess how the company performs becomes more
challenging.
• Full Disclosure: Information that is considered potentially
significant and relevant is to be completely disclosed, regardless
of whether it is detrimental to the company.
• Materiality: Similar to full disclosure, this convention also bound
organizations to put down their cards on the table, meaning they
need to totally disclose all the material facts about the
company. The aim behind this materiality convention is that any
information that could influence the person’s decision by
considering the financial statement must be included.
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Accounting Principles
Accounting principles are a set of guidelines and rules issued by
accounting standards like GAAP and IFRS for the companies to follow
while presenting or recording financial transactions in the books of
account. This enables companies to present a true and fair view of the
financial statements.
Here is the list of the top 6 accounting principles that companies follow
quite often:
1. Accrual Principle
2. Consistency Principle
3. Conservatism Principle
4. Going Concern Principle
5. Matching Principle
6. Full Disclosure Principle
Check Your Progress-2

1. Discuss various types of accounting conventions
..........................................................................................................
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..........................................................................................................
2. Give the list of accounting principles?
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1.6 ACCOUNTING STANDARDS
An accounting standard is relevant to a company’s financial reporting.

Some common examples of accounting standards are segment reporting,
goodwill accounting, an allowable method for depreciation, business
combination, lease classification, a measure of outstanding share, and
revenue recognition.
The Generally Accepted Accounting Principles (GAAP) is the primary
accounting standard adopted by the U.S. Securities and Exchange
Commission (SEC). GAAPs were designated in the United States and
form the basis of accepted accounting standards for preparing and
reporting financial statements across the world.
The International Accounting Standards Board (IASB) provides rule-
based and principle-based accounting guidelines for international
companies that are based outside the U.S. The International Accounting
Standards (IAS) are intended to achieve the uniformity of approach and
identity of meaning. Accounting standards of a specific country are
strongly influenced by its governance arrangement and tax policy.
History of Accounting Standards

Before the development of accounting standards, each company developed
and used their own approach to prepare and report financial information.
In the 1930s, following the stock market crash, the American Institute of
Accountants, in partnership with the New York Stock Exchange (NYSE),
formed the Committee on Accounting Procedure (CAP), which
recommended five broad principles of accounting.
To improve accounting practices, the Institute’s membership introduced
an additional principle, making six in total. Progressively, the institute
enacted the Securities Act of 1933 and the Securities Exchange Act of
1934, which saw the creation of the Securities and Exchange Commission
(SEC). The SEC was charged with reviewing periodic filings of companies
to ensure they adhered to its requirements, especially for full disclosure,
adherence to proper accounting, and comparability.
Accounting standards exist to define the manner in which economic events
are recorded and reported. They are also valuable to external stakeholders
– such as shareholders, banks, and regulatory institutions – to ensure that
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relevant information is reported accurately. The technical conventions
provide the boundaries between measures of financial reporting, as well
as facilitate transparency and accountability.
1.7 BRIEF REVIEW OF ACCOUNTING

STANDARDS IN INDIA
Accounting standards have been developed in India over time. It is also

called Ind As. Such standards need to be adopted by various corporate
form and NBFCs in India under the supervision of the Accounting
Standards Board (ASB). The Accounting Standards Board was established
in 1977 as a regulator and body. ASB is a professional and autonomous
body managed by the Institute of Chartered Accountants of India (ICAI).
Apart from this, there are other bodies such as Confederation of Indian
Industry (CII), Federation of Indian Chambers of Commerce and Industry
(FICCI) and Associated Chambers of Commerce and Industry of India
(ASSOCHAM) which regulate ASB.
Individuals, professors and academics from the above-mentioned bodies
acquire different standards with regard to accounting. Indian accounting
standards were developed to harmonize standards related to international
accounting and reporting. International Accounting Standards comply
with International Financial Reporting Standards (IFRS). The Indian
government body that recommends this standard to the Department of
Corporate Affairs is the National Advisory Committee on Accounting
Standards (NACAS).
Objectives of Indian accounting standards (Ind As): Following are the
objectives of applying Indian accounting standards: Ensure companies in
India adopt these standards to implement internationally recognized best
practices. Ensure that compliance is maintained worldwide. Have a single
framework for a single accounting system. The standard was developed
in accordance with IFRS principles. Therefore, it serves as a guide for the
implementation of the standard. Accounting systems used in India can be
analyzed and understood by global companies. This will make the annual
financial statements and company accounts transparent. These standards
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are harmonized to ensure that companies comply with global
requirements. A wider scope is acceptable through this Indian accounting
standard as Indian companies have expanded their global scope as
compared to the past. Applicability of Ind As: The Government of India
and the Department of Corporate Affairs have announced the recognition
and adoption of Indian accounting standards by all companies in India.
This notice was filed under the Company Accounting Standards Act (US
IND) of 2015. In accordance with the notification above, all companies
that receive this notification will be required to receive Ind As in stages
during the 2016-17 fiscal year. Since its adoption, there have been three
notification changes in 2016, 2017 and 2018.
Benefits of Adopting Indian Accounting Standards: Adopting Indian
accounting standards comes with several advantages: Harmonization: By
adopting these standards, companies can harmonize accounting rules.
Global accounting principles can be built through harmonization.
International Base: These are Internationally recognized accounting
standards. So when a company wants to expand internationally, such
principles are adopted. Global Acceptance: The existence of these
standards guarantees international recognition of all government
institutions and agencies.
Compliance:
By adopting these standards, companies can ensure effective compliance.

Introduction Phase of Indian Accounting Standards: In the notification, the
Ministry of Corporate Affairs has highlighted the requirement of Indian
companies to gradually adopt Indian accounting standards in the 2016-17
reporting year. This standard is adopted in stages, depending on the net
worth and listing status of the exchange. MCA has divided the
applicability and adoption of these accounting standards according to
different principles. India’s system of voluntary adoption of accounting
standards was applied to companies in the 2014-15 and 2015-16 fiscal
years. These standards can be adopted voluntarily or mandatorily.
However, MCA states that the standard must be adopted by the company
for a certain period of time.
Following are the stages of implementation:
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Phase I: This phase is classified as mandatory according to the Indian
accounting standards required by the companies. This phase is
implemented starting April 1, 2016. Phase I applies to the following
companies: Listed Companies (companies whose securities are listed on a
recognized stock exchange). Companies with a net worth of more than Rs.
500 crores. Note – For the application of net assets, the company’s
financial statements for the last three years are audited. Since this
accounting standard was introduced in 2016-17, the previous fiscal years
are taken into account, namely 2013-14, 2014-15, and 2015-16.
Phase II: At this point, all companies have to adopt Ind AS (Indian
Accounting Standards) from 1 April 2017. Therefore, the next fiscal year
is considered for the adoption of Indian Accounting Standards. Phase II
applies to the following companies: Listed companies (companies whose
securities are listed on a recognized stock exchange – as of March 31,
2016. Companies that have the net worth of more than Rs. 250 crore but
less than Rs 500 crore. Note – Since this accounting standard was
introduced in 2016-17, previous fiscal years are taken into account; 2013-
14, 2014-15 and 2015-16. Phase III: This stage is considered mandatory
for the implementation of Ind As by all types of banks, NBFIs, SEBI
regulated companies and insurance companies. This phase is effective
from April 1, 2018. Phase III applies to the following companies:
Companies having net worth more than Rs. 500 crores. The net worth
requirement will only apply to the company until April 1, 2018. The
Insurance Regulatory and Development Authority of India (IRDAI)
ensures by separate notification that the insurer meets the net asset
requirements. The net worth requirement of NBFC and other financial
institutions is calculated taking into account the last three fiscal years
namely 2015-16, 2016-17 and 2017-18. Phase IV: This phase will only
apply to all NBFCs whose net worth is more than Rs. 250 crores but less
than Rs 500 crores. This implementation will be taken into account starting
April 1, 2019.
Indian accounting standards apply to subsidiaries or associate companies?

If accounting standards are adopted by Indian companies, it will apply to
all forms of subsidiary i.e sister, parent and associate companies. Either
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form of individual qualification is not possible for this type of company.
This means that the IND can be applied automatically. If a company is
controlled by a foreign company, the accounting principles should be
viewed as a separate basis. IND As application is not required for these
companies. What services are provided according to Indian accounting
standards? Business advisory services related to the specific
implementation of IFRS and IND AS, eg. Mergers, Consolidations,
Financial Instruments, Hedge Accounting, Revenue Recognition and
Leases. Planning, Execution and transformation of IND accounting
standards. Facilitate the transition to the new IND accounting
standard. Assistance in analyzing the differences between GAAP and
Indian accounting standards. Assistance in determining new policies and
procedures to be implemented according to Indian accounting
standards. Support in implementing identified changes to meet
Indonesia’s accounting standards Staff training on Ind AS concepts and
requirements Support in the preparation of annual financial reports in
accordance with IND accounting standards. Indian Accounting Standards
– Key Factors for Transformation: There are various significant and key
factors that we need to consider when Indian companies adopt the above
standards: Activities managed by the organization. Identify and analyze
various tax consequences resulting from the application of these
standards. Redefinition and revision of annual financial statements to
ensure compliance with standards. Identify and review issues related to
accounting standards. Revision of contracts and conclusion of
negotiations carried out by various parties. Preparation of financial
statements annually in accordance with the requirements of Indian
accounting standards.
The following table provides a list of the major applicable Ind As:
Ind AS 1 Presentation of Financial Statements
Ind AS 2 Inventories Accounting Ind AS 7 Statement of Cash Flows
Ind AS 8 Accounting Policies, Changes in Accounting Estimates and
Errors
Ind AS 10 Events after Reporting Period
Ind AS 11 Construction Contracts
Ind AS 12 Income Taxes
Ind AS 16 Property, Plant and Equipment
59
Ind AS 17 Leases
Ind AS 18 Revenue
Ind AS 19 Employee Benefits
Ind AS 20 Accounting for Government Grants and Disclosure of
Government Assistance
Ind AS 21 The Effects of Changes in Foreign Exchange Rates
Ind AS 23 Borrowing Costs
Ind AS 24 Related Party Disclosures
Ind AS 27 Separate Financial Statements
Ind AS 28 Investments in Associates and Joint Ventures
Ind AS 29 Financial Reporting in Hyperinflationary Economies
Ind AS 32 Financial Instruments: Presentation
Ind AS 33 Earnings per Share
Ind AS 34 Interim Financial Reporting
Ind AS 36 Impairment of Assets
Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets
Ind AS 38 Intangible Assets
Ind AS 40 Investment Property
Ind AS 41 Agriculture
Ind AS 101 First-time adoption of Ind AS
Ind AS 102 Share Based payments
Ind AS 103 Business Combination
Ind AS 104 Insurance Contracts
Ind AS 105 Non-Current Assets Held for Sale and Discontinued
Operations
Ind AS 106 Exploration for and Evaluation of Mineral Resources
Ind AS 107 Financial Instruments: Disclosures
Ind AS 108 Operating Segments
Ind AS 109 Financial Instruments
Ind AS 110 Consolidated Financial Statements
Ind AS 111 Joint Arrangements
Ind AS 112 Disclosure of Interests in Other Entities
Ind AS 113 Fair Value Measurement
Ind AS 114 Regulatory Deferral Accounts
Ind AS 115 Revenue from Contracts with Customers
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The adoption of Indian Accounting Standards (Ind SA) has improved the
comparability of financial information of Indian companies worldwide.
However, Ind AS involves the application of several new and complex
concepts. This requires a high level of assessment and evaluation,
accompanied by detailed qualitative and quantitative information
according to Ind AS.
International Financial Reporting Standards
The field of financial reporting in India has seen major changes in the last
5 years. As the trade increasingly moves beyond the national boundaries,
the compliance and reporting requirements move too. Presenting the
financial statements of an entity in accordance with the reporting
requirements of every country it has a presence in, is becoming
increasingly difficult.
What is IFRS?
The International Financial Reporting Standards (IFRS) are accounting
standards that are issued by the International Accounting Standards Board
(IASB) with the objective of providing a common accounting language to
increase transparency in the presentation of financial information.
What is IASB?
The International Accounting Standards Board (IASB), is an independent
body formed in 2001 with the sole responsibility of establishing the
International Financial Reporting Standards (IFRS). It succeeded the
International Accounting Standards Committee (IASC), which was earlier
given the responsibility of establishing the international accounting
standards. IASB is based in London. It has also provided the ‘Conceptual
Framework for Financial Reporting’ issued in September 2010 which
provides a conceptual understanding and the basis of the accounting
practices under IFRS.
Components of Financial Statements under IFRS
A complete set of financial statements prepared in compliance with the
IFRS would ideally comprise of the following:
• A statement of financial position as at the end of the period – more
commonly known to us as the ‘Balance sheet’.
• A statement of profit and loss for the year and the statement of
other comprehensive income – Other comprehensive
income would include those items of income/expense that are not
61
recognized in the profit and loss account to comply with the other
relevant standards.
Both these statements may either be combined or shown separately.
• A statement of changes in equity – This would include a
reconciliation between amounts shown at the beginning and the
end of the year.
• A statement of cash flows for the period
• Notes to the financial statements – including a summary of
significant accounting policies followed and other explanatory
information
The financial statements would sometimes also include a statement of the
financial position of an earlier period in the following scenarios:
• When an entity applies an accounting policy retrospectively;
• When an entity retrospectively restated an item in its financial
statements; or
• When an entity reclassifies an item in its financial statements.
List of International Financial Reporting Standards (IFRS)
As already discussed, the Standards issued by the IASB are called IFRS.
The predecessor body, IASC, had however already issued certain
International Standards which are called International Accounting
Standards (IAS). These IAS were issued by the IASC between 1973 and
2001. Both IAS and the IFRS continue to be in force. The standards are
listed below:
Standard Standard Title

No.
IFRS 1 First-time Adoption of International Financial Reporting

Standards
IFRS 2 Share-based Payment
IFRS 3 Business Combinations
IFRS 4 Insurance Contracts
IFRS 5 Non-current Assets Held for Sale and Discontinue

Operations
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IFRS 6 Exploration and Evaluation of Mineral Resources
IFRS 7 Financial Instruments: Disclosures
IFRS 8 Operating Segments
IFRS 9 Financial Instruments
IFRS 10 Consolidated Financial Statements
IFRS 11 Joint Arrangements
IFRS 12 Disclosure of Interests in Other Entities
IFRS 13 Fair Value Measurement
IFRS 14 Regulatory Deferral Accounts
IFRS 15 Revenue from Contracts with Customers
IFRS 16 Leases
IFRS 17 Insurance Contracts
IAS 1 Presentation of Financial Statements
IAS 2 Inventories
IAS 7 Statement of Cash Flows
IAS 8 Accounting Policies, Changes in Accounting Estimates

and Errors
IAS 10 Events after the Reporting Period
IAS 11 Construction Contracts
IAS 12 Income Taxes
IAS 16 Property, Plant, and Equipment
IAS 17 Leases
63
IAS 18 Revenue
IAS 19 Employee Benefits
IAS 20 Accounting for Government Grants and Disclosure of

Government Assistance
IAS 21 The Effects of Changes in Foreign Exchange Rates
IAS 23 Borrowing Costs
IAS 24 Related Party Disclosures
IAS 26 Accounting and Reporting by Retirement Benefit Plans
IAS 27 Separate Financial Statements
IAS 28 Investments in Associates and Joint Ventures
IAS 29 Financial Reporting in Hyperinflationary Economies
IAS 32 Financial Instruments: Presentation
IAS 33 Earnings per Share
IAS 34 Interim Financial Reporting
IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities, and Contingent Assets
IAS 38 Intangible Assets
IAS 39 Financial Instruments: Recognition and Measurement
IAS 40 Investment Property
IAS 41 Agriculture
1.8 ACCOUNTING POLICIES

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Accounting policies provide a framework within which assets, liabilities,
income and expenditure are recognised, measured and presented in
financial statements, and they help to improve the comparability of
financial information. Both company law and FRS 18 require accounting
policies to be applied consistently within an accounting period and from
one financial year to the next. However, situations will inevitably arise
from time to time which make it necessary for an entity to change one or
more of its accounting policies. For instance, a new accounting standard
may have been introduced which requires a different accounting treatment
to the one previously adopted, or the nature or scale of activities may have
changed so that an existing accounting policy is no longer acceptable. FRS
18 requires accounting policies to be regularly reviewed, and sets out
specific accounting and disclosure requirements that apply whenever an
accounting policy is changed.
1.9 ACCOUNTING AS A MEASUREMENT

DISCIPLINE
Accounting is a very crucial part of any stream or subject. As a

measurement discipline, it deals with measuring all the monetary inputs
and outputs. Measurement is one of the crucial aspects of accounting. It
has inevitable regulation and evaluating techniques that impact the final
valuation. It is the cordial assignment relating all the values according to
the mathematics rules and observations. The valuation in accounting
defines the availability of all the monetary values essential for
measurement. It includes the liability, assets, and variations
in investment with a rate of interest, which are some of the standard
monetary values relevant to the accounting measurement.
Accounting measurement –Concept:

The concept of accounting measurement has values relative to ideas,
investments, and profits. According to the data, such measurement is
defined by many alternative units and the overall perspective of
observation. The data and other information are received by constantly
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observing any working body’s functionality that has the capital
investment.
Definition:
The definition and total concept of the accounting measurement define
the fact that any organisation must report the data in the active currency.
It is according to the particular place where the company operates instead
of the actual transaction type.
For example, when a company receives its funding in Euros, the
primary transaction currency in which the company deals are pounds. In
this situation, in the accounting data, the funding is represented with the
converted value in the current currency that the company follows, i.e.,
from Euros to pounds. This method is highly followed in accounting
when preparing annual and general statements.
There are various categories of the measurement system which deal with
the account’s calculations. All these measurement systems have variable
standards which follow various government and organisation level
regulations. The financial accounting measurement of accounts in terms
of assets and liabilities has variable measurement standards.
Method:
The accounting measurement measures the monetary data in terms of
money, units, working hours, etc. which means
the accounting measurement method the company or organisation can
represents their profits in terms of units sold or any other transactional
values. All the economic data with financial profits and losses are in
terms of units. If the payments or investment is received in some other
currency, it should be added to the company accounts after the
conversions. In some cases, the average working hours in which the
company completes the order and records the profits are included in
the accounting in the measurement discipline.
Critical Features of Accounting Measurement:

There are many vital features of the measurement regarding the company
accounts and statements. These features play a crucial role in
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the accounting measurement, which also reflects the accurate valuation
of all the monetary aspects. Below are the mentions:
Such measurement techniques use the particular data of working hours,
units sold or purchased, and payments in specific currencies
The foreign currencies are included after conversion in the current active
currency the company is using
According to the accounting measurement, the data calculations are done
in many ways
It increases the accuracy after it matches every aspect of the calculation
Measurement Bases of Accounting:

The measurement is a different concept from the valuation. It has a wide
range of methods that calculate valuation from different methods. This
valuation depends upon the measurement value matching with variable
methods. This calculation depends upon four integral bases for
calculating cost accounting and other accounting, which mark a
difference in the final valuation of an organisation.
1.10 VALUATION PRINCIPLES AND

ACCOUNTING ESTIMATES
VALUATION PRINCIPLES
There are four measurement base or valuation principles

1. Historical Cost
2. Current Cost
3. Realizable Value
4. Present Value
Historical Cost :- It means acquisition price or purchase price. For

example, Rs.7,00,000/- paid to purchase the machine, here historical cost
of machine is Rs.7,00,000/-.Under this principle, assets are valued at an
amount paid or fair market value at the time of acquisition.
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Accordingly Liabilities are recorded at the amount of the proceeds
received in exchange for the obligation.
liability is recorded at the amount of proceeds received in exchange for an
obligation.
Current Cost :- Assets are recorded at the amount of cash or cash

equivalents that would have to be paid if the same or an equivalent asset
has been acquired currently.
Liabilities are carried at the undiscounted amount of cash or cash
equivalents that would be required to be settle the obligation currently
Realizable(settlement) value :- Under this principle, Assets are recorded

or valued at amount which can be obtained if assets are sold in open
market.
Liabilities are carried at their settlement values; i.e. the discounted
amounts of cash or cash equivalents expressed to be paid to satisfy the
liabilities in the normal course of business.
Present Value :- Under this principle, Assets are recorded at present

discounted value of future net cash inflows that is expected to generate in
the normal course of business.
-Liabilities are recorded at present discounted value of future net cash
outflows which are expected to be paid to settle liabilities in normal course
of business.
Measurement and valuation :- Value relates to benefit to be derived

from objects, abilities or idea. According to economist, value is the utility
(i.e. satisfaction) of economic resources to the person using it. According
to accountant, value of objects, abilities or ideas is always measured in
term of money.
Accounting Estimates:- Transactions are measured by the amount

which is paid for or by applying the valuation principle. But there are some
assets and liabilities which have not occurred or can not be measured by
applying valuation principles like depreciation, provision for doubtful
68
debts. But these assets or liabilities are necessary to record in books of
accounts, but for recording these items we need some value and for
withdrawing such value we make reasonable estimates based on existing
situation and past experience.
Thus, management makes various estimates and assumptions of assets,

liabilities, income and expenses as on the date of preparation of financial
statement like depreciation, amortization of expenses, provisions of
employee benefits etc.
The process of estimation involves judgments based on information

available.
-Estimate requires revision if changes occur regarding circumstances on
which the estimate was based.
Change in estimates means difference arises between certain parameters

estimated earlier and re-estimated during the current period or actual
results achieved during the current period.
1.11 LET US SUM UP
Accounting is often referred to as the language of business. More

formally, it is described as the information system that measures business
activities, processes the information into reports, and communicates the
results to decision makers. You can also think of it as the scorecard of
business. Most businesses are formed in order to make a profit, which in
essence is an increase in the wealth of the owners, and the way to
measure and report that increase in wealth is through accounting.
Balancing your checkbook is an essential accounting function if you

want to know exactly how much money you have in the bank, but it’s
69
only a small piece of business accounting, because stakeholders, such as
business owners, investors, bankers, and other users of financial
information want to know more. They want to know what the business
owns, how much debt it has, how much revenue it generates, how much
it cost the company to make that amount of revenue, and how much new
wealth was generated. In addition, those stakeholders want to be assured
that the financial reports are accurate, and not just made up numbers.
The accounting profession in general can be divided into two distinct

fields: financial accounting, and managerial accounting. Financial
accounting focuses on external users, such as lenders (including vendors
that extend credit to the company), regulatory agencies (such as the
Internal Revenue Service), and investors. Managerial accounting focuses
on internal users, such as production managers, sales managers, and
employees. For example, a sales report used to calculate and pay
commissions would be an internal, managerial accounting document,
while a balance sheet informing shareholders of the assets and liabilities
of the company would be an external, financial accounting report.
An accounting standard is a policy that defines the treatment of an
accounting transaction in financial statements. Accounting standards
provide guidance for companies to prepare and report useful financial
statements in an accurate fashion. The U.S. Generally Accepted
Accounting Principles (GAAP) is the bedrock of accounting standards,
which now differ by country.
1.12 KEY WORDS
Going concern: Going concern is an accounting term for a company that

has the resources needed to continue operating indefinitely until it
provides evidence to the contrary. This term also refers to a company's
ability to make enough money to stay afloat or to avoid bankruptcy.
Accrual: Accrual accounting is a financial accounting method that allows

a company to record revenue before receiving payment for goods or
70
services sold and record expenses as they are incurred. In other words, the
revenue earned and expenses incurred are entered into the company's
journal regardless of when money exchanges hands.
Reconciliation: Reconciliation is an accounting process that compares

two sets of records to check that figures are correct and in agreement.
Accounting terms: Terms can provide you with valuable insight into a
company's accounting department. Understanding these industry terms
can help you read and interpret accounting documents correctly.
Consistency: The concept of accounting consistency refers to

the principle that companies should use the same accounting methods to
record similar transactions over time
1.13 ANSWER TO CHECK YOUR PROGRESS
Answer1: According to the American Accounting Association [AAA];

“Accounting refers to the process of identifying, measuring and
communicating economic information to permit informed judgments and
decisions by users of the information”.
According to Weygandt, Kieso, and Kimmel; “Accounting is an

information system that identifies records and communicates the
economic events of an organization to interested users”.
Answer2: The system of accounts is prevalent in govt. offices, courts and

state-owned organizations for determining income-expenditure and proper
running of the administration.
In preparing national planning and budget, accounting information is

needed and reasons for national progress or regress can be known through
interpretation and evaluation of accounting data.
Answer3:
71
Functions of accounting:
Systematic record-keeping
The first and foremost function of accounting is the systematic record-
keeping of the financial transactions, on a regular basis.
Facilitating rational decision making:

Another important function of accounting is to communicate the results,
i.e. the net profit or loss to the users, with the help of financial statements,
so as to help the interested parties in rational decision making.
Legal compliance
The accounting statements must be prepared, keeping in mind the
compliance with the relevant laws.
Answer4: Four important types of accounting conventions are:
• Conservatism: It tells the accountants to err on the side of caution

when providing the estimates for the assets and liabilities, which
means that when there are two values of a transaction available,
then the always lower one should be referred to.
• Consistency: A company is forced to apply the similar accounting
principles across the different accounting cycles. Once this
chooses a method it is urged to stick with it in the future also,
unless it finds a good reason to perform it in another way. In the
absence of these accounting conventions, the ability of investors to
compare and assess how the company performs becomes more
challenging.
• Full Disclosure: Information that is considered potentially
significant and relevant is to be completely disclosed, regardless
of whether it is detrimental to the company.
• Materiality: Similar to full disclosure, this convention also bound
organizations to put down their cards on the table, meaning they
need to totally disclose all the material facts about the
company. The aim behind this materiality convention is that any
information that could influence the person’s decision by
considering the financial statement must be included.
72
Answer5: Accounting principles are a set of guidelines and rules issued

by accounting standards like GAAP and IFRS for the companies to follow
while presenting or recording financial transactions in the books of
account. This enables companies to present a true and fair view of the
financial statements.
Here is the list of the top 6 accounting principles that companies follow
quite often:
• Accrual Principle
• Consistency Principle
• Conservatism Principle
• Going Concern Principle
• Matching Principle
• Full Disclosure Principle
1.14 SOME USEFUL BOOKS
References book
• Shukla & Grewal, Advanced Accounting – S Chand
• P.C. Tulsian, Financial Accounting
• Financial Accounting for Management, Dr. S. N.Maheshwari,
Vikas Publishing House, New Delhi
• Fundamentals of Accounting & Financial Analysis: By Anil
Chowdhry (Pearson Education)
Textbook references
• Maheshwari, S.N., and S.K. Maheshwari; Advanced Accountancy,
Eighth Edition, Vol. I & II, Vikas Publishing House, 2003
• Financial Accounting: Fundamentals, Sultan Chand Publishers,
2003
• Financial Accounting for Management, Amrish Gupta, Pearson
Education
Website
• https://nptel.ac.in/courses/110/101/110101131/
73
• https://guides.loc.gov/history-of-accounting/electronic-resources
• https://huntertafe.libguides.com/accounting/eResources_database
1.15 TERMINAL QUESTIONS
1. What is IFRS?
2. What is IASB?
3. Explain the meaning and significance of the going concern concept.
4. Differentiate between Bookkeeping and Accounting
5. What is meant by business entity concept?
6. State the meaning and significance of money measurement concept
7. What do you mean by the accounting concept? Explain any four
accounting concepts.
8. Explain the convention of materiality
9. State the meaning and significance of the dual aspect concept.
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Fundamentals of Accounting

After studying this unit, you will be able to:

Accounting is the system of recording financial transactions with both

1.2 DEFINITION AND SCOPE

Accounting is the process of recording financial transactions pertaining

A proper definition of accounting is that it is the process of

According to the American Institute of Certified Public Accountants

According to the American Accounting Association [AAA]; “Accounting

According to Weygandt, Kieso, and Kimmel; “Accounting is an

In the light of the above discussion and definitions of Accounting, a

Accounting is a discipline, well-equipped with techniques and methods

It helps to present and explain income, expenditure, profit-loss, and assets-

So we can say that;

So we can say; accounting is defined as an information system that

Accounting is just a tool to measure the financial position of any entity

The accounting process gives the management body the information

The information that accounting gives is very important to running it,

Financial transactions occur all along in business organizations with a

In fact, where financial transactions occur there is the importance of

Businessmen, executives, accountants, hospitals, administrators, heads of

R. J. Bull has presented the following diagram of the scope of Accounting.

Fig 1.1 scope of Accounting

The scope of Accounting in personal life

The financial transactions which occur in the individual life of a person

The scope of Accounting in business organizations

The account is rightly called ‘Language of Business’.

The prime objective of a business is to earn a profit. Financial transactions

Besides accounts of financial transactions’ of a business concern are kept

The scope of Accounting in non-trading concerns

Keeping accounts for non-trading concerns like, school,-college, hospital,

The scope of Accounting in Government Offices

The system of accounts is prevalent in govt. offices, courts and state-

In preparing national planning and budget, accounting information is

Professionals like doctors, engineers, advocates, actors, actresses earn by

They also maintain their accounts of income and expenditure. It is

The advancement of accounting is continuing with the multifarious

1.3 OBJECTIVES OF FINANCIAL

Objectives of accounting in any business are; systematically record

Check Your Progress- 1

1. Define the term Accounting

2. State the scope of accounting in Government offices

3. Explain two functions of Accounting

1.4 ACCOUNTING V/S BOOK KEEPING

In financial parlance, the terms bookkeeping and accounting are almost

Accounting refers to the process of

Data provided by Management can take important

Preparation of Financial Statement

Not done in the case of Financial statements are a part of the

No analysis is required in the Accounting analyses the data and creates

The person concerned with

Determining Financial Position

High-level learning required for

1.4.1 Terms used in accounting

66. Report release date

67. Retained earnings

70. Single-entry bookkeeping

72. Taxable earnings

73. Taxable income

74. Trial balance

76. Unearned income