Here is a compilation of term papers on ‘Accounting’ for class 11 and 12. Find paragraphs, long and short term papers on ‘Accounting’ especially written for school and college students.
Term Paper on Accounting
Term Paper Contents:
- Term Paper on the Meaning and Definition of Accounting
- Term Paper on the Objectives of Accounting
- Term Paper on the Importance of Accounting
- Term Paper on the Functions of Accounting
- Term Paper on the Methods of Accounting
- Term Paper on the Branches of Accounting
- Term Paper on the Principles of Accounting
- Term Paper on Accounting Concepts and Conventions
- Term Paper on the Bases of Accounting
- Term Paper on Accounting Equation
- Term Paper on the Advantages of Accounting
- Term Paper on the Limitations of Accounting
Term Paper # 1. Meaning and Definition of Accounting:
In all activities (whether business activities or non-business activities) and in all organizations (whether business organizations like a manufacturing entity or trading entity or non-business organizations like schools, colleges, hospitals, libraries, clubs, temples, political parties) which require money and other economic resources, accounting is required to account for these resources.
In other words, wherever money is involved, accounting is required to account for it. Accounting is often called the language of business. The basic function of any language is to serve as a means of communication. Accounting also serves this function.
Accounting, as an information system is the process of identifying, measuring and communicating the economic information of an organization to its users who need the information for decision making. It identifies transactions and events of a specific entity.
A transaction is an exchange in which each participant receives or sacrifices value (e.g. purchase of raw material). An event (whether internal or external) is a happening of consequence to an entity (e.g. use of raw material for production). An entity means an economic unit that performs economic activities.
American Institute of Certified Public Accountants (AICPA) which defines accounting as “the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events, which are, in part at least, of a financial character and interpreting the results thereof”.
Term Paper # 2. Objectives of Accounting:
Objective of accounting may differ from business to business depending upon their specific requirements.
However, the following are the general objectives of accounting:
(i) To Keeping Systematic Record:
It is very difficult to remember all the business transactions that take place. Accounting serves this purpose of record keeping by promptly recording all the business transactions in the books of account.
(ii) To Ascertain the Results of the Operation:
Accounting helps in ascertaining result i.e., profit earned or loss suffered in business during a particular period. For this purpose, a business entity prepares either a Trading and Profit and Loss account or an Income and Expenditure account which shows the profit or loss of the business by matching the items of revenue and expenditure of the same period.
(iii) To Ascertain the Financial Position of the Business:
In addition to profit, a businessman must know his financial position i.e., availability of cash, position of assets and liabilities etc. This helps the businessman to know his financial strength. Financial statements are barometers of health of a business entity.
(iv) To Portray the Liquidity Position:
Financial reporting should provide information about how an enterprise obtains and spends cash, about its borrowing and repayment of borrowing, about its capital transactions, cash dividends and other distributions of resources by the enterprise to owners and about other factors that may affect an enterprise’s liquidity and solvency.
(v) To Protect Business Properties:
Accounting provides up to date information about the various assets that the firm possesses and the liabilities the firm owes, so that nobody can claim a payment which is not due to him.
(vi) To Facilitate Rational Decision-Making:
Accounting records and financial statements provide financial information which helps the business in making rational decisions about the steps to be taken in respect of various aspects of business.
(vii) To Satisfy the Requirements of Law:
Entities such as companies, societies, public trusts are compulsorily required to maintain accounts as per the law governing their operations such as the Companies Act, Societies Act, and Public Trust Act etc. Maintenance of accounts is also compulsory under the Sales Tax Act and Income Tax Act.
Term Paper # 3. Importance of Accounting:
Every Business tries to forecast its future activities on the basis of the past experience and present experiences. It wants to determine the policies and progress well in advance. For example, a business may like to know the quality and quantity of goods to be manufactured in future.
Accounting provides the following facility to the business:
The owners provide funds or capital for the organization. They possess curiosity in knowing whether the business is being conducted on sound lines or not and whether the capital is being employed properly or not. Owners, being businessmen, always keep an eye on the returns from the investment. Comparing the accounts of various years helps in getting good pieces of information.
The management of the business is greatly interested in knowing the position of the firm. The accounts are the basis; the management can study the merits and demerits of the business activity. Thus, the management is interested in financial accounting to find whether the business carried on is profitable or not. The financial accounting is the “eyes and ears of management and facilitates in drawing future course of action, further expansion etc.”
Creditors are the persons who supply goods on credit, or bankers or lenders of money. It is usual that these groups are interested to know the financial soundness before granting credit. The progress and prosperity of the firm, two which credits are extended, are largely watched by creditors from the point of view of security and further credit. Profit and Loss Account and Balance Sheet are nerve centres to know the soundness of the firm.
Payment of bonus depends upon the size of profit earned by the firm. The more important point is that the workers expect regular income for the bread. The demand for wage rise, bonus, better working conditions etc. depend upon the profitability of the firm and in turn depends upon financial position. For these reasons, this group is interested in accounting.
The prospective investors, who want to invest their money in a firm, of course wish to see the progress and prosperity of the firm, before investing their amount, by going through the financial statements of the firm. This is to safeguard the investment. For this, this group is eager to go through the accounting which enables them to know the safety of investment.
Government keeps a close watch on the firms which yield good amount of profits. The state and central Governments are interested in the financial statements to know the earnings for the purpose of taxation. To compile national accounting is essential.
These groups are interested in getting the goods at reduced price. Therefore, they wish to know the establishment of a proper accounting control, which in turn will reduce to cost of production, in turn less price to be paid by the consumers. Researchers are also interested in accounting for interpretation.
(viii) Research Scholars:
Accounting information, being a mirror of the financial performance of a business organization, is of immense value to the research scholar who wants to make a study into the financial operations of a particular firm. To make a study into the financial operations of a particular firm, the research scholar needs detailed accounting information relating to purchases, sales, expenses, cost of materials used, current assets, current liabilities, fixed assets, long-term liabilities and share-holders funds which is available in the accounting record maintained by the firm.
Term Paper # 4. Functions of Accounting:
Accounting is the higher stage of book-keeping. It is primarily concerned with designing the scientific system of recording, classifying and summarizing the recorded data and also interpreting them for internal and external use. The responsibility of an accountant is greater than a book-keeper. In short, a book keeper records the transactions while an accountant finds out the results and decides different matters on their basis. In fact, accounting starts where book-keeping ends.
(i) Record Keeping Function:
The primary function of accounting relates to recording, classification and summary of financial transactions-journalisation, posting, and preparation of final statements. These facilitate to know operating results and financial positions. The purpose of this function is to report regularly to the interested parties by means of financial statements. Thus accounting performs historical function i.e., attention on the past performance of a business; and this facilitates decision making programme for future activities.
(ii) Managerial Function:
Decision making programme is greatly assisted by accounting. The managerial function and decision making programmes, without accounting, may mislead. The day-to-day operations are compared with some pre-determined standard. The variations of actual operations with pre-determined standards and their analysis is possible only with the help of accounting.
(iii) Legal Requirement Function:
Auditing is compulsory in case of registered firms. Auditing is not possible without accounting. Thus accounting becomes compulsory to comply with legal requirements. Accounting is a base and with its help various returns, documents, statements etc., are prepared.
(iv) Language of Business:
Accounting is the language of business. Various transactions are communicated through accounting. There are many parties-owners, creditors, government, employees etc., who are interested in knowing the results of the firm and this can be communicated only through accounting. The accounting shows a real and true position of the firm or the business.
Term Paper # 5. Methods of Accounting:
“Book-Keeping” and “Accounting” are different from each other, though some people take them as synonymous terms. In fact, book-keeping is the primary stage of accounting and is concerned mainly with the recording of financial transactions of a business.
A book-keeper is mainly responsible for keeping all the records of a business or only a segment thereof. His work is of a clerical nature and in modern times, it is being increasingly done through the use of electronically, mechanical and computerized devices.
Business transactions are recorded in two different ways:
(i) Single Entry:
It is incomplete system of recording business transactions. The business organization maintains only cash book and personal accounts of debtors and creditors. So the complete recording of transactions cannot be made and trail balance cannot be prepared.
(ii) Double Entry:
It this system every business transaction is having a twofold effect of benefits giving and benefit receiving aspects. The recording is made on the basis of both these aspects. Double Entry is an accounting system that records the effects of transactions and other events in at least two accounts with equal debits and credits.
Steps Involved in Double Entry System:
(a) Preparation of Journal:
Journal is called the book of original entry. It records the effect of all transactions for the first time. Here the job of recording takes place.
(b) Preparation of Ledger:
Ledger is the collection of all accounts used by a business. Here the grouping of accounts is performed. Journal is posted to ledger.
(c) Trial Balance Preparation:
Summarizing- It is a summary of ledge balances prepared in the form of a list.
(d) Preparation of Final Account:
At the end of the accounting period to know the achievements of the organization and its financial state of affairs, the final accounts are prepared.
Advantages of Double Entry System:
(i) Scientific System:
This system is the only scientific system of recording business transactions in a set of accounting records. It helps to attain the objectives of accounting.
(ii) Complete Record of Transactions:
This system maintains a complete record of all business transactions.
(iii) A Check on the Accuracy of Accounts:
By use of this system the accuracy of accounting book can be established through the device called a Trail balance.
(iv) Ascertainment of Profit or Loss:
The profit earned or loss suffered during a period can be ascertained together with details by the preparation of Profit and Loss Account.
(v) Knowledge of the Financial Position of the Business:
The financial position of the firm can be ascertained at the end of each period, through the preparation of balance sheet.
(vi) Full details for Purposes of Control:
This system permits accounts to be prepared or kept in as much detail as necessary and, therefore, affords significant information for purposes of control etc.
(vii) Comparative Study is Possible:
Results of one year may be compared with those of the precious year and reasons for the change may be ascertained.
(viii) Helps Management in Decision Making:
The management may be also to obtain good information for its work, specially for making decisions.
(ix) No Scope for Fraud:
The firm is saved from frauds and misappropriations since full information about all assets and liabilities will be available.
Debit and Credit:
Business transactions are events that have a monetary impact on the financial statements of an organization. When accounting for these transactions, we record numbers in two accounts, where the debit column is on the left and the credit column is on the right.
A debit is an accounting entry that either increases an asset or expense account, or decreases a liability or equity account. It is positioned to the left in an accounting entry.
A credit is an accounting entry that either increases a liability or equity account, or decreases an asset or expense account. It is positioned to the right in an accounting entry.
Meaning of Debit and Credit:
The term ‘debit’ is supposed to have derived from ‘debit’ and the term ‘credit’ from ‘creditable’. For convenience ‘Dr’ is used for debit and ‘Cr’ is used for credit. Recording of transactions require a thorough understanding of the rules of debit and credit relating to accounts. Both debit and credit may represent either increase or decrease, depending upon the nature of account.
Usage of Debit and Credit:
Whenever you create an accounting transaction, at least two accounts are always impacted, with a debit entry being recorded against one account and a credit entry being recorded against the other account. There is no upper limit to the number of accounts involved in a transaction – but the minimum is no less than two accounts.
The totals of the debits and credits for any transaction must always equal each other, so that an accounting transaction is always said to be “in balance.” If a transaction were not in balance, then it would not be possible to create financial statements. Thus, the use of debits and credits in a two-column transaction recording format is the most essential of all controls over accounting accuracy.
There can be considerable confusion about the inherent meaning of a debit or a credit. For example, if you debit cash account, then this means that the amount of cash on hand increases. However, if you debit an accounts payable account, this means that the amount of accounts payable liability decreases. These differences arise because debits and credits have different impacts across several broad types of accounts.
(i) Asset Accounts:
A debit increases the balance and a credit decreases the balance.
(ii) Liability Accounts:
A debit decreases the balance and a credit increases the balance.
(iii) Equity Accounts:
A debit decreases the balance and a credit increases the balance.
The reason for this seeming reversal of the use of debits and credits is caused by the underlying accounting formula upon which the entire structure of accounting transactions are built, which is:
Assets = Liabilities + Equity
Thus, in a sense, you can only have assets if you have paid for them with liabilities or equity, so you must have one in order to have the other. Consequently, if you create a transaction with a debit and a credit, you are usually increasing an asset while also increasing a liability or equity account (or vice versa). There are some exceptions, such as increasing one asset account while decreasing another asset account.
Term Paper # 6. Branches of Accounting:
The changing business scenario over the centuries gave rise to specialized branches of accounting which could cater to the changing requirements.
The branches of accounting are:
(i) Financial accounting;
(ii) Cost accounting; and
(iii) Management accounting.
(i) Financial Accounting:
The accounting system concerned only with the financial state of affairs and financial results of operations is known as Financial Accounting. It is the original form of accounting.
It is mainly concerned with the preparation of financial statements for the use of outsiders like:
b. Debenture holders,
c. Investors and
d. Financial institutions.
The financial statements i.e., the profit and loss account and the balance sheet, show them the manner in which operations of the business have been conducted during a specified period.
(ii) Cost Accounting:
In view of the limitations of financial accounting in respect of information relating to the cost of individual products, cost accounting was developed. It is that branch of accounting which is concerned with the accumulation and assignment of historical costs to units of product and department, primarily for the purpose of valuation of stock and measurement of profits.
Cost accounting seeks to ascertain the cost of unit produced and sold or the services rendered by the business unit with a view to exercising control over these costs to assess profitability and efficiency of the enterprise. It generally relates to the future and involves an estimation of future costs to be incurred. The process of cost accounting based on the data provided by the financial accounting.
(iii) Management Accounting:
It is an accounting for the management i.e., accounting which provides necessary information to the management for discharging its functions. According to the Anglo-American Council on productivity, “Management accounting is the presentation of accounting information is such a way as to assist management in the creation of policy and the day-to-day operation of an undertaking.”
It covers all arrangements and combinations or adjustments of the orthodox information to provide the Chief Executive with the information from which he can control the business e.g. Information about funds, costs, profits etc. Management accounting is not only confined to the area of cost accounting but also covers other areas (such as capital expenditure decisions, capital structure decisions, and dividend decisions) as well.
Term Paper # 7. Principles of Accounting:
The word ‘Principle’ has been differently viewed by different schools of thought. The American Institute of Certified Public Accountants (AICPA) has viewed the word ‘principle’ as a general law of rule adopted or professed as a guide to action; a settled ground or basis of conduct of practice.
Accounting principles refer, to certain rules, procedures and conventions which represent a consensus view by those indulging in good accounting practices and procedures. Canadian Institute of Chartered Accountants defined accounting principle as “the body of doctrines commonly associated with the theory and procedure of accounting, serving as an explanation of current practices as a guide for the selection of conventions or procedures where alternatives exist. Rules governing the formation of accounting axioms and the principles derived from them have arisen from common experiences, historical precedent, statements by individuals and professional bodies and regulations of Governmental agencies”.
To be more reliable, accounting statements are prepared in conformity with these principles. If not, chaotic conditions would result. But in reality as all the businesses are not alike, each one has its own method of accounting. However, to be more acceptable, the accounting principles should satisfy the following three basic qualities, viz., relevance, objectivity and feasibility. The accounting principle is considered to be relevant and useful to the extent that it increases the utility of the records to its readers.
It is said to be objective to the extent that it is supported by the facts and free from personal bias. It is considered to be feasible to the extent that it is practicable with the least complication or cost. Though accounting principles are denoted by various terms such as concepts, conventions, doctrines, tenets, assumptions, axioms, postulates, etc. It can be classified into two groups, viz., accounting concepts and accounting conventions.
Term Paper # 8. Accounting Concepts and Conventions:
The term “Concept” includes those basic assumptions or conditions upon which the science of accounting is based.
To make the language, convey the same meaning to all people, as far as possible, and to make it full of meaning, accountants have agreed on the following concepts like:
a. Separate entity concept,
b. Money measurement concept,
c. Going concern concept,
d. Accounting period concept.
The term “Convention” includes customs and traditions, which guides the accountant while preparing the accounting statements.
The term ‘concept’ is used to denote accounting postulates, i.e., basic assumptions or conditions upon the edifice of which the accounting super-structure is based.
The following are the common accounting concepts adopted by many business concerns:
(i) Business Entity Concept:
A business unit is an organization of persons established to accomplish an economic goal. Business entity concept implies that the business unit is separate and distinct from the persons who provide the required capital to it. This concept can be expressed through an accounting equation, viz., Assets = Liabilities + Capital. The equation clearly shows that the business itself owns the assets and in turn owes to various claimants.
It is worth mentioning here that the business entity concept as applied in accounting for sole trading units is different from the legal concept. The expenses, income, assets and liabilities not related to the sole proprietorship business are excluded from accounting. However, a sole proprietor is personally liable and required to utilize non-business assets or private assets also to settle the business creditors as per law.
Thus, in the case of sole proprietorship, business and non-business assets and liabilities are treated alike in the eyes of law. In the case of a partnership, firm, for paying the business liabilities the business assets are used first and it any surplus remains thereafter, it can be used for paying off the private liabilities of each partner.
Similarly, the private assets are first used to pay off the private liabilities of partners and if any surplus remains, it is treated as part of the firm’s property and is used for paying the firm’s liabilities. In the case of a company, its existence does not depend on the life span of any shareholder.
(ii) Money Measurement Concept:
In accounting all events and transactions are recode in terms of money. Money is considered as a common denominator, by means of which various facts, events and transactions about a business can be expressed in terms of numbers.
In other words, facts, events and transactions which cannot be expressed in monetary terms are not recorded in accounting. Hence, the accounting does not give a complete picture of all the transactions of a business unit. This concept does not also take care of the effects of inflation because it assumes a stable value for measuring.
(iii) Going Concern Concept:
Under this concept, the transactions are recorded assuming that the business will exist for a longer period of time, i.e., a business unit is considered to be a going concern and not a liquidated one. Keeping this in view, the suppliers and other companies enter into business transactions with the business unit. This assumption supports the concept of valuing the assets at historical cost or replacement cost. This concept also supports the treatment of prepaid expenses as assets, although they may be practically unsaleable.
(iv) Dual Aspect Concept:
According to this basic concept of accounting, every transaction has a two-fold aspect, viz.:
1. Giving certain benefits and
2. Receiving certain benefits.
The basic principle of double entry system is that every debit has a corresponding and equal amount of credit. This is the underlying assumption of this concept.
The accounting equation viz., Assets = Capital + Liabilities or Capital = Assets – Liabilities, will further clarify this concept, i.e., at any point of time the total assets of the business unit are equal to its total liabilities. Liabilities here relate both to the outsiders and the owners. Liabilities to the owners are considered as capital.
(v) Periodicity Concept:
Under this concept, the life of the business is segmented into different periods and accordingly the result of each period is ascertained. Though the business is assumed to be continuing in future (as per going concern concept), the measurement of income and studying the financial position of the business for a shorter and definite period will help in taking corrective steps at the appropriate time.
Each segmented period is called “accounting period” and the same is normally a year. The businessman has to analyse and evaluate the results ascertained periodically. At the end of an accounting period, an Income Statement is prepared to ascertain the profit or loss made during that accounting period and Balance Sheet is prepared which depicts the financial position of the business as on the last day of that period. During the course of preparation of these statements capital revenue items are to be necessarily distinguished.
(vi) Historical Cost Concept:
According to this concept, the transactions are recorded in the books of account with the respective amounts involved. For example, if an asset is purchases, it is entered in the accounting record at the price paid to acquire the same and that cost is considered to be the base for all future accounting.
It means that the asset is recorded at cost at the time of purchase but it may be methodically reduced in its value by way of charging depreciation. However, in the light of inflationary conditions, the application of this concept is considered highly irrelevant for judging the financial position of the business.
(vii) Matching Concept:
The essence of the matching concept lies in the view that all costs which are associated to a particular period should be compared with the revenues associated to the same period to obtain the net income of the business.
Under this concept, the accounting period concept is relevant and it is this concept (matching concept) which necessitated the provisions of different adjustments for recording outstanding expenses, prepaid expenses, outstanding incomes, incomes received in advance, etc., during the course of preparing the financial statements at the end of the accounting period.
(viii) Realisation Concept:
This concept assumes or recognizes revenue when a sale is made. Sale is considered to be complete when the ownership and property are transferred from the seller to the buyer and the consideration is paid in full.
However, there are two exceptions to this concept, viz.:
(1) Hire purchase system where the ownership is transferred to the buyer when the last installment is paid and;
(2) Contract accounts, in which the contractor is liable to pay only when the whole contract is completed, the profit is calculated on the basis of work certified each year.
(ix) Accrual Concept:
According to this concept the revenue is recognized on its realization and not on its actual receipt. Similarly the costs are recognized when they are incurred and not when payment is made.
This assumption makes it necessary to give certain adjustments in the preparation of income statement regarding revenues and costs. But under cash accounting system, the revenues and costs are recognized only when they are actually received or paid. Hence, the combination of both cash and accrual system is preferable to get rid of the limitations of each system.
(x) Objective Evidence Concept:
This concept ensures that all accounting must be based on objective evidence, i.e., every transaction recorded in the books of account must have a verifiable document in support of its, existence. Only then, the transactions can be verified by the auditors and declared as true or otherwise. The verifiable evidence for the transactions should be free from the personal bias, i.e., it should be objective in nature and not subjective.
However, in reality the subjectivity cannot be avoided in the aspects like:
a. Provision for bad and doubtful debts,
b. Provision for depreciation,
c. Valuation of inventory, etc., and the accountants are required to disclose the regulations followed.
The following conventions are to be followed to have a clear and meaningful information and data in accounting:
The convention of consistency refers to the state of accounting rules, concepts, principles, practices and conventions being observed and applied constantly, i.e., from one year to another there should not be any change. If consistency is there, the results and performance of one period can he compared easily and meaningfully with the other.
It also prevents personal bias as the persons involved have to follow the consistent rules, principles, concepts and conventions. This convention, however, does not completely ignore changes. It admits changes wherever indispensable and adds to the improved and modern techniques of accounting.
The convention of disclosure stresses the importance of providing accurate, full and reliable information and data in the financial statements which is of material interest to the users and readers of such statements. This convention is given due legal emphasis by the Companies Act, 1956 by prescribing formats for the preparation of financial statements. However, the term disclosure does not mean all information that one desires to get should be included in accounting statements. It is enough if sufficient information, which is of material interest to the users, is included.
In the prevailing present day uncertainties, the convention of conservatism has its own importance. This convention follows the policy of caution or playing safe. It takes into account all possible losses but not the possible profits or gains.
A view opposed to this convention is that there is the possibility of creation of secret reserves when conservatism is excessively applied, which is directly opposed to the convention of full disclosure. Thus, the convention of conservatism should be applied very cautiously.
Term Paper # 9. Bases of Accounting:
There are three bases of accounting in common usage.
Any one of the following bases may be used to finalise accounts:
(i) Accounting on Cash Basis:
Under cash basis accounting, entries are recorded only when cash is received or paid. No entry is passed when a payment or receipt becomes due. Income under cash basis of accounting, therefore, represents excess of receipts over payments during an accounting period. Government system of accounting is mostly on cash basis.
Certain professional people record their income on cash basis, but while recording expenses they take into account the outstanding expenses also. In such a case, the financial statements prepared by them for determination of their income are termed as Receipts and Expenditure Account.
(ii) Accrual Basis of Accounting or Mercantile System:
Under accrual basis of accounting, accounting entries are made on the basis of amounts having become due for payment or receipt. Incomes are credited to the period in which they are earned whether cash is received or not. Similarly, expenses and losses were detailed to the period in which, they are incurred, whether cash is paid or not.
The profit or loss of any accounting period is the difference between incomes earned and expenses incurred, irrespective of cash payment or receipt. All outstanding expenses and prepaid expenses, accrued incomes and incomes received in advance are adjusted while finalising the accounts. Under the Companies Act 1956, all companies are required to maintain the books of accounts according to accrual basis of accounting.
(iii) Mixed or Hybrid Basis of Accounting:
When certain items of revenue or expenditure are recorded in the books of account on cash basis and certain items on mercantile basis, the basis of accounting so employed is called ‘hybrid basis of accounting’. For example, a company may follow mercantile system of accounting in respect of its export business.
However, government subsidies and duty drawbacks on exports to be received from government are recorded only when they are actually received i.e., on cash basis. Such a method could be adopted because of uncertainty with respect of quantum, amount and time of receipt of such incentives and drawbacks.
Such a method of accounting followed by the company is called the hybrid basis of accounting. In practice, the profit or loss shown under this basis will not be realistic. Conservative people who prefer recognising income when received but cautious to provide for all expenses, whether paid or not prefer this system. It is not widely practised due to the inconsistency.
Term Paper # 10. Accounting Equation:
Every business transaction has two aspects. One aspect is debited other aspect is credited. Both the aspects have to be recorded in accounts appropriately. American Accountants have derived the rules of debit and credit through a ‘novel’ medium, i.e., accounting equation.
The equation is as follows:
Assets = Equities
The equation is based on the principle that accounting deals with property and rights to property and the sum of the properties owned is equal to the sum of the rights to the properties. The properties owned by a business are called assets and the rights to properties are known as liabilities or equities of the business.
Equities can be subdivided into equity of the owners which is known as capital and equity of creditors who represent the debts of the business know as liabilities. These equities may also be called internal equity and external equity. Internal equity represents the owner’s equity in the assets and external represents he outsider’s interest in the asset.
Based on the bifurcation of equity, the accounting equation can be restated as follows:
Assets = Liabilities + Capital (Or)
Capital = Assets – Liabilities (Or)
Liabilities = Assets – Capital.
The equation is fundamental in the sense that it gives a foundation to the double entry book-keeping system. This equation holds good for all transaction and events and at all periods of time since every transaction and events has two aspects.
Rules for Accounting Equation:
Following rules help in making the accounting equation:
If there is increase in assets, this increase is debited in assets account. If there is decrease in assets, this decrease credited in assets account.
When liabilities are increase, outsider’s equities are credited and when liabilities are decreased, outsider’s equities are debited.
When capital is increased, it is credited and when capital is withdrawn, it is debited.
Owner’s equity is decreased by the amount of revenue expenses.
(v) Income or Profits:
Owner’s equity is increased by the amount of revenue income.
Term Paper # 11. Advantages of Accounting:
Accounting is useful to the management in various ways. It enables the management to assess the achievements of its performance. Actual performance can be compared with the desired performance or with the performance of previous years. The weakness of the business can be identified and corrective measures can be applied to remove them.
Various profitability, sales and liquidity ratios can be calculated, the actual performance can be evaluated and effective line of action can be decided for the future. Fund flow statement can also be prepared to understand the additional funds earned during the year and their application.
The following are the advantages of accounting to a business:
(i) It helps in having complete record of business transactions.
(ii) It gives information about the profit or loss made by the business at the close of a year and its financial conditions. The basic function of accounting is to supply meaningful information about the financial activities of the business to the owners and the managers.
(iii) It provides useful information form making economic decisions.
(iv) It facilitates comparative study of current year’s profit, sales, expenses etc., with those of the previous years.
(v) It supplies information useful in judging the management’s ability to utilise enterprise resources effectively in achieving primary enterprise goals.
(vi) It provides users with factual and interpretive information about transactions and other events which are useful for predicting, comparing and evaluation the enterprise’s earning power.
(vii) It helps in complying with certain legal formalities like filing of income-tax and sales-tax returns. If the accounts are properly maintained, the assessment of taxes is greatly facilitated.
Term Paper # 12. Limitations of Accounting:
Accounting Principles are not only incomplete but also deprived of from the general acceptance. Because of difference in opinion, some accountants recommend a particular view while others are opposed to it. There are a number of methods for valuation of stock and goodwill, accounting to hire purchase system, etc.
One limitation of accounting principles is this that all accountants do not use a principle in a similar manner. The accountants of different business houses are implementing the accounting principles according to their need, convenience and nature of business.
(i) Accounting is historical in nature. It does not reflect the current financial position or worth of a business.
(ii) Transactions of non-monetary mature do not find place in accounting. Accounting is limited to monetary transactions only. It excludes qualitative elements like management, reputation, employee morale, labour strike etc.
(iii) Facts recorded in financial statements are greatly influenced by accounting conventions and personal judgements of the Accountant or Management. Valuation of inventory, provision for doubtful debts and assumption about useful life of an asset may, therefore, differ from one business house to another.
(iv) Accounting principles are not static or unchanging-alternative accounting procedures are often equally acceptable. Therefore, accounting statements do not always present comparable data.
(v) Cost concept is found in accounting. Price changes are not considered. Money value is bound to change often from time to time. This is a strong limitation of accounting.
(vi) Accounting statements do not show the impact of inflation.
(vii) The accounting statements do not reflect those increase in net asset values that are not considered realized.