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7/25/2019 KEY TERMS in Accounts & Differences
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KEY TERMS used in Accounting
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Sl Terminology Meaning
1 Accounting The process of identifying measuring and
communicating economic informationto permit informed judgements anddecisions by the users of information.
!inancialaccounting
The art of recording" classifying andsummarising in a significant mannerand in terms of money transactionsand e#ents $hich are at least in part ofa financial character and interpretingthe results.
% Managementaccounting
The presenting of accounting information insuch a $ay as to assist managementin the creation of the policy and &n theday to day operation of theunderta'ing.
( Accountingprinciples
Rules of action or conduct adopted by theaccountants uni#ersally $hilerecording accounting transactions.
) Accountingconcepts
*asic assumptions or conditions upon$hich the science of accounting isbased.
+ Accountingcon#entions
,ustoms and traditions $hich guide theaccountants $hile preparing theaccounting statements.
- ,ash system of
accounting
A system in $hich accounting entries are
made only $hen cash is recei#ed orpaid.
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Mercantilesystem ofaccounting
A system in $hich accounting entries aremade on the basis of amounts ha#ingbecome due for payment or receipt. &tis also termed as Accrual system of
accounting.
/ 0ournal A boo' containing a chronological record ofbusiness transactions. &t is the boo' oforiginal records.
1 ,ompound0ournalentry
A 0ournal entry recording more than onebusiness transaction occurring on thesame day" the nature of transactionbeing the same.
11 2ominalaccounts
These are accounts opened in the boo'ssimply to e3plain the nature of thetransaction. They include accounts ofall incomes4gains and e3penses andlosses.
1 5pening journal
entry
A journal entry passed for bringing for$ard
balances of assets and liabilities of thepre#ious period to the current period.
1% 0ournali6ing The process of recording transactions in thejournal.
1( 7ersonalaccounts
These are accounts of persons $ith $homthe business deals.
1) Real accounts These are accounts of tangible objects or
intangible rights o$ned by anenterprise and carrying probablefuture benefits.
1+ 8edger A boo' containing different accounts of anentity.
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1- 7osting Transferring the debit and credit items fromthe journal to the respecti#e accountsin the ledger.
1 Trial balance A statement containing the #arious ledgerbalances on a particular date.
1/ 9oucher system A plan and method of procedure for the#erifications" recording and paymentof all items:other than items to be paidfrom petty cash;$hich re
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of a specific type.
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Accommodationbill
A bill dra$n and accepted for pro#idingfunds to a friend in need.
/ *ills of e3change An instrument in $riting containing an
unconditional order signed by themar'er" directing the said person topay a certain sum of money only to orto the order of a certain person or tothe bearer of the instrument.
% ,he
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% ,urrent assets ,ash and other assets that are e3pected tobe con#erted into cash or consumed inthe production of goods or renderingof ser#ices in the normal course of
business.
%/ ,urrent liabilities 8iabilities payable $ithin a year from thedate of *alance Sheet either out ofe3isting current assets or by creationof ne$ current liabilities.
( !i3ed assets Assets held for the purpose of pro#iding orproducing goods and ser#ices and notheld for resale in the normal course of
business.
(1 !ictitious assets Assets not represented by tangiblepossession or property.
( !i3ed liabilities All liabilities other than current liabilities
(% 8iabilities The claims of outsiders :other than o$ners;against the firm?s assets.
(( 8i
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( ,ompensatingerrors
Errors $hich compensate each other.
(/ Errors of
omission.
Errors committed because of complete
omission of a transaction from theboo's of accounts.
) Errors ofcommission
Errors on account of $rong balancing of anaccount" $rong posting" $rong carryfor$ard" $rong totaling etc.
)1 Errors of7rinciple
Errors committed because of failure to ma'ea proper distinction bet$een re#enueand capital items.
) Suspenseaccount
An account to $hich the difference in thetrial balance has been put temporarily.
)% Amorti6ation The process of $riting off the intangibleassets.
)( >epletion The portion of the cost of the naturalresources recogni6ed as an e3pensesfor each period.
)) >ilapidation >amage done to a building or other propertyduring the tenancy.
)+ >epreciation The portion of the cost of tangible operatingassets :other than land; recogni6ed asan e3pense for each period.
)- >epreciationaccounting
A system of accounting $hich aims todistribute the cost or other basic
#alues of tangible capital assets:lesssal#age" if any;o#er the estimateduseful life of the asset in a systematicand rational manner.
) Accounting ratio &t is the relationship e3pressed inmathematical terms bet$een t$oaccounting figures related $ith each
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other.
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)/ *alance sheet A statement of financial position of businessat a specified moment of time.
+ *alance sheet
ratios
Ratios calculated on the basis of figures of
balance sheet only.
+1 ,omposite ratios Ratios based on figures of profit and lossaccount as $ell as the balance sheet.They are also 'no$n as inter@statement ratios
+ !inancialanalysis
,ritical e#aluation of data gi#en in thefinancial statements.
+% !inancial ratios Ratios disclosing the financial position orsol#ency of the firm. They are also'no$n as sol#ency ratios.
+( !inancialstatement
An organi6ed collection of data according tological and consistent accountingprocedures con#eying anunderstanding of some financialaspects of a business firm.
+) &nterpretation E3plaining the meaning and significance ofthe financial data.
++ 7rofitability ratios Ratios $hich reflect the final results ofbusiness operations.
+- Turno#er ratios Ratios measuring the efficiency $ith $hichthe assets are employed by a firm.They are also 'no$n as acti#ity orefficiency ratios.
+ !unds &t refers to $or'ing capital of a business.
+/ !unds flo$statement
A statement summari6ing inflo$s andoutflo$s of funds from any businessacti#ity.
- or'ing capital &t refers to the e3cess of current assets o#er
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current liabilities.
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-1 ,ash &t stands for cash and ban' balances.
- ,ash flo$analysis
A techniirect labour 8abour $hich ta'es acti#e and direct part inthe production of a particular
commodity.
- >irect material Material $hich becomes an integral part ofthe finished product and $hich can becon#eniently assigned to specificphysical units.
-/ !i3ed cost A cost that remains constant $ithin a gi#enperiod of time and range of acti#ity inspite of fluctuations in production.
8ife cycle costing The practice of obtaining o#er theirlifetimes" the best use of physicalassets at the lo$est total cost to theentity.
1 Material The substance from $hich the product is
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made.
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5#erhead4&ndirect cost
The e3penditure on labour" materials orser#ices $hich cannot beeconomically identified $ith specificsaleable cost unit.
% Semi@#ariablecost
A cost containing both fi3ed and #ariablecomponents and $hich is thusaffected by fluctuations in the le#el ofacti#ity.
( 9alue addedconcept
&t is the $ealth generated by an enterprisethrough its operations
) 9ariable cost A cost $hich tends to #ary indirect
proportion to the le#el of acti#ity.
+ Bistorical cost of&n#entories
&t is the aggregate of cost of purchase" costof con#ersion and other costs incurredin bringing the in#entories to theirpresent locations and conditions.
- &n#entory Tangible property to be consumed inproduction of goods or ser#ices orheld for sale in the ordinary course of
business.
2et reali6able#alue
The estimated selling price in the ordinarycourse of business less costnecessarily to be incurred to ma'e thesale.
/ 7eriodicin#entorysystem
A system of in#entory accounting $here the
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/1 *udget A financial and4or
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11 ,urrent standard A standard fi3ed for a short period.
1 Estimated cost An estimate of $hat the cost is li'ely to beduring a gi#en period of time.
1% &deal cost A cost $hich should be incurred during aperiod under ideal conditions.
1( Standard cost A careful pre@determination of $hat the costshould be.
1) Standard costing A costing system in#ol#ing the preparationand use of standard costs" theircomparison $ith actual costs and the
analysis of #ariances as to theircauses and points of incidence.
1+ >irect labour cost#ariance
&t is the difference bet$een the standarddirect $ages specified for the acti#ityachie#ed and the actual direct $agespaid.
1- >irect labourefficiency
#ariance
&t is that portion of direct labour cost#ariance $hich is due to the difference
bet$een standard labour hoursspecified for the acti#ity achie#ed andactual labour hours e3pended.
1 >irect labour rate#ariance
&t is that portion of direct labour cost#ariance $hich is due to the differencebet$een the standard rate of payspecified and the actual rate paid.
1/ >irect material
cost#ariance
&t is the difference bet$een the standard
cost of direct material specified for theoutput achie#ed and actual cost ofdirect material used.
11 >irect materialmi3#ariance
&t is that portion of direct material usage#ariance $hich is due to the differencebet$een the standard and actual
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composition of mi3ture.
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111 >irect materialprice#ariance
&t is that portion of direct material usage#ariance $hich is due to the reasonsother than change of mi3.
11 >irect materialusage#ariance
&t is that portion of direct cost #ariance$hich is due to the difference bet$eenthe standard
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4loss at different le#els of sales #olume$ithin a limited range.
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11 ,ash brea' e#enpoint
The le#el of acti#ity $here there is neither acash profit nor a cash loss.
1 ,ost brea' e#en
point
The le#el of acti#ity $here the total costs
under t$o alternati#es are the same.
1% ,97 analysis A management tool sho$ing the relationshipbet$een #arious ingredients of profitplanning #i6." cost" selling price and#olume of acti#ity.
1( >ifferentialcosting
A techniecision ma'ing A process of choosing among alternati#ecourses of action
1/ >ifferential cost The difference in total bet$een alternati#escomputed to assist in decisionma'ing.
1% Rele#ant cost The cost pertinent to specific managementdecision.
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DIFFERENCES BETWEEN MANAGEMENT ACCOUNTING AND
FINANCIAL ACCOUNTING
Point of Difference Financial accounting Management accounting
Objectives It is designed to supply
information in the form of
profit and loss account
and Balance Sheet to
external parties lieshareholders! creditors!
bans! investors and
"overnment
It is designed for the
internal use by the
management#
$naly%ing
performance
It portrays the position of
business as a &hole# 'he
financial statements
sho&s the overall
performance or status of
the business
It directs it attention to the
various divisions!
departments of the
business and reports about
the profitability!
performance etc# Itprovides detailed
analytical data for these
purposes#
Data used It is concerned &ith the
monetary record of past
events# It a post(mortem
It is an accounting for
future and therefore! it
supplies data both for
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analysis of past activity
and therefore out of date
for management action#
present and future duly
analy%ed and in detail in
the management language#
Monetary
measurement
Only economic events
that is &hich can bedescribed in terms of
money is measured
'he management is
e)ually interested in non(monetary economic
events vi%# technical
innovations! personnel in
the organi%ation! time
value of money etc
Periodicity of
reporting
'he income statement and
balance sheet are usually
prepared yearly or in
some cases half(yearly#
Management re)uires
information at fre)uent
intervals and therefore
financial accounting fails
to cater to the needs to themanagement#
Precision Information is more
precise as it is for the
external use
Information is *ess
precise
$s it is for the internal
use#
+ature It is more objective It is more subjective
because it is based on
judgment rather than on
measurement#*egal compulsion It is more or less
compulsory for every
business on account of the
legal provisions of one or
the other#
'he management is free to
install or not to install a
system of management
accounting#
Differences bet&een Single ,ntry and Double ,ntry system of Boo(
eeping
Point of Difference Double ,ntry System Single ,ntry System
-ecording of
transactions
'he dual aspect is
completely follo&ed
&hile recording
In case of some
transactions both the
aspects are recorded!
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business transactions &hile for some only one
aspect is recorded!
&hile in case of some
other transaction no
recording is done at all#Maintenance of boos .arious subsidiary
boos vi%# sales boo!
purchases boo and
returns boo! cash boo
etc are maintained#
+o subsidiary boos
except cash boo is
maintained
Maintenance of boos
of account
$ll major accounts real!
nominal and personal
accounts are maintained
Only personal accounts
are maintained
Preparation of trial
balance
'rial balance is
prepared to checarithmetical accuracy of
the boos of account
'rial balance cannot be
prepared hence it is notpossible to chec the
accuracy of the boos
of accounts#
$ccuracy of profits and
financial position
'rading and profit and
loss account gives the
true profit of the
business &hile balance
sheet sho&s the true
and fair financialposition of the business#
Only a rough estimate
of profit and loss can be
made# 'he statement of
affairs prepared does
not sho& the true
financial position of thebusiness#
/tility *arge business units
should compulsorily
adopt double entry
system
It is used by very small
business units#
Differences bet&een 0ournal and *edger
Point of Difference 0ournal *edger
Boo of ,ntry It is the boo of first or
original entry
It is the boo of second
and final entry
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System of record It records transactions
in a chronological order
It records transactions
in a analytical order
-eliability 0ournal is more reliable
since entry is first made
here
It is less reliable as
entry from the records
of journal is simplyposted here#
process 'he process of
recording transactions
is termed as
journali%ing
'he process of
recording transactions
in the ledger is called as
Posting#
Difference bet&een a 'rial and Balance sheet
Point of Difference 'rial Balance Balance Sheet
Meaning It is a statement
containing various
ledger balances on a
particular date
It is a statement of
various assets and
liabilities of the
business on a particular
date#
Objective It is to chec thearithmetical accuracy of
the boos of account of
the business
'he objective is toascertain the financial
position of the business
Item covered It contains all items
relating to incomes!
expenses! assets and
liabilities
It incorporates only
assets and liabilities#
Preparation It is prepared before
preparation of the
balance sheet
It is prepared not only
on the basis of trial
balance but also of any
additional information
&hich may not have
been incorporated in
trial balance#
/se It is meant only for $ balance is prepared
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internal use both for internal as &ell
as external use#
DIFF,-,+1, B,'2,,+ F/+DS F*O2 S'$',M,+' $+D I+1OM,
S'$',M,+'
POI+' OF
DIFF,-,+1,
F/+DS F*O2
S'$',M,+'
I+1OM,
S'$',M,+'
F/+DS It deals &ith the
financial resources
re)uired for running the
business activities# it
explains ho& &ere thefunds obtained and ho&
&ere they used
I' DIS1*OS,S '3,
-,S/*'S OF '3,
B/SI+,SS
$1'I.I'I,S# I, 3O2
M/13 3$S B,,+,$-+,D $+D 3O2
I' 3$S B,,+ SP,+'
M$'13I+" It matches the 4funds
raised5 and 4funds
applied5 during a
particular period# 'he
sources and
applications of fundsmay be of capital as
&ell as of revenue
nature#
It matches th6 incomes
of a period &ith the
expenditure of that
period &hich are both
of a revenue nature#
SO/-1,S Sources are many
besides operations such
as share capital!
debentures !sale of
fixed assets etc#
$n income statement
&hich discloses the
results of operations
cannot even accurately
tell about the funds
from operations alone
because of non(funditem being included
therein#
Difference bet&een cash flo& analysis and funds flo& analysis
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Point of difference 1ash flo& analysis Fund flo& analysis
Position It is concerned only
&ith the change in cash
position
It is concerned &ith
change in &oring
capital position bet&een
t&o balance sheet dates#-ecord It is merely a record of
cash receiptsand
disbursements#
2hile studying the
short term solvency of a
business one is
interested not only in
cash balance but also in
the assets &hich can be
easily converted into
cash#
Periodicity It is more useful to the
management as a toolof financial analysis in
short periods as
compared to funds flo&
analysis# It has been
rightly been said that
shorter the period
covered by the analysis
greater is the business
can meet its obligationsmaturing after 78 years
from no&
Differences bet&een Boo 9eeping and $ccounting
Point of Difference Boo 9eeping $ccounting
-ecording It is a mere recording of
business transactions in
appropriate accountboos#
It denotes the recording
of business transactions
in proper boos ofaccounts as &ell as the
preparation and analysis
and interpretation of
financial statements
Scope +arro& scope 2ider scope
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Maintenance of
accounts
It maintains information
about a business in the
boos of accounts
It analyses and
interprets the
information maintained
in the boos of accounts
Base Boo eeping serves asthe basis for recording
transaction for the first
time
$ccounting starts &hereboo eeping ends
Purpose Boo eeping practices
the principles of
accounting
$ccounting professes
i#e# lays do&n the
principles of
+ature of &or 'he &or of
booeeping is of
routine nature and so it
does not re)uire anyspecial no&ledge and
sill
'he &or in accounting
is of complicated nature
and so it re)uires
special no&ledge andsill
Person in charge 'he boo eeping &or
is usually performed by
boo eepers or account
clers
$ccounting &or is
done by )ualified
accountants
Differences bet&een "oods and $ssets:
"oods $ssets
It refers to things in &hich a
business deals
It refer to things &ith &hich a
business deals
'hey are meant for resale It is meant for use in the business
"oods does not include assets and
therefore it is narro& in sense
'he scope of the term assets is &ider
than that of the term goods and
includes goods
"oods are tangible $ssets may be tangible and
intangible
"oods are the items of trading
account#
$ssets are the items of balance sheet
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Differences bet&een $ssets and *iabilities:
$ssets *iabilities
$ssets refer to properties or things
o&ned by a business and amountsdue to a business from others#
*iabilities refer to amounts due from
a business to others#
'hey are useful to a business *iabilities are a burden to a business
$ssets such as debtors! bills
receivable! outstanding incomes!
prepaid expenses! loans given to
others etc mae others indebted to a
business
$ll liabilities mae a business
indebted to others
$ concern must necessarily have
some assets
$ concern may or may not have
liabilities
If the amount of assets of a businessis more than the amount of its
liabilities the financial position or
strength of the business &ill be
stronger
If the amount of liabilities of abusiness is greater than the amount
of it s assets the financial position of
the business &ill be &eaer
$ccounts of assets sho& debit
balances
$ccounts of liabilities sho& credit
balances
Differences bet&een debtors and 1reditors:
Debtors 1reditors
$ debtor is a person &ho o&es
money to business
$n creditor is a person to &hom the
business o&es money
$ person becomes a debtor of a
business &hen he has received some
benefit from the business
$ person becomes a creditor of a
business &hen he has given some
benefit to the business
Debtors constitute assets for a
business
1reditors constitute liabilities for a
business
$ccount of debtors sho& debit
balances
$ccounts of creditors sho& credit
balances#
Differences bet&een Debit and 1redit
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Debit 1redit
It refers to the amount of charge
given to an account for some benefit
received by that account
It refers to the amount of discharge
or re&ard given to an account for
some benefit given by that accountDebit is given to an account &hen
that account has received some
benefit
1redit is given to an account &hen
that account has given some benefit
'he entry for the debit given to an
account is made on the left(hand side
of that account
'he entry for the 1redit given to an
account is made on the right(hand
side of that account
Debit results in increase in the
amount of an asset! decrease in the
amount of liability! decrease in the
amount of o&ner;s capital! andincrease in the amount of an expense
or decrease in the amount of an
income#
1redit results in decrease in the
amount of an asset! increase in the
amount of liability !increase in the
amount of o&ner;s capital! decreasein the amount of an expense or
increase in the amount of an income
Differences bet&een 0ournal and a *edger
0ournal *edger
It is a boo of first! original or prime
entry as all transactions are recorded
first in the journal#
It is a boo of final entry as the
transactions are recorded finally in
the ledger
'he journal is a subsidiary boo!
because it does not provide the final
accounting information relating to
the business#
It is a principal boo of accounts
because it is from this boo that a
trader can obtain final information
relating to this business#
'he journal is only an original record
and not a permanent record#
$ ledger is the permanent record of
various accounts
'he journal is a daily record and so
the transactions are entered in the
journal daily#
But posting from the journal to the
ledger is done periodically< say!
&eely! fortnightly! monthly or
)uarterly according to the
convenience and re)uirements of the
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business concern#
In journal the information relating to
a particular account is not found in
one place
In ledger it is found in one place
0ournal does not provide fullinformation about a person! an asset!
an expense or an income
*edger provides full informationabout a person!an asset!an expense or
an income#
'he unit of entries in the journal is a
transaction
'he unit of entries in the ledger is an
account
$s legal evidence journal has greater
&eight than ledger
1onsidered as a secondary document
only
-ecording of transactions in the
journal is called journali%ing
-ecording of transactions in the
ledger is called posting
,ach entry in the journal sho&s both
the aspects of a transaction
,ach entry in a ledger account sho&s
only one aspect of a transaction+arration is &ritten in the journal +o narration is &ritten in the ledger
.ouchers! receipts! invoices and
debit and credit notes help the
recording of transactions in the
journal
0ournal helps the recording of
transactions in the ledger
0ournal may be avoided by a
business concern
*edger is a must for every business
concern#
0ournal is totalled but not balanced $ ledger is balanced
0ournal has debit and credit columns
it does not have debit and credit
sides#
But a ledger has debit and credit
sides
In the journal! ledger folio is &ritten In the ledger! journal folio is &ritten
$ trial balance cannot be prepared
from the entries in the journal
$ trial balance can be prepared from
the balances in ledger accounts#
Final accounts cannot be prepared
from the journal entries
Final accounts can be prepared from
the ledger account balances#
Differences bet&een 0ournalising and Posting
0ournali%ing Posting
It means recording a transaction in It means recording a transaction in
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the journal the ledger
0ournali%ing is the first stage of
recording a transaction
Posting is the second stage of
recording a transaction
It is done then and there that is soon
after a transaction has taen place
Posting is generally not made then
and there0ournali%ing of transactions is done
in the order of dates &ithout any
other considerations
Posting is made according to the
nature of the transactions
It is made in one place Posting of an entry in the journal is
made in t&o different places in the
ledger#
It is done &ith the help of vouchers!
receipts! invoices! debit notes and
credit notes
Posting to the ledger is done &ith the
help of the entries in the journal#
Differences bet&een a Debit +ote and a 1redit +ote:
Debit note 1redit note
It is prepared by the person &ho
returns the goods and is sent to the
seller of goods#
It is prepared by the person &ho
receives the goods returned and is
sent to the buyer of the goods#It serves as an intimation for the
goods returned
It serves as intimation for the receipt
of the goods returned#
It indicates that the account of the
person to &hom the goods are
returned is debited
It indicates that the account of the
person by &hom the goods are
returned is credited#
$ debit note is prepared first $ credit note is prepared after the
receipt of the debit note#
It serves as the basis for the entries in
the purchases returns boo of the
sender of the goods#
It serves as the basis for the entries in
the sales returns boo of the receiver
of goods#
Differences bet&een capital expenditure and revenue expenditure
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1apital expenditure -evenue expenditure
It is incurred for ac)uiring fixed
assets intended for use in the
business and not for resale#
It is incurred for ac)uiring or
producing goods meant for sale#
It is incurred for extending orimproving the existing fixed assets It is incurred for maintaining thefixed assets in a good &oring order
It adds to the revenue(earning
capacity of a concern
It does not add to the revenue(
earning capacity of a concern
It &ill increase the value of net assets It &ill decrease the value of the net
assets
'he benefit of capital expenditure
extends to more than one year#
'he benefit of revenue expenditure is
confined to only one year#
It is not a loss to the concern It is a loss to the concern
It &ill go to the balance sheet# It &ill go the trading account or
profit and loss account#
Differences bet&een capital receipts and revenue receipts
1apital receipts -evenue receipts
It represents the capital received
from the proprietors! loans or
deposits received! sale proceeds ofinvestments and fixed assets and
non(recurring receipts such as
legacies! life membership fees etc#
It represents the incomes! such as
sale proceeds of goods! interest
received! commission received etc#
1- are of non(recurring nature# In
other &ords! they are not received
repeatedly
-evenue receipts are of recurring
nature# In other &ords! they are
received repeatedly or regularly#
Some of the capital receipts such as
loans and deposits received are
liabilities
-evenue receipts are not liabilities
$s some of the capital receipts are
liabilities! they have to be repaid
$s revenue receipts are not
liabilities! they need not be repaid#
1apital receipts are not incomes to
the concern
-evenue receipts are incomes to the
concern
1apital receipts &ill go to the
balance sheet of the concern
-evenue receipts &ill go to the
revenue account of the concern#
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Difference bet&een management accounting and financial accounting
Point of difference Financial accounting Management accounting
Objectives It is designed to supply information in
the form of profit and loss a=c andbalance sheet to external parties lieshareholders! creditors! bans!
investors and government#
It is designed principally for
internal use by the management#
$naly%ing
performance
It portrays the position of business as a
&hole# 'he financial statements lie
income statement and balance sheetreport on overall performance or status
of the business#
Financial accounting deals &ith the
aggregates and therefore cannot reveal
&hat part of the management action isgoing &rong and&hy#
It directs its attention to the
various divisions!departments of
the business and reports aboutthe profitablility!performance etc
of each of them#
Management accounting
provides detailed analytical data
for these purposes#
Data used It is concerned &ith the monetary
record of past events# It is a post(
mortem anaysis of past activity andtherefore out of date for management
action#
I' is an accounting for future
and therefore it supplies data
both for present and future dulyanaysed and in detail in the
management language so that it
becomes basis for management
action#
Monetary
measurement
In financial accounting only such
economicevents find a place &hich
can be described in money#
It is e)ually interested in non(
monetary economic events vi%#
technical innovations! personnelin the organi%ation! changes in
the value of money etc# theseevents affect the management;s
decision and therefore
management accounting cannotafford ignore them#
Periodicity of
reporting
'he period of reporting is much longer
in financial accounting as compared tomanagement accounting# it is usually
prepared yearly Or in some cases half(
yearly
Management re)uires
information at fre)uentintervals #in management
accounting there is more
emphasis on furnishinginformation )uicly and at
comparatively short intervals as
per the re)uirements of themanagement#
Precision 'here is more emphasis on precision i 'here is less emphasis onprecision#
+ature It is more objective It is more subjective#
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*egal compulsion It is more or less become compulsory
for every business on account of thelegal provisions of one or the other
act#
'he business is free to install or
not to install a system ofmanagement accounting#
Fundamentals of Book keepn!
Defnton and Meann! of Book "eepn!
In the &ords of $#3 #-osenampff! 4Boo eeping is the art of recording
business transactions in a systematic manner5#
Boo eeping is the art and science of recording business transactions in
appropriate boos of accounts in accordance &ith the principles of
accountancy for the purpose of ascertaining the profit or loss and financial
position of the business#
In short! boo eeping means the recording of business transactions in a set
of account boos#
O#$e%ts of Book "eepn!&
7# 'o have a permanent record of all the transactions of a business for
future references#
># 'o ascertain the net result ?i#e# the net profit or the net loss@ of the
business for future reference#
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A# to no& the exact reasons leading to the net profit or the net loss
6# 'o ascertain &hat amounts are due to the business and from &hom the
amounts are due#
# 'o ascertain &hat amounts are due from the business and to &hom the
amounts are due#
C# 'o no& the exact financial position of the business as on a particular
date#
# 'o no& the progress of the business from year to year#
E# 'o minimi%e errors and frauds by facilitating their )uic detection#
# 'o eep control over the properties and the activities of the business#
78# to have valuable information for legal and tax purposes
77#'o have necessary information for future planning#
Is #ook keepn! an a't o' a s%en%e(
$n art! generally! refers to action or actual doing# Boo eeping involves
actual doing ? i#e# the actual recording of business transaction in account
boos@# So! boo eeping is an art# $ Science! usually! refers to any subject
&hich has a set of accepted principles or rules for application in practice#
Boo(eeping has a set of accepted principles or rules for application &hile
recording the business transactions# So! boo eeping is also a science#
Defnton and meann! of A%%ountn!
'he $merican Institute of 1ertified Public $ccountants has defined
accounting as 4the art of recording! classifying and summari%ing! in a
significant manner! and in terms of money! transactions and events &hich
are! in pat at least! of a financial character! and interpreting the results
thereof#5
In short! accounting is the recording! classifying and summari%ing of
business transactions and interpreting the results thereof#
Essental aspe%ts o' featu'es of a%%ountn!&
7# -ecording: it is the first essential aspect of accounting# it refers to the
entering of business transactions as and &hen they occur either in a
single boo called the journal or in several boos called the subsidiary
boos or special journals#
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># 1lassifying: It is the second important aspect of accounting# It refers
to the grouping of transactions or entries of lie nature into
appropriate heads by posting or transferring the entries from the
journal or subsidiary boos to the appropriate accounts in the ledger#
A# Summari%ing: It is third essential aspect of accounting# It means the
preparation and presentation of financial statement#
6# $nalysis and Interpretation: It is the last essential aspect of
accounting# It means the dra&ing of conclusions from the data found
in the financial statements about the profitability and the financial
position of the business#
B'an%)es of A%%ountn!
In order to satisfy the needs of different groups of people interested in the
accounting information! different branches of accounting has been evolved#
'here are three branches of accounting# 'hey are:
7# Financial accounting
># 1ost $ccounting
A# Management accounting
Fnan%al A%%ountn!&
It is concerned &ith the recording of business transactions in a set of boos
and the periodic presentation of the financial data recorded in the boos of
accounts! through financial statement s lie the profit and loss account andbalance sheet to outsiders lie creditors! shareholders! employees etc#
Cost A%%ountn!&
It is that branch of accounting &hich is mainly concerned &ith costing
information &hich is useful to the management for purpose of cost
ascertainment and cost control#
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Mana!ement A%%ountn!*mana!e'al a%%ountn!&
It is the art or techni)ue of analysis and interpretation and presentation of
facts! results and information revealed by financial accounting! cost
accounting and other boos and records ept by the business for the benefit
of persons &ho are in charge of managing the business# In short!
management accounting is the accounting &hich provides necessary
information to the management for discharging its functions such as
planning! organi%ing! directing and controlling more efficiently#
A%%ountn! %on%epts and Con+entons&
'o mae the language of business or accounting clear to the different groups
or persons! a number of rules or principles have been agreed upon andfollo&ed by accountants in the &riting up of accounts and in the presentation
of financial statements# 'he general rules or principles adopted in accounting
are called accounting standards or accounting principles#
$ccounting principles can be divided into :
I $ccounting 1oncepts
II $ccounting 1onventions
A%%ountn! Con%epts&
It means the assumptions upon &hich accounting is based# 'hey have been
developed by accountants to mae accounting convey the same meaning to
all people as far as practicable# 'here are a number of accounting concepts:
,- Mone. Measu'ement Con%ept o' Common Denomnato'
Con%ept&
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In accounting a record is made only of those transactions or
events &hich can be expressed in terms of money# +on(monetary events
lie the retirement of the managing director of a concern! team &or in
the organi%ation! good )uality of products or services in the organi%ation
are not recorded#
/- Busness Entt. Con%ept o' Sepa'ate Entt. Con%ept&
In accounting every business undertaing &hether it is a sole(
trading concern or a partnership firm or a joint stoc company is considered
as a distinct entity from the persons &ho o&n it# $s the business and the
proprietors &ho o&n the business are regarded as t&o separate entities the
transactions of the business are distinguished from those of the proprietors
and in the boos of the business! accounts are ept only for the transactions
of the business and not for those of the proprietors#
0- Gon! Con%e'n %on%ept o' %on%ept of %ontnut.&
In accounting an enterprise is considered as a going concern? i#e#
a concern that &ill continue to operate for a fairly long time@ and it is
from this point of vie&! its transactions are recorded in its boos#
1- Cost Con%ept&
$ccording to this concept! an asset ac)uired by a concern is
recorded in the boos of accounts at cost ?i#e at the price actually paid for
ac)uiring the asset@# 'he maret price of the asset is ignored! and it is its cost
price that forms the basis for all subse)uent accounting for that asset#
# Dual aspe%t %on%ept& E2uaton o' a%%ountn! e2uaton %on%ept&
,very business transaction al&ays results in receiving of some
benefit of some value and giving of some other benefit of e)ual value# For
example! &hen a business purchases goods for cash! it receives goods of
some value and gives cash of e)ual value# 'hus! every business transaction
involves dual or double aspect of e)ual value# So in accounting a record is
made of the dual or t&o aspects of each transaction# ,ach transaction &illal&ays result in e)uality of assets and liabilities and at any point of time< the
total assets of the concern &ill be e)ual to its total liabilities plus the
proprietor;s capital#
$ssets G *iabilities H Proprietor;s capital
$ssets ( *iabilities GProprietor;s capital
$ssets( Proprietor;s capitalG *iabilities
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3- A%%ountn! 4e'od Con%ept&
For measuring the financial results of the business or the &oring
life of the business is split into convenient periods of time# Such a period
often! is called as accounting period# 'he length of the accounting period
depends on the nature of the business and the objective of the proprietor
of the business!# 'he accounting period may be three months! six months!
one year or even t&o but! usually! one year is regarded as the ideal
accounting# 'he one year accounting period is also recogni%ed by la
5- O#$e%t+e e+den%e %on%ept&
'his concept means that all accounting entries should be
evidenced and supported by business documents such as invoices! vouchers
etc#'his concept also implies that evidences must be completely objective ? that
is! must state the facts as they are &ithout bias or fraud@ and must be subject
to verification by auditors#
6- Mat%)n! %on%ept o' pe'od%al mat%)n! %on%ept
,very business man invests money in the business &ith the main
objective of earning profit# 'he business demands the details of all revenues
and all expenses# Detailed information about all the items of revenue and all
the items of expenses and losses in necessary! because right business
decision in the right direction can be taen only &hen detailed information
all items of revenue and expenses are available# 'o no& the net profit and
net loss and the details of all revenues and expenses every business prepares
and presents a statement account no&n as Income statement or the profit
and loss account# 'hus! the net profit or loss of a business is determined by
matching the expenses and losses &ith the revenues#
# -eali%ation concept or -evenue -ecognition concept:
$ccording to this concept! revenue is recogni%ed or considered as
being earned on the date on &hich it is realised# -evenue is considered as
being realised not &hen goods are manufactured or &hen order is received
or contract is signed but on the date on &hich goods or services are
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transferred to the customer and the customer become legally liable to pay for
them#
78#$ccrual 1oncept:
'he accrual concept suggests that &hen a transaction has been
entered into its conse)uences &ill certainly follo So all the transactions
must be brought into record! &hether they are settled in cash or not# It
suggests that an accountant is re)uired to treat as revenues all that items for
&hich there are the legal right to receive although cash might not have been
received for them# 'hat means! if revenue is earned! but no payment is
received the same should be recorded as revenue#
77#*egal $spect concept:
'his concept means that the accounting records and boos should
reflect the legal position# 'his concept also means that the accounting
records and statements should conform to legal re)uirements# 'hat is! the
accounting records should be ept and the statements should be prepared in
the manner provided by la 'hat is by the relevant acts#
A%%ountn! Con+entons&
It refers to the customs! traditions! usages or practices follo&ed by the
accountants as a guide in the preparation of financial statements# 'hey are
adopted to mae the financial statements clear and meaningful#
Con+enton of Mate'alt.&
'his convention means that a detailed record is made only of those business
transactions &hich are material ?i#e# important@# +o detailed record is made
of transactions &hich are trivial ?insignificant@! as the &or of recording the
minute details of such transactions is not justified by the usefulness of the
result#
Con+enton of Conse'+atsm&
'he convention of conservatism means the convention of caution! prudence
or the policy of playing safe# In other &ords! it means that! in the accounting
records and the financial statements of a business# $ll the prospective losses!
riss and uncertainties should be taen note of and provided for! but
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prospective profits should be ignored# In short! 4provide for all possible
losses! but anticipate no profits5 is the implication of this convention# It is on
account of this convention that provision for doubtful debts! provision for
discount on debtors! provision for fluctuations on any investments etc are
made#
Con+enton of %onssten%.&
It signifies that the accounting practices and methods should remain
consistent from one accounting year to another# for instance! &hen once a
particular method of depreciation is adopted for a particular fixed asset the
same method should be follo&ed for that asset year after year#
Con+enton of full Ds%losu'e&'he convention of full disclosure means that the material facts must be
disclosed in the financial statements# For instance! as regards the
investments! not only the various securities held by a concern should be
disclosed but also the mode of their valuation should be stated#
It has been given recognition by the companies act#
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