Unit 1: Basic Concepts of Accounting

Functions:

Systematic Recording: Ensures all financial transactions are recorded chronologically in books of accounts.
Classification: Groups similar transactions under appropriate heads like assets, liabilities, income, and expenses.
Summarization: Prepares final accounts like profit & loss and balance sheet to present a clear financial position.
Analysis & Interpretation: Helps users like management, investors, and creditors understand financial performance.
Legal Compliance: Supports statutory reporting and taxation requirements as per financial laws and regulations.

Limitations:

Ignores Non-Monetary Aspects: Qualitative factors like employee satisfaction or brand value aren’t recorded.
Historical Cost Basis: Assets are recorded at original cost, not current market value, causing outdated valuations.
Personal Bias: Estimates like depreciation or provisions can vary based on accountant’s judgment.
Doesn’t Prevent Fraud: Proper accounting may still not stop frauds if intentional manipulation occurs.
Incomplete Picture: Only provides financial data, often ignoring social or environmental performance.

Definition: Financial accounting involves preparing and presenting reliable financial information to stakeholders.
Recording Business Activities: It focuses on monetary transactions and events related to the business.
Need for Transparency: Ensures accountability and transparency in reporting financial performance.
Decision-Making: Helps users make decisions like investments, lending credit, or operational changes.
Legal Obligations: Many laws require financial statements for tax filings, audits, and regulatory compliance.

Concepts:

Business Entity Concept: Distinguishes business accounts from personal accounts of owners.
Going Concern: Assumes the business will continue indefinitely, allowing assets to be valued at cost.
Accrual Concept: Revenue and expenses are recorded when incurred, not when cash is received or paid.
Matching Concept: Ensures expenses are matched with corresponding revenues in the same period.
Money Measurement: Only transactions measurable in money are recorded in accounting books.

Conventions:

Conservatism: Advises recognizing expected losses but not future profits—ensuring prudence.
Consistency: Same accounting methods must be applied every year for comparability.
Full Disclosure: All material facts must be disclosed in financial statements to avoid misleading stakeholders.
Materiality: Only significant items that affect financial decisions are reported.
Objectivity: Accounting data should be based on verifiable evidence or documents.

GAAP: A set of accounting rules, standards, and procedures used in the preparation of financial statements.
IAS (International Accounting Standards): Issued by the IASC, used before IFRS came into effect.
IFRS (International Financial Reporting Standards): Modern global standards by IASB for uniform financial reporting.
AS (Accounting Standards in India): Laid down by ICAI for Indian companies, focusing on fair reporting.
Ind AS: Indian version of IFRS, applicable to larger companies, aimed at global harmonization of accounting practices.

Source Documents & Vouchers: Accounting begins with sourcing invoices, bills, and vouchers to record transactions.
Journalizing: Transactions are recorded in the journal in chronological order using double-entry system.
Ledger Posting: Entries from the journal are posted to ledger accounts for classification into specific categories.
Balancing Accounts: Each ledger account is balanced to find the difference between totals of debit and credit.
Trial Balance Preparation: A statement listing all ledger balances to check arithmetic accuracy before final accounts.