cga.nic.in Junior Accounts Officer (Civil) Examination Study Material : Controller General of Accounts

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Designation : Junior Accounts Officer (Civil) Examination

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Study Material Prepared By INSTITUTE OF COST AND WORKS ACCOUNTANTS OF INDIA for Junior Accounts Officer(Civil) Examination Conducted By CONTROLLER GENERAL OF ACCOUNTS

BASICS OF FINANCIAL ACCOUNING :
INTRODUCTION TO FINANCIAL ACCOUNTING :
Accounting is a social science. The nature of accounting information has been dictated from time immemorial by the needs of the users of the day. The history of accounting reflects the pattern of social developments and the forces which necessitate the changes in accounting system from time to time.

Over the years accountancy has made tremendous progress in the field of commerce and industry. Accounting can be described as being concerned with measurement and management. Measurement of recording transactions and management with the use of data for making decisions are the two fundamental aspects.

Accounting function is vital for every entity of the society whether individuals, house wives, business entity, nonprofit making organisations like municipalities, panchyats, clubs, etc. All are required to maintain accounts.

Accounting is commonly referred to as the “language of the business” as it is effectively employed to communicate the financial performance of business to various interested parties or stakeholders. It is concerned with the measurement and communicating financial data.

Financial Accounting is based on double entry system of accounting which comprises of
(i) recording of business transactions in the books of prime entry,
(ii) posting into respective ledger accounts,
(iii) striking balance, and
(iv) preparing the performance statement (profit and loss statement) and position statement (balance sheet).

Financial Accounting is concerned with the collection, recording, classification and presentation of financial data to serve the purposes of the management, shareholders and stakeholders, such as, creditors, bankers, Government, etc.

The nature and purpose of accounting :
The basic aim of accounting in a business entity is to provide financial information for making decisions on its activities. Managers of an economic entity at various levels require analysed financial information for planning and programming, for controlling expenditure, for ascertaining the extent of profitability or otherwise of a department – even of each production item for undertaking new jobs, etc.

Financial information in tabular forms and with graphs and charts are also required by the outsiders, namely, bankers, financial institutions, creditors, investors, government agencies and even by the labour unions and the general public who have some interest in the particular business concern.

Definition of Accounting :
A widely accepted definition of accounting has been provided by the American Accounting Association. According to this definition accounting is the process of identifying, measuring and communicating information to permit judgement and decisions by the users of accounts. This definition implies that –

(1) there should be users of accounts who need relevant information,
(2) the information should enable the users to make judgement and decisions, and
(3) transactions and events are measured and the data are processed and then communicated to the users through accounting.

Basics of Financial Accounting :
Objectives of Accounting :
The basic objectives of accounting are to provide financial information to the managers, owners and the stakeholders i.e. the parties who are interested in an organisation. To attain such objectives various financial statements are prepared.

The users of financial statements may be broadly classified in the following groups –
(a) The investor – This group includes both existing and potential owners of shares in companies. They are broadly interested in the performance of the entity and the dividend declared by such entity. They also measure the social and economic policies of the company to decide whether they will remain associated with such entity.

(b) The lender – This group includes both secured and unsecured lenders. Such creditors may be financing long term or short term loans. The financial statements are analysed to determine an organisation’s ability as to
(i) pay the interest on due date,
(ii) the growth and stability of the organisation,
(iii) capability of repaying the loan as agreed upon, and.
(iv) the book value of assets offered as security by the organisation.
(c) The customers and suppliers – While customers are interested in the ability of the organisation to provide goods/services, the suppliers are interested in the capability of the organisation to pay their dues as and when due.
(d) The government – This group includes various taxation authorities viz. Income tax, Excise department, Sales tax department etc. and also various other government authorities for statistical purposes and for framing various economic and planning policies.
(e) The employee group – The employees are concerned with the capability of an organisation to pay their present emoluments and future retirement benefits. Moreover, financial statements help them to asses job security.
(f) The analyst – Advisors to the management, investors, employees or public at large collect various data from financial statements to advise their clients.
(g) The Management – Financial statements provide required information to different levels of management to assist them in making decisions at each appropriate level.

Financial Accounting Fundamentals
1.1 SUBDIVISION OF ACCOUNTING
Generally, accounting is subdivided as follows :
a) Book-keeping
b) Measuring working results and capital of the economic entity and reporting.
a) Book-Keeping : Book-keeping is the art and science of recording transactions of a business enterprise or an organisation carrying out non-business activities in a systematic and appropriate manner to measure the working results and capital at periodical interval depending upon needs of an entity.
(b) Measuring working results and capital of the economic entity and reporting : The most important aspect of accounting records is to measure the working results and the capital of the economic entity and interpreting and reporting of results.

1.2 CONCEPTS AND CONVENTIONS IN ACCOUNTING
Basic concepts:
Accounting principles are built on a foundation of a few basic concepts. These concepts are so basic that most accountants do not consciously think of them; they are regarded as being self-evident. Non-accountants will not find these concepts to be self-evident. Some accounting theorists argue that certain of the present concepts are wrong and should be changed. But in order to understand accounting, as it now exists, one must understand what the underlying concepts currently are. The different aspects are :—

1. Business Entity Concept
2. Money Measurement Concept
3. Cost Concept
4. Going Concern Concept
5. Dual-aspect Concept
6. Realisation Concept
7. Accrual Concept
8. Accounting Period Concept

1. Business Entity Concept:
The business is treated as a distinct (and separate) entity from the individuals who own it and accordingly accountants record transactions. For example, if the owner of a shop withdraws Rs. 10,000 for personal use, from the business entity point of view, the entity has less cash though it belongs to the owners. Therefore, this amount is shown as a reduction in owner’s capital, which in view of business entity concept appears as a liability in the balance sheet of the business. Without such a distinction the affairs of the shop will be mixed with the personal affairs of the owner. For a company the distinction is easier as legally the company is a distinct entity from the persons who own it.

Therefore, an entity is a business organisation or activity in relation to which accounting reports are compiled. It may include universities, voluntary organisations, government and non-business units. What we have stated above is just a superficial discussion of the concept, though the central point has been brought out clearly. But we have to go at least a little deeper because out of this basic concept, a large number of very important sub-concepts emerge, dealing with ownership equities, without which we cannot understand properly many of the modern accounting practices.

Pure Accounting Viewpoint : We will start from the fundamental accounting equation, that is:
Debit = Credit (i)
And, Assets = Liabilities (ii)
And, Assets = Internal Liabilities + External Liabilities (iii)
And finally, Assets = Capital + Liabilities; or A = C + L (iv)

2. Money Measurement Concept:
A record is made only of the information that can be expressed in monetary terms for accounting purposes. The advantage of doing this is that money provides common denominators by means of which variety of facts can be expressed as numbers that can be added and subtracted. This enables addition and subtraction of varied items since money provides the common denominator. An event even though important like the loyalty of the workers will not be recorded unless it can be expressed in monetary terms. The changing price level also creates difficulties in the monetary value.

If we look at financial accounting purely from the point of view of Fundamental Accounting Equation:
Assets = Capital + Liabilities,

then it would be evident that it had virtually no option but to adopt monetary values of assets and liabilities and capital to apply the equation in day-to-day business affairs. This concept is basically concerned with the problem of measuring items of the accounting equation. Such items may be plant and machinery (assets), liability for loan taken – all these are object of some kind of the other. Other items represent events (transactions) such as expenses and income. Basically, double entry system is additive (say, when finding the aggregate of assets) or subtractive (say when total liabilities are deducted from total assets to find capital, or deducting expenses from income to estimate profit).

But only the “like” can be added with the “like” and the “like” can be deducted from the “like”, when the word “like” means that the items involved are expressed in the same unit. But in real-world affairs, physical assets may have to be expressed in several ways, like numbers of units, weight, volume, etc. Likewise wages may have to be expressed in man-hours or simply in hours. Apart from ensuring feasibility of making addition and subtraction, which is inherent in the accounting equation, the sign of equality (actually the sign of “identity”) needs use of the same units in describing such items. In accounting the description is finally expressed quantitatively in terms of money.

In modern business it is essential link to accounting to a market system in an exchange economy a valuable source of quantitative data. Since goods and service are generally exchanged in terms of money, a monetary measurement of economics data can be assumed to be useful in decision-making, particularly for that decision relating to wealth and the production of goods and services.