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Learn All About the 5 Top Important Topics of Accounting

13 May Learn All About the 5 Top Important Topics of Accounting

Accounting is classifying and summarising the business transactions and then analyzing and interpreting the summarized results and also communicating the information to the interested parties. Thus an accountant’s work goes beyond that of a bookkeeper.

Some of the trending yet important accounting topics are discussed below:

1. Accounting Basics

This is the most common topic when you are going to study accounting. Accounting does not only include technical knowledge but also include people’s skills. Accounting basics normally consist of recording, summarizing and to classify all the business equations. Accounting basics also include the interpretation of business transactions and then classify them into different heads for making judgments easier for the entrepreneur it can be said accounting basics is the whole  of the accounting system enter there are some important terms used in basic accounting which includes:

Business transactions- A business transaction is an economic activity of the business that changes its financial position. Whenever any business transaction takes place, it results in a change in the values of some of the assets, liabilities or capital.

The event-an event is the consequence or result of a transaction.

Account– In actual practice, the individual transactions of like nature are recorded, added and subtracted at one place. Such place is customarily termed as an ‘account’. An account is divided among two parts, debit side and credit side. The left side of an account is traditionally called ‘debit side’ (Dr.) and the right side of an account is called credit side (Cr.).

Assets- Anything which is in the position or is the property of a business enterprise including the amount due to it from others, is called an asset.

Capital- It refers to the amount invested by the proprietor in a business enterprise amount may be in the form of cash, goods or assets.

Liabilities- It refers to the amount which the firm owes to outsiders. Liabilities can either be internal, external or non-current, current.

There are many other important terms which include drawings, expenses, capital receipts and revenue receipts, purchases, profit, gain loss, purchase return, sales, sales return, stock in trade, inventory, trade payables, debtors, creditors, bills payable, goods, vouchers, discount, bad debts, insolvent, turnover etc.

2. Accounting Principles

Accounting statements disclose the profitability and solvency of the business to various parties. It is, therefore, necessary that such statement should be prepared according to some standard language and set rules. These rules are generally called ‘Generally Accepted Accounting Principles’ (GAAP). These principles have been generally accepted by accountants all over the world as general guidelines for preparing the accounting statements.

The main Accounting Principles include:

  1. Business entity principle– according to this principle, business is treated as a unit separate and distinct from its owners, creditors, managers, and others. The proprietor is treated as a creditor of the business to the extent of capital invested by him in the business. The principle of a separate entity is applicable to all forms of business organizations i.e. sole proprietor partnership or a company.
  2. Money Measurement principle- According to this principle only those transactions and events are recording in the accounting which are capable of being expressed in terms of money.
  3. Accounting period principle– According to this principle, The entire life of the form is divided into time intervals for the measurement of profits of the business 12 month period is generally adopted for this purpose.
  4. The principle of full disclosure- This principle requires that all significant information relating to the economic affairs of the enterprise should be completely disclosed.
  5. The principle of materiality-This principle is an exception to the principle of full disclosure. According to this principle, items that do not affect the user are needed not to be disclosed.
  6. The principle of conservatism or prudence- According to this principle, all the estimated losses are to be registered in the books of accounts but there is no need to add the gains that are unrealized can be ignored. In simple words, it is the policy of conserving.
  7. Cost principle- According to this principle, an asset is ordinarily recorded in the books of accounts at the price at which it was acquired.
  8. Matching principle– This principle is very important for the correct determination of net profit. According to this principle, in determining the net profit from the business operations, all cost which is applicable to revenue of the period should be charged against that revenue.

3. Accounting equations

Accounting equation signifies that the Assets of a business are always equal to the total of capital and liabilities. A business transaction will result in the change in either of the assets, liabilities or capital of the firm and even after the change, the assets will be again equal to the total of capital and liabilities. If a business transaction results in the increase of assets, there will also be a corresponding increase in the amount of either capital or liabilities by the same amount. Every transaction has a double effect and in each case assets= liabilities + capital. In other words, it can be said that accounting equation is true in all cases.

S.no Transactions Assets =Liabilities+ Capital
All the transactions of the business are recorded here All  the assets are recorded here The total f liabilities and capital are shown here individually

4. Bank Reconciliation statement

Usually, all the firms open a current account with the bank and in order to record the transaction entered into the bank, maintain a bank column in the cash-Book. Bank opens a separate account for each firm in its ledger and enters all the transaction in it. Periodically, Bank supplies a copy of the firm’s account in its ledger to the firm for information. This copy of the firm’s account supplied by the bank is called bank passbook or bank statement.

The entries recorded on the debit side of the cash book must tally with the entries recorded on the credit side of the passbook and conversely, all the entries recorded on the credit side of the cash book must tally with the entries recorded on the debit side of the passbook. Therefore, at any time, the bank balance shown by the cash book must tally with the balance shown by the passbook. However, sometimes it so happens, that these two balances do not tally. This is because on a certain date it is possible that there may be some entries which have which may have been recorded in the cash book but not in the passport and vice versa. A statement is therefore prepared to identify the reasons for the difference and to reconcile the balances of the two books such a statement is called the ‘Bank Reconciliation Statement’.

Particulars Plus items Minus items
Dr. balance (favorable balance) as per cash book

Add 1. Cheques issued or drawn out but not yet presented for payment

        2. interest allowed by the bank not recorded in cash book

        3. Amount directly deposited by the customers In our bank account

        4. Interest and dividends collected by the bank on trader’s investments

        5. cheques paid into the bank but omitted to be entered in the cash book

        6. Any wrong credit is given by the bank in the passbook

Less: 1. Cheques paid into a bank for collection but not yet credited by the bank

         2. Cheques paid into a bank for collection but dishonored by the bank

         3. Direct payment made by the bank according to the standing             instructions of customers

         4. Bank charges and commission charged by the bank

         5. Cheques issued but omitted to be recorded in the cash book

         6. Any wrong debit gave by the bank in passbook

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5. Balance Sheet

The businessman would always like to know about the exact financial statements of his business. A statement is being prepared which contains all the Assets and Liabilities of the business for getting information about the exact financial condition. The statement so prepared is called the Balance Sheet. Balances of all the personal and real accounts are grouped as assets and liabilities are shown on the left-hand side and Assets are shown on the right side of the Balance Sheet.

The balance sheet as on….

Liabilities Amt Assets Amt
Current Liabilities:-

Bank overdraft

Bills Payable

Sundry creditors

Outstanding expenses

Unearned income

Fixed Liabilities:-

Long-term loans

Reserves

Capital

Add: Net profit

Less: Drawings

Less: Income Tax

Less: Life insurance Premium

Current assets:-

Cash in Hand

Cash at Bank

Bills receivable

Short-Term Investments

Sundry Debtors

Closing Stock

Prepaid Expenses

Accrued Income

Long-Term Investments

Fixed Assets:-

Furniture

Loose Tools

Motor Vehicle

Plant and Machinery

Land and Buildings

Patents

Goodwill

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