Unit- 2 1

Branches of Accounting There are three branches of Accounting. i) Financial accounting; ii) Cost accounting; iii) Management accounting. Question.1 – How many types of Accounting Branches are there? Answer – There are three types of accounting branches. Con… 2

Question.2 – Name the Accounting branches. Answer - i) Financial accounting; ii) Cost accounting; iii) Management accounting. 3

(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 mainly concerned with the preparation of financial statements for the use of outsiders like creditors, investors and financial institutions. The financial statements i.e., the profit and loss account and the balance sheet. Con… 4

Question – What is financial accounting? Answer - The accounting system is concerned only with the financial affairs of the business is known as Financial Accounting. ii) Cost Accounting It is that branch of accounting which is concerned with the accumulation and assignment of historical costs to units of product and department. Cont… 5

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. Question – What is cost accounting? Answer – Cost accounting is concerned with the ascertainment cost of unit produced and sold or the services rendered by the business unit. Con… 6

(iii) Management Accounting It deals with the processing of data obtained from financial accounting and cost accounting for managerial decision making. It also deals with application of obtained data for the efficient running of the business and thus in maximizing profits. Question – What is management accounting? Answer – Management accounting deals with the processing of data obtained from financial accounting and cost accounting for managerial decision making. Con… 7

ACCOUNTING PRINCIPLES Accountancy is based on fundamental truth, rules and procedures which are universally accepted. These rules to record business transactions are called accounting principles. Accounting principles can be classified into two groups, viz., accounting concepts and accounting conventions. Con… 8

Accounting Concepts- a) Business entity Concept b) Going Concern Concept c) Money Measurement Concept d) Cost Concept e) Accounting period Concept f) Dual aspect Concept g) Accrual Concept Con… 9

Accounting Conventions- a) Disclosure b) Materiality c) Consistency d) Conservatism Question - What do you mean by accounting principles? Answer - Fundamental truth, rules and procedures of the accounting are called accounting principles. Con… 10

Accounting Concepts: a) Business Entity Concept: According to Entity concept, business is treated as a unit of entity separate from its owner, Creditors and Management etc. b) Going Concern Concept: Under this concept, the transactions are recorded assuming that the business will exist for a longer period of time, i.e., Con… 11

a business unit is considered to be a going concern and not going to close in near future. c) Money Measurement Concept: In accounting all events and transactions are recorded which can be measured in terms of money. Transactions which cannot be expressed in monetary terms are not recorded in accounting. Con… 12

d) Cost Concept: According to cost concept the various assets acquired by enterprise should be recorded on the basis of actual cost incurred. As per cost concept Fixed Assets are shown at cost less depreciation charged from year to year. e) Accounting period: It is customary that the life of the business is divided into appropriate parts for analyzing the results shown by the business. Each part divided is known as an accounting period. Normally the accounting period consists of twelve months. Con… 13

f) Dual aspect Concept: This concept based on double Entry book-keeping which means that Accounting system is set up in such a way that a record is made of the two aspects of each transaction that affects the record. The recognition of the two aspects of every transaction is known as dual aspects concept. (Every debit is followed by a credit). g) Accrual Concept: This accounting concept states that revenue is recognized when they are earned and not when they are received similarly, cost is recognized as and when they are incurred and not when they are paid. Con… 14

Accounting Conventions- a) Disclosure: According to convention of full disclosure, accounting must disclose all the material facts and information. b) Materiality: According to the convention of materiality; account should report only what is material and ignore insignificant details while the preparing the final accounts. Con… 15

c) Consistency: This accounting convention state that once a particular accounting practice, method or policy is adopted to prepare accounts, statements and reports. It should be continued for years together and should not charge. d) Conservatism: Financial Statements are usually drawn up on a conservative basis. There are two principles of conservatism Con.. 16

a) The accountant should not consider any future income but should provide all possible losses, and b) In valuing an asset the accountant should choose a method which leads to the lesser value. Con… 17

Question - write down the accounting concepts. Answer – Accounting concepts are a) Business entity Concept b) Going Concern Concept c) Money Measurement Concept d) Cost Concept e) Accounting period Concept f) Dual aspect Concept g) Accrual Concept Con… 18

Question – Write down the accounting conventions. Answer – a) Disclosure b) Materiality c) Consistency d) Conservatism Con… 19

REVIEW Question-1. There are ……….branches of Accounting. (i) 1 (ii) 2 (iii) 3 (iv) 5 Question-2. Financial Accounting is concerned only with …………… of the business. (i) Financial affairs (ii) ascertainment of cost of unit produced (iii) Processing of data for managerial decision. Con… 20

Question-3. Cost Accounting is concerned with the …………… (i) Financial affairs (ii) ascertainment of cost of unit produced (iii) Processing of data for managerial decision. Question-4. Management Accounting deals with the …………. (i) Financial affairs (ii) ascertainment of cost of unit produced (iii) Processing of data for managerial decision. Con… 21

Question-5. Accounting is based on fundamental ……………..which are universally accepted. (i) truth rules and procedures (ii) business rules (iii) social norms Question-6. When the same rule is followed year after year this is called ………….. convention of Accounting. (i) going concept (ii) dual aspect concept (iii) consistency convention. Con… 22

Question-7. As per ………. business will run for ever. (i) going concept (ii) money measurement concept (iii) accrual concept. Question-8. There is two aspect of every transaction under the ……………of Accounting. (i) dual aspect (ii) money measurement concept (iii) accrual concept. 23