Accounting Principles and Assumptions

Which of the following is not a business transaction?

a. Bought furniture of `10,000 for business
b. Paid for salaries of employees ` 5,000
c. Paid sons fees from her personal bank account ` 20,000
d. Paid sons fees from the business ` 2,000

Option (d) shouldn't be a business transaction. The business and personal life are different entitites. So according to the rules of accounts, busienss money can't be used for personal use. But since the money from business account is already gone and therefore it will have to be adjusted in the balance sheet of business and should be mentioned as 'Drawing'.

Option (c) is not a business transaction. It is a personal transaction. Therefore it the correct answer even though it is legally the correct way to pay for personal use.

Accounting

Accounting is a systematic process of identifying, measuring, recording, classifying, summarizing, interpreting and communicating financial information.

Accounting is defined as the process of identifying, measuring, recording and communicating the required information relating to the economic events of an organisation to the interested users of such information.

• A company must record in its accounting records any economic event that impacts the company's finances
• An economic event is known as a happening of consequences to a business organisation which consists of transactions and which are measurable in monetary terms.
• Identification: It means determining what transactions to record i.e. to identify events which are to be recorded.
• Measurement: It means quantification of business transactions into financial terms by using monetary unit.
• Recording: Once the economic events are identified and measured in financial terms, these are recorded in books of accounts in monetary terms and in a chronological order.
• Communication: The economic events are identified, measured and recorded in order that the pertinent information in generated and communicated in a certain form to management and other internal and external users.

Branches of Accounting

Financial Accounting: It assists keeping a systematic record of financial transactions the preparation and presentation of financial reports in order to arrive at a measure of organisational success and financial soundness.

Cost Accounting: It assists in analysing the expenditure for ascertaining the cost of various products manufactured or services rendered by the firm and fixation of prices thereof.

Management Accounting: It deals with the provision of necessary accounting information to people within the organisation to enable them in decision making, planning and controlling business operations.

Basic Terms in Accounting

• Entity  Anything that has individual existence. For example Business entity or Accounting entity
• Transaction
• Capital - Amount invested by owner in business
• Assets - Property belonging to owner or anything which is capable of generating income and has resale value. There are many types of assets like Fixed Assets, Current Assents, Tangible assets and Intangible assets. 
• Liabilities - Obligation to pay. It can be long term like Bank loan or can be short term like Bank overdraft. 
• Sales
• Revenues - Amount we are getting from sales
• Expenses
• Expenditure

Generally Accepted Accounting Principles (GAAP)

Generally accepted accounting principles (GAAP) refers to the rules or guidelines adopted for recording and reporting of business transactions, in order to bring uniformity in the preparation and the presentation of financial statements.

Basic Accounting Concepts

Business Entity - This concept assumes that business has distinct and seperate entity from its owners. Thus, for the purpose of accounting, business and its owners are to be treated as two seperate entities.

Money measurement - The concept of money measurement states that only those transactions and happenings in an organisation, which can be expressed in terms of money are to be recorded in the book of accounts.

Going concern - The concept of going concern assumes that a business firm would continue to carry out its operations indefinitely (for a fairly long period of time) and would not be liquidated in the near future.

Accounting period - It refers to the span of time at the end of which the financial statements of an enterprise are prepared to know whether it has earned profits or incured losses. 

Cost: The cost concept requires that all assets are recorded in the book of accounts at their cost price, which includes cost of acquisition, transportation, installation and making the asset ready for the use.

Dual aspect: This concept states that every transaction has a dual or two fold effect on various accounts and should therefore be recorded at two places. Assets = Liabilities + Capital.