Wednesday, 19 October 2016

Financial Accounting - Depreciation

Depreciation reduces the value of assets on a residual basis. It also reduces the profits of the current year.
Depreciation indicates reduction in value of any fixed assets. Reduction in value of assets depends on the life of assets. Life of assets depends upon the usage of assets

Financial Accounting - Subsidiary Books

Cash Book

Cash book is a record of all the transactions related to cash. Examples include: expenses paid in cash, revenue collected in cash, payments made to creditors, payments received from debtors, cash deposited in bank, withdrawn of cash for office use, etc.

Financial Accounting - Ledger

Now let us try to understand how a journal works. With the help of journal entries, we book each and every financial transaction of the organization chronically without considering how many times the same type of entry has been repeated in that particular accounting year or period.

Financial Accounting - Journal

“The process of recording a transaction in a journal is called journalizing the transactions.”
---Meigs and Meigs and Johnson
Journal is a book that is maintained on a daily basis for recording all the financial entries of the day. Passing the entries is called journal entry. Journal entries are passed according to rules of debit and credit of double entry system.

Accounting - Systems

There are two systems of accounting followed -
  • Single Entry System
  • Double Entry System

Accounting - Classification of Accounts

It is necessary to know the classification of accounts and their treatment in double entry system of accounts. Broadly, the accounts are classified into three categories:
  • Personal accounts
  • Real accounts
    • Tangible accounts
    • Intangible accounts
Let us go through them each of them one by one.

Accounting conventions

Convention of Consistency

To compare the results of different years, it is necessary that accounting rules, principles, conventions and accounting concepts for similar transactions are followed consistently and continuously. Reliability of financial statements may be lost, if frequent changes are observed in accounting treatment. For example, if a firm chooses cost or market price whichever is lower method for stock valuation and written down value method for depreciation to fixed assets, it should be followed consistently and continuously.