16 Marks
Objectives of Accounting
• Maintenance of a/c records
• Ascertainment of P&L
• Depiction of financial position
• Providing information
(Or)
To keep a systematic record of financial transaction and events.
To ascertain the profit or loss of the business enterprises.
To ascertain the financial position or status of the enterprises.
To provide information to various stakeholders for their requirements.
To protect the properties of an enterprise and
To ascertain the solvency and liquidity position of an enterprise.
Advantages:
Maintenance of business records
Preparation of financial statements
Comparison of results
Decision Making
Statutory requirement
Provides information to related parties
Helps in taxation matters
Valuation, Merger and acquisition of firms
Disadvantages
Expresses accounting information in terms of money
Accounting information is based on estimates
Accounting information may be biased
Recording of fixed assets at the original cost
Manipulation of accounts
Branches of Accounting
Financial Accounting
It involves recording of financial transaction and events. It is historical in nature and record
are maintained for transaction and events which have already occurred. It provides financial
information to the users for taking decision.
Cost accounting
It involves the collection, recording, classification and appropriate allocation of expenditure
for the determination of the cost of products or services and for the presentation of data for
purpose of cost control and managerial decision making.
Management accounting
It is concerned with the presentation of accounting information in such a way as to assist
management in decision making and in the day-to-day operation of an enterprises
Types of Accounts
A/C CONCEPTS
• Business entity concept
The business entity concept in financial accounting states that a business is considered a
separate entity from its owners. This principle ensures that the financial transactions of the
business are recorded independently of the personal financial transactions of the owners.
• Going concern concept
A business will continue to operate indefinitely and not face liquidation in the near future.
This principle allows companies to defer the recognition of certain expenses and revenues to
future periods.
• Money measurement concept
The money measurement concept states that only transactions and events that can be
quantified in monetary terms are recorded in the financial statements. Non-monetary factors,
such as employee skills or customer satisfaction, are not included.
• Dual aspect concept
The dual aspect concept that every financial transaction has two equal and opposite effects on
the accounting equation, maintaining balance. This principle is the foundation of double-entry
bookkeeping, where each debit has a corresponding credit.
• Accounting period concept
The accounting period concept in financial accounting divides the life of a business into
specific time periods, such as months, quarters, or years, for reporting purposes. This allows
for the regular assessment of financial performance and position.
• Cost concept
The cost concept states that assets are recorded at their original purchase price, not at their
current market value. This historical cost remains on the books, regardless of changes in the
asset's value over time.
• Revenue realisation concept
The revenue realization concept, revenue is recognized when it is earned, regardless of when
the cash is received. This principle ensures that income is recorded in the period in which the
goods or services are provided, not necessarily when payment is made.
• Matching concept
The matching concept in financial accounting requires that expenses be recorded in the same
period as the revenues they help generate. This ensures that financial statements reflect the
true profitability of a business within a specific accounting period.
• Accrual concept
The accrual concept states that transactions are recorded when they occur, not when cash is
exchanged. This principle ensures that revenues and expenses are recognized in the periods
they relate to, providing a more accurate financial picture.
• Objective evidence concept
The objective evidence concept in financial accounting requires that all financial transactions
be supported by verifiable documentation, such as invoices, receipts, or contracts. This
ensures that financial records are reliable and free from bias.
Accounting Cycle
Preparing
Balance
sheet
Transaction
Preparing
profit and
loss
accounts
Opening
Journalising
Entry
Preparing
trading
accounts
Posting and
Preparing balancing
trial
balance
Classification of Different Types of Companies
Companies on the Basis of Liabilities
When we look at the liabilities of members, companies can be limited by shares, limited by
guarantee or simply unlimited.
a) Companies Limited by Shares
Sometimes, shareholders of some companies might not pay the entire value of their shares in
one go. In these companies, the liabilities of members is limited to the extent of the amount
not paid by them on their shares.
This means that in case of winding up, members will be liable only until they pay the
remaining amount of their shares.
b) Companies Limited by Guarantee
In some companies, the memorandum of association mentions amounts of money that some
members guarantee to pay.
In case of winding up, they will be liable only to pay only the amount so guaranteed. The
company or its creditors cannot compel them to pay any more money.
c) Unlimited Companies
Unlimited companies have no limits on their members’ liabilities. Hence, the company can
use all personal assets of shareholders to meet its debts while winding up. Their liabilities
will extend to the company’s entire debt.
Companies on the basis of members
a) One Person Companies (OPC)
These kinds of companies have only one member as their sole shareholder. They are separate
from sole proprietorships because OPCs are legal entities distinct from their sole members.
Unlike other companies, OPCs don’t need to have any minimum share capital.
b) Private Companies
Private companies are those whose articles of association restrict free transferability of
shares. In terms of members, private companies need to have a minimum of 2 and
a maximum of 200. These members include present and former employees who also hold
shares.
c) Public Companies
In contrast to private companies, public companies allow their members to freely transfer
their shares to others. Secondly, they need to have a minimum of 7 members, but the
maximum number of members they can have been unlimited.
Companies on the basis of Control or Holding
In terms of control, there are two types of companies.
a) Holding and Subsidiary Companies
In some cases, a company’s shares might be held fully or partly by another company. Here,
the company owning these shares becomes the holding or parent company. Likewise, the
company whose shares the parent company owns becomes its subsidiary company.
Holding companies exercise control over their subsidiaries by dictating the composition of
their board of directors. Furthermore, parent companies also exercise control by owning more
than 50% of their subsidiary companies’ shares.
b) Associate Companies
Associate companies are those in which other companies have significant influence. This
significant influence amounts to ownership of at least 20% shares of the associate company.
The other company’s control can exist in terms of the associate company’s business decisions
under an agreement. Associate companies can also exist under joint venture agreements.
Other Types of Companies
a) Government Companies
Government companies are those in which more than 50% of share capital is held by either
the central government, or by one or more state government, or jointly by the central
government and one or more state government.
b) Foreign Companies
Foreign companies are incorporated outside India. They also conduct business in India using
a place of business either by themselves or with some other company.
c) Charitable Companies (Section 8)
Certain companies have charitable purposes as their objectives. These companies are called
Section 8 companies because they are registered under Section 8 of Companies Act, 2013.
Charitable companies have the promotion of arts, science, culture, religion, education, sports,
trade, commerce, etc. as their objectives. Since they do not earn profits, they also do not pay
any dividend to their members.
d) Dormant Companies
These companies are generally formed for future projects. They do not have significant
accounting transactions and do not have to carry out all compliances of regular companies.
e) Nidhi Companies
A Nidhi company functions to promote the habits of thrift and saving amongst its members. It
receives deposits from members and uses them for their own benefits.
f) Public Financial Institutions
Life Insurance Corporation, Unit Trust of India and other such companies are treated as
public financial institutions. They are essentially government companies that conduct
functions of public financing.
Objectives of Green Accounting
Integrate environmental costs and benefits into national accounts and decision-making
processes.
Provide a comprehensive view of the true costs and benefits of economic activities by
incorporating environmental and social considerations.
Promote sustainable development and support the transition towards a green
economy.
Encourage transparency and accountability in the use of natural resources and the
management of environmental impacts.
Foster stakeholder engagement and participation in environmental decision-making.
Green Accounting Importance
Environmental Protection
Green accounting helps to identify the environmental impacts of economic activities and
promotes sustainable development by encouraging the conservation and efficient use of
natural resources.
Cost Savings
By measuring and managing environmental impacts, businesses can identify opportunities for
cost savings through improved resource efficiency, reduced waste, and lower environmental
compliance costs.
Risk Management
Green accounting helps businesses to identify and manage environmental risks that could
impact their operations or reputation, such as regulatory changes or environmental disasters.
Stakeholder Engagement
By reporting on environmental and social performance, businesses can demonstrate their
commitment to sustainability to stakeholders, including customers, investors, and regulators.
Policy Development
Green accounting can inform the development of policies and regulations that promote
sustainable development and help to address environmental challenges such as climate
change and biodiversity loss.
Components of green accounting
Environmental Management Systems
A framework for managing environmental impacts and complying with environmental
regulations. An EMS involves establishing policies and procedures for environmental
management, conducting regular environmental audits, and implementing continuous
improvement measures.
Environmental Performance Indicators (EPI)
Metrics are used to track and report on environmental performance, such as greenhouse gas
emissions, energy consumption, and water use. EPIs enable businesses to monitor progress
toward environmental goals and targets.
Life Cycle Assessment (LCA)
A method for evaluating the environmental impacts of a product or service throughout its
entire life cycle, from raw material extraction to disposal. LCA can help businesses identify
opportunities to reduce environmental impacts at all stages of the product life cycle.
Full Cost Accounting (FCA)
An accounting approach that includes both the direct costs (such as materials, labor, and
overhead) and indirect costs (such as environmental and social costs) of business activities.
FCA can help businesses make more informed decisions by accounting for the full costs of
their activities.
Environmental Reporting and Disclosure
Reporting on environmental impacts and performance to stakeholders, such as investors,
regulators, and customers. Environmental reporting can take the form of sustainability
reports, environmental impact assessments, and other disclosures.
Environmental Auditing
A systematic review of an organization’s environmental performance to identify areas for
improvement and compliance with environmental regulations. Environmental audits can be
conducted internally or externally and can help businesses identify opportunities to reduce
environmental impacts and comply with regulations.
Types of Green Accounting
Environmental financial accounting. EFA
Environmental financial accounting deals with accounting for and reporting on environmental
transactions and events that affect, or are likely to affect, the financial position of an
enterprise.
Environmental management accounting. EMA
EMA can be defined as the identification, collection, estimation, analysis, internal. reporting,
and use of materials and energy flow information, environmental cost. information, and other
cost information for both conventional and environmental. decision-making within an
organization.
Sustainability Accounting
Measures and reports on a company’s economic, social, and environmental performance over
time, using indicators such as energy and resource consumption, greenhouse gas emissions,
and social impact assessments. Sustainability accounting aims to provide a holistic view of a
company’s sustainable development and can help identify areas for improvement and
promote stakeholder engagement.
Importance of Sustainability reporting
Better decision-making:
Sustainability reporting helps make the decision-making processes of businesses more
effective and relevant.
Achieving operational efficiency:
The analysis of the business impact on sustainability issues enables companies to better plan
their resources, people and other materials to achieve enhanced operational efficiencies.
Optimizing costs and savings:
Corporate sustainability reporting provides a comprehensive analysis of business and its
impact areas. It also highlights areas where the funds are required and where they need to be
restricted. Therefore, it gives a holistic picture of the business indicating where to optimize
costs and savings, and where to reduce the spending.
Benefits of Sustainability reporting:
Achieving sustainability
One of the key benefits of sustainability reporting is that businesses get onto the track of
sustainability and do not keep it on the back burner. A sense of commitment and
accountability sets in once the business decides to bring out the company sustainability
report.
Attracting more customers
Today, customers are much more aware of the sustainability aspect of a business. Their
buying behaviour is inclined towards sustainability issues. The stakeholders and investors
make investment decisions depending upon the ESG disclosures by companies. ESG
sustainability reporting is equated to credibility and trust in a business by its stakeholders,
customers and investors.
Streamlining business performance
Sustainability reporting also leads to streamlining of the company’s performance and
improving stakeholder value. The value creation story depends on how well a business
performs on the sustainability aspects.