FUNDAMENTALS OF ACCOUNTING - icmai.in

402 Pages·2014·4.73 MB·English

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FOUNDATION : PAPER -
FUNDAMENTALS OF
ACCOUNTING
FOUNDATION
STUDY NOTES
The Institute of Cost Accountants of India
CMA Bhawan,12, Sudder Street, Kolkata - 700 016
First Edition : January 2013
Revised Edition : April 2013
Second Edition : December 2014
Published by :
Directorate of Studies
The Institute of Cost Accountants of India (ICAI)
CMA Bhawan, 12, Sudder Street, Kolkata - 700 016
www.icmai.in
Printed at :
Repro India Limited
Plot No. 02, T.T.C. MIDC Industrial Area,
Mahape, Navi Mumbai 400 709, India.
Website : www.reproindialtd.com
Copyright of these Study Notes is reserved by the Insitute of Cost
Accountants of India and prior permission from the Institute is
necessary for reproduction of the whole or any part thereof.
Syllabus
Paper 2: Fundamentals of Accounting (FOA)
Syllabus Structure
A Fundamentals of Financial Accounting 60%
B Fundamentals of Cost & Management Accounting 40%
B A
40% 60%
ASSESSMENT STRATEGY
There will be written examination paper of three hours
OBJECTIVES
To gain comprehensive understanding of all aspects relating to financial statements, principles,
procedures of accounting and their application to different practical situations
Learning Aims
The Syllabus aims to test the student’s ability to:
l U nderstand and explain the conceptual framework of Accounting
l P repare Accounts for various entities under different situations
l A cquire basic concepts of Cost & Management Accounting relevant for managerial decision
making
Skill sets required
Level A: Requiring the skill levels of knowledge and comprehension
Section A : Fundamentals of Financial Accounting 60%
1. Accounting Process
2. Reconciliation Statement
3. Accounting for Depreciation
4. Preparation of Final Accounts
5. Accounting for Special Transactions
Section B: Fundamentals of Cost & Management Accounting 40%
6. Fundamentals of Cost Accounting
7. Preparation of Cost Statements
8. Fundamentals of Management Accounting – basic knowledge and its
application
Section A : Fundamentals of Financial Accounting [60 marks]
1. Accounting Process
(a) Theoretical Framework ( meaning, scope and usefulness of Accounting; Generally Accepted
Accounting Principles, Concepts and Conventions)
(b) Capital and Revenue transactions- capital and revenue expenditures, capital and revenue receipts
(c) Measurement, Valuation and Accounting estimates
(d) Double entry system, Books of prime entry, Subsidiary Books
(e) Recording of Cash and Bank transactions
(f) Preparation of Ledger Accounts
(g) Preparation of Trial Balance- interpretation and usefulness
(h) Rectification of Errors
(i) Opening entries, Transfer entries, Adjustment entries, Closing entries
2. Reconciliation Statements
(a) Bank Reconciliation Statement
(b) Receivables / Payables Reconciliation Statement
(c) Stock Reconciliation Statement
3. Accounting for Depreciation
(a) Depreciation Policy
(b) Methods, computation and Accounting treatment
4. Preparation of Final Accounts:
(a) Of a Profit making concern (for sole proprietorship concern and partnership firm only)
(i) Preparation of Trading Account, Profit & Loss Account and Balance Sheet
(ii) Accounting treatment of bad debts, reserve for bad and doubtful debts, provision for
discount on debtors and provision for discount on creditors
(b) Of a Not-for-Profit making concern
(i) Preparation of Receipts and Payments Account;
(ii) Preparation of Income and Expenditure Account
(iii) Preparation of Balance Sheet
(c) Under Single Entry System including conversion of single entry into double entry system (basic
level)
(i) Concept of Single Entry System and preparation of Statement showing Profit and Loss ,
Statement of Affairs
(ii) Conversion of Single Entry System into Double Entry System of Accounting
5. Accounting for Special Transactions
(a) Bills of Exchange
(b) Consignment
(c) Joint Venture
(d) Sale of goods on approval or return basis
Section B: Fundamentals of Cost & Management Accounting[40 marks]
6. Fundamentals of Cost Accounting
(a) Cost and Management Accounting – Generally Accepted Cost Accounting Principles
(b) Accounting for Material cost (including Accounting of Inventory – LIFO, FIFO, Weighted Average
Cost)
(c) Accounting for Labour costs, Direct Expenses and Overheads
7. Preparation of Cost Statements
(a) Cost Data collection, Cost Sheet formats,
(b) Preparation of Cost Sheets (historical cost sheets and estimated cost sheets)
8. Fundamentals of Management Accounting
(a) Marginal Costing and Break-even analysis – basic knowledge
(b) Application of Marginal Costing for decision-making

Content
FUNDAMENTALS OF ACCOUNTING
Study Note 1 : Accounting Process
1.1 Introduction 1.1
1.2 Definitions 1.2
1.3 Book-Keeping 1.4
1.4 Accounting Cycle 1.5
1.5 Basic Accounting Terms 1.6
1.6 Generally Accepted Accounting Principles 1.10
1.7 Accounting Concepts and Conventions 1.10
1.8 Events & Transactions 1.14
1.9 Voucher 1.14
1.10 Double Entry System 1.14
1.11 The Concepts of “Account”, “Debit” & “Credit” 1.15
1.12 Types of Accounts 1.16
1.13 The Accounting Process 1.17
1.14 Accounting Equation 1.19
1.15 Accrual Basis & Cash Basis of Accounting 1.20
1.16 Capital & Revenue Transaction 1.23
1.17 Accounting Standards 1.30
1.18 Double Entry System, Books of Prime Entry, Subsidiary Books 1.33
1.19 Trial Balance 1.52
1.20 Measurement, Valuation & Accounting Estimates 1.60
1.21 Opening entries, Closing entries, Transfer entries and Rectification entries 1.75
Study Note 2 : Reconciliation Statements
2.1 Bank Reconciliation 2.1
2.2 Receivable Reconciliation 2.16
2.3 Payable Reconciliation 2.17
2.4 Stock Reconciliation 2.18
Study Note 3 : Depreciation Accounting
3.1 Introduction 3.1
3.2 Certain Usful Terms 3.1
3.3 Causes of Depreciation 3.2
3.4 Characteristics of Depreciation 3.3
3.5 Objective of and Necessity for providing Depreciation 3.3
3.6 Factors to be Consider for Calculating the Actual Depreciation 3.3
3.7 Methods of Charging Depreciation 3.4
3.8 Provision for Depreciation Account 3.12
3.9 Disposal of an asset 3.13
3.10 Profit or Loss on sale of assets - Method of Depreciation Calculation 3.15
3.11 Change of Method - Prospective and Retrospective 3.16
3.12 Application of AS 6 - Depreciation Accounting 3.21
3.13 Application of AS 10 - Accounting for Fixed Asset 3.23
Study Note 4 : Preparation of Final Accounts
4.1 Introduction 4.1
4.2 Preparation of Financial Statements 4.1
4.3 Bad Debts 4.35
4.4 Preparation of Financial Statement of Non-Trading Concern 4.48
4.5 Preparation of Financial Statement under Single Entry System
including Conversion of Single Entry into Double Entry System 4.72
Study Note 5 : Accounting for Special Transactions
5.1 Bill of Exchanges 5.1
5.2 Consignment Accounting 5.26
5.3 Joint Venture Accounts 5.41
5.4 Sales of goods on approval or return basis 5.54
Study Note 6 : Fundamentals of Cost Accounting
6.1 Introduction 6.1
6.2 Generally Accepted Cost Accounting Principles (GACAP) & 6.2
Cost Accounting Standards (CASs)
6.3 Definitions 6.14
6.4 Methods of Costing 6.17
6.5 Cost & Cost Object 6.19
6.6 Cost Organization 6.25
6.7 Costing System 6.26
6.8 Cost Determination 6.26
Study Note 7 : Preparation of Cost Statements
7.1 Cost Statements - Introduction 7.1
7.2 Cost Accumulation 7.1
7.3 Cost Collection 7.2
7.4 Cost Sheet Formats & Preparation 7.3
Study Note 8 : Fundamentals of Management Accounting
8.1 Marginal Costing-Introduction 8.1
8.2 Concept of Contribution, P/V Ratio and Break-Even Point 8.3
8.3 Concept of Margin Of Safety (MOS) 8.4
8.4 Cost - Volume - Profit Relationship (CVP Analysis) 8.5
8.5 Application of Marginal Costing for Decision Making 8.7
Study Note - 1
ACCOUNTING PROCESS
This Study Note includes
1.1 Introduction
1.2 Definitions
1.3 Book-Keeping
1.4 Accounting Cycle
1.5 Basic Accounting Terms
1.6 Generally Accepted Accounting Principles
1.7 Accounting Concepts and Conventions
1.8 Events and Transactions
1.9 Voucher
1.10 Double Entry System
1.11 The Concepts of “Account”, “Debit” and “Credit”
1.12 Types of Accounts
1.13 The Accounting Process
1.14 Accounting Equation
1.15 Accrual Basis & Cash Basis of Accounting
1.16 Capital & Revenue Transactions
1.17 Accounting Standards
1.18 Double Entry System, Books of Prime Entry, Subsidiary Books
1.19 Trial Balance
1.20 Measurement, Valuation & Accounting Estimates
1.21 Opening entries, Closing entries, Transfer entries and Rectification entries
1.1 INTRODUCTION
Business is an economic activity undertaken with the motive of earning profits and to maximize the
wealth for the owners. Business cannot run in isolation. Largely, the business activity is carried out by
people coming together with a purpose to serve a common cause. This team is often referred to as an
organization, which could be in different forms such as sole proprietorship, partnership, body corporate
etc. The rules of business are based on general principles of trade, social values, and statutory framework
encompassing national or international boundaries. While these variables could be different for different
businesses, different countries etc., the basic purpose is to add value to a product or service to satisfy
customer demand.
The business activities require resources (which are limited & have multiple uses) primarily in terms of
material, labour, machineries, factories and other services. The success of business depends on how
efficiently and effectively these resources are managed. Therefore, there is a need to ensure the
businessman tracks the use of these resources. The resources are not free and thus one must be careful
to keep an eye on cost of acquiring them as well.
As the basic purpose of business is to make profit, one must keep an ongoing track of the activities
undertaken in course of business. Two basic questions would have to be answered:
(a) What is the result of business operations? This will be answered by finding out whether it has made
profit or loss.
(b) What is the position of the resources acquired and used for business purpose? How are these
resources financed? Where the funds come from?
The answers to these questions are to be found continuously and the best way to find them is to record all
the business activities. Recording of business activities has to be done in a scientific manner so that they
reveal correct outcome. The science of book-keeping and accounting provides an effective solution. It
FUNDAMENTALS OF ACCOUNTING I 1.1