Objective of Accounting, Elements/Aspects in Accounting, Separate Entity Concept

Specific Format for Accounting - Target to be achieved

Now from what we have seen, we understand that the manner in which Mr. Oberoi was maintaining the accounting records had a limitation of not being able to provide the information that he needed at a place, ready hand, whereby he was compelled to think of alternative methods for recording the accounting transactions.

What should Mr. Oberoi's target be?

What was Mr. Oberoi looking for? What is the objective that he should try achieving through the different format for recording the accounting transactions?

Mr. Oberoi was trying to find the amount due to or due from Mrs. Vimla. It would have been conveniently derived if he had all the information relating to Mrs. Vimla at a single place.

This is the objective he should try to achieve through the specific format for recording the accounting transactions.

Specific Format for Accounting - Target to be achieved

The target to be achieved by maintaining a specific format for recording accounting transactions is "collecting all the information relating to an element at a single place".

Elements in Accounting/Accounts - Account Heads

Element

  • A small part of the total whole
  • constituent
  • part
  • building block
  • component
  • ingredient
  • factor
  • aspect

Element/Account-Head in accounting

An element for the purpose of accounting is that aspect or entity relating to which we wish to find, know or derive information.

Each element in accounting is identified as an account or an accounting head.

Some examples of accounting elements

We wish to know
  • The amount of capital invested in the business.

    Capital is an element — We identify it as Capital a/c.

  • The value of Furniture with us in the business.

    Furniture is an element — We identify it as Furniture a/c.

  • The amount of expenditure on account of salaries.

    Salaries is an element — We identify it as Salaries a/c.

  • The amount due to us from Mrs. Vimla.

    Mrs. Vimla is an element — We identify it as Mrs. Vimla's a/c.

  • The amount we owe the wholesaler Mr. Rathod.

    Mr. Rathod is an element — We identify it as Mr. Rathod's a/c.

  • The amount available in the bank.

    Bank is an element — We identify it as Bank a/c.

  • The value of sales made by us.

    Sales is an element — We identify it as Sales a/c.

  • This list can be endless ...

How many Elements/Accounting-Heads are used in accounting?

The number of elements used for the purpose of accounting for an organisation is not a static figure. It is dependent on the amount and nature of information needed by the organisation.

Taking the case of expenses incurred by an organisation,

  • Where the organisation feels that its informational need is minimum, it may consider all the expenses as a single aspect or element and identify it by the name Expenses a/c.
  • Where the organisation feels that it needs more (or detailed) information with regard to expenses, it may consider each expense (or a group of expenses) as a distinct aspect or element.

    Expenses would be represented by smaller elements as Salaries a/c, Rent a/c, Telephone Charges a/c, Miscellaneous Expenses a/c etc. All these together would represent the total expenditure of the organisation.

We understand the number of elements used for the purpose of accounting as "the number of elements into which an organisation is divided for the purpose of accounting" which is dependent on the amount of information that an organisation needs.

Greater the information needed, greater the number of elements (accounting heads) into which the organisational accounting system is divided.

The more the information we need, the more the accounting heads we need to maintain.

Separate Entity Concept

In accounting for business transactions, we should segregate ownership and business. The owner is alien to business. The owner is a party from whom the business can take/receive and to whom it can give.

If we do not see the owner and the business as separate entities, we cannot think of transactions involving capital like when capital is being brought in and amounts are being withdrawn by the ownership.

If the owner is not a separate entity, then these would amount to the owner giving to himself and taking from himself.

This gives us an understanding of one another important and fundamental concept of accounting - "The Separate Entity Concept :: Ownership and business are not one and the same".

Separate Entity Concept

The owner is also an alien to the business.

Capital a/c, Drawings a/c - Special Elements

In an accounting system, in deriving the information relating to ownership, we never use just the owners name as an identifier, i.e. as the element name or the account head. We use the owners name as a prefix to the term Capital to identify the elements identifying the contributions made by the ownership. Therefore Mr. Oberoi's name would not appear in the list of account heads used for his organisational accounting.

Capital a/c

Capital is an element used to derive information relating to the amounts brought into (or invested in) the organisation by the owner as his contribution towards capital. It represents the owner of the business.

Optionally the element name or account head may be prefixed with the name of the owner. In this case the account head representing Mr. Oberoi's contribution may be called Capital a/c or Oberoi's Capital a/c.

Where there are multiple owners, the account representing each's contribution is prefixed with the name of the owner to create distinction. Robert's Capital a/c, Ram's Capital a/c, Shyam's Capital a/c etc.

Drawings a/c

Drawings is an element used to derive information relating to the amounts withdrawn by the owner from the organisation for his personal purposes. It is also an element representing the owner of the business. However

Optionally the element name or account head may be prefixed with the name of the owner. In this case the account head representing Mr. Oberoi's drawings may be called Drawings a/c or Oberoi's Drawings a/c.

Where there are multiple owners, the account representing each's drawings is prefixed with the name of the owner to create distinction. Robert's Drawings a/c, Ram's Drawings a/c, Shyam's Drawings a/c etc.

Note

If we do not wish to have the information relating to the capital brought in and amount withdrawn separately, only one account is maintained by name Capital a/c in place of these two. In such a case, the amount withdrawn by the proprietor for personal purposes would be treated as capital taken back by the proprietor.