Accounting :: Objective, Elements/Aspects; Separate Entity Concept

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Specific Format for Accounting » Target to be achieved

 
 

What should Mr. Oberoi's target be?

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 then, is the objective, that Mr. Oberoi should try to achieve, 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 "To collect all the information relating to an element at a single place".

Elements in Accounting/Accounts » Account Heads

 
 

• Element

  • Meaning = A small part of the total whole
  • Synonyms » constituent, part, building block, component, ingredient, factor, aspect

• An Element in accounting

An element for the purpose of accounting is that aspect relating to which we wish to find/know 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 i.e. accounting 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.

Where the organisation needs less detail, it may consider all the expenses as a single element called expenses (i.e. Expenses a/c). Where the organisation feels that it needs greater detail with regard to expenses, it may sub divide it into smaller elements as Salaries a/c, Rent a/c, Telephone Charges a/c, Miscellaneous Expenses a/c. All these together would form the total expenditure of the organisation.

We interpret 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". This is dependent on the amount of information that an organisation needs.

Greater the information needed, greater the number of accounting heads i.e. the number of elements into which the organisation is divided.

• The more the information we need,
    The more the accounting heads we have to maintain.
(Or)
• The more the information we need,
    The more the number of elements into which we need to divide the organisational accounting.

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 being brought in and amounts being withdrawn.

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

This forms 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 finding the information relating to ownership we never use the owners name as an identifier, i.e. element name or account head. Therefore Mr. Oberoi's name would not appear in the list of account heads for his organisational accounting.

• Capital a/c

Capital is an element used to represent the owner of the business for recording information relating to the amounts invested by the owner as his capital.

The amount of capital invested in the business by the owner or owners
• The amount given by the owner, to the organisation/business — Identified as the element Capital or Capital a/c

• Drawings a/c

Drawings is an element used to represent the owner of the business for recording information relating to the amounts withdrawn by the owner from the organisation for his personal purposes.

The amount withdrawn by the owner for personal purposes
• The amount taken by the owner, from the organisation/business — Identified as the element Drawings or Drawings a/c

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.
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