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Accounting Fundamentals

What is Accounting?

is a
Accounting Identifies and
system that records

And summarizes
Relevant Analyzes and
the information interprets

Reliable that is
about an organization’s
Comparable business activities.

Accounting serves as a means to communicate business. Its business operations to various
stakeholders to help in decision making.. It is a process of recording, classifying, summarizing,
analysing and interpreting financial transactions and communicating the results to persons

Recording: ensures all business transactions are financial in nature and recorded in order. It is
done in the book called “journal”.

Classifying: systematic analysis of the recorded data with a view to group entries of one nature
at one place. Done in a book called ledger. Book contains on different pages, individual account
heads and all financial transactions of similar nature are collected.

Summarizing: presenting classified data in a manner which is understandable and useful.

Financial transactions: are recorded, transactions that cant be expressed in monetary terms are
not recorded.

Analysis and interpretation: helps in making meaningful judgment about the company.

Communicates: communicated in proper form (relevant, reliable, comparable) to the person and
What is accounting?

Accounting may be defined as a series of processes and

techniques used to identify, measure and communicate
economic information that users find helpful in making

•Accounting Is a Service Function

•Accounting Deals with Economic Information
•Economic Activity Must Be Identified, then Measured
•Accounting Is a Communication Device
A.I.C.P.A., “Accounting may be defined as the art of recording, classifying and
summarizing in a significant manner and in terms of money, transactions and events,
which are in part, at least of financial character, and interpreting the results thereof.”
This definition is widely accepted by majority of accounting professionals and
organisations worldwide.
H. Chakravorty, “Accounting is the science of recording, classifying and summarizing
transactions so that relation with outsiders is exactly determined and result of
operation during a particular period can be calculated, and the financial position as
the end of the period may be shown.”
Taylor and Shearing, “Accounting may be defined as the art and science of recording
business transactions in a methodological manner so as to show: (a) the true state of
affairs of a business of a particular period of time and, (b) the surplus or deficiency
which has accrued during a specified period.”
Warren Reeve Fess,” Accounting is an information system that provides reports to
stakeholders about the economic activities and conditions of a business.”
1. To keep systematic records: of financial transactions.
2. To protect business properties: by providing relevant information on funds available,
funds to be paid, fixed assets, cash etc.
3. To ascertain profit or loss: by carrying out business by maintaining proper records. It
helps in decision making.
4. To ascertain the financial position of the business: balance sheet tells how much is
owed by the company and how much is owned by it. It serves as a barometer for
financial health of the company.
5. Rational decision making: helps in making informed decisions by users.
Branches of Accounting
Users of Accounting Information

Internal Users
External Users

•Lenders •Consumer Groups •Managers •Sales Staff

•Shareholders •External Auditors •Officers •Budget Officers
•Governments •Customers •Internal Auditors •Controllers
• We must follow standard formatting when reporting
information to users outside the organization. External
users include stockholders of the company, lenders,
various governmental agencies, and others.

• Accountants also prepare reports for internal users.

Managers of the business need information to help
direct and control operations of a business. The
sales/marketing department needs information about
customers and products. Officers of the company need
information to develop strategic plans
Users of Accounting Information

External Users Internal Users

Financial accounting provides Managerial accounting provides

external users with financial information needs for internal decision
statements (shareholders, lenders, makers (officers, managers, etc.).
Financial accounting provides external users with financial statements. Managerial
accounting provides information needs for internal decision makers.

In this book, we will spend most of our time developing financial accounting information
for external users. Some of the material we cover will prove useful to managers and other
internal decision makers
Opportunities in Accounting

Managerial Taxation
•General accounting •Preparation
•Preparation •Cost accounting •Planning
•Analysis •Budgeting •Regulatory
•Auditing •Internal auditing •Investigations
•Regulatory •Consulting •Consulting
•Consulting •Controller •Enforcement
•Planning •Treasurer •Legal services
•Criminal •Strategy •Estate plans
•Lenders •FBI investigators
•Consultants •Market researchers
•Analysts •Systems designers
Accounting-related •Traders •Merger services
•Directors •Business valuation
•Underwriters •Forensic accountant
•Planners •Litigation support
•Appraisers •Entrepreneurs
Careers in accounting can follow many paths.

There is great demand for financial accountants in the preparation of financial

statements, dealing with regulatory agencies like the Internal Revenue Service, and

Management accountants help track product costs, prepare budgets and serve as a
consultant to managers.

The field of taxation includes everything from the preparation of tax returns to consulting
with clients about estate and gift planning.

Individuals with accounting backgrounds may move into other areas of importance
within an organization. Individuals with accounting training often become business
owners and managers. They are in high demand in all financial and investigative fields.