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Unit 1
Accounting

Objective of Chapter
After studying this chapter, you
should be able to:
1 Explain the meaning of accounting and identify
the key items of the conceptual framework.
2 Describe the basic objectives accounting.
3 Discuss branches of accounting.
4 Describe concepts and conventions of accounting.
5 Discuss the process of accounting.

Contents

What is Accounting
Definition
Objectives of Accounting
Users of Accounting
Functions of Accounting
Branches of Accounting
Difference between Management and
Financial accounting
Accounting Process
Concepts and Conventions of Accounting
Tools and Techniques of Accounting
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What is accounting

The language of business.

A means to communicate financial
information.
Accounting is a system in which all
the
financial
transaction
are
recorded in a proper way.

Definition
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 a financial
character, and interpreting the results
thereof .

Objectives of Accounting

To maintain record of business

Calculation of Profit and Losses
Depiction of financial position
To make information available to
various groups and users.

Users of Accounting

Functions of Accounting

Knowledge of sales and purchase

Providing information of closing stock
Knowledge of financial position
Information related to working capital
Knowledge of profit & loss of the business
Provide information to various parties
Provide Information about
misappropriation & frauds
Evidence in court.
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Branches of Accounting

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Difference between
management & financial
accounting
Management
Financial accounting
accounting

Subject Matter
Its concerned with various Its related with
departments
organization as a whole
Objectives
Its designed to provide
Its designed to provide
information to internal
information to external
parties
parties
Nature
Its concerned with not only Its concerned with
past information but also
historical records
about future plans

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Type of data used

It uses the statistical, It makes use of the data
descriptive, subjective which
is
historical,
and relates to the quantitative, Monitory
future
and objective
Accuracy
Approximations are
Accurate figures are
considered
used
Compulsion
It is optional
It
is
absolutely
compulsory to prepare
for various purposes
like, for various users
and taxation
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Accounting Process

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Concepts and Conventions

of Accounting

Separate /Business Entity Concept

Going Concern concept
Dual Aspect Concept
Cost concept
Money measurement Concept
Accounting period Concept
Matching Concept

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Separate entity concept

2 This concept states that a Business

and its Owner are two separate

entities. As per this concept, a
business should record
transactions only related to
business. Proprietors personal
transactions are not to be recorded
in the books of the business.

GOING
CONCERN
CONCEPT

4 The going concern concept assumes that the

enterprise will continue in operation long enough
to carry out its existing objectives.
Implications: depreciation and amortization are
used, plant assets recorded at cost instead of
liquidation value, items are labeled as fixed or
long-term.

Dual Aspect Concept

Every business transaction has two

effects and involves exchange of
benefits. Benefit received and
benefit given, both the aspects
should be recorded in the books. The
system which records such dual
aspects in the books of accounts is
known as Double Entry System.
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Cost Concept

The Cost concept states that all the

assets purchased should be recorded
at cost price and the cost paid will
be the base for further accounting.
Market price of an asset keeps
fluctuating. Hence, it becomes
necessary to record the transactions
at cost price
Assets should be recorded at cost.

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Money measurement
Concept
1
This concept states that only transaction data that can be

expressed in terms of money be included in the accounting

records.
Example: employee satisfaction and percent of international
employees are not transactions that should be included in the
financial records.

Customer
Satisfaction

Should be
included
in accounting

Percentage of
International
Employees
Salaries paid

Accounting period
concept
3 This concept states that the economic
life of a business can be divided into
artificial time periods.
Example: months, quarters, and years
2000
QTR 1
QTR 2
QTR 3
QTR 4

2001
JAN
APR
JUL
OCT

FEB
MAY
AUG
NOV

2002
MAR
JUN
SEPT
DEC

Matching Concept
Matching the revenues
earned
during
an
accounting period with
the cost associated with
the period to ascertain the
result of the business
concern is called the
matching concept. It is the
basis for finding accurate
profit for a period which
can be safely distributed
to the owners.
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Cont

Conventionof Disclosure
ConventionofMateriality
Conventionof Consistency
Conventionof Conservatism.

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Conventionof Disclosure
Accounting statements should disclose
fully and completely all the significant
information. Based on this, decisions
can be taken by various interested
parties.
It
involves
proper
classification and explanations of
accounting information which are
published in the financial statements

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Convention of Materiality

The materiality principle requires all

relatively
relevant
information
should be disclosed in the financial
statements.
Unimportant
and
immaterial information are either
left out or merged with other items.

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Prudence (Conservatism)
Principle
Prudence
principle
takes
into
consideration all prospective losses
but leaves all prospective profits. The
essence of this principle is anticipate
no profit and provide for all possible
losses. For example, while valuing
stock in trade, market price or cost
price whichever is less is considered.
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Convention of
Consistency
The aim of consistency principle is to
preserve the comparability of financial
statements. The rules, practices,
concepts and principles used in
accounting should be continuously
observed and applied year after year.

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Tools and Techniques of

Accounting

1.Based on Financial Accounting

Information
Analysis of Financial Statements
throughRatio Analysis.
Analysis of Financial
Statementsthrough comparative
statements, trend, graph and diagram.
Fund flow and cash flow analysis.
Return on capital employed
techniques.

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Cont.
2.Based on Cost Accounting
Information
Marginal costing (including cost
volume profit analysis).
Direct or incremental Costing and
differential costing.
Standard Costing.
Analysis of Cost Variances.
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3.Based on Future Information

Budget and Budgeting.
Budgetary control: Analysis of
Budget Variance / Revenue Variance.
Business Forecasting.
Project Appraisal or Evaluation.

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Cont..
4.Miscellaneous Tools
Managerial Reporting.
Integrated Auditing.
Financial Planning.
Revaluation Accounting.
Decision making Accounting.
Management Information System
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Check Your
Progress..

Accounting is called the _______of business.

Account Cycle pass through
___________levels.
Financial Accounting is made for
________users.
The process that controls the cost of a
product is the part of___________
Accounting.
Management account is for _____________
users.
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Quote of the Day

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