INTRODUCTION TO ACCOUNTING

MEANING OF ACCOUNTING
1.

Accounting,

as

an

information

system is the process of identifying, measuring and communicating the economic information of an

organization to its users who need

The systematic recording, reporting, and analysis of financial transactions of a business. The accountant is typically required to follow a set of rules and regulations, such as the Generally Accepted Accounting Principles.
2.

Accounting allows a company to analyze the financial performance of the business, and look at statistics such as net

3.

Accounting

is

the

art

of and

recording,

classifying

summarizing in the significant manner and in terms of money, transaction and events which are in the part at least of a financial character and interpreting the result thereof.

Meaning of Book-Keeping
Book-keeping may be defined as a systematic and regular record of events affecting a firm with a view to obtaining a clear picture of the financial state of affairs of the firm and of its performance in monetary terms over a period of

Accounting

Decision Makers

Information needs

Business Activities and transactions

Dat a

Recording of data (measuring business transactions)

Processing of data (preparation and storage of data)

Communication (as financial statements, other statements and reports)

Accounting as an information system in business and economic decision-

Information

OBJECTIVES OF ACCOUNTING
1.

To maintain accounting records : Accounting is done to keep a systematic record of (i) financial transactions, (ii) assets and (iii) liabilities.

2.

To calculate the results of operations : Preparation of Income statement (Profit & Loss A/c)

3.

To ascertain the financial position : Preparation of Position Statement (Balance sheet).

4.

To communicate the information to the users : Communicate information to internal users (Participants at all levels of management) and external users (Banks, creditors).

Activities Covered Under Accounting/Process

Identifying the transactions and events Measuring the identified transactions and events Recording the business transactions of financial character in the books (preparation of first book called 'Journal) Classifying the recorded data of similar nature in one place

Activities Covered Under Accounting/Process

Summarising the classified data to know the result of business operation and its financial position (preparation of Trial balance, Income statement and Balance sheet) Analysis and interprets the summarised data in such a way to get a meaningful judgement about the operational result and financial position of the business. Communicating the interpreted data to the various users such as Owners, Investors, Bank, etc.

Advantages of Accounting

Facilitates to replace memory Facilitates to comply with legal requirements Facilitates to ascertain net result of operations Facilitates to ascertain financial position Facilitates the users to take decisions Facilitates a comparative study

Advantages of Accounting
Assists the management in planning and controlling and decision making Facilitates control over assets Facilitates the settlement of tax liability Facilitates raising loans

Limitations of Accounting
1. 2. 3. 4.

5.

Ignores the qualitative elements Not free from Bias Estimated position and not real position Ignores the price-level changes in case of financial statement prepared on historical costs Danger of window dressing

Branches of Accounting
1.

Financial Accounting :- It is the process of identifying, measuring, recording, classifying, summarising, analysing, interpreting and communicating the financial transactions and events.

Branches of Accounting
2.

Cost Accounting :- It is the process of accounting and controlling the cost of a product, operation or function. The purpose of this branch of accounting is to ascertain the cost, to control the cost and to communicate information for decision-making.

Branches of Accounting
3.

Management Accounting :- It is the application of accounting techniques for providing information designed to help all levels of management in planning and controlling the activities of business enterprise and in decision making. The purpose of this branch of accounting is to supply any and all information that management may need in taking decision and to evaluate the impact of its decisions and actions.

Financial Accounting

Distinction Financial and Management Accounting

Cost and Management Accounting 1. It is primarily for internal purposes.

1. It is primarily for external purposes.

2. It records what has happened 2. It provides information which based on past transactions in a is used to take decisions about true and fair manner. the future. 3. It is heavily constrained by 3. It is relatively free of legal regulation and accounting constraints imposed by legal principles. regulation and accounting standards. 4. It must comply with statute and generally accepted accounting principles. 5. It emphasizes on the type of expenses. 4. It is tailored to suit the needs of the users 5. It emphasizes on the products, processes and departments.

USERS OF ACCOUNTING

USERS OF ACCOUNTS
Investors Information about growth - sales, volumes Profitability (profit margins, overall level of profit) Investment (amounts invested, assets owned) Business value (share price) Comparative information of competitors

Lenders
Cash flow Security of assets against which the lending may be secured Investment requirements in the business

Creditors
Cash flow Management of working capital Payment policy

Debtors
Sales growth New product development Investment in the business (e.g. production capacity)

Employees
Revenue and profit growth Levels of investment in the business Overall employment data (numbers employed, wage and salary costs) Status and valuation of company pension schemes / levels of company pension contributions

Government
Customs & Excise need accounting information to verify Value Added Tax ("VAT") returns local government need similar information to levy local taxes and rates

Analysts
They require very detailed financial and other information in order to analyse the competitive performance of a business and its sector.

Accounting Concepts/ Assumptions

1. Business Entity Concept : Business is treated as a separate entity or unit distinct from that of the proprietor. For Example : If when the proprietor invests Rs. 5000 in his business, it will be assumed that the owner has given that much money to the business and will be shown as a liability for the business.

2. Going Concern Concept

It is assumed that a business unit has a perpetual succession and transactions are recorded from this point of view. Hence assets are valued at cost less depreciation and not at market value. It is assumed that the enterprise has neither the intention nor the

Going concern concept

Going concern concept

3. Dual Aspect Concept

Each business transaction has two aspects, i.e., the receiving of a benefit (debit) and giving of a benefit (credit) For example, if a business purchases furniture, it must have given up cash or have incurred an obligation to pay in future. Every debit has equal amount of credit. So the total of all debits must be equal to the total of all credits. For every debit, there is a credit

4. Money measurement Concept

According to this assumption, only those transactions which are capable of being expressed in term of money are included in the accounting records. In other words, the information which cannot be expressed in terms of money is not included in accounting records.

5. Accounting Period Concept / Periodicity Concept

The concept requires that a Profit and Loss Account and a Balance sheet should be prepared at regular intervals to ascertain information about the business unit for all sorts of purposes
performance

evaluation tax computation budgetary control etc.

Accounting Period Concept / Periodicity Concept

Advantages : 1.Uniformity and consistency in accounting treatment for profit ascertainment and asset valuation. 2.Proper matching of periodic revenues and expenses to achieve the objectives of accounting. 3.Comparability of financial statements of different periods.

6. Cost Concept
According to this concept : a)An asset is ordinarily entered in the accounting records at the price paid to acquire it. b)This cost is the basis for all subsequent accounting for the assets. Note :- Asset is recorded at cost at the time of its purchase but it may systematically be reduced in its value by charging

7. Matching Concept
The expenses incurred in an accounting period should be matched with the revenues recognised in that period. This concept calls for adjustment to be made in respect of prepaid expenses, outstanding expenses, accrued revenue and unaccrued revenues.

8. Realisation Concept
Revenue is recognised in the period in which it is earned irrespective of the fact whether it is received or not during that period. Revenue is recognised when a sale is made. Sale is considered to be made at the point when the property in goods passes to the buyer and he becomes legally liable to pay.

Accounting Conventions
Conservatism Principle : Anticipate no profit but provide for all probable losses For e.g. provision for doubtful debts and discount on debtors are the applications of this principle. In other words, this principle requires that in the situation of uncertainty and doubt, the transactions should be recorded in such a manner that the profits and assets are not overstated and the losses and
1.

Full Disclosure
The financial statements must disclose all the relevant and reliable information which they purport to represent, so that the information may be useful for the users. The disclosure should be full, fair and adequate so that the users of the financial statements can make correct assessment about the financial performance and position of the enterprise.

Consistency
According to this principle, whatever accounting practices are selected for a given category of transactions, they should be followed on a horizontal basis from one accounting period to another to achieve compatibility. For e.g. if the inventory is valued on LIFO basis, should be followed year after year and if a particular asset is depreciated according to WDV

Materiality
All relatively relevant items, the knowledge of which might influence the decision of the users of the financial statements, should be disclosed in the financial statement. Which information is more relevant than others is largely a matter of judgement. The materiality depends not only upon the amount of item but also upon the

Accounting Equation Assets = Liabilities + Capital 1.Increase in an asset, increase in capital, for e.g., owner introduces further capital 2.Increase in an asset, increase in a liab., for e.g., purchased plant on credit. 3.Increase in an asset, decrease in another asset, for e.g., purchased machines against cash. 4.Decrease in one asset, decrease in a liab., for e.g. creditors paid off by cheque 5.Decrease in capital, decrease in

Q. Using Accounting Equation, show the effect of following transactions on the assets, liabilities and capital 1 2 3 4 5 6 7 8 9 10 11 12 Started business with cash Purchased goods on credit Purchased goods for cash Purchased furniture Withdrew for personal use Paid rent Received interest Sold goods for cash Paid to creditors Paid for salaries Further capital invested Borrowed from Ajay 5000 400 100 50 70 20 10 70 40 20 1000 1000