CHAPTER 1- INTRODUCTION TO ACCOUNTING

MEANING

Accounting is the process of identifying, measuring, recording and communicating the required
information relating to the economic events of an organisation to the interested users of such
information.

DEFINITION

“Accounting is the process of identifying, measuring and communicating economic information to

permit informed judgments and decisions by users of the information.” -- (Year 1966) American
Accounting Association (AAA)

ATTRIBUTES OR CHARACTERISTICS OF ACCOUNTING

 Identification: Accounting identify the financial events which are to be recorded in the books of
accounts.
 Measurement: In Accounting we record only those transactions which can be measured in
terms of money or which are of financial nature. If a transactions or event cannot be measured
in monetary terms, it is not considered for recording in financial accounts.
 Recording: A financial transaction will be recorded in the books of accounts chronological order.
Recording should be done in a systematic manner so that the information can be made available
when required.
 Classifying: Once the financial transactions are recorded in journal or subsidiary books, all the
financial transactions are classified by grouping the transactions of one nature at one place in a
separate account. This is known as preparation of Ledger.
 Summarizing: It is concerned with presentation of data and it begins with balance of ledger
accounts and the preparation of trial balance with the help of such balances.
 Analysis and Interpretation: Analysis and Interpretation of the financial data is carried out so
that the users of financial data can make use of meaningful judgement of the profitability and
financial position of the business.
 Communication: The main purpose of accounting is to communicate the financial information
the users who analyze them as per their individual requirements

OBJECTIVES OF ACCOUNTING

 The main objective of the accounting is to keep systematic record of business transactions.
 Accounting is helpful in preventing and detecting the errors and frauds.
 Accounting plays important role in calculating the profit or loss during a particular period by
preparing Trading account and Profit and Loss Account.
 Accounting is helpful in ascertaining the financial position of the business.
 Accounting provides useful information to its users.
 Accounting helps the management in decision making
 Provides information to the users.
 Since accounting maintains a systematic records of the assets, it helps to exercise control and
protect them.
FUNCTIONS OF ACCOUNTING

1. Maintaining systematic accounting records

2. Preparation of financial statements or final accounts
3. Meeting legal requirements
4. Communicating the financial information
5. Assistance to management

ADVANTAGES

1. Provides financial information about the business

2. Assistance to management
3. Replaces memory
4. Facilitates comparative study
5. Facilitates settlement of tax liability
6. Facilitates loan
7. Evidence in court
8. Facilitates sale of business
9. Assistance in the event of insolvency
10. Helpful in partnership accounts

 It provides information which is useful to management for making economic

decisions.
 It help owners to compare one year’s results with those of other years to locate the
factors which leads to changes.
 It provide information about the financial position of the business by means of
balance sheet which shows assets on one side and Capital & Liabilities on the
other side.
 It help in keeping systematic and complete records of business transactions in the
books of accounts according to specified principles and rules, which is accepted
by the Courts as evidence.
 It help a firm in the assessment of its correct tax Liabilities such as income tax,
sales tax, VAT, excise duty etc.
 Properly maintained accounts help a business entity in determining its proper
purchase price.

LIMITATION

1. It is historical in nature; it does not reflect the current worth of a business.

Moreover, the figures given in financial statements ignore the effects of changes in price
level.
2. It contains only those informations which can be expressed in terms of money. It ignores
qualitative elements such as efficiency of management, quality of staff, customers
satisfactions etc.
3. It may be affected by window dressing i.e. manipulation in accounts to present a more
favorable position of a business firm than its actual position.
 4. It is not free from personal bias and personal judgment of the people dealing with it. For
example different people have different opinions regarding life of asset for calculating
depreciation, provision for doubtful debts etc.
5. It is based on various concepts and conventions which may hamper the disclosure of
realistic financial position of a business firm. For example assets in balance sheet are
shown at their cost and not at their market value which could be realised on their sale.

Subfields/Branches of Accounting

1. Financial Accounting:- It is that subfield/Branch of accounting which is concerned with

recording of business transactions of financial nature in a systematic manner, to ascertain
the profit or loss of the accounting period and to present the financial position of the
business.
2. Cost Accounting:- It is that Subfield/Branch of accounting which is concerned with
ascertainment of total cost and per unit cost of goods or services produced/ provided by a
business firm.
3. Management Accounting:- It is that subfield/Branch of accounting which is concerned
with presenting the accounting information in such a manner that help the management in
planning and controlling the operations of a business and in better decision making.

Book Keeping

Recording of business transactions in a systematic manner in the books of account is called

bookkeeping.

Book keeping Accounting

1. It is the recording phase of an accounting 1. It is the summarizing phase of an
system. accounting system.
2. It is a Secondary Stage which begins where
2. It is a primary stage and basis for accounting.
the Book keeping process ends.
3. It is routine in nature and does not require any 3. It is analytical in nature and required special
special skill or knowledge skill or knowledge.
4. It is done by junior staff called book-keepers 4. It is done by senior staff called accountants.
5. It does not give the complete picture of the 5. It gives the complete picture of the financial
financial conditions of the business unit. conditions of the business unit.

Types of accounting information

Accounting information can be categorized into following:

1. Information relating to profit or loss i.e. income statement, shows the net profit of
business operations of a firm during a particular accounting period.
2. Information relating to Financial position i.e. Balance Sheet. It shows assets on one side
and Capital & Liabilities on the other side.
3. Schedules and notes forming part of balance sheet and income statement to give details of
various items shown in both of them.
QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION

1. Reliability
2. Relevance
3. Understandability
4. Comparability

Interested users/parties of Accountings information’s and their Needs

There are number of users interested in knowing about the financial soundness and the
profitability of the business.
Users Classification Information the user want
Return on their investment, financial health of their
1. Owner
Internal company/business.
2. Management To evaluate the performance to take various decisions.
1. Investors and potential
Safety and growth of their investments, future of the business.
investors
Assessing the financial capability, ability of the business to pay
2. Creditors
its debts.
3. Lenders Repaying capacity, credit worthiness.
Externa
Assessment of due taxes, true and fair disclosure of accounting
l 4. Tax Authorities
information.
Profitability to claim higher wages and bonus, whether their
5. Employees
dues (PF, ESI, etc.) deposited regularly.
Customers, Researchers etc., may seek different in-formation
6. Others
for different reasons.