"Accounting is the art of recording, classifying and summarizing in 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".

In 1966, the American Accounting Association (AAA) defined accounting as

follows:"Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgements and decisions by users of the information".

END USERS OF ACCOUNTING INFORMATION

1. Proprietors: A business is done with the objective of making profit. Its profitability and
financial soundness are, therefore, matters of prime importance to the proprietorswho
have invested their money in the business.

2. Managers: In a sole proprietary business, usually the proprietor is the manager. In case
of a partnership business either some or all the partners participate in the management of
the business. They, therefore, act both as managers as well as owners In case of joint stock
companies, the relationship between ownership and management becomes all the more
remote.

3. Creditors: Creditors are the persons who have extended credit to the company They also
seek financial statements because these will help them in ascertaining whether the
enterprise will be in a position to meet its commitments towards them both regarding
payment of interest and principal.

4. Prospective Investors: A person who is contemplating an investment in a business will

like to know about its profitability and financial position. A study of the financial statements
will help him in this respect.

5. Government: Government is interested in the financial statements of Government may

ask its officials to examine the accounting records of a business.

6. Employees: Employees are interested in the financial statements on account of various

profit sharing and bonus schemes. Their interest may further increase, in case they
purchase shares of the companies in which they are employed.

FUNCTIONS

Recording: This is the basic function of accounting. It is essentially concerned with not only
ensuring that all business transactions of financial character are, in fact, recorded but also
that they are recorded in an orderly manner. Recording is done in the book "Journal".

2. Classifying: Classification is concerned with the systematic analysis of the recorded data,
with a view to group transactions or entries of one nature at one place. The work of
classification is done in the book termed as "Ledger".
3. Summarizing: This involves presenting the classified data in a manner which is
understandable and useful to the internal as well as external end users accounting
statements. This process leads to the preparation of the following statements:(1) Trial
Balance (1) Income Statement (ii) Balance Sheet

. 4. Dealing with Financial Transactions: Accounting records only those transactions and
events in terms of money which are of a financial character. Transactions which are not of a
financial character are not recorded in the books of account

5. Analysing and Interpreting: The recorded financial data is analysed and interpreted in a
manner that the end users can make a meaningful judgement about the financial condition
and profitability of the business operations.

6. Communicating: The accounting information, after being meaningfully analysed and

interpreted, has to be communicated in a proper form and manner to the concerned
person.

BRANCHES OF ACCOUNTING

(1) Financial Accounting: It is the original form of accounting. It is mainly confined to the
preparation of financial statements for the use of outsiders, like shareholders, debenture
holders, creditors, banks and financial institutions.

(i) Management Accounting: It is accounting for the management, ie., accounting which
provides necessary information to the management for discharging its functions. According
to the Chartered Institute of Management Accountants, London, "Management accounting
is the application of professional information in such a way as to assist the management in
the formation of policies and in the planning and control of the operations of the
undertaking."

LIMITATIONS

1. Provides only limited information: There are now no set patterns of business on account
of radical changes in business activities: An expenditure may not bring an immediate
advantage to the business but it may have to be incurred because it may bring advantage to
the business in the long run or may be necessary simply to sell the name of the business.

2. Treats figures as single, simple and silent items: Financial accounting fails to make people
realize that accounting figures are not rere isolated phenomena bur they represent a chain
of purposeful and pertinent events. The role of accountant in not anymore only of a book-
keeper and auditor, but also that of a financial adviser.

3. Provides only a post-mortem record of business transactions: Financial accounting

provides only a post-mortem record of business transactions since it records transactions
only on historical basis.
4. Considers only quantifiable information: Financial accounting considers only those
factors which are capable of being quantitatively expressed. In modern times, the concept
of welfare state has resulted in increased government's interference

5. Fails to provide informational needs of different levels of management: The shareholders

are only rentiers of capital. The business is run, in reality, by different executives, each an
expert in his area. These executives have powers based on the level of management to
which they belong. There are usually three levels of management:

Top management

. Middle management

Lower managements

Difference Between Management Accou

LEDGER:ledger is a book or collection of accounts in which account transactions are recorded. Each
account has opening or carry-forward balance, and would record each transaction as either a debit or credit
in separate columns, and the ending or closing balance.

JOURNAL:journal is a subsidiary book of account that records monetary transactions according to
accounting standards. These transactions get recorded in chronological order, and it gives details about
the accounts that are affected by each transaction. There are seven different types of journals: purchase,
purchase returns, cash receipts, cash disbursements, sales, sales returns, and general

Journalizing: It is the practice of documenting a business transaction in accounting records.

Record-keeping, especially for accountants, is a detail-oriented skill that requires commitment.
Every business transaction is recorded in a journal, also known as a Book of Original Entry, in
chronological order.

POSTING:The term "Posting' means transferring the debit and credit items from the Journal to their
respective accounts in the Ledger. It should be noted that the exact names of accounts used in the Journal
should be carried to the Ledger. For example, if in the Journal. Expenses Account has been debited, it
would not be correct to debit the Office Expenses Account in the Ledger. Though, in the Journal, it might
have been indicated clearly in the narration that it is an item of office expenses the correct course would
have been to record the amount to the Office Expenses Account in the Journal as well as in the Ledger.

DEPRECIATION:The term depreciation refers to an accounting method used to allocate the

cost of a tangible or physical asset over its useful life. Depreciation represents how
much of an asset's value has been used. It allows companies to earn revenue from the
assets they own by paying for them over a certain period of time.
TRIAL Balance:A trial balance is a list of credit entries and debit entries that businesses use to
internally audit their double-entry accounting systems. The goal is to confirm that the sum of all debits
equals the sum of all credits and identify whether any entries have been recorded in the wrong account

VOUCHER :In general terms, à voucher means a documentary evidence in support of a business
transaction. It is a documentary evidence by which the accuracy of an entry made in the books of account
can be substantiated. It may be a receipt, a counterfoil of a receipt book, an invoice or even
correspondence with the concerned parties. The term 'Voucher has a narrower meaning when applied to
the Voucher System. It is a special form on which is recorded pertinent data about a liability and the
particulars of its payments.

TRADING ACCOUNT:Trading Account gives the overall result of trading, ie, purchasing and selling of goods.
In other words, it explains whether purchasing of goods and selling them has proved to be profitable for
the business or not. It takes into account on the one hand the cost of goods sold and on the other the
value for which they have been sold away. In case the sales value higher than the cost of goods sold, there
will be a profit, while in a reverse case, there will be a loss.

BALANCESHEET: In financial accounting, a balance sheet is a summary of the financial balances of

an individual or organization, whether it be a sole proprietorship, a business partnership, a
corporation, private limited company or other organization such as government or not-for-profit

PROFIT AND LOSS A/C: An income statement or profit and loss account is one of the financial
statements of a company and shows the company's revenues and expenses during a particular
period. It indicates how the revenues are transformed into the net income or net profit.

IFRS

•International Financial Reporting Standards (IFRS) are a set of accounting rules for the financial
statements of public companies that are intended to make them consistent, transparent, and
easilycomparable around the world.•They were issued by the London-based Accounting Standards
Board(IASB) and address record keeping, account reporting, and other aspects of financial reporting.•IFRS
fosters greater corporate transparency
Cash Book definition
•Cash book is a special type of book that is only concerned with the recording of
cash transactions of an organization. It performs the dual role of both journal
and a ledger for all the cash transactions taking place in a business organization.
•A cash book records all the cash receipts on the debit side and all the cash
payments of the organization on the credit side.
Features of Cash Book
•Cash book has the following features:
•Acts as both a journal and a ledger.
•Can be used as an alternative to a cash account for recording transactions.
•It follows the dual entry system of accounting (i,e. Debit and credit side in cash
book).
•The debit side should be identical to the credit side.
•Cash book should always have a debit balance

Personal accounts:
• Personal accounts include the accounts of persons with whom the
business deals. These accounts can be classified into the three
categories.
1.Natural Personal Accounts: The term 'Natural Persons' means persons
who are creation of God. For example, Mohan's Account, Sohan'sAccount, Abha's Accountetc.
2.Artificial Personal Accounts: These accounts include accounts of
corporate bodies or institutions which are recognised as persons in
business dealings. For example, the account of a Limited Company, the
account of a Co-operative Society, the account of a Club, the account of
Government, the account of an Insurance Company, etc
3.Representative Personal Accounts: These are accounts which
represent a certain person or group of persons. For example, if the rent
is due to the landlord, an outstanding rent account will be opened in the
books.
REAL ACCOUNTS
•Real accounts may be of the following types:
1. Tangible real accounts: Tangible Real Accounts are those which
relate to such things which can be touched, felt, measured etc. Examples
of such accounts are cash account, building account, furniture account,
stock account, etc.
2. Intangible real accounts: These accounts represent such things which
cannot be touched. Of course, they can be measured in terms of money.
For example, patents account, goodwill account, etc. The rule is:
DEBIT WHAT COMES IN CREDIT WHAT GOES OUT.