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E-Learning Module-1:
Introduction to Accounting
By Prabir Kumar Dutta
Assistant Professor
Department of Commerce
S.R.Fatepuria College, Beldanga, Murshidabad.

Course Summary:
This course attempts to discuss about the basic concept of Accounting. This course is
mainly designed for the undergraduate students of commerce.

Course Content:
1. Meaning and objectives of Financial Accounting.
2. Branches or types of Accounting.
3. Users of accounting information and their information needs.

Introduction:
With the increase in size and complexity of business, more and more people are getting
affected, directly or indirectly, by the operations of business organizations. As a result, these
affected parties want to know about the operation of business. Accounting, as a language of
business, is directed towards satisfying the diverse financial information needs of various
interested parties. Following are some of the definitions of accounting given by renowned
accounting professional bodies and accountants:

“Accounting is 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 result thereof”.- American Institute of Certified Public Accountants
[AICPA];

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

information to permit informed judgments and decisions by users of the information”. -
American Accounting Association [AAA].

“Accounting is an information system that identifies records and communicates the economic
events of an organization to interested users”. - Weygandt, Kieso and Kimmel.
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“Accounting may be defined as the collection, compilation and systematic recording of business
transactions in terms of money, the preparation of financial reports, the analysis and
interpretation of these reports and the use of these reports for the information and guidance of
management”. - A. W. Johnson.

From the above definitions it is understood that accounting is concerned with the process
of identifying, measuring, analyzing only financial information, measurable in terms of money
and communicating those information to both internal and external parties for their decision
making. Accounting is a mixture of both accounting principles and the skill and experience on
the part of accountant. Therefore, accounting may be defined as a body of knowledge and
practice concerned primarily with identifying, recording, classifying, summarizing and
communicating financial information in a summarized form to various users including
management for their decision making.

Objectives of Financial Accounting

The financial accounting is concerned mainly with the financial affairs of the organization. The
objectives of financial accounting are-

1. To identify and systematically record financial transactions in the books of accounts.

2. To ascertain result of operation by preparing income statement in case of profit seeking
concern or income and expenditure account in case of non-profit seeking concern for a
particular period.
3. To ascertain financial affairs of a concern by preparing balance sheet on a particular
date.
4. To keep cash book scientifically and accurately so that misappropriation of cash can be
controlled.
5. To help owner of the business to take right steps to exercise control over assets and
liabilities of the business.
6. To provide useful information to various interested parties to help them taking right
decision at the right time.
7. To help management in determining and evaluating appropriate management policies to
run business successfully.
8. To help tax authorities for easy determination/settlement of tax.
9. To help testing arithmetical accuracy of accounts by means of preparing trial balance.
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Different types of Accounting

We know accounting is mainly concerned with providing financial information for decision
making by various interested parties. Different branches of accounting came into existence
depending on the purposes for which accounting information is generated and also various target
users of financial information. There are some branches of accounting which are considered
traditional, such as, financial accounting, cost accounting and management accounting and
there are some others, such as, tax accounting, social responsibility accounting, forensic
accounting etc. which have evolved in recent years as a result of specialized requirements of
financial information for other special purposes. Conventionally, accounting is divided into the
following three types:

1. Financial Accounting: Financial accounting is mainly concerned with the recording of

financial transactions, determining profit or loss of business operation for the financial
period and disclosing the financial position of the business on a particular date, usually at
the end of the financial period. Financial accounting is done by following accepted
accounting principles. Financial accounting deals with historical data and as a result, it is
also called historical accounting.

2. Cost Accounting: Cost accounting is that branch of accounting which is concerned with
the ascertainment, control and reduction of cost of manufacturing of products or
providing of services. Thus, cost accounting is mainly used by manufacturing and service
rendering organizations. The cost accounting basically uses costing information and is
based on cost accounting principles. It is intended for use by the management of the
organization.

3. Management Accounting: Management accounting is concerned with the presentation

of accounting information to the management in such a way that it helps managers in
controlling day to day operation of the business and taking appropriate decisions. Thus,
management accounting generates monthly or weekly report based on accounting
information by following various methods and techniques of analysis for use by the
internal users, i.e. management.

In recent years other branches or types of accounting have also emerged. Some of them are -

1. Tax Accounting: Tax accounting is concerned with the calculation of tax liability and
preparation of tax returns. It is governed by tax laws which must be followed by
companies and individuals while preparing their tax returns. Tax accountants suggest
legal ways of minimizing tax liabilities to their clients.
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2. Social Responsibility Accounting: It cannot be denied that business organizations as a

part of the society have some important responsibilities toward the society. Social
responsibility accounting is concerned with accounting and reporting of what benefits an
enterprise is enjoying from the society and in return what it is giving to the society. In
other words, social responsibility accounting tries to find out how the activities of an
enterprise affecting the employees, customers, the community and the surrounding
natural environment.

3. Forensic Accounting: Forensic Accounting is the application of accounting, auditing

and investigative skill to analyze financial information for use in a Court of law. It is
mainly used to investigate fraud and embezzlement. Etc.

Comparison between different types of accounting

Financial Accounting vs. Cost Accounting

Points of Difference Financial Accounting Cost Accounting

Meaning Financial accounting means Cost accounting intends to
recording, classifying and measure cost accurately and
summarizing of transaction also control of cost.
and events measurable in
terms of money and
communicating to various
users.
Objective Main objective is to determine Main objective is to ascertain,
result of operation and present control and reduce cost of
correct financial position of production or providing of
the enterprise. service.
Scope Scope of financial accounting Scope of cost accounting is
is more pervasive than cost limited in comparison with
accounting. financial accounting. It is
mainly intended for use by the
management.
Period Financial statements are There is no pre determined
prepared at the end of the year period for cost accounting. It
covering one financial year. is based on requirement of the
management.
Estimation In financial accounting there is In cost accounting cost is
no place for estimation. All estimated compared with
transactions are recorded actual cost for control
based on actual figures. purpose.
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Financial Accounting vs. Management Accounting

Points of Difference Financial Accounting Management Accounting

Meaning Financial accounting means Management accounting is
recording, classifying and concerned with providing
summarizing of transaction accounting information by
and events measurable in means of various report and
terms of money and statements to the management
communicating to various for their decision making.
users.
Objective Its objective is to provide Its objective is to provide
financial information to
information to internal parties,
mainly external parties. that is, management.
Mandatory It is mandatory It is not mandatory
Format Specified formats for
No specified formats are there
preparing financial statements
in preparing management
are there. accounting report.
Period Financial statements are
There is no fixed period for
prepared at the end of the year
preparing management
covering one financial year.accounting report. The period
depends on the nature and
purpose of the report.
Dependence Financial accounting is not Management accounting has
dependent on management to depend on financial
accounting. accounting.
Measurement nature Quantitative in nature Both quantitative and
qualitative in nature.

Cost Accounting vs. Management Accounting

Points of Difference Cost Accounting Management Accounting

Meaning Cost accounting intends to Management accounting is
measure cost accurately and concerned with providing
also control of cost. accounting information by
means of various report and
statements to the management
for their decision making.
Scope The scope of cost accounting The scope of management
is narrow in comparison with accounting is much broader.
management accounting
Measuring nature It is quantitative in nature. It is both quantitative and
qualitative.
Dependence Cost accounting is not Management accounting
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dependent on management depends on cost accounting

accounting. information.
Basis Cost accounting is based on Management Accounting is
historical information. based on both historical and
predictive information.
Users Both management and Only management.
external parties.
Mandatory It is mandatory for big It is not mandatory.
business houses.

Users of Accounting Information and their information needs:

Accounting information is needed by various users to make their valued decisions
regarding present condition and also future course of action. The various users of accounting
information include investors (both present and prospective), lenders, suppliers and other
trade creditors, employees, customers, management, Governments and their agencies and
public. The information needs of these users are discussed below:

1. Investors: Investors include both present and prospective investors. The present
investors as owner of the enterprise want to know whether the income earned by the
enterprise is satisfactory or not. They need information to assess the ability of
enterprise to pay dividend. They are the internal users of accounting information. The
prospective investors want to know the ability of the enterprise to earn sufficient
profit in future.
2. Lenders: Lenders need information to make them assure that they will get back their
loan amount including interest when become due.

3. Suppliers and other trade creditors: Suppliers and other trade creditors need
accounting information which enables them to determine the ability of the enterprise
to pay their dues in time.

4. Employees: Employees and their unions need information to know whether the
enterprise has ability to pay their remunerations, various employment related
opportunities and retirement benefits. Employees are the internal users of accounting
information.

5. Customers: Customers need financial information to know about whether the

enterprise is selling its products at fair price or not. Whether they should associate
themselves with the enterprise for a long period of time or not.
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6. Management: Management as internal users uses accounting information for their

decision making.

7. Governments and their agencies: Governments and their agencies require financial
information to regulate the activities of the enterprise and determine the taxation
policies.

8. Public: General public use financial information to know about the activities of the
enterprise. They want to know how they are affected by the activities of the enterprise
in terms of job opportunity, prosperity of the locality, patronage of the local suppliers
etc.

Possible Questions:
A. Short Answer Type Questions: (Marks: 2)
1. What is accounting?
2. Write two objectives of accounting.
3. Name four users of accounting information.
4. What are the branches of accounting?
5. Write two differences between financial accounting and cost accounting.
6. Write two differences between financial accounting and management
accounting.
7. Write two differences between cost accounting and management accounting.

B. Medium Answer type Question: (Marks: 5)

1. Write about different branches of accounting.
2. Write about the objectives of accounting.
3. Distinguish between financial accounting and cost accounting.
4. Distinguish between financial accounting and management accounting.
5. Distinguish between cost accounting and management accounting.
6. Write about various users of accounting.
C. Essay Types Question: (Marks: 10)
1. Define accounting. Write different objectives of accounting. Who are the
users of accounting information?

Suggested Readings:

1. Maheshwari & Maheshwari, Advanced Accountancy, Vol.-1, Vikas Publishing House

Pvt. Ltd.
2. Hanif & Mukherjee, Financial Accounting, Tata Mcgraw Hill
3. Debarshi Bhattacharya, Financial Accounting, Lawpoint Publications