3.

0 Destiny Classes
By Ameesh Sir (PGT)
Email: [email protected]

Introduction to Accounting and Basic Accounting terms

Meaning of Accounting:
Accounting is an art of recording, classifying and summarizing the monetary transactions in an efficient
manner and interpreting the results.

Characteristics of Accounting:
The following attributes or characteristics can be drawn from the definition of accounting:
(1) Identifying financial transactions and events

 Accounting records only those transactions and events which are of financial nature.
 So, first of all, such transactions and events are identified.
(2) Measuring the transactions

 Accounting measures the transactions and events in terms of money which are considered as a
common unit.
(3) Recording of transactions

 Accounting involves recording the financial transactions inappropriate book of accounts such as
Journal or Subsidiary Books.
(4) Classifying the transactions

 Transactions recorded in the books of original entry – Journal or Subsidiary books are classified and
grouped according to nature and posted in separate accounts known as ‘Ledger Accounts’.
(5) Summarising the transactions

 It involves presenting the classified data in a manner and in the form of statements, which are
understandable by the users.
 It includes Trial balance, Trading Account, Profit and Loss Account and Balance Sheet.
(6) Analysing and interpreting financial data

 Results of the business are analyzed and interpreted so that users of financial statements can make a
meaningful and sound judgment.
(7) Communicating the financial data or reports to the users

 Communicating the financial data to the users on time is the final step of Accounting so that they can
make appropriate decisions

Objectives of Accounting:
The main objectives of accounting are:
To maintain a systematic record of business transactions

 Accounting is used to maintain a systematic record of all the financial transactions in a book of
accounts.
  For this, all the transactions are recorded in chronological order in Journal and then posted to
principle book i.e. Ledger.
To ascertain profit and loss

 Every businessman is keen to know the net results of business operations periodically.
 To check whether the business has earned profits or incurred losses, we prepare a “Profit & Loss
Account”.
To determine the financial position

 Another important objective is to determine the financial position of the business to check the value
of assets and liabilities.
 For this purpose, we prepare a “Balance Sheet”.
To provide information to various users

 Providing information to the various interested parties or stakeholders is one of the most important
objectives of accounting.
 It helps them in making good financial decisions.
To assist the management

 By analysing financial data and providing interpretations in the form of reports, accounting assists
management in handling business operations effectively.

Advantages of Accounting:
The following are the main advantages of accounting:
1. Provide information about financial performance

 Accounting provides factual information about financial performance during a given period of time
 Like, profit earned or loss incurred over a period and financial position at a particular point of time.
2. Provide assistance to management

 Accounting helps management in business planning, decision making and in exercising control.
 For this, it provides financial information in the form of reports.
3. Facilitates comparative study

 By keeping systematic records and preparation of reports at regular intervals, accounting helps in
making a comparison.
4. Helps in settlement of tax liability

 Systematic accounting records help in settlement of various tax liabilities. Such as – Income Tax,
GST, etc.
5. Helpful in raising loan

 Banks and Financial Institutions grant a loan to the firm on the basis of appraisal of the financial
statement of the firm.
6. Helpful in decision making

 Accounting provides useful information to the management for taking decisions.

Limitations of Accounting:
Following are the limitations of accounting:

 Accounting is not precise: Accounting is not completely free from personal bias or judgment.
 Accounting is done on historic values of assets: Accounting records assets at their historical cost less
depreciation. It does not reflect their current market value.
 Ignore the effect of price level changes: Accounting statements are prepared at historical cost. So
changes in the value of money are ignored.
 Ignore the qualitative information: Accounting records only monetary transactions. It ignores the
qualitative aspects.
 Affected by window dressing: Window dressing means manipulation in accounting to present a more
favourable position of the business than the actual position.

Users of Accounting Information:

Users may be categorised into internal users and external users.
(A) Internal Users

 Owners: Owners contribute capital in the business and thus they are exposed to maximum risk. So,
they are always interested in the safety of their capital.
 Management: Accounting information is used by management for taking various decisions.
 Employees: Employees are interested in the financial statements to assess the ability of the business
to pay higher wages and bonuses.
(B) External Users

 Banks and financial institutions: Banks and Financial Institutions provide loans to business. So, they
are interested in financial information to ensure the safety and recovery of the loan.
 Investors: Investors are interested to know the earning capacity of business and safety of the
investment.
 Creditors: Creditors provide the goods on credit. So they need accounting information to ascertain
the financial soundness of the firm.
 Government: The government needs accounting information to assess the tax liability of the business
entity.
 Researchers: Researchers use accounting information in their research work.
 Consumers: They require accounting information for establishing good accounting control, which
will reduce the cost of production.

Subfields of Accounting
1. Financial Accounting: The main purpose of this branch is to record the business transactions in a
systematic manner, to ascertain profit or loss and to present the financial position of the business
with the help of a balance sheet.
2. Cost Accounting: The main purpose of cost accounting is to ascertain the total cost and per unit cost
of goods produced and services rendered by business.
3. Management Accounting: The main purpose of this branch is to present the accounting information
in such a way as to assist the management in planning and controlling the operations of business.
Qualitative Characteristics of Accounting Information:
Qualitative characteristics are the attributes of accounting information, which enhance its understandability
and usefulness:

 Reliability: Reliability implies that the information must be free from material error and personal
bias.
 Relevance: Accounting information must be relevant to the decision-making requirements of the
users.
 Understandability: Information should be disclosed in financial statements in such a manner that
these are easily understandable.
 Comparability: Both intra-firm and inter-firm comparison must be possible over different time
periods.

Explain the System of Accounting:

System of accounting

 There are following two systems of recording transactions in the books of accounts:
 Double Entry System
 Single Entry System
Double-entry system

 The double entry system is based on the Dual Aspect Principle.

 Every transaction has two aspects, ‘a Debit’ and ‘a credit’ of an equal amount.
 This system of accounting recognises and records both aspects of the transaction.
Single entry system

 Under this system, both aspects are not recorded for all the transactions.
 Either only one aspect is recorded or both the aspects are not recorded for all the transactions.

Accounting Terms
1. Business Transaction: A Business transaction is an economic activity of business that changes its
financial position.
2. Account: It is a record of all business transactions relating to a particular person or item. It is a T
Shaped proforma.
3. Capital: It refers to the amount invested by the owner in a business. The amount invested could be in
the form of cash, goods, etc.
4. Drawing: Any cash or goods withdrawn by the owner for personal use made out of business funds
are known as drawings.
5. Profit: It is the excess of total revenue over total expense of a business. Profit =Revenue-Expenses.
6. Loss: The excess of expenses over related revenue is known as loss. Loss= Expenses-Revenue.
7. Gain: It is a monetary benefit resulting from events or transactions which are incidental to business
like profit on sale of fixed assets.
8. Stock: It includes goods unsold on a particular date.
9. Purchases: It refers to the amount of goods bought by business for resale or use in production.it can
be of cash or credit.
10. Purchase return: When purchased goods are returned to suppliers, it is referred to as purchase return.
11. Sales: It means transfer of goods or services for money in the normal course of business.
12. Sales return: When customers return the goods sold to them it is known as sales returns.
13. Debtors: It refers to those persons whose business has been sold goods on credit and payment has not
been received yet.
14. Creditors: It refers to those persons whose business buys goods on credit and payment has not been
done yet.
15. Voucher: A voucher is a written document which is created in support of a particular transaction. It
may be in the form of a cash memo, invoice or receipt. Voucher is a necessary component of
auditing.
16. Income: It is the difference between revenue and expense.
17. Expense: It is the amount used in order to produce and sell goods and services.
18. Discount: It is the rebate given by the seller to the buyer. It is of 2 types: Cash Discount and Trade
Discount.
19. Cash Discount: When discount is allowed to customers for making prompt payment.It is always
recorded in books of accounts.
20. Trade Discount: This is a type of discount allowed by the sellers to their customers at a fixed
percentage on the list price of goods. and also it is not entered in the books of accounts.
21. Bad Debts: It refers to the amount that debtor has not paid even after repeated reminders and has no
intention of paying in the future.
22. Assets: An asset is a resource with economic value that an individual, corporation, or country owns
or controls with the expectation that it will provide a future benefit. Assets can be classified as
current, fixed, financial, or intangible.
23. Liabilities: it refers to financial obligations of business.it denote the amount which a business owes
to others. Ex- Creditors, loan, etc. It is of 2 types;
1. Non current liabilities: It refers to those which fall due for payment in a relatively longer period. For
ex- long term loans.
2. Current liabilities: It refers to those which are to be paid in the near future. Ex-Creditors,
Outstanding expenses.

24. Expenditure: It involves spending cash or incurring a liability for the purpose of acquiring assets,
goods or services. It is of 3 types.
1. Revenue Expenditure: It refers to any expenditure, the full benefit of which is received during one
accounting period.ex-salaries,rent.
2. Capital Expenditure: It refers to expenditure, the benefit of which is received during more than one
year. Ex- Machinery.
3. Deferred Revenue Expenditure: It refers to expenditure which are revenue in nature but benefit of
which is likely to be derived over no of years. Example-Advertisement.

3.0 Destiny Classes

By Ameesh Sir (PGT)
Email: [email protected]