Introduction to Accounting

ACCOUNTING AND BOOK KEEPING

Content
Meaning and Definition of Accounting
Attributes (Characteristics) of Accounting
Functions of Accounting
Accounting Process
Book Keeping
Objectives of Accounting
Advantages of Accounting
Limitations of Accounting
Users of Accounting Information
Systems of Accounting
Basis of Accounting

ACCOUNTING AND BOOK KEEPING

MEANING AND DEFINITION OF
ACCOUNTING
Accounting is an art of
 recording,
 classifying and
 summarizing
 in a significant manner and in terms of money,
transactions and events
 which are of a financial character and interpreting
the result.

ACCOUNTING AND BOOK KEEPING

CHARACTERISTICS OF ACCOUNTING
 Transactions and events that are of financial
character are recorded.
 Transactions are recorded in terms of Money.

ACCOUNTING AND BOOK KEEPING

FUNCTIONS OF ACCOUNTING
i) Recording:
 Recording is a process in
which transactions are
recorded in the books of
original entries,
i.e. in Journal Books.
 Journal Book is sub-
divided into subsidiary
books according to the
number of transactions of
particular category.

ACCOUNTING AND BOOK KEEPING

FUNCTIONS OF ACCOUNTING
Cash Book to record cash
and bank transactions.
Cash book may be-:
 Single Column Cash Book
 Two Column Cash Book
 Three Column Cash Book
FUNCTIONS OF ACCOUNTING

ACCOUNTING AND BOOK KEEPING

FUNCTIONS OF ACCOUNTING
ii) Classifying:
 Classification means transactions or entries of one nature are
grouped under one head of account.
 The transactions recorded in ‘Journal’ or the ‘Subsidiary
Books’ are classified or posted to the ‘Ledger Account’.
FUNCTIONS OF ACCOUNTING
 Ledger is the book that contains individual
account heads under which all financial
transactions of a similar nature are collected.
FUNCTIONS OF ACCOUNTING
iii) Summarizing:
Summarizing is presenting the
classified data in a form that is
understandable and useful to
users of accounting information.
It means preparation of Trial
Balance, leading to preparation of
financial statements i.e.
 Trading and Profit and Loss
Account, and
 Balance Sheet.

Profit and Loss Account and

Balance Sheet are collectively
known as’ Final
Accounts or Financial
Statements’.

ACCOUNTING AND BOOK KEEPING

FUNCTIONS OF ACCOUNTING
iv) Analysis and Interpretation:
Analysis and interpretation means
 analyzing and then interpreting the financial data
 to make a meaningful judgment of the profitability
and financial position of the business.
 It helps in planning for the future in a better way.

v) Communicating
 Finally, the accounting function is to communicate
the financial data to the users.

ACCOUNTING AND BOOK KEEPING

ACCOUNTING PROCESS

Financial Transactions or
Events
Communicating to the User

Journal Recording
1. Cash Book
2. Purchase Book
Analysis and Interpretation 3. Sales Book
4. Purchases Return Book
5. Sales Return Book
6. Bills Payable Book
7. Bills Receivable Book
Summarizing 8. Journal Proper
Trial Balance
Trading and Profit and Loss Account
Classifying (Posting into
Balance Sheet.
Ledger)

ACCOUNTING AND BOOK KEEPING

BOOK KEEPING
 Book Keeping is a part of accounting and is
concerned with recording financial transactions
and events in the books of accounts following
accounting concepts and principles.
Thus, Book Keeping is concerned with:
 Identifying financial transactions and events;
 Measuring them in terms of money;
 Recording the financial transactions and
events so identified in the books of accounts;
and
 Classifying recorded transactions and events,
i.e., posting them into Ledger accounts.
ACCOUNTING AND BOOK KEEPING
Difference between Book keeping and Accounting
Basis of
Book Keeping Accounting
difference
In addition to Book Keeping
1) Identify transactions accounting involves :
2) Measuring identified 1) Summarizing classified
transactions transactions,
Scope 3) Recording measured 2) analyzing summarized results,
transactions 3) interpreting analyzed results and
4) Classifying recorded 4) communicating interpreted
transactions information to the interested
parties.
It is secondary stage and begins where
Stage Book Keeping is primary stage
Book - Keeping ends.

Ascertain net results of operations and

Basic Maintain systematic record of
financial position and to communicate
Objectives financial transactions
information to interested parties.

ACCOUNTING AND BOOK KEEPING

Difference between Book keeping and Accounting
Book Keeping is done by Junior Accounting work is performed
Who performs
Staff by senior staff
Accountant is required to
Book Keeper need not have
have higher level of
Knowledge Level higher level of knowledge than
knowledge than that of book -
that of an accountant
keeper
Book - Keeper may or may not An accountant is required to
Analytical Skills
possess analytical skills possess analytical skills
The job of a book keeper is
The job of an accountant is
Nature of Job often routine and clinical in
analytical in nature
nature
Designing of
It does not cover designing of It covers designing of
Accounting
accounts system accounting system.
System
The Book - Keeper does not An accountant supervises and
Supervision &
supervise and check the work checks the work of a book -
Checking
of an accountant. keeper.

ACCOUNTING AND BOOK KEEPING

OBJECTIVES OF ACCOUNTING
 Ascertaining Profit or Loss.
 Ascertaining Financial Position.
 Facilitating Management.
 Providing Accounting Information to Users.

ACCOUNTING AND BOOK KEEPING

ADVANTAGES OF ACCOUNTING
 Financial Information about Business.
 Assistance to Management.
 Replaces Memory.
 Facilitates Comparative Study.
 Facilitates Settlement of Tax Liabilities.
 Facilitates Loans.
 Evidence in Court.
 Assistance in the Event of Insolvency.
 Helpful in settlement of accounts.

ACCOUNTING AND BOOK KEEPING

LIMITATIONS OF ACCOUNTING
1. It is Not Fully Exact.
Accounting is based on evidences but yet estimates are also
made for ascertaining profit or loss. Examples are
 estimating the useful life of an asset,
 market price of closing stock, etc.

2. It Ignores the Qualitative Elements.

Since accounting is confined to monetary matters only,
qualitative elements like
 quality of management
 labour force
 industrial relations
 public relations
 are ignored.
ACCOUNTING AND BOOK KEEPING
LIMITATIONS OF ACCOUNTING
3. It Ignores the Effect of Price Level Changes.
 Accounting statements are prepared at historical cost.
Money, as a measurement unit, changes in value.
 Since Price Level Changes are not considered
 the financial statements do not show correct financial
status.

ACCOUNTING AND BOOK KEEPING

LIMITATIONS OF ACCOUNTING
4. Accounting May Lead to Window Dressing.
The term window dressing means
 manipulation of accounts
 to conceal vital facts
 present better or worse financial position than actual
 In this situation, income statement fails to provide a
true and fair view of the result of operations and
 the Balance Sheet fails to provide a true and fair view
of the financial position of the enterprise.

ACCOUNTING AND BOOK KEEPING

USERS OF ACCOUNTING INFORMATION
Internal Users
 Owners
 Management.
 Employees and Workers.
External Users
 Banks and Financial Institutions.
 Investors and Potential Investors.
 Creditors
 Government and its Authorities.

ACCOUNTING AND BOOK KEEPING

SYSTEMS OF ACCOUNTING
The systems of recording transactions in the books
of accounts are classified into two types:
(a) Double Entry System of Accounting
(b) Single Entry System of Accounting

ACCOUNTING AND BOOK KEEPING

SYSTEMS OF ACCOUNTING
(a) Double Entry System of Accounting
 Double entry system of accounting has two
aspects—
Debit and Credit.
 At the time of recording a transaction,
 it is recorded once on the debit side and
 again on the credit side.

ACCOUNTING AND BOOK KEEPING

SYSTEMS OF ACCOUNTING
For example, at the time of cash purchases, goods
are acquired and in return cash is paid.
In this transaction, two aspects are involved
 receiving goods
 paying cash.
Under the Double Entry System, both these aspects
are recorded.
This system is universally applied in accounting.

ACCOUNTING AND BOOK KEEPING

SYSTEMS OF ACCOUNTING
(b) Single Entry System of Accounting
 Single Entry System of accounting may be defined
as a system, which is an incomplete double entry
system.
 In this system, all transactions are not recorded on
the double entry basis.

ACCOUNTING AND BOOK KEEPING

BASIS OF ACCOUNTING
Transactions are recorded in the books of account
following either
 Cash Basis of Accounting; or
 Accrual Basis of Accounting

ACCOUNTING AND BOOK KEEPING

BASIS OF ACCOUNTING
Cash Basis Of Accounting
Cash Basis of Accounting is a method in which
 income is recorded when cash is received, and
 expenses are recorded when cash is paid out.

ACCOUNTING AND BOOK KEEPING

BASIS OF ACCOUNTING
Cash Basis Of Accounting
Advantages:
1.It is simple as adjustment entries are not required.
2.This approach is more objective as very few
estimates and judgments are required.
3.This basis of accounting is suitable for those
enterprises where most of the transactions are on a
cash basis.

ACCOUNTING AND BOOK KEEPING

BASIS OF ACCOUNTING
Cash Basis Of Accounting
Disadvantages
(i) It does not give a true and fair view of the profit or
loss and the financial position of an enterprise
because
 it ignores outstanding and prepaid expenses,
 accrued incomes and incomes received in advance.
(ii) It does not follow the matching principle of
accounting.

ACCOUNTING AND BOOK KEEPING

BASIS OF ACCOUNTING
Cash Basis Of Accounting
Disadvantages:
(iii) actual cash inflows and outflows are considered.
Therefore there is great possibility of profit
manipulation.

ACCOUNTING AND BOOK KEEPING

BASIS OF ACCOUNTING
Accrual Basis of Accounting
 System of accounting is based on 'accrual
concept'
 Revenue is recognized (recorded) when earned
 Expenses are recognized when incurred.
Under this system
 Income earned and expenditure incurred is
recognised irrespective of cash received or cash
paid.

ACCOUNTING AND BOOK KEEPING

BASIS OF ACCOUNTING
Accrual Basis of Accounting
It is based on two basic accounting principles,
 Revenue Recognition Concept
 Matching Concept

ACCOUNTING AND BOOK KEEPING

BASIS OF ACCOUNTING
Accrual Basis of Accounting
Revenue Recognition Concept
Accounting rule that revenue should be recorded
only when the
(1)revenue generation process has been
substantially completed, and
(2) an exchange has taken place.

ACCOUNTING AND BOOK KEEPING

BASIS OF ACCOUNTING
Accrual Basis of Accounting
Matching Concept
 Fundamental concept of accrual basis accounting
that offsets revenue against expenses on the basis
of their cause-and-effect relationship.
 It requires that, in measuring net income for an
accounting period,
 the costs incurred in that period should be
matched against the revenue generated in the
same period.

ACCOUNTING AND BOOK KEEPING

BASIS OF ACCOUNTING
Accrual Basis of Accounting
Advantages:
(i) It is more scientific compared to Cash Basis
(ii) This basis of accounting shows a complete
picture
(iii) This system discloses correct profit or loss for a
particular period and also exhibits true
financial position of the business on a
particular day.
(iv) It reflects correct profit or loss during the
accounting period

ACCOUNTING AND BOOK KEEPING

BASIS OF ACCOUNTING
Disadvantages:
(i) This system is not as simple as Cash Basis of
Accounting.

(ii) The accounting process under this basis is too

elaborate.

(iii) A quick appraisal of the profit/loss is not possible

because many adjustments are required to ascertain
the true financial position of the business.

ACCOUNTING AND BOOK KEEPING

ACCOUNTING AND BOOK KEEPING