Introduction to Accounting

Meaning of Accounting

 Accounting, as an information system is the process of

identifying, measuring, communicating the economic
information of an organization to its users who need the
information for decision making.
 Thus accounting covers – Identifying, Measuring,
Recording, Classifying, Summarizing, Analyzing,
Interpreting and Communicating.
Accountancy, Accounting and Book-keeping

 Accountancy refers to a systematic knowledge of accounting. It explains ‘why

to do, and ‘how to do’ of various aspects of accounting. It tells us why and
how to prepare the books of accounts and how to summarize the accounting
information and communicate it to the interested parties.
 Accounting refers to the actual process of preparing and presenting the
accounts. In other words, it is the art of putting the academic knowledge of
accountancy into practice.
 Book keeping: Book keeping is a part of accounting and is concerned with
record keeping or maintenance of books of accounting which is often routine
and clerical in nature.
Definitions

 Definition by the American Institute of Certified Public

Accountants (Year 1961):
 “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”.
 Definition by the American Accounting Association (Year
1966):
 “The process of identifying, measuring and communicating
economic information to permit informed judgments and decisions
by the users of accounting”.
 Meaning of an Accounting cycle

 Step 1- Journalising – Record the transactions in the journal

 Step 2 – Posting : transfer the transactions ( recorded in the journal), in the respective accounts opened
in the Ledger.

 Step 3- Balancing: Ascertain the difference between the total of debit amount column and the total of
credit amount column of a ledger account.

 Step 4- Trial Balance: Prepare a list showing the balances of each and every account to verify whether
the sum of the debit balances is equal to the sum of the credit balances.

 Step 5- Income statement: Prepare Trading and profit and Loss Account to ascertain the profit or loss
for the accounting period.

 Step 6- Position Statement (i.e Balance sheet) Prepare the Balance Sheet to ascertain the financial
position as at the end of accounting period.
Users of Accounting information and their needs
Users of Accounting information and their
needs
 Nature of Accounting
 1) Accounting as a service activity

 Accounting is a service activity. Its function is to provide quantitative information,

primarily financial in nature, about economic entities that is intended to be useful in
making economic decisions, in making reasoned choices among alternative courses of
action. It means that accounting collects financial information for the various users for
taking decisions and tackling business issues. Accounting in itself cannot create
wealth though, if it produces information which is useful to others, it may assist in
wealth creation and maintenance.
 (2) Accounting as a profession
 Accounting is very much a profession. A profession is a career that involve the acquiring of a
specialised formal education before rendering any service. Accounting is a systematized body of
knowledge developed with the development of trade and business over the past century.
 The accounting education is being imparted to the examinees by national and international
recognised the bodies like The Institute of Chartered Accountants of India (ICAI), New Delhi in
India and American Institute of Certified Public Accountants (AICPA) in USAetc. The candidate
must pass a vigorous examination in Accounting Theory, Accounting Practice, Auditing and
Business Law.
 The members of the professional bodies usually have their own associations or organisations,
where in they are required to be enrolled compulsorily as Associate member of the Institute of
Chartered Accountants (A.C.A.) and fellow of the Institute of Chartered Accountants (F.C.A.). In
a way, accountancy as a profession has attained the stature comparable with that of lawyer,
medicine or architecture
 (3) Accounting as a social force
 In early days, accounting was only to serve the interest of the owners. Under the changing
business environment the discipline of accounting and the accountant both have to watch
and protect the interests of other people who are directly or indirectly linked with the
operation of modern business.
 The society is composed of people as customer, shareholders, creditors and investors. The
accounting information/data is to be used to solve the problems of the public at large such
as determination and controlling of prices. Therefore, safeguarding of public interest can
better be facilitated with the help of proper, adequate and reliable accounting information
and as a result of it the society at large is benefited.
 (4) Accounting as a language
 Accounting is rightly referred the "language of business". It is one means of reporting
and communicating information about a business. As one has to learn a new language to
converse and communicate, so also accounting is to be learned and practised to
communicate business events.
 (5) Accounting as science or art
 Science is a systematised body of knowledge. It establishes a relationship of cause and
effect in the various related phenomenon. It is also based on some fundamental
principles. Accounting has its own principles e.g. the double entry system, which
explains that every transaction has two fold aspect i.e. debit and credit. It also lays down
rules of journalising. So we can say that accounting is a science.
 (6) Accounting as an information system

 Accounting discipline will be the most useful one in the acquisition of all the business knowledge
in the near future. You will realise that people will be constantly exposed to accounting
information in their everyday life.

 Accounting information serves both profit-seeking business and non-profit organisations. The
accounting system of a profit-seeking organisation is an information system designed to provide
relevant financial information on the resources of a business and the effect of their use.
Information is relevant and valuable if the decision makers can use it to evaluate the financial
consequences of various alternatives.
Advantages of Accounting

 Facilitates to replace memory

 Facilitates to comply with legal requirements
 Facilitates to ascertain net result of operations
 Facilitates to ascertain financial position
 Facilitates the users to take decisions
 Facilitates a comparative study
 Assists the management
 Facilitates control over assets
 Facilitates the settlement of tax liability
 Facilitates the ascertainment of value of business
 Facilitates raising loans
 Acts as legal evidence.
Limitations of Accounting

 Ignores the qualitative elements

 Not free from bias
 Estimated position and not real position
 Ignores the price level changes in case of financial statements prepared on
historical costs
 Danger of window dressing
Branches of Accounting

 1. Financial Accounting: It is the original form of accounting. It Is mainly

confined to the preparations of financial statements for the use of outsiders like
shareholders, debenture holders, creditors, banks and financial institutions. The
object of financial accounting is to ascertain the results (profit or loss) of business
operations during the particular period and to state the financial position (balance
sheet) as on a date at the end of the period.

 2. Management Accounting: It is accounting for the management i.e. 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 applications of professional information of policies
in the planning and control of the operations of the undertaking”.
 3. Cost Accounting: The object of cost accounting is to find out the cost of goods
produced or services rendered by a business. It also helps the business in
controlling the costs by indicating avoidable losses and wastes. Cost accounting is
concerned with the application of costing principles, methods and techniques for
ascertaining the costs with a view to controlling them and assessing the
profitability and efficiency of the enterprise.

 4. Social Responsibility Accounting: Social responsibility accounting is a new

phase in the development of accounting and owes its birth to increasing social
awareness which has been particularly noticeable over the last two decades or so.
Social responsibility accounting widens the scope of accounting by considering
the social effects of business decisions; in addition to the economic effects..
Basic Accounting terminology

 Entity
 Event
 Transaction
 Voucher
 Entry
 Assets - Current Assets- fixed assets (tangible & intangible)
 Liabilities – (current liabilities and long term liabilities)
 Capital
 Drawings
 Purchases
 Sales  Income
 Stock  Expenses
 Trade debtors  Gains
 Trade creditors  Losses
 Receivables  Revenue
 Payables  Net profit
 Expenditure  net loss