INTRODUCTION TO ACCOUNTING

Need for Accounting

⮚ Accounting is a systematic record of financial transactions of a business. a businessman always

starts business with the profit motive.
⮚ Accounting is helpful in maintaining record of each and every transaction.
⮚ To know the financial strength of the business
⮚ To know the profitability of the business.
⮚ It provides useful information to the users.

What is Accounting?

It is the language of a business. It is used to record the financial transactions in the books of accounts
and to communicate the accounting information to its users.

Accounting is the process of identifying, measuring, recording, classifying, summarising, analysing and
interpreting and communicating accounting information to its users.

Definition of Accounting

“Accounting is the art of recording, classifying and summarising 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
results there of.”

Characteristics of Accounting

1. Identifying and measuring the financial transactions: accounting records only those
transactions and events which can be measured in terms of money or which are of a financial
character.
2. Recording: this is the basic function of accounting it is essentially concerned with ensuring that
all business transactions of financial characters are recorded in an orderly manner. It is done in a
book called journal which can be further divided into various subsidiary books such as cash
journal purchase journal sales journal etc.
3. Classifying: it is concerned with the systematic analysis of the recorded data, with a view to
group the transactions or entries of one nature at one place. Classification is done in a book
which is termed as letter.
4. Summarising: this involves presenting the classified data in a manner which is understandable
and useful to the internal as well as external end users of accounting statement. this process
leads to the preparation of following statements
● Trial balance
● Income statement
● Balance sheet
5. Analysis and interpretation: this is the final function of accounting. they 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. It is also used for
preparing the future plants and framing of policies for executives such plants.

1
6. Communication: the accounting information after being meaningfully analysed and interpreted
has to be communicated in a proper form and manner to the proper users.

Objectives of Accounting

1. To keep systematic record: the main objective of accounting is to record all financial
transactions systematically. There are large number of transactions in a business and it is
very difficult for human beings to remember all the transactions. Does, systematic recording
of transactions is helpful in maintaining large volume of data in easily accessible format.
2. To ascertain the operational profit or loss: As we know the main aim of businesses to earn
profit and profit can be easily calculated by preparing income statement.
3. To ascertain the financial position of a business: at the end of the accounting, to know the
financial position of a business, the balance sheet is prepared for this purpose. In the
balance sheet all assets and liabilities are shown. The financial position of a business can be
ascertained by comparing these assets and liabilities.
4. To facilitate rational decision-making: Accounting provides important information to the
management for effective decision making. Accounting is helpful in knowing the actual
profit of the business as well as assets and liabilities of the business, which is helpful in
knowing the financial position of the business.
5. To provide information to the interested parties: The financial accounting information is
equally important to the internal and external users. These users may be investors,
government, creditors, employees, researchers etc.

Advantages of Accounting

1. Provides complete and scientific record: Accounting is meant to maintain the complete
record of financial transactions during the accounting period of an entity as such the
limitation of human memory is no handicap because of accounting system.
2. information regarding performance and position accounting cycle after recording
moves on to prepare final accounts which reveal how much profit has been earned or
loss suffered during the period ?under this system balance sheet is also prepared which
tells the financial position of a business on that date.
3. Enables comparison of costs: Expenses, sales and profits of the business related to
current year are compared with previous years and also with other units of the same
trade or industry.
4. Helps in complying with legal formalities: Nowadays business is to deal with the tax
regulating authorities like income tax. These require filing of periodic returns and
submitting proof of activities. Records maintained under accounting system helps in
preparing such returns. also such records when audited are trusted by the authorities
5. Evidence in legal matters: Properly maintained accounts, supported by authentic
documents can be produced as a proof of matters and are likely to be admitted by the
courts as evidence.

2
Limitations of Accounting

1. No record of important non-monetary information: Accounting takes into consideration only

monetary transactions. A transaction however important will not be recorded in the books if it
cannot be expressed in monetary terms. Hence greatest limitation of accounting is the
consideration of only monetary transactions.
2. Window dressing: Sometimes information given by accounting is not true and faithful or may
be manipulated by the accountants. When accounts are manipulated and present the
accounting information to show the better position of the business than the actual position, it is
known as window dressing. In such a situation, results provided by the accounting information
are not true and fair and do not show the actual financial position of the business.
3. No consideration of price level changes: The most serious limitation of accounting is adoption
of historic cost concept for recording various assets irrespective of subsequent changes in their
prices.
4. Analysis of past records: Accounting provides information at the end of the accounting. In the
form of annual accounts such information at the best is only of historical nature and cannot be
used to take corrective action. The business requires timely information at frequent intervals to
help the management to make plants and take corrective measures. But the accounting is not
supposed to supply such information at shorter intervals than one year.

Branches of Accounting

1. Financial accounting: The object of financial accounting is to ascertain the results of the
business operations during the particular. And to state the financial position as on date at the
end of the period.
2. Cost accounting: The object of cost accounting is to find out the cost of goods produced and
services rendered by a business. It also helps the business in controlling the costs by indicating
avoidable losses.
3. Management accounting: The object of management accounting is to supply relevant
information at appropriate time to the management so that they can take important decision
and control effectively.
4. Social responsibility accounting: It is the accounting for social cost incurred by the enterprise
and social benefits created.
5. Human resource accounting: It aims at the identification and reporting of investment made in
human resources of an enterprise, these are not presently accounted for under conventional
accounting practises.

Meaning of Book-keeping

It is that Part of knowledge which is concerned with keeping records of financial transactions in a
systematic manner.

Definition of Book-keeping

Book-keeping as the science and art of correctly recording in the books of accounts all those
business transactions that result in the transfer of money or money's worth.

3
 Advantages of Book-keeping

1. A permanent record of all transactions can be made.

2. The net result of business activities during a particular. Can be correctly ascertained.
3. At any point of time, the true financial position of the business can be determined which
facilitates sale or purchase of the business.
4. Book-keeping record provides a great help to management in taking important decisions
and in controlling the business efficiently.
5. Adequate financial information is made available for legal and tax purposes.

Difference between bookkeeping and accounting

Basis Book-keeping accounting

Nature It is concerned with identifying, It is concerned with

measuring, recording and summarising, interpreting and
classification of business communication of financial
transactions in journal in a information to its users.
sequence.

Stages It is the first stage. It in fact starts where book-

keeping ends.

Responsibility It is done by a junior staff it is performed by senior staff

whose responsibility is less. like accountant and accounts
officer whose responsibility is
more

Nature of knowledge required It does not require special It requires a special technical
knowledge and ability. knowledge and ability.

Meaning of Accountancy

Accountancy refers to the entire body of the theory and practise of accounting.

Accountancy is a systematic knowledge of accounting. It is the process of communicating financial

information about the business entity to its users. The communication is generally in the form of
financial statements that show in monetary terms the economic resources under the control of
management, the art lies in selecting the information that is relevant to the user and is reliable.

Difference between Book-keeping, Accounting and Accountancy

Book-keeping Accounting Accountancy

it is maintained by junior staff it is maintained by senior staff accountancy is maintained by

professionals

it is the primary stage it is the secondary stage it is the complete process

4
 which includes both
bookkeeping and accounting

it is concerned with recording it is based on book-keeping It is helpful in decision-making

of day to day transactions

It is concerned with It is concerned with it refers to the entire body of

identification, recording and summarising, interpretation and theory and practise of
classification of financial communication of financial accounting.
transactions results

Accounting as a source of information

Accounting is a service activity. Its function is to provide qualitative information, primarily financial in
nature, about economic entities that is intended to be useful in making economic decisions. -
Accounting principles board

The main function of accounting is to provide qualitative information, primarily financial in nature,
about economic entities that is intended to be useful in making economic decisions. - American Institute
of certified public accountants

Types of Accounting Information

1. Information related to profit: Trading account prepared by a firm provides information about
gross profit or loss. Profit and loss account provides figures of net profit or loss made by the firm
during an accounting. Information provided by trading account and profit and loss account is
used by its users for decision-making and to know the profitability and efficiency of the business.
2. Information related to financial position: Accounting information is useful in assessing the
financial position of a business. Financial position of a business can be judged through the
balance sheet prepared by the business. It provides information about the assets and liabilities
of a business at the end of the accounting, which is helpful in knowing the financial strength of
the business.
3. Information about earning capacity and efficiency: Accounting information indicates about the
earning capacity and ability of management to utilise resources effectively in meeting its
objectives. It also provides information about cash flows of a business during an accounting
year.

Qualitative characteristics of Accounting Information

1. Reliability: Accounting information is said to be reliable, when it is free from personal bias
and based on facts or some evidence. It should be verifiable and free from errors and
faithfully presents what it is meant to represent.
2. Relevance: Information should be relevant and helpful for the decision-making.
Unnecessary and irrelevant information should not be given.
3. Understandability: Accounting is known as the language of business. The task of learning
accounting is essentially the same as task of learning a new language. Accounting
information should be relevant and useful and it should be presented in such a manner that

5
 it is easily understood by the users. If any information is relevant but not presented
correctly or in a very difficult manner, it will miss guide the user and it will create confusion
and conflict.
4. Compatibility: It is not necessary that one accounting information is relevant and reliable at
the same time. Accounting information is set to be useful when it is compatible with
another period, to know the progress of an enterprise. It should be prepared and presented
in such a manner that it should be compatible with the previous years and should be
compatible with in two same businesses.

Role of Accounting

1. Role of language: Accounting is known as the language of business, because it is through

accounting that various transactions recorded by a bookkeeper are analysed and interpreted
and the results are communicated to the concerned parties. Accounting serves as a source of
communication.
2. Role of historical records: Accounting records all transactions in the order they happen.
Accounting provides information of profit and loss and financial position of the business at the
end of each accounting. All information provided by accounting are historical in nature.
3. Role of information system: The main function of accounting is to provide the important and
useful information to the users. Accounting provides important information to the investors and
creditors in taking decisions relating to investments and lending.
4. Role of determining the profit or loss and financial position of a business: Accounting gives
information about profit or loss and the financial position of the business. The basic function of
accounting is to provide meaningful information about the financial activities of the business to
its users.