u n to

I FNIIIIIIG OBJEC11VES
Di isd a~ .w 1"' eal iles t<4 Mt sh» ...., :d4 Nt
:t ~ -..dD efal b>ts d Aa:o ul0) 9 0 Nt .»e a6. g~
iJ: ~ Cha rade ns~s d ~ a 8uld ilsd kDJ udli llg
~ ~ d~ Q eoat«eeping./ta:o. •:.ga nt1 ~
::J fw»lit:Jrtsd ~ Q Jluw tting 111.L t C N1- 6ilsl "ype s
~ M--agesd~ a o a fA! O.- ._ws M l ~
0 ti1 1lJ D1 Sd ~ 3 Use l5o fAc mu nti ng~
□ Rde dAaD .sm g l;l 8115iness
□ ~ o f AcmunliAg

MEANING AND DEFINITIONS OF ACCOUNTING

Am>unting is a syst ema tic process of recording, clas

sify ing, sum mar isin g., ana lysi ng
and inte rpre ting the financial tran....~ctions and com
mun icat ing the resu lts to the
men ; tbe re(i . The use rs of acro unti ng
info rma tion incl ude own ers, cre di~ ban k anc
fina:nria) ins titu tio~ em plo ~ government, etc.
It gives information on:
(i) the resources ava ilab le;
(ii) how the available reso mce s hav e bee n employe
d; and
{iu) the results achieved by the ir use .

It shows the pro fit ear ned or loss incurred during the
accounting period, value an1
natu re of asse ts, liab iliti es and own ers' equ ity, i.e.,
cap ital
Since accounting is a medium of coDlD.lnnication, it is call
ed the lan gua ge of bus ines?
•A« oun ting is the art of rerording, classifying and
summarising in a signi(icani rnan,,u
and in ter11UJ of money; tron sad ion , and events whi
ch are, in par t at kast, of a {ina.ncu
charoder, and interpreting the results them,(.•
-A me ric an Ins titu te of Cer tifi ed Pub lic Acc ou. nta
n1
"'Accounting is the science of recording and classifying
business transactions an
events, primoril1 of a financial. character, and the art of ma
kins signi(ican.t summ-a,u.
anal,as and interpretations of those tran.saction.s and events and com
remlts to persons who must make decisions or form judgmen mwii.catin.g tJ
t."
-Sm ith and Ashburt1
"Accounting is the pro aa, of identifying. measuring and
comm.unicating econom
information to permit informed judgment.s and decisions
by users of the information
-Am eri can Accounting Auociatio
r ,.2 Double Entry Book Keep/ng-CBsE)(J

- -
- chnrncter1st
The . of ace ounting are:
. ics

Financial Transactions

Results to Users of
Accounting lnfol'ITlatlon

1
A, Ideiati(ication of
Financial 1:rollBact~~~s ~nd Erifiits;.. ,· · , . . ..
' tin.grecor .. . . can b~ measured III terms.
0fccoun This • ds only those transactions and events.which
· · identifying
involves · · · s and events
transaction h d are dPart
f fini that econollUc
b of fir
money. s e . goo s ya m.
activity, for example, Purchase of raw matenal or sale o
2. Measuring the ldenti~ed Tra~acti-Ons .· • ... · ,.. . , •• •,, ·

Financial transacti.ons and events are measured in terms of money. An event which
cannot be measured in terms of money is not recorded in the <•
ho_oks of account.
~
For
r t . ·• , I l · · ) . . Ii • •

example, event like the calibre or' qualio/ Of nianageme

,. 1 ,

nt__team or appointment of a
manager are not recorded in the hoiiks of iiCCOwit. ··
a. Reco~i_ng ~
;· , , • ..... f·
.. • , . f J {• .
·
1 '
' ' , l •

t • • . . • ' ' • I

kcounting is an art of l'eCOrding.b~ess trans8.ctions in .the books of account.

Recording is the Process of l'eCOrding busine~s tr~action s of financial chaJ-acter, i.e.,
transactions measured in money terms, in the hook-of angina} entry, i.e., Journal.
4. Claa,,if;ying · . ,n , , _, " •-.. ,_ .• •. ~ .. , . ·

Classiricatio!l is the ProcesS'of gr<illping tfuisactioriS or of Oiie 'nature at one 'entnes

Place: The tr&iiiiactions ?8Cordec1 in the 'JO~: or th~ 'subsfdiary books !lie classified
or ~te.d,in th~-~ book of accounts knOWU Ila th8 Lecig~r.' Thlii'hook bu individual
account lieada llnder whicli financial transactions related t.o that account are poat.ed
(transr~ ) fro~ Jo11rna1. For exatilple, lnRahul'a Atciouat i:11 the ~ ·a11 liusuied
With Rahul
, , ,;ai1f.P08ted:,1t'
enab)ea to IOli:erta'fu IUiiount dill
transaction
to froni into
entered
RaliuI orsdue Rahul.'
►
I

Introduction to Accounting 13

s. Summarising
This involves presenting the classified dat a in
a ma nne r which is und ~st and abl e and
useful for internal as well as external use rs of fina
ncial stat em ent s. Thi s process lea ds
to the preparation of Trial Balance from which:
(i) Trading and Profit & Loss Account or
Sta tem ent of Pro fit & Loss (in cas e of
Companies), and
(ii) ~alance Sheet are prepared.
The above statements are collectively known as Fin
al Accounts or Fin anc ial Statements.
6. Analysis and Int erp ret atio n
Analysis and inte rpr eta tion of the financial dat
a are car ried out so tha t the use rs of
financial dat a can make a meaningful judgem
ent of the profitability and financial
position of the business.
7. Communicating
Finally, accounting function involves· commu
nicating the financial information, i.~.,
financial stat em ent s, to its users. The accoun
ting ~or ma tio n should be provided in
time to the use rs so tha t appropriate decisions
inay be tak ~n at the app rop riat e time.

OBJECTIVES OF ACCOUNTING

The objectives of accounting are:

1. Ma int ain ing Accounting Records
The objective of accounting is to record financial tran
sactions and events ofthe organisation
in the books of account in a systematic manner
following the principles of accountancy.
•' . . . .
2. De ter min ing Pro fit or Loss . . ,.
, •
I i
i t 'I. I•

~o the r objective of accounting i~ to_determine

whether during the accounting per iod ,
the firm has ear ned profit or has incurred loss
. For this purpose, a statement called
~ Inc om e Sta tem ent or the Tra
ding and Pro fit & Los s Ac cou nt is prepar
Rev enu ~ res ulti ng from the transactions of ed.
~e period are transferred in the credit
and expenses are tran sfe rred in the debit. The
difference between the two sides is
eith er profit or loss. . . .. . . .... . .. _'' : i•
• . .

a. Determining Financial Position

i - ., • '· · '

··· ·
Another objective of accounting is to determ
ine financial position. It is known from
the Balance Sheet, which shows value of the
ass ets_on ~n~ side ~d liabilities on the
oth er side. ~ positio0: of the bu~ in~
_ia as relevant for the users of financial
statem.ewf "i s the incom~ S~t em ent , i.e., Pro
t\t & Loss Account (Statement of Profit
& Lo u, in the case of Co,iu__peniee)• ... ! i \ ... · • ;,
•• u i -
rI . '
M ag em en t
'- F oc ll lt at inll an fte . •n fo rm at io n fo r
Do ub le En try Bo ok

de ci si on -m ak in g, ef
Ke ep ing
-cos€)(,
411

Th an ag er oe nt o n r eq ui re s fi na nc ia l ~ vi de s fi na nc ia l in fo rm at io n tofe .
eu :L bu dg et in g a nd . g A cc ou nt in g pr o ct1v~
fo re ca 1n th is fu nc tio
con . di scha rg~t in g n. a.saiat
t.he m an ag em en t in • In fo rm at io n to U se
5 p, .ovi'dJ,
· .. a A cc ou nt in N rs . .
· .e
ti . •d e ac co
.
h bj ec tiv e of ac co un ng is to pr oV l un ti ng in fo rm at io n to us er s b
Ye t an ot er o h ac .
in te rn al an d ex te rn a I' w ho an al ys e t em co rd in g to th ei r re qu ir em en ts . , ot h
. B us in es s A ss et s
6 .P ro t.e ct in g
.
A no th er objectiv e f cc ou nt .m g is . t ha ve re co rd s
o of as se ts ow ne d b y
o a th
.
Aoeounting m am
f
· ta in s re co rd o as s et s ow ne d by th e b us .
in es s w h ' h e bu si nese
m an ag em en t to ex er . nt ro l an d pr ot ec t th em ic en ab le s th ·
ci se co . e
FU N C TI O N S O F A C
C O U N TI N G
J. M ai nt ai ni ng S ys
te m at ic A cc ou n ti n g
. fu t' R ~ co r~ s .
Th e pn m ar y nc 10n of ac co un ti ng is to m a1 nt .
fi na nc ia l tr an sa ct io ns a1 n sy st em at ic ac co
an d ev en ts . un ti ng re co rd s of
2 . P re pa ra ti on o f F in an ci al S ta te
m en ts o r F in a l A cc
Fi na nc ia l st at em en ts ou n ts
ar e pr ep ar ed at th e
In co m e St at em en t (P en d of t~ e- ac co un ti
ro fi t & L os s A cc ou nt ng pe ri od an d in cl ud
Fi na nc ia l st at em en ts ) an d P os it io n S ta te e
sh ow th e fi na nc ia l pe m en t (B al an ce Sh ee
du ri ng th e ac co un tin rf or m an ce , i.e ., pr of t) .
g ye ar an d th e fi na it ea rn ed or lo ss in cu
en d of th e ac co un tin nc ia l po si ti on , i.e ., rr ed
g ye ar . B ot h th e st at B al an ce S he et as at
ta ki ng de ci si on s. em en ts ar e im po rt th e
an t fo r al l th e us er
s for
a. M ee ti ng L eg al R eq
u ir em en ts
A cc ou nt in g re co rd s ar
e ac ce pt ed as ev id en
sy st em at ic al ly fo llo w ce by th e co ur t of la
in g th e ac co un ti ng pr w if th ey ar e m ai nt ai
as th e C om pa ni es A ct in ci pl es an d co nc ep ne d
, In co m e T ax A ct , G ts . B es id es , th e la w
in th e fo rm an d pe ri od S T A ct , et c. , re qu ir su ch
as is pr es cr ib ed in th e su bm is si on s of re
ac co un tin g re co rd s ar e la w . T he re tu rn s tu rn s
e m ai nt ai ne d sy st em ca n be su bm it te d if
, at ic al ly an d ti m el y. th e
4. C om m un ic at in g th
e F in an ci al In fo rm
It is ye t an ot he r fu nc at io n
ti on of ac co un ti ng to
th e us er s, w hi ch m ay co m m un ic at e th e fi
be in te rn al us er s or na nc ia l in fo rm at io n
em pl oy ee s, go ve rn m ex te rn al us er s, su ch to
en t au th or it ie s, et c. as m an ag em en t, ba
nk s,
5. A ss is ta n ce to M an
ag em en t
M an ag em e? t 0 _ften re
qu ir es fi na nc ia l in fo
re cord 8 w hi ch in tu m rm at io n w hi ch is gi
ve n by th e ac co un tin
sh he lp s th e m an ag em en t in de ci si
thou ld be m ai ntam · d·
e in su eh a m an ne r on -m ak in g. A cc ou nt in
g
e m an ag em en t in pr ot th at th e as se ts ow ne g reco:d
ec ti ng th e as se ts an d ar e kn ow n. It will 8 ssist
d al so ,=. vo ._. .,.;
_: _