PA R T A : F I N A N C I A L A C C O U N T I N G - 1

Introduction to Accounting CHAP T ER :1

ACCOUNTING
Accounting is a process of identifying, measuring recording, classifying, summarising, analysing interpreting
and communicating the financial business transactions in a useful manner.

Characteristics or Features or Attributes of Accounting

Identification of Financial Classifying
Transactions and Events Summarising
Measurement of Transactions Analysing and Interpreting
Recording Communicating

Branches of Accounting

Financial Accounting Cost Accounting Management Accounting

It deals with maintenance of It deals with accounting which is It deals with accounting
books of accounts to determine concerned with controlling the which is concerned with
profitability and financial cost of products manufactured or decision-making process of
position of the business. services rendered. management.

BOOK-KEEPING, ACCOUNTING AND ACCOUNTANCY

There is a fundamental difference between the three terms.
Book-keeping
Book-keeping is the process of recording the financial transactions and events of a business. It is a part of
accounting and involves.
• Identification of Financial Transactions and Events.
• Measurement of Transactions in terms of money,
• Recording the financial transactions in Journal or Subsidiary Books,
• Classifying them through Ledger.

Accounting
Accounting is a broad term and in addition to Book-keeping, it also includes summarising, interpreting and
communicating the financial data to the interested parties.

Accountancy
Accountancy refers to systematic knowledge of the principles and the techniques, which are applied in
accounting. It has a wider approach than accounting.
 Uses of Accounting
Financial Reporting Stakeholder
Decision-making Internal Control
Planning and Budgeting Auditing
Tax Compliance Legal Compliance
Monitoring Performance Performance Evaluation
Resource Allocation Historical Record keeping

Objectives of Accounting Advantages of Accounting

To maintain systematic record of Provides information about Financial Performance
Business Transactions Provides assistance to Management.
To ascertain Profit or Loss Facilitates Comparative Study
To determine Financial Position Helpful in Raising Loans
To provide information to various users Evidence in Court
To assist the Management Help in Decision Making

Limitations of Accounting
Accounting does not indicate the Realisable Value Ignore the Qualitative information
Ignores Effect of Price Level Changes Affected by Window Dressing

ROLE OF ACCOUNTING IN BUSINESS

Accounting is a process of identifying, measuring, recording, classifying, summarising, analysing, interpreting
and communicating the financial information of the business.
Following points highlighted the role of accounting in business:
• Maintenance of Systematic Records
• Assistance to Management
• Facilities Comparative Study
• Evidence in Court
• Others

Accounting Information
Accounting Information refers to the financial statements prepared through the process of Book-keeping.

Types of Accounting Information

Income Statement Statement of Financial Position Cash Flow Statement

 USERS OF ACCOUNTING INFORMATION
The users may be categorised into Internal Users and External Users.
Internal Users of Accounting Information
• Owners: They need the accounting information to know the profitability and financial soundness of the
business.
• Management: Management needs accounting information to take various decisions.
• Employees: They use the information to assess the ability of the business to pay higher wage.
External Users of Accounting Information
• Banks and Financial Institutions: They need it to ensure safety and recovery of the bank advanced and
regularity of the interest amount.
• Investors and Potential Investors: They are interested in knowing the earning capacity of the business
and safety of the investment.
• Creditors: They need accounting information to ascertain financial soundness and creditworthiness of the
firm.
• Public: Public is interested in the accounting information to know the contribution of business towards the
welfare of the society.

QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION

• Reliability: Accounting intimation must be free from material error and personal biasness and verifiable
• Relevance: Unnecessary and relevant intimation should not be included in financial statements.
• Understandability: Information should be presented in such a manner that users can easily understand it.
• Comparability: Users should be able to make intra-firm and inter-firm companion.

SYSTEMS OF ACCOUNTING
There are main two systems of recording transactions in the book of accounts
• Double Entry System refers to a system of accounting which recognises and records both aspects of a
transaction.
• Single Entry System is a system in which either both aspects of transaction are recorded or only one aspect
is recorded or not recorded at all.

BUSINESS TRANSACTION
Business Transaction is an economic activity of the business, which changes its financial position.
Characteristics of a Business Transaction:
• It brings about a change in the financial position of the firm.
• It involves exchange of goods or services for money consideration.
• A transaction has two aspects a Debit and a Credit of equal amount.
• A transaction may be a cash transaction or a credit transaction.
 ACCOUNT FIXED ASSETS
Account is a summarised record of related Fixed Assets are those Non-Current Assets which
transactions at one place under a particular head. are held for use in the business and are not meant
for resale. Fixed assets are further classified as:
(a) Tangible Assets (b) Intangible Assets
CAPITAL (c) Fictitious Assets
Capital is the amount invested by the owner in the
business.
RECEIPTS
Receipts refer to the amounts received or
DRAWINGS receivable by the business organisation from
Drawings refer to the withdrawal of money and/or
selling assets, goods or services. Receipts are of
goods by the owner from the personal use.
two kinds namely:
(a) Revenue Receipts (b) Capital Receipts
LIABILITIES
Liabilities are obligations or debts that an
enterprise has to pay at some time in the future.
EXPENDITURE
Expenditure refers to the amount spent or liability
Liability can be further classified as: incurred for acquiring assets, goods or services.
(a) Non-Current Liability (b) Current Liability Expenditure can be further classified as:
(a) Capital Expenditure (b) Revenue Expenditure
(c) Deferred Revenue Expenditure
ASSETS
Assets are economic resources of an enterprise,
which can be expressed in terms of money. Assets
REVENUE
Revenue is total amount received or receivable
can be further classified as: from the sale of goods or services.
• Current Assets: Current Assets are those assets
which are held for short term period with the
purpose of converting them into cash within one EXPENSE
year. Expense is the cost incurred by a business in the
• Non-Current Assets: Non-Current Assets are process of earning revenue.
those assets which are held for long term period
in the business and are not meant for resale.
GOODS
Goods refers to the products in which the business
unit is dealing, i.e., goods mean all the items which
INCOME are purchased and sold in the ordinary course of
Income is the surplus of revenue over expenses i.e., business.
it is the profit earned during a period.

STOCK OR INVENTORY
PROFIT Stock or inventory refers to the goods held by a
Profit is the excess of total revenues over total business for sale in the ordinary course of business
expenses of a business enterprise for an or for consumption in the production of goods or
accounting period. Profit is normally categorised services for sale. Stock may be opening stock and
as Gross Profit and Net Profit. closing stock.
 GAIN TRADE RECEIVABLES
Gain is a monetary benefit, profit or advantage Trade Receivables refers to the amount receivable
that arises from transactions, which are incidental for sale of goods sold or services rendered in the
to business. normal course of business. Trade Receivables
include both Debtors and Bills Receivable.

LOSS
Loss is the excess of total expenses over total
revenue. TRADE PAYABLES
Trade Payables refers to the amount payable for
purchase of goods or services taken in the normal
PURCHASES course of business. Trade Payables include both
Purchases refer to the amount of goods bought by Creditors and Bills Payable.
a business for resale or for use in the production.

COST
PURCHASES RETURN Cost is the total expenditure incurred or
When purchased goods are returned to the seller chargeable to a specified product or activity.
due to some reason like not according to
specifications or due to some defect, then it is
termed as Purchases Return. VOUCHER
Voucher is a documentary evidence in support of a
business transaction.
SALES
Sales refer to the amount of goods sold that are
already bought or manufactured by the DISCOUNT
business. Discount is any type of reduction in the price by
the seller to the buyer. It may be of two types:
• Trade Discount: Trade Discount is the rebate
SALES RETURN allowed by the seller at a fixed percentage of the
When sold goods are returned by the purchaser list price.
due to some reason, then it is termed as Sales • Cash Discount: Cash Discount is the rebate
Return. allowed to the buyer for making prompt payment.