Objectives:

 To explain the importanceof Accounting

Accounting
 Definition

 The American Institute of Certified

Public Accountants (AICPA) defines accounting as:
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
financial character, and interpreting the results
thereof.
Meaning:

 Accounting can be defined as a process of reporting, recording,

interpreting and summarizing economic data. The introduction of
accounting helps the decision-makers of a company to make effective
choices, by providing information on the financial status of the business.

 Accountancy act as a language of finance. To understand accounting

efficiently it is important to understand the aspects of accounting
 Aspects of accounting
 Economic Events- It is a consequence of a company has to undergo when the
number of monetary transactions is involved. Such as purchasing new
machinery, transportation, machine installation on-site, etc.
 Identification, Measurement, Recording, and Communication- The accounting
system should be outlined in such a way that the right data is identified,
measured, recorded, and communicated to the right individual and at the right
time.
 Organization-In refers to the size of activities and level of a business
operation.
 Interested Users of Information- It is about communicating important financial
information to the customers, according to which they will make the correct
decision.
 Features of accounting

 (1) Identifying financial transactions and events

 Accounting records only those transactions and events which are of
financial nature.
 So, first of all, such transactions and events are identified.
 (2) Measuring the transactions
 Accounting measures the transactions and events in terms of money which
are considered as a common unit.
 (3) Recording of transactions
 Accounting involves recording the financial transactions inappropriate
book of accounts such as Journal or Subsidiary Books.
 4) Classifying the transactions
 Transactions recorded in the books of original entry – Journal or Subsidiary
books are classified and grouped according to nature and posted in separate
accounts known as ‘Ledger Accounts’.
 (5) Summarising the transactions
 It involves presenting the classified data in a manner and in the form of
statements, which are understandable by the users.
 It includes Trial balance, Trading Account, Profit and Loss Account and
Balance Sheet.
 (6) Analysing and interpreting financial data
 Results of the business are analyzed and interpreted so that users of financial
statements can make a meaningful and sound judgment.
 (7)
Communicating the financial data or
reports to the users
 Communicating the financial data to the
users on time is the final step of Accounting
so that they can make appropriate
decisions.
 Recording- Journal or subsidiary books
 Journal is also known as books of original entry
 Classifying-Ledger
 Trial balance-To identify and rectify the errors
 Summarising- Trading and profit and Loss account, and
Balancesheet
 Interpretation- Get an Idea about the profit or Loss, and
 Financial position of business
International Financial Reporting
Standards ( IFRS )
 IFRS
are a set of Accounting standards set
up by the International Accounting
Standards Board
 Objectives of Accounting
 To maintain a systematic record of business transactions
 Accounting is used to maintain a systematic record of all the
financial transactions in a book of accounts.
 Forthis, all the transactions are recorded in chronological order in
Journal and then posted to principle book i.e. Ledger.
 To ascertain profit and loss
 Every businessman is keen to know the net results of business
operations periodically.
 Tocheck whether the business has earned profits or incurred losses,
we prepare a “Profit & Loss Account”.
 To determine the financial position
 Another important objective is to determine the financial
position of the business to check the value of assets and
liabilities.
 For this purpose, we prepare a “Balance Sheet”.
 To provide information to various users
 Providinginformation to the various interested parties or
stakeholders is one of the most important objectives of
accounting.
 It helps them in making good financial decisions .
To assist the management
By analysing financial data and
providing interpretations in the form
of reports, accounting assists
management in handling business
operations effectively.
 Advantages of Accounting
1. It provides information which is useful to management for making economic
decisions.
 2. It help owners to compare one year’s results with those of other years to
locate the factors which leads to changes.
 3. It provide information about the financial position of the business by means of
balance sheet which shows assets on one side and Capital & Liabilities on the
other side.
 4. It help in keeping systematic and complete record of business transactions in
the books of accounts according to specified principles and rules, which is
accepted by the Courts as evidence.
 5. It help a firm in the assessment of its correct tax Liabilities such as income
tax, sales tax, VAT, excise duty etc.
 6. Properly maintained accounts help a business entity in determining its proper
purchase price.
 Limitations of Accounting
 1. It is historical in nature; it does not reflect the current worth of a business.
 Moreover, the figures given in financial statements ignore the effects of changes
in price level.
 2. It contain only those information which can be expressed in terms of money. It
ignore qualitative elements such as efficiency of management, quality of staff,
customers satisfactions etc.
 3. It may be affected by window dressing i.e. manipulation in accounts to present
a more favorable position of a business firm than its actual position.
 4. It is not free from personal bias and personal judgment of the people dealing
with it. For example different people have different opinions regarding life of
asset for calculating depreciation, provision for doubtful debts etc.
 5. It is based on various concepts and conventions which may hamper the
disclosure of realistic financial position of a business firm. For example assets in
balance sheet are shown at their cost and not at their market value which could
be realised on their sale.
 What are the Different Branches of Accounting?

 Following are the main branches of accounting:

 (a) Financial accounting:
 Financial Accounting is that branch of accounting which involves identifying,
measuring, recording, classifying, summarising the business transactions i.e. it
involves the steps from Identifying, Recording of transactions to Summarisation,
and communicating the financial data.
 (b) Cost accounting:
 Cost Accounting is that branch of accounting which is concerned with the process
of ascertaining and controlling the cost of products or services.
 (c) Management accounting
 Management Accounting is that branch of accounting which is concerned with
gathering and processing information relating to funds, cost, profit etc. to simplify
the decision-making process of management.
Steps of the Accounting Process
 Steps of the Accounting Process
(1) Identification & Recording
 For recording, we use ‘Journal’ or Subsidiary Books.
 (2) Classification of transactions
 Classification means segregation of transactions on the basis of nature and
posting them in a format known as Ledger Account.
 (3) Summarisation
 It includes preparation of Trial Balance and Financial Statements.
 (4) Analysis & Interpretation
 It includes an assessment of the financial reports and making some meaningful
conclusions.
 (5) Communicating information to the users
 It includes sharing the financial reports and interprets results to the users of
financial statements.
Book Keeping – The Basis
of Accounting
 Book keeping and accounting

Book keeping is the record-making phase of accounting

which is concerned with the recording of financial
transactions and events relating to business in a
significant and orderly manner.
Book keeping is the recording phase while accounting is
concerned with the summarizing phase of an
accounting system
 Definition

Book keeping is an art of recording in the books of accounts, the

monetary aspects of financial and commercial transactions.
(NORTHCOTT)

1.Identifying financial transactions and events

2.Measuring them in terms of money
3.Recording the identified financial transactions and events in the
books of accounts
4.Classifying the recorded transactions and events, means posting
them to the ledger
Differences
 Accountancy and Accounting

Accountancy is the systematic knowledge of

accounting. Accounting is the action or process .

 Accounting process is carried out on the basis of the

rules and principles framed by accountancy

 Thusaccountancy is the knowledge of accounting, and

accounting is the application of accountancy
 Users of accounting information
 Users may be categorised into internal users and external users.

 (A) Internal Users

 Owners: Owners contribute capital in the business and thus they

are exposed to maximum risk. So, they are always interested in the
safety of their capital.

 Management: Accounting information is used by management for

taking various decisions.

 .
 (B) External Users

 Employees: Employees are interested in the financial statements to assess

the ability of the business to pay higher wages and bonus
 Banks and financial institutions: Banks and Financial Institutions provide
loans to business. So, they are interested in financial information to ensure
the safety and recovery of the loan.
 Investors: Investors are interested to know the earning capacity of business
and safety of the investment.
 Creditors: Creditors provide the goods on credit. So they need accounting
information to ascertain the financial soundness of the firm.
 Government: The government needs accounting information to assess the
tax liability of the business entity.
 Researchers: Researchers use accounting information in their research work.
 Consumers: They require accounting information for establishing good
accounting control, which will reduce the cost of production.
Qualitative Characteristics of Accounting Information

 Qualitative
characteristics are the attributes of accounting information,
which enhance its understandability and usefulness:
 Reliability:Reliability implies that the information must be free from
material error and personal bias.
 Relevance: Accounting information must be relevant to the decision-
making requirements of the users.
 Understandability: Information should be disclosed in financial
statements in such a manner that these are easily understandable.
 Comparability: Both intra-firm and inter-firm comparison must be
possible over different time periods.
 System of accounting
 There are following two systems of recording transactions in the books of accounts:
 Double Entry System
 Single Entry System
 Double-entry system
 The double entry system is based on the Dual Aspect Principle.
 Every transaction has two aspects, ‘a Debit’ and ‘a credit’ of an equal amount.
 This system of accounting recognises and records both the aspects of the
transaction.
 Single entry system
 Under this system, both aspects are not recorded for all the transactions.
 Either only one aspect is recorded or both the aspects are not recorded for all the
transactions.
 Single entry system

Single Entry System, is the oldest and most

straightforward method of keeping records of
financial transactions
In this system, only one side of the transaction is
recorded, because of the absence of any prescribed
rules and so the records maintained are more or
less incomplete.
What Are the Advantages of the Double-entry System of Accounting?

 Scientific system
 As compared to the other systems, this system of recording
transactions is more scientific and useful to achieve the objective of
accounting.
A complete record of the transaction
 Since both the aspects of transactions are considered there is a
complete recording of each and every transaction.
 Using these records we are able to compute profit or loss easily.
 Checks arithmetical accuracy of accounts
 Under this system, by preparing a Trial Balance we are able to check
the arithmetical accuracy of the records.
 Determination of profit/loss and depiction of financial
position
 Underthis system by preparing ‘Profit & Loss A/c’ we get
to know about the profit earned or loss incurred; &
 Bypreparing the ‘Balance Sheet’ financial position of the
business can be ascertained the i.e. position of assets and
liabilities is depicted.
 Helpful in decision making
 Administrationand management are able to take
decisions on the basis of factual information under the
double-entry system of accounting.
 Importance or,Features ,Advantages of double entry system


Keeps complete record of each transaction:
 Double entry system records all financial transaction by dividing them into three accounts –
personal, real and nominal accounts. Similarly, it records both the aspects of such transactions to
reveal a complete and clear picture of the organization.

Ascertains the result of business organization:
 With the help of double entry system, a profit and loss account can be prepared easily, which helps
to ascertain the results of business operations i.e. profit or loss.

Presents the financial position:
 It helps to prepare balance sheet by providing details assets and liabilities of the business, which
helps to present the financial position of the business.

Checks arithmetical accuracy:
 It helps to check the arithmetical accuracy by preparing a summary report called ‘trial balance’.
 Facilitates comparison:
 Under this system, separate recording is made for each years transactions.
Therefore, it facilitates comparison of one item of one year with similar item
of previous year and helps to know its progress from year to year.

Reduces errors and other irregularities:
 In this system, a transaction is recorded in two places (i.e. accounts).
Therefore, it reduces the possibilities of frauds, errors and manipulation of
accounts.

Reliability:
 Under this system, transactions are recorded in a scientific and systematic
manner; therefore, it provides an authentic record of all the transactions of a
business, which is accepted by the court, tax authorities, etc. as an authentic
documents.