BASICS OF ACCOUNTING

Dr. Rupali Gupta

Through To Do

To do something through something is a

transaction.
For an action to be called as transaction at
least two parties are required.
Any transaction which
involves money is called
financial transaction.
 ACCOUNTANCY

BOOK-KEEPING ACCOUNTING

Identifying Measuring Recording Classifying

Books of
Financial Original Books of
Transactions Entry/ second
In terms of entry/
Journal
money Ledger
 Computer A/c
Ledger
Whenever I Whenever I Book
purchase a sale a
computer, will be computer, will
posted in LHS be posted in
RHS Ram A/c

Whatever I Whatever
pay to RAM purchase
from RAM

Shyam Ac/c

Whenever we transact with a party for

first time, we will open account in
his/her name
=> This is called as Opening of a new
account
Book Keeping
Is mainly concerned with record keeping or maintenance of books of accounts. The
maintenance of books of accounts includes the following four activities:

1. Identifying the transactions of financial nature from among the various

transactions

2. Measuring the identified transactions in terms of money

3. Recording the identified transactions in terms of original entry/ Journal

4. Classifying them: classification is done in what is called Ledger in the forms of

Accounts

Account-
In actual practice, the individual transactions of Ledger
like nature are recorded, added and subtracted at Ledger is the book containing
one place. Such a place is customarily called as various accounts (A/c)

ACCOUNT (A/c)
 ACCOUNTANCY

BOOK-KEEPING ACCOUNTING

Identifying Measuring Recording Classifying

Financial In terms of Books of Books of

Transactions money Original Entry/ second
Journal entry/Ledger

Summarizing Analyzing
and Communicating
Interpreting
Trial Trading & Balance
Balance P/L Account Sheet
 Accounting Means Simply to Explain

Accounting starts where book-keeping ends. It includes following three activities:

1. Summarizing : the classified transactions. Summarizing is one in the following

forms.
(a) Trial Balance
(b) Trading and P/L Account
(c ) Balance Sheet

2. Analyzing and Interpreting the summarized results : this is done through a number
of techniques such as : ratio analysis, funds flow, cash flow analysis, trend analysis,
comparative balance sheet, common size statements, etc.

3. Communicating the information to the interested parties through reporting and

disclosures.
However, in actual practice, Accounting includes book-keeping function also.

Therefore, accounting can be defined as :

“Accounting is systematic process of identifying, measuring, recording,

classifying, summarizing, analyzing, interpreting and communicating
financial information.”

NOTE: Any kind of non-financial information is out of the cope of accounting.

The American Institute of Certified Public Accountants has defined accounting as

“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 thereof”.

Accounting is also called the language of business

 ACCOUNTANCY

BOOK-KEEPING ACCOUNTING

Identifying Measuring Recording Classifying

Financial In terms of Books of Books of

Transactions money Original Entry/ second
Journal entry/Ledger

Summarizing Analyzing
and Communicating
Interpreting
Trial Trading & Balance
Balance P/L Account Sheet
 ACCOUNTANCY

Accountancy refers to systematic knowledge of Set of guidelines /rules

accounting concerned with principles and according to which the
techniques which are applied in Accounting. It tells function of book-keeping
us the following: and accounting is
performed.
• How to prepare books of accounts

• How to summarize the accounting information

• How to communicate it to the interested

parties.
 Reliability
(the information should be capable
enough to make a difference n
decision making)

Relevance
(information is verifiable, factual
and neutral)
Qualitative Characteristics
of Accounting Information
Understandability
(it should be understandable by
interested parties)

Comparability
(information can be used to
compare different entities)
Objectives of Accounting / Financial Accounting

Systematic record of transactions

Ascertainment of working results

Disclosure of financial results

Providing data/ information to various interested

parties
Need for Financial Accounting

• Business Forecasting
• Decision Making
• Ascertaining Profit & Loss
• Ascertaining financial position
• Helping in Solving Business Disputes
• Correct Taxation
• Understanding Liquidity
• Proper Payments and Receipts
• Compliance of Statutory Provision
• Facilitates raising of finance
 Limitations of Accounting

• Provides only information which is historical in nature.

• Financial accounting does not provide cost and profitability
information department wise, product wise it gives the results of
the whole business.
• Does not provide information to analyze losses due to
inefficiencies and wastages.
• Financial accounting fails to reveal the behavior of costs which
are essential for control purpose.
 COST ACCOUNTING

Terminologies to understand:

• Cost

• Costing

• Cost Accounting

• Cost Accountancy
 COST

Cost is measurement in monetary terms of the amount of

resources used for the purpose of production of goods or
rendering services.

According to ICMA, London, “ The amount of expenditure

incurred on or attributable to a specified thing or activity is
called cost.”
 COSTING

“The technique and process of ascertaining cost is known as costing.”

Costing relates to the determination of the cost of a product manufactured

or services rendered. In order to ascertain the cost, it involves system,

methods and techniques of accumulation, classification and analysis of costs.

Techniques refers to principles and methods which are applied for

ascertaining costs.

Example: The cost of manufacturing a product ,e.g., motor car, furniture,

chemical, steel ,paper.. The cost of providing a service, e.g., electricity,
transport, etc.
 Cost Accounting

Cost accounting is the process of accounting for cost from the point at which
expenditure is incurred or committed to the establishment of its ultimate
relationship with cost centers and cost units.

Cost accounting is the method of accounting for total cost and per unit cost of
product, service, process or job.

Cost comprises three elements viz. material, labor and expenses.

The recording and accounting for all these elements of costs find their treatment
is cost accounting.
 Cost Accountancy

Cost accountancy is application of costing and cost accounting principles, methods

and techniques to the science, art and practice of cost control and the
ascertainment of profitability. It includes the presentation of information derived
therefore for the purpose of managerial decision making.

The term Cost Accountancy Includes

(i) Costing (ii) Cost Accounting

It’s Purposes Are:

(i) Cost Control (ii) Profitability Ascertainment

Cost control does not necessarily mean cost reduction. If the prices of
materials and labour go up and consequently the operations costs goes up,
the cost can be said to be within control, even with the increased cost
provided there is no abnormal wastage or greater idle capacities or any
marked inefficiency.

Profitability is different from Profit-making. Profitability is the potentiality to

make profit inherent in the business, or in an enterprise.

 Functions/ Objectives of Cost Accounting

• Cost Ascertainment : Cost of each unit of production ,job, process or

department etc. is ascertained
• Cost control
• Cost reduction (Cost accounting aims at improving profitability by
controlling and reducing costs)
• Ascertainment of profitability
• Determination of selling price
• Providing basis for business policy and decision making (Serves the
needs of management, for managerial decisions like make or buy,
selling below cost.)
• Compliance to statutory requirements
 Cost Centre

• For the purpose of ascertaining cost ,the whole organization is divided

into small parts or sections.
• Each small section is treated as a cost centre of which cost is
ascertained.
• A cost centre is defined by CIMA as a location ,person, or item of
equipment (or group of these ) for which costs may be ascertained and
used to which cost can be charged.
• Thus a cost centre refers to section of business to which costs can be
charged. It may be a location (a department, a sales area),an item of
equipment (a machine ,a van), a person (a salesman, a machine
operator)
The main purpose of ascertaining the cost of a centre is cost control.

Cost center's are primarily of two types

• Personal cost centre – which consists of persons or group.

• Impersonal cost centre - which consists of a location or an item of

equipment.

From functional point of view cost centre is of two types

• Production cost centre- where actual production work takes place.eg-

weaving department in textile mill, cane in sugar mill.

• Service cost centre – where service rendered to production cost

center's. eg.- powerhouse ,tool room , stores department.

 Cost Unit
A cost unit is defined by CIMA , ‘unit of product or service in relation to which
costs are ascertained’

Eg. – In sugar mill the cost per ton of sugar may be ascertained
Thus a ton or sugar are cost units.

Cost units can be of two types.

Units of production – ream of paper, tons of steel, meter of cable.

Units of service- cinema seats ,consulting hours.

Industry /business -Cost Unit

Cement-ton
Bricks-1000 bricks
Soft drinks-crate of 24 bottles 12 bottles
Hospital- bed per patient
Electricity-kilowatt
Transport -kilometre
Financial Accounting VS.
Cost Accounting
 Financial Accounting Cost Accounting

Purpose Its main purpose is to prepare profit & loss The main purpose of cost accounting is
account & balance sheet for reporting to to provide detailed cost information to
owners or shareholders & other outside management i.e. internal users
agencies
i.e. external users & Internal users
Statutory These accounts have to be prepared Maintenance of these accounts is
requirements according to the legal requirement of voluntary except in certain industries
Companies Act &Income Tax Act. where it has been made obligatory to
keep cost records under Companies Act.

Analysis Financial accounts reveal the profit & loss Cost accounts show the detailed cost &
of the business as a whole for a particular profit data for each product line ,
period. It does not show the figures of cost department, process etc.
& profit for individual products,
departments & process.
Periodicity of Financial reports are prepared periodically, Cost report is a continuous process and
reporting usually on as annual basis. may be daily,weekly,monthly.
 Financial Accounting Cost Accounting

Control It lays emphasis on the recording of It provides for a detailed system of

Aspect financial transactions and does not attach control with the help of certain special
any importance to control aspect. techniques like standard costing and
budgetary control.

Historical & It is concerned almost exclusively with It is concerned not only with historical
predetermine historical records .The historical nature of records but also with predetermined
d costs financial accounting can be easily costs. This is because cost accounting
understood in the context of purposes for does not end with what has happened
which it was designed. in the past & extends to plans & policies
to improve performance in the future.
Types of FA records only external transactions like CA not only records external
transactions sales , purchases , receipts, etc. with transactions but also internal or inter-
recorded outside parties. departmental transactions like issue of
materials by store keeper to production
department.
 Financial Accounting
Types of Financial accounting prepares general
statements purpose statement like P& L account & B.S.
prepared That is to say, financial accounting must
produce information that is used by many
classes of people ,none of whom have
explicitly defined informational needs.
Cost Accounting
Cost accounting generates special
purpose statements & reports like
reports on Loss of materials,
Variance report, idle time report,
etc.
 Management Accounting
It is the application of professional skills and knowledge in the preparation of
financial and accounting information in a manner in which it will assist the
internal management in the formulation of policies, planning and control of
the operations of the business.

The basic function of management accounting is to help management in

making correct and quality decisions. There is no fixed structure or format or
set.

Financial accounting, costing, business analysis, economics, are some of the

tools and techniques of management accounting.

The only need of management accounting is that the data should serve its
purpose which is to help management take important business decisions.
Management accounting is the process of identification, measurement, accumulation,
analysis, preparation, interpretation and communication of information by manager
and to plan, evaluate and control within an organisation and to assure for
accountability for use of its resources.

Some Principle Tasks or Management Accounting are:

• Planning
• Controlling business operations
• Organizing
• Decision making
• Performance evaluation
• Capital projects
• Identifying business problem areas
• Understanding financial data
• Other roles
 LIMITATIONS of Management Accounting

• Inaccuracy in past data will lead to inaccuracy in decisions suggested

by management accountants.

• Some problems cannot be expressed in terms of money. As such

these cannot be interpreted for future and cannot help the

management unit as well.

Financial Accounting vs.
Management Accounting
 Financial Accounting Management Accounting

Users Financial Accounting serves the interest of Management Accounting serves the
the various categories of persons including interest of internal users (i.e.
external & internal. management )

Statutory These accounts have to be prepared Management Accounting is optional

requirements according to the legal requirement of and audit is not compulsory.
Companies Act &Income Tax Act.

Principles The objective of financial accounting is GAAP is not considered in case of

preparing and presenting the accounting management accounting.
information on the basis of GAAP.

Presentation Financial accounting presents reports . Management accounting presents

of reports reports covering shorter and longer
terms.
 Financial Accounting Management Accounting

Presentation Financial accounting presents historical Management accounting reveals

of information . predetermined and past information.
information

Centre of Importance is attached to the business Importance is given to each of the

focus enterprise as a whole in case of financial separate units of the enterprise in the
accounting. case of management accounting.

Precision FA emphasizes accuracy of facts and MA needs prompt and timely reports of
figures . facts .

Methodology Transactions relating to nominal accounts, This classification is not followed in MA.
real accounts , personal accounts are to be
recorded in FA.