General

Accounting
Principles
Lecture 2
 Definitions of Accounting
• Some prominent definitions of accounting to help us better
understand the meaning of basic accounting.
• According to the Committee of Terminology of American Institute of
Certified Public Account:” Accounting is the art of recording,
classifying summarizing in a significant manner and in terms of
money, transaction, and events which are, in part at least of a
financial character and interpreting the results thereof.”
• According to Bierman and Drebin:” Accounting may be defined as
identifying, measuring, recording and communicating of financial
information.”
• Therefore accounting can be defined as “the process of recording,
summarizing, reporting and analyzing required financial information
relating to the economic events of an organization to the interested
users for making decisions.”
Components of Basic Accounting
1. Recording
The primary function of accounting is to make records of all transactions that the firm enters
into. For the purpose of recording, the accountant maintains a set of books. Their procedures
are very systematic. Nowadays, the computer has been deployed to automatically account for
transactions as they happen.
2. Summarizing
Recording of transactions creates raw data. Pages and pages of raw data are of little use to an
organization for decision making. For this reason, the accountant classifies data into categories.
3. Reporting
Management is answerable to the investors about the company’s state of affairs. The operations
that are being financed with the money of owners, it needs to be periodically updated to them.
For this reason, there are periodic reports annually summarizing the performance of all four
quarters which are sent to them.
In the form of financial statements reporting is done. To ensure that there is no misleading
financial reporting, these financial statements are also regulated by government bodies.
4. Analyzing
• Lastly, accounting entails conducting an analysis of the result. After
results have been summarized and reported, a meaningful conclusion
needs to be drawn. Management must find out its positive and
negative points. Accounting helps in doing so by means of
comparison. It factors to compare profit, cash, sales, and assets, etc.
with each other to analyze the performance of the business.
• Thus accounting is a language of business. It communicates the
performance of the business with various end-users who are
interested to know about the business. Accounting provides
quantitative information of financial nature to both management
and other users so that they can take a proper decision about the
business.
Q: The first step in the accounting process is_______.
A. Summarizing
B. Interpreting
C. Recording
D. None of the above
Ans: The correct answer is C. Maintaining proper and fine accounts has become
very essential today, as a result, of increasing complementation in the business
world. Every business organization is, therefore, supposed to maintain fine accounts
comprising of all the financial transactions, financial as well as nonfinancial
information.
• We all know that any accounting involves a fine recording, summarizing, proper
classification as well as the interpretation and communication of financial
information. Every business has to be recorded first so that the other processes
can be carried out effectively. Therefore the first step in the accounting process is
recording.
 Primary Characteristics of Accounting
• The following are the primary characteristics of accounting as follows-
• Relevance: Relevance in accounting is closely related to the concept
of useful information. It means that the information must be capable
of making a difference in taking various decisions by the users. The
information gathered by users relevant for one purpose may not be
necessarily relevant for other purposes. The relevant information also
reduces decision-makers uncertainty about future acts.
• Reliability: Reliable information is required to form judgments about
the earning potential and financial position of a business firm.
Reliability differs from item to item. There are many factors affecting
the reliability of information such as uncertainties inherent in the
subject-matter and accounting measurements.
 Secondary Characteristics of Accounting-
• The following are the secondary characteristics of accounting
as follows-
• Comparability: Comparability means that the users should
be able to compare the accounting information of an
enterprise of the period either with that of other periods,
known as an intra-firm comparison or with the accounting
information of the other enterprises, known as an inter-firm
comparison.
• Understandability: Understandability means that the
information provided through the financial statements must
be presented in a manner that the users are able to
understand it.
 Objective of Accounting
• The following are the main objectives of accounting:-
To keep Systematic Records
• The main objective of accounting is to keep a systematic record of
financial transactions which helps the users to understand the day to
day transactions in a systematic manner so as to gain knowledge
about overall business.
To Protect Business Properties
• Accounting provides protection to business properties from
unjustified and unwarranted use. Information about the above
matters helps the proprietor in assuring that the funds of the
business are not necessarily kept idle or underutilized.
Ascertain Profit
• Another objective of accounting is that it helps in
ascertaining the net profit earned or loss suffered on account
of carrying the business which is done by keeping a proper
record of all books of accounts with respect to revenues and
expenses of a particular period.
Ascertain the Financial Position
• The accounting also helps the businessman to know about
his financial position. This objective is served by the Balance
Sheet or Position Statement. The Balance Sheet is a
statement of assets and liabilities of the business on a
particular date. It serves as a tool for ascertaining the
financial health of the business.
Facilitate Decision Making
• Accounting also helps in the collection, analysis, and
reporting of information at the required points of time
to the required levels of authority in order to facilitate
rational decision-making.
Information System
• Another objective of accounting is that it can be
defined as accounting functions as an information
system for collecting and communicating economic
information about the business enterprise. This
information helps the management in taking
appropriate decisions.
 Roles of Accounting
Accounting plays an important and useful role in developing the information for
various types of users. The major roles of accounting in different areas are as
follows-
• Since the increased volume of business results in a large number of transactions
and no businessman can remember everything. Therefore accounting records
reduce the necessity of remembering various transactions.
• Another role of accounting records is that it should be prepared on the basis of
uniform practices will enable a business to compare results of one period with
another period.
• The various different authorities have their opinion according to which, they
believe that the facts contained in the set of accounting books are maintained
according to generally accepted accounting principles which will help in better
understanding for users of financial information.
• Those accounting records which are supported by proper and authenticated
vouchers are good evidence in a court of law.
• Another concerned role is that if a business is to be sold as a going concern, then
the various values of different assets which are shown by the balance sheet will
help in bargaining proper price for the business.
Solved Example
Q: True & Fair profit or loss of a company is known by:
a) Preparing Trial Balance
b) After preparing Vouchers
c) Preparing Trading and Profit and Loss A/c
d) None of the above
Ans: The correct option is C. We can only ascertain the profit or loss of
the company after arriving at the Net Profit which is obtained in the
Profit and Loss A/c. The Trading A/c gives us the operating profit.
Arriving at the profit figure is one of the most important roles of
accounting.