ORIGIN OF ACCOUNTING

The term accounting simply means recording and reckoning of numbers.

In Mesopotamian Civilization, more than 700 years ago, the advent of agriculture and trade
led to the keeping of records which was the start of accounting
In India, Chanakya wrote a manuscript similar to a financial management book during
Mauryan Empire. His books Arthashastra contains few aspects of maintaining books of
accounts for the Mauryan Period.
It was not until the 13th Century that the most important innovation in accounting started to
emerge and in the 1494, Luca Pacioli is considered as the Father of Accounting who gave the
foundation of accounting as practiced today.
MEANING & DEFINITION OF ACCOUNTING
Accounting is the art of recording/recounting the information of the business enterprises
transacted during the specific period in a summarised manner. Hence, accounting is broadly
classified into 3 main functions:
 Recording
 Classifying
 Summarised
So, in a nutshell, we can tell that accounting is a method of recording, summarising and
analysing all the transaction of a business which are monetary in nature.
USERS OF ACCOUNTING INFORMATION
INTERNAL USERS
 Management- The Management is held responsible for not only maintain the books of
account but also for the discrepancy arising in the book account. So, it is the
management first who are user of accounting information
 Employees & Workers- The employees are getting benefit when an organization is
maintaining books of accounts because the employees are given extra incentives from
the profit generated. So, all the employees and workers are the person who need
accounting information.
 Owners- Owners are maintaining the books of account to know the actual profit
earned by the business. So, it is necessary for the owner to know all the information
relating to accounting so as to know his profit.
EXTERNAL USERS
 Banks & Financial Institution- They are interested in the books of account because
they are the ones who have given finance to the business so they are bothered whether
the loan given by them to the business can be recovered or not.
 Investors & Potential Investors- The persons who have invested in the business are
interested in the books of account so that they can know the money they will get as
their profit. Potential Investors are interested in the books of account so as to make the
decision whether they should do an investment in a particular business or not.
  Creditor- Creditor also provides finance to the organization. So, they should be kept
informed of the transaction & the maintenance of books of account.
 Government & its authorities- The main intention of the Government is to collect the
tax which will be calculated on the profits earned by an organization. So, it is obvious
that Government & its authorities wants to know the details of books of account.
 Public- The common wants to analyse regarding the wealth creation mechanism of the
organization. So, they are also interested in the books of account.
OBJECTIVES OF MAINATAING ACCOUNT
 To ascertain the profits earned by an organization.
 To ascertain the financial position of the business.
FIELDS OF ACCOUNTING
 FINANCIAL ACCOUNTING- When an organization is maintaining records
regarding the finances obtained & expenses done in an organization that comes under
the category of financial accounting.
 COST ACCOUNTING- When the organization is maintaining the cost of each unit
produced by an organization comes under the category of Cost Accounting.
 MANAGEMENT ACCOUNTING- Management Accounting related to the use of
accounting data collected with the help of financial & cost accounting for the purpose
of policy formation, planning, control & decision making by the organization.
HOW IS ACCOUNTING BENEFICIAL WHILE STUDYING LAW?
Law is mainly for benefit of society. The laws created is for safeguarding the interest of
society. Different Acts such as Indian Contract Act 1872, Sales of Goods Act 1930,
Negotiable Instruments Act 1881, Partnership Act 1832, they all talk about the interest of the
persons entering into the particular contract. Financial transactions recorded in books of
account are affected by law in the sense that in some cases accounting data must comply with
the requirements of particular enactment. For example, a sole proprietorship/partnership firm
need not prepare the final account whereas joint stock companies have a statutory obligation
to prepare a final account. Every statement of profit & loss of a company should comply with
the requirement of Part II Schedule III of Company Act 2003. A lawyer & advocate should
have sufficient knowledge of accounting if he/ she is to be successful Income Tax Advocate
or to fight successfully the cases relating to accounting problems.
PROCESS OF ACCOUNTING
 Identification of Transaction
 Preparation of Business Transaction
 Recording of Transaction in Journal
 Posting in Ledger
 Preparation of Unadjusted Trial Balance
 Passing of Adjustment Entries
 Preparation of an adjusted Trail Balance
o Trading & Profit and Loss
o Balance Sheet
1. IDENTIFICATION OF TRANSACTION
 Every organization need to differentiate between financial & non-financial transaction.
Financial transaction is those which are monetary in nature. So, the first step of
accounting process is that the organization should have knowledge in bifurcating the
transaction into different heads.
Ex- An organization is purchasing machinery for factory.
2. PREPARATION OF BUSINESS TRANSACTION
When chronological & detailed wise all the monetary transaction are recorded in
books of accounts are called preparation of business transaction.

3. RECORDING OF TRANSACTION IN JOURNAL

The word Journal has been derived from ‘jour’ which means per day. Journal is every
day’s transaction recording book.
For example- If a machine purchased by an organization & then the entry in the
journal will be like this.
s/no Date Particulars LF DR CR

4. POSTING IN LEDGER
When the entries from the journal are posted to specific accounts maintained in
different registers can be called as posting in Ledger.

5. PREPARATION OF UNADJUSTED TRIAL BALANCE

When the details from Ledger are transferred to a raw data then it is called as
preparation of trial balance without any adjustment.

6. PASSING OF ADJUSTMENT
The adjustment entries will always be given to the Trial Balance to which an
accountant will need to pass necessary entries.
For example- Adjustment can be given as provide depreciation at the rate of 10% p.a.
on a machinery costing Rs. 5 lakhs. The adjustment entry will be 10% of 5 lakhs. So,
the book value will be shown as Rs. 4,50,000.

7. TRADING AND PROFIT & LOSS ACCOUNT

Calculate the gross profit / gross loss & net profit/ net loss.
The gross profit/gross loss derived from Trading Account is essential for making P&L
Account.
Net profit/ Net loss derived from P&L Account is needed to prepare Balance Sheet
which says that the total of asset side should be equal with the total liability side.
DIFFERENT VALUES OF BANK OF ACCOUNT
There are 4 different values in the business practices that should be followed/ recorded in the
system of accounting:
  Original Value- It is the value of the asset only at the moment of purchase of
acquisition.
 Book Value- It is the value of asset maintained in the Book of Account and the book
value is generally calculated as value of depreciation provided.
 Realizable Value- This is the value of asset at which the assets are realized (sold).
 Present Value- The market value of the asset can be called as present value. It may be
greater than/less than original value.

CASH ACCOUNTING ACCURAL

DEFINITION The accounting method in
which the income &
expenses is recognized only
when there is actual inflow/
outflow of cash.
NATURE Simple in nature as we are
dealing only with the cash.
So, only cash Book of
Account needs to be
maintained.
INCOME STATEMENT The company’s following
Cash Accounting method
will always show lower
income as only the cash
transactions are recorded.
RECOGNITION OF Revenue is recognized only
REVENUE when cash is received.
RECOGNITION OF Expenses is recognized
EXPENSES when cash is paid.
RECOGNITION OF Lower degree of Cash
ACCURACY Accounting.
ACCOUNTING
The Accounting in which
the income/expenses is
recognized on mercantile
basis. (When the
transactions are taking place
does not matter there is cash
inflow/ outflow)
Complex Process. As this
needs to be maintained on
the basis of golden rules
followed in accounting.
Income Statement will show
a comparatively high
income.
Revenue is recognized the
moment it is earned.
Expenses is recognized
when the expenses are
incurred
Comparatively high degree
of accuracy.

SINGLE ENTRY DOUBLE ENTRY

SYSTEM
DEFINITION The system of accounting in
which only one side of entry
is required to be recorded in
matters of financial
transaction.
NATURE Simple in nature
TYPES OF RECORDING It can be considered as
SYSTEM
The accounting system in
which every transaction
affects two accounts
simultaneously.
Complex in nature as two
accounts are simultaneously
affected.
It can be considered as
 incomplete type of
recording.
It is difficult to find errors
because one particular
account is affecting.
Ledger Only two ledger that is
personal and cash account is
maintained.
PREFERABLE FORM It is preferable for small
enterprises.
PREPARATION OF Difficult to prepare financial
FINANCIAL statement with incomplete
STATEMENT information.
FOR TAX PURPOSE Not suitable
FINANCIAL POSITION Difficult to know the exact
financial position of an
enterprise as the financial
statement cannot be
prepared.
complete type of recording.
It is easy to find the errors as
two accounts are
simultaneously affecting.
Personal, Real and Nominal
Account is maintained.
Preferable for bigger
enterprises.
Easy to prepare financial
statement as we have
complete information.
Suitable for tax purpose.
Financial position can be
ascertained easily as the
financial statement is
prepared.

ACCOUNTING PRINCIPLES CONVENTIONS, ASSUMPTION

Accounting standards are policy documents issued by

Government of Ministry of Corporate ICAI for non-corporate entities (ICAI-

Affairs (MCA) for corporate entities in Institute of Chartered Accountants of India)
consultation with NACAS (National
Advisory Committee on Accounting
System)

Completely follow Corporate Companies Act 2013

GENERALLY ACCEPTED ACCOOUNTING PRINCIPLES (GAAP)
GAAP
Assumption
National GAAP International GAAP
Policies
Principles Convention AS IAS
(India) (UK, European
Countries)
New version is Ind AS prepared
in line with IFRS New version is IFRS

ACCOUNTING PRINCIPLES
All the users look forward to accounting for appropriate useful & reliable information for
their decisions making process. For making the accounting information meaningful to its
internal & external users, it is important that such information is reliable as well as
comparable. The comparability of information is required both to make inter-firm comparison
i.e., to see how a has performed as compared to other firms. Inter period comparison i.e., now
it has performed as compared to the previous year.
This becomes possible only if the information provided by the financial statements is based
on consistent accounting, policies, principles and practices such consistency is required
throughout the process of accounting.
In order to maintain uniformity & consistency in accounting records certain rules &
principles have been developed that are generally accepted by the accounting profession.
These rules are called by different names such as principles, concepts, convention, postulates,
assumption and modifying principles. Thus, GAAP refers to the rules and guidelines adopted
for recording and reporting of business transaction.
PRINCIPLES OF ACCOUNTING CONCEPTS / BASIC ACCOUNTING CONCEPT
i. BUSINESS ENTITY CONCEPT
(Owner & business organization are two separate entities)
This concept assumes that business has a distinct and a separate entity from its
owners. Therefore, business transactions are recorded in the books of accounts from
the business point of view and not owner’s point of view. Owner is considered as the
creditor of a company as he paid capital. Therefore, he is treated as an outsider.
Ex- If owner brings Rs. 1000000 as a capital in business it is treated as a liability of
business no owner. Similarly, if owner withdraw Rs. 50000 from business for
personal use, then it is treated reduction of owner’s capital and consequently
reduction in liability of business towards owner.
ii. MONEY MEASUREMENT CONCEPT
(Recording of transactions which are monetary in nature)
This concept state that transactions and events that can be expressed in money terms
or only recorded in the books of account. Non-monetary transactions cannot be
recorded in books like appointment of manager, capability of human resources.
Limitation- It ignores the qualitative aspects. Ex-Effective human resources (asset),
satisfied customer (asset), dishonest employees (liabilities). Value of money is not
stable; therefore, it does not reflect fair views of business affairs.
iii. GOING CONCERN CONCEPT
The concept assumes that business shall continue to carry out its operators indefinitely
for a long period of time and would be liquidated in the foreseeable future. It provides
the very basis for showing the value of assets in the balance sheet.
Ex- A machinery is purchased for two lakhs and its estimated life is considered 2
years. The cost of machinery is spread on suitable basis over next 10 years. The total
cost of machine is not treated as an expense in the year of purchase itself.
iv. ACCOUNTING PERIOD CONCEPT
(Concept of uniform accounting among the firms towards the durations)
According to this concept the life of an enterprises is divided into smaller period so
that its performance can be measured at regular intervals these smaller periods are
 called accounting periods. Accounting period is defined as the interval of time, at the
end of which, the profit and loss account and the balance sheets are prepared so that
the performance is measured at regular intervals and decisions can be taken at the
appropriate time. Accounting period is usually a period of one year.
Relevance: This assumption requires the require the allocation of expenses between
capital and revenue. Capital expenses are such expenses which are incurred in one
particular accounting period but its benefit is derived for a longer accounting period.
Portion of capital expenditure that is consumed during the account year is charged to
the income statement whereas the remaining portion is shown as an asset in the
balance sheet.
v. COST CONCEPT
According to this principle an asset is recorded in the books of account at its original
cost which comprises the cost of acquisition cost and all the expenditure incurred for
making the assets ready to use. This cost becomes the basis of all subsequent
accounting transactions for the assets since the acquisition cost relates
to the past. It is referred to as the historical cost.
For ex- Machinery was purchased for 2 lakhs in cash and 30000 was spent on the
installation of machine then Rs.230000 will be recorded as the cost of machine in the
books of account and depreciation will be charged on this cost only. If the market
value of the machine goes up to Rs. 500000 due to inflation, then the increased value
will not be recorded. This cost is systematically reduced year after year by charging
the depreciation.
vi. DUAL ASPECT CONEPT
According to the principle, every business transaction has 2 aspects a debit and a
credit of equal amount. The other words for every debit there are a credit of equal
amount in one or more accounts. This system of recording transaction on the basis of
this principle is known as double entry system.
For ex- Due to the principle the two sides of balance sheet are always equal and the
following accounting equation will always hold true, i.e.,
Assets= Capital + Liability (equity)
For ex- Ram started a business with cash of Rs. 10 lakhs. It increases cash on the asset
side and capital on the liability side by Rs. 10 lakhs only.
vii. REVENUE RECOGNITION CONCEPT
(Realisation Concept)
Here more attention is given to the income. According to this principle, revenue is
considered to have been realised when a transaction has been entered and obligation
receive the amount has been established. In other words when we receive revenue
then it is called as revenue is realised.
viii. MATCHING CONCEPT
(Concept of fusion in between the expenses and revenues)
According to this principle all expenses incurred by an enterprise during an
accounting period as matched with revenue recognised during the same period. The
matching principle facilitates ascertainment of the amount of profit earned or loss
incurred in a particular period by deducting the related expenses for the following
treatment of expenses & revenue are done due to matching principle.
o Ascertainment of paid expenses
 o Ascertainment of income received in advance
o Valuation closing stock
o Depreciation charge of fixed assets
For ex- A law firm as a fixed salary to 6 of its consultants, the same law
firm earned revenue of Rs.230000 and Rs. 180000 in June and July respectively. The
expenses for the 2 months will remain the same i.e., 4000*6= 24000 as the salaries are
fixed but the profits for the month of June and July will be Rs. 206000 and Rs.
2156000 respectively. This is because the expense on salaries is watched to the
revenues generated for the individual months.
ACCOUNTING CONVENTIONS
Accounting conventions are wherein the practical considerations in recording the transactions
of the business enterprise in supreme manner.
i. CONVENTION OF CONSISTENCY
(Sale accounting method to be followed year after year)
This concept states that accounting practice followed by an enterprise should be
uniform and consistent over a period of time. Consistency eliminates the personal
business and helps in achieving the results that are comparable. However,
consistency does not prohibit the change in accounting policies. Necessary
changes can be adopted & should be disclosed.
Ex- If an enterprise has adopted straight line method of changing depriciation,
then it has to be followed year after year. If we adopt written down value method
how second year for changing depreciation, then the financial information will
not be comparable.
ii. CONSERVATISM CONCEPT/ PRUDENCE CONCEPT
(Be ready for all the losses & do not be happy for the income)
This concept takes into consideration all the prospective losses but not the
prospective profits. It means profit should not be recorded until it is realised. But
all the losses even that have least possibility of occurring has to be recorded in the
books off accounts. The objective of this principle is not to overstate the profit of
the enterprise in any case & this concept ensures the realistic picture of the
company is portrayed.
For ex- Valuing the closing stock at cost market values which is lower.
iii. Creating provision for doubtful debts and depreciation.