Objective of accounting may differ from business to business depending upon their

specific requirements. However, the following are the general objectives of accounting.
(i) Recording business transactions systematically− It is necessary to maintain
systematic records of every business transaction, as it is beyond human capacities to
remember such large number of transactions. Skipping the record of any one of the
transactions may lead to erroneous and faulty results.
(ii) Determining profit earned or loss incurred− In order to determine the net result
at the end of an accounting period, we need to calculate profit or loss. For this purpose
trading and profit and loss account are prepared. It gives information regarding how much
of goods have been purchased and sold, expenses incurred and amount earned during a
year.
(iii) Ascertaining financial position of the firm− Ascertaining profit earned or loss
incurred is not enough; proprietor also interested in knowing the financial position of
his/her firm, i.e. the value of the assets, amount of liabilities owed, net increase or
decrease in his/her capital. This purpose is served by preparing the balance sheet that
facilitates in ascertaining the true financial position of the business.
(iv) Assisting management− Systematic accounting helps the management in
effective decision making, efficient control on cash management policies, preparing
budget and forecasting, etc.
(v) Assessing the progress of the business− Accounting helps in assessing the
progress of business from year to year, as accounting facilitates the comparison both
inter-firm as well as intra-firm.
(vi) Detecting and preventing frauds and errors− It is necessary to detect and
prevent fraud and errors, mismanagement and wastage of the finance. Systematic
recording helps in the easy detection and rectification of frauds, errors and inefficiencies,
if any.
(vii) Communicating accounting information to various users− The important step
in the accounting process is to communicate financial and accounting information to
various users including both internal and external users like owners, management,
government, labour, tax authorities, etc. This assists the users to understand and interpret
the accounting data in a meaningful and appropriate manner without any ambiguity.
1.2.4. Users of accounting information
Owners: The owners provide funds or capital for the organization. They possess
curiosity in knowing whether the business is being conducted on sound lines or not and
whether the capital is being employed properly or not. Owners, being businessmen,
always keep an eye on the returns from the investment. Comparing the accounts of
various years helps in getting good pieces of information.
Management: The management of the business is greatly interested in knowing
the position of the firm. The accounts are the basis, the management can study the merits
and demerits of the business activity. Thus, the management is interested in financial
accounting to find whether the business carried on is profitable or not. The financial
accounting is the “eyes and ears of management and facilitates  in drawing future course
of action, further expansion etc.”
Creditors: Creditors are the persons who supply goods on credit, or bankers or
lenders of money. It is usual that these groups are interested to know the financial
soundness before granting credit. The progress and prosperity of the firm, two which
credits are extended, are largely watched by creditors from the point of view of security
and further credit. Profit and Loss Account and Balance Sheet are nerve centres to know
the soundness of the firm.
Employees: Payment of bonus depends upon the size of profit earned by the firm.
The more important point is that the workers expect regular income for the bread. The
demand for wage rise, bonus, better working conditions etc. depend upon the profitability
of the firm and in turn depends upon financial position. For these reasons, this group is
interested in accounting.
Investors: The prospective investors, who want to invest their money in a firm, of
course wish to see the progress and prosperity of the firm, before investing their amount,
by going through the financial statements of the firm. This is to safeguard the investment.
For this, this group is eager to go through the accounting which enables them to know the
safety of investment.
Government: Government keeps a close watch on the firms which yield good
amount of profits. The state and central Governments are interested in the financial
statements to know the earnings for the purpose of taxation. To compile national
accounting is essential.
Consumers: These groups are interested in getting the goods at reduced price.
Therefore, they wish to know the establishment of a proper accounting control, which in
turn will reduce to cost of production, in turn less price to be paid by the consumers.
Researchers are also interested in accounting for interpretation.
Research Scholars: Accounting information, being a mirror of the financial
performance of a business organization, is of immense value to the research scholar who
wants to make a study into the financial operations of a particular firm. To make a study
into the financial operations of a particular firm, the research scholar needs detailed
accounting information relating to purchases, sales, expenses, cost of materials used,
current assets, current liabilities, fixed assets, long-term liabilities and share-holders funds
which is available in the accounting record maintained by the firm.
1.2.5. Functions of accounting
Record Keeping Function: The primary function of accounting relates to
recording, classification and summary of financial transactions-journalisation, posting,
and preparation of final statements. These facilitate to know operating results and
financial positions. The purpose of this function is to report regularly to the interested
parties by means of financial statements. Thus accounting performs historical function
i.e., attention on the past performance of a business; and this facilitates decision making
programme for future activities.
Managerial Function: Decision making programme is greatly assisted by
accounting. The managerial function and decision making programmes, without
accounting, may mislead. The day-to-day operations are compared with some pre-
determined standard. The variations of actual operations with pre-determined standards
and their analysis is possible only with the help of accounting.
Legal Requirement function: Auditing is compulsory in case of registered firms.
Auditing is not possible without accounting. Thus accounting becomes compulsory to
comply with legal req
 uirements. Accounting is a base and with its help various returns, documents,
statements etc., are prepared.
Language of Business: Accounting is the language of business. Various
transactions are communicated through accounting. There are many parties-owners,
creditors, government, employees etc., who are interested in knowing the results of the
firm and this can be communicated only through accounting. The accounting shows a real
and true position of the firm or the business.
1.2.6. Branches of accounting
The changing business scenario over the centuries gave rise to specialized branches
of accounting which could cater to the changing requirements. The branches of
accounting are;
(i) Financial accounting
(ii) Cost accounting; and
(iii) Management accounting. 
Now, let us understand these terms
Financial Accounting
The accounting system concerned only with the financial state of affairs and
financial results of operations is known as Financial Accounting. It is the original from of
accounting. It is mainly concerned with the preparation of financial statements for the use
of outsiders like creditors, debenture holders, investors and financial institutions. The
financial statements i.e., the profit and loss account and the balance sheet, show them the
manner in which operations of the business have been conducted during a specified
period.
Cost Accounting
In view of the limitations of financial accounting in respect of information relating
to the cost of individual products, cost accounting was developed. It is that branch of
accounting which is concerned with the accumulation and assignment of historical costs
to units of product and department, primarily for the purpose of valuation of stock and
measurement of profits. Cost accounting seeks to ascertain the cost of unit produced and
sold or the services rendered by the business unit with a view to exercising control over
these costs to assess profitability and efficiency of the enterprise. It generally relates to the
future and involves an estimation of future costs to be incurred. The process of cost
accounting based on the data provided by the financial accounting.
Management Accounting
It is an accounting for the management i.e., accounting which provides necessary
information to the management for discharging its functions. According to the Anglo-
American Council on productivity, “Management accounting is the presentation of
accounting information is such a way as to assist management in the creation of policy
and the day-to-day operation of an undertaking.” It covers all arrangements and
combinations or adjustments of the orthodox information to provide the Chief Executive
with the information from which he can control the business e.g. Information about funds,
costs, profits etc. Management accounting is not only confined to the area of cost
accounting but also covers other areas (such as capital expenditure decisions, capital
structure decisions, and dividend decisions) as well
1.3. Accounting equation
 The accounting equation shows the relationship between assets, liabilities and
equity. It is the basis upon which the double entry accounting system is constructed.
Business transactions must be recorded in accordance with the accounting equation, to
ensure that each part of a journal entry is correct. In essence, the accounting equation is as
follows:
Assets = Liabilities + Shareholders' Equity
The asset, liability, and shareholders’ equity portions of the accounting equation
are explained further below, noting the different accounts that may be included in each
one. You can see this relationship between assets, liabilities, and shareholders' equity in
the balance sheet, where the total of all assets always equals the sum of the liabilities and
shareholders' equity sections
ASSETS: The assets in the accounting equation are the resources that a company
has available for its use, such as cash, accounts receivable, fixed assets, and inventory.
Accounts receivable include all amounts billed to customers on credit that relate to the
sale of goods or services. Inventory includes all raw materials, work-in-process, finished
goods, merchandise, and consigned goods being offered for sale by third parties.
If assets are classified based on their convertibility into cash, assets are classified
as either current assets or fixed assets (non-current assets). An alternative expression
of this concept is short-term vs. long-term assets.
Current asset: are assets that can be easily converted into cash and cash
equivalents (typically within a year). Current assets are also termed liquid assets and
examples of such are:
Cash
Cash equivalents
Short-term deposits
Accounts receivables
Inventory
Marketable securities
Office supplies
Fixed or Non-Current Assets: are assets that cannot be easily and readily converted
into cash and cash equivalents. Non-current assets are also termed fixed assets, long-term
assets, or hard assets. Examples of non-current or fixed assets include:
Land
Building
Machinery
Equipment
Patents
Trademarks
LIABILITIES: The Liabilities part of the equation is usually comprised of
accounts payable that are owed to suppliers, a variety of accrued liabilities, such as sales
taxes and income taxes, and debt payable to lenders. Accounts payable include all goods
and services billed to the company by suppliers that have not yet been paid. Accrued
liabilities are for goods and services that have been provided to the company, but for
which no supplier invoice has yet been received.
 Businesses sort their liabilities into two categories: current and long-term (non-
current) depending on their temporality. Current liabilities are debts payable within one
year, while long-term liabilities are debts payable over a longer period. For example, if a
business takes out a mortgage payable over a 15-year period, that is a long-term liability.
However, the mortgage payments that are due during the current year are considered the
current portion of long-term debt and are recorded in the short-term liabilities section of
the balance sheet.
Current Liabilities: These are short-term liabilities that are due and payable
within one year, generally by current assets. If a firm has operating cycles that last
longer than one year, current liabilities are those liabilities that must be paid during the
cycle. Examples of Current Liabilities:
 accounts payable,
 commercial paper payable,
 trade notes payable,
 short-term notes payable,
 operating costs include salaries payable, wages payable, interest payable,
income tax payable
 the current balance of long-term debt due in a year.
 Callable long term debt like bonds
Long-term (non current liabilities): These are long-term liabilities that are due
in over a year’s time. They are an important source of a company’s long-term
financing. Examples of Long-term Liabilities:
 Long-term bonds payable
 Long-term notes payable
 Deferred tax liabilities
 Pension obligations
 Mortgage payable
 Capital Lease
The equation and what it means: Liabilities = Assets – Owner Equity
It is a simplified representation of how the financial side of business functions. 
EQUITY: The Shareholders' Equity part of the equation is more complex than
simply being the amount paid to the company by investors. It is actually their initial
investment, plus any subsequent gains, minus any subsequent losses, minus any dividends
or other withdrawals paid to the investors. The shareholders’ equity section tends to
increase for larger businesses, since lenders want to see a large investment in a business
before they will lend significant funds to an organization.
Owners equity can be said as the difference of assets and liabilities. This is also
known as shareholders fund or net assets. It denotes the portion of the company’s net
asset which can be claimed by its shareholders. In simple words, the amount invested by
the owner in the business added with the company’s net earnings and reduced by capital
already withdrawn by them and outside liabilities. For examples:
+ Common Stock: 
+ Prefered Stock
+ Paid-in Capital in Excess of Par Value
 + Retained Earnings
+ Other Comprehensive Income
Concepts and conventions of accounting
Accounting concepts and convention are a set of rules or principles that are taken
into consideration in the preparation of financial statements. The financial statements
include: Trading, profit and loss account as well as the balance sheet. For uniformity of
purpose, a generally accepted rules or principles in the form of assumption for its
preparation and presentation are adopted, and these are called accounting concepts and
conventions.
1.4.1. Business entity: 
This concept refers to the assumption that a business enterprise is independent of
its owner, meaning that an action taken on a business doesn't affect its owner.
1.4.2. Money measurement:
When operating, accountants only record monetary terms and values in their books
and are less concerned about other factors. In the other ways, this concept states that
financial statements must reflect only transaction and entries that are capable of being
expressed in monetary terms.
1.4.3. Going concern
When working with companies, accountants assume that a company isn't going
bankrupt unless there is evidence to state otherwise.
1.4.4. Cost concept:
In the preparation of financial statements. Assets are value at cost. It is on cost and
not market value because the business is not for sale.
1.4.5. Accrual concept
This concept states that expenses and revenue are recognized and reported in the
profit and loss account as they are incurred and earned respectively and not as they are
paid or received.
1.4.6. Matching concept
This concept explains that all expenses must be matched and reported against
revenue generated at that period to determine the net profit. NB: This is the same as
accrual concept
1.4.7. Accounting period concept
All the transactions are recorded in the books of accounts on the assumption that
profits on these transactions are to be ascertained for a specified period. This is known as
accounting period concept. Thus, this concept requires that a balance sheet and profit and
loss account should be prepared at regular intervals. This is necessary for different
purposes like, calculation of profit, ascertaining financial position, tax computation etc.
1.4.8. Materiality convention
This convention states that amount of materials significant n value must be
recorded in the preparation of financial statement. This explains why certain economic
events are not reported when the amount of their value are insignificant as to affect the
financial statement e.g. depreciations of calculator, wall clock e.t.c.
1.4.9. Consevatism convention
The convention of conservatism states that the principles of treating income and
losses as well as valuation of assets.
 + Income should not be anticipated
+ All possible losses must be provided for
+ When more than one method of valuing an asset is evolved, choose the method
with less value (i.e. lower of cost) and or market value.
1.4.10. Consentency convention
This states that there should be consistency in the treatment of similar transactions.
This implies that similar transaction within the same period and between one period and
another must be treated alike, any changes of method may distort the profit calculation.
1.5. Types of accounting activity
Business activities include any activity a business engages in for the primary
purpose of making a profit. This is a general term that encompasses all the economic
activities carried out by a company during the course of business. Business activities,
including operating, investing, and financing activities, are ongoing and focused on
creating value for shareholders.
1.5.1. Operating activities
These activities include many items from the income statement and the current
portion of the balance sheet. The cash flow statement adds back certain non-cash items
such as depreciation and amortization. Then changes in balance sheet line items, such as
accounts receivable and accounts payable, are either added or subtracted based on their
previous impact on net income.
These line items impact the net income on the income statement but do not result
in a movement of cash in or out of the company. If cash flows from operating business
activities are negative, it means the company must be financing its operating activities
through either investing activities or financing activities. Routinely negative operating
cash flow is not common outside of nonprofits.
Operating activities include the following transactions: Issuance of stock;
Borrowings from a bank; Issuance of bonds payable; Repayment of borrowings;
Repayment of bonds payable; Purchase of entity’s own stock; Cash dividend, stock
dividend.
1.5.2. Financing activities
Financing activities are transactions that are involved with financing the company
and/or individual customer financing. Any transaction like a loan or anything bought on
credit would be this type. Any monies paid on principle or interest paid would be
considered a financing activity and would go in that section of the Statement of Cash
Flows. Dividends paid to shareholders or the repurchase of stock would also be
considered a financing activity.
Financing activities include the following transactions: Issuance of stock and
bonds. Borrowings from creditors; Repayment of the borrowings from creditors;
Repayment of bonds payable; Repurchase of the entity’s own stock.
1.5.3. Investing activities
Investing transactions are those that are not part of daily operation of the company
and are used solely for investing purposes. Small term investments would be considered
obviously, but any loans made to customers or other entities would also be considered an
investing transaction. Dividends and interest earned on investments would also qualify
under the investing category for Statement of Cash Flows. Purchases of long term
investments such as land, equipment or property will also be viewed as an investment.
Investing activities include the following transactions: Purchase of property, plant
and equipment; Sale of property, plant and equipment; Purchase of securities issued by
other entities; Sale of securities issued by other entities; Purchase of intangible assets;
Sale of intangible assets.
Transaction: It is an event which involves exchange of some value between two
or more entities. It can be purchase of stationery, receipt of money, payment to a supplier,
incurring expenses, etc. It can be a cash transaction or a credit transaction.
Purchases: This term is used for goods to be dealt-in i.e. goods are purchased for
resale or for producing the finished products which are meant for sale. Goods purchased
may be Cash Purchases or Credit Purchases. Thus, Purchase of goods is the sum of cash
purchases and credit purchases.
Creditors: Creditors are persons who have to be paid by an enterprise an amount
for providing goods and services on credit.
Sales: Sales are total revenues from goods or services provided to customers. Sales
may be in cash or in credit.
Debtors: Persons who have to pay for goods sold or services rendered or in respect
of contractual obligations. It is also termed as debtor, trade debtor, and accounts
receivable.
Revenue (Sales): Sales revenue is the amount by selling products or providing
services to customers. Other items of revenue common to many businesses are:
Commission, Interest, Dividends, Royalties, and Rent received, etc.
Expenses: Costs incurred by a business in the process of earning revenue are
called expenses. In general, expenses are measured by the cost of assets consumed or
services used during the accounting period. The common items of expenses are:
Depreciation, Rent, Wages, Salaries, Interest, Cost of Heating, Light and water and
Telephone, etc.
Income: The difference between revenue and expense is called income. For
example, goods costing 25.000 are sold for 35.000, the cost of goods sold (25.000) is
expense, the sale of goods (35.000) is revenue and the difference  (10.000) is income. In
other words, we can state that Income = Revenue - Expense
Gain: Usually this term is used for profit of an irregular nature, for example,
capital gain.
Loss: It means something against which the firm receives no benefit. It is a fact
that expenses lead to revenue but losses do not, such as theft.
Profit: It is the excess of revenue of a business over its costs. It may be gross
profit and net profit. Gross profit is the difference between sales revenue or the proceeds
of goods sold and/or services provided over its direct cost of the goods sold. Net profit is
the profit made after allowing for all types of expenses. There may be a net loss if the
expenses exceed the revenue.
Expenditure: Spending money or incurring a liability for some benefit, service or
property received is called expenditure. Payment of rent, salary, purchase of goods,
purchase of machinery, etc. are some examples of expenditure. If the benefit of
expenditure is exhausted within a year, it is treated as revenue expenditure. In case the
benefit of expenditure lasts for more than one year, it is treated as an asset and also known
as capital expenditure. Expenditure is usually the amount spent for the purchase of assets.
It increases the profit earning capacity of the business. Expense, on the other hand, is an
amount to earn revenue. Expenditure is considered as capital expenditure unless it is
qualified with words like revenue expenditure on rent, salaries etc., while expense is
always considered as a revenue expense because it is always incurred to earn revenue.
Drawings: It is the amount of money or the value of goods which the proprietor
takes away from business for his/her household or private use.
Capital: It is the amount invested in an enterprise by its owners e.g. paid up share
capital in a corporate enterprise. It also refers to the interest of owners in the assets of an
enterprise. It is the claim against the assets of the business. Any amount contributed by
the owner towards the business unit is a liability for the business enterprise. This liability
is also termed as capital which may be brought in the form of cash or assets by the owner.
Assets: An asset is a resource with economic value that an individual, corporation,
or country owns or controls with the expectation that it will provide a future benefit.
Assets can be broadly categorized into current (or short-term) assets and fixed assets
(non-current assets).
Liabilities: Liabilities mean the amount which the business owes to outsiders, that
is, except the proprietors. In the words, liabilities are debts, they are amounts owed to
creditors. Thus, the claims of those who are not owners are called Liabilities. This can be
expressed as Liabilities = Assets – Capital

Resources controlled by the entity

as a result of past transactions or
events and from which future
economic benefits are expected to
flow to the entity is the definition of:
a. equity
*b. assets.
c. liabilities.
d. income.
34. Which of these is an asset?
a. Income tax payable
b. Revaluation reserve
c. Interest earned on investments
*d. Investments
35. “A present obligation of the
entity arising from past events, the
settlement of which is expected to
result
in an outflow from the entity of
resources embodying economic
benefits” is the definition of:
a. an expense
*b. a liability
c. equity
d. revenue
36. Which of the following is an
example of a liability?
a. allowance for doubtful debts
b. accumulated depreciation
*c. revenue received in advance
d. GST paid
37. Decreases in economic
benefits in the form of outflows or
depletions of assets or incurrences
of
liabilities that result in a decrease
in equity, other than those relating
to distributions to equity
participants, is the definition of:
a. liabilities.
b. income.
*c. expenses.
d. equity
Resources controlled by the entity
as a result of past transactions or
events and from which future
economic benefits are expected to
flow to the entity is the definition of:
a. equity
*b. assets.
c. liabilities.
d. income.
34. Which of these is an asset?
a. Income tax payable
b. Revaluation reserve
c. Interest earned on investments
*d. Investments
35. “A present obligation of the
entity arising from past events, the
settlement of which is expected to
result
in an outflow from the entity of
resources embodying economic
benefits” is the definition of:
a. an expense
*b. a liability
c. equity
d. revenue
36. Which of the following is an
example of a liability?
a. allowance for doubtful debts
b. accumulated depreciation
*c. revenue received in advance
d. GST paid
37. Decreases in economic
benefits in the form of outflows or
depletions of assets or incurrences
of
liabilities that result in a decrease
in equity, other than those relating
to distributions to equity
participants, is the definition of:
a. liabilities.
b. income.
*c. expenses.
d. equity