CLASS NOTES

Class: XI Topic: Introduction to Accounting:

Meaning, Process and Interested users in
Subject: ACCOUNTING Accounting information.

Accounting: It is a term used to describe a wide range of activities. It may be defined as the
identifying, measuring, recording and communicating of financial information. The task of an
accountant (one who keep the records of transactions of business) covers such diverse areas as
measuring economic changes and conditions, recording financial transactions, reporting the results
of financial transactions, and establishing systems for record-keeping and reporting.

Definition of Accounting:
According to AICPA( American Institute of Certified Public Accountants)” Accounting is 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”.

The above definition of accounting describes the complete process of accounting. Here are some
highlighted words which need to be understood before understanding the definition of accounting.

Identification: It means determining what transactions to record; means to identify first, what are
the transactions or events which are to be recorded? Generally, transactions having financial nature
areto be recorded. Example: If a company purchase or sale whether on cash or credit, or pays salary
or any other expenses, it is to be recorded in the books of account.

Measurement: It means quantification of business transactions into financial terms by using

monetary units i.e. rupee or paisa as a measuring unit. If any event which cannot be quantified in
monetary terms, it is not considered for recording in financial accounts.
Example: Purchase of furniture for Rs. 5,000 will be recorded where as appointment of a new
managing director, signing of contracts are not shown on the books.

Recording: Once the economic events are identified or measured in financial terms, these are
recorded in books of account in monetary terms and in a chronological order. Recording is done in a
manner that the necessary financial information is summarized as per well established practice and
is made available as and when required.

Classifying: It is the process of grouping the transactions of one nature at one place, in a
separateaccount. This account is known as ledger.
Example: All transactions related to purchase are recorded in a separate account called purchases,
all transactions related to sales are recorded in a separate account called sales, etc.

Summarizing: It is the process of presenting the final value of all classified account in a separate
statement, called “Trial Balance”.
Analyzing and interpreting: In Accounting, the results of the business are analyzed and interpreted
sothat user of financial statements can make a meaningful and sound judgment about the
profitability and financial positions of the business.
Communicating: Accounting involves communicating the financial data to the interested parties
through annual and periodic reports. The accounting information must be provided on time so that
decisions are taken at the appropriate time.

Accounting Process:
Based on the definitions above, the accounting process is shown below:
Identification of Financial transactions and events;
Measurement of transactions in terms of money;
Recording the financial transactions in Journal or Subsidiary Books;
Classifying them through Ledger;
Summarizing the transactions by preparing Trial Balance, Trading Account, Profit & Loss Account
and Balance Sheet;
Analyzing and interpreting the financial data;
Communicating the financial data to the interested parties.

Interested users of Information:

Accounting is a means by which necessary financial information about the business enterprise is
communicated to many interested users who need financial information in order to make important
decisions. These users can be divided into two broad categories.
Users of Accounting Information

Internal Users External Users

(Chief executives, Financial Officer, Vice President, (Investors, Creditors,
Plant Managers) Customers etc.)

Internal users: are mainly management, who needs timely information on cost of sales, profitability
etc. for planning, controlling and decision making.
External users: who have limited authority, ability and resources to obtain the necessary information
and have to rely on financial statements?
Primarily external users are interested in the followings:
Investors and potential investors: need information on the risks and return of investment;
Union and employee groups: need information on the stability, profitability and distribution of
wealth within the business.
 Lenders and financial institutions: need information on the credit worthiness of the company and its
ability to repay loans and pay interest.
Suppliers and creditors: need information on whether amounts owed will be repaid when due, and
on the continued existence of the business.
Customers: need information on the continued existence of the business and thus the probability of
a continued supply of products.

Government and other regulators: need information on the allocation of resources and
thecompliance to regulations;
Competitors: need information on the relative strengths and weaknesses of their competition.
Social responsibility groups: need information on the impact on environment and its protection.

An Accounting Transaction is a business activity or transaction that has a monetary impact on a

company’s financial statements.

External Transactions: These kinds of transactions occur between two companies or organizations.

Internal Transactions: These involve the process within the organizations, for example, by reducing the
value of an asset by depreciating it year on year.

Types of Accounting Transactions based on the Exchange of Cash: Based on the exchange of cash,
there are three types of accounting transactions, namely cash transactions, non-cash transactions, and credit
transactions.

1. Cash transactions: They are the most common forms of transactions, which refer to those that are dealt
with cash. For example, if a company purchases office supplies and pays for them with cash, a debit card,
or a check, then that is a cash transaction.

2. Non-cash transactions: They are unrelated to transactions that specify if cash’s been paid or if it will be
paid in the future. For example, if Company A purchases a machine from Company B and sees that it is
defective, returning it will not entail any cash spent, so it falls under non-cash transactions. In other words,
transactions that are not cash or credit are non-cash transactions.

3. Credit transactions: They are deferred cash transactions because payment is promised and completed at
a future date. Companies often extend credit terms for payment, such as 30 days, 60 days, or 90 days,
depending on the product or service being sold or industry norms.

Types of Accounting Transactions based on Objective: There are two types of accounting transactions
based on objective, namely business or non-business.

1. Business transactions: These are everyday transactions that keep the business running, such as sales
and purchases, rent for office space, advertisements, and other expenses.

2. Non-business transactions

These are transactions that don’t involve a sale or purchase but may involve donations and social
responsibility.

3. Personal transactions: Personal transactions are those that are performed for personal purposes such as
birthday expenditures.

Assets: tangible and intangible items that the company owns that have value (e.g. cash, computer systems,
patents)

Liabilities: money that the company owes to others (e.g. mortgages, vehicle loans)

Equity: that portion of the total assets that the owners or stockholders of the company fully own; have paid
for outright

Revenue or Income: money the company earns from its sales of products or services, and interest and
dividends earned from marketable securities

Expenses: money the company spends to produce the goods or services that it sells (e.g. office supplies,
utilities, advertising)
 EVENT VS TRANSACTION

Meaning

All incidents or occurrences that Events which are recorded in books

pertain to and that may have an of accounts of a business as they have
effect on the business quantifiable impact on its finances

Exchange of resources or value

Events (other than transactions) do Yes involved

not involve such exchange

Measurability

Events (other than transactions) are Measurable in monetary terms

not measurable in monetary terms

Disclosure in books of accounts

Not recorded in books. Can be Recorded in books of accounts

disclosed in other reports which
accompany financial statements

Inclusion

All events are not transactions All transactions are events

Scope

Wide Narrow

Scope

Events, other than transactions Purchase and sale of goods or

include death or retirement of services
important management persons,
labor strikes etc