Unit I: Introduction to Accounting [4 hours]

Book Keeping
The term boo keeping is made with the combination of two different terms: book and keeping. ln
general, book refers to the set of accounts in which different financial transactions are recorded.
And the term keeping refers to the process of maintaining the recording a proper manner. In this
sense, it can be defined as an act of systematic recording of different financial transactions in a
given set of books. Hence, book keeping is that branch of knowledge which is concerned with the
proper with recording, classifying and summarizing the different financial transactions and
ascertaining the results therefore.
Accounting
Book keeping is limited only on the recording of different financial transactions. But it is not
sufficient. In addition to this, some more performance have also to be done in the business
organization. Eg. systematically recorded transactions in book keeping are to be summarized and
then they are to be analyzed and interpreted by using certain accounting tools and techniques in
order to know the true and fair financial position as well as to identify the different strong aspects
and short comings. It is necessary to do so, because if there are any strong aspects, they are to be
continued in future and if there are any shortcomings, they are to be corrected in tome. Hence, it
can be defined as the process of systematic recording, classifying, summarizing, analyzing and
interpreting the records in such a way that the true and fair position of a business can be known at
the end of accounting period and preparing an annual report there of and communicating the same
to the different users according to their necessity.
Different between Book Keeping and Accounting
Bases Book keeping Accounting
Scope It has a limited scope: It has wider scope in addition to bookkeeping,
identifying, classifying and summarizing, analyzing and interpreting the
recording financial summarizes records and communicating them
transactions. to different users.
Stage It is the primary stage of It is secondary stage hence the different
recording. financial transactions recorded in book keeping
are analyzed, interpreted and summarized.
Whole or It is a part of accounting. It is a whole in itself and hence it include book
part keeping in it.
Basic Its basic objective is to Its basic objective is to ascertain the operating
objective maintain a systematic record of results in terms of net profit/loss and financial
financial transactions. position and communicate them to users.
Nature of job It is performed by lower level It is performed by the higher level staff.
staff.

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Objectives/Functions of Accounting

 To keep systematic record: Accounting is done to keep a systematic record of financial

transactions.
 To ascertain the operational profit or loss: Accounting helps to ascertain the amount of
net profit/loss on account of carrying out the different business activities.
 To ascertain the financial position of business: The profit and loss account gives the
amount of profit or loss made by the business during a particular period preparing income
statement, balance sheet, cashflow, p/l appropriation etc.
 To analyze and interpret the financial records: Summarized records of the business
organization are to be analyzed and interpreted by using different accounting tools and
techniques like ratio, trend, growth, etc.
 To communicate the result of business operation: Analyzed and interpreted accounting
records, annual report is also be prepared at the end of accounting period. These reports are
provided to investor, loan provider, government, suppliers, etc.
GAAP
GAAP refers to the universally accepted concepts, principles and conventions for financial
accounting system. Financial accounting mainly based on certain standards or guides which are
called generally accepted accounting principles. It provides the consistency and free of bias
information to the stakeholders of business. GAAP are established by International Financial
Accounting Standard Board (IFASB).
GAAP consists of the following:
A. Accounting Concepts/Assumptions:
Concepts is the ground rules for understanding the process for financial accounting. Hence, GAAP
are the assumptions for the preparation of financial statements. The basic concepts are:
- Business entity concept: This concept assumes that all the business transactions are made
from the view of entity concept not from owner's concept.
- Money measurement concept: All the record of transactions should be expressed in
monetary terms. Non-monetary items are out of accounting scope.
- Going concern concept: It assumes that business entity do its business for a indefinite
period of time. All the assets are valued at its book not at market value.
- Accounting period concept: Accounting period is followed strictly for the presentation of
final result of business operation annually. In Nepal, 1st Shrawan is the beginning and 31st
Ashad is ending (fiscal year) or 1st Baishak to end of chaitra (Calendar year).
B. Accounting Principles:
Principles are the set of accounting standard and process.

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 - Cost Principle: Assets or resources in the firm should be shown at the cost of their
acquisition not at current market value.
- Realization/Revenue Principle: Revenue is as it earned on the date when goods or
services are rendered to customers in cash or claims to cash. Revenue is created at the time
of sales.
- Matching Principle: Expenses and revenues at an accounting period are matched to find
out the net profit/loss.
- Full Disclosure Principle: Financial statements must provide the full information of every
transactions to ensure the stakeholders that they are not misleading.
C. Accounting Conventions:
It is an agreement, principle or statements expressed or implied to solve the given types of
problems.
- Materiality: In one company a thing may be material and it may not be for another. In
furniture company, cupboards, chairs, etc. are final products for sale but in other company,
they are capital goods.
- Consistency: Accounting methods should not be changed period to period.
- Conservatism: The accounting which has favourable immediately on financial statements
should be used.
- Cost-benefit analysis: It the comparison of ouflows of resources for the inflow of
resources.
Accounting Functions in the Hospitality Industry

Hospitality industry is a rapidly expanding business sector in the world. A properly organized
accounting system is an essential requirement for any business and hospitality industry is no
exception when it comes to this rule.

Every successful venture needs a solid financial management to enable its growth. Take the case of
a hotel- accommodating guests, paying the salaries of the hotel employees, reporting the total sales,
recording transactions, analyzing the profits etc. require a specialized accounting management.
Without that the whole system will be mismanaged and inefficient. That is why accounting is
crucial to the hospitality industry. Using the basic principles of accounting, you can get the
information required to improve the working of every aspect of your industry. With such useful data
available at hand hotel owners can make proactive decisions and improve the profit of their
business.

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Annual Reports

An annual report is a financial summary of a company’s activities during the year along with
management’s analysis of the company’s current financial position and future plans. Annual
reports are prepared at the end of the fiscal year for external users to gain financial information
about the inner workings of the company and what management plans to do in the future. There
are mainly three financial statements (Annual reports).

Income Statement

The Income Statement is one of a company’s core financial statements that shows their profit and
loss over a period of time. The profit or loss is determined by taking all revenues and subtracting
all expenses from both operating and non-operating activities.

The income statement is one of three statements used in both corporate finance (including financial
modeling) and accounting. The statement displays the company’s revenue, costs, gross profit,
selling and administrative expenses, other expenses and income, taxes paid, and net profit, in a
coherent and logical manner.

Balance Sheet

A balance sheet is a financial statement that reports a company's assets, liabilities and shareholders'
equity at a specific point in time, and provides a basis for computing rates of return and evaluating
its capital structure. It is a financial statement that provides a snapshot of what a company owns
and owes, as well as the amount invested by shareholders.

A balance sheet is a statement of the financial position of a business that lists the assets, liabilities,
and owner's equity at a particular point in time. In other words, the balance sheet illustrates your
business's net worth.

The balance sheet may also have details from previous years so you can do a back-to-back
comparison of two consecutive years. This data will help you track your performance and will
identify ways to build up your finances and see where you need to improve.

You can also use the balance sheet to determine how to meet your financial obligations and figure
out the best ways to use credit to finance your operations.

Cashflow Statement

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A cash flow statement is a financial statement that provides aggregate data regarding all cash
inflows a company receives from its ongoing operations and external investment sources. It also
includes all cash outflows that pay for business activities and investments during a given period.

The Statement of Cash Flows (also referred to as the cashflow statement) is one of the three
key financial statement that report the cash generated and spent during a specific period of time
(e.g., a month, quarter, or year). The statement of cash flows acts as a bridge between the income
statement and balance sheet by showing how money moved in and out of the business.

Retained Earning Statement

The Statement of Retained Earnings, or Statement of Owner's Equity, is an important part of your
accounting process. Retained earning represent the amount of net income or profit left in the
company after dividends are paid out to stockholders. The company can then reinvest this income
into the firm.

Functions of Hospitality Accounting

Recording Revenue

In the hospitality industry, revenue recognition is fairly straightforward. For both restaurants and
hotels, revenue is earned when the meal or the hotel stay occurs. It is important to note that
reservations often include a deposit for the first night's stay. As this deposit has not yet been
earned, these deposits are not revenue yet. Payments received for deposits are considered deferred
revenue until they are earned.

Costs of Sales

Major costs in the hospitality industry include costs of food and labor. Food costs, depending on
the type of restaurant or resort, can be nearly half of a company's expenses. Costs of sales should
be recorded in line with revenue recognized.

Operating Expenses

Non-guest and patron costs of the company are reflected in the company's operating expense
accounts. When operating costs are incurred the company will make a debit to operating expenses
and a credit to cash or accounts payable, depending on whether the purchase was made via cash or

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credit, respectively. Common operating expenses in the hospitality industry are rent, insurance and
non-client service salary expenses.

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Capital Purchases

Serving meals or taking care of hotel guests usually requires a fair amount of equipment. Industrial
linen washers, stove tops, mixers and computers are all viewed as capital expenditures. These
items, which benefit more than one accounting period, are recorded with a debit to fixed assets and
a credit to cash at the time of purchase. Over the useful life of the equipment the item is
depreciated. Depreciation entries are made with a debit to depreciation expense and a credit to
accumulated depreciation

Users of Accounting Information

Accounting information needs to the decision makers. These decision include when to buy, hold or
sell the shares, etc. The reports assess the ability of the enterprise to pay its employees, determine
distributable profit and regulate the activities of the enterprise. Investors and lenders are the most
obvious users of accounting information. The users of accounting are broad classified into two
groups:
Users of accounting
information

Internal users External users

 Various level  Investors/shareholders

management  Lenders/suppliers
 Regulators, rating agencies and security
analyst
 Employees, trade union and tax
authorities
 Customers
 Government and regulatory agencies
 Public (for social responsibility)
Cash versus Accrual Basis of Accounting

The Cash Basis Accounting

Accounting system that records only transaction sin which revenues are recognizsed when cash is
received and expenses are recognized when cash paid. Cash basis accounting is not prescribed
under GAAP because it does not record income and expenses when incurred, so it breaks
accounting principle.

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The Accrual Basis Accounting
Accounting system that recognizes revenues and expenses when they are earned or incurred.
Accounting that records the impact of business transactions as they occur and they are recorded in
the accounting records and reported in the financial statements of the periods to which they relate.
Eg. a company performs services or sales of goods for a customer on credit. Although the
company has not received cash, the revenue is recorded at the time when company provided
services or goods. Similarly, a company pays cash to the insurance for their stock on July 1 for one
year period. At the time of payment company records it an asset (prepaid) and at the closing date
of accounting period i.e. December 31, the company recognizes six months period of insurance is
expenses with the match of prepaid expenses.
Cash basis Accrual basis
revenues are recognized when received when earned
Expenses are recognized when paid when incurred
Note: In Nepalese banking, expenses are accounted under accrual basis where cash basis for
revenues (This is Hybrid accounting)

Branch of Accounting
Book Keeping: Recording, handling and summarizing of economic information is known as book
keeping. The book-keeping covers the technical part of accounting. It is related to recording of
transactions into day book, preparation of journal entries, posting into ledgers or t-account, trial
balance and financial statements.
Financial Accounting: Financial accounting is next field of accounting which basically relates wit
the financial report aspects. It is that part of accounting which involves the activities or recording
which are driven by preparation of financial statements like income statement, statement of
retained earnings, balance sheet, cashflow statement and statement of changes in shareholders'
equity.
Management Accounting: Management accounting is the modern aspect of accounting which is
the technical tool for managers to support in their alternative evaluation process for the best
decision making. Management accounting is targeted to serve internal users of accounting
information to carry out the management functions mostly; planning, controlling and decision
making.
Cost Accounting: Cost accounting is focused in providing information about the detailed cost of
product or services being supplied by the business. Cost accounting provides detailed cost
information to various levels of management for efficient performance of their functions. Cost
accounting mainly consists of principles and rules which are used for determining the
manufacturing cost of product or services.
Tax Accounting: Tax accounting is concerned with the accounting of tax related issues in
business. Basically it is related to the tax planning and tax evasion. Tax planning is taking the

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decision in advance about the reduction of tax payable amount in future in a systematic and legal
way. It searches the various options so that the tax amount would be minimized and controlled.
Auditing: Auditing provides legal recognition the financial reports that are prepared at the end of
each accounting period. Auditing is a kind of control system in recording and reporting of
accounting which implies that the organization generate reliable financial reporting and
substantially complies wit the law and regulations that apply to it.
Accounting Process/Cycle
Accounting process/cycle is the process of recording, classifying and summarizing accounting
information. It begins with the initial recording of the business transactions and concludes with the
preparation of set of formal financial statements which summarize the effects of financial
transactions upon the assets, liabilities and owner's equity of the business. The steps are as follows:

Identify the transactions

(Through source document)

Analyze the transactions

(Determine the amount which accounts are affected)

Journal entries
(Transactions are recorded in journal as debit and credit)

Post to ledger
(Journal entries transferred to ledger or T-account)

Trial balance
(Trial balance is calculated to verify the sum of Dr. and Cr.)

Adjusting entries
(Adjusting entries are made for Accrued and deferred items)

Adjusted trial balance

(New trial balance is calculated after making adjustment)

Financial statements
(Final reports are prepared)

Closing entries
(Transfer the revenue and expense to owner's equity)

After closing trial balance

(Final trial balance is calculated after closing entries)
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Double Entry Accounting
In general, the different financial transactions are recorded under two systems. They are: single
entry system and double entry system. The modern and scientific system of recording the different
financial transactions is double entry system. It was firstly developed by Luca Pacioli (an Italian)
in the year 1494. This system recognized that every financial transaction has two aspects. one of
them is debit and another is credit. The rule of double entry system is that every debit, there is a
corresponding credit of the same amount. It helps to prepare ledger accounts, profit and loss
account and balance sheet.

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