Introduction to

Accounting
 Accounting
● “Accounting is the art of identifying, recording, classifying and
summarising in a significant manner and in terms of money ;
transactions and events which are, in part at least , of a financial
character, and interpreting the results thereof.”

-American Institute of Certified

Public Accountants

● Accounting is a medium of communication, it is called the language

of business
Attributes of Accounting
● Only financial transactions are recorded

01 Identification of Financial Transactions and

events
●
●
●
Brings about a change in resources of a firm
For example- purchase of raw material
Bills and receipts are evidence of such transaction

● Common measurement unit i.e., currency of the country

02 Measuring the identified transactions ●

●
Measured in terms of money.
For example-10 tonnes of steel for Rs 2,50,000

● Process of recording business transaction in financial nature in the Journal

03 Recording ● Purchase book for credit purchase and sales book for credit sales, cash book
for cash transactions

● Process of collecting similar transactions at one place by opening accounts in

the Ledger book

04 Classifying ●
●
Journal transactions posted to Ledger
For example-Rahul’s account in the ledger ,all transactions due to or due from him
are recorded
 Attributes of Accounting
● Presenting classified data in understandable and useful manner to internal
and external users

05 Summarising ● Trial balance, Trading and profit and loss account ( Statement of profit and
loss ), Balance sheet
● Collectively known as Financial Accounts or Financial statements

06 Analysis and Interpretation

● Users can make meaningful judgement of financial performance ( profit ) and
financial position of business

07 Communicating ● Communicating financial data to users

Is Accounting a Science or an Art ?
Science
● Organised knowledge based on certain
principles is a ‘science’.
● Accounting is an organised knowledge based
on certain basic principles.
Art
● Art is a technique which helps us to achieve
our desired objectives
● Accounting is an art of identifying, recording,
classifying and summarising financial
transactions.
● Helps in knowing profitability and financial
position of the business.
Process of Accounting
 Branches of Accounting

Financial Cost Management

Accounting Accounting Accounting
 Book Keeping and Accounting ( NOPS3)
Basis Book Keeping Accounting

NATURE OF Routine in nature Analytical and dynamic in nature

JOB

OBJECTIVE To maintain systematic records of To ascertain net results of operations and

financial transactions financial position and to communicate
information to the interested parties

PERFORMANCE Junior staff performs this function Senior staff performs this function

STAGE Primary stage. It is basis of Accounting Secondary stage. It begins where book
keeping ends.

SPECIAL Mechanical in nature thus no special skill Requires special skills and ability to analyse
SKILLS required. and interpret.

SCOPE Concerned with identifying, measuring, Concerned with summarising the recorded
recording and classifying financial transactions, interpreting them and
transactions. communicating the results
 What is Accountancy?
“Refers to the entire body of the theory and practice of accounting” Kohler

It educates us how to maintain the books

of accounts and how to summarise

the accounting information and

communicate it to the users

 Difference between Accounting and
Accountancy
Accountancy Accounting
1) It is an area of knowledge 1)Accounting is the action or process used in this area.

2)Accountancy doesn’t depends on accounting 2)Accounting depends on rules and principles framed by
accountancy
3)Accountancy is knowledge of accounting
3)Accounting is the application of accountancy
 Protecting Business Assets

Determine Profit and Loss

Objectives Determine Financial Position

of
Accounting Communicating Accounting Information to Users
(PDF CAR)
Assisting the Management

Record of Financial Transactions and Events

Functions of Accounting

C A M M P
Communicating Assistance to Maintaining Maintaining Preparation of
the Financial Management Systematic Legal Financial
Data Accounting Requirements Statements
Records

● Info beyond financial ● Accounting records

data is required
● Communicate
● Accounting records
financial data to
should be in
users
understandable
● Internal or external
manner for decision
● Example- making and assets
management , banks owned are known
, employees etc. ● Ex- duration of debtors
● Income statement
● Primary function accepted as evidence in
court ( p&l A/c)
● Maintained following
● Companies act , Income ● Balance sheet
accounting
tax require submission of (position
principles and
returns statement)
concepts.
● The returns are prepared if
● Shows financial
● Book keeping is accounting records are
performance and
primary function of recorded systematically
financial position
accounting and timely
Advantages and Limitations of Accounting

ADVANTAGES LIMITATIONS

1) Financial Information about business 1) Accounting is not fully exact

2) Assistance to management 2) Accounting does not indicate the realisable
3) Replaces memory value
4) Facilitates comparative Study 3) Accounting ignores qualitative elements
5) Facilitates Settlement of Tax liabilities 4) Accounting ignores the effect of price level
6) Facilitates Loans changes
7) Evidence in court 5) Accounting may lead to Window Dressing
8) Facilitates sale of business
9) Helps in decision making
 Users of accounting Information
Internal Users
1) Owners- interested in knowing profit earned and
loss suffered.
2) Management- Decision making like selling price ,
investments into new projects ,etc.
3) Employees and Workers- Entitled to bonus which
is linked with profit earned by firm. Also financial
statement shows whether the enterprise has
deposited its dues into PF, employees state
insurance, etc., or not
External Users
1) Banks and Financial Institutions- to advance loans
2) Investors and potential Investors- Assess earning
capacity and how safe is their investment.
3) Creditors- Credit worthiness of the business
4) Government and its Authority- compile national
income,policy decisions, assess correct tax dues
5) Researchers- For research work
6) Consumers- fix fair prices for consumers so that they
are not exploited
7) Public- they want to see firm running since it
contributes to economy like employment
 Reliability
● Verifiable
● Free from bias,
● free from material error

Qualitative characteristics of Relevance

Accounting Information
● Relevant to users
● Meet the needs of users
in decision making

Understandability
● Users are able to
understand

Comparability
● Intra - firm comparison
● Inter- firm comparison
 System of Accounting

Double Entry System Single Entry System

A. Both debit and credit aspects of accounting are A. Incomplete Double Entry System
recorded. B. All transactions are not recorded on double entry
B. A transaction has both debit and credit aspects system
C. It is recorded once on debit side and again on C. Not all accounts are maintained only Personal
credit side account or Cash Book is maintained
D. It is scientific and complete and reliable system of D. Accounts in this system are incomplete,
accounting unsystematic and not reliable.
E. Also known as Accounts from Incomplete Records
F. Trial balance, profit and loss account and balance
sheet cannot be prepared