Why Accounting?

• Every trader generally starts business for the

purpose of earning profit. While establishing
business, he brings own capital, purchases
machinery, furniture, raw materials and other
assets.

• He starts buying and selling of goods, paying for

salaries, rent and other expenses, depositing and
withdrawing cash from bank, i.e., he undertakes
innumerable transactions in business.
 Why Accounting?
• The number of transactions in an organization
depends upon the size of the organization.

• It is humanly impossible to remember all these

transactions. Further, it may not be possible to find
out the final result of the business without recording
and analyzing these transactions.
• Accounting came into practice as an aid to human
memory by maintaining a systematic record of
business transactions.
 DEFINITION

Accounting is defined as the process of recording,

classifying, summarizing, analyzing and interpreting the
financial transactions and communicating the results
there of to the persons interested in such information.

Hence accounting is the Language of Business.

 USERS OF ACCOUNTING
INFORMATION
The users of accounting can be divided in two broad
groups:

 Internal Users – Managers, Investors, Workers

 External Users – Researches, Government,
Creditors
 OBJECTIVES OF
FINANCIAL ACCOUNTING
 To keep permanent, accurate and complete record of
business transactions
 To maintain records of incomes and expenses and
losses in such a way that, the Net profit/Loss for
any specified period is ascertained
 To maintain records of Assets and Liabilities and in
such a way that, the Financial position of the
business at any point is ascertained
 To provide information for legal & tax purposes.
 ACCOUNTING PRINCIPLES

Accounting principles may be defined as those

rules of conduct or procedures which are adopted
by the accountants universally while recording the
accounting transactions.

These principles enable standardization in

recording & reporting financial information.
 ACCOUNTING PRINCIPLES

Accounting principles are classified in to two

categories

 Accounting Concepts

 Accounting Conventions
 BOOK KEEPING

Book keeping is the science and art of correctly

recording in books of accounts all those business
transactions that result in transfer of money or
money’s worth.
 DOUBLE ENTRY SYSTEM
OF BOOK KEEPING
“When a transaction takes place, one person
receives benefits and the other person gives benefit.”

So, Every transaction is divided in to two aspects

Debit & Credit.
BASIC PRINCIPLE:
For every Debit, there is a corresponding Credit of
Equal Value.
 ACCOUNTING CYCLE
Recording
Journal

Interpreting Classifying
Balance Sheet Ledger

Interpreting Summarizing
Trading and Trial Balance
P&L a/c
 TYPES OF ACCOUNTS

Every organization deals with certain common

factors like persons, properties, incomes and
expenses. On the basis of common factors, accounts
are classified as

 Personal Accounts
 Real Accounts
 Nominal Accounts
 PERSONAL ACCOUNTS

These accounts relate to natural persons, artificial

persons and representative persons.
Ex: Ram a/c, BPL Company a/c, Bank a/c etc.

RULE:

DEBIT – The Receiver

CREDIT – The Giver
 REAL ACCOUNTS

These accounts relate to tangible or intangible real

assets.
Ex: Land a/c, Furniture a/c, Cash a/c etc.

RULE:

DEBIT – What comes in

CREDIT – What goes out
 NOMINAL ACCOUNTS

These accounts relate to expenses, losses, incomes

and profits.
Ex: Salary a/c, Rent a/c, Interest a/c etc.

RULE:

DEBIT – All expenses and losses

CREDIT – All gains and profits
 JOURNAL

The word Journal is derived from the French word

“JOUR” which means a day. All the transactions are
first recorded in the journal as and when they occur
in chronological order.

Journal is also called Book of Original Entry or

primary book or Day book.
 PROFORMA

DATE PARTICULARS LEDGER DEBIT CREDIT

FOLIO AMOUNT AMOUNT

Year Name of a/c Dr.

Date/ To Name of a/c
*** ***
Month (Being…..
Narration)
 NOTE ON GOODS a/c

Goods a/c is classified into 4 categories for

convenience of recording the transaction.
Purchase a/c: When Goods are purchased
Sales a/c: When Goods are sold
Purchase returns a/c: When purchased Goods are
returned
Sales return a/c: When sold Goods are returned by
customers.
 LEDGER

After recording the transaction in the journal, the

next step is to post the transactions of journal into
their individual respective accounts (Ledger).

The ledger a/c is divided into two halves, the left

hand side for Dr. and the right hand side for Cr.
 PROFORMA
Dr. Name of the a/c
Cr.
DATE PARTICULARS JF AMT DATE PARTICULARS JF AMT
(Rs.) (Rs.)
Year To ________ a/c *** Year To ________ a/c ***
Date Date
Month Month
Sources:

1. Dhanesh K Khatri, Financial Accounting,

Tata Mc –Graw Hill, 2011.
2. Paresh Shah, Financial Accounting for
Management 2e, Oxford Press, 2015.
3. S. N. Maheshwari, Sunil K Maheshwari,
Sharad K Maheshwari, Financial
Accounting, 5e, Vikas Publications,
2013.