INTRODUCTION TO ACCOUNTING

MEANING OF
ACCOUNTING
● “Accounting is the art of recording,
classifying and summarising in a
significant manner and in terms of money;
transactions and events which are, of a
financial character and interpreting the
results thereof”.
 Accounting process
● T

FINANCIAL
TRANSACTION
S

RECORDING
COMMUNICATION
TO
USERS

ANALYSIS & CLASSIFYIN

INTERPRETATIO G
N

SUMMARISIN
G
 CHARACTERISTICS OF ACCOUNTING
● IDENTIFICATION OF FINANCIAL TRANSACTIONS
Records only monetary transactions.
E.g. purchase of raw materials, sale of goods by a firm.
Events which cannot be measured in money terms are not
recoded in books of account.
● RECORDING
Process of entering business transactions in Journal.
Also called as book of original entry.
● CLASSIFYING
Process of grouping transactions of one nature at one place.
Transactions recorded in journal are posted to main book of
account called Ledger
 ..
SUMMARISING
Presenting the classified data in an understandable manner
Preparing financial statements viz.
(i) Trading & Profit & Loss A/c
(ii) Balance Sheet
● ANALYSIS & INTERPRETATION
Analysing financial data so that users can make
judgement about profitability & financial position of
the business.
● COMMUNICATING
Communicating financial information to its users. To
internal as well as external users.
 MAINTAINING RECORDS

DETERMINE PROFIT
OR
LOSS

OBJECTIVES FACILITATE
OF MANAGEMEN
ACCOUNTIN T
G

PROVIDE INFORMATION
TO
USERS

DETERMIN
E
FINANCIAL
POSITION
 OBJECTIVES OF ACCOUNTING
● MAINTAINING ACCOUNTING RECORDS
To record financial transactions & events in the books of
account in a systematic manner

● DETERMINING PROFIT OR LOSS

To determine the Net results of transactions over a period of
time through Trading and Profit & Loss A/c
Also called as Income Statement

● DETERMINING FINANCIAL POSITION

To determine financial position through Balance Sheet
Also called as Position statement
..
● FACILITATING MANAGEMENT
Provides financial information to management.
Assists management in decision making, effective
control & forecasting.
● PROVIDING INFORMATION TO USERS
Provides Accounting information to users to
analyse information as per their needs
USERS OF ACCOUNTING INFORMATION

INTERNA
EXTERNA
L
L USERS
USERS

GOVERNMEN
T

EMPLOYEE
OWNER S BANK
S S
INVESTOR
S

MANAGEMEN CREDITOR
T S
RESEARCHER
S
 INTERNAL USERS

● OWNERS
Contribute capital in the business & bear the risk
Interested in knowing profit earned or loss incurred by
the business
● MANAGEMENT
Needs information in Decision making
such as fixing selling price, cost control, investment
into new projects
● EMPLOYEES & WORKERS
Interested in financial statements
to ensure availability of salary and bonus
 EXTERNAL USERS
● BANKS
To ensure safety & recovery of the loan advanced by them to the
business
● INVESTORS
To assess earning capacity of the enterprise and ensure safety
of their investment
● GOVERNMENT
To collect information about earnings of the enterprise for
collection of taxes
Further it enables Government to take policy decisions
● CREDITORS
Those who supply goods or services on credit
Interested in assessing credit- worthiness of business
● RESEARCHERS
To use Accounting information for their research work
 BOOK KEEPING VS ACCOUNTING

“ACCOUNTING IS THE ART OF RECORDING, CLASSIFYING

AND SUMMARISING IN TERMS OF MONEY
TRANSACTIONS WHICH ARE OF FINANCIAL CHARACTER,
AND INTERPRETING THE RESULTS THEREOF”
BASIS BOOK KEEPING ACCOUNTING
1.Scop BOOK Keeping involves Accounting in addition to
e (a) identifying the Bookkeeping involves
transactions, (a)summarizing the
(b) measuring them in classified Transactions,
money terms (b)analysing & interpreting
(c) recording them in the the results
books of account and (c) communicating the
(d) classifying them results to the interested
parties

2 Stage Book-keeping is Primary Accounting is the Secondary

stage. stage. It starts where
bookkeeping ends.
3. Basic Objective The basic objective of The basic objective of
book accounting is to ascertain
keeping is to maintain net results of operations
systematic records of and
financial financial position and to
transactions. communicate
information to the
interested parties.
BASIS BOOK KEEPING ACCOUNTING

D
4. Who Performs

● .
Book-keeping work is
performed by junior staff.
Accounting work is
performed by senior staff

6. Analytical Skills The book-keeper does not An accountant is required

need to possess analytical to possess analytical skill.
skill.
7. Nature of Job The job of a book-keeper is The job of an accountant is
often routine and clerical in analytical is nature.
nature.
IGNORES SHOWS
PRESENT FICTITIOUS
VALUE ASSETS

NOT
FULL
Y
EXAC
MAY T
LEAD TO
WINDOW IGNORES
DRESSING QUALITATIV
E ELEMENTS
 LIMITATIONSOF ACCOUNTING
● ACCOUNTING IS NOT FULLY EXACT
Although most transactions are recorded on the basis of evidence
yet some estimates are made for assessing profit or loss
E.g. estimating life of an asset, value of stock ,provisions for doubtful
debts etc.

Different firms follow different methods so result will change with

change in practice

● IGNORES QUALITATIVE INFORMATION

Records only financial transactions
Ignores Non-financial transactions
Qualitative elements like efficiency of management &
competition in the market affect performance of business , but are
not recorded
..

● MAY LEAD TO WINDOW DRESSING

‘Window dressing’ means manipulation of
accounts to conceal vital facts & present a
better position.
Here Financial statements fail to provide True & fair view
of
the financial position of the enterprise.

SHOWS FICTITIOUS ASSETS

Certain assets don’t have value but are shown in Balance –
sheet
Such as preliminary expenses, discount on issue of shares
Showing these assets in books makes result doubtful
..

IGNORES PRESENT VALUE OF BUSINESS

Accounting follows Going concern concept
i.e. business will continue for indefinite period
As such assets are not shown at market price rather at
purchase price which is Historical
QUALITATIVE CHARACTERISTICS OF ACCOUNTING
● RELIABILITY
Means users must be able to depend on information
Information must be reliable
Verifiable, free from Bias & material error

● RELEVANCE
To be relevant, information must be available in time
Must help in prediction and feedback, and
Must influence the decisions of users
Unnecessary & irrelevant information should not be given
 ..

● COMPARABILITY
To be useful information must be comparable
To be comparable, accounting reports must
belong to a common period and
Use common unit of measurement
It should facilitate inter-firm & intra –firm comparisons
● UNDERSTANDABILITY
Information should be presented in simple manner
Should be easily understood by different users
Relevant explanatory notes can be given to explain the
information given in financial statements
 ADVANTAGES OF ACCOUNTING
● EVIDENCE IN LEGAL MATTERS
● PROVIDES COMPLETE & SYSTEMATIC RECORD
● PROVIDES INFORMATION ABOUT PROFIT or
LOSS
● ENABLES COMPARATIVE STUDY
● FACILITATES RAISING LOANS
● HELPFUL IN DECISION MAKING
● FACILITATES SALE OF BUSINESS
THANK YOU