Institute of Hotel Management, Kolkata

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INTRODUCTION TO ACCOUNTNG

Meaning of accounting:
In business, the term ‘accounting’ refers to the process of recording of the
financial transactions of a business.
Accounting is called the “language of business” because it is the only way of
conveying the financial information of a business to anyone who wants to know it.
Definition of accounting:
According to the American Institute of Certified Public Accountants (AICPA),
“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”.
Various Users of Accounting Information:
I. Internal Users:
 Owners
 Management
 Employees

II. External Users:

 Investors
 Creditors
 Banks and other financial institutions
 Government
 Auditors
 Customers
 Researchers

Course: Semester-2 of 3-Year B. Sc. in H&HA Page 1 of 12

Subject: Accountancy (BHM-108)
Lesson: Introduction to Accounting
Lesson prepared by: G. C. Bhatt
Faculty, IHM Kolkata
 Institute of Hotel Management, Kolkata

____________________________________________________________
Objectives of accounting:
The main objectives of accounting are as follows:
 To maintain a systematic and up-to-date records of all financial
transactions of a business.
 To calculate the true profit or loss of a business during a particular
period.
 To calculate the true financial position of a business on a particular date.
 To communicate the necessary financial information about a business to
various users.
 To facilitate managerial decision making, planning and controlling.
 To detect and prevent various errors and frauds, if committed.
Advantages/Functions of accounting:
The various advantages or functions of accounting are as follows:
 It helps to maintain a systematic and up-to-date records of a business.
 It tells about the true profit or loss of a business during a particular
period.
 It tells about the true financial position of a business on a particular
date.
 It communicates the necessary information about a business to various
users.
 It facilitates managerial decision making, planning and controlling.
 It helps to detect and prevent various errors and frauds, if committed.
 It helps in comparing the results of business operations between two or
more firms.
 It helps in the taxation matters.
 Accounting information can be produced as an evidence before the
court of law in solving the legal matters.
 It helps in making the true valuation of a business firm.

Course: Semester-2 of 3-Year B. Sc. in H&HA Page 2 of 12

Subject: Accountancy (BHM-108)
Lesson: Introduction to Accounting
Lesson prepared by: G. C. Bhatt
Faculty, IHM Kolkata
 Institute of Hotel Management, Kolkata

____________________________________________________________

Disadvantages/Limitations of accounting:
The various disadvantages or limitations of accounting are as follows:
 Non-monetary transactions are ignored.
 Accounting information is historic in nature.
 Accounting information may be biased.
 Recording of fixed assets of a business is done at their original cost only.
 Following of alternative methods of accounting.
 There may be chances of manipulation of accounts.
 Changes in the value of money over the time-period is not considered
while recording the business transactions.
 Accounting information cannot be free from errors, frauds or
irregularities, if staff members join hands together to do so.

Accounting Terminology:
The various terms that are used in accounting are as follows:
1. Assets: Assets are the properties owned by a business concern to use them in
business operations. They can be tangible (which have physical presence) e.g.
land, building, machinery, plant, furniture, closing stock, debtors, cash, bank, etc.
and non-tangible (which have no physical presence) e.g. goodwill, patents,
copyrights, trademarks etc.
2. Liabilities: Liabilities are the amounts payable by a business concern to
outsiders. These are the business obligations. In other words, these are the
amounts that the business owes e.g. creditors, bank overdraft, outstanding
expenses, advances received, loans taken etc.
3. Capital: The amount of money or money’s worth which is invested by the
owner of a business is called capital. It is also known as ‘owner’s equity’.

Course: Semester-2 of 3-Year B. Sc. in H&HA Page 3 of 12

Subject: Accountancy (BHM-108)
Lesson: Introduction to Accounting
Lesson prepared by: G. C. Bhatt
Faculty, IHM Kolkata
 Institute of Hotel Management, Kolkata

____________________________________________________________
4. Expenses: Expenses are the cost of doing business. In other words, the money
spent or costs incurred by a business enterprise to generate revenues is called
expenses of the business. For example, purchase of goods, rent paid, electricity,
insurance, taxes, repair charges, discount allowed, carriage, freight, wages,
salaries, advertisement, interest paid, commission paid etc.
5. Incomes or Revenues: The money which is earned by a business enterprise by
doing its normal business operations are called incomes or revenues of the
business. For example, sale of goods, interest received, commission received, rent
received, discount received etc.
6. Profit: The excess of incomes over expenses is called profit.
Incomes ̵ Expenses = Profit
7. Loss: The excess of expenses over incomes is called loss.
Expenses ̵ Incomes = Loss
8. Debtors: The person who owes money to the business is known as the debtor
of the business. In other words, debtors are the customers to whom a business
sells its goods on credit. It is an asset of the business.
9. Creditors: The person to whom the business owes money is known as the
creditor of the business. In other words, creditors are the suppliers from whom
the business purchases goods on credit. It is a liability of the business.
10. Stock or Inventory: The unsold goods or unused materials that a business
possesses on a particular date are called stock or inventory. Stock may be of
opening stock or closing stock.
11. Goods: The things which are purchased and sold by a business concern are
called goods. For example, stationery items for a stationery dealer are goods,
furniture for a furniture dealer are goods.
12. Transaction: An exchange of goods and services for money between two
business concerns is called a transaction.

Course: Semester-2 of 3-Year B. Sc. in H&HA Page 4 of 12

Subject: Accountancy (BHM-108)
Lesson: Introduction to Accounting
Lesson prepared by: G. C. Bhatt
Faculty, IHM Kolkata
 Institute of Hotel Management, Kolkata

____________________________________________________________
13. Discount: The concession that is allowed by a seller to its buyers is known as a
discount.
Discount is of two types. They are as follows:
a) cash discount and
b) trade discount.
Cash discount is the discount which is allowed by a seller to his customers in order
to motivate the latter to make quick payment of the amount already due within a
specified date. Thus, cash discount is given to make an early payment of the
amount due. It is recorded in the books of accounts.
Trade discount is the discount that a seller gives to his buyer to motivate the latter
to purchase more and more amount of goods at one point of time. It is deducted
from the list price of the goods purchased. This type of discount is not at all
recorded in the books of accounts.
14. Accounting period: It is the time period in which a business records its
transactions and prepares its financial statements at the end of that period to
determine its profit or loss and financial position. It may be a twelve-month
consecutive period starting from 1st January to 31st December or 1st April to 31st
march.
15. Vouchers: Vouchers are the supporting documents for different business
transactions. Thus, a voucher is the evidence which is required to authenticate a
business transaction. It may be a bill, a cash memo or a receipt.
16. Account: An account is the individual record of an asset, a liability, an income,
an expense or capital in a summarized manner. For example, the individual
summarised record of sales of goods is 'sales account'. Similarly, the individual
summarised record of purchases of goods is 'purchases account'. An account is
prepared in ‘T’-shape.
17. Debit side (Dr.): The left hand side of an account is called the debit side or Dr.

Course: Semester-2 of 3-Year B. Sc. in H&HA Page 5 of 12

Subject: Accountancy (BHM-108)
Lesson: Introduction to Accounting
Lesson prepared by: G. C. Bhatt
Faculty, IHM Kolkata
 Institute of Hotel Management, Kolkata

____________________________________________________________
18. Credit side (Cr.): The right hand side of an account is called the credit side or
Cr.
19. Books of Accounts: The books, registers, loose sheets etc. that are maintained
by a business concern to record transactions are collectively called the books of
accounts.
20. Entry: The recording of a business transaction in the books of accounts is
called an entry.
21. Owner or proprietor: A proprietor is the person who invests his money in the
business and bears all the risks of the business alone.
22. Drawings: The amount of money, or the value of goods or assets which is
taken away by the owner from the business for his personal or domestic use is
called drawings.

Suppose Ramesh, the owner of a business, withdrew cash ₹5,000, from bank
₹3,000 and goods worth ₹2,000 from the business for his personal use. So the
amount of drawing made by him is ₹10,000.

System of Accounting:
System of accounting refers to the way or process of recording the financial
transactions of a business in its books of accounts. There are basically two systems
of accounting. They are:

1. Single Entry System

2. Double Entry System
1. Single Entry System:
Under this system, only the personal and cash aspects of the transactions are
recorded. This system is not based on the ‘dual aspect concept’ of accounting.
Hence it does not record both the aspects of all business transactions.
Normally the real and nominal accounts are ignored.

Course: Semester-2 of 3-Year B. Sc. in H&HA Page 6 of 12

Subject: Accountancy (BHM-108)
Lesson: Introduction to Accounting
Lesson prepared by: G. C. Bhatt
Faculty, IHM Kolkata
 Institute of Hotel Management, Kolkata

____________________________________________________________

In this system, only a cash book is maintained to record all cash transactions of a
business. All the transactions relating to persons are simply recorded in a rough
book. No other ledger accounts are prepared.

Trial balance can be prepared under this system to check the arithmetical
accuracy of the books of accounts prepared. Since real and nominal accounts are
not considered in this system, the preparation of ‘profit & loss account’ and
‘balance sheet’ is not possible to know the true profit or loss and true financial
position of a business.

Single entry system is an incomplete, inaccurate and unscientific records of

business transactions. It is rarely used in the modern days.

2. Double Entry System:

Double Entry System is a method or system of accounting in which the dual

aspect of every business transaction is expressed by a debit amount and an equal
and ̵offsetting credit amount. Thus, as per the rule of double entry system “for
every debit, there is a corresponding credit and vie-versa”. Thus, in this system,
total debits must always be equal to total credits. The accounting equation is
based on this double entry principle which is as follows:

Assets = Liabilities + Capital

OR
Assets – Liabilities = Capital
OR
Assets – Capital = Liabilities
Advantages of Double Entry System:
Double entry system is acknowledged as the best method of accounting in the
modern world. Following are the main advantages of double entry system:

Course: Semester-2 of 3-Year B. Sc. in H&HA Page 7 of 12

Subject: Accountancy (BHM-108)
Lesson: Introduction to Accounting
Lesson prepared by: G. C. Bhatt
Faculty, IHM Kolkata
 Institute of Hotel Management, Kolkata

____________________________________________________________

 Under this method, both the aspects of each and every transaction are
recorded. So it is possible to keep complete records of all business
transactions.
 Since both the aspects of a transaction are recorded, it is possible to
check the arithmetical accuracy of the books of accounts by preparing a
trial balance.
 Under this system, a profit and loss account can be prepared to know
the true profit or loss of the business during a given period.
 A balance sheet can be prepared to know the true financial position of
the business on a particular date.
 Under this system, errors and frauds can be detected easily. So it puts a
moral pressure on the accounting staff.
 Under this system, necessary information about a business is easily
available so that the management can take appropriate decision and run
the business smoothly and efficiently.
 The total amount owed by debtors and the total amount owed to
creditors can be calculated easily.
 Results of business operations can be easily compared between business
firms and the success or failure of the business can be measured easily
to take the necessary remedial actions.

Disadvantages of Double Entry System:

The double entry system has some disadvantages which are as follows:
 Under this method, each transaction is recorded in books in two stages
(journal and ledger) and two sides (debit and credit). This results in
increase of number and size of books of accounts and creation of
complications.
 It involves time, labour and money. So it is not possible for smaller
business concerns to keep their accounts under this system.
 It requires expert knowledge to keep accounting records under this
system.

Course: Semester-2 of 3-Year B. Sc. in H&HA Page 8 of 12

Subject: Accountancy (BHM-108)
Lesson: Introduction to Accounting
Lesson prepared by: G. C. Bhatt
Faculty, IHM Kolkata
 Institute of Hotel Management, Kolkata

____________________________________________________________
 As the system is complex, there is greater possibility of committing
errors.

Classification of Accounts:
Accounts may be into the following three categories:
1. Personal Accounts
2. Real Accounts
3. Nominal Accounts
1. Personal Accounts: Personal accounts are those accounts which relate to
persons only. Persons may be of natural persons or artificial persons.
Natural Persons are the human beings e.g. Ramesh, Harish etc., whereas, artificial
persons are the persons created by law. They are not the human beings. But they
have a separate identity in the eyes of law and are capable to enter into
agreements or contracts. The examples are sole-proprietorship businesses,
partnership firms, co-operative societies, companies, municipal corporations,
hospitals, banks, government bodies, schools, colleges, clubs etc.
The examples of personal accounts are Ramesh’s a/c, Harish’s a/c, Capital a/c,
drawings a/c, Debtor’s a/c, Creditor’s a/c, State Bank India a/c, ABC enterprise a/c,
Reliance Industries Limited a/c, Rotary club a/c, Tata Memorial Hospital a/c etc.
2. Real Accounts: Real accounts are those accounts which relate to both tangible
and non-tangible things.
Tangible things are those things which can be seen, touched and which have a
physical shape. For example, cash, furniture, building, machinery etc. On the other
hand, non-tangible things are those things which cannot be seen, touched and
which have no physical shape. For example, goodwill, patents, copyrights,
trademarks etc.

Course: Semester-2 of 3-Year B. Sc. in H&HA Page 9 of 12

Subject: Accountancy (BHM-108)
Lesson: Introduction to Accounting
Lesson prepared by: G. C. Bhatt
Faculty, IHM Kolkata
 Institute of Hotel Management, Kolkata

____________________________________________________________
The examples of real accounts are Plant a/c, Furniture a/c, Cash a/c, Machinery
a/c Building a/c, Purchases a/c, Sales a/c, Stock a/c, Goodwill a/c, Patents a/c,
Copyright A/c, Trade-mark a/c etc.

3. Nominal Accounts: Nominal Accounts are the accounts relating to the

expenses, losses, incomes, and gains.
The examples of nominal accounts are Wages a/c, Salary a/c, Interest a/c,
Depreciation a/c, Repairs a/c, Insurance a/c, Advertisement a/c, Commission a/c,
Bad-debt a/c, Rent a/c etc.
Rules for making Debit and Credit:

• Personal Accounts: Debit→ The receiver

Credit→ The giver

• Real Accounts: Debit→ What comes in

Credit→ What goes out

• Nominal Accounts: Debit→ All expenses and losses

Credit→ All incomes and gains

Basis of Accounting:
Basis of accounting deals with the timing of the revenue recognition in a business
i.e. when should the revenue be recognized in the books of accounts of a
business. There are two bases of accounting. They are:

1. Cash basis of accounting and

2. Accrual basis of accounting

Course: Semester-2 of 3-Year B. Sc. in H&HA Page 10 of 12

Subject: Accountancy (BHM-108)
Lesson: Introduction to Accounting
Lesson prepared by: G. C. Bhatt
Faculty, IHM Kolkata
 Institute of Hotel Management, Kolkata

____________________________________________________________
1. Cash basis of accounting:
Under the cash system of accounting, an income will only be recorded when it is
actually received in cash. Similarly, an expense will be recorded only when it is
actually paid in cash.
In other words, only the actual cash receipts and actual cash payments are
recorded under the cash basis of accounting.
No entry is made in the books of accounts for an expense or an income that is
merely due.
For example, a business firm pays the salary of its employees for the month of
June on the 3rd of July. This salary expense will thus be recorded in the month of
July only and not in the month of June, although the expense relates to the period
of June. Similarly, if the business firm made a credit sale on 5th August, but the
payment is received on 11th October, then this sale will be recorded on 11 th
October only.
Government accounting is based on the cash system only. Professional people like
Lawyers, Chartered Accountants, etc., maintain accounts under this system only.
2. Accrual Basis of Accounting:
Under this basis of accounting, accounting entries are made not only for actual
cash receipts and cash payments but also for all those amounts that have already
become due for receipt or payment. In other words, both cash transactions and
credit transactions are recorded in the book of accounts.
Accrual basis is the more logical and scientific approach to accounting. This is the
most widely used method of accounting as it gives a more fair representation of
the profit or loss and financial position of a company.
Thus, in the accrual system, all revenues and expenses are recognized in the time
period in which they occur, not when the money is actually received or paid. So an
income will be recorded if it becomes due irrespective of whether the payment
for the same has been received or not. Similarly, an expense will be recorded

Course: Semester-2 of 3-Year B. Sc. in H&HA Page 11 of 12

Subject: Accountancy (BHM-108)
Lesson: Introduction to Accounting
Lesson prepared by: G. C. Bhatt
Faculty, IHM Kolkata
 Institute of Hotel Management, Kolkata

____________________________________________________________
when it becomes due irrespective of whether the payment has been made or not.
This is done in order to depict the true profit or loss and true financial position of
the business. All commercial establishments follow this system only.
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Course: Semester-2 of 3-Year B. Sc. in H&HA Page 12 of 12

Subject: Accountancy (BHM-108)
Lesson: Introduction to Accounting
Lesson prepared by: G. C. Bhatt
Faculty, IHM Kolkata