Introduction to

Accounting: The
Language ofoftenBusiness
Welcome to the world of accounting, referred to as the "language of
business." This course will introduce you to the fundamental concepts, principles,
and practices that form the backbone of accounting. Throughout this
presentation, we will explore how accounting serves as an information system
that identifies, measures, records, and communicates economic events to
interested users.

By the end of this course, you will understand the meaning and need for
accounting, recognize its role as a crucial information source, identify various
users of accounting information, comprehend accounting objectives, appreciate
its evolving role in business, and become familiar with essential accounting
terminology.
Learning Objectives
1 State the meaning and need of accounting
Understand what accounting is and why it is essential for businesses and
organizations of all sizes.

2 Discuss accounting as a source of information

Recognize how accounting generates valuable information for decision-
making and performance evaluation.

3 Identify internal and external users

Learn who uses accounting information and how their information needs
differ.

4 Explain objectives and role of accounting

Comprehend the primary purposes of accounting and its evolving role in
modern business environments.
The Evolution of Accounting
Modern Role
Traditional Role
Today, accountants work in exciting areas like forensic accounting, e-commerce,
For centuries, accounting was primarily confined to financial record-keeping financial planning, and environmental accounting, serving as key members of
functions, focusing on recording transactions accurately. decision-making teams.

Expanding Functions
As business environments became more complex, accounting expanded beyond
mere bookkeeping to include information provision for decision-making.
Meaning of Accounting

Identify
Recognize economic events relevant to the business entity

Measure
Quantify transactions in monetary terms

Record
Systematically document information chronologically

Communicate
Share relevant information with users
Historical Development of
Accounting
1 Ancient Civilizations (4000 B.C.)
Seeds of accounting were sown in Babylonia and Egypt, who recorded transactions of
payment of wages and taxes on clay tablets.

2 Greek and Roman Period

Greeks used accounting for apportioning revenues among treasuries, while Romans
developed daybooks and ledgers for monthly recording.

3 India's Contribution
In India, accounting practices date back to Kautilya's Arthashasthra (3rd century B.C.),
which described methods for maintaining accounting records.

4 Double-Entry System (1494)

Luca Pacioli's book is considered the first text on double-entry bookkeeping,
introducing terms like Debit (Dr.) and Credit (Cr.) that are still used today.
Economic Events in Accounting
What is an Economic External Events Internal Events
Event?
Transactions between an organization Transactions that occur entirely within
An economic event is a happening of and outside parties, such as sales to an organization, such as the transfer of
consequence to a business organization customers, purchases from suppliers, materials from stores to production
that is measurable in monetary terms. It rent payments to landlords, and service departments or payment of wages to
comprises multiple transactions that provision to clients. employees.
collectively impact the business entity.
Identification in Accounting Process

Observation Evaluation
Carefully watching business activities Assessing which events have financial
as they occur character

Categorization Selection
Classifying transactions into Choosing relevant transactions for
appropriate accounts recording
Measurement in
Accounting

Monetary Estimation Financial Filter

Quantification When Needed
Only events
Converting Using reasonable quantifiable in
transactions into estimates where exact monetary terms are
financial terms using amounts cannot be considered for
currency as the determined financial accounting
measuring unit immediately. records.
(rupees and paise).
Recording in Accounting
Source Documents
Collection of vouchers, receipts, invoices that provide evidence of
transactions

Journal Entries
Chronological recording of transactions with debit and credit
amounts

Ledger Posting
Transferring entries to respective accounts to track individual
balances

Trial Balance
Preparing list of all accounts to verify mathematical accuracy
Communication in Accounting

Financial Statements
Final outputs that summarize financial information

Visual Representations
Charts, graphs, and tables that enhance understanding

Analysis & Interpretation

Additional insights to help users make decisions

Timely Delivery
Ensuring information reaches users when needed
Types of Business Organizations

Accounting applies to all types of organizations regardless of their size, structure, or purpose. These include sole proprietorships (single owner businesses),
partnership firms (businesses with multiple co-owners), cooperative societies (member-owned organizations), companies (corporate entities with limited
liability), and government organizations such as local authorities and municipal corporations.
Internal Users of Accounting
Information

Chief Executive Financial Officers Managers at Various

Officer Levels
Rely on detailed financial data
Uses accounting information for funding decisions, cash Need operational and financial
for strategic planning, overall management, and financial metrics to control costs,
performance assessment, and reporting compliance. evaluate performance, and
major decision-making. make tactical decisions for
their departments.

Line Supervisors
Use basic accounting
information to monitor
resource utilization and
operational efficiency within
their scope of responsibility.
External Users of Accounting Information

Investors Creditors
Present and potential shareholders Banks, financial institutions, and
who assess investment risks and lenders who evaluate
returns creditworthiness

Other Stakeholders Government Agencies

Customers, suppliers, labor unions, Tax authorities and regulators who
and competitors ensure compliance
Why Users Need Accounting
Information
Owners/Shareholders
To assess return on investment, evaluate the company's financial health, and make decisions
about continuing or increasing their investment.

Directors/Managers
To compare performance against industry standards, ensure adequate returns on investments,
control costs, and maintain solvency while making operational decisions.

Creditors and Lenders

To evaluate the likelihood of repayment by analyzing liquidity ratios and the ability of the
company to meet its obligations as they become due.

Government and Regulators

To ensure tax compliance, protect investor interests, and verify adherence to legal obligations
imposed by various laws and regulatory bodies.
Branches of Accounting

Financial Accounting Cost Accounting Management Accounting

Focuses on recording transactions and Analyzes expenditures to determine the Provides information for internal
preparing standardized financial cost of products manufactured or decision-making, planning, and control.
statements for external users. It provides services rendered. It helps in cost control, It includes budgeting, performance
information about profitability and inventory valuation, and providing cost evaluation, and strategic analysis that
financial position, adhering to accounting information for pricing decisions. helps managers guide the organization's
standards and legal requirements. future.
Qualitative Characteristics of Accounting
Information
Reliability Relevance
Information must be dependable, free Information must be timely and have
from error and bias, and faithfully predictive or feedback value. It should
represent what it claims to represent. make a difference in users' decisions by
Users must be able to trust the helping them evaluate past, present, or
information for decision-making. future events.

Comparability
Understandability
Information should allow users to identify 3 Information should be presented clearly
similarities and differences between
so that users with reasonable knowledge
different periods or different entities,
of business can comprehend it without
enabling meaningful comparisons.
confusion.
Components of Reliability in Accounting

Neutrality
Representational Faithfulness
Information should be free from bias that would
Verifiability
There should be agreement between the influence users toward a predetermined result
Different knowledgeable and independent description of an economic event and the or outcome. The accounting information should
observers should be able to reach consensus actual event that took place. Financial not be selected or presented in a way that
that the information represents what it claims statements must accurately reflect the favors one set of interested parties over
to represent. This means that the accounting underlying transactions and events without another.
methods used should be capable of being distortion.
checked by another accountant.
Relevance in Accounting
Information
Timeliness
Information must be available to decision-makers before it loses its capacity to
influence decisions. Delayed information, no matter how accurate, has little or no
value.

Predictive Value
Information should help users forecast future outcomes or confirm or correct their
previous expectations. Historical data should enable prediction of future trends.

Feedback Value
Information should confirm or correct prior expectations, allowing users to evaluate
their past decisions and adjust future actions accordingly.

Decision Usefulness
Overall, information must be capable of making a difference in users' decisions by
helping them form predictions about outcomes or confirm/correct prior expectations.
Understandability in
Accounting
Clear Presentation
Information must be presented in a clear, concise manner that allows users to
comprehend its meaning without confusion.

User Knowledge
While accounting information should be understandable, it assumes users have
reasonable knowledge of business and economic activities.

Proper Classification
Transactions and events should be properly categorized and structured to enhance
clarity and facilitate understanding.

Visual Aids
Charts, graphs, and tables can supplement textual information to improve
comprehension of complex accounting concepts.
Comparability in Accounting
Time Period Comparison Entity Comparison

Users should be able to identify trends Users should be able to compare

in an entity's financial information by financial information between
comparing statements from different different entities to assess relative
periods. This helps in evaluating the performance and position.
entity's performance over time.
For example, comparing profitability
ratios between competitors in the
For example, comparing this year's same industry to evaluate competitive
profit with last year's profit to assess standing.
growth.
Objectives of Accounting: Record Maintenance

Systematic Recording
Creating organized financial records

Complete Documentation
Ensuring all transactions are captured

Evidence Preservation
Maintaining verifiable proof of business activities

Memory Support
Providing reliable records where human memory fails
Objectives of Accounting: Profit and Loss Calculation
Objectives of Accounting: Depicting Financial
Position

Balance Sheet Assets Presentation Liabilities and Equity

A balance sheet provides a snapshot of a The balance sheet clearly shows what the The balance sheet also presents all
company's financial position at a specific business owns, including physical assets like obligations to creditors and the owner's
point in time. It lists all the resources owned buildings and equipment, as well as financial investment in the business, showing the
by the business (assets) on one side and all assets like cash and receivables, classified as financial structure and solvency of the
claims against these resources (liabilities and current or non-current. organization.
owner's equity) on the other side.
Objectives of Accounting: Providing Information
to Users

For Internal Users For External Users Information Formats

Management at various levels needs timely Investors, creditors, government agencies, Accounting information is communicated
information on costs, profitability, and and other external parties rely on through reports, statements, graphs, and
operational efficiency for planning, standardized financial statements to assess charts designed to make complex financial
controlling, and decision-making. This the company's financial health, performance, data understandable and useful for various
information is often detailed, frequent, and and compliance with regulations for making decision-making situations.
tailored to specific management needs. informed decisions.
External Users' Information
Needs
Investors
Need information on risks and potential returns on their investments, profitability
trends, and dividend prospects to make buy, hold, or sell decisions.

Lenders and Financial Institutions

Require data on creditworthiness, ability to repay loans, interest coverage, and
collateral value to make lending decisions and set terms.

Government and Regulators

Need information on compliance with tax laws, resource allocation, and adherence to
industry regulations to ensure legal operations.

Other Stakeholders
Suppliers, customers, unions, and social responsibility groups each have specific
information needs related to their relationship with the business.
Different Roles of Accounting
Language of Historical Record Economic
Business Reality
It functions as a
Accounting serves as a chronological record of Accounting aims to
universal business financial transactions, determine the true
language that preserving the financial economic position and
communicates financial history of an performance of an
information about organization at actual entity, showing changes
enterprises to various amounts involved. in wealth over time.
stakeholders in a
standardized format.

Information
System
It works as a process
linking information
sources to receivers
through communication
channels, facilitating
informed decision-
making.
Accounting Entities
What is an Entity? Entity Types
In accounting, an entity refers to a specifically identifiable business Accounting entities can be sole proprietorships, partnerships, companies,
enterprise that is treated as separate from its owners and other businesses. cooperatives, non-profit organizations, government bodies, or any other
Each accounting system is designed for a specific business entity. distinct economic unit.

Entity Concept Importance

The accounting entity concept ensures that personal transactions of owners Proper identification of the accounting entity is fundamental to determining
are kept separate from business transactions, maintaining clear boundaries which transactions should be recorded in the books of accounts and which
for financial reporting. should be excluded.
Business Transactions
Definition
An event involving exchange of value between two or more entities
that can be measured in monetary terms

Transaction Types
Can be cash-based (immediate payment) or credit-based (payment
deferred)

Examples
Purchase of goods, sale of services, receipt of money, payment to
creditors, incurring expenses

Recording Basis
Must have documentary evidence (voucher) to support the
transaction
Assets: Economic Resources
Definition of Assets

Assets are economic resources owned by a business that can

be usefully expressed in monetary terms. They are items of
value that provide future economic benefits to the entity.

For example, a retail store's building, inventory, cash, and

accounts receivable are all assets that help generate revenue
for the business.
Classification of Assets

Current Assets Non-Current Assets

Assets expected to be converted into Assets with benefits extending
cash or used within one operating beyond one year, not intended for
2
cycle or one year sale

Intangible Assets
Tangible Assets
Non-physical assets like patents, 4
Physical assets that can be seen and
goodwill, trademarks, and copyrights
touched like buildings, machinery
Examples of Current Assets

Current assets include cash on hand and in bank accounts, which provide immediate purchasing power. Accounts receivable represent amounts due from
customers for goods or services sold on credit. Inventory consists of goods held for sale in the ordinary course of business. Short-term investments are
temporary holdings of excess cash in marketable securities. Prepaid expenses are advance payments for services or goods to be received in the near future.
Examples of Non-Current Assets

Land and Buildings Plant and Machinery Intangible Assets

Property owned by a business for Equipment used in manufacturing or Non-physical assets with long-term value,
operations rather than for sale, including service operations over multiple years. such as patents, trademarks, copyrights,
land, factory buildings, offices, and This includes production machinery, goodwill, software, and brand recognition
warehouses. These long-term assets vehicles, computers, furniture, and that provide competitive advantages and
typically appreciate over time and form a fixtures that contribute to the operating future economic benefits.
significant portion of a company's capacity of a business.
capital.
Liabilities: Obligations

Definition
Claims against business assets by creditors

Nature
Future payment obligations resulting from past transactions

Measurement
Recorded at the amount expected to be paid to settle the obligation

Settlement
4 May require outflow of assets or provision of services
Classification of Liabilities
Current Liabilities Non-Current Liabilities

Obligations that must be settled within one year or one Obligations that extend beyond one year from the balance
operating cycle, whichever is longer. These include: sheet date. These include:

• Accounts payable (amounts owed to suppliers) • Long-term loans and mortgages

• Short-term loans and current portion of long-term debt • Bonds payable
• Accrued expenses like wages and taxes payable • Deferred tax liabilities
• Unearned revenue (advance payments from customers) • Pension obligations
• Long-term lease obligations
Capital: Owner's Investment

Definition Accounting Equation

Capital represents the amount invested by the Capital can be derived from the fundamental
owner(s) in the business. It is the owner's claim on the accounting equation: Capital = Assets - Liabilities. This
assets of the business after all liabilities have been shows that capital is a residual interest in the assets.
paid.

Forms of Investment Classification

Capital may be contributed in the form of cash or other In the balance sheet, capital appears on the liabilities
assets. The value of non-cash assets is recorded at their side as it represents the business's obligation to the
fair market value at the time of investment. owner(s), though it is technically owners' equity rather
than a liability.
Revenue: Business Income

Sales Revenue Commission Income Interest Revenue

Income earned from selling Earnings received for Income earned from lending
goods or providing services to facilitating transactions money or from investments in
customers, whether for cash or between other parties, interest-bearing securities and
on credit. This is the primary commonly seen in real estate, accounts.
source of revenue for most insurance, and sales industries.
businesses.

Other Revenues
Additional income sources
such as rent received from
property, royalties from
intellectual property, and
dividends from investments.
Expenses: Costs of Earning Revenue
Expenditure: Spending for Benefits
Revenue Expenditure Capital Expenditure

Spending that provides benefits within the current Spending that provides benefits over multiple accounting
accounting period (usually one year). These expenditures are periods (more than one year). These expenditures are
recorded as expenses in the period incurred. recorded as assets and gradually expensed through
depreciation.
Examples include:
Examples include:
• Salaries and wages
• • Purchase of land and buildings
Rent and utilities
• • Purchase of machinery and equipment
Office supplies
• • Vehicle acquisitions
Repairs and maintenance
• • Major renovations or improvements
Insurance premiums
• Software development costs
Profit: Excess of Revenue over Expenses
Gain vs. Profit
Gain
A gain arises from incidental or peripheral transactions that are not part of a business's main
operations. It represents an increase in owner's equity from activities not related to the normal
course of business.

Examples include:
• Profit from selling fixed assets above book value
• Winning a court case or settlement
• Appreciation in the value of investments
• Foreign exchange gains

Profit
Profit results from the core operations of a business. It is the excess of operating revenues over
related expenses from the primary activities of the enterprise.

Examples include:
• A retailer's profit from selling merchandise
• A service company's profit from providing services
• A manufacturer's profit from producing and selling goods
Loss: Excess of Expenses over Revenue

₹50,000
Operating Loss
When normal business expenses exceed operating revenue

₹20,000
Theft Loss
Value of cash or goods stolen without compensation

₹35,000
Asset Disposal Loss
Selling fixed assets below book value

₹15,000
Fire Damage Loss
Uninsured property damage from accidents
Discount: Price Reductions
Trade Discount
Reduction in list price offered at the time of sale, typically from
manufacturers to wholesalers or wholesalers to retailers

Cash Discount
Deduction offered to encourage prompt payment of credit sales, given
when payment is made within stipulated period

Quantity Discount
Price reduction based on the volume or quantity of goods purchased

Seasonal Discount
Special reduction offered during specific times to boost sales in off-peak
periods
Vouchers: Transaction Evidence

Cash Memo Invoice Receipt

A document provided when goods are A bill issued by the seller to the buyer Written acknowledgment given by the
purchased for cash, showing details of when goods are sold on credit. It contains receiver of money, confirming that a
items, quantities, rates, and the total particulars of goods sold, terms of specific amount has been received. It
amount paid. It serves as proof of cash payment, and becomes the basis for serves as evidence of payment and is
transaction and is essential for recording recording credit sales and purchases. used to record cash outflows and inflows.
purchases in the books of accounts.
Goods: Products for Trading

In accounting, "goods" refers specifically to the products in which a business entity deals - what it buys and sells as its primary
activity. For a furniture dealer, chairs and tables are goods, while for other businesses, they would be classified as assets
(furniture). Similarly, stationery items are goods for a stationery merchant but are expenses (office supplies) for other businesses.
The classification depends on the nature of the business rather than the items themselves. This distinction is crucial for proper
accounting treatment of purchases and inventory.
Drawings: Owner's Withdrawals
Cash Withdrawals Goods Withdrawals
Money taken from the business by the owner for personal use, Products taken from business inventory for the owner's personal
such as personal expenses, household costs, or family needs. consumption or use outside the business.

Asset Withdrawals Accounting Impact

Business assets such as vehicles or equipment taken for personal Drawings reduce the owner's capital and the business's assets but
use by the owner. are not expenses as they don't relate to earning revenue.
Purchases: Acquisition of Goods
Cash Purchases Credit For Trading
Purchases
Goods bought with Merchandise bought by
immediate payment of Goods acquired with retail and wholesale
cash, providing no deferred payment, businesses specifically
credit period. These creating an obligation for resale without
transactions typically to pay in the future. significant
offer better prices but These arrangements modification.
require available funds. help businesses
manage cash flow while
obtaining necessary
inventory.

For
Manufacturing
Raw materials and
components purchased
by manufacturing
concerns to be
processed into finished
goods before sale.
Stock: Inventory on Hand

Opening Stock Stock-in-Hand Closing Stock

The inventory a business has on hand at The total inventory available with a The inventory remaining unsold at the
the beginning of an accounting period. business at any point in time. For a end of an accounting period. It becomes
It represents goods remaining unsold trading concern, this includes goods the opening stock for the next
from the previous period and forms the available for sale. For a manufacturing accounting period and appears as a
starting point for the current period's company, it comprises raw materials, current asset on the balance sheet.
inventory calculations. work-in-progress, and finished goods.
Debtors: Credit Customers

Definition Accounting Treatment

Debtors are persons or entities who owe money to a Debtors are recorded as "Accounts Receivable" or "Sundry
business for purchasing goods or services on credit. They Debtors" on the asset side of the balance sheet. They
represent an asset for the business as they will bring in reflect the amount yet to be received from credit
cash in the future. customers.

Business Significance Aging Analysis

Managing debtors is crucial for cash flow. Businesses must Debtors are often categorized by age of debt (0-30 days,
balance offering credit to boost sales while ensuring 31-60 days, etc.) to monitor collection efficiency and
timely collection to maintain liquidity and working identify potential bad debts requiring follow-up.
capital.
Creditors: Suppliers Owed Money
The Accounting Cycle
Identify Transactions Record in Journal
Analyze business events to determine Enter transactions chronologically in
recordable transactions the journal

Prepare Financial
Post to Ledger
Statements 6
Transfer entries to appropriate
Create income statement, balance
accounts in the ledger
sheet, and cash flow statement

Make Adjustments Prepare Trial Balance

Record end-of-period adjusting entries List all accounts with their balances to
check equality
Double Entry Accounting System
Core Principle Debit and Credit Rules

The double entry system is based on the fundamental The double entry system uses debits and credits to record
accounting equation: Assets = Liabilities + Capital transactions:

This system ensures that for every financial transaction • Increase in assets: Debit
recorded, the accounting equation remains in balance. Every • Decrease in assets: Credit
transaction has a dual effect - it affects at least two accounts.
• Increase in liabilities: Credit
• Decrease in liabilities: Debit
• Increase in capital: Credit
• Decrease in capital: Debit
Source Documents in Accounting

Source documents are the original records that provide evidence of business transactions. They form the foundation of the accounting process by providing
verification that transactions actually occurred. Common source documents include invoices (for credit sales or purchases), receipts (for cash transactions),
cheques, bank statements, payroll records, and goods received notes. These documents must be preserved as they serve as audit trails and may be required for
legal or tax purposes. In modern accounting systems, electronic documents and digital records increasingly replace paper documents.
Generally Accepted Accounting Principles (GAAP)

Materiality Concept
Matching Principle
Only transactions that would
Consistency Principle
Expenses should be recorded in influence the decisions of a
Going Concern
Requires consistent application the same accounting period as reasonable person need to be
Concept
of accounting methods and the related revenues they helped recorded in strict accordance
Assumes that the business will procedures from period to to generate, ensuring accurate with GAAP. Immaterial items may
continue to operate indefinitely, period, allowing for meaningful profit calculation. This principle be handled in more practical
justifying the valuation of assets comparisons of financial guides the timing of expense ways.
based on historical cost rather statements over time. Any recognition.
than liquidation value. This change in methods must be
principle allows for the disclosed.
depreciation of assets over their
useful lives.
Financial Statements

Income Statement Balance Sheet Cash Flow Statement

Also called Profit and Loss Account, this Also called Statement of Financial This statement shows the inflows and
statement reports the revenues, Position, this presents the financial outflows of cash during a period,
expenses, and resulting profit or loss for position at a specific point in time, categorized as operating, investing, and
a specific period. It answers the listing assets, liabilities, and owner's financing activities. It explains how the
question: "How profitable was the equity. It validates the accounting cash position changed during the
business during the reporting period?" equation: Assets = Liabilities + Equity. period.
Accounting Standards

International Standards
Globally recognized framework for financial reporting

National Standards
Country-specific accounting rules and guidelines

Industry Specific Standards

Specialized rules for particular business sectors

Company Accounting Policies

Organization-level implementation of accounting standards
Emerging Areas in Accounting

Forensic Accounting Environmental Accounting E-commerce Accounting

Specializes in investigating financial Focuses on measuring and reporting the Deals with the unique challenges of
fraud, embezzlement, and other financial environmental impact of business online business transactions, including
crimes. Forensic accountants combine activities. This includes identifying designing secure payment systems,
accounting knowledge with investigative environmental costs, evaluating natural managing digital sales tax compliance
skills to analyze financial trails and resource usage, and determining across jurisdictions, and tracking online
provide evidence for legal proceedings. ecological footprints of organizations. revenue streams.
Technology in Accounting

Accounting Software
Computerized systems replacing manual record-keeping

Cloud Accounting
Remote access and real-time collaboration capabilities

Process Automation
Automated data entry and reconciliation processes

Artificial Intelligence
Advanced analytics and predictive capabilities

Blockchain Technology
Distributed ledger for transparent and secure transactions
Ethics in Accounting

100%
Integrity
Commitment to honesty and transparency

0%
Bias
Impartiality in financial reporting

100%
Confidentiality
Protection of sensitive financial information

100%
Competence
Maintaining professional knowledge and skills
Career Paths in Accounting

Public Accounting
Working in accounting firms providing audit, tax, and consulting services to multiple clients

Corporate Accounting
Serving in the accounting department of a business entity, handling internal financial management

Government Accounting
Working in public sector organizations, focusing on budgeting and compliance with government regulations

Non-profit Accounting
Managing finances for charitable organizations with focus on fund accounting and grant compliance

Academic Path
Teaching and researching accounting principles at educational institutions
Key Takeaways from
Introduction to Accounting
1 Accounting is an Information System
Accounting identifies, measures, records, and communicates economic information to
enable informed judgments and decisions by users.

Diverse User Groups

Accounting serves both internal users (management) and external users (investors,
creditors, government) with different information needs.

Quality Matters
Useful accounting information must possess reliability, relevance, understandability,
and comparability.

Evolving Field
Accounting continues to evolve from record-keeping to a strategic business partner
role, embracing technology and addressing new business challenges.