Introduction to

accounting
• Business organisation and other
business
• Organisations carry on activities
which involves exchange of money
and money’s worth or economic
resources.
• Information about the business and other
organisations is required not only to the
proprietors and managers of the
business, but also to various interested
users as government, investors,
customers and employees.
• In 1941, The American Institute of
Certified Public Accountants (AICPA) had
defined accounting as

• “the art of recording, classifying, and

summarising in a significant manner and
in terms of money”.
• In 1966, the American Accounting
Association (AAA) defined accounting as

• ‘the process of identifying, measuring and

communicating economic information to permit
informed judgments and decisions by users of
information’.
• Accounting the financial activities in a
systematic way helps in ascertaining the
efficiency of performance of these
activities and provide data about the
state of affairs of the organisation for further
analysis and planning

• Accounting is a language of business

 Evaluation of accounting
In the earliest days of civilization ,
Accounting was done by Stewards
They rendered accounts periodically to
the owners of the property,
The Stewardship accounting is said to be
the root of ac counting of debit and
credit in the
12th century itself.
• In 1494, Luca Pacioli an Italian
• Developed double entry system of book
keeping.

• Though accounting was individual centric in

the initial stage of evolution of accounting , it
has gradually developed in to social
responsibility accounting in the 21st
century, due to the vast growth of business
activities.
Meaning and definition of
Accounting
• Accounting is the systematic process
of
• Identifying,
• Measuring,
• Recording,
• Classifying,
• Summarising,
• Interpreting and communicating financial
information.
• The profit or loss during the
accounting period, Assets,
• laibilities and capital can be find out
from the information recorded in the
accounts.
• American Accounting Association
defines,
• “ the process of identifying,
measuring and communicating
economic information to permit
informed judgments and decision by
the users of the information”
Accounting as a Source of
Information
Accounting Cycle
• Transactions • The first step in the accounting process is
identifying the financial transactions of a firm.
• Journalising • All the monetary transactions are recorded in the books of
original entry called journals.
• Recording the transactions in the journal is called
journalising. (In a chronological order)

• Ledger posting • Transferring the entries from the journal to the

ledger is called posting. Totaling two columns of
ledger is called balancing.
• Trial Balance • Trial balance is prepared on the basis of as ledger
balances.

• Preparing trading and profit and loss account

• Trading profit and
loss account. for a particular accounting period to know the gross
profit and net profit during the year.

• A statement showing the balances of assets and

• Balance sheet
liabilities namely balance sheet is prepared as the
final step in the accounting process.
 Objectives of accounting
• i) To keep a systematic record of financial transactions
and events
• ii) To ascertain the profit or loss of the business
enterprise
• iii) To ascertain the financial position or status of the
enterprise
• iv) To provide information to various stakeholders for
their requirements
• v) To protect the properties of an enterprise and
• vi) To ascertain the solvency and liquidity position of an
enterprise
 Functions of
Accounting

1.Measurement

Comparison
2. Forecasting

3.
6.Assistance
government
to

4. Decision
5. Control making
Measurement • The main function of accounting is
to keep systematic record of all
transactions and preparing final
accounts.

• It helps to measuring the

• performance as well as the
financial position of the business
enterprises.
. Forecasting
• The accounting system
may help the people to
understand the Future
performance and
financial position of the
business enterprises can
be forecasted.
Comparison • The systematic accounting
process may help to compare
the actual financial results of the
business enterprises with
projected figures and standards.
• The effective measures can
• be taken to enhance the
efficiency of various operations.
. • Accounting provides relevant
Decision information to the management
making for planning and controlling the
business organisation.
• This will help the business to
take various decisions various
decision regarding cost, price,
• sales, level of activity, etc.
Control • As accounting works as
a tool of control, the
strengths and
weaknesses are
identified to provide
• feedback on various
measures adopted.
Assistance to
• Government needs full
government
information on the
financial aspects of the
business for various
purposes such as
taxation, grant of
subsidy, etc.
Importance of Accounting
• All the transactions are financial in nature are recorded in a
systematic way in the books of accounts.

• Financial position of the business is ascertained by

preparation of financial statements namely, trading and profit and
loss account and balance sheet.

• Financial information can be done to assess the progress of the

organisation in different areas and it provides complete picture of
the liquidity, profitability and solvency of the business.

• Accounting information provides the relevant data to make

appropriate decisions. The future policies and programmes can be
planned by the management based on the accounting data
provided by the organisation.
• Preparation of proper accounting facilitating the legal
requirements like PF, EPF , income tax and TDS to employees.

• Accounting supplies appropriate information to different interested

groups like owners, management, creditors, employees, financial
institutions, tax authorities and the government.

• Accounting records are generally accepted as evidence in courts of

law and other legal authorities in the settlement of disputes.

• When two or more business units decide to merger, accounting

records provide information about the value of assets and
liabilities of the business.
Branches of Accounting
 • It involves recording of financial
Financial Accounting
transactions and events.
It is historical in nature and records are
kept for transactions which have
already occurred.
It provides financial information to the
users for taking decisions.
It is concerned with identification,
recording, classifying and
summarizing of financial transactions
Preparing income statement and
financial statements to know the
financial position
Cost accounting • It involves the collection, recording of
expenditure for the determination of the
costs of products or services.

• These data helps the management for cost

control and managerial decision.
Management • It is concerned with the
Accounting
presentation of
accounting information in
such a way as to assist
management in decision
making and in the day-to-
day operations of an
enterprise.
Social
Responsibility
Accounting
Human
• It is concerned with
Resources identification,
Accounting
quantification and
reporting of investments
made in human resources
of an enterprise.
 Bases of Accounting
• There are three basis of accounting in common usage, namely.

• i. Cash basis- actual cash receipts and actual cash payments are
recorded.

• ii. Accrual or mercantile basis- Under accrual basis of accounting, the

revenue whether received or not, but has been earned or accrued during
the accounting period and expenses incurred whether paid or not are
recorded.

• iii. Mixed or hybrid basis---This basis is a combination of cash basis and

accrual basis of accounting.
• Revenues and assets are generally recorded on cash basis
• Expenses and liabilities are generally taken on accrual basis.
 Internal and external users

Internal users External users

• i. Owners • i. Creditors and financial
• ii. Management institutions
• ii. Investors
• iii. Employees
• iii. Customers
• iv. Tax authorities and
regulatory bodies
• v. Government
• vi. Researchers
• vii. General public
Role of an Accountant
• (i) Record keeper
• (ii) Provider of information to the management

• (iii) Protector of business assets

• (iv) Financial advisor

• (v) Tax manager

• (vi) Public relation officer
Using Debit and Credit
• As already stated every transaction involves give
and take aspect.

• In double entry accounting, every transaction

affects and is recorded in at least two accounts.

• When recording each transaction, the total amount

debited must equal to the total amount credited.
• Rules of Debit and Credit
• All accounts are divided into five categories for the
purposes of recording the
• transactions:
• (a) Asset
• (b) Liability
• (c) Capital
• (d) Expenses/Losses, and
• (e) Revenues/Gains.
• Two fundamental rules are followed to record the
changes in these accounts:
• (1) For recording changes in Assets/Expenses (Losses):
• (i) “Increase in asset is debited, and decrease in asset is credited.”
• (ii) “Increase in expenses/losses is debited, and decrease in expenses/
losses is credited.”

• (2) For recording changes in Liabilities and

Capital/Revenues (Gains):
• (i) “Increase in liabilities is credited and decrease in liabilities is debited.”
• (ii) “Increase in capital is credited and decrease in capital is debited.”
• (iii) “Increase in revenue/gain is credited and decrease in revenue/gain is
debited.”