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INTRODUCTION TO ACCOUNTING
Father of Accounting- Lucas Pacioli Accounting is thelanguage of business. It serves the purpose of communicating the results of business operations to all the interested parties such as propreitors, managers, creditors and investors. Definitions of Accounting: *AICPA defines Accounting as the art of recording, classifying & summarizing in a significant manner & in terms of money transactions & events which are of a financial character & interpreting the results thereof. *American Accounting Association defines accounting as the process of identifying, measuring and communicating economic information to permit informed judgements and decision by users of the information. Attributes & Steps of Accounting 1) Recording: --- Systematic recording of business transactions in chronological order; --- Every entry to be supported by documentery evidence; ---Recording usually done in JOURNAL or SUBSIDARY BOOKS (Books of original Entry) 2) Classification: --- process of grouping transactions or entries on a predetermined basis --- takes the form of Accounts in a separate book called LEDGER. Eg. Goods sold on Credit- Sales Book Cash ReceivedCah Book Goods Returned by Customer-Sales Return Book. Each Ledger provides the complete picture of the dealings in relation to that particular person, property or expense or income. 3) Summarising: Classifeid data in the ledger is presented periodically in a manner which is understandable & useful to the owners & other interested parties. It takes place in the form Trial Balance, Trading A/C, P& LA/C & Balance Sheet. TB: ensures the arithmetical accuracy of the recording & classification process. Trading A/C: reveals Gross Profit. P& L A/C: reveals Net Profit. Balance Sheeet: portrays the financial position of the business. 4) Significant Manner: Every business has its own pecularities, special problems & particular requirements. The management of the business needs specific types of information for controlling & decision making purposes.
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5) In Terms of Money: Money is the medium through which all the business transactions are expressed. Money Measurement is the basis for Accounting. 6) Transactions & Events of Financial Character: are recorded in Accounts. All the events, dealings & happenings which have no financial effect are completely ignored in the Accounting process. Eg. Working conditions, skilled workforce, sales policies etc. 7) Interpreting the Results: usually done through Ratios & Flow Statements . It is useful in evaluating past performance & providing guidance for future plans & operations. Objectives: The main objectives of accounting are 1. To maintain accounting records. 2. To calculate the result of operations. 3. To ascertain the financial position. 4. To communicate the information to users. 5. To provide effective control over the business 6. To prevent fraud. Advantages of Accounting: 1. Systematic Records 2. Preparation of Financial Statements 3. Assessment of Progress 4. Aid to Decision making 5. Statutory Requirements 6. Information to Interested Groups 7. Evidence in Courts 8. Taxation Problems 9. Merger of Firms Limitations of Accounting: 1. Ignores transactions which cannot be expressed in terms of money. 2. Relies on estimates & forecasts in several important mattes 3. Relies on Historical records 4. Ignores price level changes 5. Subjective opinions on Valuation of Stocks, Provision on Debtors for doubtful debts & discounts. 6. Window Dressing or Manipulation of Accounts is possible. Groups Interested in Accounting Information Internal users of Accounting Information 1. Owners 2. Management
Accounts (XIth)-Introduction to Accounting Prepared By Sameer Wadhwa

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3. Employees External Users 1. Creditors & Financiers 2. Potential Investors 3. Consumers 4. Tax Autorities 5. Government 6. Research Scholars BRANCHES OF ACCOUNTING 1. FINANCIAL ACCOUNTING: is A/Cing for revenues, expenses, assets & liabilities that is commonly carried out in the general office of business. Expressed in P& L A/C & B/S. 2. COST ACCOUNTING: deals with classification, recording, allocation, summarisation of current & prospective cost. It determines cost of production & distribution by departments, functions or product, etc. 3. MANAGEMENT ACCOUNTING: meant exclusively for managerial decision making. It provides necessary information to the management for dicharging its functions of planning, organising, co-ordinating, directing & controlling. It provides data on funds & cash flows, investment projects, prepation & implementation of budgets etc. METHODS OF ACCOUNTING: 1. SINGLE ENTRY SYSTEM: The term Single Entry is vaguely used to define the method of maintaining A/Cs which do not confront to strict principles of double entry. It is not a system. The term Single Entry does not mean that there is only one entry for each transaction. Only the personal A/Cs of the Drs.& Crs. & Cash book of the traders are maintained. Impersonal A/Cs such as Sales A/C, Purchases A/C etc. as well as other Assets A/Cs are ignored. The absence of the 2 fold effect of each transaction makes it impossible to prepare TB, TA. P&L A/C & B/S. It is followed by those firms whose transactions are limited & at the same time who maintains only the essential records. There is no Hard & Fast rule for maintaining records under this system, ie. It depends on the circumstances & the needs of the firm. 2. DOUBLE ENTRY SYSTEM: was invented by Lucas Pacioli in 1494 AD. Every transaction has two concepts one is Benefit receiving concept or Incoming aspect & the other is benefit giving aspect or outgoing concept BENEFIT RECEIVING CONCEPT--- DEBIT
Accounts (XIth)-Introduction to Accounting Prepared By Sameer Wadhwa

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BENEFIT GIVING CONCEPT

--- CREDIT

Eg. Furniture purchased for cash Furniture = Benefit Received Cash = Benefit Giving Furniture A/C Dr. To Cash A/C For every Debit .there must be a corressponding & for every Credit there must be a corressponding & equal Debit.

&

equal

Credit

DEBIT- is derived from the Latin word DEBITUM which means Due for That. In short benefit receiving aspect of a transaction is known as Debit. CREDIT is derived from the Latin word Creder which means Due to That. Benefit giving aspect of a transaction is known as Credit. Advantages of Double Entry System: 1. Complete record, systematic & accurate record of all business transactions. 2. Ascertainment of Profit or Loss. 3. Knowledge of financial position. 4. Check on the accuracy of A/Cs 5. No scope for fraud. 6. For Tax authorities. 7. Easy ascertainment of amount due from customers. 8. Easy ascertainment of amount due to suppliers. 9. Makes comparative study easy.

Book-keeping Book-keeping is that branch of knowledge which tells us how to keep a record of business transactions. It is often routine and clerical in nature. It is important to note that only those transactions related to business which can be expressed in terms of money are recorded. The activities of book-keeping include recording in the journal, posting to the ledger and balancing of accounts. R.N. Carter says, Book-keeping is the science and art of correctly recording in the books of account all those business transactions that result in the transfer of money or moneys worth.

Accounts (XIth)-Introduction to Accounting Prepared By Sameer Wadhwa

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Objectives The objectives of book-keeping are 1. To have permanent record of all the business transactions. 2. To keep records of income and expenses in such a way that the net profit or net loss may be calculated. 3. To keep records of assets and liabilities in such a way that the financial position of the business may be ascertained. 4. To keep control on expenses with a view to minimise the same in order to maximise profit. 5. To know the names of the customers and the amount due from them. 6. To know the names of suppliers and the amount due to them. 7. To have important information for legal and tax purposes Advantages of Book-Keeping i. Permanent and Reliable Record: Book-keeping provides permanent record for all business transactions, replacing the memory which fails to remember everything. ii. Arithmetical Accuracy of the Accounts:With the help of book keeping trial balance can be easily prepared. This is used to check the arithmetical accuracy of accounts. iii. Net Result of Business Operations: The result (Profit or Loss) of business can be correctly calculated. iv. Ascertainment of Financial Position: It is not enough to know the profit or loss; the proprietor should have a full picture of his financial position in business. Once the full picture (say for a year) is known, this helps him to plan for the next years business. v. Ascertainment of the Progress of Business: When a proprietor prepares financial statements evey year, he will be in a position to compare the statements. This will enable him to ascertain the growth of his business. Thus book keeping enables a long range planning of business activities besides satisfying the short term objective of calculation of annual profits or losses. vi. Calculation of Dues : For certain transactions payments may be made later. Therefore, the businessman has to know how much he has to pay others. vii. Control over Assets: In the course of business, the proprietor acquires various assets like building, machines, furnitures, etc. He has to keep a check over them and find out their values year after year. viii. Control over Borrowings: Many businessmen borrow from banks and other sources. These loans are repayable. Just as he must have a control over assets, he should have control over liabilities.

Accountancy, Accounting and Book-keeping:

Accounts (XIth)-Introduction to Accounting Prepared By Sameer Wadhwa

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Accountancy refers to a systematic knowledge of accounting. It explains why to do and how to do of various aspects of accounting. It tells us why and how to prepare the books of accounts and how to summarize the accounting information and communicate it to the interested parties. Accounting refers to the actual process of preparing and presenting the accounts. In other words, it is the art of putting the academic knowledge of accountancy into practice. Book-keeping is a part of accounting and is concerned with record keeping or maintenance of books of accounts. It is often routine and clerical in nature DISTINCTION BETWEEN BOOK-KEEPING AND ACCOUNTING Basis of distinction 1. Objective Book-keeping Accounting

The objective of Book-keeping is to Accounting aims at maintaining maintain records of business business records, calculation of transactions. business income, depiction of financial position of business and communication of business results. The function of Book-keeping is to The function of Accounting is the record business transactions as and recording, classifying, summarizing, when they take place. interpreting business transactions and communicating the results. It has a limited scope. It is a part of Its scope is wider. Besides Bookaccounting. keeping, it includes classification, summarization, interpretation and communication. It does not require special knowledge. In accounting advance and conceptual Only elementary knowledge of understanding is required. accounting is sufficient. For recording business transactions, Accounting work is carried on from vouchers and other supporting records which are available from documents are prepared. book-keeping.

2. Function

3. Scope

4. Level of knowledge 5. Basic

Accounts (XIth)-Introduction to Accounting Prepared By Sameer Wadhwa