Accounting Introduction Notes Career Collegiate

Definition of Accounting:
Accounting may be defined as the science as well as the art of
recording financial transactions under appropriate accounts. The American
Institute of Certified Public Accounts has define Accounting as the art of
recording, classifying and summarizing in a significant manner and in terms of
money transactions and events which in part, at least of a financial character and
interpreting the results thereof From the above definition, we attribute the
following Accounting emerge:
1. It is an art of recording financial transactions.
2. It is an art of making summaries and analyses the financial
transactions.
3. It is an art of interpreting the results of the financial transactions
and communicating the results to the persons who are interested
in it.

Systems of Accounting
There are basically two systems of accounting:
(i) Cash System of Accounting:
It is a system in which accounting entries are made only when
cash is received or paid. No entry is made when a payment or receipt is
merely due. Certain professional people and small business houses record
their income on cash basis, but while recording expenses they take into
account the outstanding expenses also. In such a case, the financial
statement prepared by them for determination of their income is termed as
Receipts and Expenditure Account
(ii) Accrual System of Accounting:
It is a system in which accounting entries are made on the basis
of amounts having become due for payment or receipt. This system
recognizes the fact that if a transaction or an event has occurred; its
consequences cannot be avoided and therefore should be brought into
record in order to present a meaningful picture of profit earned or loss
suffered during a period and also of the financial position of the firm
concerned at the end of a period.
Difference between cash and accrual system:
The difference will be clear with the help of the following example:
A firm closes its books on December 31st each year. A sum of Rs.5,000 has
become due for payment on account of rent for the year 2000. The amount
has, however been paid in January 2001.
In this case, if the firm is following cash system of accounting, no entry will
be made for the rent having become due in the books of accounts of the firm
in 2000. The entry will be made only in January 2001 when the rent is
actually paid. However, if the firm is following accrual system of accounting,
two entries will be made:
i. On December 31st 2000, rent account will be debited while the rent
payable account will be credited by the amount of outstanding rent.
ii. In January 2001 rent payable account will be debited while the cash
account will be credited with the amount of the rent actually paid.
The Accrual system is considered to be better since it takes account
the effects of all transactions already entered into. This system is
followed by most of the industrial and commercial firms.

Career Collegiate
23G G Market Block 6 PECHS Ph 4534165
 Accounting Introduction Notes Career Collegiate
Fields of Accounting :
Any business needs computation of profit and loss. The process of
computing business computing business profit and loss is known as
Accounting. Every business and every group of businesses have their own
field of accounting. The following are three main fields of Accounting:
I. Financial Accounting.
II. Cost Accounting.
III. Managerial Accounting.
I) Financial Accounting :
All receipts and payments are recorded in a chronological order
based on happening of transactions. At the end of a certain period total
expenses and loses are deducted from total revenue/ income which results
in net gain or loss of the period all other field are also base the same.
II) Cost Accounting/ Manufacturing :
It is also known as manufacturing accounting. In the business of
manufacturing or producing the product the profit is fully dependent upon the
cost of product. As cost of product in minimum, the profit ratio will be greater.
III) Managerial Accounting :
The financial accounting data is set in order of the management
requirement in several dimensions or alternates, which is needed for
decision-making and future planning.
Nature of Accounts and its meaning :
We can say that by nature there are only five accounts in the world
and thousands of accounts must be related to any one of the following
nature:
1. Assets 2. Liabilities
3. Proprietorship 4. Revenue
5. Expenses.
1. Assets mean the resources of the business or the commodities possessed
by the business.
2. Liabilities mean the claims of the suppliers of cash or commodities or the
obligation of the business to pay at a certain period.
3. Proprietorship means the claims of the owner of the business for his
interest up to his investment after finalizing the expenses and revenue up to
the date.
4. Revenue means any type of income directly or indirectly of the business.
5. Expense means any type of expense directly or indirectly of the business.
Rules for Debit and Credit :
Debit Nature of Accounts Credit
Increase Assets Decrease
Decrease Liabilities Increase
Decrease Proprietorship Increase
Decrease Revenue/ Income Increase
Increase Expenses Decrease

Career Collegiate
23G G Market Block 6 PECHS Ph 4534165