Introduction to Accounting

Chapter 1

Introduction to Accounting

Introduction to Accounting

DEFINITION OF ACCOUNTING
"Accounting is the art of recording, classifying and

summarising in a significant manner and in terms of

money; transactions and events which are, in part at
least, of a financial character, and interpreting the
results thereof."
-American Institute of Certified Public Accountants

Introduction to Accounting

DEFINITION OF ACCOUNTING
"Accounting is the science of recording
classifying

business

transactions

and

and

events,

primarily of a financial character, and the art of

making

significant

summaries,

analysis

and

interpretations of those transactions and events and

communicating the results to persons who must make
decisions or form judgment."
-Smith and Ashburne

Introduction to Accounting

DEFINITION OF ACCOUNTING
"Accounting is the process of identifying, measuring

and communicating economic information to permit

informed judgments and decisions by users of the
information."
-American Accounting Association

Introduction to Accounting

Meaning of Accounting
Thus, accounting is a process of
collecting,
recording,
summarising and
communicating financial information to the users
for decision-making.

Introduction to Accounting

ATTRIBUTES (CHARACTERISTICS) OF
ACCOUNTING

The definitions of accounting bring to light the

following attributes of Accounting:
1. Identification of Financial Transactions and
Events
2. Measuring the Identified Transactions
3. Recording
4. Classifying
5. Summarising
6. Analysis and Interpretation
7. Communicating

Introduction to Accounting
ACCOUNTING PROCESS
Communicating to the
Users

Analysis and Interpretation

Summarizing
Trial Balance
Trading and Profit and Loss
Account
Balance Sheet.

Analysis of Financial
Transactions or Events
1.
2.
3.
4.
5.
6.
7.
8.

Journal
Cash Book
Purchase Book
Sales Book
Purchases Return
Book
Sales Return Book
Bills Payable Book
Bills Receivable
Book
Journal Proper

Recording

Classifying (Posting
into Ledger)

Introduction to Accounting

BRANCHES OF ACCOUNTING
Branches of
Accounting

Financial
Accounting

Cost
Accounting

Management
Accounting

Introduction to Accounting

Financial Accounting
Financial Accounting is that branch of accounting,
which records financial transactions and events,
summarises and interprets them and communicates
the results to the users.

The end-product of Financial Accounting is the Profit

and Loss Account for the period ended and the
Balance Sheet as on the last day of the accounting
period.

Introduction to Accounting

Cost Accounting
The limitation of Financial Accounting in respect of
information relating to the cost of products or
services led to the development of a specialised
branch, i.e., Cost Accounting.

It ascertains the cost of products manufactured or

services rendered and helps the management in
decision-making (say price fixation) and exercising
controls.

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Introduction to Accounting

Management Accounting
Management Accounting is the
developed branch of accounting.

most recently

It is concerned with generating accounting

information relating to funds, costs, profits, etc., as it
enables the management in decision-making.
We may say that Management Accounting
addresses the needs of a single user group, i.e., the
management.

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Introduction to Accounting

BOOK KEEPING, ACCOUNTING AND

ACCOUNTANCY

Meaning of Book Keeping

Book Keeping is part of and it is concerned with:
Identifying financial transactions and events,
Measuring them in terms of money,
Recording the financial transactions and
events so identified in the books of
accounts, and
Classifying
recorded
transactions
and
events, i.e., posting them into Ledger
accounts.

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Introduction to Accounting

BOOK KEEPING, ACCOUNTING AND

ACCOUNTANCY

Accounting
Accounting is an art of
recording,
classifying and
summarising the financial data and interpreting the
results thereof.
Accounting is a wider concept than Book Keeping.
It starts where Book Keeping ends. In other words,
Book Keeping is a part of accounting.

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Introduction to Accounting

OBJECTIVES OF ACCOUNTING
The objectives or functions of accounting are:

Maintaining Systematic Records of Financial

Transactions an Events
Ascertaining Profit or Loss
Ascertaining Financial Position
Assisting the Management
Communicating Accounting Information to Users

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Introduction to Accounting

ADVANTAGES OF ACCOUNTING
Followings are the advantages of Accounting
Financial Information about Business
Assistance to Management
Replaces Memory
Facilitates Comparative Study
Facilitates Settlement of Tax Liabilities
Facilitates Loans
Evidence in Court
Facilitates Sale of Business
Assistance in the Event of Insolvency
Helpful in Partnership Accounts

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Introduction to Accounting

LIMITATIONS OF ACCOUNTING
Followings are the limitations of accounting

Accounting is not Fully Exact

Accounting does not Indicate the Realisable Value
Accounting Ignores the Qualitative Elements
Accounting Ignores the Effect of Price Level
Changes
Accounting may Lead to Window Dressing

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Introduction to Accounting

Types of Accounting Information

The Accounting Information can be categorised
into the following:

Information Relating to Profit or Surplus;

Information Relating to Financial Position; and
Information about Cash Flow.

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Introduction to Accounting

USERS OF ACCOUNTING INFORMATION

Internal Users
Owners
Management
Employees and Workers

External Users
Banks and Financial Institutions
Investors and Potential Investors
Creditors
Government and its Authorities
Researchers
Consumers
Public

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Introduction to Accounting

SYSTEMS OF ACCOUNTING
The systems of recording transactions in the
books of accounts are two namely:

1. Double Entry System and

2. Single Entry System.

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Introduction to Accounting

Double Entry System

The Double Entry System of accounting was
developed in the 15th Century in Italy by Lucas
Pacioli.
Under the system, every transaction has two
aspects-Debit and Credit and at the time of
recording a transaction, it is recorded once on the
debit side and again on the credit side.
The Double Entry System has proved to be a
scientific and complete system of accounting
followed by every enterprise and organisation.

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Introduction to Accounting

Double Entry System

For example, at the time of cash purchases, goods
are acquired and in return cash is paid.
In the transaction, above two aspects are involved,
i.e., receiving goods and paying cash
Under the Double Entry System, both these aspects
are recorded.
One part, i.e., the receipt of goods is debited and the
second part, i.e., payment of cash is credited.
The method of Debit and Credit will be discussed in
Accounting Procedure Rule of Debit and
Credit

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Introduction to Accounting

Features of the Double Entry System

It maintains a complete record of each transaction.
It recognises the two-fold aspect of every transaction,
viz., the aspect of receiving (value in) and the aspect
of giving (value out).
In this system, one aspect is debited and other aspect
is credited following the rules of debit and credit.
Since, one aspect of a transaction is debited and the
other is credited, the total of all debits is always equal
to total of all credits. It helps in establishing
arithmetical accuracy by preparing the Trial Balance.

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Introduction to Accounting

Stages of Double Entry System

The following are the three different stages of a
complete system of a double entry book keeping:
Recording the transactions in the Journal.
Classifying the transactions in the Journal by
posting them to the appropriate ledger
accounts and then preparing the Trial
Balance.
Closing the books and preparing the final
accounts.

All these stages shall be discussed one by one in

succeeding chapters.

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Introduction to Accounting

Advantages of the Double Entry System

The main advantages of Double Entry System are
Scientific System
Complete Record of Transactions
A Check on the Accuracy of Accounts
Ascertainment of Profit or Loss
Knowledge of Financial Position
Full Details for Purposes of Control
Comparative Study is Possible
Helps Management in Decision-Making
No Scope of Fraud

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Introduction to Accounting

Single Entry System

Single Entry System of recording transactions in the
books of accounts, may be defined to be an
incomplete Double Entry System.
In this system, all transactions are not recorded on
the double entry basis.
As regards some transactions, both aspects of the
transactions are recorded, as regards others, either
one aspect is recorded or not recorded at all.
Instead of maintaining all the accounts, only
Personal Accounts and Cash Book are maintained
under this system.

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Introduction to Accounting

Single Entry System

The accounts maintained under this system are
incomplete and unsystematic and therefore, not
reliable.
The Single Entry System is also known as Accounts
from Incomplete Records.
Since all transactions are not recorded under double
entry principle, it is not possible to prepare a Trial
Balance.
As a result, the Profit and Loss Account and the
Balance Sheet cannot be prepared.

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