ACCOUNTING

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SUMMARY
• 1. Nature of Accounting
• 2. Objectives of Financial Statements
• 3. Definition of Accounting
• 4. The Accounting Cycle
• 5. Functions of Accounting
• 6. Limitations of Accounting
• 7. Groups Interested in Accounting Information
• 8. Review of Accounting Cycle-Recording,
Posting and Preparation of Trail Balance
• 9. Review of Accounting Cycle-Final Accounts

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 1. Nature of Accounting
Accounting is often referred to as the language of
business
One of the important objectives of accounting is
- to measure the profit of the business, and
- to ascertain the financial position of the business
The first one is done through the preparation of Profit &
Loss account (income statement) and the second one
requires the preparation of Balance Sheet
The basic overall purpose of the above statements is to
communicate quantitative information, generated by
financial accounting process to several groups of
affected parties like shareholders, creditors, employees
and others like researchers, economists and financial
analysts
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2. Objectives of Financial Statements

• The basic objective of financial statements

according to AICPA is “ to provide quantitative
financial information about a business enterprise
that is useful to statement users, particularly
owners and creditors in making economic
decisions”
• Apart from the above, the other important
objectives are
i) to provide useful information to investors in
taking decisions relating to investment.

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ii) to provide economic information to the
owners to judge the management on its
stewardship of the resources of the
enterprise and the achievement of the
corporate objectives
iii) to provide information which enables the
investors to compare the performance with
similar other undertakings and take
appropriate decisions regarding retention or
disinvestment of their holdings

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3. Definition of Accounting
The most acceptable definition given by
AICPA is as under
“Accounting is the art of recording,
classifying and summarizing 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”. It can be
broken up as under

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i) Accounting is an art….

ii) of recording, classifying and summarizing….

iii) in terms of money……..

iv) transactions and events of a financial

character, and

v) interpreting the results there of

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 4. The Accounting Cycle
The accounting Cycle is a complete sequence of
accounting procedures which are repeated in
the same order during each accounting period.
The cycle includes
i) recording transactions in subsidiary books
ii) classifying data by posting them from
subsidiary books to the accounts
iii) closing the books and preparation of final
accounts

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5. Functions of Accounting
i) Keeping systematic records

ii) Protecting properties of the business

iii) Communicating the results

iv) Meeting legal requirements

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6. Limitations of Accounting
i) Only transactions which can be measured in
terms of money can be recorded in the account
books
ii) Present true worth of business may not be
known
iii) There is conflict between one accounting
principle and other viz., valuation of current
assets
iv) Comparison of financial statements may not
be correct because of subjectivity in maintaining
the accounts

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 7. Groups Interested in
accounting Information
i) Owners
ii) Management
iii) Potential Investors
iv) Creditors
v) Employees
vi) Government
vii) Researchers etc.

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8.Review of Accounting Cycle-Recording, Posting and
Preparation of Trail Balance

When business transactions takes place, they are first of all recorded
in subsidiary books. These are also called books of prime entry or
journals. These journals can be divided into two types
i) General journals and
ii) Special Journals
Special Journals can be further of the following types:
a) Sales book
b) Purchases book
c) Returns books (both sales and purchase returns)
d) Bills books (Bills receivable and Bills payable)
e) Cash book

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Recording
In accounting, the basic unit of recording is an account.
An account maintained in the ledger has two sides.
Conventionally, the left side is known as debit side and
the right side is known as credit side. Accounts are
classified into three types viz.,
i) Personal Accounts
ii) Real Accounts and
iii) Nominal accounts
Rules for debiting and crediting
Account Debit Credit
Personal the receiver the giver
Real what comes in what goes out
Nominal all exp & losses all gains & profits

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Posting (Posting from subsidiary books
to ledger)
Ledger: -It is a book in which various accounts are
opened. In other words it is a set of accounts.
Posting:- It the process of entering in the ledger, the
information given in the ledgers.
Relationship between Journal and Ledger:-
i) the journal is the book of first entry, the ledger is the
book of the second entry
ii) the journal is the book for chronological record, the
ledger is the book for analytical record
iii) the process of recording in the journal is called
journalizing, the process of recording in the ledger is
called posting
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Preparation of Trail Balance
After recording and posting of all transactions of a
particular period, it is essential to find out the balance of
each account.
When all the accounts of a concern are thus balanced
off, then they are put in a list, debit balances on one side
and credit balances on the other side. The list so
prepared is called Trail Balance
The total of the debit side of the Trail balance must be
equal to that of its credit side. This is based on the
principle that in the double entry system, for every debit
there must be a credit.

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 9. Review of Accounting Cycle-
Final Accounts
Contain primarily historical Information
• Balance Sheet:-Assets, liabilities & owners’
equity
• Income Statement:-Revenue (-) Expenses =
Net Income
• Statement of retained earnings:-Cumulative
sum of undistributed profits
• Statement of cash flows:-Operating, Investing
and Financing activities
• Footnotes:-Significant accounting policies,
estimates, etc.

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Balance Sheet
• Balance sheet:-Statement of the financial
position of a business as of a certain date.
• Assets:-Resources owned by a corporation,
e.g., cash, accounts receivable, equipment, land
• Liabilities:-amounts/services owed by the
company, e.g., loans payable, accounts payable,
customer advances, etc.
• Stockholders’ equity:-initial investment by the
owners (capital stock --common and preferred
stocks) plus the cumulative sum of undistributed
profits (retained earnings)
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Income Statement
• Income statement measures the “performance”
of a company over a period of time
• Revenues --a measure of economic benefits
generated by the sale of products or providing of
services over a period of time
• Expenses --a measure of economic sacrifices
incurred to “earn” the revenues of a given
period. Examples of expenses --cost of inventory
sold, salaries to employees, rent and lighting,
advertising...
• Net income = revenues (-) expenses

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Retained earnings:-
• -A measure of undistributed profits of a business
• -Do not include capital contributed by owners
Retained earnings = Cumulative sum of profits earned
from the inception of business (-) Cumulative sum of all
“dividends” distributed to the owners from the inception
of business
Statement of shareholders’ equity describes the
change in retained earnings over a period of time
(e.g., a year)
• -Beginning balance in retained earnings
• -Add Net: income earned during the period
• -Subtract: Dividends distributed during the period
• -Ending balance in retained earnings

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 Summary
• Accounting is a complex field contrary to
common perceptions.
• Financial accounting information facilitates
the exchange of resources.
• To become a sophisticated financial
statement user, you need to understand
how the information in financial statements
is recorded

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