Introductio

n to
Accounting
PRACTICAL ACCOUNTING & BOOKKEEPING
OUTLINE
 Definition
 Purpose of Accounting

 Need for Accounting

 Basic features and use of Accounting system

 Important terms of Accounting

 Objectives of Accounting

 Function of Accounting

 Single entry system

 Branches of Accounting

 Specialized Accounting fields

 Accounting information relating to Business

 Parties interested in accounting information

 Bookkeeping , Accounting , Accountancy

DEFINITION
 "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
PURPOSE OF ACCOUNTING
 Income determination for rational
decision making
 Financial reporting by maintaining a
systematic records of financial
transactions
 Protection of business assets from
unjustified and unwarranted use.
ATTRIBUTES/ CHARACTORISTICS
 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
 ACCOUNTING AS A WHOLE PROCESS
Financial Transactions
Communicating to the or Events
Users
Journal
1. Cash Book Recording
2. Purchase Book
3. Sales Book
Analysis and Interpretation 4. Purchases Return
Book
5. Sales Return Book
6. Bills Payable Book
Summarizing 7. Bills Receivable
Trial Balance Book
Adjusted trial balancde 8. Journal Proper
Trading and Profit and Loss
Account Classifying (Posting
Balance Sheet. into Ledger)
NEED FOR ACCOUNTING
Mangers, investors and other external
groups
Want the answers of two important
questions:
HOW WELL DID WHERE DOES THE
THE ORGANISATION ORGANIZATION
WILL PERFORM? STANDS?
OBJECTIVE 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
FUNCTION OF ACCOUNTING
 Ascertaining the income of the business and
its financial position as on a date by the
preparation of final accounts
 Helping the stakeholders in decision making
by providing information of the business
income and financial position
 Meeting legal & statutory requirements-
accounting provides the required information
for statutory purposes, tax returns, auditing
and for evidence purposes in court of law
IMPORTANT ACCOUNTING TERMS
 Account
An account is a record used to properly classify the activity recorded
in the General Ledger.
 Account balance
An account balance is the sum of debit entries minus the sum of
credit entries in an account. If positive, the difference is called a debit
balance; if negative, a credit balance.
 Accounts Payable
 Accounts Payable is an amount owed by an entity for delivered goods
or completed services. Accounts Payable is a liability.
 Accounts Receivable
Account Receivable is an amount owed to an entity from a completed
transaction of sales or services rendered. For example-student
account balances. Accounts Receivable is an asset.
 Asset
 An asset is what an entity owns. For example- land, property,
buildings, equipment, cash in bank accounts, other investments and
accounts receivable.
 Audit
 An audit is a formal examination and official endorsement of the
accuracy of the financial statements of the college by an
independent certified public accountant (CPA) or CA.
 Balance Sheet
 A Balance Sheet is a summary report of an entitie’s assets, liabilities
and EQUITY on a specific date.
 Budget
 A budget is an estimate of activity for a fiscal year or period. A
budget can be created for a department or a project.
 Cost of Goods Sold
Cost of Goods Sold (CGS) is the cost of items purchased for resale. For
example-the bookshop purchases textbooks to sell in the bookshop
 Credit
A credit is an entry on the right side of a double-entry accounting system
that represents the reduction of an asset or expense or the addition to a
liability or revenue, Equity.
 Debit
 A debit is an entry on the left side of a double-entry accounting system
that represents the addition of an asset or expense or the reduction to a
liability or revenue.
 Double-Entry Accounting
 Double-entry accounting is a method of recording financial transactions in
which each transaction is entered in two or more accounts and involves
two-way, self-balancing posting. Total debits must equal total credits.
 Expense
An expense is funds paid by an entity. For example-paychecks to
employees, reimbursements to employees, payments to vendors for
goods or services.
 Financial Statements
Financial Statements are a series of reports showing a summary view of
the various financial activities of an entity at a specific point in time.
Each statement tells a different story about the financial activity of an
entity.
 Fiscal Year
 A fiscal year is a period of 12 consecutive months chosen by an entity as
its accounting period which may or may not be a calendar year.
 Fixed Asset
 A fixed asset is any tangible item with a useful life of more than one year.
For example- buildings and major equipment. A fixed asset is an asset.
 General Ledger
 The general ledger is the collection of all asset, liability, equity, revenue
and expense accounts.
 Income Statement
 An Income Statement is a summary report that shows revenues and
expenses over a specific period of time, typically a month, quarter or
fiscal year.
 Journal Entry
 A journal entry is a group of debit and credit transactions that are
posted to the general ledger. All journal entries must net to zero so
debits must equal credits.
 Liability
 A liability is what an entity owes. For example-loans, taxes, payables,
long term debt from a bond issue, funds held by the college for a third
party such as a student group.
 Net Income (loss)
 Net Income (loss) is the amount the an entity, a
department or a project made or lost for a
specific period of time. To arrive at this number
take total revenues minus total expenses.
 Revenue
 Revenues are funds collected by an entity; it
can also be called income. For example-tuition,
fees, rentals, income from investments.
 BRANCHES OF ACCOUNTING

Branches of
Accounting

Financial Cost Management

Accounting Accounting 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.
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.
MANAGEMENT ACCOUNTING
 Management Accounting is the most recently
developed branch of accounting.
 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.
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
SPECIALIZED ACCOUNTING FIELDS
 Financial accounting
 Auditing
 Cost accounting
 Management accounting
 Tax accounting
 Budgetary accounting
 International accounting
 Not-for-profit accounting
BOOKKEEPING, ACCOUNTING AND ACCOUNTANCY

 "Book Keeping is an art of recording in the books of

accounts the monetary aspect of commercial and
financial transactions."
 -Northcott
 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.
 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.
 BOOKKEEPING is the recording of business data in a
prescribed manner. A bookkeeper may be responsible for
keeping all the records of a business or only a minor
segment, such portion of customer accounts in department
store. Much of the work of the bookkeeper is critical in
nature and increasingly being accomplished through the
use of mechanical and electronic equipment.

 ACCOUNTING is primarily concerned with the design of the

system of records, the preparation of reports based on the
recorded data, and the interpretation of the reports.
Accountants often direct and review the work of
bookkeeper. In event, the accountant must possess a much
higher level of knowledge, conceptual understanding, and
analytical skill than is required of the bookkeeper.
 DIFFERENCE BETWEEN BOOKKEEPING & ACCOUNTING
Basis Book Keeping Accounting
1. Scope Book Keeping is concerned Accounting is concerned
with identifying financial with summarising the
transactions; measuring them recorded transactions,
in money terms; recording interpreting them and
them in the books of accounts communicating the results.
and classifying them.

2. Stage It is a primary stage. It is a secondary stage. It

begins where Book Keeping
ends.
3. The objective of Book Keeping The objective of accounting
Objectiv is to maintain systematic is to ascertain net results of
records of financial operations and financial
e transactions. position and to
communicate information to
the interested parties.
 DIFFERENCE BETWEEN BOOKKEEPING & ACCOUNTING

4. Nature of Job This job is This job is

routine in analytical and
nature. dynamic in
nature.
5. Performance Junior staff Senior staff
performs this performs this
function. function.
6. Relation Book Keeping is Accounting begins
the basis for where Book
accounting. Keeping ends.
7. Special Skills Book Keeping is Accounting
mechanical in requires special
nature and thus, skills and ability
does not require to analyse and
special skills. interpret.
ACCOUNTANCY
 Accountancy
 Accountancy refers to a systematic knowledge of
accounting.
 It explains how to deal with various aspects of
accounting.
 It educates us why and how to maintain the books
of accounts and how to summarise the accounting
information and communicate it to the users.
 In the words of Kohler, accountancy refers to the
entire body of the theory and practice of accounting
 Accounting and Accountancy
 Accountancy is an area of knowledge whereas
accounting is the action or process used in
this area.
 Accounting depends on the rules and
principles framed by the Accountancy but
Accountancy does not depend on Accounting.
 It may be said that Accountancy is the whole
thing while Accounting is the application part
of accountancy.
 UNDERSTANDING DEBIT AND CREDIT
DEBIT
A debit is an entry on the left
side of a ledger, representing
the addition of an asset,
expense or cogs or the
reduction to a liability, equity
or revenue.
Increase of ASSETS
Increase of EXPENSES
Increase of COGS/COS
Decrease of LIABILITY
Decrease of REVENUES
Decrease of EQUITY
CREDIT
A credit is an entry on the
right side of a ledger,
representing the reduction of
an asset, expense or cogs or
the addition to a liability or
revenue, Equity.
Decrease of ASSETS
Decrease of EXPENSES
Decrease of COGS/COS
Increase of LIABILITY
Increase of REVENUES
Increase of EQUITY