Traditional definition of Accounting: Accounting is an art of recording, classifying and summarizing, in a significant manner and in terms of money, transactions

s and events which are, in part at least, of a financial character, and interpreting the results thereof The above definition makes an impression that Accounting is an art of record keeping. ( General Journal, Subsidiary Books, Ledger etc)

However the above definition does not reflect properly the role of accounting in the modern society. The scope of Accounting is wider at present than that described above.

Some thoughtful remarks on Accounting: A renowned accountant once observed that Accounting was born without notice and reared in neglect Some say that Accounting was first practiced and then theorized. There are sufficient evidences exist to corroborate the fact that the art and practice of accounting, as a highly developed system, was in vogue in India even during the times of Vedas and Upanishads. A reference needs to be made to a pertinent observation made by Alexander Hamilton F.R.S, the noted Orientalist in the book review in monthly review 26 1798) page 129, he stated as under: We would remark that the Banias of India have been from time immemorial, in possession of the method of book-keeping by double entry and that. (Authors note: Banias mean Businessmen) The birth of double entry book-keeping is suggested to have been at the hands of a Franciscan Monk, Luca Fra Pacioli, an Italian Mathematician, who published a book in 1494, a philosophical and mathematical work, which included a treatise on bookkeeping

Accounting as an Information system: In the present world, Accounting is called the language of business as it is used to serve as a means of communication among people in society. Information as regards financial position (assets minus liabilities), operating results (profit or loss), Cash flows and other information like financial information required by Banks, or when required by any investor etc. So Accounting provides information that is useful in making business and economic decisions for making reasoned choices among alternative uses of scarce resources in the conduct of business and economic activities. It is the principal means of communicating financial information to owners, lenders, managers, Government and its regulatory agencies.

Importance of Accounting:
- Assistance

to Management

- Records rather than memory - Comparison - Aid in legal matters - Help in taxation matters - Sale of a business

Branches of Accounting:
Financial Accounting : It is concerned with the recording of business transactions and the periodic preparation of income statement, balance sheet, and cash flow statement from such records. Cost Accounting : It has been developed to ascertain the costs incurred for carrying out various business activities and to help the management to ensure proper decision making, to exercise strict control, etc. Management Accounting: It is concerned with the interpretation to guide the management for future planning, decision making, control etc. It serves the information needs of the insiders, e.g., owners, managers and employees.

Bases of Accounting:
Cash basis: The net income is calculated as the excess of actual cash receipts in respect of sale of goods, services, properties, etc over the actual cash payments regarding purchase of goods, expenses like rent, electricity, salaries etc. Accrual basis: It means revenue and expenses are taken into consideration for the purpose of income determination on the basis of the accounting period to which they relate. Mixed or hybrid basis of Accounting: Revenues are recognized on cash basis while the expenses are recorded on accrual basis. The purpose is to remain cautious, safe and hundred percent certain for revenue items and make adequate provisions for expenses.

Double Entry Accounting:

The recording of transactions and events follows a definite rule. Each transaction and or event has two aspects or sides debit and credit. Every debit has an equal and opposite credit. This is the crux of double entry concept. Each transaction should be recorded in such a way that it affects two sides debit and credit equally. It may not be out of place to mention here that the principles of the double entry accounting were first explained in print by Luca Fra Pacioli.

The Accounting Equation:

Balance Sheet has three elements Assets, Liabilities and Equity. We know that Equity is the residual interest of owners in assets over liabilities. Thus the relationship among these elements of the Balance Sheet can be expressed with the help of an equation, known as the Fundamental Accounting Equation: Assets = Liabilities + Equity The above equation has a unique feature in the sense that all the business transactions will affect the equation in such a way that the either the equality will be maintained or a new equality achieved. This is possible because of the operation of the double entry concept. Every business transaction can be explained in terms of its effects on the accounting equation.

The Accounting Trail:

As we know that accounting function initiates with the recording of transactions and events and ends with the presentation of financial statements. Thus, the sequence of activities in an accounting process can be shown below: - Transaction / Event - Preparation of Voucher - Recording in the primary books - Postings in the secondary books - Preparation of Trial Balance - Preparation and presentation of financial statements

Transaction and Events:

The statement of Financial Accounting Concepts (No. 6), issued by the Financial Accounting Standards Board (FASB) of USA defines an event as a happening of consequence to an entity . An event may be an internal happening or an external incident. For example, when the management of a business entity negotiates a wage settlement with its labour union, it is an internal event. On the other hand, when the same management recruits a fresh MBA, it is an external event. However, the event does not involve transfer or exchange of any value instantly. If the event involves transfer or exchange of any value, that is called Transaction. For example, if the same business purchases raw materials from its suppliers, it is an event and it also involves exchange of value instantly.

Preparation of vouchers:
In the present age of information technology majority of the business entities use software packages for accounting purposes. The computer takes care of most of the operations like recording in primary books, postings in secondary books, preparation of trial balance and finally even preparation of financial statements. The human intervention normally ends with the preparation of necessary documents. These documents (popularly called vouchers) can be of three types Receipt Voucher, Payment Voucher and Journal Voucher. The receipt voucher is prepared to record all cash and bank receipts. The payment voucher is prepared to record all cash and bank payments. The journal voucher is drawn to record all non-cash transactions and events. The voucher should be filled with all the necessary information minutely so that the computer takes the details correctly.

Recording in the primary Books:

Recording in primary books is an essential step in the accounting process. The primary books are popularly known as Journals. A primary book is a book of first entry or prime entry. When a happening satisfies the nature of a transaction or an event, the first place of recording the transaction is the primary book. If the transaction is omitted from recording in the primary book, the transaction will not have any reflection in the subsequent process. The steps involved in the journalisation of transaction are as follows: - Identify a transaction or an event - Identify the elements of the transaction - Apply the ground rule of journalisation to confirm the dual effect - Journalize i.e., record in the primary book

Ground Rules of Journalisation:

The following ground rules should be followed in recording the elements of transactions in Journals: - Assets / Increase in assets / decrease in liabilities = Debit - Liabilities / Decrease in assets/ increase in Liabilities = Credit - Expenses and losses Income and gains = Debit = Credit

(Note that the term Debit is derived from the latin word Debeo, meaning amount owed to me, the Proprietor and the term Credit is derived from latin word Credo, meaning trust or believe)

Assets/liabilities/Income/Expenses Explained:
An asset is recognized in a financial statement if it satisfies the following two conditions. The asset has a cost or value that can be reliably measured and It is expected that the future economic benefits will flow to the enterprise out of the use of that asset. For example: the investments made by an enterprise in acquiring a building for official purposes is an asset because future economic benefits will be derived from the use of that building and the building has a definite cost. A Liability is recognized if the following conditions are satisfied: It is expected that an outflow of resources embodying economic benefits will result from the settlement of a present obligation, and The amount of settlement can be reliably measured. The amount at which equity is shown in the balance sheet is dependant on the measurement of assets and liabilities.

Income and Expenses Explained:

Income is recognized in the financial statement when there is an inflow of economic benefits. It includes sales, other income, profit on sale of assets etc or it even means the revenue receipts. Expenses on the other hand are recognized when the amount spent on the cost of the goods and services used up in the process of earning revenues. Common examples are salaries of the employees, rent of the building, depreciation of assets etc. An expenditure is immediately recognized in the financial statement as expenses if such expenditure is not expected to produce any future economic benefits. Expenses are an outflow of economic benefits or depletion of assets or increase of liabilities resulting in decrease in equity. However when economic benefits out of an expenditure are expected to arise over several accounting period, expenses are to be recognized on a reasonable basis over the same period. For example, the amount paid to an advertising agency to carry out advertisements on behalf of a business entity for the next two years should be recognized as expense over two accounting periods either equally or on some suitable basis (e.g. turnover).