Chapter 1: Introduction To Accounting
Chapter 1: Introduction To Accounting
Chapter 1: Introduction To Accounting
1) Definition of Accounting:
In 1941, The American Institute of Certified Public Accountants
(AICPA) defined accounting as 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 financial
character, and interpreting the results.
In 1966, The American Accounting Association (AAA) defined
accounting
as
the
process
of
identifying,
measuring
and
summarizing,
analyzing,
interpreting
the
2) Functions of Accounting:
a) Recording:
This is the basic function of accounting.
Concerned with all business transactions of financial character are
recorded.
Recording is done in the book Journal
Journal is sub-divided into Cash Journal(for
recording
cash
b) Classifying:
Concerned with the systematic analysis of the recorded data, with
a view to group transactions or entries of one nature at one place.
The classification is done in the book termed as Ledger
Ledger contains different or separate individual account heads
under which all financial transactions of similar nature are
collected. For e.g.: There are separate account heads for Travelling
expenses, Printing & stationary, Advertising.
All expenses under these heads after being recorded in the Journal
will be classified under separate heads in the Ledger, which will
help in finding out the total expenditure incurred under each of the
above heads.
c) Summarizing:
Involves in presenting the classified data in a manner which is
understandable and useful to the internal as well as external endusers of accounting statements.
This process leads to preparation of Trial balance, Income
Statement, Balance Sheet.
d) Analyzing & Interpreting:
The recorded financial data is analysed and interpreted in a
manner that end-users can make a meaningful judgement about
the financial condition and profitability of the business operations.
Analysis is methodical classification of the data given in the
financial statements. For e.g.: All items related to Current Assets
are put at 1 place while all items related to Current Liabilities are
put at another place.
Interpretation means explaining the meaning and significance of
the data so simplified.
e) Communicating:
of
accounting
ratios,
graphs,
diagrams,
funds
flow
External
Internal
-Management-BOD/MD
-Partners
Individual proprietor
organizational
goals.
Management
refers
to
accounting
information as a tool.
That enables them in planning, executing, evaluating and
controlling the business activities of the organization.
External users are individuals and organizations who have present
and future economic interest in the business but not a part of the
management team. It includes those who have a direct financial
interest like-- Shareholders/ investors use accounting information to make
decisions on future investment and to protect their current
holdings.
Creditors/ banks/ financial institutions use accounting information
to appraise the financial soundness of the business and judge the
risks involved in lending to the concerned organizations.
Apart from these there are others who have an indirect financial
interest in the accounting information of the organization. They
may be categorized as:
Government/ Regulators that are appointed to regulate business
activities and certain types of business. Agencies like SEBI, Board
of Industrial Finance and Reconstruction (BIFR), Income Tax and
Sales Tax authorities keep a track on accounting information
brought out by organizations. This information is used by agencies
primarily to protect the interest of investors and to collect revenue
for the government in the form of direct and indirect taxes.
Employees of an organization are interested in knowing about the
stability, continuity and growth of their organization. It also
enables them to protect their legitimate demands like pay revision
and bonus.
4) Objectives of Accounting:
a. Systematic recording of transactions:
The basic objective of Accounting is to systematically record of all
financial aspects of business (i.e.) Book Keeping.
These recorded classifications are later on
classified
and
5) Book Keeping:
are
governed
by
the
financial
with
reference
to
the
requirement
of
financial
statements.
A book keeper may be responsible for keeping all the records of a
business or only of a minor segment, such as position of the
customers accounts in a departmental store.
The essential idea behind maintaining book keeping records is to
show correct position regarding each head of income and
expenditure.
A business may purchase goods on credit as well as cash. When
the goods are bought on credit, a record must be kept of the
person to whom money is owed.
The proprietor of the business may like to know, from time to time,
what account is due on credit purchase and to whom. If proper
record is not maintained, it is not possible to get details of the
transactions in regard to the expenses.
At the end of the accounting period, the proprietor wants to know
how much profit has been earned or loss has been incurred during
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the course of the period. For this lot of information is needed which
can be gathered from a proper record of the transactions. So Book
keeping is very essential.
6) Objectives of Book keeping:
A. Complete Recording of Transactions :
and
8) Types of Accounting:
I. Financial Accounting:
It is the original form of accounting.
Financial accounting covers the preparation and interpretation of
financial statements & communication to the users of accounts.
It is historic in nature as it records transactions which have already
been occurred.
The final step of accounting is the preparation of profit and loss
account, and balance sheet.
It primarily helps in determination of the net result for an
accounting period and the financial position as on the given date.
II.
Management Accounting:
It is concerned with internal reporting of necessary accounting
information to the people within the organization (managers of a
business unit) to enable them in decision-making, planning and
controlling business operations.
Management accounting draws the relevant information mainly
from financial accounting and cost accounting which helps the
management in budgeting, assessing profitability, taking pricing
Cost Accounting:
It is the process of accounting for cost which begins with the
recording of income and expenditure or the bases of which they
are calculated and ends with the preparation and periodical
statements and reports for ascertaining and controlling costs.
It is a systematic procedure for determining the unit cost of output
produced or services rendered.
The basic functions of cost accounting are to ascertain the cost of
a product and to help the management in the control of cost.
data
are
also
relevant
for
decision-making.
of
such
data.
Statistical techniques
are now
techniques
are
used
in
collection,
analysis,
and
and
instalments
payment
transactions,
and
encompasses
application
of
many
disciplines
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