Introduction

Definition of Accounting
The definition is given by the American Institute of Certified Public Accountants clearly brings out the meaning
and function of accounting. According to it 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 result thereof.”
Accounting is an art: It is related to analysis & interpretation of financial data which requires special knowledge,
experience and judgment.
Recording means systematically writing down the transactions and events in account books soon after their
occurrences. . It records transaction in the terms of money: This provides a common measure of recording and
increases the understanding of the state of affairs of the business. It records only those transaction and events,
which are of financial character. If a transaction has no financial character then it will not be measured in the
terms of money and will not be recorded.
Classifying is the process of grouping transactions or entries of one nature at one place. This is done by opening
accounts in a book ledger. Summarizing involves the preparation of reports & statements from the classified
data (ledger) understandable and useful to management and other interested parties. This involves preparation
of final accounts.
Interpretation is the art of interpreting the results of operations to determine the financial position of the
enterprise, the progress it has made and how well it is getting along.
Accounting involves communication: The results of analysis and interpretation are communicated to
management and to other interested parties.
Objectives and Functions
The primary or basic objective of accounting is to supply the necessary information to the users and analysts for
taking futuristic decisions. Other objects and functions are:
I) Providing necessary information about the financial activities to the interested parties.
II) Providing necessary information about the efficiency, or otherwise, of the management regarding the proper
utilization of the scarce resources.
III) Providing necessary information for predictions (financial forecasting
IV) Facilitates to evaluate the earning capacity of the firm by supplying a statement of financial position, a
statement of periodical earning together with a statement of financial activities to the various interested person.
V) Facilitates decisions regarding the changes in the manner of acquisition, utilizations, preservation and
distribution of the scarce resources.
VI) Facilitates decisions regarding replacement of fixed assets and expansion of the firm
VII) Provides necessary data to the government for taking proper decisions relating to duties, taxes and price
control etc.
VIII) Devices remedial measure for the deviations between the actual and budgeted performance.
IX) Provides necessary data and information to the managers for internal reporting and formulation of overall
policies.
Branches of Accounting
1. Financial Accounting: Accounting deals with recording, classifying and summarizing business events, which
have already occurred and is, therefore, historical in nature. That’s why it is called Historical Accounting or Post-
mortem Accounting or more popularly financial Accounting. Its aim is to develop information about income and
financial position on the basis of business events, which have taken place during a period of time. Information
provided by financial accounting system about financial results and financial position on historical basis is
significant but not sufficient for smooth, orderly and efficient
running of the business. Management needs more information for planning and control of the business
activities. The answer lays in two more forms of accounting namely, Cost Accounting and Management
Accounting.
2. Cost Accounting: It deals with detailed study of cost with reference to cost ascertainment, cost reduction and
cost control. The emphasis is no historical costs as well as future decision-making costs.
3. Management Accounting: It provides information to the management not only about cost but also about
revenue, profits, investments etc. to enable managers to discharge their functions of managing the business
more efficiently and effectively. Thus, it provides required database to managers to plan and control the
activities of business enterprises.
Distinction between Book-keeping and Accounting
Basis Book-keeping Accounting
Scope (a) Identifying the transactions, Accounting in addition to Book-keeping involves – summarizing
(b) Measuring the identified the classified transactions, analyzing the summarized results,
transaction, interpreting the analyzed results and communicating the
(c) Recording the measured Interpreted information to the interested parties.
classifying the recorded
transactions
Stage Book-keeping is primary stage. Accounting is the secondary stage. It starts where Bookkeeping
ends.
Objective The basic objective of Booking- The basic objective of accounting is to ascertain net results of
keeping is to maintain systematic operations and financial position and to communicate
records of financial transactions. information to the interested parties.

Who Junior staff. Senior staff.

Performs
Knowledge The Book-keeper is not required to The accountant is required to have higher level of knowledge
Level have higher level of knowledge than that of Book-keeper
than that of an accountant.
Analytical Book-keeper may or may not The accountant is required to possess analytical is nature.
Skill possess analytical skill.
Nature of The job of a book-keeper is often The job of an accountant is analytical is nature.
Job routine and clerical in nature.
Designing of It does not cover designing of It covers designing of accounting system.
Accounting accounts system.
System
Supervision The Book-keeper does not An accountant supervises and checks The work of a bookkeeper.
and supervise and check the work
Checking of an accountant.

Interested persons in accounting information

1. Owner(s): This refers to a person or group of persons who have supplied capital for running the business. This
refers to an individual in case of a proprietor, partners in case of a partnership firm and shareholders in case of a
joint stock company. Owners need the accounting information to know whether their business is growing or
falling, they are in profit or loss so that they can take necessary actions.
2. Managers: For managing business profitably, information about financial results and financial position is
needed by management. By providing this information, accounting helps managers in efficient and smooth
running of a business enterprise.
3. Investors: Prospective investors would like to know about the past performance of the business enterprise
before making investment in that concern. By analyzing historical information provided by accounting records,
they can arrive at a decision about the expected return and the risk involved in investing in a particular business
enterprise.
4. Creditors and Financial Institutions: Whosoever is extending credit or loan to a business enterprise, would
like to have information about its repaying capacity, credit worthiness etc. Analyzing and interpreting the
financial statements of the business enterprise can obtain the required information.
5. Employees: Employees are concerned about job security and future prospects. Both of these are intimately
related with the performance of the business enterprise. Thus by analyzing financial statements they can draw
conclusions about their job-security and future prospects.
6. Government: Government policies relating to taxation, providing subsidies etc. are guided by relevance of the
industry in the economic development of the country and the past performance of the industry. Information
about past performance is provided by the accounting system. Collection of taxes is also based on accounting
records.
7. Researchers: Researchers need financial information for testing hypothesis and development of theories and
models. The required information is provided by accounting system.
8. Customers: Customers who have developed loyalties to a business are certainly interested in the continuance
of the business. They certainly want to know about the future directions of the enterprise with which they are
associating themselves. The way to information about the enterprise is through their financial statements.
9. Public: An enterprise affects the public at large in many ways such as a provider of employment to a number
of persons, being a customer to many suppliers, a provider of amenities in the locality or a cause of concern to
the public due to pollution etc. Hence, public at large is interested in knowing the future directions of enterprise
and the only window to peep inside the enterprise is their financial statements.
Above-mentioned list of group of users of accounting information is not exhaustive. Anyone having an interest in
the business enterprise can use information for decision-making.
Advantages of Accounting
The advantages of accounting are as follows:
1. Facilitates to replace memory: Accounting facilitates to replace human memory by maintaining compete
record of financial transactions. Human memory is limited by its very nature. Accounting helps to overcome this
limitation.
2. Facilitates to comply with legal requirements: Accounting facilitates to comply with legal require an
enterprise to maintain books of accounts. For example, Sec. 209 of The Companies Act 1956, requires a company
to maintain proper books of accounts on accrual basis, Sec 44AA of The Income Tax 1961 requires certain
persons to maintain specified books of accounts.
3. Facilitates to ascertain net result of operations: Accounting facilitates to ascertain net results of operations
by preparing Income Statement.
4. Facilitates to ascertain financial position: Accounting facilitates to ascertain financial position by preparing
Position Statement.
5. Facilitates the users to take decisions: Accounting facilitates the users (i.e., Short-term Creditors, Long-term
Creditors, Present Investors, Potential Investors, Employee groups, Management, General Public, Tax
Authorities) to take decisions by communicating accounting information to them.
6. Facilitates a comparative study: Accounting facilitates a comparative study in the following four ways:
(i) Comparison of actual figures with standard or budgeted figures for the same period and the same firm;
(ii) Comparison of actual figures of one period with those of another period for the same firm (i.e. Intra-firm
Comparison);
(iii) Comparison of actual figures of one firm with those of another standard firm belonging to the same industry
(i.e. Inter-firm Comparison); and
(iv) Comparison of actual figures of one firm with those of industry to which the firm belong (i.e. Pattern
Comparison).
7. Assist the management: Accounting assists the management in planning and controlling business activities
and in taking decisions. For example, Projected Cash Flow Statement facilitates the management to know future
receipts and payments and to take decision regarding anticipated surplus or shortage of funds.
8. Facilitates control over assets: Accounting facilitates control over assets by providing information regarding
Cash Balance, Bank Balance, Debtors, Fixed Assets, Stock etc.
9. Facilitates the settlement of tax liability: Accounting facilitates the settlement of tax liability with the
authorities by maintaining proper books of accounts in systematic manner.
10. Facilitates the ascertainment of value of business: Accounting facilitates the ascertainment of value of
business in case of transfer of business to another entity.
11. Facilitates raising loans: Accounting facilitates raising loans from lenders by proving them historical and
projected financial statements.
12. Acts as legal evidence: Proper books of accounts maintained in systematic manner act as legal evidence in
case of disputes.
Basic Terms in Accounting
1. Capital: Generally refers to the amount invested in an enterprise by its owners e.g., paid up share capital in a
corporate enterprise. It is also used to refer to the interest of owners in the assets of an enterprise.
2. Assets: Tangible objects or intangible rights owned by an enterprise and carrying probable future benefits.
3. Liability: The financial obligation of an enterprise other than owners’ funds.
4. Revenue: The gross inflow of cash, receivables or other consideration arising in the course of ordinary
activities of an enterprise resources yielding interest, royalties and dividends. Revenue is measured by the
charge made to customers or clients for goods supplied and services rendered to them and by the charges and
rewards arising from the use of resources by them. It excludes amounts collected on behalf of third parties such
as certain taxes. In an agency relationship, the revenue is the amount of commission and not the gross inflows of
cash, receivables or other consideration.
5. Cost of Goods Sold: The cost of goods sold during an accounting period. In manufacturing operatio0ns, it
includes (i) cost of materials; (ii) labour and factory overheads; selling and administrative expenses are normally
excluded.
6. Profit: A general term for the excess of revenue over related cost. When the result of this computation is
negative, it is referred to as loss.
7. Expenditure: Incurring a liability, disbursement of cash or transfer of property for the purpose of obtaining
assets, goods or services.
8. Expenses: The cost relating to the operation of an
accounting period or the revenue eared during the period or the benefit of which do not extend that period.
9. Deferred Expenditure: Expenditure for which payment has been made or a liability incurred but which is
carried forward on the presumption that it will be benefit over a subsequent period or periods. This is also
referred to as deferred revenue expenditure.
10. Sales Turnover: The aggregate amount for which sales are affected or services rendered by an enterprise.
The terms gross turnover and net turnover (or gross sales and net sales) are sometimes used to distinguish the
sales aggregate before and after deduction of returns and trade discounts.
11. Inventory: Tangible property held for sale in the ordinary course of business, or in the process of the
production for such sale, or the consumption in the production of goods or services for sale, including
maintenance supplies and consumables other than machinery spares.
12. Accumulated Depreciation: The total to date of the periodic depreciation charges on depreciable assets.
13. Profit and Loss Statement: A financial statement which
presents the revenue and expenses of an enterprise for an accounting period and shows the excess of revenue
over expenses (or vice versa). It is also known as profit and loss account.
14. Appropriation Account: An account sometimes included as a separate section of the profit and loss
statement showing application of profits towards dividends, reserves, etc.
15. Prior Period Item: A material change or credit which arises in the current period as a result or errors or
omissions in the preparation of the financial statements of one or more prior periods.
16. Accounting Policies: The specific accounting principles and the methods of applying those principles adopted
by an enterprise in the preparation and presentation of financial statements.
17. Cash Basis of Accounting: The method of recording transactions by which revenues and costs and assets and
liabilities are reflected in the accounts in the period in which actual receipts or actual payments are made.
18. Accrual Basis of Accounting: The method of recording transactions by which revenue, costs, assets and
liabilities are reflected in the accounts in the period in which they accrue. The ‘accrual basis of accounting’
includes considerations relating to deferrals, allocations, depreciation and amortization. This basis is also
referred to as mercantile basis of accounting. exhibits its assets, liabilities, capital, reserves and other account
balances at their respective book value.
19. Balance Sheet: A statement of the financial position of an enterprise as at a given date,
21. Goodwill: An intangible asset arising from business connection or trade name or reputation of an enterprise.
22. Sundry Creditor: Amount owed by an enterprise on account of goods purchased or services received or in
respect of contractual obligations. Also termed as trade creditor or account payable.
24. Contingent Asset: An asset the existence, ownership or value of which may be known or determined only on
the occurrence or non-occurrence of one or more uncertain future events.
25. Contingent Liability: An obligation relating to an existing condition or situation which may arise in future
depending on the occurrence or non-occurrence of one or more uncertain future events.

Accounting is the language of business through which the Business communicates with the
outside world. Over a period the nature of the accounting function has changed. Initially
more thrust was on book-keeping that is maintenance of records manually. However,
today, where computerized accounting software’s are used, role of accountants is more
towards analysis and interpretation than the mere maintenance of the data. The accounting
information is useful not only for the owners and managements but also useful to creditors,
employees, government and prospective investors. The main objective of the accounting is
to reflect the true and fair picture of profitability and financial position, which helps
management to take corrective actions and future decisions.