Module 7 Finance & Accounting

2018
MODULE: 7
Finance and Accounting
TELECENTRE ENTREPRENEUR COURSE
CSC e-Governance Services India Limited 3rd Floor, Electronics Niketan,

6 CGO Complex Lodhi Road, New Delhi – 110003
MODULE 7 Finance and Accounting
Structure of the Unit
1.1 About Finance and Accounting

1.2 OBJECTIVES OF ACCOUNTING
1.3 Origin and Growth of Accounting
1.4 Nature of Accounting
1.5 Branches of Accounting
1.1 ABOUT FINANCE AND ACCOUNTING
Finance and Accounting is the process of recording, summarizing and reporting the myriad
of transactions resulting from business operations over a period of time. These transactions
are summarized in the preparation of financial statements, including the balance sheet,
income statement and cash flow statement, that encapsulate the company's operating
performance over a specified period.
1.2 OBJECTIVES OF ACCOUNTING: The following are the main objectives of accounting.
1. To keep systematic records: Accounting is done to keep a systematic record of

financial transactions. In the absence of accounting there would have been terrific
burden on human memory which in most cases would have been impossible to bear.
2. To protect business properties: Accounting provides protection to business
properties from unjustified and unwarranted use. This is possible on account of
accounting supplying the following information to the manager or the proprietor:
 The amount of the proprietor's funds invested in the business.
 How much the business have to pay to others?
 How much the business has to recover from others?
 How much the business has in the form of (a) fixed assets, (b) cash in hand, (c) cash
at bank, (d) stock of raw materials, work-in-progress and finished goods?
3. To ascertain the operational profit or loss: Accounting helps in ascertaining the net
profit earned or loss suffered on account of carrying the business. This is done by
keeping a proper record of revenues and expense of a particular period. The Profit
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and Loss Account is prepared at the end of a period and if the amount of revenue for
the period is more than the expenditure incurred in earning that revenue, there is
said to be a profit.
4. To ascertain the financial position of the business: The Profit and Loss Account gives
the amount of profit or loss made by the business during a particular period.
5. To facilitate rational decision making: Accounting these days has taken upon itself
the task of collection, analysis and reporting of information at the required points of
time to the required levels of authority in order to facilitate rational decision-making.
6. Information System: Accounting functions as an information system for collecting
and communicating economic information about the business enterprise. This
information helps the management in taking appropriate decisions
1.3 Origin and Growth of Accounting
Accounting was practised in India twenty three centuries ago as is clear from the book
named "Arthashastra" written by Kautilya, King Chandragupta's minister. This book not only
relates to politics and economics, but also explains the art of proper keeping of accounts.
However, the modern system of accounting based on the principles of double entry system
owes it origin to Luco Pacioli who first published the principles of Double Entry System in
1494 at Venice in Italy. Thus, the art of accounting has been practised for centuries but it is
only in the late thirties that the study of the subject 'accounting' has been taken up
seriously.
Purpose of Accounting:
The main purpose of accounting is to ascertain profit or loss during a specified period, to
show financial condition of the business on a particular date and to have control over the
firm's property. Such accounting records are required to be maintained to measure the
income of the business and communicate the information so that it may be used by
managers, owners and other interested parties. Accounting is a discipline which records,
classifies, summarises and interprets financial information about the activities of a concern
so that intelligent decisions can be made about the concern.
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Distinction between Book-Keeping and Accounting
Book-keeping is a part of accounting and is concerned with the recording of transactions

which is often routine and clerical in nature, whereas accounting performs other functions
as well viz. measurement and communication, besides recording. An accountant is required
to have a much higher level of knowledge, conceptual understanding and analytical skill
than is required of the book-keeper.
An accountant designs the accounting system, supervises and checks the work of the book-
keeper prepares the reports based on the recorded data and interprets the reports.
Nowadays, he is required to take part in matters of management, control and planning of
economic resources
1.4 Nature of Accounting
The various definitions and explanations of accounting has been propounded by different
accounting experts from time to time and the following aspects comprise the nature of
accounting:
 Accounting as a service activity: Accounting is a service activity. Its function is to provide

quantitative information, primarily financial in nature, about economic entities that is
intended to be useful in making economic decisions, in making reasoned choices among
alternative courses of action. It means that accounting collects financial information for
the various users for taking decisions and tackling business issues.
 Accounting as a profession: Accounting is very much a profession. A profession is a
career that involves the acquiring of a specialised formal education before rendering any
service. Accounting is a systematized body of knowledge developed with the
development of trade and business over the past century.
 Accounting as a social force: In early days, accounting was only to serve the interest of
the owners. Under the changing business environment the discipline of accounting and
the accountant both have to watch and protect the interests of other people who are
directly or indirectly linked with the operation of modern business. The society is
composed of people as customer, shareholders, creditors and investors. The accounting
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information/data is to be used to solve the problems of the public at large such as
determination and controlling of prices.
 Accounting as a language: Accounting is rightly referred the "language of business". It is
one means of reporting and communicating information about a business. As one has to
learn a new language to converse and communicate, so also accounting is to be learned
and practised to communicate business events.
 Accounting as science or art: Science is a systematised body of knowledge. It establishes
a relationship of cause and effect in the various related phenomenon. It is also based on
some fundamental principles. Accounting has its own principles e.g. the double entry
system, which explains that every transaction has two fold aspects i.e. debit and credit.
Art requires a perfect knowledge, interest and experience to do a work efficiently. Art
also teaches us how to do a work in the best possible way by making the best use of the
available resources. Accounting is an art as it also requires knowledge, interest and
experience to maintain the books of accounts in a systematic manner.
 Accounting as an information system: Accounting discipline will be the most useful one
in the acquisition of all the business knowledge in the near future. You will realise that
people will be constantly exposed to accounting information in their everyday life.
Accounting information serves both profit-seeking business and non-profit
organisations.
1.5 Branches of Accounting:
1. Financial accounting: The object of financial accounting is to ascertain the results (profit
or loss) of business operations during the particular period and to state the financial
position (balance sheet) as on a date at the end of the period.
2. Cost accounting: The object of cost accounting is to find out the cost of goods produced
or services rendered by a business. It also helps the business in controlling the costs by
indicating avoidable losses and wastes.
3. Management accounting: The object of management accounting is to supply relevant
information at appropriate time to the management to enable it to take decisions and
effect control.
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Summary:
Accounting can be understood as the language of financial decisions. It is an ongoing

process of performance measurement and reporting the results to decision makers. The
discipline of accounting can be traced back to very early times of human civilization. With
the advancement of industry, modern day accounting has become formalized and
structured. A person who maintains accounts is known as the account. The information
generated by accounting is used by various interested groups like, individuals, managers,
investors, creditors, government, regulatory agencies, taxation authorities, employee, trade
unions, consumers and general public.
Keywords:
 Accounting: It is the means of collecting, summarising and reporting in monetary

terms, information about the business.
 Financial accounting: Financial accounting deals with the maintenance of books of
accounts with a view to ascertain the profitability and the financial status of the
business.
 Transaction: A transaction is a stimulus from one person and a related response
from another.
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2018

CSC e-Governance Services India Limited 3rd Floor, Electronics Niketan,

Structure of the Unit

1.1 About Finance and Accounting

1.1 ABOUT FINANCE AND ACCOUNTING

1. To keep systematic records: Accounting is done to keep a systematic record of

1.3 Origin and Growth of Accounting

Book-keeping is a part of accounting and is concerned with the recording of transactions

1.4 Nature of Accounting

 Accounting as a service activity: Accounting is a service activity. Its function is to provide

1.5 Branches of Accounting:

Accounting can be understood as the language of financial decisions. It is an ongoing

 Accounting: It is the means of collecting, summarising and reporting in monetary

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