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CHAPTER - 1
INTRODUCTION OF
FINANCIAL ACCOUNTING
DEFINITION OF ACCOUNTING
• According to American Institute of Certified

Public Accountants (AICPA) “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 results
thereof ”.
PROCESS OF ACCOUNTING
• RECORDING TRANSACTIONS
• CLASSIFYING THE TRANSACTIONS
• SUMMARISING THE TRANSACTIONS
• INTERPRETING THE TRANSACTIONS
• COMMUNICATION OF RESULTS
OBJECTIVES / NEED / ADVANTAGES / IMPORATANCE OF
ACCOUNTING
• SYSTEMATISES RECORDING OF TRANSACTIONS
• ASCERTAINMENT OF RESULT OF ABOVE RECORDED TRANSACTIONS
• ASCERTAINMENT OF THE FINANCIAL POSITION OF THE BUSINESS
• PROVIDING INFORMATION TO THE USERS FOR RATIONAL

DECISION MAKING
• TO KNOW THE SOLVENCY POSITION

FUNCTIONS OF ACCOUNTING
1. MEASUREMENT
2. FORECASTING
3. DECISION – MAKING
4. COMPARISON AND EVALUATION
5. CONTROL
6. GOVERNMENT REGULATION AND TAXATION
LIMITIATION / DISADVANTAGES / DEMERITS OF
ACCOUNTING
1. RECORDING ONLY MONETARY ITEMS
2. TIME VALUE OF MONEY
3. RECOMMENDATION OF ALTERNATIVE
METHODS
4. ACCOUNTING PRINCIPLES
5. RECORDING OF PAST EVENTS
6. ALLOCATION OF PROBLEM
7. MAINTAINING SECRECY
8. TENDENCY FOR SECRET RESERVES

USERS OF ACCOUNTING INFORMATION
• Owners
• Management
• Investors
• Creditors
• Employees
• Government
• Customers
• Investment agencies
• Stock exchange
• Economics
• General public
BRANCHES OF ACCOUNTING
• FINANCIAL ACCOUNTING
Financial Accounting is based on a systematic method of recording
transactions. It is the original form of the accounting process. The main
purpose of financial accounting is to calculate Trial Balances, Profit &
Loss Accounts and Balance Sheets. These are used by creditors, banks
and financial institutions to assess the financial status of the company.
• COST ACCOUNTING
Cost accounting deals with evaluating the cost of a product or
service offered. The objective of cost accounting is to help the
management in fixing the prices and controlling the cost of production.
It also pin points any wastages, leakages and defects during
manufacturing and marketing processes.
• MANAGEMENT ACCOUNTING
It helps in making important decisions and controlling of various
activities of the business. The management is able to take decisions
efficiently with the help of various Management Information Systems
such as Budgets, Cash Flow and Fund Flow Statements.
BASIS OF ACCOUNTING
• CASH BASIS OF ACCOUNTING

Under the basis of accounting, Revenue is recorded when
cash is received . Expenses are recorded when cash is paid. It
records only cash transactions.
• ACCRUAL BASIS OF ACCOUNTING / MERCANTILE BASIS OF

ACRUAL BASIS
Under the basis of accounting, revenue is recorded when it is
earned. Expenses are recorded when incurred. It records both cash
transactions and credit transactions.
ACCOUNTING CYCLE
• CAPITAL :
Capital refers to investment made by owners of a business
enterprise in the form of cash or kind.
• DRAWINGS:
Drawings refers the money or any other item, if the business
used or withdrawn by owners for personal purposes.
• GOODS:
Goods refers to articles, commodities, things with which business
deals. Example: stationery, books pens, pencils, table, cupboards.
• PURCHASES:
Purchase refers to acquisition of goods,
• PURCHASE RETURNS:
When goods purchased are returned to the supplier of goods
on account of damage defect.
ACCOUNTING PRINCIPLES
ACCOUNTING CONCEPTS
1. Business entity concept:

A business and its owner should be treated separately as far as their
financial transactions are concerned.
2. Money measurement concept:

Only business transactions that can be expressed in terms of money
are recorded in accounting, though records of other types of transactions
may be kept separately.
3. Dual aspect concept:

Dual Aspect of Accounting means that every transaction
that take place has two aspects one is debit & another is credit
& because of dual aspect of a transaction asset side of
Balance sheet matches with Liabilities side.
The Accounting equation is : Liabilities + Capital= Assets
ACCOUNTING STANDARD
• An accounting standard is a set of principles,
standards and procedures that define the
financial accounting policies and practices.
Accounting standards improve the
transparency of financial reporting in all
countries.
ADVANTAGES / IMPORTANCE OF ACCOUNTING
STANDARDS
• Accounting standards help investors in judging
for company.
• Accounting standards helps the chartered
accountants to deal with their clients by providing
rules and regulations
• Accounting standards helps in reporting financial
statements
• Accounting standards helps the tax authorities and
government officials.
• Accounting standards helps in reliable documents
for the purpose of analysis and interpretation of
data.
LIMITATIONS OF ACCOUNTING
STANDARDS
• Accounting standards flexibility problem
• Accounting standards have to many rules and
regulations.
• Difficulty in finding solutions

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CHAPTER - 1

• According to American Institute of Certified

• CLASSIFYING THE TRANSACTIONS

• SUMMARISING THE TRANSACTIONS

• INTERPRETING THE TRANSACTIONS

• ASCERTAINMENT OF RESULT OF ABOVE RECORDED TRANSACTIONS

• ASCERTAINMENT OF THE FINANCIAL POSITION OF THE BUSINESS

• PROVIDING INFORMATION TO THE USERS FOR RATIONAL

• TO KNOW THE SOLVENCY POSITION

4. COMPARISON AND EVALUATION

8. TENDENCY FOR SECRET RESERVES

• CASH BASIS OF ACCOUNTING

• ACCRUAL BASIS OF ACCOUNTING / MERCANTILE BASIS OF

1. Business entity concept:

2. Money measurement concept:

3. Dual aspect concept:

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