Chapter 1 - Introduction To Accounting
Accounting
Accounting is an art of recording, classifying and summarizing the monetary transactions in an
efficient manner and interpreting the results
Functions of Accounting
I Identification of financial transaction & event
( Transaction - Happening something)
( Event - Outcome )
M Measurement in terms of Money
R Recording in Journal
( Journal )
C Classifying in Ledger
( Eg. Purchases & Sales Seprate )
S Summarising in Trial Balance
( Eg. Total of purchases & sales )
With the help of trial balance we prepare :
Trading A/c
Income Statement
Profit & Loss A/c
Balance Sheet Position Statement
A Analysing & Interpretation
(Eg. Determination of Profit & loss)
C Communicating to users
Objectives of Accounting
● Maintaining Accounting Records
● Determination of Profit & loss
● Determining Financial Position
● It facilitates Management in Decision making ( Facilitates - Help)
● Providing Accounting Information to users
● Protecting Business Assets
Functions of Accounting
● Maintaining Systemetic Accounting Records
● Preparation of financial Statements (Trading, P&L, Balance Sheet)
● Meeting Legal Requirements
Companies Act
Income Tax Act
Gst Act etc.
● Communicating the financial information
● Assistance to management in decision making
Advantages of Accounting
● Assistance to management in decision making
● Determining Profit & loss of the business
● Determining Financial Position
● Replaces Memory - Accounting helps in systematic recording.
● Evidence in Court
● Facilitates Loans
Limitations of Accounting
● Accounting is not fully exact - because in accounting sometimes we also make estimates.
● Accounting ignores Qualitative aspects .
Which can not be quantified.
● Accounting ignores price level changes.
(Eg. Mobile Phone price change)
● Accounting records historical values and thus provides unrealistic information.
● Window Dressing - Manipulation in accounts to show higher profits
Role of Accounting in Business
● Maintaining Systemetic Accounting Records
● Assistance to management in decision making
● Facilitates Comparative Study
(Eg. Comparison of profit to previous years)
● Evidence in Court
● Facilitates Loans
Accounting Process
(Steps of Accounting)
I Identification
M Measurement
R Recording
C Classification
S Summerization
A Ananlysis & Interpretation
C Communication
Branches of Accounting
● Financial Accounting
● Cost Accounting
● Management Accounting
● Social Reporting Accounting
● Human Resource Accounting
● Financial Accounting
It is that branch of accounting which records financial transactions and event to determine
profit or loss of the business.
● Cost Accounting
This branch of accounting is concerned with ascertaining the COSTof product and deter-
mining price of product.
● Management Accounting
It is that branch of accounting which is concerned with genrating accounting information
as it enables the management in decision making.
● Social Reporting Accounting
Social Cost Social Benefits
● Human Resource Accounting
Record value of employees
Difference b/w Book Keeping & Accounting
BOOK KEEPING ACCOUNTING
Scope It involves identification, measurement, It involves summerising, interpreting and
recording and classifying. communicating to users.
Stage It is a primary stage. It is secondary stage i.e Accounting begins
when book keeping ends.
Nature This job is Routine in nature. This is Analytical in nature.
of job
Staff It is performed by junior Staff. It is performed by Senior Staff.
Skills It does not require any special skills. It requires Special Skills.
Accounting Information
● It refers to financial Statements.
● Financial Statements include :
● Information relating to profit & loss.
● Information relating to financial position.
● Information relating to cash flow.
Qualitative Characterstics of Accounting Information
● Reliability - Accounting information must be reliable.
● Relevance - Accounting information must be relevant to users which helps him in decision
making .
● Understandability - It means that information must be presented in such a manner that user
are able to understand it.
● Comparability - It means that users should be able to compare the accounting information.
Intra Firm Inter Firm
(Same Firm) (Diff. Firms)
Users of Accounting Information
Internal Users External Users
Owners Potential Investor
Management Creditors
Employees and workers Government
Bank
Financial Institution
Difference b/w Accounting & Accountancy
Accounting Accountancy
● Accounting is the process. Accountancy is Knowledge.
● Accounting is the application of Accountancy is the knowledge of
accountancy. accounting.
Accounting System
Double Entry System Single Entry System
● It means a system of accounting which It means recording One aspect of
records both aspects of a transaction i.e a transaction.
Debit and Credit. (Eg. Pen Purchase 10 Rupee)
(Eg. Pen purchased 10 rupees & Pay 10)
● It maintains Complete record of each It is also known as Accounts from
transaction. incomplete records .
● Total of Debits is always equal to total In this system we maintain only
of credits. Personal Accounts & Cash Book .
(Total Debit = Total Credit)
