Introduction to Accounting
Presented by-
Ms. Shreya Sanghvi
Basic Information
Lucas F. Pacioli, a resident of venice (Italy), is regarded as the
founder of book-keeping. His book ‘De Computiset Scripturise’
was published in 1494, which is regarded as the first book on
Book-keeping. Book-Keeping is a part of accounting and is
concerned with record keeping or maintenance of books of
accounting in a proper set of books. Accounting begins where
book-keeping ends. Book keeping is the first stage of accounting.
Book-Keeping- Book-Keeping is an art as well as science of recording business
transactions of an individual, firm, company, corporation and other association of
persons and institution in a certain set of books regularly according to prescribed
rules and regulations on the basis of some definite system for fulfilment of certain
objects. The founder of Book Keeping is Lucas F. Pacioli.
Accounting- Accounting is the process of identifying, measuring, recording,
classifying, summarising, analysing, interpreting and communicating the financial
transactions and events in monetary terms. It covers preparation of Trial Balance,
Manufacturing Account, Trading Account, Profit and loss Account and Balance Sheet.
Accountancy- Accountancy covers those rules, regulations, procedures, principles,
concepts, conventions and techniques which are to be applied in the process of
accounting. It is a broad term. It also includes Financial Accounting, Cost Accounting,
Management Accounting etc. Accounting refers to the entire body of the theory and
practice of accounting.
Terminology
Proprietor Liabilities
Debtor Tangible Assets
Creditor Intangible Assets
Bills Receivable
Livestock
Bills Payable
Capital
Accrued
Voucher
Outstanding
Prepaid
Drawings
Advance Revenue
Assets Expenditure
Accounting Process
Identification of business
transaction Documents/Voucher
Record of business Journal
transaction
Cash Subsidiary book for
Ledger Book credit transaction
Classification of business
transaction
Trial Balance
Summarisation of business Rectification of errors
transaction (Adjustment of entries) 1. Purchase Book
Financial Statements 2. Purchase Return Book
(Trading A/c, P&L A/c 3. Sales Book
and Balance Sheet) 4. Sales Return Book
5. Bills Receivable Book
Analysis and Interpretation 6. Bills Payable Book
of business transaction Analysis and Interpretation of 7. Journal Proper
Financial Statement
Object: To take financial Communication to users of
and Managerial decision Accounting Information
First Stage: Identification of business transaction
It means determining what to record, i.e., to identify recordable economic
events. The events which have financial implications and which are relevant
for accounting should be identified. It must be important that transaction
can be measure in monetary terms. Quality of a person can not recorded.
The business transaction and other economic events are evaluated for
appropriate accounting action based on materiality of an event supported by
documentary evidence like invoices of purchase and sales, credit and debit
notes, cash memos, pay in slips etc.
For ex:- 1. Rahul purchase gift for his parents.
Hence this transaction is not related with business.
2. Rahul purchase machinery for business.
Hence this transaction is related with business.
Second Stage: Record of business transaction
Once the economic events are identified and measured in financial terms, they are recorded in
an orderly and systematic manner in the Journal. For this purpose the transaction is analysed
to decide which account should be debited and credited.
In case transaction of a particular nature are large in number then a subsidiary book can be
opened.
Rules of Journal
Traditional Approach/ English Approach Modern Approach/ American Approach
Types of A/c Dr. Cr.
Personal A/c - Dr. The receiver
Cr. The giver 1. Assets A/c Increase Decrease
Real A/c - Dr. What comes in 2. Liabilities A/c Decrease Increase
Cr. What goes out 3. Capital A/c Decrease Increase
Nominal A/c - Dr. All expense & losses 4. Expenses/ Loss Increase Decrease
Cr. All Income & Gains 5. Income/ Profit Decrease Increase
Third Stage: Classification of business transaction
All business transactions are classified according to their nature like income, expenses,
purchase, sale, assets, liabilities etc. This helps in deciding the treatment of transaction in
accounting book, i.e., Account. Classified account is called Ledger.
Record of Journal and other subsidiary books is input for ledger. On the basis of this record,
postings are made in ledger in various accounts. Each account is balanced at the end of a
certain period and this balances are output of ledger.
Specimen of Ledger
Dr. Cr.
Date Particular J.F. Amount Date Particular J.F. Amount
Fourth Stage: Summarisation of business transaction
Preparation of Trial Balance, preparation of Final Accounts with adjustment and
rectification of errors is the fourth stage of accounting process. Balance from Ledger are
transfer to Trial Balance. Total of debit balances in Trial Balance should be equal to total
of credit balances in Trial Balance.
On the basis of Trial Balance, Final Accounts are prepared. Final Accounts refers to
Trading Account, Profit and Loss Account and Balance Sheet. Balance Sheet is the
summary of whole of the accountancy or business transactions.
Specimen of Trial Balance
( For the year ending ……………)
Particular Debit Credit
Trading Account- This account is prepared to find out gross profit or gross loss on the basis of
purchase and sales.
Cost of good sold = Opening Stock + Purchases + All Direct Expenses incurred in purchases and bringing
the goods to the shop or godown of the persons, firm or company in whose books trading account is to be
prepared. From the total of these three, namely opening stock, purchases and direct expenses, closing
stock is deducted and the balance is known as cost of good sold.
Profit and Loss Account- This account is prepared to find out net profit or net loss. All those
expenses and losses, incomes and gains not recorded in Trading account are recorded in Profit & Loss
account. These expenses are termed as indirect expenses, because these expenses are directly not related
with the acquisition of goods and to bring them in saleable form. If the total of its credit side is more than
debit side, excess is called net profit and if total of its debit side is more than its credit side, excess is called
net loss.
Balance Sheet- Balance Sheet is a statement which represents financial position of a business at a
prescribed date. This prescribed date is the date at which final accounts are prepared. Some persons are
of the view that Balance Sheet is a statement of assets and liabilities of business at a particular date.
Fifth Stage: Analysis and Interpretation of business transaction
Analysis and interpretation is the last stage of accounting process. Management needs
objective accounting information from account. For this various reports like sales report,
purchase report, expenses report etc are prepared. In addition to this Ratio Analysis, Cash
Flow Analysis, Fund Flow Analysis are prepared for decision making process, business
forecasting and preparation of future business plans.
• Characteristics or elements of Accounting:
1. Recording of economic activity
2. Re-arrangement of figures
3. Recording of past economic events
4. Monetary transactions
5. Presentation in summary form
6. An art of classifying the data.
7. It is a science
8. Coverage
9. Usefulness
10. Analysis of interpretations
Objectives of Accounting:
I. Main Objects:
1. To know profit or loss of the business
2. To know the worth of assets & liabilities of the business at a particular date.
3. To know as to what amount is to be paid to a particular person or what amount is to be
received from a certain person on a particular date.
4. To know about the progress or downfall of business.
II. Other objects:
1. To know about the position of good stocks.
2. To know the position of cash.
3. To know about the errors & frauds committed by the employee.
4. To have detailed information about capital in the business,
5. To satisfy the taxation authorities.
6. To know the financial & other requirements of the business at a particular time.
Advantages of Accounting:
1. Maintenance of business records
2. Preparation of financial statements
3. Comparison of results
4. Decision making
5. Evidence in legal matters
6. Provides information to related parties
7. Helps in taxation matters
8. Valuation of business
9. Replacement of memory
Limitations of Accounting:
1. No record of non-monetary transactions
2. Legal restrictions
3. No record of changing price level
4. No record of immaterial information
5. No record of prospective profits
6. No application of objectivity factor
Methods of Accounting:
1. Mercantile method of accounting
2. Cash method of Accounting
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