CHAPTER-1

IMPORTANT TOPIC OF THIS CHAPTER:-

1. Meaning of accounting
2. Accounting process
3. Branches of accounting and its type
4. Book-keeping, accounting and accountancy
5. Objectives of accounting
6. Advantage and limitation of accounting
7. Accounting as a source of information
8. User of accounting
9. Qualitative characteristics of accounting
10. System of accounting

1. MEANING OF ACCOUNTING

“ACCOUNTING IS THE ART OF RECORDING, CLASSIFYING AND SUMMARISSIG IN A SIGNIFICANT MANNER AND IN
TERM OF MONEY, TRANSACTION AND EVENT WHICH ARE, IN PART AT LEAST OF A FINANCIAL CHARACTER.”
OR
“ACCOUNTING IS THE PROCESS OF IDENTIFYING, MEASURING AND COMMUNICATING ECONOMICS
INFORMATION TO PERMIT INFORMED JUDGEMENT AND DECISIONSBY USER OF INFORMATION.”

2. ACCOUNTING PROCESS
IT INVOLVES THE FOLLOWING STEPS

1- IDENTIFICATION: - IDENTIFICATION IS THE FIRST STAGE OF ACCOUNTING, IN WHICH A TRANSACTION

IS IDENTIFIED WETHER IT IS ECONOMIC OR NON ECONOMIC. IN ACCOUNTING ONLY ECONOMIC
TRANSACTION WILL BE RECORDED.

2. RECORDING: - AFTER A TRANSACTION IS IDENTIFIED. SECOND STEP IS TO BE TAKEN IN TERM OF

RECORDING. RECORDING IS AN ART. ALL THE ECONMIC/ MONETARY BUSINESS TRANSACTIONS ARE
RECORDED IN” JOURNAL”. IN LARGE BUSINESS NUMBER OF TRANSACTION IS VERY LARGE, SO JOURNAL
IS ALSO SUB-DIVIDED IN VARIOUS SUBSIDIARY BOOKS. SUCH AS: - (1) CASH BOOK, (2) PURCHASE BOOK,
(3) SALES BOOK, (4) PURCHASE-RETURN BOOK, (5) SALES RETURN BOOK ETC.

3. CLASSIFYING: - AFTER RECORDING OF A TRANSACTION IN JOURNAL THESE ARE CLASSIFIED.

CLASSIFICATION IS A PROCESS OF GROUPING OF TRANSACTION OF SIMILAR NATURE AT ONE PLACE. IN
CLASSIFICATION “LEDGER” IS TO BE MENTAINED.

4- SUMMARISIG: - IN THIS PROCESS CLASSIFIED OF LEDGER IS PRESENTED TO MANAGEMENT IN A

UNDERSTANBLE AND USEFUL MANNER. THIS PROCESS IS INVOLVED PREPARATION OF TRAIL BALANCE,
TRADING AND P/L ACCOUNT AND BALANCE SHEET.

5- ANALYSIS AND INTERPRETATION: - IN THIS PROCESS FINANCIAL STATEMENTS PROVIDES USEFULL

INFORMATION OF THE BUSINESS TO MANAGEMENT AND TO OTHER END USERS SUCH AS CREDITORS,
BANKERS, FINANCIAL INSTITUTIONS, PROPRIOTOR ETC.
6- COMMUNICATION: - AFTER ANALYSIS INFORMATION CONCERNING PROFITABILITY POSITION,
SOLVANCY POSITION AND EFFICIEDNCY OF BUSINESS IS TO BE COMMUNICATE TO ITS VARIOUS USERS.

FINANCIAL TRANSACTION

COMMUNICATION RECORDING

ANALYSIS & JOURNAL OR BOOKS OF ORIGINAL

INTERPRETATION ENTRY
1. CASH BOOK
2. PURCHASE BOOK
3. SALES BOOK
PREPARE THE FOLLOWING:- 4. PURCHASE-RETURN BOOK
1- TRAIL BALANCE 5. SALES-RETURN BOOK
2- FINANCIAL STATEMENT 6. JOURNAL PROPER
(A) TRADING AND P/L ACCOUNT
(B) BALANCE SHEET

SUMMARISING
CLASSIFYING (LEDGER)

3. BRANCHES OF ACCOUTING AND ITS TYPE

DIFFERENT TYPE OF BUSINESSES NEEDS DIFFERENT TYPE OF ACCOUNTING. SO IT CREATES TYPE OF ACCOUNTING.

1. FINANCIAL ACCOUNTING: - This accounting is generally uses for recording of financial transaction, classifying,
summarizing and interpreting them so that financial position of the business can be ascertained.

2. COST ACCOUNTING: - This accounting is used to ascertain the cost of product or services provided by the
enterprises so that the selling price of a product can be ascertained.

3. MANAGEMENT ACCOUNTING: - This accounting refers to accounting for managerial decision making.

4. TAX ACCOUNTING: - in this accounting accounts are prepared with a view to compute income tax, sales tax,
excise duty, import duty. This type of accounting is known as tax accounting.

5. COPORATE ACCOUNTING: - this is mainly preferred for large organization named “companies”. account of a
company or large organization is to be maintained in corporate account.

6. SOCIAL RESPONCIBILITY ACCOUNTING: - social responsibility of business towards the employee, consumer,
shareholder and the whole society is needed to be maintained. For this social accounting is to be used.

4. BOOK-KEEPING, ACCOUNTING AND ACCOUNTANCY

BOOK-KEEPING- Book keeping is an art of identify, recording and classifying the business transaction in a set of
books. Book-keeping is consisted in Accounting. It is a primary stage of Accounting. Thus it includes the following:-
1. Identification of financial transactions.
2. Measuring the transactions in term of money
3. Recording the financial transaction in the books of account.
4. Classifying the recorded transaction in Ledger.

ACCOUNTING- Discussed earlier

ACCOUNTANCY- Accounting is a systematic knowledge of the principal and the technique applied in accounting. It
also refers to the entire body of the theory and practice of accounting.

5. OBJECTIVES OF ACCOUTING

1. Keep systematic record of business transaction: - The main objective of accounting is to keep a complete and
systematic record of business transaction.

2. Calculation of profit or loss of the business: - Accounting helps in the calculation of profit or loss earned by the
firm. For this purpose firm prepare Trading & P/L account.

3. Depict financial position of business: - Accounting also help to ascertain the financial position of a business. To
ascertain the financial position of a business Balance Sheet will be prepare. Means balance sheet the financial
position of a business organization.

4. Facilitates management: - Accounting provide all the important information required by the management to
the management.

5. Provide accounting information to users: - Accounting provides all the important information required by the
user. It also helps the user to know the financial position of business.

6. ADVANTAGE AND LIMITATION OF ACCOUNTING

ADVANTAGE OF ACCOUNTING:-
1. Provide complete and systematic record: - same as earlier
2. Provide information about profit and loss: - same as earlier
3. Provide information regarding financial position: - same as earlier
4. Help in taking managerial decision: - same as earlier
5. Help in settlement of tax liability: - Accounting helps in settlement of tax
liability. Tax is calculated on the profit earned by the proprietor and such profit is calculated by preparing trading
and P/L A/c. these accounts are prepared in Accounting.
6. Help in taking Loan: - Accounting help in preparation of final account. Bank and
financial institute grant loan on financial statement.

DISADVANTAGE OF ACCOUNTING:-
1. Based on accounting concept and convention: - in preparation of financial
statement of account lots of concept and accounting convention is to be used. So accounting is little hazy.
2. Based on personal judgment: - Accounting of a firm are prepared on the basis
of personal judgment of the management. Because user of account is humans being and they are bound to react
in a different manner on same financial statement.
3. Based on historical cost: - Assets are shown in the balance sheet at their
original cost while they should be shown at their current market value.
4. Suffer from window dressing: - Window dressing is a main problem of
accounting. Because financial account is prepare by the management. They can record transaction according to
their need.
5. Not suitable for forecasting: - Accounting is not suitable forecasting. In
accounting past data is provided. We cannot forecast our future while comparing the past data.
 7. ACCOUNTING AS A SOURCE OF INFORMATION

Accounting is a main source of business to provide information. Accounting provides information to a business in
term of:-
1. Provide information for taking economic decision
2. Provide information for making inter-firm and Intra-firm comparison.
3. Provide information for judging the managerial efficiency.
4. Provide information for making analysis and interpretation.

8. USER OF ACCOUNTING
There are two type of user of accounting:-
1. Internal user
2. External user

Internal user: - It means, user of business who are directly connected with the business operation and
management. This are-
(a) Management: - Management requires accounting information for smooth and
efficient running of the enterprises. They need frequent information about the business. So they prepare final
account to know the financial condition of the business.
(b) Proprietor: - Proprietor means the owner of business. The owner of the
business also interested to know that in their business profit is increasing or decreasing.
(c) Employee: - Employees are also interested in the accounting information of the
assesse the ability of the entity to pay higher and regular wages.

External user: - It means, user of business who are not directly connected with the business operation and
management. These are –
(a) Investor: - Investor invests money into the business. They also wanted to know
their share. Accounting helps them to know about his profit and dividend.
(b) Bankers: - Banker provide loan after checking the financial statement of
business organization.
(c) Creditor: - They provide credit goods to the business entity.so they would like
to know about credit worthiness of the firm.
(d) Government: - Government collects taxes. So Government agencies need
accounting information of the assesse.
(e) Public: - Public also interested in knowing the growth of business entity. Only
prosperous entity will provide job employment opportunity to the public.

9. QUALITATIVE CHARACTERSTICS OF ACCOUNTING

The basis objective of financial statement is that profit and loss account must be true and fair view. So the
correct financial position of the business can be revealed. For this purpose these further qualities must be
contained in accounting.
1. Reliability: - Reliability means that users of accounting must be able to present correct and rely information.
This is possible only when it is free from error and personal bias.

2. Relevance: - Accounting information provided by the financial statements must be relevant with the
information need of the various end users of the accounting service.

3. Understandability: -It means, information provided through the financial statement must be presented in
such a manner that the users are able to understand it easily.

4. Comparability: - It means, Accounting information provide such data that can be compared easily.
Mainly comparisons are of two types:-
 a) Intra-firm Comparison- Within same organization of different year
b) Inter- firm comparison – With other enterprises.

10. SYSTEM OF ACCOUNTING

There are two type of accounting system: -

a) Double Entry system
b) Single Entry System
a) Double Entry System: - Double entry system is a system of accounting where both Debit and credit, aspect of
accounting are recorded. In other Words: “The system which recognizes and record both aspects of a transaction.
The Double Entry System has proved to be a scientific and complete system of accounting.”

Feature of the Double Entry System: -

i. It maintains complete record of each transaction.

ii. It recognizes two-fold aspect of every transaction.
iii. In this system one aspect is debited and other aspect is credited using Dr. and Cr. Rule.
iv. It Consist the following stages of accounting: Recording, classifying and summarizing.

Advantages of Double Entry System: -

i. Scientific System:-

ii. Complete record of transaction:-

iii. Arithmetic Accuracy of Accounting: -

iv. Knowledge of financial position: -

v. Determination of profit and loss:-

vi. Knowledge of financial position: -

vii. Helps management in decision making: -

b) Single Entry System: - This system is also known as incomplete record system. In this system, All transaction are
not recorded on double entry system. Only one aspect is recorded in this system. Instead of maintaining all
account, only personal account and cash book are maintained under this system. Account maintained under this
system is not fully reliable. It is not possible to prepare trail balance under this system. So as a result, final
accounts can’t be prepared.