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Lecture 1

Accounting is the process of collecting, recording, summarizing, and communicating financial information, essential for efficient business operations. It serves various users, including managers, shareholders, and tax authorities, providing insights for decision-making and resource management. Financial, cost, and management accounting each have distinct objectives and functions, focusing on external reporting, cost control, and internal decision-making, respectively.

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Lecture 1

Accounting is the process of collecting, recording, summarizing, and communicating financial information, essential for efficient business operations. It serves various users, including managers, shareholders, and tax authorities, providing insights for decision-making and resource management. Financial, cost, and management accounting each have distinct objectives and functions, focusing on external reporting, cost control, and internal decision-making, respectively.

Uploaded by

masoomch1987
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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WHAT IS ACCOUNTING?

Accounting is the process of collecting, recording, summarising and communicating financial


information.
WHY KEEP ACCOUNTS?
Accounting information is essential to the efficient running of a business. It helps managers to
control the use of resources, keep track of the assets and liabilities of the business and plan
effectively for the future.
Accounts show where money came from and how it has been spent, this
• aids the efficient running of a business
• indicates how successfully managers are performing
• provides information about the resources and activities of a business

Accounting information aids the efficient running of a business in many ways.


(a) A business needs to pay bills for the goods and services it purchases, and collect money
from its customers. It must, therefore, keep a record of such bills and invoices so that the correct
amounts can be paid or collected at the correct times.
(b) Keeping records of a business's assets (e.g. its motor vehicles or computers) helps to keep
them secure.

USERS OF ACCOUNTING INFORMATION


Accounting information is required for a wide range of users both within and outside the
business.
User Group Description
Managers of the People appointed by the company's owners to supervise the daily
company activities of the company need information about the company's
current and expected future financial situation, to make planning
decisions.
Shareholders of the Want to assess how effectively management is performing and
company, how much profit they can withdraw from the business for their
i.e. the company's own use.
owners
Trade Creditors, i.e. Suppliers want to know about the company's ability to pay its
suppliers of goods to debts; customers need to know that the company is a secure source
the company on credit of supply and is in no danger of closing down.
and customers
Providers of finance to Lenders will want to ensure that the company is able to meet
the company, i.e. interest payments, and eventually to repay the amounts advanced.
lenders both short and
long term
Tax authorities Want to know about business profits in order to assess the tax
payable by the company.
Employees Need to know about the company's financial situation because
their future careers and the level of their wages and salaries depend
on it.
Government and Interested in the allocation of resources and in the activities of
Regulators enterprises. Also require information in order to provide a basis
for national statistics.
The public Want information because enterprises affect them in many ways,
e.g. by providing jobs and using local suppliers, or by affecting the
environment (e.g. pollution).

FINANCIAL ACCOUNTING DEFINITION AND OBJECTIVE

Definition:
Financial Accounting is the process of recording, summarizing, and reporting a company’s
financial transactions over a specific period. It follows standardized accounting principles like
IFRS (International Financial Reporting Standards) or GAAP (Generally Accepted Accounting
Principles) to ensure transparency and consistency.

Objective:

 To provide accurate financial information to external stakeholders such as investors,


creditors, regulators, and tax authorities.
 To ensure comparability, reliability, and transparency in financial reporting.
 To help in decision-making, investment analysis, and regulatory compliance.
 To prepare financial statements, including the Income Statement, Balance Sheet, and
Cash Flow Statement.

COST ACCOUNTING DEFINITION AND OBJECTIVE

Definition:
Cost Accounting is a specialized branch of accounting that focuses on calculating, analyzing,
and controlling the costs associated with production, operations, and services. It helps
businesses optimize their expenses and improve profitability.

Objective:

 To determine the cost of products or services accurately.


 To assist in cost control and reduction by analyzing direct and indirect costs.
 To support pricing decisions by calculating the total and per-unit cost of production.
 To improve operational efficiency by identifying areas of waste and inefficiency.

Example: A manufacturing company uses cost accounting to determine the cost of producing
a single unit of a product, considering raw materials, labor, and overhead costs.

MANAGEMENT ACCOUNTING DEFINITION AND OBJECTIVE

Definition:
Management Accounting involves analyzing financial data to aid internal decision-making.
Unlike financial accounting, which is focused on external reporting, management accounting
provides customized reports to help managers plan, control, and make strategic decisions.

Objective:

 To provide real-time financial insights for better decision-making.


 To assist in budgeting, forecasting, and financial planning.
 To support performance measurement and risk management.
 To help senior management strategize for business growth and efficiency.

Example: A company uses management accounting to prepare a budget forecast for the next
fiscal year, helping executives decide on resource allocation.

COMPARISON TABLE

Management
Aspect Financial Accounting Cost Accounting
Accounting
Internal decision-
Purpose External reporting Cost control and analysis
making
Investors, creditors, Cost managers, production Business executives,
Users
regulators teams managers
Financial position & Budgeting, forecasting,
Focus Cost of products/services
profitability strategy
Key Income Statement, Cost sheets, variance Budgets, performance
Reports Balance Sheet analysis reports
Regulations Follows IFRS/GAAP No mandatory standards No mandatory standards

Assets
Definition
An asset is anything of value owned by a business that helps generate income or benefits in the future.
Assets can be tangible (physical) or intangible (non-physical).

Examples:

 Tangible Assets: Cash, land, buildings, machinery, inventory.


 Intangible Assets: Patents, trademarks, goodwill, copyrights.

Example in Business: A company’s office building is an asset because it provides value and
can be used for business operations.
Liabilities
Definition:

A liability is an obligation or debt that a company owes to external parties, such as creditors,
suppliers, or lenders.

Types of Liabilities:

 Current Liabilities (due within a year): Accounts payable, short-term loans, wages
payable.
 Non-Current Liabilities (long-term obligations): Long-term loans, bonds payable,
deferred taxes.

Example in Business: If a company borrows Rs. 1,000,000 from a bank, it records this as a
liability until it is repaid.

Capital
Definition:

Capital refers to the owner’s investment in the business, including initial contributions and
retained earnings. It is also known as Owner’s Equity or Shareholders’ Equity.

Types of Capital:

 Owner’s Capital: Funds invested by the business owner.


 Share Capital: Funds raised by issuing shares in a company.
 Retained Earnings: Profits reinvested into the business.

Example in Business: If an entrepreneur invests Rs. 500,000 to start a business, this amount
is recorded as capital in the company’s books.

Revenue
Definition:

Revenue is the total income a company earns from sales of goods or services before deducting
any expenses. It is also called sales or turnover.

Types of Revenue:

 Operating Revenue: Income from core business activities (e.g., sales of products).
 Non-Operating Revenue /other income: Income from non-core activities (e.g.,
interest earned, rental income).

Example in Business: If a shop sells Rs. 200,000 worth of goods in a month, this amount is
recorded as revenue.
Expense
Definition:

Expenses are the costs incurred in running a business to generate revenue. They reduce
profitability.

Types of Expenses:

 Operating Expenses: Salaries, rent, utility bills, advertising, depreciation.


 Non-Operating Expenses: Interest on loans, tax payments, legal fees.

Example in Business: A company pays Rs. 50,000 as office rent, which is recorded as an
expense in the income statement.

Term Definition Example


Asset Resources owned by a business Cash, land, equipment
Liability Debts or obligations owed Bank loan, accounts payable
Capital Owner’s investment in the business Initial investment, retained earnings
Revenue Income from business activities Sales, service fees
Expense Costs incurred to generate revenue Rent, salaries, utilities

Term Increase Decrease


Capital
Liability Credit Debit
Revenue
Asset
Debit Credit
Expense

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