Introduction to Accounting
Accounting – An Overview
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Introduction to Accounting
Learning Objectives
This Chapter would enable you to understand:
Definitions of Accounting
Attributes of Accounting
Accounting Process
Branches of Accounting
Bookkeeping and Accounting
Difference between Bookkeeping and Accounting
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Introduction to Accounting
Learning Objectives
Objectives of Accounting
Functions of Accounting
Advantages of Accounting
Limitations of Accounting
Accounting Information
Users of Accounting Information
Accounting Systems
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Introduction to Accounting
DEFINITION OF ACCOUNTING
«Accounting is a service activity. Its function is to
provide quantitative information, primarily financial in
nature, about economic entities, that is intended to
be useful in making econcomic decisions.»
-Financial Reporting Standards Council(FRSC)-
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Introduction to Accounting
DEFINITION OF ACCOUNTING
"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."
-American Institute of Certified Public Accountants
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Introduction to Accounting
DEFINITION OF ACCOUNTING
"Accounting is the process of identifying, measuring
and communicating economic information to permit
informed judgments and decisions by users of the
information."
-American Accounting Association
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Introduction to Accounting
Meaning of Accounting
Thus, accounting is a process of
Analyzing
collecting,
recording,
summarizing and
communicating financial information to the users
for decision-making.
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Introduction to Accounting
ATTRIBUTES (CHARACTERISTICS) OF ACCOUNTING
The definitions of accounting bring to light the
following attributes of Accounting:
1. Identification of Financial Transactions and
Events
2. Measuring the Identified Transactions
3. Recording
4. Classifying
5. Summarizing
6. Analysis and Interpretation
7. Communicating
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Introduction to Accounting
ACCOUNTING PROCESS
Financial Transactions or
Events
Communicating to the Users
Recording
Journal
1. Sales Journal
Analysis and Interpretation 2. Purchase Journal
3. Cash Receipts Journal
4. Cash Disbursements
Journal
5. General Journal
Summarizing
Trial Balance
Income Statement
Classifying (Posting into
Balance Sheet.
Ledger)
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Introduction to Accounting
BRANCHES OF ACCOUNTING
Branches of Accounting
Financial Accounting Cost Accounting Management Accounting
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Introduction to Accounting
Financial Accounting
Financial Accounting is that branch of accounting,
which records financial transactions and events,
summarizes and interprets them and communicates
the results to the users.
The end-product of Financial Accounting are the set
of financial statements:
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Introduction to Accounting
Financial Accounting
1. Statement of Financial Position (Balance Sheet)
2. Statement of Profit or Loss and other
Comprehensive Income (Income Statement)
3. Statement of Cash Flows
4. Statement of Changes in Equity
5. Notes to Financial Statements
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Introduction to Accounting
Cost Accounting
Cost accounting is a process of collecting,
recording, classifying, analyzing, summarizing,
allocating and evaluating various alternative courses
of action & control of costs. Its goal is to advise the
management on the most appropriate course of
action based on the cost efficiency and capability.
Cost accounting provides the detailed cost
information that management needs to control
current operations and plan for the future.
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Introduction to Accounting
Management Accounting
Management accounting is the process of measuring
and reporting information about economic activity
within organizations, for use by managers in
planning, performance evaluation, and operational
control:
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Introduction to Accounting
BOOKKEEPING, ACCOUNTING AND ACCOUNTANCY
Meaning of Bookkeeping
Bookkeeping is part of and it is concerned with:
Identifying financial transactions and events,
Recording the financial transactions and events so
identified in the books of accounts,
Measuring them in terms of money, and
Classifying recorded transactions and events, i.e.,
posting them into Ledger accounts.
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Introduction to Accounting
BOOKKEEPING AND ACCOUNTING
Definitions of Bookkeeping
"Bookkeeping is an art of recording in the books of
accounts the monetary aspect of commercial and
financial transactions."
"Bookkeeping is an art of recording business
dealings in a set of books."
"Bookkeeping is the art of recording business
transactions in a systematic manner."
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Introduction to Accounting
BOOKKEEPING AND ACCOUNTING
Accounting
Accounting is an art of recording, classifying and
summarizing the financial data and interpreting the
results thereof.
Accounting is a wider concept than bookkeeping.
It starts where bookkeeping ends. In other words,
Bookkeeping is a part of accounting.
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Introduction to Accounting
BOOKKEEPING, ACCOUNTING AND ACCOUNTANCY
DIFFERENCE BETWEEN BOOKKEEPING AND ACCOUNTING
Basis Bookkeeping Accounting
1. Scope Bookkeeping is concerned with Accounting is concerned with
identifying financial transactions; summarizing the recorded
measuring them in money terms; transactions, interpreting them
recording them in the books of and communicating the results.
accounts and classifying them.
2. Stage It is a primary stage. It is a secondary stage. It begins
where bookkeeping ends.
3. Objective The objective of bookkeeping is to The objective of accounting is to
maintain systematic records of ascertain net results of operations
financial transactions. and financial position and to
communicate information to the
interested parties.
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Introduction to Accounting
BOOKKEEPING AND ACCOUNTING
DIFFERENCE BETWEEN BOOKKEEPING AND ACCOUNTING
4. Nature of Job This job is routinary in This job is analytical and
nature. dynamic in nature.
5. Performance Junior staff performs this Senior staff performs this
function. function.
6. Relation Bookkeeping is the basis Accounting begins where
for accounting. bookkeeping ends.
7. Special Skills Bookkeeping is mechanical Accounting requires special
in nature and thus, does skills and ability to analyse
not require special skills. and interpret.
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Introduction to Accounting
OBJECTIVES OF ACCOUNTING
The objectives or functions of accounting are:
Maintaining Systematic Records of Financial
Transactions an Events
Ascertaining Profit or Loss
Ascertaining Financial Position
Assisting the Management
Communicating Accounting Information to Users
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Introduction to Accounting
FUNCTIONS OF ACCOUNTING
The functions of accounting are:
Maintaining Systematic Records
Communicating the Financial Results
Meeting Legal Requirements
Protecting Business Assets
Assistance to Management
Stewardship
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Introduction to Accounting
ADVANTAGES OF ACCOUNTING
Followings are the advantages of Accounting
Financial Information about Business
Assistance to Management
Replaces Memory
Facilitates Comparative Study
Facilitates Settlement of Tax Liabilities
Facilitates Loans
Evidence in Court
Facilitates Sale of Business
Assistance in the Event of Insolvency
Helpful in Partnership Accounts
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Introduction to Accounting
LIMITATIONS OF ACCOUNTING
Followings are the limitations of accounting
Accounting is not Fully Exact
Accounting does not Indicate the Realisable Value
Accounting Ignores the Qualitative Elements
Accounting Ignores the Effect of Price Level
Changes
Accounting may Lead to Window Dressing
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Introduction to Accounting
USERS OF ACCOUNTING INFORMATION
Internal Users
• Owners
• Management
• Employees and Workers
External Users
• Banks and Financial Institutions
• Investors and Potential Investors
• Creditors
• Government and its Authorities
• Researchers
• Consumers
• Public
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Introduction to Accounting
SYSTEMS OF ACCOUNTING
The systems of recording transactions in the
books of accounts are two namely:
1. Double Entry System and
2. Single Entry System.
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Introduction to Accounting
Double Entry System
The Double Entry System of accounting was
developed in the 15th Century in Italy by Lucas
Pacioli.
Under the system, every transaction has two
aspects-Debit and Credit and at the time of
recording a transaction, it is recorded once on the
debit side and again on the credit side.
The Double Entry System has proved to be a
scientific and complete system of accounting
followed by every enterprise and organisation.
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Introduction to Accounting
Double Entry System
For example, at the time of cash purchases, goods
are acquired and in return cash is paid.
In the transaction, above two aspects are involved,
i.e., receiving goods and paying cash
Under the Double Entry System, both these aspects
are recorded.
One part, i.e., the receipt of goods is debited and the
second part, i.e., payment of cash is credited.
Rule of Debit and Credit”
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Introduction to Accounting
Features of the Double Entry System
It maintains a complete record of each transaction.
It recognizes the two-fold aspect of every transaction,
viz., the aspect of receiving (value in) and the aspect
of giving (value out).
In this system, one aspect is debited and other aspect
is credited following the rules of debit and credit.
Since, one aspect of a transaction is debited and the
other is credited, the total of all debits is always equal
to total of all credits. It helps in establishing
arithmetical accuracy by preparing the Trial Balance.
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Introduction to Accounting
Stages of Double Entry System
The following are the three different stages of a
complete system of a double entry book keeping:
Recording the transactions in the Journal.
Classifying the transactions in the Journal by posting
them to the appropriate ledger accounts and then
preparing the Trial Balance.
Closing the books and preparing the final accounts.
All these stages shall be discussed one by one in
succeeding chapters.
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Introduction to Accounting
Single Entry System
Single Entry System of recording transactions in the
books of accounts, may be defined to be an
incomplete Double Entry System.
In this system, all transactions are not recorded on
the double entry basis.
As regards some transactions, both aspects of the
transactions are recorded, as regards others, either
one aspect is recorded or not recorded at all.
Instead of maintaining all the accounts, only
Personal Accounts and Cash Book are maintained
under this system.
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Introduction to Accounting
Single Entry System
The accounts maintained under this system are
incomplete and unsystematic and therefore, not
reliable.
The Single Entry System is also known as Accounts
from Incomplete Records.
Since all transactions are not recorded under double
entry principle, it is not possible to prepare a Trial
Balance.
As a result, the Profit and Loss Account and the
Balance Sheet cannot be prepared.
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Introduction to Accounting
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