INTRODUCTION TO ACCOUNTING

SAKSHI KARN
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COURSE OBJECTIVE
 To make students understand about the basics of accounting.
 To make them aware about different practices used in financial
accounting
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INTRODUCTION TO ACCOUNTING

BOOK KEEPING:- It means the recording of business transactions in systematic manner

in a set of accounts books.
OBJECTIVES OF BOOK KEEPING:-
• To have a permanent record.
• To keep record of expenses, costs and incomes.
• To keep record of all changes in the value of assets and liabilities.
• To know names of debtors who owe money to the business.

ACCOUNTING:- It is the art of recording, classifying and summarizing in a significant

manner and in terms of money, transactions and events which are in a part at least of a
financial character, and interpreting the results thereof.
 The first step in the cycle of accounting is to identify transactions that
will
4 find place in books of accounts. Transactions having financial impact
only are to be recorded. E.g. if a businessman negotiates with the
customer regarding supply of products, this will not be recorded. The
negotiation is a deal which will potentially create a transaction and will
have exchange of money or money’s worth. But unless this transaction is
finally entered into, it will not be recorded in the books of accounts.
 Secondly, the recording of the business transactions is done based on the
Golden Rules of accounting (which are explained later) in a systematic
manner. Transaction of similar nature are grouped together and recorded
accordingly. e.g. Sales Transactions, Purchase Transactions, Cash
Transactions etc. One has to interpret the transaction and then apply the
relevant Golden Rule to make a correct entry thereof.
 Thirdly, as the transactions increase in number, it will be difficult to
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understand the combined effect of the same by referring to individual
records. Hence, the art of accounting also involves the step of
summarizing them. With the aid of computers, this task is simplified in
today’s accounting world. The summarization will help users of the
business information to understand and interpret business results.
 Lastly, the accounting process provides the users with statements which
will describe what has happened to the business. Remember the two basic
questions we talked about, one to know whether business has made profit
or loss and the other to know the position of resources that are used by
the business.
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OBJECTIVES OF ACCOUNTING

The principal object of accounting is to keep permanent record of all monetary

transactions effected by a person or enterprise during a definite period and ascertainment
of results of those transactions at the end of the period. The main objects of accounting
are enumerated below:
1. Proper Recording of Transactions: The first and foremost object of accounting is to
keep record of monetary transactions in a systematic manner.
2. Determination of Results: Every person or institution is always interested to know the
results of his/its monetary transactions at the end of a definite period. So, ascertainment of
result of financial transactions is an important object of accounting.
3. 7Ascertainment of Financial Position: Another object of accounting is
the ascertainment of debtors and creditors, assets and liabilities and the
overall financial position.
4. Supplying Financial Information: Another important object of
accounting is to make available all sorts of financial reports and statements
to all parties interested in the affairs of the concerned institution as soon as
possible after preparing those reports and statements.
5. Defalcation Prevented: Another special object of accounting is the
prevention of defalcation of money made through fraud by the officials of
the institution as well as control of expenditure.
 NEED FOR ACCOUNTING
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The necessity and importance of accounting is limitless or unbounded to men in their
day-today personal life, family life, and intuitional life. The necessity of accounting is
described below:
1. Accounting supplies numerical information to the institution relating to its
management and administration.
2. Exact results of the institution are disclosed through accounting.
3. The firm can ascertain the financial status of the business operation.
4. Firm can compare the financial position of two/more years.
5. Books accounts are very valuable documents.
6. Proper accounting makes the firm credible to other party.
7. Tax authority can assess taxes for the firm using the accounting information.
8. Firm can determine the actual assets and liabilities.
9. Using accounting data, a firm can formulate policy and take many decisions
on future operations.
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FEATURES / PROCESS OF ACCOUNTING

Accounting is the process of identifying the transactions and events, measuring the
transactions and events in terms of money, recording them in a systematic manner in the
books of accounts, classifying or grouping them and finally summarizing the transactions
in a manner useful to the users of accounting information.
1. Identifying the Transactions and Events: This is the first step of accounting process.
It identifies the transaction of financial character that is required to be recorded in the
books of accounts. Transaction is transfer of money or goods or services from one person
or account to another person or account. Events happen as a result of internal policies or
external needs. Events of non-financial character cannot be recorded even though such
events may have an impact on the operational results of the firm.
2. Measuring: This denotes expressing the value of business transactions and
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events in terms of money (in terms of rupees in India).

3. Recording: It deals with recording of identifiable and measurable transactions

and events in a systematic manner in the books of original entry that are in
accordance with the principles of accountancy.

4. Classifying: It deals with periodic grouping of transactions of similar nature

that appear in the books of original entry into appropriate heads by posting or
transfer entries. For example, all purchases of goods made for cash or on credit
on different dates are brought to purchase account.
5.11Summarizing: It deals with summarizing or condensing transactions in
a manner useful to the users. This function involves the preparation of
financial statements such as income statement, balance sheet, statement of
changes in financial position and cash flow statement.

6. Analyzing: It deals with the establishment of relationship between the various

items or group of items taken from income statement or balance sheet or both. Its
purpose is to identify the financial strengths and weaknesses of the enterprise.
The above six process in the present-day scenario are generally performed using
software packages.
7. Interpreting: It deals with explaining the significance of those data in a manner
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that the end-users of the financial statement can make a meaningful judgment
about the profitability and financial position of the business. The accountants
should interpret the statement in a manner useful to the users, so as to enable the
user to make reasoned decision out of the alternative course of action. They should
explain various factors on what has happened, why it happened, and what is likely
to happen under specific conditions.
8. Communicating: It deals with communicating the analyzed and interpreted
data in the form of financial reports/statements to the users of financial
information, e.g., Profit and Loss account, Balance Sheet, Cash Flow and Funds
Flow statement, Auditors Report etc. The Accounting Information system.
 LIMITATIONS OF ACCOUNTING
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1. Though accounting system is the only source for extracting financial
information of the firm, it grossly lacks qualitative elements. Qualitative
resources could include leadership of top brass, highly talented human
resource, highly motivated team, best products, the power of resource and
development, brand image etc.
2. Accounting is not free from bias. The accountants have some leeway or
freedom on the methods of depreciation charged, inventory valuation etc.
Though the convention says consistency has to be maintained on the policies
adopted, there is considerable room for bias, favourism and personal
judgement.
3. Accounting reveals the estimated position and not the real position of the firm.
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Generally, financial statements are prepared on separate entity concept,
conservatism concept etc. which are based on the estimates that may lead to
overvaluation or undervaluation of assets and liabilities. The exact picture of the
financial situation can be ascertained only on the liquidation of an enterprise.
4. Accounting ignores the price level changes when financial statements are
prepared on historical cost. Fixed assets are shown in the balance sheet at historical
cost less accumulated depreciation and not at their replacement value. Land value
is shown at historical cost but the replacement value could be far higher than the
value stated in the balance sheet due to appreciation of land value over the period
of time.
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5. The danger of window dressing arises when the management decides to

incorporate wrong figures to artificially inflate revenue or deflate losses or
when there is a threat of hostile takeover. In such a situation, the
management fails to provide true and fair view of the financial position to
the various users of the financial statement. Satyam Computer Services, the
fourth largest software firm, went into bust when the information on inflated
income to the extent of ` 7,000 crore was revealed.
16 DIFFERENCE BETWEEN ACCOUNTING AND BOOK
KEEPING
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Course Outcomes:

At the end of this course students would be able to:

 Have the knowledge about the meaning of book keeping and
accounting.
Know about the objectives, features and limitations of accounting.

Know the difference between accounting and book-keeping.

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THANK YOU