Introduction to Accounting

SUBMITTED TO :-
Dr. Sunil Kumar Verma
SUBMITTED BY :-
Gurkirat Singh

 Accounting is as old as civilization itself. From the ancient relies of Babylon, it can
be well proved that accounting did exist as long as 2600 BC however, in modern
from accounting based on the principles of Double entry system, which came into
existence in 15th century.
 Fra Luka Paciolo, a mathematician published a book De computicet scripturies in
1494 at Venice in Italy. This book was translated into English in 1543 in this book
he covered a brief section on “book-keeping”
 Origin of accounting in India:
The accounting on modern lines was introduced in India after 1850 with the
formation of joint stock companies in India.

The American Institute of Certified Public Accountants
(AICPA) defines accounting as “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”

4
• Accounting is the information system that,
• Measures business activities,
• Processes data into reports, and
• Communicates results to decision makers.

 Accounting:
“Accounting is the process of summarizing, analyzing and reporting
the financial transactions in a manner that adheres to certain
accepted standard formats, helping to evaluate a past performance,
present condition, and future prospects as well”
 Bookkeeping:
“Book-Keeping involves the chronological recording of finance
transactions in a set of books in a systematic manner.”

Accounting, as an information system, is the process of
identifying, measuring, and communicating the economic
information of an organization to its users who need the
information for decision making.

INPUT PROCES
S
OUTPUT
•Recording
•Classifying
•Summarizing
•Analyzing
•Interpreting
Communicating
information to
users ( P&L
A/C, B/S, CFS,
etc)
Economic
events
measured in
financial
terms
ACCOUNTING INFORMATION
SYSTEM

 In all activities and organizations (business or non-business) which
require money and other economic resources, accounting is required
to account for these resources.
 In other words, wherever money is involved, accounting is required
to account for it.
 Accounting is often called the language of business. The basic
function of any language is to serve as a means of communication.
Accounting also serves this function.

Accounting helps answering questions like:-
 Am I making or losing money from my business ?
 How much am I worth ?
 Should I put more money in my business or sell it and go into
another business ?
 How much is owed to me, and how much do I owe ?
 How can I change the way I operate to make more profit ?

 Keeping systematic record.
 Ascertain the results of the operation.
 Ascertain the financial position of the business.
 Portray the liquidity position.
 To protect business properties.
 To facilitate rational decision – making.
 To satisfy the requirements of law.

USERS OF ACCOUNTING
INFORMATION
Internal Users:-
• Board of Directors,
• Partners,
• Managers,
• Officers, etc.
External Users:-
Financing group:
• Investors (present and potential)
• Lenders
• Suppliers
Public Group:
• Govt and Regulatory Authorities
• Employees and Trade Unions
• Customers
• Rating Agencies
Others:
• Security Analyst
• Academicians
• Researches

 Decide when to buy, hold or sell an equity investment.
 Assess the stewardship or accountability of mgt.
 Assess the ability of the enterprise to pay and provide other benefits to its
employees.
 Assess the security for amounts lent to the enterprise.
 Determine distributable profits and dividends.
 Determine taxation policies.
 Prepare and use national income statistics.
 Regulate the activities of enterprises.

 Cash Based Accounting:
Most of us use the cash method to keep track of our personal financial activities.
The cash method recognizes revenue when payment is received, and recognizes
expenses when cash is paid out. For example, your personal checkbook record is
based on the cash method. Expenses are recorded when cash is paid out and
revenue is recorded when cash or check deposits are received.
 Accrual Accounting:
The accrual method of accounting requires that revenue be recognized and assigned
to the accounting period in which it is earned. Similarly, expenses must be
recognized and assigned to the accounting period in which they are incurred.
A Company tracks the summary of the accounting activity in time intervals called
Accounting periods. These periods are usually a month long. It is also common for a
company to create an annual statement of records. This annual period is also called
a Fiscal or an Accounting Year.

 Financial Accounting:
 Financial accounting system is concerned with the financial state of affairs and
financial results of operations. It is mainly concerned with the preparation of
financial statements for the use of outsiders like creditors, debenture holders,
investors and financial institutions.
 Cost Accounting:
 Cost accounting seeks to ascertain the cost of unit produced and sold or the services
rendered by the business unit with a view to exercising control over these costs to
assess profitability and efficiency of the enterprise. It involves an estimation of future
costs to be incurred based on the data provided by the financial accounting.
 Management Accounting:
It is concerned with presentation of accounting information in such a way as to assist
management in the creation of policy and the day-to-day operation. It covers all
arrangements and combinations or adjustments of the traditional information to
provide the Chief Executive with the information from which he can control the
business e.g. Information about funds, costs, profits etc.

 The accounting system uses Accounts to keep track of information. Here is
a simple way to understand what accounts are. In your office, you usually
keep a filing cabinet. In this filing cabinet, you have multiple file folders.
Each file folder gives information for a specific topic only.
 For example you may have a file for utility bills, phone bills, employee
wages, bank deposits, bank loans etc. A chart of accounts is like a filing
cabinet. Each account in this chart is like a file folder. Accounts keep track
of money spent, earned, owned, or owed. Each account keeps track of a
specific topic only.

 Personal Accounts: Personal Accounts also includes accounts in the names of
firms, companies or institutions such as Malini & sons account, Nagarjuna finance
limited account, Andhra Bank Account etc.
Debit The Receiver & Credit The Giver
 Real Accounts: Accounts relating to properties or assets are known as ‘ Real
Accounts’. Every business needs assets such as machinery, furniture etc., for
running its activities. A separate account is maintained for each asset owned by
the Business.
Debit What Comes In Credit What Goes Out
 Nominal accounts: Accounts relating to expenses, losses and incomes and
gains are known as ‘ Nominal Accounts’ Examples of Nominal Account Wages,
salaries, commission, interest received accounts.
Debit All Expenses And Losses Credit All Incomes And Gains

Capital:
It is the part of wealth which is used for further production and thus capital
consists of all current assets and fixed assets. Cash in Hand, Cash at bank,
Building, Plant and Machinery, furniture etc., are the capital of the business.
Capital is classified as “Fixed capital and Working capital”.
1) Fixed capital:
The amount of invested in acquiring fixed assets is called fixed capital. Plant
and machinery, vehicles, furniture and building etc., are some of the examples
for fixed capital.
2) Working Capital:
The part of capital available with the firm for day-to-day working of the
business is known as working capital. Working capital can also be expressed as
under.
Working Capital = Current Assets - Current Liabilities

 Revenue: It means the amount which, as a result of operations, is
added to the capital. It is defined as the inflow of assets which result
in an increase in the owner’s equity. It includes all incomes like sales
receipts interest, commission, brokerage etc., However, receipts of
capital nature like additional capital, sale of assets etc., are not a
pant of revenue.
 Expenses: The terms ‘expense’ refers to the amount incurred in the
process of earning revenue. If the benefit of an expenditure is limited
to one year, it is treated as an expense (also known as revenue
expenditure) such as payment of salaries and rent.

 Assets: An Asset is a property of value owned by a business.
Physical objects and intangible rights such as money, accounts
receivable, merchandise, machinery, buildings, and inventories for
sale are common examples of business assets as they have economic
value for the owner. Assets can be of the following types:
• Fixed Assets,
• Current Assets,
• Fictitious Assets,
• Intangible Assets,
• Wasting Assets

 Liabilities: Liabilities are the obligations or debts payable by the
enterprise in future in the form of money or goods. Liabilities can be
classified as fixed, current and contingent liabilities.
• Fixed Liabilities,
• Current Liabilities,
• Contingent Liabilities

Financial Statements are of the following types:-
 Profit and Loss A/C (Statement of financial performance)
 Balance Sheet (Statement of financial position)
 Statement of Cash Flows (Statement of cash receipts and cash
payments)

Introduction to Accounting

Related slideshows

More Related Content

Introduction to Accounting