Introduction to

Accounting
 Accountancy
Accountancy refers to
systematic knowledge of the
principles and the techniques,
which are applied in
accounting. It has a wider
approach than accounting
 systematic knowledge

principles techniques

Bookkeeping Accounting
 Book Keeping is the process of
recording the financial transactions
and events of a business. It s a part of
accounting and involves: (i)
Identification of Financial Transactions
and Events; (ii) Measurement of
Transactions in terms of money; (iii)
Recording the financial transactions in
Journal or Subsidiary Books; (iv)
Classifying them through Ledger
Accounting is a broad
term and in addition
to Book Keeping, it
also includes
summarizing,
interpreting and
communicating the
financial data to the
interested parties.
 Difference Between Book Keeping and Accounting
Basis Book Keeping
1. Scope Book Keeping involves identifying
financial transactions, measuring
them in terms of money, recording
them and classifying them in ledger.
2. Stage It is a Primary Stage.
3. Nature of Job The job is routine in nature.
4. Objective The main aim is to maintain
systematic records of financial
transactions.
5. Performance Junior staff performs this function.
6. Level of Skills Book Keeping does not require
special skills as the work is
mechanical in nature.
Accounting
In addition to Book Keeping,
Accounting also includes
summarising, interpreting and
communicating the financial data to
the interested parties.
It is a Secondary Stage. It begins
where book-keeping ends.
The job is analytical in nature
The main aim is to ascertain the
profitability and financial position of
the business and to communicate it
to the interested parties.
Senior staff performs this function.
It requires specialised skill to analyse
and interpret the financial
statements.
ACCOUNTING
PROCESS
 1 3 6

Recording Analyzing and

Identification Interpreting the
of Financial the financial
transactions financial data
Transactions 5
and Events; in Journal or
Subsidiary Summarizing the
Books; transactions by
preparing Trial Communicating
4 Balance, Trading the financial
Measureme
Account and data to the
2 nt of Classifying interested
Profit and Loss
Transactions them Account (or parties.
in terms of through Statement of
money; Profit and Loss) 7
Ledger
and Balance
Sheet;
 CHARACTERISTICS OR
FEATURES OR
ATTRIBUTES OF
ACCOUNTING

1. Identification of Financial
Transactions and Events:
A business is full of events, which are
both financial and non-financial.
Accounting records only those
transactions and events which are of
financial nature as they bring a change in
the resources of a firm. For example,
purchase of goods or assets.
2. Measurement of
Transactions:
Accounting records the transactions only
in terms of money. It involves quantifying
business transactions into financial terms
using monetary unit of the country. In
India, rupee is used as a measuring unit.
Any event which cannot be measured
in terms of money, is not recorded in
the accounting books. For example,
events like receiving an order for sale
of goods or appointment of an
employee are not recorded in the
books of accounts.
.
3. Recording:
Accounting involves recording
the financial transactions in the
books of accounts. It means
entering a business transaction
in the books of original entry.
• In a small concern with few
transactions, recording is done
in a book called 'Journal'.
• In a big concern with
numerous transactions, the
Journal is further sub-divided
into various books known as
'Subsidiary Books' such as Cash
Book, Purchases Book, Sales
Book, etc.
4. Classifying:
Accounting is an art of
classifying transactions of the
business. Classification is the
process of grouping the
transactions of one nature at
one place, in a separate
account, known as 'Ledger'.
• Classification involves
entering the transactions
from Journal or the
Subsidiary Books to ledger. It
is also called 'Posting'.
5. Summarising:
It involves presenting the classified
data in a manner which is
understandable and useful to the
users of accounting statements.
This process leads to the
preparation of the following
statements:
• Trial Balance;
• Trading Account and Profit and
Loss Account or Statement of
Profit and Loss (in case of
companies); and
• Balance Sheet.
6. Analysing and
Interpreting:
In Accounting, the results of
the business are analysed
and interpreted so that users
of financial statements can
make a meaningful and
sound judgement about the
profitability and financial
position of the business.
7.Communicating:
Accounting involves
communicating the
financial data to the
interested parties through
annual and periodic
reports. The accounting
information must be
provided on time so that
decisions are taken at the
appropriate time.
Advantage of accounting
• Provides Information about
Financial Performance
• Provides assistances to
Management
• Facilitates Comparative Study
• Replaces Memory
• Helps in settlement of Tax Liability
• Advantages of Accounting
• Helpful in Raising loans
• Evidence in Court
• Helps in the Sale of Business
• Helpful in Decision Making
 Disadvantage of accounting

• Accounting is not Fully Exact

• Accounting does not Indicate
the Realisable Value
• Ignores Effect of Price Level
Changes
• Ignores the Qualitative
Information
• Affected by Window Dressing
 Financial
Accounting
Cost
Accounting

Management
Accounting
Branches
( types ) of
accounting
 BRANCHES OF ACCOUNTING
Financial Accounting Cost Accounting Management
(Deals with (Deals with accounting Accounting
Maintenance of which is concerned (Deals with
Books of Accounts to with controlling the accounting which
Determine cost of products is concerned with
Profitability and decision-making
manufactured or services
Financial Position of process of
rendered)
the Business) management)
Accounting is
OR
ACCOUNTING: SCIENCE OR ART
• Accounting is a Science as it is an organised
body of knowledge, which is based on
certain principles.
• Accounting is also an Art as it involves
recording, classifying, summarising and
interpreting the financial transactions of a
business, which helps in achieving the
desired objectives.
So, it can be concluded that Accounting is a
science as well as an art.
ACCOUNTING AS A SOURCE OF INFORMATION
Accounting is a definite process of interlinked
activities, that begins with the identification of
transactions and ends with the preparation of
financial statements.
• Every step in the accounting process generates
information. Generation of information is not an
end in itself.
• It is a means to facilitate the dissemination of
information among different users. Such
information enables the users to take appropriate
decisions.
THE ACCOUNTING INFORMATION SHOULD ENSURE TO:
1.Provide information for making economic decisions;
2. Serve the users who rely on financial statements as their
principal source of information;
3. Provide information useful for predicting and evaluating the
amount, timing and uncertainty of potential cash flows;
4. Provide information for judging management's ability to
utilise resources effectively in meeting goals.
5. Provide factual and interpretative information by disclosing
underlying assumptions on matters subject to interpretation,
evaluation, prediction, or estimation; and
6. Provide information on activities affecting the society.
 TYPES OF ACCOUNTING INFORMATION
1. Income Statement: It provides accounting information about the profit
earned or loss incurred during an accounting period.
• A Firm prepares Trading Account and Profit and Loss Account to provide
information about the Net Profit or Net Loss.
• A Company prepares Statement of Profit and Loss in the form prescribed
in Schedule III, part II of the Companies Act, 2013 to determine Net Profit
or Net Loss.
• A Not-For-Profit Organisation prepares Income and Expenditure Account
to determine Surplus or Deficit.
2. Statement of Financial Position: The Financial Position of an entity at a
given date is depicted by the Position Statement, i.e. Balance Sheet. The
Balance Sheet provides information about the Assets owned by the entity,
amount due to outsiders, i.e. Liabilities and amount due to the owners, i.e.
Capital.
3. Cash Flow Statement: It is prepared in accordance with AS-3 (Revised)
and provides information about inflow and outflow in cash during a
specific period.
 USERS OF ACCOUNTING INFORMATION
Internal Users
(i) Owners: Owners are exposed to the maximum risk in the business as they
invest capital in the business. So, they are always interested in the safety of their
capital.
• They also want to know the profitability and financial soundness of the
business.
• Accounting information provides them the information about financial
performance of the business.
(it) Management: Accounting information is used by the management for taking
various decisions. Management is also concerned with ensuring that the money
invested in the organisation is generating an adequate return and that the
organisation is able to pay its debts and remain solvent.
(iii) Employees: They are interested in the financial statements to assess the
ability of the business to pay higher wages and bonus. Employees are also
interested in knowing whether the various amounts due to them such as
Provident Fund, Employees State Insurance, etc. are being deposited regularly.
External Users
(i) Banks and Financial Institutions: Banks and other financial institutions provide loan to
the business. So, they need accounting information to ensure the safety and recovery of the
loan advanced and regularity of the interest amount.
(ii) Investors and Potential Investors: Present investors use accounting information as they
are interested in knowing the earning capacity of the business and safety of the investment.
(iii) Creditors: Creditors provide goods on credit to the business. So, they need accounting
information to ascertain financial soundness of the firm and to ensure creditworthiness of
the firm.
(iv) Government and their Agencies: The Government authorities collect various taxes, like
sales tax, VAT, excise duty, etc. from the business. So, government need accounting
information to assess the tax liability of the business entity.
(v) Researchers: They use accounting information to undertake research in various
economic, business and other related areas.
(vi) Consumers: Consumers are interested in getting good quality goods at reasonable prices.
So, they require accounting information for establishing good accounting control, which will
reduce cost of production and less price is to be paid by them.
(vii) Public: Business is an indispensable part of the society and gets its manpower and other
resources from society. The general public is interested in its accounting information to
know the contribution of business towards the welfare of the society.
 QUALITATIVE CHARACTERISTICS OF
ACCOUNTING INFORMATION
Qualitative characteristics are the attributes of accounting
information, which enhances its understandability and usefulness.
The qualitative characteristics are:
1. Reliability: Accounting information must be reliable.
Reliability implies that the information must be free from
material error and personal biasness and verifiable**.
**The accounting information is said to have verifiability if
transactions are supported by documentary evidences such
as cash memos, sales invoices, etc.
2. Relevance: Accounting information must be relevant to the
decision-making requirements of the users. It means, unnecessary
and irrelevant information should not be included in financial
statements.
3. Understandability: Understandability means decision-makers
must interpret accounting information in the same sense as it is
prepared and conveyed to them. An information should be
presented in such a manner that users can easily understand it.
4. Comparability: Comparability means that the users should be able
to compare various aspects of a firm over different time periods
(known as intra-firm comparison) and with other firms (known as
inter-firm comparison).
To be comparable, accounting information must belong to a
common period and use common unit of measurement and format
of reporting.
SYSTEMS OF ACCOUNTING
1- Double Entry System
It is based on the Principle of "Dual Aspect” which recognises and records both aspects
of a transaction.
1. It is a systematic and scientific method of recording financial transactions.
2. Every transaction has two-fold effect: the aspect of receiving and the aspect of giving.
3. With the help of rules of debit and credit, one aspect is debited and other aspect is
credited.
4. The total of all debits and all credits must be equal. The arithmetical accuracy can be
checked by preparing Trial Balance.
For example, if a firm has purchased machinery for cash, then in this transaction, two
accounts will be affected: Machinery and Cash. Under the Double Entry System, both
these aspects are recorded: Machinery will be debited and Cash will be credited for the
same amount.

Advantages of the Double Entry System

4- Determining Profit or Loss
1-Scientific System
5- Depicts Financial Position
2- Complete Record of Transactions
6- Facilitates Comparative Study
3- Checks Arithmetical Accuracy of Accounts
7- Helpful in Decision Making
 SYSTEMS OF ACCOUNTING

Single Entry System.

Single Entry System is an unscientific method of record keeping, which does not
follow the accepted accounting rules.
"A system of book keeping in which, as a rule only records of cash and of
personal accounts are maintained, it is always incomplete double entry varying
with the circumstances". rules of Double Entry System are not followed
completely
• Double Entry in respect of certain transactions, such as cash received from
debtors, cash paid to creditors, etc.
• Single Entry in respect of certain transactions, such as cash purchases, cash
sales, assets purchased, etc.
• No Entry in respect of certain transactions, such as depreciation, bad debts,
etc.