PRINCIPLES OF

ACCOUNTING
Introduction & Scope of Accounting
Week 01

Instructor: Farhan Bajwa

2 1.1 Definition of Accounting:

 Accounting is an art of recording, classifying and summarizing transactions

and events which are in part in terms of money, and interpreting the results
thereof.
 Accounting also involves analyzing and interpreting the financial
transactions and communicating the results to the persons interested in
such information.
 Accounting is considered as an ‘Information System’, as the function of
Accounting is to provide quantitative information, primarily financial in
nature about the business organization.

Instructor: Farhan Bajwa

3 1.2 Origin & Growth of Accounting:

 Event Recording: In the early stages of civilization, the number of

transactions to be recorded were so small that each businessman was able
to record and check for himself all his transactions.

 However, the modern system of accounting based on the principles of

double entry system owes it origin to Luca Pacioli who first published the
principles of Double Entry System in 1494 at Venice in Italy.

Instructor: Farhan Bajwa

4 1.3 Nature and Scope of Financial
Accounting:

 i ) Accounting as a service activity: Accounting collects financial information

for the various users for taking decisions and tackling business issues.

 (ii) Accounting as a profession: Accounting is a systematized body of

knowledge developed with the development of trade and business over the
past century. Like other professions, Lawyers, Doctors & etc

 (iii) Accounting as a social force: The society is composed of people as

customer, shareholders, creditors and investors. The accounting
information/data is to be used to solve the problems of the public at large
such as determination and controlling of prices.

Instructor: Farhan Bajwa

5 1.3 Nature and Scope of Financial
Accounting:

 iv) Accounting as a language: It is one means of reporting and

communicating information about a business.

 (v) Accounting as an information system: Accounting generally does not

generate the basic information (raw financial data), rather the raw
financial data result from the day to day transactions of the business.
As an information system, accounting links an information source or
transmitter (generally the accountant), a channel of communication
(generally the financial statements) and a set of receivers (external users).

Instructor: Farhan Bajwa

6 1.4 Different Types of Business Organizations:

 Sole Proprietorship:
The simplest and most common form of business ownership,
A business owned and run by someone for their own benefit.
The business’ existence is entirely dependent on the owner’s decisions,
 Partnership:
These come in two types: general and limited.
In general partnerships, both owners invest to the business and are both 100% liable
How much you invest but you are still potentially responsible for all its debt.
partnerships can be verbal or even implied between the two business owners.
Limited partnerships require a formal agreement between the partners.
Limited partnerships allow partners to limit their own liability for business debts
according to their portion of ownership or investment.

Instructor: Farhan Bajwa

7 1.4 Different Types of Business Organizations:

 Corporation
Corporations are, for tax purposes, separate entities and are considered a
legal person. This means, among other things, that the profits generated by a
corporation are taxed as the “personal income” of the company. Then, any
income distributed to the shareholders as dividends or profits are taxed again
as the personal income of the owners.
 Limited Liability Company (LLC)
Similar to a limited partnership, an LLC provides owners with limited liability
while providing some of the income advantages of a partnership. Essentially,
the advantages of partnerships and corporations are combined in an LLC,
mitigating some of the disadvantages of each.

Instructor: Farhan Bajwa

8 1.5 Types of Accounting:

 1. Financial Accounting : Financial accounting involves recording and

classifying business transactions, and preparing and presenting financial
statements to be used by internal and external users.

 2. Managerial Accounting: Managerial or management accounting deals

with the needs of the management rather than strict compliance with
generally accepted accounting principles.

 3. Cost Accounting: It refers to the recording, presentation, and analysis of

manufacturing costs. Cost accounting is very useful in manufacturing
businesses since they have the most complicated costing process.

Instructor: Farhan Bajwa

9 1.5 Types of Accounting:
 4. Auditing: External auditing refers to the examination of financial statements by an
independent party.
 5. Tax Accounting: Tax accounting helps clients follow rules set by tax authorities. It
includes tax planning and preparation of tax returns. It also involves determination
of income tax and other taxes,
 6. Accounting Information Systems: Accounting information systems (AIS) involves
the development, installation, implementation, and monitoring of accounting
procedures and systems used in the accounting process.
 7. Fiduciary Accounting: Fiduciary accounting involves handling of accounts
managed by a person entrusted with the custody and management of property of
or for the benefit of another person. Examples of fiduciary accounting include trust
accounting, receivership, and estate accounting.
 8. Forensic Accounting: Forensic accounting involves court and litigation cases,
fraud investigation, claims and dispute resolution, and other areas that involve legal
matters. This is one of the popular trends in accounting today.

Instructor: Farhan Bajwa

10 1.6 Role of Accounting:

 (i) Increased volume of business results in large number of transactions and

businessman can’t remember everything. Accounting records obviate the
necessity of remembering various transactions.
 (ii) Accounting records, prepared on the basis of uniform practices, will enable
a business to compare results of one period with another period.
 (iii) Taxation authorities (both income tax and sales tax) are likely to believe the
facts contained in the set of accounting books if maintained according to
generally accepted accounting principles.
 (iv) Accounting records, backed up by proper and authenticated vouchers,
are good evidence in a court of law.
 (v) If a business is to be sold as a going concern, then the values of different
assets as shown by the balance sheet helps in bargaining proper price for the
business.

Instructor: Farhan Bajwa

11 1.7 Objectives of Accounting:
 Systematic record all business transactions.

 Ensure Results of Business Operation To know Profit / Loss Statement

 Ensure Results of Financial Position To know Balancesheet of the business.

 To provide information to Users for decision making. Accounting aims to

meet the information needs of the decision maker and help them in
rational decision making.

Instructor: Farhan Bajwa

12 1.8 Functions of Accounting:

 Measurement: Accounting measures the performance of the business & its

current financial position.
 Forecasting: Accounting helps in forecasting future performance
 Decision–making: Accounting provides relevant information to the Users to
make rational decision–making.
 Comparison & Evaluation: Accounting assesses performance achieved in
relation to targets.
 Control: Accounting identifies weaknesses in the operational system
 Government Regulation: Accounting provides necessary information to the
Government, to exercise control on the entity as well as in collection of tax

Instructor: Farhan Bajwa

13 1.9 Advantages & Disadvantages of
Accounting:

 Advantages of Accounting
 Maintenance of business records
 Preparation of financial statements
 Comparison of results
 Decision making
 Evidence in legal matters
 Provides information to related parties
 Helps in taxation matters
 Valuation of business
 Replacement of memory financial transitions

Instructor: Farhan Bajwa

14 1.9 Advantages & Disadvantages of
Accounting:

 Disadvantages of Accounting
 Expresses Accounting information in terms of money
 Accounting information is based on estimates
 Accounting information may be biased
 Recording of Fixed assets at the original cost
 Manipulation of Accounts
 Money as a measurement unit changes in value

Instructor: Farhan Bajwa

15 1.10 Users of Financial Information:

Users Purpose

Management decision–making and performance evaluation.

Proprietor / profitability and financial position.

Shareholder Track record of the Company.
s
Lenders – Determine the financial position and strength of the Company,
Banks & Fin.
Institutions
Suppliers Determine the credit worthiness of the Company.

Instructor: Farhan Bajwa

16 1.10 Users of Financial Information:

Users Purpose
Customers To know general business viability

Employees To know the stability, continuity and growth of the enterprise,

Government To ensure prompt collection of Direct and Indirect Tax revenues,

To evaluate performance and contribution to social objectives.

Research Scholars For study, research and analysis purposes.

Public at Large To see whether the enterprise is making a reasonable / substantial
contribution to the local economy,

Instructor: Farhan Bajwa

17 1.11 Relationship of Accounting with
other Disciplines:
Discipline Relationship
Auditing process reviews the Financial Statements, which are the outcome of
1. Auditing the accounting process.
Economics uses the database provided by Accounting System, for developing
decision–models and for rational decision–making on the use of scarce
resources.
2. Economics Economic Theories have influenced the development of decision–making tools
used in accounting.
Transactions and events are governed by the laws of the land like the law of
Contracts, Sale of Goods, Negotiable Instruments and Taxation Laws.
The entity itself is governed by specific statutes like Partnership Act,
Companies Act, Co–operative Societies Act, which have a bearing on
3. Law maintenance of account books.
The format of Financial Statements is also prescribed by certain Statutes like
Companies Act, Banking Regulation Act, etc.
Instructor: Farhan Bajwa
18 1.11 Relationship of Accounting with
other Disciplines:
Discipline Relationship

Knowledge of arithmetic and algebra is a pre–requisite for accounting

computations and measurements, e.g. Depreciation, Use of interest and
4. Mathematics annuity tables, Lease Rentals, Hire Purchase Instalments, etc.
Ratios, Graphs, and Operations Research Models have been widely used in
accounting

5. Management Management relies on accounting and other data for effective decision–
making. Accounting System can be designed to serve management purposes.

In accounting, many ratios and financial calculations are based on statistical

6. Statistics methods, which help in averaging them over a period of time. Thus, Statistics is
helpful in development of accounting data and in their interpretation, using
Pie–Charts, Graphs and Trend Curve Diagrams, etc.
Instructor: Farhan Bajwa
19

Thanks

Instructor: Farhan Bajwa