INTRODUCTION TO

ACCOUNTING

Accounting, also known as, accountancy, is the

measurement, processing, and communication of
financial and non financial information about
economic entities such as businesses and
corporations. Accounting, which has been called
the "language of business", measures the results of
an organization's economic activities and conveys
this information to a variety of users, including
investors, creditors, management, and
regulators.Practitioners of accounting are known
as accountants. The terms "accounting" and
"financial reporting" are often used as synonyms.

HISTORY
Accounting is thousands of years old and can be
traced to ancient civilizations.The early
development of accounting dates back to ancient
Mesopotamia, and is closely related to
developments in writing, counting and money;
there is also evidence of early forms of
bookkeeping in ancient Iran,and early auditing
systems by the ancient Egyptians and
Babylonians.By the time of Emperor Augustus, the
Roman government had access to detailed
financial information.

TERMINOLOGY
Accounting has variously been defined as the
keeping or preparation of the financial records of
transactions of the firm, the analysis, verification
and reporting of such records and "the principles
and procedures of accounting"; it also refers to the
job of being an accountant.
Accountancy refers to the occupation or profession
of an accountant,particularly in British English.

PURPOSE OSF ACCOUNTING

Even if you’re not in business, chances are you
work for somebody that is. Whether you fix the
computers, write advertisements or makes sales
over the phone, your role is designed to help your
employer achieve one key objective – making a
profit. Your ability to understand financial
information makes you that much more valuable,
not only to your employer but to your clients and
customers too. By understanding accounting, you
can understand how a business makes money,
making you a complete professional and
connecting you with your employer, your clients,
and their goals.
We also cannot forget the benefits of good
personal finance. Accounting/Bookkeeping is as
much a personal tool as it is a business one. Money
is a big problem for many people all over the
world. Perhaps you are finding it difficult to make
ends meet, or maybe you’re trying to save for a
vacation but can’t seem to figure out where all
your money goes. Accountancy provides you with
the skills you need to manage your money, where
you can trace and categorize your expenses and
effectively budget your income. This allows you to
determine exactly how much you spend on non-
essentials such as movies and fancy dinners, while
also ensuring the important stuff such as rent and
food for the family is always paid on time.

ACCOUNTING VS FINANCE
The difference between finance and accounting is
that accounting focuses on the day-to-day flow of
money in and out of a company or institution,
whereas finance is a broader term for the
management of assets and liabilities and the
planning of future growth.

If you want to exercise high-level control over a

company’s strategy, finance could be for you. If you
want to take a detailed look at a company’s books
you’re probably more interested in accounting. It’s
often said that accounting looks back to a
company’s past financial transactions, whereas
finance looks forward to plan future acquisition of
assets.

Accounting is more about accurate reporting of

what has already happened and compliance with
laws and standards. Finance is about looking
forward and growing a pot of money or mitigating
losses. If you like thinking in terms of a longer time
horizon you may be happier in finance than in
accounting.

If you want to study accounting you can expect to

take classes in accounting practices and accounting
ethics, business law, tax law and accounting
theory. If you study finance you’ll likely spend some
time on macroeconomics and international finance
in your classes, as well as on financial engineering
and corporate finance.

SUB FIELDS OF ACCOUNTING

Accounting is a fairly wide term and encompasses
within it many meanings and types of recording
and analyzing activities. These various types of
accounting are known as subfields of accounting.
They include financial accounting, management
accounting, human resource accounting.
FINANCIAL ACCOUNTING
Financial accounting largely concerns itself with
the preparation and interpretation of financial
statements and accounts of a company. It is mainly
aimed at providing external users (such as
shareholders, creditors, tax authorities etc) with
the financial information that they require. The
process begins with bookkeeping.

We say that financial accounting is historical in

nature. It only records and summarises
transactions after they have already taken place.
And the final step of financial accounting is the
preparation of the final accounts, which is the
Profit & Loss Statement (also known as the Income
Statement) and the Balance Sheet. This is done at
the end of the financial year to determine the
overall net profit or loss of the company. Financial
accounting also summarizes the financial position
of the company at the year-end.

Financial accounting generally uses the double

entry system. It implements the principles of the
Accounting Standards (AS) to maintain their
financial records. Various accounting techniques
are used to maintain these financial records via
journals, ledgers, trial balance etc. The ultimate
aim is to provide the users (stakeholders of the
company) with all the financial information they
may require in a fair and systematic manner.

MANAGEMENT ACCOUNTING
Quite simply put, management accounting is
concerned with such accounting information which
is useful to the management and the managers. It
is any accounting information (reports, accounts,
budgets etc) that is useful to the management of a
firm to more efficiently carry out its functions of
directing, planning, controlling, etc.

So in management accounting, the information is

grouped and organized in a way desired by the
managers who are the users of this information. So
such reports, budgets, memos make the
information easier to understand and analyze for
the managers. Thus they can plan their managerial
activities accordingly and take better and smarter
decisions as well.

Also, the different levels of management have

different needs. So one of the main functions of
management accounting is to modify the data
according to the needs of the top, middle and
lower levels of management. For example, the top
level managers will need more concise information
while the lower level managers will require more
detailed information.

COST ACCOUNTING
Cost accounting is the process of accounting and
ultimately controlling the costs related to a
product or job or process or an operation. It
allocates the expenditures of the company to their
correct product/service/job to help determine the
exact cost of such a cost center. And cost
accounting also organizes and presents this
information suitable for the purpose and use of the
management.

Cost accounting deals with all three aspects of cost

ascertainment, the controlling of cost and
eventually cost reduction. This will help the
management in avoiding wastage, determining
the selling price of a product/service, calculating
the break-even point, and overall better decision
making functions. Cost accounting is also very
important for budgeting and implementing
budgetary control for the organization.

HUMAN RESOURCES
ACCOUNTING
Human resources are argued to be the most
important resources of an organization. Without
human resources, a company simply cannot
function. However, in the conventional form of
accounting, there is no scope for the accounting of
these resources or a way to measure their costs
and benefits. Human Resource Accounting was a
concept developed in the 1960’s that aimed to
change that.
One of the main objectives of human resource
accounting is to determine the cost of recruiting,
developing, training and maintaining the human
resources of an organization. It can even provide
for the appreciation or the depreciation of the
human resources. This will basically allow
management to monitor the effectiveness and the
efficiency of their employees. And now that the
information is available, they can make better
decisions regarding their human resources.

Over the years accountants have come up with

many methods of Human Resource Accounting like
the historical method, opportunity cost method,
replacement cost method, present value method
etc. All these have their own benefits and
limitations and the organization will choose the
one best suited to them.
ACTIVITIES WITHIN
ORGANISTIONS
An organization is made up of many people and
activities. Companies plan for the future and
manage the present. They budget, report and track
success by developing processes and systems that
monitor success and progress. An increasing
important function involves hiring the right people
and developing them into successful and effective
employees. Organizations also organize their work
in the most efficient manner, which allows for the
proper mix of people, products, services and
systems.
Planning
Planning is an essential element for all
organizations. The degree and effectiveness of
your company's planning process develops your
company for both the present and the future. Some
organizations have a very formal process that
ultimately produces a thorough and executable
plan for each of the company's operating quarters.
Plans are created for sales, products, people and
systems. Expenditures are anticipated and results,
including profitability, are estimated and planned.
Planning is an activity that leads your company to
the future.

Staffing
Maintaining the proper staffing levels is essential
for all companies. Having too few people means
poorer customer service and even weaker financial
performance. Too many employees drains profits
and creates redundancies that harm the
profitability of your organization. Keeping exactly
the correct number and mix of talented people in
your company is essential for survival, and
constantly having a pool of promotable and
talented associates is a daily job for all successful
companies.

Budgeting
An organization must have a solid budgeting
process or profitability and success will suffer.
Some companies have a budgeting process that is
simple and uncomplicated, while others have a
systematic and thorough process that produces a
workable budget for everyone. Consistent
budgeting over time helps when producing an
estimate, but the involvement of everyone in your
company in the budgeting process is the best way
to ensure accuracy. Once the budget is created, you
can then accurately and efficiently operate your
company with a solid road map.

Reporting
Reporting carries throughout your entire
organization. From entry-level employees to the
highest points in your organizational charts,
reporting is an essential element for all companies.
Customer service associates report sales and
satisfaction scores. Supervisors enter their sales
and profit levels into your tracking system. Division
managers are accountable for the profitability of
their stores, and your human resource team tracks
turnover and benefits statistics. Department heads
discuss results with your vice presidents, and
company executives are accountable to the board
of directors.

Directing
Directing others flows throughout all layers of your
organization. Every employee of your company is
accountable to a supervisor or manager who
directs the performance of their associates.
Progress is tracked and reported and
improvements are made based on results.
Performance discussions are frequent and the work
of your company flows smoothly when everyone is
led to produce results. Directing the work of others
is common in your management team's
performance reviews, and evaluating the success
of others is a vital task that happens during every
minute of your organization's day.

USERS OF ACCOUNTING
INFORMATION
AIS is a system which collects, stores and processes
the accounting and financial data. This financial
data is useful for users of accounting information
system for reporting the financial information to
Owners/Shareholders, Managers, Prospective
Investors, Creditors, Bankers, and other Lending
Institutions, Government, etc. Let us learn more
about Characteristics and users of accounting
information system.
Owners/Shareholders
Managers
Prospective Investors
Creditors, Bankers, and other Lending Institutions
Government
Employees
Regulatory Agencies
Researchers
Customers

FORM OF BUSINESS
SOLE PROPRIETER/TRADER
PARTNERSHIP
COMPANIES
CO-OPERATIVE

SOLE PROPERITEROR SOLE

TRADER
This is the simplest form of business where an
individual can operate a business. He himself owns
the business and is also liable for any debts. It can
operate in the name of the owner or any other
fictitious name which does not have any separate
legal entity.

PARTNERSHIP
Partnership is based on mutual agreement and in a
partnership, they agree to share capital, profits
and loss of the business. The individuals who have
entered into the partnership are known as
partners.

COMPANIES
Accountants analyse the business finances so the
owner can make better decisions. This information
is organized into reports that show the financial
health of a business. Accounting helps business
owners meet their compliance obligations. It also
helps them make smart decisions with their money.

CO-OPERATIVE
The cooperative's accounting system is a method of
recording and reporting the financial results of its
business transactions. The bookkeeper records the
business transactions of the cooperative in a daily
jour- nal.

MERITS
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

DEMERITS
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

FINANCIAL INFORMATION
Management accountants provide information and
analysis to decision makers inside the organization
in order to help them run it. Financial accountants
furnish information to individuals and groups both
inside and outside the organization in order to help
them assess its financial performance.
UNDERSTANDABILITY
RELEVANCE
RELIABILITY
COMPARIBILITY

MEANING OF ETHICS
Accounting ethics refers to following specific rules
and guidelines set by governing bodies that every
person associated with accounting should follow to
prevent misuse of the financial information or their
management position.