INTRODUCTION TO ACCOUNTING Dr.

Aleem Ansari
 MEANING OF ACCOUNTING
oAccounting is used by business entities for keeping records of their money or financial
transactions.
oExample: A businessman who invested money in his business would like to know whether his
business is making profit or incurring losses, the position of his assets and liabilities, and
whether his capital has increased or decreased.
oDefinition-
“ Accounting is 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 financial character
and interpreting the results thereof”.
DIFFERENCE
Book-Keeping

Accounting

Accountancy
SCOPE OF FINANCIAL ACCOUNTING
oRecords Financial Transactions
oClassify and Summarize Information
oPrepare Financial Statements
oInterprets Financial Information
oCommunicates all outcomes
oDetermines and Maintain Financial Position
FUNCTIONS OF ACCOUNTING
oKeeping Systematic Records
oProtecting and Controlling Business Properties
oAscertaining the Operational Profit/Loss
oAscertaining the Financial Position of the Business
oFacilitating Rational Decision Making
oAccounting as Information System
USERS OF ACCOUNTING INFORMATION
oOwners/Shareholders
oManagers
oProspective Investors
oCreditors
oGovernment
oEmployees
oRegulatory Agencies
oResearchers
ADVANTAGES OF ACCOUNTING
oMaintenance of Business Records
oPreparation of Financial Statements
oComparison of Results
oDecision Making
oEvidence in Legal Matters
oHelps in Taxation Matters
oValuation of Business
LIMITATIONS OF ACCOUNTING
oAccounting information is expressed in terms of money
oAccounting information may be biased
oFixed assets are recorded as the original costs
oOmission of Qualitative information
oMoney as a measurement unit changes in value
 BUSINESS TRANSACTION: MEANING
oA business transaction is an event involving an interchange/exchange of goods, money or
services between two or more parties.
oThe transactions can be as brief as cash purchase or as long-lasting as a service contract
extending over years.
oThe business transaction can be between two parties engaged in business or between business
entity and a customer.
POINTS TO REMEMBER ABOUT BUSINESS
TRANSACTION
1. There must be at least two parties involved.
2. The transaction involves an exchange or transfer of money or money’s worth such as
goods or services.
3. It must have a two fold effect in the elements of accounting.
TYPES OF BUSINESS TRANSACTIONS
Cash and Credit Transactions
A transaction in which cash is paid or received immediately at the time when transaction occurs
is known as Cash Transaction.
In a Credit Transaction, the cash does not change the hands immediately at the time when
transaction occurs. In other words, the cash is received or paid at a future date.
Internal and External Transactions
Internal transactions (also known as non-exchange transactions) are those transactions in which
no external parties are involved. These transactions do not involve in the exchange of values
between two parties but the event is measurable in monetary terms and impacts the financial
position of the business. Example- Depreciation charged, provision for bad debts etc.
External transactions (also known as exchange transactions) are transactions in which a
business exchanges value with external parties. Normally, all transactions other than internal
transactions are external transactions. Example- Purchase and sale of goods or services.
QUIZ:
1. When a machine is purchased for cash
Answer- Business Transaction
2. When “A” sells goods to “B” and “B” promises to pay in future
Answer- Business Transaction
3. Sending quotation for sale to the buyer
Answer- Non-business Transaction
4. Taking the family on an overseas holiday paid for in cash
Answer- Non-business Transaction
5. Paid son’s fees from his personal bank account Rs. 20,000.
Answer- Non-business Transaction
BASIC ELEMENTS OF ACCOUNTING
oAssets-
An asset is anything of monetary value owned by a business that will generate cash flows in
the future such as plant and machinery, inventory, marketable securities etc.
oLiabilities-
A liability is something a person or company owes, usually a sum of money such as loans,
accounts payable, mortgages etc.
oEquity/Capital-
Equity represents the amount of investment made by the owner or owners in the business such
as Share Capital, contributed surplus, retained earnings, and dividends.
oRevenue/ Income-
Revenue is the income that a business earns from its normal business usually sales of goods and
services.
oExpenses-
An expense is the cost of operations that a company incurs to generate revenue. Generally
goes with the saying of “is costs money to make money”. Examples- Employees’ wages and
salaries, rent, depreciation etc.
oProfit-
A gain is the increase in the net profit resulting from something other than day to day earnings.
It arises if the selling price of the asset is higher than the original purchase price.
oLosses-
Loss is decrease in the net income that is outside the normal operations of the business.
oDebtors-
A person, firm or company who owes something to the business is called debtor.
oCreditor-
A person, firm or company to whom something is owing by the business is called creditor.
THANKYOU