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STUDY NOTE 1: INTRODUCTION to ACCOUNTING

The concept of accounting has been in vogue for many centuries. More than 3,000 years ago,
scribes of Babylon and Egypt received what, in effect, was formal accounting training in
schools. Accounting profession declined in the middle ages but was revived in Italy during
the Crusades. Full-blown double-entry bookkeeping appears in Genoese records of 1340. For
centuries, accounting was primarily associated mainly with government activities. However,
the industrial revolution is what additional accounting needs. Large Scale Enterprises require
used capital to finance them and many people to direct their operations. This led to an
investor-manager combination. The investors to finance the project like to know how the
form is protecting and utilising the resources interested in it. This led to the growth of
accounting as a profession.
The importance of accounting for the guru with managers realising the importance of
accounting information in improving the effectiveness of the decision-making process. Thus,
accounting took a new shape of Management Accounting.
Today, most organisations have accounting as the most prominent staff unit. The accounting
group essentially consists of two types of people:
1. Bookkeepers and other clerical employees who maintain the detailed operating
records and
2. Professional Accountants who decide how items should be reported prepare the
reports to correct them, analyse design, and operate the system through which
information flows and ensure that the information is accurate.
All accounting is a staff function performed by the accounting profession within an
organisation. The ultimate responsibility of generating accounting information, financial or
managerial, rests with the management. Management responsibility for accounting is why
one of the top officers of many businesses is the controller. The controller's responsibility is
to satisfy the needs of other managers related to Management accounting information and
comply with the requirements of financial reporting. For proper flow of such information, the
controllers of employees and accounting professionals in both management and financial
accounting. These accountants design, install and operate the information system required to
generate financial and managerial reports.
Bookkeeping
It is the art of recording and noting the facts of financial transactions in a simple and easy-to-
understand way. This forms the basis to measure the operating performance of the business
and to analyse the financial position of the businesses.
Accounting is a process of identifying, measuring, and communicating information so that it
can make informed judgment decisions. Accounting as a function is related to all the
functions in an organisation, like planning, implementation, marketing control, etc. This is a
wide range of environments of accounting as the function increases the scope of accounting
as a profession. Accounting professionals are responsible for preparing and finalising
financial statements.
Types of financial statements
Curated by: POONAM NAMJOSHI TRI-1:FRA
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1. Profit and loss account

2. Balance sheet
Profit and loss account depicts how much profit or loss an organisation has made in a time
period. A balance sheet is a statement of what an organisation owes and what it owns at a
given point of time. The above statements are used by many groups of people with different
purposes.

Management
Managers are responsible for the financial performance of the organisation. They must
periodically compile and interpret financial statements to measure financial performance. The
managers are also interested in various cost and control information pertaining to different
departments or functions to understand how far the organisation has been successful in
achieving its financial goals and to take corrective measures.
Shareholders Security Analysts and Investors
Shareholders and investors are the owners of the firm. We need to have information to know
how the firm is performing. Analysts who advise to potential investors are largely interested
in assessing the Profitability, examination strength, and estimating the value of the firms.
Lenders
Financial statements are normally used by lenders to judge the Profitability and the liquidity
of a business and to assess the security of the funds they are going to lend. The landers and
the creditors are primarily interested in ensuring the safety of their loans. Banks use financial
statements of the form to assess their working capital needs. The focus of all the about groups
is to evaluate the risk in investing in a firm.
Suppliers
Suppliers of raw materials to a company are usually interested in short-term liquidity of the
company. The information and the financial statements help them to analyse the liquidity
position of the firm.
Customers
The quality of goods and services of the firm legal obligation associated with the guarantee is
warranties, and after-sale service contracts tend to establish a long-term relationship between
the business and its customers. The customers may use the financial statements to draw
inferences about the long-term viability of the firm.
Employees
Employees have a vested interest in the continued and profitable operations of the
organisation in which they are working. Financial statements can be an important source for
obtaining information regarding current and future profitability and solvency.
Government and regulatory authorities

Curated by: POONAM NAMJOSHI TRI-1:FRA

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Income Tax authorities are interested in assessing the taxable profits generated by a firm.
Similarly, regulatory authorities may use financial statements to check whether the
organisation has followed the rules and the procedures set by them.
Others
Diverse persons such as academicians, researchers and analysts may approach business forms
for financial information. To draw conclusions, they study the financial statements in depth.
The end user of the financial statements need not be from a finance background. They might
not understand the complex technicalities of the financial statements. People who do not have
a detailed understanding of the financial accounting process and the related legal provisions
are sure to fail to make any sense of the information presented in the annual reports;
therefore, annual reports provide summarised information from the balance sheet and profit
and loss account in non-technical language. Experts, however, feel that in this process of
summarisation, the meaning content of financial information may be diluted or lost. Because
of the lack of well laid out procedures and rules and regulations for financial reporting,
experts that company the accomplishments of the company and downplay the information
with, show its poor performance. This paved the way for the Financial Accounting Standard
Board in the USA, similar to the Accounting Standard Board of the Institute of Chartered
Accountants of India, to issue a series of guidelines on financial reporting concepts and
practices.
According to FASB, there are two main objectives of financial reporting:
1. Information about enterprise earnings and its components method by a cruel
accounting provides a better indication of enterprise performance than information
about the current cash receipts and payments.
2. Financial reporting should also provide information about an enterprise’s economic
resources, obligations, and owners’ equity, liability or solvency, and management
explanation and interpretation of information provided.
FASB has several guidelines for improving the information provided in the financial
statements. Each new disclosure provides some additional Useful information to readers of
financial statements. But again, financial statements, footnotes, and supplementary statements
complicate the entire reporting process. Many users of financial statements argue that most
summarised presentations may result in effective communication of financial information.
Summary reporting is something less than the full text of current annual reports to
shareholders but something more than the brief presentation of financial highlights and
summary indicators that generally appear in the annual reports. However, one should clearly
understand that summary reports would not eliminate the statement to be included in filing
the annual reports. The summary report would serve as primary information for those not
experts in reading financial statements.

Curated by: POONAM NAMJOSHI TRI-1:FRA