PRINCIPLES OF ACCOUNTING

UNIT 1
INTRODUCTION
ACCOUNTING intro
 Accounting is the science and art of recording and classifying transactions in a
systematic manner so that the financial position of the company can be ascertained at
any point of time.
 Accounting is a discipline , well equipped with techniques and methods through
which all types of transactions , measurable in terms of money or money’s worth can
be recorded, classified and summarised in a proper and systematic way
 Accounting is an ancient art such as old money which conveys the language of
business in a easy manner to understand and interpreting the results there of
 The main purpose of accounting is to ascertain the profit or loss during a specified
period and to present the Financial position of a business on a particular date
 It reveal the profit and loss of a business for a given period and the value of a firm’s
Assets, liabilities and owner’s equity.
 Bookkeeping is a foundation on which the whole structure of modern business is
based.

Meaning
 Accounting is the art of recording , classifying and summarizing in significant
manner and in terms of money , transactions and events which are , in part, at least of
a financial character and interpreting the results thereof.---- According to THE
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANT (AICPA) IN
1941
 RELEVANT ASPECTS OF DEFINITION
 Economic events
 Identification , measurement, recording and communication
 Organisation
 Interested users of imformation
 In 1966 the American Accounting Association (AAA) defined accounting as “the
process of identifying, measuring and communicating economic information to permit
informed judgments and decisions by users of information
Need of accounting
 Accounting is termed as language of business.
 It help to identify where the business organisation stands i.e what he owns , What he
owes
 The need for accounting is mainly for a person who is running a business
 It provide quantitative imformation of financial nature to various stakeholders which
is used in making economic decisions.
 These stakeholder include Investors, management, government, suppliers, Financiers,
Regulators etc
 It helps the management in planning controlling and decision making processes

Objectives
 To keep systematic records of business transactions
 To calculate profit or loss of the business
 To depict the financial position of the business
 To communicate imformation to stakeholders

Advantages
 It helps to resolve tax problems
 It provide Permanent and reliable record
 It helps to verify the arithmetic accuracy of the accounts
 It helps to ascertain the value of the business
 Records can be produced as evidence

Limitations
 It does not record non monetary transactions
 It can be manipulated
 It is subject to fraud and errors
 Does not provide imformation about opportunity costs
 Influenced by personal judgements
 Does not provide timely imformation

ACCOUNTING CYCLE
 RECORDING

COMMUNICATION CLASSIFYING

INTERPRETING SUMMARISING

 RECORDING
Recording of transactions is done in book named as Journal. Journal is also
known as book of prime entries and this is further divided in various
subsidiary books such as Cash journal (to record cash transactions), Purchase
journal (to record credit purchase)etc

 CLASSIFYING
Claassifying of transactions is done in book termed as Ledger . In this all the
journal entries are posted in ledger accounts.

 SUMMARISING
This include preparation of the trial balance , profit and loss account and
balance sheet of the business.

 INTERPRETING
This involves computation of various accounting ratios etc to know about the
liquidity , solvency and profitability of business

 COMMUNICATION
This involves that all the required imformation which is required and
necessary for the stakholders to take decisions will be communicated .

Functions
 RECORDING
  This is the basic function of accounting. Recording is done in the book
“Journal”.
 This book may be further subdivided into various subsidiary books
such as Cash Journal (for recording cash transactions), Purchase
Journal (for recording credit purchase of goods), Sales Journal (for
recording credit sales of goods), etc. the number of subsidiary books
to be maintained will be according to the nature and size of the
business.

 CLASSIFYING

 Classification is concerned with the systematic analysis of the recorded

data, with a view to group transactions or entries of one nature at one
place.
 The work of classification is done in the book termed as “Ledger”.

 SUMMARISING

 This involves presenting the classified data in a manner which is

understandable and useful to the internal as well as external end-users
of accounting statements.
 This process leads to the preparation of the following statements:
(i) Trial Balance, (ii) Income Statement, and (iii) Balance Sheet

 DEALING WITH FINANCIAL TRANSACTIONS

 Accounting records only those transactions and even in terms of

money which are of a financial character.
 Transactions which are of a financial character are not recorded in the
books of accounts.

 ANALYSING AND INTERPRETING

 The recorded financial data is analysed and interpreted in a manner

that the end-users can make a meaningful judgement about the
financial condition and profitability of the business operations.
 The term ‘Analysis’ refers to the methodical classification of the data
given in the financial statements.
 The term ‘Interpretation’ means, explaining the meaning and
significance of the data simplified

 COMMUNICATING
  After doing every function it is required to communicate the
necessasry imformation to the stakeholders which will help them in
taking necessary economic decisions to a great extent.

Accounting system
Business transactions may be recorded in any system, which will enable the ascertainment of
the profit or loss of a business and its financial position.

The following are the main systems adopted:

 CASH SYSTEM OF ACCOUNTING
 Only actual cash receipts and payments
transactions will be entered into the book of
accounts
 No entry will be made for credit transactions
 Govt system of accounting is mostly on cash
basis
 They prepare Income and expenditure account
instead of Profit and loss account4
 Outstanding expences are considered

 MERCHANTILE SYSTEM OF ACCOUNTING

 This system is based on double entry
Principle
 This book consider both cash and credit
transactions
 This system is followed by industrial and
commercial firms
 This system origin owes to an Italian
merchant Luco Pacioli who wrote the book
“DE COMPUTIS ET SCRIPTURIS” On
double entry accounting inn 1494

BASIS OF DIFFERENCE CASH SYSTEM MERCHANTILE SYSTEM

TYPE OF RECIEPT AND CASH RECEIPYT AND CASH AND CREDIT
PAYMENT PAYMENT BOTH RECIPT AND
PURCHASE
INCOME AND EXP AC YES NO
PROFIT AND LOSS AC NO YES
DOUBLE ENTRY NO YES
PRINCIPLE
FOLLOWED IN GOVT SYSTEM INDUSTRIAL AND
COMMERCIAL FIRMS

SYSTEM OF BOOK
KEEPING
 The art and technique of recording the business transactions in a set of books is called
as Bookkeeping.
 It is the process of analyzing, classifying and recording transactions in accordance
with a preconceived plan.

IT CAN BE DONE IN 2 WAYS

Single entry system

it is an incomplete maitainace of books of accounts
It records only one side of each and every transactions
only personal and cash accounts are opened
trial balance and balance sheet cannot be prepared
It is not accceptalble for taxation and insurance claims
not accepted as evidences

Double entry systems

It refers to a system of accounting under which both the aspects i.e
debot and credit of every transactions are recorded in the accounts
Every debit and credit have equal amounts
the total of debit and credit must be equal
all personal real and nominal accounts are opened
trial balance and balanace sheet can be prepared
accepted by Income tax authorities
it can be used as a evidence and kept as record

BASIS OF DIFFERENCE SINGLE ENTRY DOUBLE ENTRY

FULL IMFORMATION NO YES
 ACCOUNT OPEN PERSONAL AND CASH ALL PERSONAL REAL
ACCOUNT ARE OPENED AND NOMINAL
ACCOUNTS ARE OPENED

ACCEPTED BY INCOME NO YES

TAX AUTHORITIES
TRIAL BALANCE AND NOT PREPARED PREPARED
BALANCE SHEET
EVIDENCE CANNOT BE TREATED AS IT WILL BE TREATED AS
EVIDENCE EVIDENCES
TRANSACTIONS IT RECORD ONLY ONE SIDE OF IT RECORD BOTH SIDES OF EACH
EACH AND EVERY AND EVERY TRANSACTIONS
TRANSACTIONS

BRANCHES/STREAMS OF
ACCOUNTING
The subject of accountancy has become important part for all the business organization .Its
subject matter has been increased and it has taken form of accounting

BRANCHES OF ACCOUNTING
FINANCIAL ACCOUNTING

COST ACCOUNTING

MANAGEMENT ACCOUNTING

TAX ACCOUNTING

GOVERNMENT ACCOUNTING

SOCIAL RESPONSIBILITY ACCOUNTING

HUMAN RESOURCE ACCOUNTING

 Financial Accounting
 Journal
 Ledger
 Trial balance
  Final accounts
 Cost Accounting
 Cost sheet
 Job and contract costing
 Process costing
 Operating costing
 Management Accounting
 Ratio Analysis
 Break even point analysis
 Standard costing
 Analysis of financial statements
 Tax Accounting
 Sales tax
 Income tax
 Wealth tax
 Excise duty
 Government Accounting
 Budget
 Consolidated fund
 Contingency fund
 Public accounting
 Social responsibility accounting
 Social fund
 TQM
 Environmental accounting
 Human resource accounting
 Employee inventory management
 HRD operational & Administrative Aspects
 Profitability and work measurement

Financial accounting
 It is a branch of accounting that keeps track of a company’s financial transactions
 It is the art of recording, classifying and summarizing in a significant manner and in terms
of money, transactions and events which are at least in part of a financial character , and
interpreting the results thereof.
 Businesss transactions are recorded in books of accounts
 It calculate the profit and loos to know about the financial position of the business
 It is primarily concerned with the preparations of financial statements which summarises
the results of operations for a selected period of time and show the financial position of
the company at particular dates.
 Journal, subsidiary books, ledger, trial balance, trading account, profit and loss account
and balance sheet are prepared
LIMITATIONS OF FINANCIAL ACCOUNTING
 Gives only limited imformation to the management which create problem for the
management in the task of decision making
 It is inadequate for making future projections as it provide historical imformation
 It fails to meet the imformation needs of different levels of management as every different
levels of management needs different imformation
 It consider only quantifiable imformation it does not consider social factors
 Change in technology and fast growth of business made the task of modern management
highly complicated and financial accounting have simple structure which cannot cope
with the needs of modern management.

Management accounting
 It is the presentation of accounting imformation in such a way which helps to guide the
management in policy creation and day to day operations
 Provide imformation to management for decision making
 It helps to take decisions for future
OBJECTIVES
 Assist in decision making process
 Formulate planning and policy
 Assist in controlling business operations
 Organize the data
 Understand financial data
 Identify business problem areas
 Interpretation of financial documents
LIMITATIONS
 Based on financial and cost records
 Personal bias
 Costly installation
 Lack of knowledge
 Provides only data
 Resistance to change
 Unquantifiable variables

FINANACIAL ACCOUNTING MANAGEMNT ACCOUNTING

Primary objective is recording business
transactions in systematic way and ascertain
business results and financial position of
business
It is related to historical records
It is compulsory
It is related to business as a whole
More emphasis on precise data
It is external accounting as it present
imformation to external parties
It presents annual reports
It is prepared in accordance with the GAAP
It is objective as it is based on measurement
It record only monetary transactions
Its scope is not vast as it do not include
techniques such as costing, statistics
bookkeeping vs accounting
BOOK KEEPING
It is the primary stage
It involves recording and maintenance of
accounts
Objective is to maintain systematic records
of business transactions
This work is done by junior staff
High level of knowledge is not required
Bookkeeper’s job is routine and clerical in
nature
Analytical skill is not required
Work is supervise by the accountant
COST ACCOUNTING
Objective is to provide necessary imformation
to management for efficient decision making
It is related to future plans
It is optional
It is related to reports of a particular
department
Less emphasis on precise data . estimates and
future data are mostly used
It is internal accounting as it present
imformation to management
It cover both shorter and longer duration
reports
It is prepared according to internal
requirements of management
It is subjective as it is based on judgement
It records both monetary and non monetary
transactions
Its scope is wider as it include financial
accounting, cost accounting etc
ACCOUNTING
It is the secondary stage
It involves bookkeeping and also it
analyses, summarises and communicates the
results according to interested parties
Objective is to ascertain the net results of
operations and financial position
It is done by senior staff
High level of knowledge is required
Accountant job is analytical in nature
Analytical skill is required
Work is not supervised by the bookkeeper
  Wheldon defines cost accounting as “classifying, recording and appropriate allocation
of expenditure for determination of costs of products or services and for the
presentation of suitably arranged data for purposes of control and guidance of
management”.
 Cost accounting helps in maintaining a desirable margin between cost and price so
that business can earn profit
 It is the process of ascertaining and controlling the cost of product
 It include job and contract costing, process costing., operating costing and cost sheet
preparations.
Importance
 It aids price fixation
 Eliminates wastages
 Cost ascertainment
 Control of costs
 Aids to management decision making
 Makes comparison possible
 Proper match of cost with revenue
LIMITATIONS
 Lack of uniformity
 Conceptual diversity
 Do not cover future aspect
 Expertise is needed while recording
 System complexity
 Costly to maintain

Financial accounting vs cost

accounting
FINANCIAL ACCOUNTING
Its aims to safeguard the interests of people
connected with business such as
shareholder, creditors etc
It emphasizes on the measurement of
proftitability
It disclose net profit and loss of business as
a whole
It mainly deals with actual facts and figures
It deals with historical records
Financial reports are prepared periodically
COST ACCOUNTING
It aims to provide guidance to management
for proper planning , operation, control and
decision making
It emphasizes at ascertainment of costs and
accumulated data
It disclose profit and loss of each product ,
job or service
It deals with facts and figures and partly
with estimates
It deals with historical and pre determined
costs
Cost reporting is a continusous process and
 may be daily,weekly,monthly etc
It is concerned with external transactions It is concerned with internal transactions

Social RESPONSIBILITY
ACCOUNTING
 It is the process of accounting for social responsibility met by the organisation
 It is concerned with the measurement and disclosure of costs and benefits to the societyas
a result of operating activities of the business organisation

Human resource accounting

 It is the process of identifying and reporting made for the human resource of an
organisation
 It involves measuring the costs incurred by the business firms to recruit, attract, hire, train
and develop human assets.
 It also measure economic value of people to organisation.

TAX ACCOUNTING
 It deals with the preparations of the tax returns and tax payments
 It is used by individuals ,business, corporation and other entities
 It focuses on income, qualifying deductions ,donations and any investment gains or losses
 For a business tax accounting is more complex

Govt accounting
 It is an accounting system used in govt institutions for purpose of
recording ,classifying , summarizing and communicating the financial
imformation regarding the collection and utilization of public funds and properties