Unit One

Lesson one

Introduction to Accounting (Part One)

1. INTRODUCTION

Business is an economic activity undertaken with the motive of earning profits

and maximising the wealth for the owners. Business cannot run in isolation.
Largely, business activity is carried out by people coming together with a
purpose to serve a common cause. This team is often referred to as an
organisation, which could be in different forms such as sole proprietorship,
partnership, body corporate etc.

The business activities require resources (which are limited & and have
multiple uses) primarily in terms of material, labour, machinery, factories and
other services. Business success depends on how efficiently and effectively
these resources are managed. Therefore, there is a need to ensure that the
businessman tracks the use of these resources. The resources are not free and
thus one must be careful to keep an eye on the cost of acquiring them as well.

Recording of business activities has to be done scientifically so that they reveal

the correct outcome. The science of bookkeeping and accounting provides an
effective solution. It is a branch of social science. This study material aims to
give a platform to the students to understand basic principles and concepts,
which can be applied to measure the performance of business accurately.

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 2. DEFINITION

 Definition by the American Institute of Certified Public Accountants (Year

1961)
“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 a financial character, and interpreting the result thereof”.

3. OBJECTIVES

Objectives of
Accounting

To Know the Providing Information to

Solvency Position the Users for Rational
Decision-making

Systematic Ascertainment of
Recording of Results of above
Transactions Transactions

Ascertain the
Financial Position
of Business

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 4. CLASSIFICATIONS

The various sub-fields of the accounting are

ACCOUNTING

Financial Cost Accounting Management

Accounting
(Stewardship Accounting)
Determining the
financial results for the
period and the state of
affairs on the last day
the accounting period.
(Control Accounting) Accounting (Decision
Accounting)
Information generation
Accounting to assist
for controlling management in
operations to maximise
planning and decision
efficiency and profit. making.

Financial Accounting Management Accounting

Financial Accounting is based on the
monetary transactions of the enterprise.
Its main focus is on recording and classifying
monetary transactions in the books of
accounts and preparation of financial
statements at the end of every accounting
period.
Reports as per Financial Accounting are
meant for the management as well as for
shareholders and creditors of the concern.
Reports should always be supported by
relevant figures and it emphasizes on the
objectivity of data.
Reports are always subject to statutory audit.
It ascertains, evaluates and exhibits the
financial strength of the whole business.
Management Accounting is primarily
based on the data available from Financial
Accounting.
It provides the necessary information for the
management to assist them in the process of planning,
controlling, performance evaluation and decision-
making.
Reports prepared in Management Accounting are
meant for management and as per management
requirements.
Reports may contain both subjective and
objective figures.
Reports are not subject to statutory audit.
It evaluates the sectional as well as the
entire performance of the business.

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