Scribd Logo
Upload

Welcome to Scribd!

  • Introduction To Accounting

    Uploaded by

    Smart Gamer
    4 views20 pages

    Original Title

    Introduction to Accounting

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    4 views20 pages

    Introduction To Accounting

    Uploaded by

    Smart Gamer

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 20
    b patenarel det a Book Keeping, Accounting and Accou Q Accounting Information and its Types Qualitative Characteristiesof Accounting Information Users of Accounting Information Systems of Accounting eiguuene Accounting is a systematic process of recording, clas and interpreting the financial transactions and users thereof. The users of accounting information includ financial institutions, employees, government, etc. It gives information o __ lithe resources available; ae _ fii Tow the available resources have been employe _ Sitar the results achieved by their use It_shows the profit earned or loss incurred during the nature of assets, liabilities and owners’ equity, i. pital. ifying, summarising, analysing cating th to the and ounting period, Since accounting is a medium of communication, it is called the language of business. “Accounting is the art of recording, classifying and summarising ina 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.” —American Institute of Certified Public Accountants “Accounting is the science of recording and classifying business transactions and events, primarily of a financial character, and the art of making significant summaries, analysis and interpretations of those transactions and events and communicating the results to persons who must make decisions or form judgment.” —Smith and Ashburne “Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.” f —American Accounting Associations y A F ey , Results to Users of Accounting Information ation of Financial Transactions and Events 8 records only those transactions and events which can be measured in terms _ of money. This involves identify ‘ying transactions and events that are part of economic activity, for example, pi chase of raw material or sale of finished goods by a firm, 2 Measuring the Identified Transactions Financial transactions and event cannot be measured in terms of ‘ded in the books of account. For _ example, event like the calibre or $ are measured in terms of money. An event which 3. Recording uunting is an art of recording business transactions in the books of account, ding is the process of recordi ling business transactions of financial character, i.e, transactions measured in money ca) in the book of original entry, i.e., 4. Classifying ‘Classification is the Process of grou . The transactions recorded in Journal. ping transactions or entries of one nature at one idiary books are classified known as the Poe Vin book has individual transactions related to that account are posted from Journal. For example, in Rahul's Account in the Ledger, all business and interpretation of the financial data are carried out so that the users of ‘data can make a meani igful judgement of the profitability and financial of the business, Z Communicating Finally, accounting function involves communicating the financial information. ie.. financial statements, to its users. The accounting information should be provided in time to the users so that appropriate decisions may be taken at the appropriate time. | The objectives of accounting are: 1. Maintaining Accounting Records / ‘The objective of accounting is to record financial transactions and in the books of account in a systematic manner fo lowing the principles of accou 2. Determining Profit or Loss (Another objective of accounting is to determine w hether during the the firm has earned profit or has incurred loss. For this p . an Income Statement or the Trading and Profit & Loss Revenues resulting from the transactions and expenses are transferred in the debit either profit or loss. e, a statement called— Account is prepared» of the period are transferred in the credit . The difference between the two sid is 3. Determining Financial Position X Another objective of accounting is to determine financial position. It is known from _ the Balance Sheet, which shows value of the assets on one side and liabilities on the other side))Financial position of the business is as relevant for the users of financial ‘Statements as is the Income Statement, i.e., Profit & Loss Account (Statement of Profit & Loss, in the case of Companies), ing records of tS are prepared at the end of the accounting ement (Profit & Loss Account) and Position Statemer Statements show the financial performance, the accounting year and the financial fing vear.(Both the s atements Period and includg nt (Balance Sheet) ¢., profit eamed or los n, Le, Balance Sh are important for all ‘Ss INcurrey eet as at the the users for vidence by the court of law if they are maintained s, the law such ons of returns ‘an be submitted if the ince to Management often requires financial information, wi oh in tum helps the management in decision-making, Accounting record lined in such a manner that the assets owned are known, It will assist in protecting the assets and also ising control, ich is given, by the accounting and timely recording of transactions ebvites the nevessity to reesber nsactions. The accounting record provides the necessary information. Facilitates Comparative Study - A systematic record enables comparison of one year's results with those of other years and identify factors leading to change, if any. 5.Facilitates Settlement of Tax Liabilities ~ Asystematic accounting record immensely helps in settlement of income tax and Goods and Services Tax (GST) liabilities, since it is a good evidence of the correct recording of transactions. 6. Facilitates Loans Loan is granted by the banks and financial institutions on the ba Potential which is supported by the performance and secur makes available the information with respect to p available as security. - erformance and 7, Evidence in Court Systematic record of transactions is often accepted by the Cor 8.Facilitates Sale of Business If someone desires to sell his business, the accou the ascertainment of the proper purchase price. 9. Assistance in the Event of Insolvency Insolvency proceedings involve explaining n many tr: the past. Systematic accounting sactions tha’ ave taken place in uation. records ta great deal in such 10. Helpful in Partnership Accounts At the time of admission or retireme of the firm, the accounting record is the basis to reach a settlement. nt or death of a partner or in case ef dissolution of vital importance and use because it provides s a ples, estimating the usef, eer: value of closing stoc, ete eet istari id depreciated over e books ts at historical cost and depr Huseh life, The f iy nse chs assets are recorded at historical cost and n ts iE shown. Also their useful life is estimated to provide it makes the information unrealistic. B Ignores the Qualitative Elements he ‘confined to monetary matters ‘only, therefore, qualitative elements like quali management and staff, industrial relations and public relations are ignored, ing Ignores Effect of Price Level Changes hing statements are prepared at historical cost. Money, as @ measurement s in value frequently, i.e, it does not remain stable. Accounting, however, Presumes that value of money remains stable. Unless price level changes are considered, : Accounting information will not show correct financial results. ing May Lead to Window Dressing 1 term window dressing means manipulation of accounts in a way so as to conceal vital and present the financial statements to show a better position than what actually is. In this situation, income statement (ie., Profit & Loss Account) does not W correct profit or loss and th ie Balance Sheet does not provide a true and fair view of the financial position of the enterprise, +. 5, Accounti; Accounting is a Process of identifying, _ “analysing, interpreting and communi Following points highlight the role of 1.Maintenance of Systematic Re The primary role of accounting is to inorder to ascertain the net profit o1 of the business as on a particular 2. Assistance to Management ting assists the management by making available financial information for effective functioning and rational decision making, 3. Facilitates Comparative Study Systematic record of financial transactions with those of other years and identifies reas, in Court 8 records are often accepted by courts as 800d evidence, measuring, recording, cl cating the financial info assifying, summarising, rmation of the business, f accounting in business, cords maintain systematic records of loss for the a date, f financial transactions counting period and financial position enables com, comparison of one year’s results ons leading to change, if any, ACCOUNTING PROCESS: ttributes of accounting, steps of accounting Process are: 5 Financial Transactions and Events, (ii) Recording, (iii) Classifying, x) Summarising, (v) Analysing and Interpreting and (vi) Communicating. __ The accounting process may be explained with the help of a diagram: Accounting Process _ aac) and Events -——— Journal J. Cash Book 2. Purchases Book es 3, Sales Book Summarising 4, Purchases Return Book Trial Balance 5,Sales Return Book» _ Mee, 2. Trading and Profit & Loss Account 6.Bills Payable Book® *—~ | 7..Bills Receivable Book* «(Statement of Profit & Loss) ; '3, Balonce Sheet 8 Journal Proper a Classifying (Posting into Ledger) *Not in Syllabus. BRANCHES OR SUB-FIELDS OF ACCOUNTING The changing business requirements through centuries have given rise to'specialised branches of accounting which could cater to the changing requirements, Branches of Accounting ———_| Financial Accounting Cost Accounting Management Atcounting { ' Deals with maintenance of Books -—Dealswithrecording costswiththe Deals with of Accounts to determine financial ‘hice a ay Peemancand franc poston and controling costs, ofthe business, in respect of the information relating to ¢p, ar oat th development of a specialised branch, i.e, a Cost Account; the cost of products manufactured or services rend, Accounting is the most recently developed branch of accountin, th generating accounting information relating to funds, costs, the management in decision-making. We may say that Mana, g addresses the needs of a single user group, i.e., the management, 8: It ig Profits, gement, HiP BETWEEN BOOK KEEPING, ACCOUNTING Al is a part of Accounting and Accounting is a p among Book Keeping, Accounting and Account: manner. UUs part of Accountancy, The ancy can be shown in the Accountancy Accounting a es Book Keeping he terms ‘Book Keepin, gs’ and ‘Accounting’, are often coy A ns terchangeabl, ly. But these two terms are differen pete idered ag same and are used ing. ider term than Book Keeping. It includes Book es each other, Accounting is a of Book Keeping ing is a part of accounting being a Process of recor, Bee cs ; jin the books of account. Thus, Book Keeping involvog, neil transactions financial transactions and events, Ives: g them in terms of money, is the science and art of recording transactions that result in the transfer of money or money’s worth.” Keeping is the art of recording business transactions in a Accounting As is discussed earlier, Accounting is a process of identifying. recording, ¢l: summarising, analysing, interpreting and communicating the financial transact an understandable manner. Accounting is a wider term than Book Keeping. It starts where Book Keeping ends. In other words, Book Keeping is a part of aceo systemanic manner.” Rosen Kampff —AD sifying. jons in ing. Difference between Book Keeping and Accounting basis Book Keeping ‘Accounting “1. Scope Book Keeping isa process of identifying financial | Accounting inaddition to SaokkBOMS SEAIEES transactions and events; measuring them in | of summarising the recorded tansactions aS ‘money terms; recording them in the books of | events, interpreting them andi commUNKATINS TE account and classifying them. results thereof to the users, 2. Stage Itisa primary stage. Iti the basis for accounting, | It is a secondary stage. It Degins where Book Keeping ends. 3, Objective | The objective of Book Keeping is to maintain | The objective of systematic records of financial transactions | of operations and and events. 4, Nature of Job _| This job is routine in nature. 5. Performance | It being a routine work can be performed by not ga SDR so trained staff. trained staff, 6, Level of Skills | Book Keeping is mechanical in nature and, thus, does not require special sills. Accountancy Accountancy is a systematic knowledge of acco various aspects of accounting are explained alo ing process W son, how to the books of account, summarise the accounting information and communicate it the users. In the words of Kohler, accountancy refers to the entire body of the theory and practice of accounting. Accounting and Accountancy Accountancy is knowledge whereas accounting is the a Process is carried out on the basis of the rules and principles ction or process. Accounting -amed by accountancy Thus, it may be said that accountancy is knowledge of accounting and accounting is the application of accountancy. the process of | record transactions and analy the made available by fnancial statements prepared by te 9 | bookteerng process ofbookheeping, ACCOUNTING INFORMATION. “Accounting is a service Activity. Is function is ¢ Primarily financial inna ormation, iture, about economic entities that is tended to be useful in making economie decisions,” i —Accounting Principles Board 1 Asan information system, accounting collects fin, ifies and summarises it to provide qualitative info ancial data, records it in the books ‘0 produce financial infor mation that is tions of Preparation of financial Statements (j,¢ Income Statement and Balance Sheet), Each step in the Process of accounting Senerates information. Generation Of information is not an nd in itself it is a Way to facilitate the communication OF information to users of accounting informatio, , q Types of Accounting Information | | Accounting Information refers tothe financial stato Book Keeping, ments generated th use of which helps the users to a oe , igh the process of tatement, Maen ae The financial Statements f , * Account and the Position de available by th, lese Statements are: Profit or Surplus *Counting informatj ‘ ‘ation about the ‘urred as a result of business ‘ations op otherwise during let Profit or Net Loss. a res Statement of Profit & Loss in the form prescribed in Schedule q “the Companies Act, 2018 to determine Net Profit or Net Loss, ; ot-fo Organisation prepares Income & Expenditure Account to determine Surplus or Deficit, 2, Information Relating to Financial Position ‘The Position Statement, i.., the Balance Sheet makes available the information about the financial position of the entity. The Position Statement provides information about the assets owned by the entity, amounts receivable and the cash and bank. balances held byit. These are represented in the liabilities by the amounts owed by the entity towards loans, creditors and amounts payable, and capital. 3. Information about Cash Flow Cash Flow Statements statement that shows flow, both inflow and outflow, ofcash during a specific period. It is of immense use as many decisions such as payment of liabilities, payment of dividend and expansion of business, etc., are based on availability of cash. QUALITATIVE CHAR, CA Aelia elt The fundamental characteristic of accounting information is ‘True and Fair’, Besides this qualitative characteristics. are attributes that make the accounting information useful to users. The qualitative characteristics are: 1. Reliability Accounting information should be reliable. Reliability of information means it is verifiable, free from bias and material error. U 2.Relevance Accounting information must be relevant to the user. Information is relevant if it meets the needs of the users in decision-making. 3% Understandability Understandability means that the information provided through the financial statements must be presented in a manner that the users are able to understand it. 4.Comparability VU Comparability means that the users should be able to compare the accounting information of an enterprise of the period either with that of other periods, known as intra-firm comparison or with the accounting information of other enterprises known as inter-firm comparison. a aaa: wa i ms needs accounting information to make ’ cana as determination of selling price ang | costs, ete, such as how to control t eas need accountng information to compare : eaters of the enterprise with other simijay inthe industry. ties needs accounting information to take ; important decson to plan fture ofthe enterprise, je, expansion reduction in ize et, External Users ‘ ar the uses who do not have access to information a the micro level but have information statements (final accounts) that ives information relevant to them, Following are the types ‘and their needs for accounting information. 2,Banks and Financial 3.Potential Investors }work for an Institutions Paid wages, Banks and financial institutions are aS remuneration. ‘the organisations which provide loans tobusines enterprises, Usual employes are ented to» Banks and fnancil institutions Ivestrssuchasbani lend money onus and increment at the year ‘eed accounting information to tothe enterprise, Additional funds, td. Such bonus and increment is track the progres ofthe enterprise Potential investors are the people who are likely to invest in the enterprise if equited, may be sought from ‘generally based on performance of so that they can make the following outside Patties. Before investing _ the enterprise, Hence, employees decisions, they look at safety of investment information to know + Whether to lend money tothe plan about their remuneration enterprise? Ee: Prospects. ‘Investors use the financial + What is the ability of the Statements ofthe enterprise to enterprise to repay theloan? 885085 that their investment is ’ Hom much money to lend to the Sect Potential investors use the enterprise? Information to decide whether ¢ How safes theloan gen bythe they should invest in the enterprise Bank to the enterprise? beg and retums ing information also ; to assess the enterprise's enterprise to compile contribution to the information regarding economylnmanyways,ie, accounting hationalincome,ie, total employment generated their improvement income of the country, bytheenterprise, amount and_ alignment with This helps them in spent as Corporate Social the evolving world. making policy decisions. Responsibility, etc. For example, new The Government « Publicisalso interested in accounting standards levies various taxes on the financial information _are framed and existing enterprises, To assess of an enterprise to be ones are modified In whether correct amount aware about the change accordance with the of taxes have been paid —_inits management, practical scenarios, by the enterprise, the * Publicis also concerned Government Authorities whether the enterprise need the financial is performing its duties statements of the towards keeping the enterprise. environment clean or not. The systems of recording transactions in the books of account are two namely: 1. Double Entry System, and 2. Single Entry System. 1. Double Entry System Double Entry System means a system of accounting which recognises and records both aspects-Debit and Credit of a financial transaction. At the time of recording a transaction, one aspect is recorded on the debit side and other aspect is recorded on the credit side. For example, when goods are purchased for cash, goods are acquired and in return cash is paid. In this transaction, two aspects are involved, i.e., receiving goods and paying cash. Under the Double Entry System, both these aspects are recorded. This system is based on the ‘Dual Aspect Concept’ and is universally applied in accounting. Features of the Double Entry System (i) It maintains a complete record of each transaction. (ii) Tt recognises two-fold aspect of every transaction, viz., the aspect of receiving (value in) and the aspect of giving (value out). of Double Entry System are: ic System Entry System is a Scientific system of recording busin toSingle Entry system. It helps attain the objective: ete Record of Transactions er the system, both sides of a transaction s transactions as 8 of accounting, are recorded. It is a complete record ag arithmet Balance, f Determining Profi or Loss Ht earned or loss incurred duri Account, tical Accuracy of the Accounting work can be NB € period can be determined by Preparing Profit 115 (vii) Comparative Study is Possible ithe Results of one year may be compared with those of previous years and reaso change can be identified. (viii) Helps Management in Decision-making a , Leste ‘Management is able to obtain good information for its work, especially in making’ decisions. (ix) Detection of Frauds and Misappropriations Frauds and misappropriations are minimised since compl and liabilities is available. It is because of these advantages that the lete information about all assets Double Entry System is extensively used. 2. Accounts from Incomplete Records or Single Entry System ‘Account from Incomplete Records or Single Entry System of recording transactions in mplete Double Entry System. In this | the books of account may be defined as an incol : system, all transactions are not yecorded on double entry basis. In some transactions, both aspects of the transactions are recorded, while in others, either one aspect is recorded or not recorded at all. Instead of maintaining all the accounts, only Personal ‘Accounts and Cash Book are maintained under this system. ‘The accounts maintained under this system are incomplete and unsystematic and, therefore, not reliable. Since all transactions are not recorded under this not possible to prepare a Trial Balance. As a result, Balance Sheet cannot be prepared. system on double entry basis, it is the Profit & Loss Account and the igher Order Thinking Skills (HOTS) Questions @. 1. Resignation by a Marketing Manager is not recorded in the books of account. Why? ‘Ans. It is not recorded because it cannot be measured in money terms, Q. 2. Book Keeping is not a part of accounting. Is the statement correct? ‘Ans, No. Book Keepingiis a part of accounting. Two processes of accounting, i.e. collecting and recording of financial transactions and events are the processes of Book Keeping. Q.8. Is the basic objective of Book Keeping to maintain systematic records or to ascertain net results of operations of financial transactions? (MSE Chandigarh) ‘Ans, Yes, the basic objective of Book Keeping is to maintain systematic records of financial transactions. 4. Recording the transactions and events correctly and preparing fina the only objectives of accounting. Is it correct? ncial statements are ‘Ans. No. Besides recording them correctly and preparing financial statements, accounting has the objectives of facilitating management control and communicating financial information to the users. the following is not a sub-field of accounting? Keeping (6) Management Accounting @ Cost Accounting () Payment of salary (d) Purchase of Goods Keeping is concerned with (a) Tecording financial data relating to business transactions, (®) classifying ana summa; recorded data, al users, a [Education Department, Chandigarh, 2021) (&) Which is the last step of Accounting as a Process of information? (@) Recording the transaction (b) Preparation of financial statements munication of infor Mterpret finaneiay data. None of these, (b) Journal book, ) None of thes, usiness, transaction? a. amounted t0% 59, and wages Mounted to z 10,000 office premises & 5,099 of goods for resale S : (a) Board of Directors (b) Managers (©) Employees (d) None of these. (xii) Which of the following is a limitation of accounting? (@) Assistance to Management (b) Replaces Memory (€) Unrealistic Information (@) Evidence in Court (xiii) Cost of Goods Manufactured is determined by (@) Financial Accounting. (b) Cost Accounting. (c) Management Accounting. (d) Human Resource Accounting. (xiv) Qualitative characteristic of Accounting includes (a) Reliability and Relevance. (b) Understandability and Comparability. (©) True and Fair, Reliability, Understandability and Comparability (d) None of the above. (cv) Which of the following is not a qualitative characteristic of accounting information? (a) Reliability () Understandability () Comparability (d) Materiality (zvi) Use of common unit of measurement and common format of reporting promotes (a) Comparability. (b) Understandability. (©) Relevance. (@) Reliability. (NCERT) (vii) Which qualitative characteristic of accounting information is reflected when accounting information is clearly presented? (a) Reliability (b) Relevance () Comparability (@) Understandability (NCERT, KV, 2021) [Ans.: (i) (0); (i) (a); (it) (€); (iv) (a); (v) (0); (Wi) (a); (wit) (BY; (wit) (Bs) (Os (0) (@; (xt) (ai (©); (xp (0; (xiv) (2 (0) (Gee) (@s (ait). A Book Keeping. ss ‘ business. ’ ‘the aca cessing financial data relating tp ned with recor : ; (it) False; (iii) False; (iv) True; (v) False, ree a cay poten (viii) False; (ix) True; (x) True) : with appropriate words: Measures the business transactions in terms of units, (NCERT) starts where Book Keeping ends. a ‘ation in financial reports is based on, (NCERT) d nd measured economic events should be recorded inorder. ) The process of accounting starts with andends with a (NCERD, 40) Manipulation of accounts in a way s0 as to show the better position than what it actually is called : (vit) Information is said to be relevant if it is _ (eH) Tnternal users of accounting information ac SE of the busincss entity (2) To determine the financial position of» ci © Qualitative characteristics cf Aerountingineude Reliability, Relevance, Comparability and _ ia 62) Cost of Goods Manufactured is determined fe Gxt) Profit or Loss is calculated by account. S° Posted is termed a, poeta ott cesta business is termed a, [Ans.: (i) Monetary; (ii) Accounting; (iii) Deron ms termed as Z (0) Identification of Financial fone, @t*8Actions; (iy) Chronological: : (©) Window Dressing; (vi) Fre from Peron’ oP MUnicating pe information; a ‘* (ix) Balance Sheet or a srs (vit Owners/Management: Gi) Cost; (i) Financial: (xt Vi iv) Asser’ Understandabitity is (xvi) Income Ge Liabitities; (xu Ledger; MO" Statement of Prop Loss.) o functions of accounting are: i ( Identifying financial transactions; and (ii) Recording them in the ‘books of account. ig

    You might also like