Introduction to

Accounting
Author: Davinder Kaur Sohi
 Introduction to Accounting
Accounting Defined

Accounting may be defined as the process of recording, classifying, summarizing, analyzing and interpreting
the financial transactions and communicating the results thereof to the person interested in such information.

Components of Accounting:

 Recording

 Classifying

 Summarizing

 Dealing with Financial Transactions

 Analyzing and Interpreting

 Communicating

Author: Davinder Kaur Sohi 10/09/2020 2

 Introduction to Accounting
Objectives of Accounting

• To keep systematic record- Accounting is done to keep systematic record of financial transactions. In the absence of
accounting there have been terrific burden on human memory which is most cases would have been impossible to bear.

• To protect business properties- Accounting provides protection to business properties from unjustified and
unwarranted use.

• To ascertain the operational profit or loss- Accounting helps in ascertaining the net profit earned or loss suffered on
account of carrying the business. This is done by keeping a proper record of revenues and expenses of a particular period.

• To ascertain the financial position of business- Balance sheet is a statement of assets and liabilities of the business on a
particular date. It serves as barometer for ascertaining the financial health of the business.

• To facilitate rational decision making- Accounting has taken up the task of collection, analysis and reporting of
information at the required points of time to the required levels of authority in order to facilitate rational decision making.

Author: Davinder Kaur Sohi 10/09/2020 3

 Introduction to Accounting
Accounting Component: Recording
Recording : It is essentially concerned with ensuring that all business transactions of financial character are in fact recorded

and recording is done in an orderly manner.

Recording is done in the book Journal. This book 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).

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 Introduction to Accounting
Accounting Component: Classifying

Classifying: It is concerned with the systematic analysis of the recorded data with a view to group transactions or entries of

one nature at one place.

Work of classification is done in a book termed as ledger.

This book contains of different pages individual account heads under which all financial transactions of similar nature are collected.

Example- there may be separate account heads for travelling expenses, printing & stationery, advertising etc.

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 Introduction to Accounting
Accounting Component: Summarizing

Summarizing : Involves 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 following statements:

 Trial balance

 Income statement

 Balance sheet.

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 Introduction to Accounting
Accounting Component: Dealing with financial transactions

Dealing with financial transactions : Accounting records only those transactions and events in terms of money which are of

financial character.

Example – If a company has got a team of dedicated and trusted employees, if it is of great use to the business but since it is not

of a financial character and capable of being expresses in terms of money, it will not be recorded in the books of business.

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 Introduction to Accounting
Accounting Component: Analyzing And interpreting
Analyzing And interpreting- Recorded financial data is analyzed and interpreted as is helpful to make a meaningful
judgement about the financial condition and profitability of the business operations. The data is also used for preparing the
future plan and framing of policies for executing such plans.

The Term Analysis means methodical classification of the data given in the financial statements.

 Example- all items relating to current assets are put at one place while all items relating to current liabilities are put at
another place.

Term interpretation means explaining the meaning and significance of the data so simplified. Both analysis and
interpretation are complementary to each other.

Interpretation requires analysis while analysis is useless without interpretation.

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 Introduction to Accounting
Accounting Component: Communicating

Communicating : The accounting information are being meaningfully analyzed and interpreted must be communicated in a
proper form and manner to the proper person.

This is done through preparation and distribution of accounting reports which include besides the usual income statement and
the balance sheet additional information in the form of:

 Accounting ratios

 Graphs

 Fund flow statements

 Cash flow statements etc

Author: Davinder Kaur Sohi 10/09/2020 9

Thank You

Author: Davinder Kaur Sohi 10/09/2020 10