Unit 1: Introduction

By-Isha Chowrasia
 Accountancy
• Accountancy is the process of communicating
financial information about a business entity to
users such as shareholders and managers. The
communication is generally in the form of financial
statements that show in money terms the economic
resources under the control of management; the art
lies in selecting the information that is relevant to
the user and is reliable.
 Accounting
• Accounting is defined by the American Institute of
Certified Public Accountants (AICPA) as "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 financial character, and interpreting the results
thereof."
 Accountancy vs Accounting
• Accountancy is the art of communicating
financial information about a business entity
to users such as shareholders and managers.
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 financial
character, and interpreting the results thereof.
 Book-keeping
• Bookkeeping is the recording of financial
transactions. Transactions include sales, purchases,
income, and payments by an individual or
organization. Bookkeeping should not be confused
with accounting. There are some common methods
of bookkeeping such as the Single-entry bookkeeping
system and the Double-entry bookkeeping system.
But while these systems may be seen as "real"
bookkeeping, any process that involves the recording
of financial transactions is a bookkeeping process.
 Objectives of Accounting
The objectives of accounting are two-fold:
(1) To record permanently, all business transactions,
and
(2) To show the effect of each transaction and also the
combined effect of all such transactions for a given
period so as to find out the profit the business has
earned or loss incurred, and also to know the
correct financial position on a particular date.
 Fundamental Concepts of Accounting

• Covered in Basic Fundamentals.

 Classification of Accounts
• According to Modern approach Accounts are
classified into five groups:
• Asset
• Expense
• Revenue
• Liability
• Capital
 Classification of Accounts
• According to Traditional approach Accounts are
classified into three groups:
• Real : all the assets except Debtors
• Nominal : all the expenses , incomes , losses, gains.
• Personal : all the accounts of persons, company or
firms. these are further classified into three types
– Natural: all the accounts of persons. E.g. debtors, Creditors
– Artificial: all the accounts of a company, a firm,or any other
business organization. E.g. Bank, Sharma Traders etc.
– Representative: all the expense O/S or prepaid, revenue in
advance or accrued.
 Principles of Accounting
• Generally Accepted Accounting Principles
(GAAP) is a term used to refer to the standard
framework of guidelines for financial
accounting used in any given jurisdiction;
generally known as Accounting Standards.
GAAP includes the standards, conventions,
and rules accountants follow in recording and
summarizing transactions, and in the
preparation of financial
 Cont..
• Principle of regularity: Regularity can be defined as
conformity to enforced rules and laws.
• Principle of consistency: states that when a business has
once fixed a method for the accounting treatment of an item,
it will enter all similar items that follow in exactly the same
way.
• Principle of sincerity: According to this principle, the
accounting unit should reflect in good faith the reality of the
company's financial status.
• Principle of the permanence of methods: aims at allowing
the coherence and comparison of the financial information
published by the company.
 Cont..
 Principle of prudence: This principle aims at showing the
reality "as is": one should not try to make things look prettier
than they are. Typically, revenue should be recorded only when
it is certain and a provision should be entered for an expense
which is probable.
• Principle of continuity: When stating financial information, one
should assume that the business will not be interrupted. This
principle mitigates the principle of prudence: assets do not have
to be accounted at their disposable value, but it is accepted that
they are at their historical value (see depreciation and going
concern.
• Principle of non-compensation: One should show the full
details of the financial information and not seek to compensate
a debt with an asset, revenue with an expense, etc.
 Cont..
• Principle of periodicity: Each accounting entry should be
allocated to a given period, and split accordingly if it covers
several periods. If a client pre-pays a subscription (or lease,
etc.), the given revenue should be split to the entire time-
span and not counted for entirely on the date of the
transaction
• Principle of Full Disclosure/Materiality: All information
and values pertaining to the financial position of a business
must be disclosed in the records.
• Principle of Utmost Good Faith: All the information
regarding to the firm should be disclosed to the insurer
before the insurance policy is taken
 Rules of Accounting
• Personal Account- includes account of a
person with whom the business deals. 3
categories- Natural personal accounts
Artificial personal accounts
Representative personal accounts
The rule for personal account is-
Debit the receiver
Credit the giver
• Real Account- It is of 2 types
Tangible real accounts
Intangible real accounts

The rule of real account is

Debit what comes in
Credit what goes out
• Nominal account- Are opened in the books to
simply explain the nature of transaction. They
do not really exist. This includes all expenses,
losses, incomes and gains.
• The rule of nominal account is
Debit all expenses & losses
Credit all Incomes & gains.
 Branches of Accounting
Accounting has three main forms of branches-
• financial accounting,
• cost accounting
• management accounting.
Thank You!!