INTRODUCTION TO

ACCOUNTING
HISTORY
Evolution of Accounting

•Accounting is as old as civilisation

•Seeds of accounting were more likely sown in Babylonia and

Egypt around 4000 B.C who recorded transactions of payments
of wages and taxes on clay tablets.

•Egyptians used account to record the safe keeping of gold and

the valuables in treasures. Day wise reports were sent to
wizards' by the in charges and Month wise report to Kings.
 Father of Accounting

Luco Pacioli is the father of accounting who introduced

Double Entry System of account in 1494 at Venice in Italy.
 Accounting
Book-keeping does not present a clear financial picture of the state of
affairs of a business. When one has to make a judgement regarding the
financial position of the firm, the information contained in these books
of accounts has to be analysed and interpreted.

Definition
According to American Institute of Certified Public Accountants,
“Accounting is the art of recording, classifying and summarising 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
results thereof.”

In Simple words, accounting is the process of collecting, recording,

classifying, summarising and communicating financial information to
the users for judgment and decision-making.
 Basis Book keeping Accounting

Scope Recording and maintenance of It is not only recording and

books of accounts maintenance of books of
accounts but also includes
analysis, interpreting and
communicating the information.

Stage Primary Secondary

Nature Routine and clerical Analytical

Supervision Book keeping doesn’t Accountant supervises the work

supervise the work of of book keeper
accountant

Staff Work is done by junior staff in Senior staff performs the

any organisation accounting work
 LIMITATIONS OF ACCOUNTING
1. Ignores Qualitative data- Accounting ignores qualitative data like
management reputation, employee morale, labour strike.
2. Historic cost- All the assets are recorded at historic cost.
3. Window dressing- Information contained may be manipulated
by the accountants .
4. Personal Biasness- Some events are measured on the basis of
some estimates. In such a case, Judgement of the person plays a
vital role. Judgement of the accountant may differ from person
to person. So accounting gets influenced by personal judgments.
5. Lack of uniformity- As it permits alternative treatment
 PROCESS
The process of accounting as per the above definition is given
below:

Input Process Output

• Business • Identifying • Information to

transactions • Recording users
• Classifying
• Summarising
• Analysing
• Interpreting
• Communicating
 Identifying
Identifying the business transactions from the source documents.

Recording
The next function of accounting is to keep a systematic record of all business transactions

Classifying
This is concerned with the classification of the recorded business transactions so as to group the transactions of similar type at one
place.

Analysing
It establishes the relationship between the items of the profit and loss account and the balance sheet.

Interpretation
It is concerned with explaining the meaning and significance of the relationship so established by the analysis.

Communication
The results obtained from the summarised, analysed and interpreted information are communicated to the interested parties.
 CASH
AND
ACCRUAL BASIS
Cash method is an accounting system that

•identifies income (or revenue) only when it is received

•expenses only when payment is done.

•The cash method is straight forward in sense that the

business’s books are maintained on the basis of the flow of
cash in and out of the business.

•This method is not recognized by Companies Act

•In this case we can quickly get how much cash is generated
by the company
•Accuracy is doubtful as it doesn’t consider all the
transactions
Accrual basis

•Income and expenses are recognized when they are

earned, whether they are received or not

• It is complex and difficult to understand

•We can understand how profit is earned at the end of

the period

•It is more accurate method

•It is recognized by Companies Act

 DIFFERENCE
S.NO. BASIS CASH BASIS ACCRUAL BASIS
1. Meaning Revenues and expenses Revenues and expenses are
recorded only when recorded when they are
received or paid earned whether received or
not, paid or not
2 Method Not recognised by Act Recognised by Act
3 Stock Not recorded Recorded
4 Outstanding Will not consider Will record outstanding as
and prepaid well as prepaid`
5 Accuracy It will not show accurate It will show accurate
information information