Financial Accounting and Analysis

Accounting as Language of Business

• Accounting described as the "language of business” because
it is the medium of communication between a business firm
and the various parties interested in its financial activities.
• Accounting helps in communicating the financial
performance of business to various interested parties or
stakeholders.
• Accounting provides financial data to the management,
shareholders and stakeholders, such as, creditors, bankers,
Government, etc.
 Accounting Terminologies
Account- Account is written or oral description
of transaction and event.

Accounting- Process of maintaining account is

known as Accounting.
or
Accounting is the process of recording financial
transactions pertaining to a business.
 Accounting Terminologies
Capital- Funds introduced by owner to start a
business is known as Capital
Liability- Amount borrowed from outsider for
the business purpose is known as Liability
Assets- Anything belongs to business and used
for future operation of the business such as
Land & building , Plant & Machinery and
Stock etc are called Assets
 Cont…d
Expense- Amount spent to generate
revenue/income is known as Expense
Income- Total amount received during a
particular period by doing any business
activities is known as Income
Drawings- Cash or Goods taken by owner for
his/her personal use is known as Drawings
 Cont…d
Event – Any happenings in the business is Event
Transaction- Any exchange of goods and services
between business and outsider for cash or on
credit is known as Transaction
Debtors- The person or organization to whom
credit sale is made , are known as Debtors
Creditors – The person or organization that supply
the goods or anything to business on credit basis
are known as Creditors.
 Cont…d
Goods-This includes all articles, commodities or
merchandise in which the business deals.
Thus, cloth would be goods for a dealer in
cloth; furniture would be goods for a dealer in
furniture and so on.
Net worth-It means assets minus outside
liabilities. Profits of a business increase net
worth whereas losses reduce the net worth of a
business.
 Accounting
Accounting is art of recording , classifying and
summarizing the financial transaction and
communicating result to the interested parties.

Accounting is the process of recording ,

classifying ,summarizing, analyzing and
interpreting financial transaction and
communicating the result thereof to the
persons interested in such information parties.
 Definition
According to American Institute of
Certified and 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”.
 Characteristics of Accounting
 It is the art of recording business transactions.
 It is the art of classifying business transactions.
 The transactions or events of a business must be
recorded in monetary terms.
 It is the art of summarizing financial transactions.
 The results should be communicated to users
 Functions of Accounting

 Systematic record of business transaction

 Protecting the property of the business

 Communicating results to interested parties

 Compliance with legal requirement

 Assistance to Management

 Fixing responsibility
 Advantages of Accounting
 Replacement of Memory
 Evidence in court
 Settlement of taxation
 Comparative study
 Sale of Business
 Assistance to the insolvent person
 Assistance to various parties
 Facilitates in raising loans
 Assistance to the management
Users of Accounting Information
External users
 Investors
 Creditors
 Government
 Research Scholar
 Consumers
 Members of not for profit organizations
Users of Accounting Information

Internal users
 Owners

 Management

 Employees
 Limitations of Accounting
 Records only monetary transactions
 Effect of price level changes not considered
 No realistic information
 Personal bias of accountant affects the
accounting statements
 Permits alternative treatments
 No real test for managerial performance
 Historical in nature