Meaning: Accounting is an art of recording, classifying, summarizing and

reporting of transactions with the aim of showing the financial health of an

entity-a business unit, a club, a college etc., one which has its income and
expenses.

Definition
1. American Institute of Certified Public Accountants
“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 a financial character, and interpreting the result thereof”.

2 .Accounting is often called the language of business. The function of a

language is to facilitate communication among individuals in a society.
Accounting is common language used to communicate financial information from
one person to another in the world of industry and commerce.
 Accounting the information system
INPUTS PROCESSES OUTPUTS

*Accounting
* Business Principles *Profit and Loss
Transactions *accounting Account
(e.g., purchases, standards * Balance sheet
sales, cash *Management * Statement of
Cash Flows
receipts, and Estimates
* Explanatory
cash payments) *Transaction Notes
* External processing * Special Reports
Events (e.g., * Laws and and analysis
Regulations * Tax Returns
fire, earthquake,
(e.g., * Filing with
and change in regulations
Companies Act)
tax law)
 Advantages of Accounting

• It facilitates to replace the human memory.

• It facilitates to comply with the legal requirements.
• It facilitates to ascertain the net results of operations.
• It facilitates to ascertain the financial position.
• It helps the users to take decisions.
• It facilitates in comparative study.
• It ascertains the value of business.
• It facilitates in raising loans.
 Branches of Accounting
• Financial accounting is the preparation and communication of
financial information mainly for those outside the organization.

• Cost Accounting is the process of accounting and controlling

the cost of a product, operation or function.

• Management Accounting is the preparation and

communication of financial and other information for the
internal use of management.
Accounting Cycle: Accounting cycle is a step-by-step process of recording,
classification and summarization of economic transactions of a business.
Accounting Cycle starts from the recording of individual transactions and ends
on the preparation of financial statements and closing entries.
 BASIC ACCOUNTING TERMS
• Event: An event is a business transaction that affects the accounting
equation. For example purchase of materials, sale of goods,
purchase of machinery etc. which are measured in monetary terms
and are recorded in accounting by an accountant
• Transaction: It means an event or a business activity which involves
exchange of money or money’s worth between parties. Transaction could
be a cash transaction or credit transaction
• Goods/Services : These are tangible article or commodity in which a
business deals. These articles or commodities are either bought and sold
or produced and sold. Services are intangible in nature which are
rendered with or without the object of earning profits.
• Asset: Asset is a resource owned by the business with the purpose of
using it for generating future profits. Assets can be Tangible and
Intangible.
– Tangible Assets : Plant &Machinery, Land & Building, vehicles etc.
– lntangible Assets. Goodwill, Patents, Trade-marks, Copyrights, Brand Equity,
Designs.
Liability: It is an obligation of financial nature to be settled at a future date. It
represents amount of money that the business owes to the other parties.
– Current liability: Creditors, Bills Payable, Outstanding expenses
– Non-current liability: Term Loan, Debentures etc.
– Contingent Liability : It represents a potential obligation that could be
created depending on the outcome of an event. It is not recorded in books
of account, but disclosed by way of a note to the financial statements.
Creditors: A creditor is a person to whom the business owes money or money’s
worth. e.g. money payable to supplier of goods or provider of service. Creditors are
generally classified as Current Liabilities.
Debtor : The sum total or aggregate of the amounts which the customer owe to
the business for purchasing goods on credit or services rendered or in respect of
other contractual obligations, is known as Sundry Debtors or Trade Debtors, or
Trade Payable, or Book-Debts or Debtors.
In other words, Debtors are those persons from whom a business has to recover
money on account of goods sold or service rendered on credit. These debtors may
again be classified as under:
(i) Good debts : The debts which are sure to be realized are called good debts.
(ii) Doubtful Debts : The debts which may or may not be realized are called doubtful
debts.
(iii) Bad debts : The debts which cannot be realized at all are called bad debts.
 Capital : It is amount invested in the business by its owners. It may be in the
form of cash, goods, or any other asset which the proprietor or partners of
business invest in the business activity.
Drawings : It represents an amount of cash, goods or any other assets which
the owner withdraws from business for his or her personal use. e.g. if the life
insurance premium of proprietor or a partner of business is paid from the
business cash, it is called drawings.
Drawings will result in reduction in the owners’ capital. The concept of drawing
is not applicable to the corporate bodies like limited companies.
Capital Expenditure: This represents expenditure incurred for the purpose of
acquiring a fixed asset which is intended to be used over long term for earning
profits there from. e. g. amount paid to buy a computer for office use is a
capital expenditure. At times expenditure may be incurred for enhancing the
production capacity of the machine. This also will be a capital expenditure.
Capital expenditure forms part of the Balance Sheet.
Revenue expenditure: This represents expenditure incurred to earn revenue of
the current period. The benefits of revenue expenses get exhausted in the year
of the incurrence. e.g. repairs, insurance, salary & wages to employees, travel
etc. The revenue expenditure results in reduction in profit or surplus. It forms
part of the Income statement.
• Voucher: Voucher is a written record or a document which proves that the transaction has
been performed like purchase voucher, sales voucher , payment voucher, receipt voucher etc.
• Goods: The things which are purchased and sold by business are called goods. When goods
are purchased it is written as purchases. When goods are sold it is written as sales. When
goods are unsold at the end of the year It is written as a stock .
• Stock: When goods are unsold at the end of the year It is called as stock. Stock are of two
types i.e. Opening Stock: Value of stock at the beginning of a year. Closing Stock: Value of
stock at the end of a year.
• Expense: An expense is the amount spent by a business to produce and sell goods or services
to make profit. The total of expenses is called cost. Expenses are of two types’ i.e. direct
expenses and indirect expenses.
• Revenue: The total income of a business from operating and non-operating activities like sale
of goods or services, interest received, commission received etc. is known as the revenue.
Revenues increase the value of assets and decrease the value of liabilities in a business.
• Income: The difference between Revenue and expenses of a business during a particular
accounting period is called as income. It is also known as the profit of a business. Income
increases the value of assets of a business. Income is of two type’s i.e. gross income and net
income.
• Trial Balance: Trial balance is a statement which is prepared to check arithmetical accuracy of
the books of accounts. Generally it is prepared at the end of the year.
• Credit: Right hand side of an account is called credit. A credit increases liability or decreases in an asset.
• Debit: Left hand side of an account is called debit. A debit decreases liability or increases in an asset.
Balance Sheet: It is the statement of financial position of the business entity on
a particular date. It lists all assets, liabilities and capital. It is important to note
that this statement exhibits the state of affairs of the business as on a particular
date only. It describes what the business owns and what the business owes to
outsiders (this denotes liabilities) and to the owners (this denotes capital). It is
prepared after incorporating the resulting profit/losses of Income statement.
Profit and Loss Account or Income Statement: This account shows the revenue
earned by the business and the expenses incurred by the business to earn that
revenue. This is prepared usually for a particular accounting period, which
could be a month, quarter, a half year or a year. The net result of the Profit and
Loss Account will show profit earned or loss suffered by the business entity.
Depreciation :The reduction in the value of an asset over time due to use,
wear and tear or obsolescence. This decrease is measured as
depreciation.

The decreased in the value of assets may be caused by a number of

other factors as well such as unfavorable market conditions, etc
 users
1 Short-term creditors(for example,
Suppliers of raw materials/goods,
Suppliers of short-term loans)
2 Long-term creditors(For example,
Suppliers of long-term loans)
3 Present investor(for example,
Equity shareholders)
4 Potential investors(for example,
Those who want to invest)
5 Management
6 Employees
7 Tax Authorities
8 Customers
10 Public
Need for information
Short -term creditors need information to determine whether the amount
owing to them will be paid when due and whether they should extend,
maintain or restrict the flow of credit to an individual enterprise.
Long-term creditors need information to determine whether their
Principals and the interest thereof will be paid when due and whether
They should extend , maintain or restrict the flow of credit to an
Enterprise.
Present investors need information to judge prospects for their
Investment and to determine whether they should buy, hold or sell
The shares.
Potential investors need information to judge prospects of an enterprise
And to determine whether they should buy the shares.
Management need information to review the firm’s short-term solvency,
Long –term solvency, profitability in relation to turnover and
Investments and to decide the course of action in future.
Employees and their representatives groups are interested in
information about the stability and profitability of the employers.
They are also interested to know regarding company’s ability to pay
Remuneration, retirement benefits etc.
Tax authorities need information to assess the tax liabilities of an
Enterprise.
Customers have an interest in information about the continuation of an enterprise, especially
when they have established a long-term
Involvement with, or are dependent on , the enterprise
Public must need the information regarding social responsibility
To be fulfilled by the enterprises.
 Generally Accepted Accounting Principles
• Financial accounting practice is governed by concepts and rules
known as generally accepted accounting principles (GAAP).

• Accounting Principles can be classified into two categories:

 Accounting concepts
 Accounting convention
 Accounting Concepts

• Accounting concepts are basic assumptions or

conditions upon which the science of
accounting is based.
Business Entity Concept: A business entity is an economic unit distinct from its
owner(s). Such entity owns its assets and has its own obligations. Only those
transactions and events which affect the financial position of the business entity will
be recorded in its books of accounts.
Money Measurement Concept: Only transactions and events which are measurable
in monetary terms should be recorded.
Going Concern Concept: An entity is said to be a going concern if it has ‘neither the
intention nor the necessity of liquidation. The valuation principles of assets and
liabilities depend on this concept.
Accounting Period Concept: Accounts are prepared for a defined accounting period.
Such period could be a quarter, half year, a year or, in exceptional circumstances,
more than one year. This concept is essential to measure financial performance.
Matching Concept: While measuring periodic financial results, revenue earned
during an accounting period is matched with expenses incurred (to earn the
revenue) in the same accounting period.
Dual Aspect concept: According to this concept, every financial transaction involves
two-fold aspect. For example, if a business has acquired an asset, it must have given
up some other asset such as cash or obligation to pay for it in future. The
accounting equation (Asset = liabilities + capital) is based on dual aspect concept.
Revenue Recognition concept: According to this concept, revenue is
considered as being earned on the date at which it is realized i.e., on
the date when the property in goods passes to the buyer and he
becomes legally liable to pay.
Cost Concept: Assets and liabilities should be recorded at historical
cost or cost at which it was purchased irrespective of its market
value.
Accrual Concept: Income and expenses should be recognized as and
when they are earned and incurred, irrespective of whether money
is received or paid in connection thereof.
Objective Evidence concept: It refers that. There is some evidence in
ascertaining the correctness of the information reported. Invoices
and vouchers for purchases and sales, bank statements etc. are
examples of objective evidence which are capable of verification.
 Accounting conventions:
It denotes customs or traditions which guide the accountant while
preparing the accounting statements.
Convention of full Disclosure: According to this convention, all
accounting statements should be honestly prepared and to that end
full disclosure of all significant information should be made.
Convention of Materiality: Whether something should be disclosed
or not in the financial statements will depend on whether it is
material or not.
Convention of Consistency: Transactions and valuation methods are
treated the same way from year to year, or period to period. Users of
accounts can, therefore, make more meaningful comparisons of financial
performance from year to year.
Convention of conservation or Prudence: This concept suggests that
all possible expenses and losses should be estimated and recorded,
but anticipated gains should be ignored. This concept is also called
the concept of ‘conservatism’.
 Accounting Standards

1. Accounting Standard is a set of selected accounting policies which guide the

preparation, presentation of accounting information on uniform basis.

2. Accounting Standards are formulated with a view to harmonies different

accounting policies and practices in use in a country.

3. The objective of Accounting Standards is to reduce the accounting

alternatives in the preparation of financial statements within the boundaries
of rationality.
2. Secondly, it ensures comparability of financial statements of different
enterprises with a view to provide meaningful information to various users of
financial statements to enable them to make informed economic decisions.

In India now 28 Accounting Standards are prevalent.

 IFRS- International Financial Reporting Standards

• IFRS is a set of accounting standards, developed by the International

Accounting Standards Board (IASB) that is becoming the global standard
for the preparation of public company financial statements.

• These have already been applied in ore than 100 countries and would
soon be used across the globe.

• IFRS have 41 standards .