Accounting Lec 1

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ContentsContents

Double entry systemDouble entry system

Meaning and definition of accountingMeaning and definition of accounting

Users of accountingUsers of accounting Branches of accountingBranches of accounting

Management accountingManagement accounting

Difference between managementDifference between management

and financial accountingand financial accounting


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Double entry systemDouble entry system

Double entry systemDouble entry system It is a common system of book-keepingIt is a common system of book-keeping

whereby the two aspects of everywhereby the two aspects of every

transaction i.e., It is based on the dualtransaction i.e., It is based on the dualaspect concept . This method ofaspect concept . This method of

writing every transaction in twowriting every transaction in two

different accounts on opposite sidesdifferent accounts on opposite sides

for equal value is known as the doublefor equal value is known as the double

entry system of book keeping. This isentry system of book keeping. This is

the most accurate, complete andthe most accurate, complete and

scientific system of accounting.scientific system of accounting.


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Advantages of double entryAdvantages of double entry

systemsystem It keeps a complete record of businessIt keeps a complete record of business

transactions.transactions. It provides complete information concerningIt provides complete information concerning

the business .the business .

It provides a check on the arithmeticalIt provides a check on the arithmeticalaccuracy of books of accounts.accuracy of books of accounts.

It discloses the operating results .It discloses the operating results . It makes possible a meaningful comparison ofIt makes possible a meaningful comparison of

operating and financial performance over aoperating and financial performance over aperiod of time and enable the businessman toperiod of time and enable the businessman toevaluate the progress of his business.evaluate the progress of his business.

It also enables a business man to plan andIt also enables a business man to plan andcontrol his operations.control his operations.

It reduces the chances of committing fraud.It reduces the chances of committing fraud.


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What is accountingWhat is accounting

The language of business.The language of business. A means to communicate financialA means to communicate financial

information.information.

A way to convey information about aA way to convey information about abusiness to usersbusiness to users Accounting is the art of identifying,Accounting is the art of identifying,

recording, classifying andrecording, classifying and

summarizing in a significant mannersummarizing in a significant mannerand in terms of money transactionsand in terms of money transactionsand events which are, in part at leastand events which are, in part at leastof a financial character andof a financial character andinterpreting the result thereof.interpreting the result thereof.


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DefinitionDefinitionThe American Institute of Certified PublicThe American Institute of Certified Public

Accountants defines accounting as the artAccountants defines accounting as the artof recording, classifying and summarizing inof recording, classifying and summarizing in

a significant manner and in terms of moneya significant manner and in terms of money

transactions and events, which are, in parttransactions and events, which are, in part

at least, of a financial character, andat least, of a financial character, andinterpreting the results thereof .interpreting the results thereof .

A business house must necessarily keep aA business house must necessarily keep a

systematic record of its day-to-daysystematic record of its day-to-daytransactions to enable stakeholders to get atransactions to enable stakeholders to get a

complete financial picture of the companycomplete financial picture of the company

and to take stock of its financial position onand to take stock of its financial position on

a periodic basis. Stakeholders include thea periodic basis. Stakeholders include the


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Classification of accountsClassification of accounts

1)1) Personal accounts ( Natural PersonPersonal accounts ( Natural Person

& Legal Person)& Legal Person)2) Impersonal accounts2) Impersonal accounts

A) Real account (Business asset)A) Real account (Business asset)

B) Nominal account (Business exp.,B) Nominal account (Business exp.,Losses, Gains)Losses, Gains)


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Users of accountingUsers of accounting

Who uses accounting information?Who uses accounting information?

OwnersOwners

ManagersManagers InvestorInvestor

CreditorsCreditors

Government (tax assessment)Government (tax assessment) RegulatorsRegulators

CustomersCustomers


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Characteristics of financialCharacteristics of financial

accountingaccounting Accounting is an art-Accounting is an art- Art is that part ofArt is that part of

knowledge which helps us in attaining ourknowledge which helps us in attaining ouraim. Accounting helps us in attaining ouraim. Accounting helps us in attaining ouraim of ascertaining the financial results byaim of ascertaining the financial results byshowing the best way of recording,showing the best way of recording,classifying and summarizing the businessclassifying and summarizing the businesstransaction.transaction.

Recording, Classifying andRecording, Classifying andsummarizing-summarizing- It provides informationIt provides informationabout all the transactions of financial inabout all the transactions of financial in

nature, recorded in journal, classifying innature, recorded in journal, classifying informs of ledgers, preparation of trialforms of ledgers, preparation of trialbalance for checking the accuracy ofbalance for checking the accuracy ofaccounts.accounts.

In terms of money-In terms of money- Only thoseOnly thosetransaction are recorded which are intransaction are recorded which are in


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Objectives or functions ofObjectives or functions of

accountingaccounting

Knowledge of sales and purchaseKnowledge of sales and purchase Providing information of closing stockProviding information of closing stock

Knowledge of financial positionKnowledge of financial position Information related for working capitalInformation related for working capital Knowledge of profit & loss of the businessKnowledge of profit & loss of the business Provide information to various partiesProvide information to various parties

Provide Information aboutProvide Information aboutmisappropriation & fraudsmisappropriation & frauds

Evidence in court.Evidence in court.


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Accounting ProcessAccounting Process

Recording of transaction (JournalRecording of transaction (Journal

entry)entry)

Classification (Ledger Posting)Classification (Ledger Posting)

Summarizing (Trial balance)Summarizing (Trial balance)

Interpreting (Income &positionInterpreting (Income &position

statement)statement) Analysis of transactionsAnalysis of transactions


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Branches of AccountingBranches of Accounting

Financial AccountingFinancial Accounting:- It is concerned with:- It is concerned withrecording and processing the financial transactionsrecording and processing the financial transactionswhich affect the financial position of the business.which affect the financial position of the business.It leads to the preparation of income statement &It leads to the preparation of income statement &position statement of the business.position statement of the business.

Cost accountingCost accounting:- is concerned with the:- is concerned with therecording, classifying and appropriate allocation ofrecording, classifying and appropriate allocation ofexpenditure for the determination of the cost ofexpenditure for the determination of the cost ofproducts or services and for the presentation ofproducts or services and for the presentation ofsuitably arranged data for purposes of control andsuitably arranged data for purposes of control andguidance of the management.guidance of the management.

Management accountingManagement accountingIt is concerned with the collecting systematicallyIt is concerned with the collecting systematically

and regularly all such information as will helpand regularly all such information as will helpmanagement in discharging its functions ofmanagement in discharging its functions of


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Generally Accepted Accounting principlesGenerally Accepted Accounting principles

(GAAP) / Concepts and conventions of(GAAP) / Concepts and conventions of


The accounting practice is based onThe accounting practice is based oncertain standard concepts, which enablecertain standard concepts, which enableaccountants to convey meaningfulaccountants to convey meaningful

information to all stakeholders. Theseinformation to all stakeholders. Theseconcepts are as followsconcepts are as follows Business Entity ConceptBusiness Entity Concept Going Concern conceptGoing Concern concept

Dual Aspect ConceptDual Aspect Concept Cost conceptCost concept Money measurement ConceptMoney measurement Concept Accounting period ConceptAccounting period Concept

Matching ConceptMatching Concept


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Business entity conceptBusiness entityconcept

Business is treated as a unit or entityBusiness is treated as a unit or entity

apart from its owner. The owner ofapart from its owner. The owner of

an organization is always consideredan organization is always considered

to be separate and distinct from theto be separate and distinct from the

business which he controls. that isbusiness which he controls. that is

why, the capital of the owner iswhy, the capital of the owner isalways entered in liability side ofalways entered in liability side of

balance sheet. It is considered as thebalance sheet. It is considered as the

creditor of the business.creditor of the business.


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Cont.Cont.

Going concern conceptGoing concern conceptIt is assumed that the business willIt is assumed that the business willexist for the foreseeable future andexist for the foreseeable future andtransactions are recorded from thistransactions are recorded from this

point of view. It should continue topoint of view. It should continue tooperate at its present scale in theoperate at its present scale in theforeseeable future.foreseeable future.

Dual Aspect ConceptDual Aspect Concept

Financial accounting has dual aspectFinancial accounting has dual aspectof recording. Every debit has itsof recording. Every debit has itscorresponding credit & every creditcorresponding credit & every credithas its corresponding debit. Thehas its corresponding debit. The

modern accounting system basicallymodern accounting system basically


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Cont.Cont.

Money measurement conceptMoneymeasurement concept

The money concept underlines theThe money concept underlines the

fact that in accounting every worthfact that in accounting every worthrecording event, happening orrecording event, happening or

transaction is recorded in terms oftransaction is recorded in terms of

money. In other words, a fact or amoney. In other words, a fact or ahappening which cannot behappening which cannot be

expressed in terms of money is notexpressed in terms of money is not

recorded in the accounting books.recorded in the accounting books.


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Cost conceptCost concept

The transactions are recorded at theThe transactions are recorded at theamounts actually involved. Foramounts actually involved. Forinstance, a piece of land may haveinstance, a piece of land may havebeen purchased at Rs.1,50,000,been purchased at Rs.1,50,000,whereas the company considers it towhereas the company considers it tobe worth Rs.3,00,000. The land isbe worth Rs.3,00,000. The land isrecorded in the books of accounts atrecorded in the books of accounts atRs.1,50,000 only. Thus, an arbitraryRs.1,50,000 only. Thus, an arbitraryvaluation of the companys assets isvaluation of the companys assets isavoided by recording the value at theavoided by recording the value at theactual amount involved. Since thisactual amount involved. Since thisamount would have been mutuallyamount would have been mutually

agreed upon by both the partiesagreed upon by both the parties


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ContCont

Accounting period conceptAccounting period concept

Accounts choose some shorter andAccounts choose some shorter and

convenient time for the measurement ofconvenient time for the measurement of

income. Twelve- month period is normallyincome. Twelve- month period is normally

adopted for this purpose. this time intervaladopted for this purpose. this time intervalis called accounting period.is called accounting period.

Matching conceptMatching conceptIt is based on the determination of theIt is based on the determination of the

profit & loss of a particular accountingprofit & loss of a particular accounting

period is the process of matching theperiod is the process of matching the

revenue earned during the period and therevenue earned during the period and the


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Cont.Cont.Accounting conventionsAccounting conventions

Conventions are the customs andConventions are the customs andtraditions that act as a guide to thetraditions that act as a guide to the

preparation of the financialpreparation of the financial

statements. Following thesestatements. Following theseconventions leads to clear andconventions leads to clear and

meaningful financial statements. Themeaningful financial statements. The

conventions followed to prepareconventions followed to prepare

accounting statements are the :accounting statements are the : Convention of Consistency (Consistency inonvention of Consistency (Consistency in

rules and formats)rules and formats)

Convention of Full disclosureonvention of Full disclosure

C ti f C i tC ti f C i t


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Convention of ConsistencyConvention of Consistency

The convention of consistency aims atThe convention of consistency aims at

making the financial statements moremaking the financial statements morecomparable and useful. The conventioncomparable and useful. The convention

holds that in accounting processes, allholds that in accounting processes, all

concepts, principles and measurementconcepts, principles and measurement

approaches should be applied in a similarapproaches should be applied in a similaror consistent way from one period toor consistent way from one period to

another period.another period.

To build business strategies theTo build business strategies themanagement of a company needs tomanagement of a company needs to

arrive at important conclusions and takearrive at important conclusions and take

important decisions from the financialimportant decisions from the financial

statements over a period of years. Thestatements over a period of years. The

C ti f F llCon ention of Full


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Convention of FullConvention of Full

DisclosureDisclosure

The accounting convention of fullThe accounting convention of fulldisclosure implies that accounts shoulddisclosure implies that accounts shouldmake a full disclosure of all monetary ormake a full disclosure of all monetary orfinancial information that can impactfinancial information that can impact

decision making of different parties. Thisdecision making of different parties. Thisaccounting information is of interest to theaccounting information is of interest to themanagement, current and potentialmanagement, current and potentialinvestors and current and potentialinvestors and current and potentialcreditors of the business.creditors of the business.

This convention specifies that there shouldThis convention specifies that there shouldbe complete and understandable reportingbe complete and understandable reportingin the financial statements of allin the financial statements of allsignificant information relating to thesignificant information relating to the

economic affairs of the entity. Alleconomic affairs of the entity. Allinformation which is of material interest toinformation which is of material interest to

C ti f M t i litC ti f M t i lit


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Convention of MaterialityConvention of MaterialityThe convention of materiality proposesThe convention of materiality proposes

that while accounting for variousthat while accounting for various

transactions, only those transactionstransactions, only those transactionsshould be considered which have materialshould be considered which have materialimpact on the profitability or the financialimpact on the profitability or the financialstatus of the organization. For example,status of the organization. For example,

for a business that buys and sellsfor a business that buys and sellsstationery items, the pens lying unsold atstationery items, the pens lying unsold atthe end of the accounting period arethe end of the accounting period arematerial items for the business. These willmaterial items for the business. These will

be recorded in the books of account. Onbe recorded in the books of account. Onthe other hand, for a business thatthe other hand, for a business thatmanufactures cars, the unused pens aremanufactures cars, the unused pens arenot material items and will not benot material items and will not berecorded in the books of account.recorded in the books of account.Similarly, insignificant transactions orSimilarly, insignificant transactions or


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Management accountingManagement accounting

Management accounting includes theManagement accounting includes themethods and concepts necessary formethods and concepts necessary for

effective planning for choosingeffective planning for choosing

among and for control through theamong and for control through theevaluation and interpretation ofevaluation and interpretation of

performanceperformance

The objective of ManagementThe objective of Managementaccounting is to Provide relevantaccounting is to Provide relevant

data , analyze and interpretationdata , analyze and interpretation

facilitates overall control and providefacilitates overall control and provide

ualitative decision makin .ualitative decision makin .


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management & financialmanagement & financial

accountingaccountingManagementManagementaccountingaccounting

FinancialFinancial


Subject MatterSubject Matter

Its concerned withIts concerned withvarious departmentsvarious departments

Its related withorganization as a whole

ObjectivesObjectives

Its designed to provideIts designed to provideinformation to internalinformation to internalpartiesparties

Its designed to provideIts designed to provideinformation to externalinformation to externalpartiesparties

NatureNature


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Type of data usedType of data used

It uses the statistical,It uses the statistical,descriptive, subjectivedescriptive, subjective

and relates to the futureand relates to the future

It makes use of the dataIt makes use of the datawhich is historical,which is historical,

quantitative, Monitoryquantitative, Monitoryand objectiveand objective

AccuracyAccuracy

Approximations areApproximations areconsideredconsidered

Accurate figure are usedAccurate figure are used

CompulsionCompulsion

It is optionalIt is optional It is absolutelyIt is absolutelycompulsory to preparecompulsory to preparefor various purposes like,for various purposes like,for various users andfor various users and

taxationtaxation

Difference between costerence etween cost


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Difference between costerence etween costand Managementand Management

accountingaccountingPurpose Costaccounting ManagementaccountingObjective Ascertaining the cost of

goods and servicesAims presentation ofcost data and someother information for

taking decision

Time factor It uses the past datarather future

It predicts future onpast data for presenthappenings

Information coverageIt relates information

relating to cost incurredor budgeted , standardcosting, variances etc.

It uses cost data as well

as some otherinformation also.

Rules for preparation

of reports

Based on ICWAI Change according to

requirements. 26

BOOKKEEPING AND


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BOOKKEEPING ANDACCOUNTING

BOOKKEEPING is the recording of business

data in a prescribed manner. Abookkeeper may be responsible forkeeping all the records of a business oronly a minor segment, such portion ofcustomer accounts in department store.

Much of the work of the bookkeeper iscritical in nature and increasingly beingaccomplished through the use ofmechanical and electronic equipment.

ACCOUNTING is primarily concerned withthe design of the system of records, thepreparation of reports based on therecorded data, and the interpretation ofthe reports. Accountants often direct and

review the work of bookkeeper. In event,


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Accounting Lec 1