INTRODUCTION TO INTRODUCTION TO ACCOUNTINGACCOUNTING

By: Prof. Bhavik R. ShahBy: Prof. Bhavik R. Shah

[M.Com ; M.Ed][M.Com ; M.Ed]98 98 46 21 4898 98 46 21 48

IntroductionIntroduction:: Innumerable transactions take place in the Innumerable transactions take place in the

business everyday.business everyday. All these transactions can not be remembered.All these transactions can not be remembered. Hence, it is necessary to record them.Hence, it is necessary to record them. For this purpose, proper accounts are required For this purpose, proper accounts are required

to be maintain.to be maintain. Keeping proper accounts help the owner of the Keeping proper accounts help the owner of the

businessbusiness To know the profit or loss of the business andTo know the profit or loss of the business and Its financial position at the end of the year.Its financial position at the end of the year. For determining income tax payable by the For determining income tax payable by the

owner of the business.owner of the business.

Users Of Accounting:Users Of Accounting: Accounts provide useful information.Accounts provide useful information. To the managers of the business for taking To the managers of the business for taking

business decisions.business decisions. To the financial institutions taking the decision To the financial institutions taking the decision

for granting a loan to the business unit, and to for granting a loan to the business unit, and to what extent on the basis of the accounting what extent on the basis of the accounting information.information.

To creditors of the business , to decide whether To creditors of the business , to decide whether to sell the goods to the firm on credit.to sell the goods to the firm on credit.

To trade unions.To trade unions. To customer protection associations.To customer protection associations. To government etc.To government etc.

History Of Accounting:History Of Accounting: Accounts are written since ancient times.Accounts are written since ancient times. Many evidences are available that accounts Many evidences are available that accounts

were maintained inwere maintained in Ancient ChinaAncient China MissarMissar Greek and Italian Culture.Greek and Italian Culture. Many references are found inMany references are found in The Vedic literature of the fact that accounts The Vedic literature of the fact that accounts

were properly written in ancient india.were properly written in ancient india. In the Valmiki Ramayan.In the Valmiki Ramayan.

When Bharat met Ram in the forest , Ram When Bharat met Ram in the forest , Ram asked Bharat about the incomes and expenses asked Bharat about the incomes and expenses of the State and whether the income is more of the State and whether the income is more than the expenses or the expenses are more than the expenses or the expenses are more then the income.then the income.

In the Mahabharat, King Yudhishthir had asked In the Mahabharat, King Yudhishthir had asked his brother Nakul to Supervise the accounts of his brother Nakul to Supervise the accounts of his army.his army.

During the age of the Maurya Samrajya, During the age of the Maurya Samrajya, Kautilya, the Prime Minister of Chandragupt Kautilya, the Prime Minister of Chandragupt Maurya , in his book ‘Arthashastra’ , has given Maurya , in his book ‘Arthashastra’ , has given various details instructions about maintaining various details instructions about maintaining the accounts. the accounts.

The Italian Monk Luca Pacioli for the first time The Italian Monk Luca Pacioli for the first time in 1494 AD.in 1494 AD.

• In his book on Mathematics,In his book on Mathematics,

Made presentation of the currently in use Made presentation of the currently in use

double entry accounting system.double entry accounting system. Thereafter, the accounting has become an Thereafter, the accounting has become an

integral part of each facet of life.integral part of each facet of life. The accounts of household expenses are also The accounts of household expenses are also

maintained in many houses.maintained in many houses.

Meaning of Accounting:Meaning of Accounting: ““Accounting is The process ofAccounting is The process of Identifying Identifying Measuring in terms of ‘Money’Measuring in terms of ‘Money’ RecordingRecording ClassifyingClassifying SummarizingSummarizing Analyzing and interpretingAnalyzing and interpretingThe Business Transactions-The Business Transactions-

ANDAND CommunicatingCommunicating The Accounting Information (Reports)The Accounting Information (Reports) To the users for making correct decisions.To the users for making correct decisions.

From the above definition,From the above definition,It can be said that:It can be said that:

1.1. The business transactions, which can be measured in The business transactions, which can be measured in terms of money, are recorded in accounting.terms of money, are recorded in accounting.

2.2. After recording the transactions, they are classified:After recording the transactions, they are classified:3.3. * At the end of accounting period (normally at the end of * At the end of accounting period (normally at the end of the year)the year)

* Conclusions (profit & loss account and balance sheet) * Conclusions (profit & loss account and balance sheet) are drawn.are drawn.

* So that, the profit or loss of the business is ascertained * So that, the profit or loss of the business is ascertained AndAnd

* The financial position of the business can be known.* The financial position of the business can be known.4.4. In accounting , the result of business areIn accounting , the result of business are

* Analyzed and * Analyzed and * Interpreted.* Interpreted.* Thereafter, this information is sent to the user * Thereafter, this information is sent to the user (Specially, members of limited companies and other (Specially, members of limited companies and other

institutions) in the form of report.institutions) in the form of report.

Objective Of AccountingObjective Of Accounting Main Objectives of Accounting can be described as under:Main Objectives of Accounting can be described as under:1.1. The aim of Accounting is (Maintenance Of Records)The aim of Accounting is (Maintenance Of Records)• To keep permanent record of all transactions of the business.To keep permanent record of all transactions of the business.• To show the financial effects of these business transaction To show the financial effects of these business transaction

on the business.on the business.2. The aim of Accounting is (Financial Position = Balance Sheet)2. The aim of Accounting is (Financial Position = Balance Sheet)• To recorded all transactions during the accounting period.To recorded all transactions during the accounting period.• To know the true financial position of the business after To know the true financial position of the business after

determining the effect of all the transactions.determining the effect of all the transactions.3. (Calculations of Profit or Loss)3. (Calculations of Profit or Loss)

To evaluate the profitability (earning capacity) of the To evaluate the profitability (earning capacity) of the business and to provide accounting information during the business and to provide accounting information during the accounting period.accounting period.

4. To provide the useful information to know the efficiency of 4. To provide the useful information to know the efficiency of the managers.the managers.

5. To provide necessary information for preparing budget. 5. To provide necessary information for preparing budget. Control can be exercised over various activities of the Control can be exercised over various activities of the business through budget.business through budget.

6. To provide useful information to the government for taking 6. To provide useful information to the government for taking proper decisions about taxes.proper decisions about taxes.

From the above objectives it can be said that;From the above objectives it can be said that; Accounting is the language of business.Accounting is the language of business.

Thus accounts provide useful informationThus accounts provide useful information To the owner and To the owner and The managers of business andThe managers of business and Outside parties.Outside parties.

They can take proper decisions on the basis of They can take proper decisions on the basis of this information.this information.

Types or Form of Accounting InformationTypes or Form of Accounting Information

Accounting starts with identification of financial Accounting starts with identification of financial transaction.transaction.

The transactions which are non-financial are not The transactions which are non-financial are not included in the accounting information.included in the accounting information.

There are TWO types of financial transactions:There are TWO types of financial transactions:• Financial transactions which can be measured in Financial transactions which can be measured in

terms of moneyterms of money• Financial transactions which can not be Financial transactions which can not be

measured in terms of money.measured in terms of money. Only those transactions, which can be measured Only those transactions, which can be measured

in terms of money, are recorded in the accounts.in terms of money, are recorded in the accounts.

Advantages Of Accounting:Advantages Of Accounting:The following are the advantages of Accounting.The following are the advantages of Accounting. The owner of the business can get accounting The owner of the business can get accounting

information, whenever required, by maintaining information, whenever required, by maintaining accounts.accounts.

Profit or loss of the business can be known at the Profit or loss of the business can be known at the end of accounting period.end of accounting period.

Financial position of the business can be known at Financial position of the business can be known at the end of the accounting period.the end of the accounting period.

Accounting helps the owner and manager of the Accounting helps the owner and manager of the business to exercise control based on the business to exercise control based on the information of the assets and liabilities of the information of the assets and liabilities of the business.business.

Accounting provides necessary information for Accounting provides necessary information for decision making.decision making.

6.6. Accounting information is necessary to determine Accounting information is necessary to determine the taxes payable to the government. Accounting is the taxes payable to the government. Accounting is also useful in planning about the taxes, e.g. income also useful in planning about the taxes, e.g. income tax, sales tax etc.tax, sales tax etc.

7.7. It helps in exercising moral control over the It helps in exercising moral control over the employees. Moreover thefts, frauds and employees. Moreover thefts, frauds and manipulations can be found out and controlled.manipulations can be found out and controlled.

8.8. It is useful for determining the price of the It is useful for determining the price of the business while selling the business.business while selling the business.

9.9. Books af accounts can be produced and accepted as Books af accounts can be produced and accepted as evidence.evidence.

10.10. Current year’s information can be compared with Current year’s information can be compared with the information of the previous year and with that the information of the previous year and with that of other firms.of other firms.

Limitations Of Accounting:Limitations Of Accounting:

This part will discuss later onThis part will discuss later on