Notesale: Turn your study into money

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UNIT 1
Accounting has rightly been termed as the language of the business
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It
communicates the results of business operations to various parties who have some stake in the
business viz
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The need for accounting is all the more great for a person who is running a business
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What he owns?

ii
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Whether he has earned a profit or suffered a loss on account of running a business?

iv
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e
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MEANING OF ACCOUNTING
The main purpose of accounting is to ascertain profit or loss during a specified period, to show
financial condition of the business on a particular date and to have control over the firm's
property
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Accounting is a discipline which records, classifies, summarises and interprets financial
information about the activities of a concern so that intelligent decisions can be made about
the concern
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American Accounting Association defines accounting as "the process of identifying,
measuring, and communicating economic information to permit informed judgements and
decisions by users of the information
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Classifying: It Is concerned with the systematic analysis of the recorded data so as to
accumulate the transactions of similar type at one place
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Summarising: It is concerned with the preparation and presentation of the classified data in
a manner useful to the users
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Interpreting: Nowadays, the aforesaid three functions are performed by electronic data
processing devices and the accountant has to concentrate mainly on the interpretation aspects
of accounting
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The accountant should explain not only what has happened but also (a) why it happened, and
(b) what is likely to happen under specified conditions
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, measurement and communication, besides recording
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An accountant designs the accounting system, supervises and checks the work of the bookkeeper, prepares the reports based on the recorded data and interprets the reports
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DISTINCTION BETWEEN ACCOUNTING AND ACCOUNTANCY
Although in practice Accountancy and Accounting are used interchangeably yet there is a thin
line of demarcation between them
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Accounting is
concerned with recording all business transactions systematically and then arranging in the

form of various accounts and financial statements
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The word accounting tries to explain the nature of the
work of the accountants (professionals) and the word Accountancy refers to the profession
these people adopt
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Its function is to
provide quantitative information, primarily financial in nature, about economic entities
that is intended to be useful in making economic decisions, in making reasoned choices
among alternative courses of action
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Accounting in itself cannot create wealth though, if it produces information which is
useful to others, it may assist in wealth creation and maintenance
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A profession is
a career that involve the acquiring of a specialised formal education before rendering
any service
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The accounting education is
being imparted to the examinees by national and international recognised the bodies
like The Institute of Chartered Accountants of India (ICAI), New Delhi in India and
American Institute of Certified Public Accountants (AICPA) in USA etc
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Under the changing business environment, the discipline of accounting
and the accountant both have to watch and protect the interests of other people who
are directly or indirectly linked with the operation of modern business
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The
accounting information/data is to be used to solve the problems of the public at large
such as determination and controlling of prices
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➢ Accounting as a language: Accounting is rightly referred the "language of business"
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As one
has to learn a new language to converse and communicate, so also accounting is to be
learned and practised to communicate business events
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Both are based and propounded
on fundamental rules and symbols
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The expression, exhibition
and presentation of accounting data such as a numerals and words and debits and credit
are accepted as symbols which are unique to the discipline of accounting
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It
establishes a relationship of cause and effect in the various related phenomenon
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Accounting has its own principles e
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the
double entry system, which explains that every transaction has two fold aspect i
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debit and credit
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So we can say that accounting
is a science
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Art also teaches us how to do a work in the best possible way by making
the best use of the available resources
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Everybody cannot become a good accountant
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➢ Accounting as an information system: Accounting discipline will be the most useful
one in the acquisition of all the business knowledge in the near future
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Accounting information serves both profit-seeking business and non-profit
organisations
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Information is relevant and valuable
if the decision makers can use it to evaluate the financial consequences of various
alternatives
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As an information system, accounting links an information source or
transmitter (generally the accountant), a channel of communication (generally the
financial statements) and a set of receivers (external users)
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In the absence of accounting there would have been terrific
burden on human memory which in most cases would have been impossible to bear
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This is possible on account of accounting
supplying the following information to the manager or the proprietor:
o The amount of the proprietor's funds invested in the business
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❖ To ascertain the operational profit or loss: Accounting helps in ascertaining the net
profit earned or loss suffered on account of carrying the business
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The Profit and
Loss Account is prepared at the end of a period and if the amount of revenue for the
period is more than the expenditure incurred in earning that revenue, there is said to be
a profit
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Profit
and Loss Account will help the management, investors, creditors, etc
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In case it has not proved to
be remunerative or profitable, the cause of such a state of affairs will be investigated
and necessary remedial steps will be taken
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However, it is not enough
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e
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The Balance Sheet is a statement of assets and
liabilities of the business on a particular date
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❖ To facilitate rational decision making: Accounting these days has taken upon itself
the task of collection, analysis and reporting of information at the required points of
time to the required levels of authority in order to facilitate rational decision-making
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Of course, this is by no means an easy task
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❖ Information System : Accounting functions as an information system for collecting
and communicating economic information about the business enterprise
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This function, as
stated, is gaining tremendous importance these days
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Accounting is the
discipline that provides information on which external and internal users of the information
may base decisions that result in the allocation of economic resources in society
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Following can be the various external users of accounting
information:
❖ Investors: Those who are interested in investing money in an organisation are
interested in knowing the financial health of the organisation of know how safe the
investment already made is and how safe their proposed investment will be
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❖ Creditors: Creditors (i
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supplier of goods and services on credit, bankers and other
lenders of money) want to know the financial position of a concern before giving loans

or granting credit
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e
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To
know the liquid position, they need accounting information relating to current assets,
quick assets and current liabilities which is available in the financial statements
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need accounting
information to know how their contributed funds are being utilised and to ascertain if
the organisation deserves continued support or support should be withdrawn keeping
in view the bad performance depicted by the accounting information and diverted to
another organisation
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❖ Government: Central and State Governments are interested in the accounting
information because they want to know earnings or sales for a particular period for
purposes of taxation
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Governments also
needs accounting information for compiling statistics concerning business which, in
turn helps in compiling national accounts
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Consumers need accounting information for establishing good
accounting control so that cost of production may be reduced with the resultant
reduction of the prices of goods they buy
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Prices are fixed keeping in view fair
return to manufacturers on their investments shown in the accounting records
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Accounting information, being a mirror of the financial
performance of a business organisation, is of immense value to the research scholars
who wants to make a study to the financial operations of a particular firm
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Internal Users of Accounting Information:
Internal users of accounting information are those persons or groups which are within the
organisation
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The owners provide funds for the operations of a business and they want to
know whether their funds are being properly used or not
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The financial statements prepared from time to time
from accounting records depicts them the profitability and the financial position
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Accounting
information is an aid in this respect because it helps a manager in appraising the
performance of the subordinates
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Thus, accounting
information provides "the eyes and ears to management"
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Employees are interested in the financial position of a concern they serve
particularly when payment of bonus depends upon the size of the profits earned
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BRANCHES OF ACCOUNTING
To meet the ever increasing demands made on accounting by different interested parties such
as owners, management, creditors, taxation authorities etc
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There are as follows :
Financial accounting
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Cost accounting
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It also helps the business in controlling the costs by indicating
avoidable losses and wastes
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The object of management accounting is to supply relevant
information at appropriate time to the management to enable it to take decisions and effect
control
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Business entity means a specifically identifiable business enterprise like Khanna
Jewelers, Prakash Pipes Ltd
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An accounting system is devised for a specific
business entity (also called 'accounting entity')
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In other words, an event is a happening of consequence
to an entity
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In other words, it is any dealing between two or more persons
involving exchange of goods or services for a consideration in money
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o Cash transactions are those in which cash is involved in the exchange
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o In case of credit transactions cash is not paid immediately, the settlement is
postponedto a later date
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❖ Goods: The term 'goods' refers to articles in which the business deals
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Other articles
which are purchased for the purpose of using them in the business are not called goods
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He may be having tables and
chairs
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In case of a furniture dealer, tables and chairs
are goods
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❖ Debtor: A debtor is one who owes some amount to the business
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❖ Creditor: A creditor is one to whom the business owes some amount
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g
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If necessary, the journal and also the ledger may be
sub-divided into a number of books
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❖ Journal: Journal is the book of prime entry
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❖ Ledger: The transactions recorded in the journal are transferred to a separate book
called ledger
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For example, Capital Account, Salaries Account, Furniture Account, Building
Account, etc
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It is vertically divided into two parts in T shape (alphabet
T)
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This type of recording helps in knowing
the net result i
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, whether that account has received more or’ given more
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In other words, cash or any thing which enables the business entity to get
cash or a benefit in future is an asset
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vehicles, furniture,
stock of goods, cash, etc
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❖ Expenditure: Expenditure means the spending of money or incurring a liability for
some benefit/ service received by the business entity
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, are some examples of expenditure
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On the other hand, if the
benefit of an expenditure is available for more than one accounting year, it is treated
as an asset (also called capital expenditure) such as purchase of furniture and
machinery
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Equities are of two types : (i) creditors' equity, and (ii) owners' equity
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The claim of the owner is called
owner's equity or capital
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Loan from a bank, creditors for
goods supplied, rent payable, salaries payable, interest payable to the lenders, are some
examples of liabilities
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It represents the owner's
claim on the firm's assets and is known as owner's equity
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❖ Drawings: Drawings refer to the amount withdrawn or the value of goods taken by
the proprietor for personal use from the business
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It is
owner’s equity
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For example, cash or goods lost by theft or fire accident
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In either case, loss decreases the owner's equity
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For example,
sale of goods or services
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❖ Trade discount: It is a common practice these days to print the price of an article on
its package
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When you buy an article, the seller may agree to give you some concession and
charge a price which is less than the list price
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❖ Cash discount: When goods are sold on credit, the buyer is expected to pay the
amount on or before the due date
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Such an allowance is called 'cash discount'
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It motivates the debtor to make prompt payment
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❖ Insolvent: A person who is not in a position to pay his debts in full and is so declared
by the court
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❖ Stock: The amount of goods lying unsold or unuse;
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❖ Account receivable: The sum of money owed by your customers after goods or
services have been delivered and/or used
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, in return
for goods and/or services they have delivered
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These
principles, which serve as the rules for accounting for financial transactions and preparing
financial statements, are known as the “Generally Accepted Accounting Principles,” or
GAAP
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ACCOUNTING CONCEPTS
✓ Business entity concept: A business and its owner should be treated separately as far
as their financial transactions are concerned
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✓ Dual aspect concept: For every credit, a corresponding debit is made
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✓ Going concern concept: In accounting, a business is expected to continue for a fairly
long time and carry out its commitments and obligations
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✓ Cost concept: The fixed assets of a business are recorded on the basis of their original
cost in the first year of accounting
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No rise or fall in market price is taken into account
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✓ Accounting year concept: Each business chooses a specific time period to complete
a cycle of the accounting process—for example, monthly, quarterly, or annually—as
per a fiscal or a calendar year
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✓ Realisation concept: According to this concept, profit is recognised only when it is
earned
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ACCOUNTING CONVENTIONS
✓ Conservatism is the convention by which, when two values of a transaction are
available, the lower-value transaction is recorded
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✓ Consistency prescribes the use of the same accounting principles from one period of
an accounting cycle to the next, so that the same standards are applied to calculate
profit and loss
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Accountants should record important data and leave out insignificant information
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