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Accountancy Revision Notes for
Introduction to Accounting of Chapter 1
Learning Objectives:
After studying this chapter, you should be able to understand:
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Meaning of Accounting
Accountancy, Accounting and Book-keeping
Relationship between Accountancy, Accounting and Book-keeping
Distinguish between Book-keeping and Accounting
Users of Accounting information
Advantages and limitations of Accounting
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”
Accounting Principles Board (APB) of AICPA (U
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A) defined accounting as “Accounting
is a service activity
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”
In Simple words, accounting is the process of collecting, recording, classifying,
summarising and communicating financial information to the users for judgment and
decision-making
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To keep systematic and complete records of financial transactions in the books of
accounts according to specified principles and rules to avoid the possibility of
omission and fraud
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To ascertain the profit earned or loss incurred during a particular accounting
period which further help in knowing the financial performance of a business
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To ascertain the financial position of the business by the means of financial
statement i
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balance sheet which shows assets on one side and Capital &
Liabilities on the other side
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To provide useful accounting information to users like owners, investors,
creditors, banks, employees and government authorities etc who analyze them
as per their requirements
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To provide financial information to the management which help in decision
making, budgeting and forecasting
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To prevent frauds by maintaining regular and systematic accounting records
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It provides information which is useful to management for making economic
decisions
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It help owners to compare one year’s results with those of other years to locate
the factors which leads to changes
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It provide information about the financial position of the business by means of
balance sheet which shows assets on one side and Capital & Liabilities on the
other side
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It help in keeping systematic and complete records of business transactions in
the books of accounts according to specified principles and rules, which is
accepted by the Courts as evidence
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It help a firm in the assessment of its correct tax Liabilities such as income tax,
sales tax, VAT, excise duty etc
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Properly maintained accounts help a business entity in determining its proper
purchase price
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It is historical in nature; it does not reflect the current worth of a business
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It
ignores qualitative elements such as efficiency of management, quality of staff,
customers satisfactions etc
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It may be affected by window dressing i
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manipulation in accounts to present a
more favorable position of a business firm than its actual position
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It is not free from personal bias and personal judgment of the people dealing with
it
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For example assets in
balance sheet are shown at their cost and not at their market value which could
be realised on their sale
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Book Keeping should not be confused with accounting
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The distinction between the two are as under
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It is the recording phase of an
1
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accounting system
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It is a primary stage and basis for
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where the Book keeping process ends
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It is routine in nature and does not
3
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It is done by senior staff called
book-keepers
accountants
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It does not give the complete picture of 5
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unit
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Information relating to profit or loss i
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income statement, shows the net profit of
business operations of a firm during a particular accounting period
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Information relating to Financial position i
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Balance Sheet
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3
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Subfields/Branches of Accounting
1
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Interested users/parties of Accountings information’s and their Needs
There arenumber of users interested in knowing about the financial soundness and the
profitability of the business
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Owner

Information the user want
Return on their investment, financial health of their
company/business
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Management
To evaluate the performance to take various
decisions
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Investors and
Safety and growth of their investments, future of the
al
potential investors
business
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Creditors
Assessing the financial capability, ability of the
business to pay its debts
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Lenders
Repaying capacity, credit worthiness
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Tax Authorities
Assessment of due taxes, true and fair disclosure of
accounting information
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Employees
Profitability to claim higher wages and bonus,
whether their dues (PF, ESI, etc
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, may seek different
in-formation for different reasons
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Reliability: Means the information must be based on facts and be verified
through source documents by anyone
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Basic accounting terms
Business Transaction
An Economic activity that affects financial position of the business and can be
measured in terms of money e
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, purchase of goods for use in business
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All accounts are divided into two sides
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Capital: Amount invested by the owner in the firm is known as capital
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Drawings: The money or goods or both withdrawn by owner from business for personal
use, is known as drawings
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Assets: Assets are valuable and economic resources of an enterprise useful in its
operations
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Current Assets: Current Assets are those assets which are held for short period
and can be converted into cash within one year
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2
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For example: Land,
Building, Machinery etc
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Tangible Assets: Tangible Assets are those assets which have physical
existence and can be seen and touched
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For example: Goodwill,
Patent, Trade mark etc
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Liabilities can be classified as:
1
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For Example: Creditors, Bill Payable etc
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Non-Current Liabilities: Non-Current Liabilities are those obligations or debts
that are payable after a period of one year
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Receipts
1
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2
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Expenses: Costs incurred by a business for earning revenue are known as expenses
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Expenditure: Spending money or incurring a liability for acquiring assets, goods or
services is called expenditure
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Revenue Expenditure: If the benefit of expenditure is received within a year, it is
called revenue expenditure
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2
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Example: Purchase of Machinery
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Deferred Revenue Expenditure: There are certain expenditures which are
revenue in nature but benefit of which is derived over number of years
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Profit: The excess of revenues over its related expenses during an accounting year is
profit
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Loss: The excess of expenses of a period over its related revenues is termed as loss
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The items that are purchased for
the purpose of resale and not for use in the business are called goods
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In case of trading concerns it is purchase of final goods and in manufacturing
concern it is purchase of raw materials
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Purchase Return: When purchased goods are returned to the suppliers, these are
known as purchase return
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Sales may be cash sales or credit sales
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Debtors: Debtors are persons and/or other entities to whom business has sold goods
and services on credit and amount has not received yet
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Creditors: If the business buys goods/services on credit and amount is still to be paid to
the persons and/or other entities, these are called creditors
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Bill Receivable: Bill Receivable is an accounting term of Bill of Exchange
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Bill Payable: Bill Payable is also an accounting term of Bill of Exchange
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Discount: Discount is the rebate given by the seller to the buyer
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Trade Discount: The purpose of this discount is to persuade the buyer to buy
more goods
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This discount is not recorded in the accounting books as it is
deducted in the invoice/cash memo
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Cash Discount: The objective of providing cash discount is to encourage the
debtors to pay the dues promptly
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Account : Account refers to a summarised record of relevant transaction of particular
head at one place
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Income means increase in
the wealth of the enterprise over a period of time
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Cost : Cost refers to expenditures incurred in acquiring manufacturing and processing
goods to make it saleable
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For example, if we buy goods for cash we get cash memo, if we buy goods on credit,
we get an invoice, when we make a payment we get a receipt
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