Introduction to

Accounting

By : Gaurang Badheka
MA, Sem - 1
What is accounting?

Accounting is a system of
dealing with financial
information that provides
information for decision-
making.
G.E. Syme & T.W. Ireland
What is accounting?

Accounting is the
language of business.
Art Lightstone
Accounting fundamentals
• There must be a system. A system to
organize the information and present it
systematically.

• How do we keep record of money received

and spent in the house?
By writing it in a small note book or a diary
Accounting fundamentals
• Our household expenses are very few and
they can fit in that little diary.
• Whenever we need to know something we
refer that diary.

• But this method will not work in a

business. Because, a business has
thousands of things to write.
Accounting fundamentals
• We need a better system to record
business transactions

• As we follow some rules to organize

information in a business.

• Accounting rules are like traffic rules.

Accounting fundamentals
• Just imagine for a while our highways are
not divided or tracks not properly marked

• The result will be total chaos. Same way

the records are meaningless if the
information is not available easily.
Basics…..
• Accounting - a process of identifying,
recording, summarizing, and reporting
economic information to decision makers
in the form of financial statements

• Financial accounting - focuses on the

specific needs of decision makers external
to the organization, such as stockholders,
suppliers, banks, and government
agencies
Accounting system
• The accounting system is a series of steps
performed to analyze, record, quantify,
accumulate, summarize, classify, report,
and interpret economic events and their
effects on an organization and to prepare
the financial statements.
Accounting system
• Recording Journal
• Classifying Ledger
• Summarising Trial Balance
• Interpretation Profit & Loss a/c
and Balance Sheet
Accounting system
• Accounting systems are designed to meet
the needs of the decisions makers who
use the financial information.

• Every business has some sort of

accounting system.
– These accounting systems may be very
complex or very simple, but the real value of
any accounting system lies in the information
that the system provides.
Importance of Accounting
is a
Accounting Identifies
system that

Records

information
Relevant Communicates
that is

Reliable
about an
organization’s
Comparable business activities.
Who are the users?
• Who are users? – anyone or any
entity that has an interest in the
economic performance and well-
being of a business
Who are the users?
Bankers and other creditors – need to ensure that the business has the
ability to repay loans, and on a timely basis

Suppliers – need to ensure their customer (the business) will be around

to purchase their supplies and then be able to pay for them

Customers – are interested in the business to determine if they will

always be around to provide a constant flow of goods and services

Government – need to ensure that the business pays the correct amount
of taxes

Employees and Management– need to ensure that the business is doing

well so that they will have a job
Who are the users?
Internal Users
External Users

•Lenders •Consumer Groups •Managers •Sales Staff

•Shareholders •External Auditors •Officers •Budget Officers
•Governments •Customers •Internal Auditors •Controllers
Types of business
All businesses fall into three general
categories…
Sells effort (ie. work, talent) that does not
1. service result in a material item. A haircut would be
an example of a service. A service is often
viewed as an expense by the buyer.

Combines effort and materials to produce a

2. manufacturing new product. These products may be
viewed by the buyer as an expense (ie.
fuel) or an asset (ie. car).

Purchases a manufacturer’s product and

3. merchandising resells it to another customer for a higher
price. Again, such products may be viewed
as assets or expenses by the buyer.
Accounting - Definition
• Accounting can be defined as the process
of identifying, measuring, recording and
communicating the economic events of an
organization to the interested users of the
information.
Characteristics of Accounting
• Economic events
• Identification, measuring, recording and
communication
• Organization
• Interested users of information
Economic Events
• An economic event has been defined as ‘a
happening of consequence’ to a business
entity. Economic events are classified into

• External types

• Internal types.
Identification
• It means determining what to record, i.e.
to identify recordable events. It involves
observing activities and selecting those
events that are considered to be evidence
of economic activity.
Identification continue …

• The value of human resources, changes in

managerial policies or changes in
personnel are important but none of these
items is recorded in financial accounts.
However, when a company makes a cash
sale or purchase, even if the item is small,
it is recorded in the books of account.
Measurement
• It means quantification, including
estimates of business transactions into
financial terms, i.e. rupees and paise. If
an event cannot be quantified in monetary
terms, it is not considered for recording in
financial accounts.
Recording
• Once the economic events are identified
and measured in financial terms, they are
recorded, i.e. a chronological diary of
these measured events is kept in an
orderly and systematic manner.
Communication
• The economic events are identified,
measured and recorded is communicated
in some form to management and others
for internal and external uses. The
information is communicated through the
preparation and distribution of accounting
reports. The most common reports are in
the form of financial statements (Balance
Sheet and Profit and Loss Statement).
Organization
• It can be a business entity or a non-
business entity, depending upon the profit
or non-profit motive.
Branches of accounting
• Financial accounting
• Cost accounting
• Managerial accounting
• Tax accounting
• Auditing
• Accounting systems
Distinguish between
financial accounting and
management accounting.
FA Vs. MA
Primary Users
Financial Management
Investors Internal managers
Creditors of the business
Government
authorities
FA Vs. MA
Purpose of Information
Financial Management
• Help investors, • Help managers
creditors, and plan and control
others make business
investment, operations
credit, and
other decisions
FA Vs. MA
Focus and Time Dimension
Financial Management
• Reliability, • Relevance
objectivity, and
focus on the
past
FA Vs. MA
Type of Report
Financial Management
• Financial • Internal reports
statements not restricted by
restricted by GAAP;
GAAP determined by
cost-benefit
analysis
FA Vs. MA
Verification
Financial Management
• Annual • No independent
independent audit
audit by CAs
FA Vs. MA
Scope of Information
Financial Management
• Summary • Detailed reports
reports primarily on parts of the
on the company company
as a whole
FA Vs. MA
Behavioral Implications
Financial Management
• Concern about • Concern about
adequacy of how reports will
disclosure affect employees
behavior
Accounting & Fin. Mgt
Two aspects of
Money

Measurement of Management of
Money Money

Accounting Financial Mgt.

Accounting & Fin. Mgt
• Thus, accounting is information gathering
system whose objective is collecting,
processing and reporting the date.

• Where, Financial Management is a

decision-making system whose objective
is planning, analysis and controlling
financial decisions
Steps in accounting process
• Identifying business transactions
• Measuring transaction
• Recording transaction (journal entry)
• Classifying transaction (ledger entry)
• Summarizing transaction (TB, P/L & B/S)
• Analysing
• Communication / reporting
Key functions of fin. statement
• Planning/Budgeting
• Control
• Decision Making
• Investment Analysis
• Valuation
Accounting equation

1. Assets These are

2. Liabilities known as
3. Capital basic
elements of
4. Revenue accounting
5. Expenses
Accounting equation

1. Assets • Assets are items

of value that the
2. Liabilities business owns or
controls
3. Capital
• Best example is
4. Revenue cash in the cash
box
5. Expenses
Accounting equation
1. Assets • Liability
represents the
2. Liabilities outsiders who
gave us the
3. Capital assets or service,
4. Revenue but we did not
pay for it
5. Expenses • These are the
parties whom we
owe money
Accounting equation

1. Assets • Capital is the

owners’ claim in
2. Liabilities the business.
• It like liability of
3. Capital the business to its
4. Revenue owner
• It shows what the
5. Expenses owner really got
in his business
Accounting equation
• Revenue is what
1. Assets the business
2. Liabilities charges its
customers for its
3. Capital service or goods
4. Revenue • Revenue is the
benefit while
5. Expenses expense is the
cost of doing
business
Accounting equation

1. Assets • Expense is the

sacrifice for
2. Liabilities generating
revenue in a
3. Capital business
4. Revenue • Expense is the
cost of doing
5. Expenses business and
revenue is the
reward
Accounting equation

1. Assets 1. Liabilities
2. Expenses = 2. Capital
3. Revenue
ASSETS

These are economic resources of an

enterprise that can be usefully expressed in
monetary terms. Assets are things of value
used by the business in its operations.
 Fixed Assets
 Current Assets
ASSETS continue…

 Fixed Assets are assets held on a long-

term basis.
e.g. Land, Building, Machinery, Plant,
Furniture and Fixtures, etc.
ASSETS continue…

 Current Assets are assets held on a

short-term basis.
e.g. Debtors, Bills receivable,
Stock(Inventory), Cash and Bank
balances, etc.
LIABILITIES

These are obligations or debts that the

enterprise must pay in money or services at
some time in the future.

• Long-term liabilities

• Short-term liabilities
LIABILITIES continue..

 Long-term liabilities are those that are

usually payable after a period of one year.

e.g. A term loan from a financial institution,

debentures (bonds) issued by a company.
LIABILITIES continue..

 Short-term liabilities are obligations that

are payable within a period of one year.

e.g. Creditors, bills payable, overdraft from

a bank for a short period.
CAPITAL

Investment by the owner for use in the firm

is known as capital. Owner’s equity is the
ownership claim on total assets. It is equal
to total assets minus total liabilities.
REVENUES

These are the amounts the business earns

by selling its products or providing services
to customers. Other titles and sources of
revenue common to many businesses are:
sales, fees, commission, interest, dividends,
royalties, rent received, etc.
EXPENSES
These are costs incurred by a business in
the process of earning revenue. Generally,
expenses are measured by the cost of
assets consumed or services used during an
accounting period. The usual titles of
expenses are: depreciation, rent, wages,
salaries, interest, costs of heat, light and
water, telephone, etc.
PURCHASES
Purchases are total amount of goods
procured by a business on credit and for
cash, for use or sale. In a trading concern,
purchases are made of merchandise for
resale with or without processing.
In a manufacturing concern, raw materials
are purchased, processed further into
finished goods and then sold. Purchases
may be cash purchase or credit purchase.
SALES

Sales are total revenues from goods or

services sold or provided to customers.
Sales may be cash sales or credit sales.
STOCK

Stock (Inventory) is a measure of

something on hand – goods, spares and
other items – in a business.

It is called stock on hand.

STOCK: continue…

In a trading concern, the stock on hand is

the amount of goods which have not been
sold on the date on which the balance sheet
is prepared. This is also called closing
stock.
STOCK continue…

In a manufacturing concern, closing stock

comprises raw materials, semi-finished goods
and finished goods on hand on the closing
date.

Similarly, opening stock is the amount of

stock at the beginning of the accounting
year.
DEBTORS
Debtors are persons and/or other entities who
owe to an enterprise an amount for receiving
goods and services on credit.

The total amount standing against such persons

and/or entities on the closing date, is shown in the
Balance Sheet as Sundry Debtors on the asset
side.
CREDITORS
Creditors are persons and/or other entities who
have to be paid by an enterprise an amount for
providing the enterprise goods and services on
credit.

The total amount standing to the favour of such

persons and/or entities on the closing date, is
shown in the Balance Sheet as Sundry Creditors
on the liability side.
Rules which affect accounting
 Accounting Standards / Accountancy
bodies
 Companies Acts / Company Law
 Stock Exchange Requirements
 Audit Reports / Auditing legislation
 Taxation Requirements
•Any question ???