1Basics of Accounting

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Meaning of AccountingTraditional definition:

Accounting is the art of recording, classifying and

summarizing in a significant manner and in terms of money, transactions and events which are, in part at least,of a financial character, and interpreting the resultthereof.

( American Institute of Certified Public Accountants 1941 )


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Meaning of AccountingModern definition:

The process of identifying, measuring and communicating

economic information to permit informed judgments' anddecisions by the users of accounting information( American Accounting Association 1966)


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Activities covered under AccountingIdentifying Measuring Recording

ClassifyingSummarizing Analyzing

Interpreting Communication


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Meaning of Accountancy Accountancy refers to a systematic knowledge of accounting. It explains why to do and how to do of various aspects of accounting. It tells us why and how toprepare the books of accounts and how to summarize theaccounting information and communicate it to theinterested parties.


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Meaning of Book-keepingBook-keeping is a part of accounting and is concerned with record keeping or maintenance of books of accounting which is often routine and clerical in nature.It covers 4 activities:

1. Identifying the transactions and events.2. Measuring the transactions and events in a common

measuring unit.3. Record the identified and measured transactions andevents in proper books of accounts.

4. Classifying the recorded transactions and events inledger.


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Difference between Book-Keeping and

AccountingBasis of distinction Book-keeping Accounting

1. Scope Book-keeping involvesidentifying, measuring,recording and classifying.

Accounting in addition alsoinvolve summarizing,analyzing, interpreting andcommunicating.

2. Stage Book-keeping is primary stage.

Accounting is thesecondary stage. It starts where book-keeping ends.

3. Basic objective To maintain systematicrecords.

To ascertain net results of operations and financialposition and tocommunicate.

4. Who performs It is performed by juniorstaff.

It is done by senior staff.


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5. Knowledge level The book-keeper is notrequired to have higherlevel of knowledge that of an accountant.

The accountant is requiredto have higher level of knowledge than that of book-keeper.

6. Analytical skill The book-keeper may ormay not possess analyticalskill.

An accountant is requiredto possess analytical skill.

7. Nature of job The job of a book-keeper isoften routine and clerical innature.

The job of an accountant isanalytical in nature.

8. Designing of accountingsystem

It does not cover designingof accounting system.

It covers designing of accounting system


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9. Supervision andchecking

The book-keeper does notsupervise and check the work of an accountant.

An accountant supervisesand checks the work of abook-keeper.


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Users of an accounting information and their

needsUsers Need of information

1. Short term

creditors

Short term creditors need information to amount owing to them will be

paid when due and whether they should extend, maintain or restrict theflow of credit to an individual enterprise.

2. Long termcreditors

They need information to determine whether their principals and theinterests thereof will be paid when due and whether they should extend,maintain or restrict the flow of credit to an enterprise.

3. Presentinvestors

Present investors need information to judge prospects for theirinvestment and to determine whether they should buy, hold or sellshares.


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4. Potential

investors

Potential investors need information to judge prospects of an

enterprise and to determine whether they should buy the shares.5. Management They need information to review the firms:

Short term solvency Long term solvency. Effective utilization of resources.

Profitability in relation to turnover. Profitability in relation to investment

6. Employees They are interested in information about the stability andprofitability of the employers. They are also interested ininformation which enables them to assess the ability of theenterprise to pay remuneration, retirement benefits and to provideemployment opportunities.


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7. Tax authorities Tax authorities need information to assess the tax liabilities of an

enterprise.8. Customers They have an interest in information about the continuation of an

enterprise, especially when they have established a long-terminvolvement with, or are dependent on the enterprise.

9. Governmentand theiragencies

They are interested in the allocation of resources and therefore theactivities of enterprise. They also require information in order toregulate the activities of enterprise, determine taxation policies andas the basis for the national income and similar statistics.


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Primary objectives of accountingObjectives

To maintain

systematicaccountingrecords

To ascertain thefinancialperformance

To ascertain thefinancialposition

Tocommunicatethe informationto the users


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Functions of accountingMeasurementForecasting

Decision makingComparison and evaluationControlGovernment regulation and taxation


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Advantages of accountingFacilities to replace memory.Facilitates to comply with legal requirement.Facilitates to ascertain net result of operations.Facilitates to ascertain financial position.

Facilitates the users to take decisions.Facilitates a comparative study. Assists the management.Facilitates control over assets.Facilitates the settlement of tax liability.Facilitates the ascertainment of value of business.Facilitates raising loans. Acts as a legal evidence.


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Disadvantages of accounting

Ignores the qualitative elements.Not free from bias.Estimated position and not real position.Ignores the price-level changes in case of financialstatements prepared on historical costs.

Danger of window dressing


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Basic accounting terms

Entity: an entity means an economic unit that performseconomic activities.Event: an event is a happening of consequences to anentity. (ex. Use of raw material in production)

Business transaction: it is an exchange in which eachparticipant receives or sacrifice value. It involvesexchange of goods or services on cash or credit basis. It isan economic event that involves transfer of money ormoneys worth. It occurs between an outsider and anaccounting entity.Entry: it is the record made in the books of accounts inrespect of a transaction or event. An entry is based onthe basis of vouchers.


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Voucher: it is a document which serves as an evidence of a transaction. The vouchers act as source documents onthe basis of which transactions are recorded in the booksof accounts.

Assets: assets refer to tangible objects or intangiblerights of an enterprise which carry probable futurebenefits.

There are 4 types of assets:1. Current assets.2. Fixed assets.3. Tangible assets.

4. Intangible assets.


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Liabilities: it refers to the financial obligations of anenterprise other than owners funds. There are 2 types of liabilities:1. Current liabilities.2. Long-term liabilities. Assignment:Define purchases, sales, stock, debtors, creditors,

receivables, payables, expenses, incomes, gainsand losses and revenue


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Basis of accounting

Accrual basis of accounting : it is a method of recording transactions by which revenue, costs, assetsand liabilities are reflected in the accounts for theperiod in which they accrue.

Cash basis of accounting : it is a method of recordingtransactions by which revenues, costs, assets andliabilities are reflected in the accounts for the period in which accrual receipts or actual payments are made.


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Relationship of accounting with otherdisciplines

With economics With statistics With mathematics With law With management


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Thank You..

1Basics of Accounting

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