UNIT I

INTRODUCTION TO ACCOUNTING

NEED AND IMPORTANCE

What has happened to the investment? What is the result of the business transactions? What are the earnings and expenses? How much amount is receivable /Payable from/

to customers From/To whom goods have been Purchased/ sold on

credit? What are the nature and value of assets & Liabilities

possessed by the business concern?

BOOK-KEEPING “ Is the science and art of correctly recording in the books of

account all those business transactions that result in the transfer of money or money’s worth”.

The branch of knowledge which tells us how to keep a record of business transactions.

Advantages: Permanent, Reliable & Arithmetical accuracy Net Results & Ascertainment of Financial Position & Progress Calculation of Dues, Taxation and Mgt. Decision making Control over Assets and borrowings Fixing the selling price & Legality issues Identifying Do’s and Don’ts

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ACCOUNTING

American Accounting Association defines accounting as “the process of identifying, measuring and communicating economic information to permit informed judgements and decision by users of the information”

The systematic and comprehensive recording of financial transactions pertaining to a business.

The process of summarizing, analyzing and reporting these transactions.

OBJECTIVES

The main objectives of accounting are:1. To maintain accounting records2. To calculate the result of operations3. To ascertain the financial position4. To communicate the information to users

Business transacti

ons (monetary value)

IdentifyingRecordingClassifying

SummarizingAnalyzing

InterpretingCommunicating

Process

Information to Users

OutputInput

PROCESS OF ACCOUNTING

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USERS ACCOUNTING INFORMATION

Owners & Management Employees & Trade Unions Creditors, Banks & Lending Institutions Potential Investors & Present Investors Government & Tax Authorities Regulatory Agencies & Researchers

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BRANCHES OF ACCOUNTING Financial accounting

Recording business transactions in the books of accounts to found the operating result(FP) for a particular period

Cost accounting Collection, classification and ascertainment of the cost of

production or job undertaken by the firm Management accounting

For the purpose of policy formulation, planning, control and decision making by the management

BASIC ACCOUNTING TERMS1. Cash transaction

Cash receipt or payment2. Credit transaction Where cash is not involved immediately but will be paid or

received later3. Proprietor

A person who owns a business4. Capital

Amount invested by the proprietor in the business5. Assets

Properties belongings to the business

CONT…6. Liabilities

Financial obligations of a business. The amounts which a business owes to others.

7. Drawings The amount of cash or value of goods

withdrawn from the business by the proprietor for his personal use

CONT…8. DebtorsA person who receives a benefit without

giving money , but liable to pay in future or in due course of time is debtor

9. creditorsA person who gives a benefit without

receiving money , but to claim in future is a creditor

CONT…10. Purchases The amount of goods bought by a

business for resale or for use in the production.

11. Purchases return or returns outward When goods are returned to the

suppliers due to defective quality or not as per the terms of purchase

12.SALES The amount of goods sold that are

already bought or manufactured by the company.

CASH SALES Sold for Cash

CREDIT SALE Sold but payment are not received at that

time TOTAL SALES

= Cash Sales + Credit Sales

13.SALES RETURN

14. STOCK

15. REVENUE Amount receivables or realized from sale of

goods Earnings from Interest, Commission,

Dividend etc. 16.EXPENSES

Amount spent in order to produce and sell the goods and services

17. INCOME Difference between Revenue and

Expenses = Revenue – Expenses.

18. VOUCHER

19. INVOICE

20. RECEIPT

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ACCOUNTING EQUATION Fundamental Accounting Equation:Assets = Liabilities + Owners’ Equity

This equation is always in balance

In order for this equation to remain in balance, double-entry bookkeeping is employed. That is, the recording of every transaction or event must

have at least two parts Either an equal impact (increase or decrease) to both sides of the

equation or equal and opposite impact to one side. The recording of every transaction must keep this equation

in balance