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Introduction to Accounting |
👉 Meaning and Definitions of Accounting
It is a systematic process of identifying, measuring, recording, classifying, summarizing, interpreting and communicating financial information to the users.
👉 Characteristics of Accounting
1. Identification of Financial Transactions and Events = It records only those transactions and events which can be measured in terms of money.
2. Measuring the Identified Transactions = It measures the transactions and events in terms of a common measurement unit (that is the currency of a country).
3. Recording = It is an art of recording business transactions in the books of account. Recording is the process of recording business transactions of financial character in the book of original entry, i.e., Journal.
4. Classifying = It is the process of grouping transactions or entries of one nature at one place.
5. Summarizing = This involves presenting the classified data in a manner which is understandable and useful for internal as well as external users of accounting statements.
6. Analysis and Interpretation = Analysis and interpretation of the financial data are carried out so that the users of financial data can make a meaningful judgement of the profitability and financial position of the business.
7. Communicating = The accounting information must be provided in time and presented to the users so that appropriate decisions may be taken at the right time.
👉 Objectives of Accounting
1. Maintaining Accounting Records = The objective of accounting is to record financial transactions and events of the organisation in the books of account in a systematic manner following the principles of accountancy.
2. Determining Profit and Loss = To determine whether during the accounting period, the firm has earned a profit or incurred a loss.
3. Determining Financial Position = Financial position of the business is as relevant for the users of financial statements as is the Income Statement, i.e., Profit and Loss Account (Statement of Profit and Loss, in the case of Companies).
4. Facilitating Management = The management often requires financial information for decision-making, effective control, budgeting and forecasting. Accounting provides financial information to assist the management in discharging this function.
5. Providing Accounting Information to Users = Yet another objective of accounting is to provide accounting information to users, both internal and external, who analyse them as per their needs.
6. Protecting Business Assets = Accounting maintains record of assets owned by the business which enables the management to protect them and exercise control.
👉 Functions of Accounting
1. Maintaining Systematic Accounting Records = The primary function of accounting is to maintain systematic accounting records of financial transactions and events.
2. Preparation of Financial Statements = It means final accounts prepared at the end of the accounting period. It includes Income Statement (Profit and Loss Account) and Position Statement (Balance Sheet).
3. Meeting Legal Requirements = Accounting records are accepted as evidence by the court of law if they are maintained systematically following the accounting rules, principles and concepts.
4. Communicating the Financial Information = It is yet another function of accounting to communicate the financial information to the users, which may be internal users or external users, such as management, banks, employees, government authorities, etc.
5. Assistance to Management = Management often requires financial information which is given by the accounting records which in turn helps the management in decision-making.
👉 Advantages of Accounting
1. Financial Information about Business
2. Assistance to Management
3. Replaces Memory
4. Facilitates Comparative Study
5. Facilitates Settlement of Tax Liabilities
6. Facilitates Loans
7. Evidence in Court
8. Facilitates Sale of Business
9. Assistance in the Event of Insolvency
10. Helpful in Partnership Accounts
11. Helpful in Decision-making
👉 Limitations of Accounting
1. Accounting is not Fully Exact
2. Unrealistic Information
3. Accounting Ignores the Qualitative Elements
4. Accounting Ignores the Effect of Price Level Changes
5. Accounting May Lead to Window Dressing
👉 Accounting Process
Based on the attributes of accounting, the steps of accounting process are as follows :
(i) Identifying Financial Transactions and Events
(ii) Recording = It includes Journal, Cash Book, Purchase Book, Sales Book, Purchases Return Book, Sales Return Book, Bills Payable Book, Bills Receivable Book.
(iii) Classifying
(iv) Summarizing = It includes Trial Balance, Trading and Profit and Loss Account (Statement of Profit and Loss), Balance Sheet
(v) Analyzing and Interpreting
(vi) Communicating
👉 Branches of Accounting
1. Financial Accounting = It is that branch of accounting which records financial transactions and events, summarises and interprets them before communicating the results to the users.
2. Cost Accounting = This branch of accounting is concerned with ascertaining cost of products, operations, processes or activities. It is that branch of accounting which deals with recording costs with the objective of ascertaining, reducing and controlling costs.
3. Management Accounting = It is the most recently developed branch of accounting. It is concerned with generating accounting information relating to funds, costs, profits, etc., as it enables the management in decision-making. We may say that Management Accounting addresses the needs of a single user group, i.e., the management.
👉 Book Keeping and Accounting
Book Keeping = It is a part of accounting being a process of recording financial transactions and events in the books of account. It involves :
(i) Identifying financial transactions and events
(ii) Measuring them in terms of money
(iii) Recording the identified financial transactions and events in the books of account, and
(iv) Classifying recorded transactions and events, i.e., posting them into Ledger accounts.
Accounting = It is a wider concept than Book Keeping. It starts where Book Keeping ends. In other words, Book Keeping is a part of accounting.
👉 Accounting Information
Accounting is a service activity. Its function is to provide qualitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.
Types of Accounting Information
1. Information Relating to Profit or Surplus;
2. Information Relating to Financial Position, and
3. Information about Cash Flow.
Qualitative Characteristics of Accounting Information
1. Reliability
2. Relevance
3. Understandably
4. Comparability
Users of Accounting Information
1. Owners
2. Management
3. Employees and Workers
4. Banks and Financial Institutions
5. Investors and Potential Investors
6. Creditors
7. Government and its Authorities
8. Researchers
9. Consumers
10. Public
👉 Systems of Accounting
1. Double Entry System
2. Single Entry System
👉 Most Important Questions
1. Explain the meaning of Accounting.
2. What is the difference between Book Keeping and Accounting ?
3. Why the following parties are interested in Accounting Information :
(a) Investors (b) Government ?
4. State what is the end-product of Financial Accounting.
5. What are the features of Accounting ?
6. What do you mean by Accounting ? What are the main objectives ?
7. What are the advantages of Accounting ?
8. Explain any two limitations of Accounting.
9. Accounting provides information about the profitability and financial soundness of a concern. In addition, it provides various other valuable information also. However, accounting has certain limitations. Explain any three of such limitations.
10. Write a short note on Double Entry System of Accounting.
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