UNIT-1
Concept of Accounting
Definition of Accounting
Definition by the American Institute of Certified Public Accountants (Year 1961):
“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 result thereof”.
Definition by the American Accounting Association (Year 1966):
“The process of identifying, measuring and communicating economic information to permit
informed judgments and decisions by the users of accounting”.
(a) Objectives of Accounting
(i) Providing Information to the Users for Rational Decision-making
The primary objective of accounting is to provide useful information for decision-making to
stakeholders such as owners, management, creditors, investors, etc. Various outcomes of
business activities such as costs, prices, sales volume, value under ownership, return of
investment, etc. are measured in the accounting process. All these accounting measurements
are used by stakeholders (owners, investors, creditors/bankers, etc.) in course of business
operation. Hence, accounting is identified as ‘language of business’.
(ii) Systematic Recording of Transactions
To ensure reliability and precision for the accounting measurements, it is necessary to keep a
systematic record of all financial transactions of a business enterprise which is ensured by
bookkeeping.
These financial records are classified, summarized and reposted in the form of accounting
measurements to the users of accounting information i.e., stakeholder.
(iii) Ascertainment of Results of above Transactions
‘Profit/loss’ is a core accounting measurement. It is measured by preparing profit and loss
account for a particular period. Various other accounting measurements such as different
types of revenue expenses and revenue incomes are considered for preparing this profit and
loss account. Difference between these revenue incomes and revenue expenses is known as
result of business transactions identified as profit/loss. As this measure is used very frequently
by stockholders for rational decision making, it has become the objective of accounting.
For example, Income Tax Act requires that every business should have an accounting system
that can measure taxable income of business and also explain nature and source of every item
reported in Income Tax Return.
,(iv) Ascertain the Financial Position of Business
‘Financial position’ is another core accounting measurement. Financial position is identified
by preparing a statement of ownership i.e., Assets and Owings i.e., liabilities of the business
as on a certain date. This statement is popularly known as balance sheet. Various other
accounting measurements such as different types of assets and different types of liabilities as
existed at a particular date are considered for preparing the balance sheet. This statement
may be used by various stakeholders for financing and investment decision.
(v) To Know the Solvency Position
Balance sheet and profit and loss account prepared as above give useful information to
stockholders regarding concerns potential to meet its obligations in the short run as well as
in the long run.
Scope of accounting
1. Accounting is concerned with financial transactions and events which bring' about a change
in the resources (or wealth) position of the business firm. Such transactions have to be
identified first, as and when they occur. It is not difficult because. there will be proof in the
form of a bill or receipt (called vouchers). With the help of these bills and receipts
identification of a transaction is easy. For example, when you purchase something you get a
bill, when you make payment you get a receipt.
2. These transactions are to be measured or expressed in terms of money, if not done already.
Generally, this problem will not arise, because the statement of proof expresses the
transaction in terms of money. For example, if ten books are purchased at the rate of Rs. 20
each, then the bill is prepared for Rs. 200. But, if an event cannot be expressed in monetary
terms, it will not come under the scope of accounting.
3. The transactions which are identified and measured are to be recorded in a book called
journal or in one of its sub-divisions.
4. The recorded transactions are to be classified with a view to group transactions of similar
nature at one place. The work of classification is done in a separate book called ledger. In the
ledger, a separate account is opened for each item so that all transactions relating to it can
be brought to one place. For example, all payments of salaries are brought to salaries account.
5. The recording and classification of many transactions will result in a mass of financial data.
It is, therefore, necessary to summarise such data periodically (at least once a year), in a
significant and meaningful form. The summarisation is done in the form of profit and loss
account which reveals the profit made or loss incurred, and the balance sheet which reveals
the financial position.
6 The summary results will have to be analysed, interpreted (critically explained) and
communicated to interested parties. Accounting information is generally communicated in
the form of a 'report'. Big organisations generally present printed reports, called published
account.
, Basic accounting terminologies
(i) Transaction: It means an event or a business activity which involves exchange of money or
money’s worth between parties. The event can be measured in terms of money and changes
the financial position of a person e.g. purchase of goods would involve receiving material and
making payment or creating an obligation to pay to the supplier at a future date. Transaction
could be a cash transaction or credit transaction. When the parties settle the transaction
immediately by making payment in cash or by cheque, it is called a cash transaction. In credit
transaction, the payment is settled at a future date as per agreement between the parties.
(ii) Goods/Services : These are tangible article or commodity in which a business deals. These
articles or commodities are either bought and sold or produced and sold. At times, what may
be classified as ‘goods’ to one business firm may not be ‘goods’ to the other firm. e.g. for a
machine manufacturing company, the machines are ‘goods’ as they are frequently made and
sold. But for the buying firm, it is not ‘goods’ as the intention is to use it as a long term
resource and not sell it. Services are intangible in nature which are rendered with or without
the object of earning profits.
(iii) Profit: The excess of Revenue Income over expense is called profit. It could be calculated
for each transaction or for business as a whole.
(iv) Loss: The excess of expense over income is called loss. It could be calculated for each
transaction or for business as a whole.
(v) Asset: Asset is a resource owned by the business with the purpose of using it for generating
future profits. Assets can be Tangible and Intangible. Tangible Assets are the Capital assets
which have some physical existence. They can, therefore, be seen, touched and felt, e.g. Plant
and Machinery, Furniture and Fittings, Land and Buildings, Books, Computers, Vehicles, etc.
The capital assets which have no physical existence and whose value is limited by the rights
and anticipated benefits that possession confers upon the owner are known as lntangible
Assets. They cannot be seen or felt although they help to generate revenue in future, e.g.
Goodwill, Patents, Trade-marks, Copyrights, Brand Equity, Designs, Intellectual Property, etc.
Assets can also be classified into Current Assets and Non-Current Assets.
Current Assets – An asset shall be classified as Current when it satisfies any of the following :
(a) It is expected to be realised in, or is intended for sale or consumption in the Company’s
normal
Operating Cycle,
(b) It is held primarily for the purpose of being traded ,
(c) It is due to be realised within 12 months after the Reporting Date, or
(d) It is Cash or Cash Equivalent unless it is restricted from being exchanged or used to settle
a
Liability for at least 12 months after the Reporting Date.
Concept of Accounting
Definition of Accounting
Definition by the American Institute of Certified Public Accountants (Year 1961):
“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 result thereof”.
Definition by the American Accounting Association (Year 1966):
“The process of identifying, measuring and communicating economic information to permit
informed judgments and decisions by the users of accounting”.
(a) Objectives of Accounting
(i) Providing Information to the Users for Rational Decision-making
The primary objective of accounting is to provide useful information for decision-making to
stakeholders such as owners, management, creditors, investors, etc. Various outcomes of
business activities such as costs, prices, sales volume, value under ownership, return of
investment, etc. are measured in the accounting process. All these accounting measurements
are used by stakeholders (owners, investors, creditors/bankers, etc.) in course of business
operation. Hence, accounting is identified as ‘language of business’.
(ii) Systematic Recording of Transactions
To ensure reliability and precision for the accounting measurements, it is necessary to keep a
systematic record of all financial transactions of a business enterprise which is ensured by
bookkeeping.
These financial records are classified, summarized and reposted in the form of accounting
measurements to the users of accounting information i.e., stakeholder.
(iii) Ascertainment of Results of above Transactions
‘Profit/loss’ is a core accounting measurement. It is measured by preparing profit and loss
account for a particular period. Various other accounting measurements such as different
types of revenue expenses and revenue incomes are considered for preparing this profit and
loss account. Difference between these revenue incomes and revenue expenses is known as
result of business transactions identified as profit/loss. As this measure is used very frequently
by stockholders for rational decision making, it has become the objective of accounting.
For example, Income Tax Act requires that every business should have an accounting system
that can measure taxable income of business and also explain nature and source of every item
reported in Income Tax Return.
,(iv) Ascertain the Financial Position of Business
‘Financial position’ is another core accounting measurement. Financial position is identified
by preparing a statement of ownership i.e., Assets and Owings i.e., liabilities of the business
as on a certain date. This statement is popularly known as balance sheet. Various other
accounting measurements such as different types of assets and different types of liabilities as
existed at a particular date are considered for preparing the balance sheet. This statement
may be used by various stakeholders for financing and investment decision.
(v) To Know the Solvency Position
Balance sheet and profit and loss account prepared as above give useful information to
stockholders regarding concerns potential to meet its obligations in the short run as well as
in the long run.
Scope of accounting
1. Accounting is concerned with financial transactions and events which bring' about a change
in the resources (or wealth) position of the business firm. Such transactions have to be
identified first, as and when they occur. It is not difficult because. there will be proof in the
form of a bill or receipt (called vouchers). With the help of these bills and receipts
identification of a transaction is easy. For example, when you purchase something you get a
bill, when you make payment you get a receipt.
2. These transactions are to be measured or expressed in terms of money, if not done already.
Generally, this problem will not arise, because the statement of proof expresses the
transaction in terms of money. For example, if ten books are purchased at the rate of Rs. 20
each, then the bill is prepared for Rs. 200. But, if an event cannot be expressed in monetary
terms, it will not come under the scope of accounting.
3. The transactions which are identified and measured are to be recorded in a book called
journal or in one of its sub-divisions.
4. The recorded transactions are to be classified with a view to group transactions of similar
nature at one place. The work of classification is done in a separate book called ledger. In the
ledger, a separate account is opened for each item so that all transactions relating to it can
be brought to one place. For example, all payments of salaries are brought to salaries account.
5. The recording and classification of many transactions will result in a mass of financial data.
It is, therefore, necessary to summarise such data periodically (at least once a year), in a
significant and meaningful form. The summarisation is done in the form of profit and loss
account which reveals the profit made or loss incurred, and the balance sheet which reveals
the financial position.
6 The summary results will have to be analysed, interpreted (critically explained) and
communicated to interested parties. Accounting information is generally communicated in
the form of a 'report'. Big organisations generally present printed reports, called published
account.
, Basic accounting terminologies
(i) Transaction: It means an event or a business activity which involves exchange of money or
money’s worth between parties. The event can be measured in terms of money and changes
the financial position of a person e.g. purchase of goods would involve receiving material and
making payment or creating an obligation to pay to the supplier at a future date. Transaction
could be a cash transaction or credit transaction. When the parties settle the transaction
immediately by making payment in cash or by cheque, it is called a cash transaction. In credit
transaction, the payment is settled at a future date as per agreement between the parties.
(ii) Goods/Services : These are tangible article or commodity in which a business deals. These
articles or commodities are either bought and sold or produced and sold. At times, what may
be classified as ‘goods’ to one business firm may not be ‘goods’ to the other firm. e.g. for a
machine manufacturing company, the machines are ‘goods’ as they are frequently made and
sold. But for the buying firm, it is not ‘goods’ as the intention is to use it as a long term
resource and not sell it. Services are intangible in nature which are rendered with or without
the object of earning profits.
(iii) Profit: The excess of Revenue Income over expense is called profit. It could be calculated
for each transaction or for business as a whole.
(iv) Loss: The excess of expense over income is called loss. It could be calculated for each
transaction or for business as a whole.
(v) Asset: Asset is a resource owned by the business with the purpose of using it for generating
future profits. Assets can be Tangible and Intangible. Tangible Assets are the Capital assets
which have some physical existence. They can, therefore, be seen, touched and felt, e.g. Plant
and Machinery, Furniture and Fittings, Land and Buildings, Books, Computers, Vehicles, etc.
The capital assets which have no physical existence and whose value is limited by the rights
and anticipated benefits that possession confers upon the owner are known as lntangible
Assets. They cannot be seen or felt although they help to generate revenue in future, e.g.
Goodwill, Patents, Trade-marks, Copyrights, Brand Equity, Designs, Intellectual Property, etc.
Assets can also be classified into Current Assets and Non-Current Assets.
Current Assets – An asset shall be classified as Current when it satisfies any of the following :
(a) It is expected to be realised in, or is intended for sale or consumption in the Company’s
normal
Operating Cycle,
(b) It is held primarily for the purpose of being traded ,
(c) It is due to be realised within 12 months after the Reporting Date, or
(d) It is Cash or Cash Equivalent unless it is restricted from being exchanged or used to settle
a
Liability for at least 12 months after the Reporting Date.
