MODULE 1
INTRODUCTION TO ACCOUNTING
Meaning of Accounting
Accounting is a means of communicating the results of business operations to various parties
interested in or connected with the organisation. It is the process of systematic recording and
analysis of business transactions, preparation and interpretation of accounts and statements
required for the ascertainment of trading results and financial position of the organisation.
Accounting is the language of business. A language is a medium of communication.
Accounting communicates the results of the operations of an organization to various parties
who are interested in it. It-
1. Identifies the transactions of the organization
2. Measures the identified transactions
3. Records the transactions in the Journal
4. Classifies the recorded transactions in the Ledger
5. Prepares Income Statement and Position Statement
6. Analyses the results and
7. Communicates the information to interested persons.
Accounting is an information system which receives data, processes the same and gives its
output in the form of information which is useful for decision making. In simple words
Accounting is the art, as well as the science of recording, classifying and summarising of
business transactions which are of a financial character and are expressed in terms of money.
Definition of Accounting
“Accounting is the art of recording, classifying, and summarising in a significant manner and
in terms of money, transactions and events which are, in part at least, of financial character,
and interpreting the results thereof” - The American Institute of Certified Public
Accountants (AICPA)
1
,Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgements and decisions by users of the information." -
American Accounting Association.
Objectives of Accounting
1. To Maintain Systematic Records
Accounting is done to keep a systematic record of financial transactions of a business
concern. It helps in the evaluation of performance. It provides accounting information
required for decision making. It helps in the detection and prevention of errors and frauds. It
provides evidence before the court of law. It helps to comply with the requirements of law.
2. To Ascertain Profit or Loss
Accounting helps in ascertaining the profit earned or loss incurred in running the business.
This is done through the preparation of Profit and Loss account at the end of an accounting
period.
3. To Ascertain the Financial Position
Accounting helps in ascertaining the financial position of a business concern. This is done
through the preparation of Balance Sheet. A balance sheet is a statement of assets, liabilities
and capital of the business as on a particular date.
4. To Provide Accounting Information to Users
The keeping of accounting records helps in providing information required for planning,
control and decision making to the various users of accounting information.
5. To Assist the Management
By analysing financial data and providing interpretations in the form of reports, accounting
assists management in handling business operations effectively.
Characteristics/Features/Functions of Accounting
1. Identifying financial transactions and events
Accounting records only those transactions and events which are of financial nature. So, first
of all, such transactions and events are identified.
2. Recording of transactions
2
, Accounting involves recording the financial transactions in appropriate book of accounts
such as Journal or Subsidiary Books.
3. Classifying the transactions
Transactions recorded in the books of original entry – Journal or Subsidiary books are
classified and grouped according to nature and posted in separate accounts known as ‘Ledger
Accounts’.
4. Summarising the transactions
It involves presenting the classified data in a manner and in the form of statements, which are
understandable by the users. It includes Trial balance, Trading Account, Profit and Loss
Account and Balance Sheet.
5. Analysing and interpreting financial data
Results of the business are analyzed and interpreted so that users of financial statements can
make a meaningful and sound judgment.
6. Communicating the financial data or reports to the users
Communicating the financial data to the users on time is the final step of accounting so that
they can make appropriate decisions.
Users of Accounting Information
There are two types of users of accounting information
I. Internal Users
Owners: Owners contribute capital in the business and thus they are exposed to maximum
risk. So, they are always interested in the safety of their capital.
Management: Accounting information is used by management for taking various decisions.
Employees: Employees are interested in the financial statements to assess the ability of the
business to pay higher wages and bonuses.
II. External Users
Banks and financial institutions: Banks and Financial Institutions provide loans to
business.
3
INTRODUCTION TO ACCOUNTING
Meaning of Accounting
Accounting is a means of communicating the results of business operations to various parties
interested in or connected with the organisation. It is the process of systematic recording and
analysis of business transactions, preparation and interpretation of accounts and statements
required for the ascertainment of trading results and financial position of the organisation.
Accounting is the language of business. A language is a medium of communication.
Accounting communicates the results of the operations of an organization to various parties
who are interested in it. It-
1. Identifies the transactions of the organization
2. Measures the identified transactions
3. Records the transactions in the Journal
4. Classifies the recorded transactions in the Ledger
5. Prepares Income Statement and Position Statement
6. Analyses the results and
7. Communicates the information to interested persons.
Accounting is an information system which receives data, processes the same and gives its
output in the form of information which is useful for decision making. In simple words
Accounting is the art, as well as the science of recording, classifying and summarising of
business transactions which are of a financial character and are expressed in terms of money.
Definition of Accounting
“Accounting is the art of recording, classifying, and summarising in a significant manner and
in terms of money, transactions and events which are, in part at least, of financial character,
and interpreting the results thereof” - The American Institute of Certified Public
Accountants (AICPA)
1
,Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgements and decisions by users of the information." -
American Accounting Association.
Objectives of Accounting
1. To Maintain Systematic Records
Accounting is done to keep a systematic record of financial transactions of a business
concern. It helps in the evaluation of performance. It provides accounting information
required for decision making. It helps in the detection and prevention of errors and frauds. It
provides evidence before the court of law. It helps to comply with the requirements of law.
2. To Ascertain Profit or Loss
Accounting helps in ascertaining the profit earned or loss incurred in running the business.
This is done through the preparation of Profit and Loss account at the end of an accounting
period.
3. To Ascertain the Financial Position
Accounting helps in ascertaining the financial position of a business concern. This is done
through the preparation of Balance Sheet. A balance sheet is a statement of assets, liabilities
and capital of the business as on a particular date.
4. To Provide Accounting Information to Users
The keeping of accounting records helps in providing information required for planning,
control and decision making to the various users of accounting information.
5. To Assist the Management
By analysing financial data and providing interpretations in the form of reports, accounting
assists management in handling business operations effectively.
Characteristics/Features/Functions of Accounting
1. Identifying financial transactions and events
Accounting records only those transactions and events which are of financial nature. So, first
of all, such transactions and events are identified.
2. Recording of transactions
2
, Accounting involves recording the financial transactions in appropriate book of accounts
such as Journal or Subsidiary Books.
3. Classifying the transactions
Transactions recorded in the books of original entry – Journal or Subsidiary books are
classified and grouped according to nature and posted in separate accounts known as ‘Ledger
Accounts’.
4. Summarising the transactions
It involves presenting the classified data in a manner and in the form of statements, which are
understandable by the users. It includes Trial balance, Trading Account, Profit and Loss
Account and Balance Sheet.
5. Analysing and interpreting financial data
Results of the business are analyzed and interpreted so that users of financial statements can
make a meaningful and sound judgment.
6. Communicating the financial data or reports to the users
Communicating the financial data to the users on time is the final step of accounting so that
they can make appropriate decisions.
Users of Accounting Information
There are two types of users of accounting information
I. Internal Users
Owners: Owners contribute capital in the business and thus they are exposed to maximum
risk. So, they are always interested in the safety of their capital.
Management: Accounting information is used by management for taking various decisions.
Employees: Employees are interested in the financial statements to assess the ability of the
business to pay higher wages and bonuses.
II. External Users
Banks and financial institutions: Banks and Financial Institutions provide loans to
business.
3
