Introduction To Accounting

• The need for recording business transactions was felt even in early day of
life. The old accounting mostly dealt with the simple and limited number of
transactions of private and government enterprises.
• Accounting function is vital for every entity of the society whether that is an
individuals, business entity, nonprofit making organizations like
municipalities, clubs, etc. All are required to maintain accounts.
• Accounting is commonly referred to as the “language of the business” as it is
effectively employed to communicate the financial performance of business
to various interested parties or stakeholders. It is concerned with the
measurement and communication of financial data.
 The term accounting can be defined in different
ways as under:

• Accounting is the basis for business decisions. It means that the primary
purpose of accounting is to provide information that is useful for decision
making purpose.
• Accounting is a language of business. It means that accounting is widely used
to describe all type of business activities; Costs, Prices, Sales Volume, Profit,
ROI are all accounting measurements.
 Accounting is an art of identifying, recording, classifying, summarizing and
interpreting all those business transactions which can be presentable in
monetary terms and useful for all stakeholders or users to make better financial
decisions
 Objectives of Accounting

• To organize the financial details of a business.

• To identify the financial transactions.
• To organize the financial data into useful information.
• To measure the value of these information in terms of money.
• To analyze, interpret, and communicate the information to persons or
groups, both inside or outside the business.
 Users of Accounting

• The purpose of accounting is to provide information about the financial

operations and conditions of an enterprise to the interested parties. These
parties normally includes the following:

• The Owner
• The owners of the business want to know the financial status of their
business and income earned or loss suffered.
 Managerial Personnel
The managers of the business need the information for decision making techniques.
 Creditors
The investors and creditors of the business are interested to know the profit-earning capacity of
the business and its financial position. Those who supply goods and services on credit, or banks
and individuals who lend money to the business are called creditors.
 Employees
Employees are also interested in the stability of the business in which they are employed.
 Government Agencies
Government agencies are also keenly interested in incomes and other business activities of the
organization.
 Others
For example, customers and clients, labor unions, trade associations and journalists etc. are also
interested with the business world.
 Major Field of Accounting
• Financial Accounting is concerned with general accounting system. The
chief purpose of financial accounting is to calculate profit or loss made by
the business during the year and exhibit financial position of the business as
on a particular date.
• Cost Accounting function is to ascertain the cost of a product and to help
the management in the control of cost.
Management Accounting is the accounting that provides necessary information to the management
for discharging its function. It is the reproduction of financial accounts in such a way as will enable the
management to take decisions and to control activities.
Forensic Accounting/Auditing is concerned with checkup and review of the accounting. The field
involves testing and examining the records of an enterprise to be certain that they are fair and
accurate.
 Single Entry and Double Entry Accounting

The Single Entry System records only cash movement of transactions and that too up to the extent of
recording one aspect of the transactions. This means that only receipt or payment of cash is recorded
and no separate record is maintained (about the source of receipt and payment) as to from whom the
cash was received or to whom it was paid.
Double entry or commercial accounting system records both aspects of transaction i.e. receipt or
payment and source of receipt or payment. It also records credit transactions i.e. recording of
electricity bill or accruals of salary payment etc.
 Accounting Terminologies

• Transaction
In accounting or business terms, any dealing between two businesses or persons involving money or a
valuable thing is called transaction.
• Voucher/Invoice
• Voucher is documentary evidence in a specific format that records the details of a transaction. It is
accompanied by the evidence of transaction.
• Assets
• Any property or Investment which can be convertible into cash.
• Liabilities
• Amount payable to providers of goods and services (Creditors) and providers of capital (Owners).
 Revenue
Amount earned out of the sale proceeds and the amount earned on investments.
 Expense
Amount incurred or expended to earn the revenue.
Profit = Total revenue – Total expanses
 Loss
If the total expenses is more than total revenue it is termed as loss.
 Sales
Sales can be defined as the economic price paid by customers or the amount received by selling good to
the customers or the goods which are sold for the purpose of profit is called sale.
 Sales Returned
The goods which are returned by the customers due to some defect is called sale returned.
 Account Payable (Creditors)
Person who provide money or goods on credit to the business (Supplier).
 Account Receivable (Debtors)
Goods sold/or money provided on credit by the business (Customers).
 Account
A summarized record of a transaction relating to a person or things is called an account.
 Purchases
Any things which are purchase for resale purpose is called purchase.
 Purchase Returned
The goods which are returned to supplier due to defect is called purchase returned.
 Commission
It is a form of compensation for services which is provided by one person to another. Commission
Received: it is income for business and received when we do some work for others or provide service.
Commission Allowed: it is expense for a business and paid to others when they do some services for us.
 Discount
o Trade Discount: it is a rebate or allowance from the scheduled price granted by the seller to
the buyer. No entry passed in journal the discount (made direct payment to payer e.g. not
written in the bill).
o Cash Discount: it is deduction or allowances allowed by a creditor to a debtor and it
motivates the debtors to pay before the due date.
• Discount receive is income and discount allowed is an expense.
 Depreciation
Depreciation is the diminution (decrease) in the value of assets due to use, wear and tear and efflux of
time. It is an estimate charge against profit for use of fixed assets. The provision for depreciation is to
create funds for replacement of assets. It may either be written off against asset accounts or it may be
Depreciation Provision Account keeping Asset Account at cost.
 Drawing
The cash and goods taken away by the owner from business for his personal use are called drawings.
 Goodwill
This is simply the value attached to the good reputation earned by the business through good and clean
conduct of business over a number of years. This good reputation also has a value and becomes part of
investment in business.
 Reserve
Reserves are amounts that are retained in the business and not distributed to the owners.
 Prepaid Expense
The expense which is paid in advance is called prepaid expense and treated as an asset.
 Unearned income
The income which is received but not earned (no goods or services provided to the customer) is called
unearned income and treated as a liability.
 Merchandise (Goods)
It includes all merchandise commodities which are purchased by the business or selling.
 Inventory (Stock)
Goods and merchandise on hand, that is goods remaining unsold, is called, stock, stock-in-trade, or
inventory.
Comparison of American and British Accounting Terms
 BRITISH ACCOUNTING TERMS AMERICAN ACCOUNTING TERMS

Goods Merchandise

Capital Owner’s Equity

Profit Income

Debtors Account Receivable

Creditors Accounts Payable

Accounting Period Fiscal Period

Accounting Year Fiscal Year

Debit Note Debit Memorandum

Credit Note Credit Memorandum

 BRITISH ACCOUNTING TERMS AMERICAN ACCOUNTING TERMS
On Credit On Account
Opening Stock Opening Inventory (Beginning Inventory)
Closing Stock Closing Inventory (Ending Inventory)
Gross Profit Gross Income/Gross Margin
Profit & Loss Account Income Statement
Income Revenue
Net Profit Net Income
Bills Receivable Notes Receivable
Bills Payable Notes Payable
Bad Debts Uncollectable
Provision for Bad Debts Allowances for Uncollectable
Company Corporation
Shares Stock
Shareholder Stock-holder
Ordinary Share Common Stock
Bonus Shares Stock Dividend
Profit & Loss Appreciation Account Retained Earnings
Cheque Check
 Accounting life cycle

The term accounting cycle refers to the framework and processes followed in each accounting
period. The accounting cycle begins with the identification of events and transactions, and ends
with the after-close trial balance.
The accounting cycle is a conceptual framework that describes the process a company goes
through each accounting period. While the exact number and description of the steps in the cycle
is somewhat subjective, the core processes include:
 Journalisation of Transactions
Identification of events and transactions as they occur and recording them using the proper journal entry.
 Posting to Ledger
Transferring the journal debits and credits to the proper ledger accounts.
 Trial Balance and Adjustments
Includes the preparation of various worksheets to prove debits equal credits, and perform adjusting entries
such as accruals.
 Preparing Financial Statements
Company's balance sheet, income statement, and statement of assembly of accounting information to
construct the owner's equity.
 Closing Accounts
Reducing the balance of temporary accounts to zero in preparation for the journalization of transactions
associated with the next accounting period.
 After-Close Trial Balance
Following the closing of accounts and adjustments, this step proves that debits are still equal to credits.
 Transaction

Financial
Journals
Statements

Trial
Ledger
Balance