MEANING OF ACCOUNTING

accounting is mainly concerned with recording of

financial transaction , summarizing them and
communicating the users.

Since accounting is a medium of communication , it is

called language of business.
Accounting could be defined as the art of recording,
summarizing, reporting, and examining financial
transactions. Accountancy typically generates financial
statements which demonstrate in money terms the
economic resources within the control of management;
selecting information which is related and representing
it faithfully.
1. Recording: Recording is the process of entering the
transactions and events in the books of original entry
in chronological manner.
2. Classifying: It means posting of entries in the
ledger to ensure that transactions of comparable naure
are collected at one place.
3. Summarizing: It is involved with the preparation of
financial statements for example income statement,
balance sheet and cash flow statement.
4. Interpreting: Interpreting is the final phase of the
accounting process. The accountants need to interpret
the financial statements in a manner that they are
helpful to the users of the accounting information. The
accounting information system needs to be developed in
such a manner that the right information is
communicated to the right person at the correct time.
❑Accounting is the process of recording financial
transaction pertaining to the business.
❑The accounting process includes

❑Summarizing, analyzing , and reporting these

transactions to oversight t agencies, regulators, and
tax collection entities.
❑The financial statements used in accounting are a
concise summary of financial transactions over an
accounting period, summarizing a company's operations,
financial position, and cash flows.
❑“It is a systematic process of identifying,
recording, measuring, classifying, verifying,
summarizing, interpreting and communicating
financial information.”

❑Accounting Principles Board, “Accounting is a

service activity. Its function is to provide
quantitative information, primarily financial in
nature, about economic activities that is
useful in making economic decisions, in making
reasoned choices among alternative course of
actions.”
Nature and Scope of Financial Accounting: The nature
and scope .of accounting is described in
the traditional definition of amounting given 1961 by
the AICPA as Accounting is the art of recording,
classifying and sum marising significant manner and in
terms of money transactions and event with are part
at least, of a financial and interpreting the result
thereof.
Identifying the Transaction and
Events: Accounting identifies transaction and event,
which can be expressed ion term of money and bring
change in the financial position of a business unit. An
event (whether internal or external ) is a happening of
a consequence to an entity (e.g, use of raw material
for production ) An entity means an economic unit that
performs economic activities.
Measuring the identified Transaction and
Events: Accounting measures the transaction and
events in term of money.
Recording: It is the process of entering the
transaction and events in the books of original entry
in the chronological manner e.g., date wise.
Classifying: It is the process of posting of entries in
the ledger so that transaction of similar type are
accumulated at one place.
Summarizing: It is concerned with the preparation
of Financial Statement such as Income Statement,
Balance Sheet and Cash Flow Statement.
Analyzing: It is concerned with the establishment of
relationship between the various item or group of items
taken from Income statement or Balance Sheet or both. Its
purpose is to identify the financial strengths and weakness
of the enterprise. It provides the basis for interpretation.
Interpreting: Interpreting is the last stage of accounting
process. It is concerned with explaining the meaning and
significance of the relationship established by the analysis.
In fact, interpretation is the main function of accountant in
the present condition since the routine work of recording,
classifying and summarizing business transaction business
transaction can be easily handled by the electronic devices
like computers.
Communicating: It is concerned with the transmission of
summarized, analyzed and interpreted information to the
user to enable them to make reasoned decisions.
Meaning of accounting and accountancy

The terms ‘Accounting’ and ‘Accountancy’ are commonly

used with the same meaning today. However, they are
not the same.
According to Alexander & Co, a Manchester-based firm
of chartered accountants that specialises in
entrepreneurs:
“Accountancy is the whole field. It includes accounting,
bookkeeping, and auditing. Accounting is one of the
three principles of accountancy, together with auditing
and bookkeeping.”
 MEANING OF BOOK KEEPING
Bookkeeping is the recording, on a day-to-day basis, of
the financial transactions and information pertaining to a
business. It ensures that records of the individual
financial transactions are correct, up-to-date and
comprehensive. Accuracy is therefore vital to the
process.
Bookkeeping provides the information from which accounts
are prepared. It’s a distinct process, that occurs within
the broader scope of accounting.
Each transaction, whether it pertains to a purchase or a
sale, must be recorded. There are usually set structures
in place for bookkeeping that are called ‘quality controls’,
which help ensure timely and accurate records.
OBJECTIVES OF ACCOUNTING
❑Written evidence of all business transaction.
❑Knowledge about financial position and condition of
business.
❑Knowledge about profit and loss reasons.

❑Prediction of right taxation .

❑Knowledge about business goods.

❑Knowledge about assets and liabilities .

❑Correct knowledge about business capital.

❑For knowing errors occurs in business.

❑It helpful for planning and decision making .

1. Identification and recording of transactions
2. Ascertainment(find something) of results
3. Ascertainment of financial affairs
4. Keeping accounts of cash
5. Control over assets and liabilities
6. Controlling money defalcation and cost
7. Providing economic data
8. Helping tax fixation
9. Determination and evaluation of policy
10. Testing the arithmetical accuracy of accounts
11. Acceptability to others
12. Creation of values and accountability
13. Following legal bindings and prohibition
 KEY POINTS OF ACCOUNTING
❑Regardless of the size of a business, accounting is a necessary
function for decision making, cost planning, and measurement of
economic performance measurement.

❑A bookkeeper can handle basic accounting needs, but a Certified

Public Accountant (CPA) should be utilized for larger or more
advanced accounting tasks.

❑Two important types of accounting for businesses are managerial

accounting and cost accounting. Managerial accounting helps
management teams make business decisions, while cost accounting
helps business owners decide how much a product should cost.

❑Professional accountants follow a set of standards known as the

Generally Accepted Accounting Principles (GAAP) when preparing
financial statements.
DIFFERENCE BETWEEN ACCOUNTING AND
ACCOUNTANCY

Accounting refers to the mechanism of maintaining and

keeping the records of the transactions and events and
also its analysis and interpretation. It also includes the
preparation of final accounts i.e. Trading and Profit and
Loss Account and Balance Sheet at the end of the
financial year. It is associated with communicating the
interpreted results of the financial information to its
users.
Accountancy refers to systematic knowledge of
accounting concerned with the principles and techniques
which are applied in accounting. It tells us how to
prepare the books of accounts, how to summarize the
accounting information and how to communicate it to the
interested users.
 HOW ACCOUNTING WORKS

❑Accounting is one of the key functions of almost any

business.
❑ It may be handled by a bookkeeper or an accountant at
a small firm, or by sizable finance departments with
dozens of employees at larger companies.
❑ The reports generated by various streams of accounting,
such as cost accounting and managerial accounting, are
invaluable in helping management make informed business
decisions.
❑The financial statements that summarize a large
company's operations, financial position, and cash flows
over a particular period are concise and consolidated
reports based on thousands of individual financial
transactions.
TYPES OF ACCOUNTING
➢Financial accounting.
➢Cost accounting.

➢Management accounting.

➢Tax accounting.

➢Quantitative accounting.

➢Inflation accounting.

➢Government accounting.

➢Legal accounting .

➢National accounting.

➢Human resources accounting.

What is Financial Accounting?

❑The term financial accounting relates mainly to the

preparation of financial statements
for external presentation to third parties such as
investors, lenders, suppliers, and tax authorities.
❑The prime purpose of financial accounting is to
report the results of the business for the accounting
period.
❑ Financial accounts are useful to management but do
not provided the detailed accounting information
required to allow management to plan and control
their business
What is Management Accounting?
❑The term management accounting or managerial
accounting relates mainly to the preparation of
financial statements and other accounting information
for internal use by the management of the business.
❑Management are normally involved in planning,
controlling and budgeting for the future of the
business, and therefore require more detailed
financial information than that provided in published
financial statements available to the general public.
❑As the accounting information is normally for
use inside the business, the presentation does not
have to comply with accounting standards, and can
therefore be in a format most suitable for allowing
management to control, operate, and make decisions
about their business.
❑Management accounting includes cost
accounting which is the application of costing
principles, methods and techniques to cost control for
the purposes of managerial decision making.
 COST ACCOUNTING

Cost accounting is the reporting and analysis of a

company's cost structure. Cost accounting is a process
of assigning costs to cost objects that typically
include a company's products, services, and any other
activities that involve the company.
Cost accounting is helpful because it can identify
where a company is spending its money, how much it
earns, and where money is being lost. Cost accounting
aims to report, analyze, and lead to the improvement
of internal cost controls and efficiency. In short, cost
accounting is a system of operational analysis for
management.
 FUNCTION OF ACCOUNTING

Accounting is concerned with identifying, recording,

and communicating financial information. Functions
of Accounting may be classified into two distinct
groups, such as:-
➢Historical Functions and

➢Managerial Function
Historical functions;
accounting
The historical function includes recording, classifying,
summarizing, analyzing, and interpreting past business
transactions. For an accounting period of an
enterprise. These are discussed below:

➢Recording

➢Classifying

➢Summarizing

➢Interpreting
 MANAGERIAL ACCOUNTING

➢Managerial functions of accounting

➢The managerial function of accounting is
concerned with accounting information, which is
useful to management in performing its functions
effectively. Planning, organizing, and directing, and
controlling are the main functions of management.
➢Nowadays accountants help management in the
performance of those functions by providing
different financial data through various internal
reports.
PRINCIPLES ,AND CONCEPTS ,
ASSUMPTIONS AND
CONVENTIONS OF
ACCOUNTANCY
PROBLEMS-THINKING-THEORY-
PRINCIPLE
➢Accounting Principles are the rules and
benchmarks in the accounting field, a company
should follow while reporting the financial
statements.
➢The common set of accounting standards as
per the U.S.A. is GAAP (Generally Accepted
Accounting Principles).
➢However, these accounting Principles may vary
from one country to another, but the principles
are more or less of the same type and fashion.
➢These standards are framed so that they can
easily be understandable and universally
acceptable all over the world
THERE ARE PRINCIPLE OF
ACCOUNTING
❖Economic Entity Assumption
❖Revenue Recognition
❖Conservatism
❖Consistency
❖Historical Cost
❖Full Disclosure
❖Going Concern
❖Matching Concept
❖Materiality
❖Monetary Unit
❖Reliability
❖Revenue Recognition
❖Time Period
Conditions of accounting principles

Accounting principles, as a body of doctrines commonly

associated with the theory and procedures of
accounting, justify the current practice and financial
reporting. You or your accountant may choose a method
to account and prepare the financial statement while
another accountant chooses a different method. Both
can be said to be correct only if the accounting
principles applied are acceptable and to be acceptable,
it should satisfy the following conditions:
❑Accounting principles should be based on realistic
assumptions.
❑Accounting principles must be simple, understandable
and explanatory.
❑Accounting principles should be followed consistently
❑Accounting principles should be able to reflect future
predictions
❑Accounting principles should be informative for the
users.
Money measurement principle : In accounting, all
the business transactions are measured in terms of money
as a common unit of measurement. Since money is the
common unit of measurement, as an accounting principle,
you are allowed to record only those transactions or events
which can be measured or expressed in terms of money.

Business entity concept: This concept of accounting

principle views business and business owner separately as
far as their financial transactions are concerned. Legally,
your business can exist independently of you and your firm
can sue or can be sued in its own name.
Going-concern principle: This principle applies that all
the transactions are recorded on the assumption that
the business will remain in operation for a long time and
will be able to carry out its obligations as per the plan.

Cost principle: This accounting principle sets the rules

for accounting the fixed assets. According to the cost
principle, all the fixed assets are accounted at the
original price i.e. the price paid to procure it and
subsequently, every year, value is depreciated based on
usage, wear and tear, accidents, the passage of time
etc.
Dual-aspect concept: This accounting principle
states that for every debit, corresponding
credit is made. This is the foundation on which
the accounting system is carried out. This is
important for you to understand in detail. Read
our article ‘Accounting – The Language of
Business’ to know more about it

Accounting year concept: This implies that

each business chooses a specific time period to
complete the accounting cycle and financial
reporting. In short, this principle talks about
the periodicity of accounting. The period can be
monthly, quarterly or annually.
Matching concept: The concept stress on the
Accounting principle that if any revenue is recognized
then expenses related to earn that revenue should also
be recognized. This gives a true picture of profit
earned during the accounting period.
Realization concept: The accounting concept implies
that revenue is reported when it’s earned, regardless
of when payment is received. Anything paid or received
is not considered as profit until the goods or services
have been delivered to the buyer
Accounting conventions

After accounting concepts, the next important

part of accounting principles is accounting
conventions. Accounting conventions refers to a
set of customs and traditions that guide the
business in preparing the accounting statement.
These conventions are derived by usage and
practice. The following are the 4 accounting
conventions:
❑Consistency: consistency is a fundamental assumption
that states accounting practices and policies are
consistent from one period to another.
❑Full disclosure: This convention as part of accounting
principles implies that the accounts should be prepared
in a manner that all material information is clearly
disclosed.
❑Conservatism: This convention takes into consideration
all prospective losses and leaves all prospective profit
until they are earned.
❑Materiality: In the materiality principle, all the items
having a significant economic effect on the business
should be disclosed in the financial statement. All
unimportant items are either ignored or merged with
other items.
INDIAN ACCOUNTING STANDARDS

Accounting standards imply a standardized set of

principles, procedures and conventions that define the
basis of financial accounting policies and practices.

Accounting standards increases the quality of financial

reporting around the world.

Without standards, users of financial statements would

need to learn the accounting rules of each company,
and comparisons between companies across based in
different countries would be difficult.
Accounting standards in use today are referred to
as Generally Accepted Accounting Principles (GAAP).
These principles have been set by regulatory bodies
and global accountancy has accepted them as
appropriate.

International companies follow the International

Financial Reporting Standards (IFRS), which are set by
the International Accounting Standards Board (IASB)
and serve as the guideline for non-U.S. GAAP
companies reporting financial statements.

Similarly, India has formulated her own set of

Accounting Standards in line with her own Accounting
and economic scenario
INDIAN ACCOUNTING
IND AS 2 – Inventories
IND AS 7 – Statement of Cash Flows
IND AS 8 – Accounting Policies, Changes in Accounting Estimates
and Errors
IND AS 10 – Events after the reporting period
IND AS 11 – Construction contracts
IND AS 12 – Income Tax
IND AS 16 – Property, plant and equipment
IND AS 17 – Lease
IND AS 18 – Revenue
IND AS 19 – Employee Benefits
IND AS 20 – Accounting for Government Grants and Disclosure
of Government assistance
IND AS 21 – Effect of change in foreign exchange rates
IND AS 23 – Borrowing costs
IND AS 24 – Related parties disclosure
IND AS 27 – Separate financial statements
IND AS 28 – Investment in joint venture and associates
IND AS 29 – Financial reporting in hyperinflationary economies
IND AS 32 – Financial instruments presentation
IND AS 33 – Earning Per Share
IND AS 34 – Interim Financial Reporting
IND AS 36 – Impairment of Assets
IND AS 37 – Provisions, contingent liabilities and assets
IND AS 38 – Intangible asset
IND AS 40 – Investment Property
IND AS 41 – Agriculture
IND AS 101 – First-time adoption of IND AS
IND AS 102 – Share-based payment
IND AS 103 – Business combination
IND AS 104 – Insurance contract
IND AS 105 – Non-current assets held for sale and
discontinued operations
IND AS 106 – Exploration and evaluation of mineral
resources
IND AS 107 – Financial instruments disclosure
IND AS 108 – Operating segments
IND AS 109 – Financial instruments
IND AS 110 – Consolidated financial statements
IND AS 111 – Joint agreement
IND AS 112 – Disclosure of interests in other entities
IND AS 113 – Fair value measurement
IND AS 114 – Regulatory Deferral Accounts
IND AS 115 – Revenue from Contracts with Customers
CHARACTERISTICS OF ACCOUNTING
STANDARDS
There is general agreement that, before it can be
regarded as useful in satisfying the needs of various user
groups, accounting information should satisfy the following
criteria:
Understandability

This implies the expression, with clarity, of accounting

information in such a way that it will be understandable to
users - who are generally assumed to have a reasonable
knowledge of business and economic activities
Relevance
This implies that, to be useful, accounting information must
assist a user to form, confirm or maybe revise a view -
usually in the context of making a decision (e.g. should I
invest, should I lend money to this business? Should I work
for this business?)
Consistency
This implies consistent treatment of similar items and application
of accounting policies

Comparability
This implies the ability for users to be able to compare similar
companies in the same industry group and to make comparisons of
performance over time. Much of the work that goes into setting
accounting standards is based around the need for comparability.
Reliability
This implies that the accounting information that is presented is
truthful, accurate, complete (nothing significant missed out) and
capable of being verified (e.g. by a potential investor).
Objectivity
This implies that accounting information is prepared and reported
in a "neutral" way. In other words, it is not biased towards a
particular user group or vested interest