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INTRODUCTION TO ACCOUNTING
Father of Accounting- Lucas Pacioli
Accounting is thelanguage of business. It serves the purpose of communicating the results
of business operations to all the interested parties such as propreitors, managers, creditors and
investors.
Definitions of Accounting:
*AICPA defines Accounting as the art of recording, classifying & summarizing in a significant
manner & in terms of money transactions & events which are of a financial character &
interpreting the results thereof.
*American Accounting Association defines accounting as the process of identifying, measuring
and communicating economic information to permit informed judgements and decision by users
of the information.
Attributes & Steps of Accounting
1) Recording: --- Systematic recording of business transactions in chronological order;
--- Every entry to be supported by documentery evidence;
---Recording usually done in JOURNAL or SUBSIDARY BOOKS
(Books of original Entry)
2) Classification: --- process of grouping transactions or entries on a predetermined basis
--- takes the form of Accounts in a separate book called LEDGER.
Eg. Goods sold on Credit- Sales Book
Cash ReceivedCah Book
Goods Returned by Customer-Sales Return Book.
Each Ledger provides the complete picture of the dealings in relation to that particular person,
property or expense or income.
3) Summarising: Classified data in the ledger is presented periodically in a manner which is
understandable & useful to the owners & other interested parties. It takes place in the form Trial
Balance, Trading A/C, P&L A/C & Balance Sheet.
TB: ensures the arithmetical accuracy of the recording & classification process.
Trading A/C: reveals Gross Profit.
P& L A/C: reveals Net Profit.
Balance Sheeet: portrays the financial position of the business.
4) Significant Manner: Every business has its own pecularities, special problems & particular
requirements. The management of the business needs specific types of information for
controlling & decision making purposes.
Accounts (11th)-Introduction to Accounting

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5) In Terms of Money: Money is the medium through which all the business transactions are
expressed. Money Measurement is the basis for Accounting.
6) Transactions & Events of Financial Character: are recorded in Accounts. All the events,
dealings & happenings which have no financial effect are completely ignored in the Accounting
process. Eg. Working conditions, skilled workforce, sales policies etc.
7) Interpreting the Results: usually done through Ratios & Flow Statements. It is useful in
evaluating past performance & providing guidance for future plans & operations.
Objectives:
The main objectives of accounting are
1. To maintain accounting records.
2. To calculate the result of operations.
3. To ascertain the financial position.
4. To communicate the information to users.
5. To provide effective control over the business
6. To prevent fraud.
Advantages of Accounting:
1. Systematic Records
2. Preparation of Financial Statements
3. Assessment of Progress
4. Aid to Decision making
5. Statutory Requirements
6. Information to Interested Groups
7. Evidence in Courts
8. Taxation Problems
9. Merger of Firms
Limitations of Accounting:
1. Ignores transactions which cannot be expressed in terms of money.
2. Relies on estimates & forecasts in several important mattes
3. Relies on Historical records
4. Ignores price level changes
5. Subjective opinions on Valuation of Stocks, Provision on Debtors for doubtful debts &
discounts.
6. Window Dressing or Manipulation of Accounts is possible.
Groups Interested in Accounting Information
Internal users of Accounting Information
1. Owners
2. Management
3. Employees

Accounts (11th)-Introduction to Accounting

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External Users
1. Creditors & Financiers
2. Potential Investors
3. Consumers
4. Tax Autorities
5. Government
6. Research Scholars
BRANCHES OF ACCOUNTING
1. FINANCIAL ACCOUNTING: is A/Cing for revenues, expenses, assets & liabilities
that is commonly carried out in the general office of business. Expressed in P& L A/C &
B/S.
2. COST ACCOUNTING: deals with classification, recording, allocation,
summarisation of current & prospective cost. It determines cost of production &
distribution by departments, functions or product, etc.
3. MANAGEMENT ACCOUNTING: meant exclusively for managerial decision
making. It provides necessary information to the management for dicharging its functions
of planning, organising, co-ordinating, directing & controlling. It provides data on funds
& cash flows, investment projects, prepation & implementation of budgets etc.
METHODS OF ACCOUNTING:
1. SINGLE ENTRY SYSTEM: The term Single Entry is vaguely used to define the
method of maintaining A/Cs which do not confront to strict principles of double entry. It
is not a system. The term Single Entry does not mean that there is only one entry for
each transaction. Only the personal A/Cs of the Drs.& Crs. & Cash book of the traders
are maintained. Impersonal A/Cs such as Sales A/C, Purchases A/C etc. as well as other
Assets A/Cs are ignored. The absence of the 2 fold effect of each transaction makes it
impossible to prepare TB, TA. P&L A/C & B/S. It is followed by those firms whose
transactions are limited & at the same time who maintains only the essential records.
There is no Hard & Fast rule for maintaining records under this system, ie. It depends
on the circumstances & the needs of the firm.
2. DOUBLE ENTRY SYSTEM: was invented by Lucas Pacioli in 1494 AD. Every
transaction has two concepts one is Benefit receiving concept or Incoming aspect &
the other is benefit giving aspect or outgoing concept
BENEFIT RECEIVING CONCEPT--- DEBIT
BENEFIT GIVING CONCEPT
--- CREDIT

Accounts (11th)-Introduction to Accounting

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Eg. Furniture purchased for cash

Furniture = Benefit Received
Cash
= Benefit Giving
Furniture A/C
Dr.
To Cash A/C
For every Debit .there must be a corressponding
& for every Credit there must be a corressponding & equal Debit.

&

equal

Credit

DEBIT- is derived from the Latin word DEBITUM which means Due for That. In short benefit
receiving aspect of a transaction is known as Debit.
CREDIT is derived from the Latin word Creder which means Due to That. Benefit giving
aspect of a transaction is known as Credit.
Advantages of Double Entry System:
1. Complete record, systematic & accurate record of all business transactions.
2. Ascertainment of Profit or Loss.
3. Knowledge of financial position.
4. Check on the accuracy of A/Cs
5. No scope for fraud.
6. For Tax authorities.
7. Easy ascertainment of amount due from customers.
8. Easy ascertainment of amount due to suppliers.
9. Makes comparative study easy.

Book-keeping
Book-keeping is that branch of knowledge which tells us how to keep a record of business
transactions. It is often routine and clerical in nature. It is important to note that only those
transactions related to business which can be expressed in terms of money are recorded. The
activities of book-keeping include recording in the journal, posting to the ledger and balancing of
accounts.
R.N. Carter says, Book-keeping is the science and art of correctly recording in the books of
account all those business transactions that result in the transfer of money or moneys worth.
Objectives
The objectives of book-keeping are
1. To have permanent record of all the business transactions.
2. To keep records of income and expenses in such a way that the net profit or net loss may
be calculated.

Accounts (11th)-Introduction to Accounting

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3. To keep records of assets and liabilities in such a way that the financial position of the

business may be ascertained.

4. To keep control on expenses with a view to minimise the same in order to maximise

profit.
5. To know the names of the customers and the amount due from them.
6. To know the names of suppliers and the amount due to them.
7. To have important information for legal and tax purposes

Advantages of Book-Keeping
i. Permanent and Reliable Record: Book-keeping provides permanent record for all business
transactions, replacing the memory which fails to remember everything.
ii. Arithmetical Accuracy of the Accounts:With the help of book keeping trial balance can be
easily prepared. This is used to check the arithmetical accuracy of accounts.
iii. Net Result of Business Operations: The result (Profit or Loss) of business can be correctly
calculated.
iv. Ascertainment of Financial Position: It is not enough to know the profit or loss; the
proprietor should have a full picture of his financial position in business. Once the full picture
(say for a year) is known, this helps him to plan for the next years business.
v. Ascertainment of the Progress of Business: When a proprietor prepares financial statements
evey year, he will be in a position to compare the statements. This will enable him to ascertain
the growth of his business. Thus book keeping enables a long range planning of business
activities besides satisfying the short term objective of calculation of annual profits or losses.
vi. Calculation of Dues : For certain transactions payments may be made later. Therefore, the
businessman has to know how much he has to pay others.
vii. Control over Assets: In the course of business, the proprietor acquires various assets like
building, machines, furnitures, etc. He has to keep a check over them and find out their values
year after year.

Accountancy, Accounting and Book-keeping:

Accountancy refers to a systematic knowledge of accounting. It explains why to do and how
to do of various aspects of accounting. It tells us why and how to prepare the books of accounts
and how to summarize the accounting information and communicate it to the interested parties.
Accounting refers to the actual process of preparing and presenting the accounts. In other words,
it is the art of putting the academic knowledge of accountancy into practice.
Book-keeping is a part of accounting and is concerned with record keeping or maintenance of
books of accounts. It is often routine and clerical in nature
Accounts (11th)-Introduction to Accounting

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DISTINCTION BETWEEN BOOK-KEEPING AND ACCOUNTING

Basis of
distinction

Book-keeping

Accounting

1. Objective

The objective of Book-keeping is to Accounting aims at maintaining

maintain
records
of
business business records, calculation of
transactions.
business income, depiction of financial
position
of
business
and
communication of business results.

2. Function

The function of Book-keeping is to The function of Accounting is the

record business transactions as and recording, classifying, summarizing,
when they take place.
interpreting business transactions and
communicating the results.

3. Scope

It has a limited scope. It is a part of Its scope is wider. Besides Bookaccounting.

keeping, it includes classification,
summarization, interpretation and
communication.

4. Level of
knowledge

It does not require special knowledge. In accounting advance and conceptual

Only elementary knowledge of understanding is required.
accounting is sufficient.

5. Basic

For recording business transactions, Accounting work is carried on from

vouchers
and
other
supporting records which are available from
documents are prepared.
book-keeping.

Accounts (11th)-Introduction to Accounting