Introduction to accounting

1. INTRODUCTION TO ACCOUNTING

2. ACCOUNTING
• It is a technique of financial reporting of the
economic activities.
• It is a language of the business
• To communicate the matters relating to
business operations
• Communicate to whom?
• To various individuals and institutions who are
directly or indirectly interested in the activities
of business

3. Meaning of Accounting
In simple words, ‘accounting’ merely means
‘recounting’.
The American Institute of Certified Public Accountants
defines accounting as
“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 results thereof”.

4. Features of Accounting
1. Recording : of all cash and credit transaction
Done in journal and other subsidiary books
2. Classifying: grouping of entries of like nature.
All transaction under individual account head is
posted
All transactions from journal and subsidiary books
are posted into a book of final entry called Ledger
3. Summarizing: the balances or totals of all accounts
are shown in a statement called Trial Balance used
to prepare profit and loss a/c and Balance sheet
4. Interpreting: used to make judgment of the
profitability , liquidity and solvency of the business

5. BOOK KEEPING AND ACCOUNTING
• Book keeping is the science and art of correctly
recording in books of accounts all those
business transactions that result in the
transfer of money or money’s worth.
• Summarization analysis and interpretation is
called as accounting

6. SYSTEMS OF BOOK KEEPING
• 1. Single entry system
• 2. Double entry system
• Single entry system:
• Complete record of both aspects is not
recorded but only one aspect is recorded.
• Double entry system:
• It records both the aspects of a transaction

7. SINGLE ENTRY DOUBLE ENTRY
1. Simple and economic
2. Unscientific and unreliable
3. Only on aspect of a
transaction is recorded
4. Arithmetical accuracy
cannot be checked
5. True profit and financial
position cannot be known
6. Involves less clerical work
1. Difficult and costly
2. Scientific and reliable
3. Both aspects of a
transaction are recorded
4. Arithmetical accuracy can
be checked
5. True profit and financial
position can be known
6. Involves more clerical
work

8. Users of Financial Statements

9. BRANCHES OF ACCOUNTING
Accounting
Cost Accounting
To ascertain the
cost and control
cost for planning
and controlling
the operations
Management
Accounting
Accounting data
collected from
financial and cost
accounting is used for
profit maximization
and loss minimization
at different levels of
management
Financial Accounting
To ascertain the profit
or loss during a
period and find the
financial status of
business to give
information on the
activities of business

10. Objectives of the Accountancy
1. It is a means of recording the monetary transactions and events.
2. It required to ascertain the earnings of the company, which is
achieved by preparation of Profit and Loss account.
3. It is required to identify the obligations (liabilities) and resources
(asset) of the organization.
4. Accounting records are required to be maintained statutorily by
certain government and regulatory bodies.
5. Accounting records are also required by the management for
taking the financial decisions.
6. Generally, investors and certain lenders also require the
preparation of financial statements.

11. LIMITATIONS OF ACCOUNTING
1. Only transactions measurable in monetary
terms are recorded
2. Accounting transactions are recorded at cost
hence does not account for changes in prices
3. Chances of manipulation are higher
4. It is historical in nature

12. TERMS IN ACCOUNTING
1. Transaction: activity which involves transfer of
money or money’s worth
2. Debtor: person who owes money to the
business
3. Debt : amount due from a person or business
4. Creditor: Person to whom money is payable
5. Capital: amount invested by the owner in the
business
6. Assets: properties or the rights owned by
business.It can be current or fixed , tangible or
intangible or fictitious

13. 7.Stock: unsold goods at a given period . Opening
stock is unsold goods at the beginning of a
period and closing stock is at the end.
8. Equities: Claim against the assets of the firm .
Liability is an amount which a business is liable
to pay for some benefit.
9. Expense: An amount incurred in return for
some benefit of revenue nature. Expenditure is
an amount to acquire an asset.
10.Loss:Amount lost without any benefit.

14. • 11.Income: it is a source of revenue due to its
operations which increases owner’s equity
• 12. Drawing: It is the amount or goods
withdrawn by proprietor for personal use
• 13.Purchases and sales
• 14.Account: Summary of various business
transactions relating to a particular person

15. ACCOUNTING EQUATION
Total Liabilities = Total Assets
(or)
Owners’ Equity + Outside Liability = Assets

16. • All the business transactions have twofold effect.
Recording of both aspects of a transaction is called
Double Entry system of bookkeeping.
• Under the duality concept, that sources of funds
must always equal to uses of funds and from this
equality was derived.

17. Symbols and Sources and Uses
• The accepted symbol for sources is Cr. and that for uses is
Dr.
• The symbol Cr. is commonly pronounced as ‘CREDIT’ and
the symbol Dr. as ‘DEBIT’.
• Increase in liabilities, revenues or profits being sources of
funds are all called ‘Cr’ items.
• Similarly, increase in assets, expenses and losses being uses
of funds are all called ‘Dr’ items.

18. Increase Decrease
Liability, Revenue and Profit CR = Source DR = Use
Asset, Expense and Loss DR = Use CR = Source
Symbols and Sources and UsesSymbols and Sources and Uses

19. Nature of Debit and Credit
Inflow ofInflow of
ResourcesResources

21. Rules of Debit and Credit
Rules of Debit and Credit
Personal
Accounts
Nominal
Accounts
The
Receiver
All
expenses
and losses
The Giver All incomes
and gains
Real Accounts
What
Comes in
What goes
out
Debit
Credit