Chapter 1 – Introduction to Accounting

All organization which are driven by    profit motive perform  several transactions  of financial nature such as purchasing of goods, selling of goods, incurring expenses and receiving income etc.

All organization undertake several financial transactions  such as purchase and sale of goods, incurring revenue and capital expenses and receiving revenue and capital receipts.

What is the Meaning of Accounting ?

Accounting is the process of collecting, recording, summarizing and communicating financial information to the users the accounting which may include the owners of the business, creditors, investors, Government, employees, etc.

According to The American Institute of Certified Public Accountants , “Accounting is 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.”




What are the key Characteristics of Accounting ?

  1. Accounting is an art as well as science: There is an art which is involved in the recording, the classification and summarizing of various transactions which involves preparation of various accounts and statements. When performing the recording part of accounting, there are certain basic principles of accounting which are used and therefore accounting is also considered as a science.
  2. Accounting records financial transactions only : In accounting, only those transaction which can be expressed in terms of money , are recorded in the books of accounts. Non monetary transactions, even if they are very important to the organisation like disruption in supply , disputes with employee unions and not recorded in Accounting .
  3. Accounting records transactions by expressing them in money terms
  4. Accounting performs various functions:
    • Identification: Accounting identifies financial transactions which are expressed in terms of money .
    • Recording: Once financial transactions are identified , such transactions are recorded in the books of accounts through journal entries
    • Classifying: Transactions recorded in Journal are classified and recorded to the main books of accounts under individual Ledgers.
    • Summarizing:  It  involves presenting the  data classified above in form of Trading and Profit and loss account, Trial balance and Balance Sheet.
    • Analysis and interpretation: This   stage  involves determination of  profitability and the financial position of the business
    • Communicating: The results are thereafter  communicated to the  users.
  5. Accounting is a service activity: As Accounting  serves the business organization to take relevant decision for future growth and prosperity.




What are the various Branches of Accounting ? 

  • Financial Accounting : Financial accounting is the branch of accounting which records financial transactions and events. It involves all those functions which are performed in simple accounting as in identification, recording, classifying, summarizing, analysis and communicating.
  • Cost Accounting  : Cost accounting is that branch of accounting, which deals with cost of production and various constituents of cost of production. It involves determining unit cost at different levels of production.
  • Management Accounting : Management accounting is concerned with generating accounting information which enables the management in decision making relating to funds, costs, profits, etc.
  • Tax Accounting : Tax accounting is the branch of accounting used for tax purposes . Income tax and Goods and Services tax are computed on the basis of this accounting.
  • Social responsibility Accounting  : In social responsibility accounting techniques have been developed for measuring the cost of these contributions and the benefit to the society

Objectives of Accounting

  1. Maintaining systematic records of transactions ;
  2. Ascertaining profit or loss earned in a business by preparation of trading and profit and loss account
  3. Ascertaining financial position  of an entity through preparation of Balance Sheet
  4. Assisting the management by providing them various financial data at all levels
  5. Communicating information to  internal and external users
  6. Prevention of frauds

Advantages of Accounting

  1. Accounting provides information about the business to its users on a real time basis and at the end of accounting period.
  2. Accounting management by making plans, taking decisions and controlling activities
  3. Accounting helps in  comparing records of one year with the others.
  4. Accounting facilitates  settlement of tax liabilities.
  5. Systematic records of transaction acts as a good evidence by court.

Limitations of Accounting

  1. Accounting  considers only the quantitative aspect of business and   qualitative  aspects are ignored
  2. Accounting is not fully exact.
  3. It ignores the effect of price level changes.
  4. Accounting may lead to manipulation of accounts to show the better financial position.

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