Accounting chapter-1

This presentation is
owned by
ABUL KALAM AZAD
PATWARY
“for class 9-
10[accounting]”

Chapter 1 : Introduction to Accounting.

Meaning of Accounting:
Accounting, as an information system is the process
of identifying, measuring
and communicating the economic information of an
organization to its users who need
the information for decision making. It identifies
transactions and events of a specific
entity. A transaction is an exchange in which each
participant receives or sacrifices
value (e.g. purchase of raw material). An event
(whether internal or external) is a
happening of consequence to an entity (e.g. use of
raw material for production). An
entity means an economic unit that performs
economic activities.

Accounting is a subject by studying which the various financial activities
of a person or organization which can be correctly recorded in the
books of accounts and their actual results can be determined after a
certain period.
Definition of Accounting
American Institute of Certified Public Accountants (AICPA) which 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”.

Objective of Accounting:
i) To keeping systematic record: It is very difficult to remember all the
business transactions that take place. Accounting serves this purpose of
record
keeping by promptly recording all the business transactions in the books
of account.
ii) To ascertain the results of the operation: Accounting helps in
ascertaining result i.e., profit earned or loss suffered in business during a
particular
period. For this purpose, a business entity prepares either a Trading and
Profit and
Loss account or an Income and Expenditure account which shows the
profit or loss of
the business by matching the items of revenue and expenditure of the
some period.

iii) To ascertain the financial position of the business: In addition to
profit,
a businessman must know his financial position i.e., availability of
cash, position of
assets and liabilities etc. This helps the businessman to know his
financial strength.
Financial statements are barometers of health of a business entity.
iv) To portray the liquidity position: Financial reporting should
provide
information about how an enterprise obtains and spends cash, about
its borrowing and
repayment of borrowing, about its capital transactions, cash
dividends and other
distributions of resources by the enterprise to owners and about
other factors that may
affect an enterprise’s liquidity and solvency.
v) To protect business properties: Accounting provides upto date
information about the various assets that the firm possesses and the
liabilities the firm
owes, so that nobody can claim a payment which is not due to him.

IMPORTANCE OF ACCOUNTING :
IN CASE OF TRADE :
1) Finding out profit and loss.
2) Exhibiting financial condition
3) Comparative analysis (present and past)
4) Cost control
5) Finding out tax
6) Vat fixation
7) Prevention of fraud and forgery
8) Decision making
9) Control over cost
10) Advantages in taking loan
11) Efficient management

IN OTHER FIELDS:
i) Owners: The owners provide funds or capital for the organization.
They
possess curiosity in knowing whether the business is being conducted
on sound lines
or not and whether the capital is being employed properly or not.
Owners, being
businessmen, always keep an eye on the returns from the investment.
Comparing the
accounts of various years helps in getting good pieces of information.
ii) Management: The management of the business is greatly interested
in
knowing the position of the firm. The accounts are the basis, the
management can
study the merits and demerits of the business activity. Thus, the
management is
interested in financial accounting to find whether the business carried
on is profitable
or not. The financial accounting is the “eyes and ears of management
and facilitates
in drawing future course of action, further expansion etc.”

iii) Creditors: Creditors are the persons who supply goods on credit, or
bankers or lenders of money. It is usual that these groups are interested to
know the
financial soundness before granting credit. The progress and prosperity of the
firm,
two which credits are extended, are largely watched by creditors from the
point of
view of security and further credit. Profit and Loss Account and Balance Sheet
are
nerve centres to know the soundness of the firm.
iv) Employees: Payment of bonus depends upon the size of profit earned by
the firm. The more important point is that the workers expect regular income
for the
bread. The demand for wage rise, bonus, better working conditions etc.
depend upon
the profitability of the firm and in turn depends upon financial position. For
these
reasons, this group is interested in accounting.
v) Investors: The prospective investors, who want to invest their money in a
firm, of course wish to see the progress and prosperity of the firm, before
investing
their amount, by going through the financial statements of the firm. This is to
safeguard the investment. For this, this group is eager to go through the
accounting

vi) Government: Government keeps a close watch on the firms which yield
good amount of profits. The state and central Governments are interested
in the
financial statements to know the earnings for the purpose of taxation. To
compile
national accounting is essential.
vii) Consumers: These groups are interested in getting the goods at
reduced price. Therefore, they wish to know the establishment of a proper
accounting control,which in turn will reduce production cost.in turn less
price to be paid by consumers.
viii) Research Scholars: Accounting information, being a mirror of the
financial performance of a business organization, is of immense value
to the research scholar who wants to make a study into the financial
operations of a particular firm. To make a study into the financial
operations of a particular firm, the research scholar needs detailed
accounting information relating to purchases, sales, expenses, cost of
materials used, current assets, current liabilities, fixed assets, long-
term liabilities and share-holders funds which is available in the
accounting record maintained by the firm.

Five essential Functions of Accounting :
Recording:
This is the basic function of accounting. It is essentially concerned with not
only ensuring that all business transactions of financial character are in
fact recorded but also that they are recorded in an orderly manner.
Recording is done in the book "Journal".
Classifying:
Classification is concerned with the systematic analysis of the recorded
data, with a view to group transactions or entries of one nature at one
place. The work of classification is done in the book termed as "Ledger".
Summarizing:
This involves presenting the classified data in a manner which is
understandable and useful to the internal as well as external end-users of
accounting statements. This process leads to the preparation of the
following statements: (1) Trial Balance, (2) Income statement (3) Balance
sheet.
Analysis and Interprets:
This is the final function of accounting. The recorded financial data is
analyzed and interpreted in a manner that the end-users can make a
meaningful judgment about the financial condition and profitability of the
business operations. The data is also used for preparing the future plan
and framing of policies for executing such plans.

Communicate:
The accounting information after being meaningfully analyzed and interpreted
has to be communicated in a proper form and manner to the proper person.
This is done through preparation and distribution of accounting reports, which
include besides the usual income statement and the balance sheet, additional
information in the form of accounting ratios, graphs, diagrams, funds flow
statements etc.

Financial Accounting:
The main object of Financial Accounting is to find out the profitability
and to provide information about financial position of the concern. It
presents a general idea of the working of the business and permits
management to control in general way the major functions of a
business, viz. finance, administration, production and distribution.
Cost Accounting:
The main objects of Cost Accounting is to find out the cost of goods
produced or services rendered by business. It also helps the
management to detect and control all leakages, defective works, and
wastage in tools and stores.
Management Accounting:
The primary objective of Management Accounting is to supply relevant
information at appropriate time to the management to enable it to take
the decisions and effect control.
BRANCHES OF ACCOUNTING:

USERS OF ACCOUNTING INFORMATION:

There are two broad categories of interested parties,
or accounting information users:
external users
internal users
Types of external users include: External users are parties outside
the reporting entity or company who are interested in the
accounting information.
Investors (i.e., owners), who use accounting information to make
buy, sell or keep decisions related to shares, bonds, etc.
Creditors (i.e., suppliers, banks), who utilize accounting
information to make lending decisions.
Taxing authorities (i.e., Internal Revenue Service), who need
accounting information to determine a company's tax liabilities.
Customers, who may need accounting information to decide which
products to buy from which companies.

Internal users are parties inside the reporting entity or company who are
interested in accounting information.
Types of internal users include:
A company's senior and middle management, who use accounting
information to run the business.
Employees who use accounting information to determine a company's
profitability and profit sharing.

Advantages of Accounting
i) It helps in having complete record of business transactions.
ii) It gives information about the profit or loss made by the business at the
close of a year and its financial conditions. The basic function of
accounting is to supply meaningful information about the financial
activities of the business to the owners and the managers.
iii) It provides useful information form making economic decisions,
iv) It facilitates comparative study of current year’s profit, sales, expenses
etc., with those of the previous years.
v) It supplies information useful in judging the management’s ability to
utilise enterprise resources effectively in achieving primary enterprise
goals.
vi) It provides users with factual and interpretive information about
transactions and other events which are useful for predicting, comparing
and evaluation the enterprise’s earning power.
vii) It helps in complying with certain legal formalities like filing of income
tax
and sales-tax returns. If the accounts are properly maintained, the
assessment of taxes is greatly facilitated.

Limitations of Accounting
i) Accounting is historical in nature: It does not reflect the current
financial
position or worth of a business.
ii) Transactions of non-monetary mature do not find place in
accounting.
Accounting is limited to monetary transactions only. It excludes
qualitative elements like management, reputation, employee morale,
labour strike etc.
iii) Facts recorded in financial statements are greatly influenced by
accounting conventions and personal judgements of the Accountant or
Management. Valuation of inventory, provision for doubtful debts and
assumption about useful life of an asset may, therefore, differ from
one
business house to another.
iv) Accounting principles are not static or unchanging-alternative
accounting procedures are often equally acceptable. Therefore,
accounting statements do not always present comparable data
v) Cost concept is found in accounting. Price changes are not
considered.
Money value is bound to change often from time to time. This is a
strong limitation of accounting.

ROLE of Accounting in our everyday life :
Accounting is used in many activities :
a) Paying off various bills
b) Managing the wages of staffs in the organization.
c) Paying taxes
d) keep track of daily expenses.
FOR PAYING BILLS
a) Paying bill is a sort of hectic task for many individuals.
b) In home it is though, okay but for payment of bills in an
organization , they need to adapt to an accounting process.
c) In big organization, the billing part is a huge thing.
d) They have to pay the various bills such as electronic bills,
phone bills, internet bills, rent and many more.
e) To main the billing section,the accounts team maintain a
journal with proper reminders that help them in paying the
bills on exact time.

MANAGING WAGES:
a) Usually there are multiple section to ones wages.
b) So accounting would help to make sense of wages.
PAYING TAXES:
a) Tax payment is one of the most hectic and disturbing process for
a general person.
b) Though paying of the income tax,is one of the duties of the
citizen, but due to its difficult understanding people are not
comfortable with it.
c) Now accounting can really help here.
d) People can maintain their earnings , savings, tax paid and tax
returns in the journal form that they can review time to time and
then can pay tax properly.

KEEPING TRACK OF EXPENSES:
a) The very important and noteworthy tasks that accounting do is to
keep the track of the expenses.
b) Accounting can be helpful in maintaining the savings done by the
individual, expenses done till date and also the expenses that has to
be done by the person.
c) This helps the individual in having proper savings and
also reducing the worthless expenses by keeping track of
the expenses done and to be done by the individual.

ROLE OF ACCOUNTING IN CREATING VALUES:
a) Religious bindings : Keeping accounts of financial transactions and a
proper use of god gifted resources are the religious bindings of a man.
Accounting inspires a man to carry out such duties presenting clear
methods and techniques of maintaining accounts.
b) Economy and saving tendency : Economy and saving tendency brings
financial solvency among people . Profit means excess revenues over
expenditures. Saving is made out of earned profit for future.
Accounting practices creates accounts consciousness among people
which help them develop the habit of savings and economy.
c) Self confidence and self reliance : Self confidence and self reliance are
the two great qualities of a man. They play a positive role in achieving
his ultimate success. Practices of accounting methods and techniques
creates accounts consciousness among people. It helps people to be
self confident and self reliant.
d) Carefulness in paying loan: Loan default ; failure of repayment after
taking loan is a social crime. Accounting helps to study debt repayment
capability of the borrower by providing necessary data and information.

e) Discouraging fraud and forgery : Through accounting, corrupt
people are identified easily. So, people concerned become aware
of funds misappropriation , irregularity , misuse and
expenditure beyond budget which indirectly helps creating
values.
f) Responsibly towards society and state: The main sources of
income of govt. are VAT, customs, excise and income tax etc. By
utilizing the concept of
accounting, accounts are recorded properly hence, the dodging
of tax pay
tendency reduces.

ROLE OF ACCOUNTING IN CREATING PROCESS FOR
ACCOUNTABILITY :
a) Accountability for expenditure
b) Accountability in success and failure of activities
c) Accountability of higher authority to lower authority
d) Accountability of lower authority to higher authority.
e) Accountability towards lender and investors.
f) Accountability of government towards public.

The History of Accounting
14th Century
The history of accounting dates back to ancient civilizations, however the
birth of double-entry bookkeeping in the 14th century is seen as being the
beginning of the modern accounting period. The Renaissance period in Italy
(14th to 16th century) saw many major developments in accounting practice.
At this time, Arabic numerals were first used to keep records of business
transactions in place of Roman numerals, and record keeping developed on a
large scale. In 1494 Luca Pacioli, a Franciscan friar, published the Summa de
Artihmetica, Geometria, Proportioni et Proportionalita. In it were 36 chapters
on bookkeeping in which Pacioli described double-entry bookkeeping and
other commerce-related concepts. Double entry bookkeeping is a system in
which a debit and credit entry is entered for each transaction : “Every debit
has its credit – every amount that is charged to on account must be placed to
the credit of another”. Although Pacioli did not invent double-entry
bookkeeping, he is credited with being the first person to widely disseminate
this knowledge, and the principles published in his Summa remain largely
unchanged to this day. Developments that came later included the splitting
of records into different books “suited to the nature of the business carried
on, each [book] containing such transactions as exclusively apply to its title”,
for example cash books for recording money received and paid, and invoice
books for recording goods purchased and sold. Variations in bookkeeping
also developed between different industries & professions (e.g. Shipping,
newspapers and printing).

17th Century
Colonial expansion in the 17th century and demand for foreign goods saw
the rise of ‘chartered companies’, the first corporations. The scale of these
endeavors required large investment, the reward for investors being that
assets were divided between stock holders at the end of each voyage.
However this was not always possible, with permanently invested capital
required to support future voyages. Bookkeeping had to develop to keep
track of the assets and profits of many distinct trading ventures at different
stages of completion.
In 1657, the company ruled that stock was to be valued, and four years
later the governor of the company stated that “future distributions would
consist of the profits earned (dividends) and not “divisions” as in the past”.
This was a big progression towards the modern conditions under which
corporations operate and was the first large-scale example of stock
exchange, investment and corporate finance. These accounting practices
continued to develop through the next centuries. Many guides for investors
and accountants were written during this development period. Examples
include Stock Exchange Accounts; with an appendix of forms which details
stock exchange bookkeeping, Haight and Freese Co’s Guide to
Investors which lists the stock prices for various companies between 1890-
1900 and A Corporate Venture which states that “unless the stockholder in
a corporation knows the ropes they may be pulled to his disadvantage”.
The Phonopore Company Limited certificate is an example of a shares
certificate from 1893 indicating that William Robert Pullman Esquire was the
holder of 120 shares in the Phonopore Company, valued at £1 each.

18th Century
During the Industrial Revolution, methods were required which could be used
to track costs related to large scale production in factory-manufacturing
operations. Josiah Wedgwood, the founder of famous pottery manufacturer
Wedgwood is considered by many to be a pioneer in cost accountancy. After
examining business accounts, Josiah Wedgwood discovered that his head
clerk had been embezzling from the company and so after hiring a new clerk
he implemented weekly account reviews to keep track of his finances. These
reviews allowed him to calculate detailed costs for materials and labour,
leading to the discovery of overhead costs and economies of scale.

19th Century
The early evolution of accounting was dominated by advances in
bookkeeping practice. There are numerous books chronicling this
progression. The century following the industrial revolution saw great
progress from the “method of systematically recording [financial] exchanges
into a means of giving business management an effective control over its
affairs”.
1816 - John Croaker, a bank clerk from England, was caught and
charged with embezzling from the bank and was sent to the colony
of New South Wales. Upon arrival he was granted an immediate ticket
of leave and began working as a clerk in the justiciary and set
himself up as a commodities dealer. At this time, the first Bank of
New South Wales opened, and John Croaker helped to establish their
bookkeeping practices, instigating double-entry bookkeeping for the
first time in Australia.
1854 - On the 6th of July 1854, a petition was signed by forty-nine
accountants in Glasgow asking Queen Victoria for the grant of a Royal
Charter. Thus the formal accounting profession emerged in Scotland with
the formation of Edinburgh Society and Glasgow Institute of Accountants.
The title ‘Chartered Accountant’ was decided upon and adopted for
members of the Society, and was soon adopted by the Glasgow Institute
and the later formed Aberdeen Society. However the Institute of Chartered
Accountants of Scotland was not formed until the three societies merged
in 1951.

1880 - In 1880, the Institute of Chartered Accountants in England and Wales
was formed, bringing together members from a number of individual
accounting organisations. The newly formed institute developed standards of
conduct and examinations for admission.
Books such as Book-keeping exercise for accountant students, The student’s
business methods and commercial correspondence and Australian
elementary bookkeeping represent examples of the shift towards
professional education and accreditation in the accountancy
profession.Double Entry Bookkeeping for technical classes and schools gives
examples of civil service examination papers for accountants from this
period.
1887 - During the rapid growth of American industry in the 1800s, many
Scottish and British accountants travelled to the United States to audit and
keep track of British investments in the country. A number of these
professionals remained in the US and are thought to have begun the practice
of accountancy in America. In 1887 the American Association of Public
Accountants was formed.

20th Century
On the 19th of June 1928, a Royal Charter was granted by George the
Fifth, establishing The Institute of Chartered Accountants in Australia
upon recognition that the “profession of Public Accountants in the said
Commonwealth [Australia] is practiced by a considerable number of
persons and the duties and functions of such public accountants are of
great and growing importance in respect of their employment in the
capacities of Liquidators acting in the winding up of Companies and of
Receivers under Decrees and Trustees in Bankruptcy or Insolvency,
arrangements with creditors and in various positions of trust under the
Courts of Justice in the said Commonwealth of Australia, and also in the
auditing and certification of the accounts of Public Companies and other
business, and various other kindred matters, in all of which a technical
knowledge of the duties imposed is of essential importance.”

Some important definition to remember as an Accounting student:
a) GAAP : Full form of GAAP is generally Accepted Accounting
Principles. This is developed by the accounting professionals has
common standards which are generally accepted and universally
practiced. This is needed to report economic events.
b) FASB: Full form of FASB is Financial Accounting Standard Board , a
private organizations that establishes generally accepted
accounting principles.
c) IASB : Full form of IASB is International Accounting Standard Board
, an accounting standard setting body that issues standards
adopted by many countries outside of the United states. Recently ,
IASB and FASB have worked closely to minimize the differences in
their standards and principles.
d) Securities and Exchange Commission (SEC) : A governmental
agency that requires companies to file financial reports in
accordance with generally accepted accounting principles.

Accounting chapter-1

More Related Content

What's hot (20)

Similar to Accounting chapter-1 (20)

More from Gyanbikash (20)

Recently uploaded (20)

Accounting chapter-1