ACCOUNTING

ACCOUNTING

Accounting is the language of business. The

affairs and the results of the business are
communicated to others through accounting
information, which has to be systematically
recorded and presented.

ACCOUNTING - DEFINITION
Accounting can be defined as the process of
identifying, measuring, recording and

communicating the economic events of

an organization to the interested users of

the information.

CHARACTERISTICS OF ACCOUNTING

Economic events
Identification, measuring, recording and
communication
Organization
Interested users of information

ECONOMIC EVENTS
An economic event has been defined as a
happening of consequence to a business

entity.

IDENTIFICATION
It means determining what to record, i.e. to
identify recordable events. It involves
observing activities and selecting those
events that are considered to be evidence of
economic activity.

MEASUREMENT
It means quantification, including estimates
of business transactions into financial terms,

i.e. rupees and paise. If an event cannot be

quantified in monetary terms, it is not

considered
accounts.

for

recording

in

financial

RECORDING
Once the economic events are identified
and measured in financial terms, they are

recorded, i.e. a chronological diary of these

measured events is kept in an orderly and

systematic manner.

COMMUNICATION
The economic events are identified,
measured and recorded is communicated in
some form to management and others for
internal and external uses. The information
is communicated through the preparation
and distribution of accounting reports. The
most common reports are in the form of
financial statements (Balance Sheet and
Profit and Loss Statement).

ORGANIZATION
It can be a business entity or a nonbusiness entity, depending upon the profit

or non-profit motive.

ACCOUNTING EQUATION

Assets = Liabilities + Owners Equity

ACCOUNTING PRINCIPLES
Accounting Concepts (From the Balance Sheet)

Business Entity Concept

Going Concern Concept

Money Measurement Concept

Historical Cost Concept

Dual Aspect Concept

ACCOUNTING PRINCIPLES
Accounting Concepts (From the Profit and Loss Account)

Accounting Period Concept

Conservatism Concept

Realization Concept

Matching Concept

BUSINESS ENTITY CONCEPT

Business is treated as a separate entity or
unit apart from its owner and others. All the
transactions of the business are recorded in
the books of business from the point of view
of the business as an entity and even the
owner is treated as a creditor to the extent
of his/her capital.

GOING CONCERN CONCEPT

It is persuaded that the business will exists
for a long time and transactions are

recorded from this point of view.

MONEY MEASUREMENT CONCEPT

In

accounting,

we

record

only

those

transactions which are expressed in terms

of money. In other words, a fact which can

not be expressed in monetary terms, is not

recorded in the books of accounts.

HISTORICAL COST CONCEPT

The concept requires the accounting
transactions to be recorded at their
historical costs.
Historical cost is the value of a resource
given up or a liability incurred to acquire
an asset/service at the time when the
resource was given up or the liability
incurred.

DUAL ASPECT CONCEPT

Each transaction has two aspects, that is,
the receiving benefit by one party and the

giving benefit by the other. This principle is

the core of accountancy.

ACCOUNTING PERIOD CONCEPT

A twelve month period is normally adopted
for calculating profit and loss and assets
and liabilities. This time interval is called
accounting period.

CONSERVATISM CONCEPT
Financial statements are always drawn up
on rather a conservative basis. That is,
showing a position better than what it is,
not permitted. It is also not proper to show
a position worse than what it is. In other
words, secret reserves are not permitted.

REALIZATION CONCEPT
Accounting

is

historical

record

of

transactions. It records what has happened.

It does not anticipate events. This is of

great important in preventing business firms

from inflating their profits by recording sales

and income that are likely to accrue.

MATCHING CONCEPT
The matching concept is an accounting
practice whereby expenses are recognized
in the same accounting period as the
related revenues are recognized. The
period's revenues, that is, are reported
along with the expenses that brought them

FUNCTIONS OF ACCOUNTING
Keeping systematic records
Protecting properties of the business

Communicating the results

Meeting legal requirements

KEEPING SYSTEMATIC RECORDS

The first function of accounting is to keep a
systematic record of financial transactions,

to post them to the ledger accounts and

ultimately prepare final statements.

PROTECTING PROPERTIES OF THE

BUSINESS
The second important function is to protect
the property of the business. The system

accounting is designed in such a way that it

protects its assets from an unjustified and

unwarranted use.

MEETING LEGAL REQUIREMENTS

The

fourth

accounting

and
is

the
to

last
meet

function
the

of

legal

requirements under the Companies Act,

Income Tax Act, Sales Tax Act and so on.