Accounting

Book keeping
• “Book keeping is an art of recording business
transactions in a systemic manner”
-A.N. Rosen Kampf
Book keeping is a part of accounting and is
concerned with the recording of financial data
in the book of accounts.
• Accounting is the language of business.
• The concept of accounting is broader than book
keeping.
• Accounting is concerned with the act of recording,
classifying and summarizing the financial transactions
of a business to know its profit or loss and financial
position.
or
• Accounting is the process of collecting, recording,
summarizing and communicating financial information.

• where as book-keeping is concerned only with the act

of recording the financial transactions systematically.
 Book-Keeping Accounting
Basis of Distinction

It includes recording of It includes summarizing

financial transactions and the recorded transactions, their
their classification. interpretational communicating
(1) Scope the results to users.

It is the primary stage and it It is the secondary stage and

is done first. begins after book-keeping.

(2) Stage
Special knowledge and ability Special knowledge and ability
Is not required. It is done is required to analyse and
by clerical i.e. junior staff. interpret. It is done by qualified
and senior staff.
(3) Skill requirement Outsiders do not have
any interest in it.
Various groups including
(4) Interest of outsiders outsiders have interest in it.
It is complimentary
to accounting. It is not complimentary to
(5) Nature book- keeping.
 Explain the steps in accounting. / A/c
cycle /Explain the process of accounting.
(1) Identification of Financial Transaction –
First of all, the transaction to be recorded are
identified. Accounting records only those
transactions which can be measured in terms
of money.
(2) Recording of transactions –
Accounting involves recording business
transactions and events of financial nature in
the books of accounts in a systematic way in
Journal etc.
(3) Classification –
Classifying is a process of grouping the
transactions of same nature at one place.
This is done by preparing a book known as Ledger
which contains individual account heads.
For example, all transactions relating to cash are
recorded in the Cash Account.
( 4) Summarizing –
Summarizing involves presenting the classified
data in a understandable manner.
It involves preparation of trial balance and
financial statements i.e. Profit and Loss Account
and Balance Sheet.
(5) Analysis and Interpretation –
The financial data is required to be analyzed and
interpreted so that the various users of accounting
information can make a meaningful judgment about
the profitability and financial position of the
business organization.
(6) Communication-
Finally, the financial data is communicated to the
users.
i.e-Internal and external users
Importance or Advantages of Accounting
• Complete record
Accounting facilitates the replacement of
human memory by maintaining the complete
record of financial transactions. Human
memory is limited by its very nature.
Accounting helps to overcome this limitation.
• Knowledge of profitability
Accounting prepares the Profit and Loss
Account or Income Statement which helps to
ascertain the profit and loss of the
organization.
• Knowledge of financial position
Accounting prepares Balance Sheet or Position
Statement which helps to find the financial
position of the organization.
• Reduction in errors
Accounting record all financial transactions
scientifically and systematically which finds
errors and frauds that took place in the
organization and also take steps to prevent
them.
• Helpful in decision-making
Accounting provides diferent important
information's that can be used to take decisions
for future. Similarly, accounting helps the
management in planning and controlling business
activities.

• Availability of information
Accounting communicate information to the
management, creditors, employees and the
government to serve the interest of a business as
a whole.
• Proof in the court of law
A systematic and correct record of accounts of
business can be presented in the court of law for
giving necessary documentary evidence.
Accounting
Concepts
Accounting concept refers to the
basic assumptions and rules and
principles which work as the basis of
recording of business transactions
and preparing accounts.
• To know the profitability and financial position
of a business, diferent types of financial
statements are to be prepared.
• The financial statements are to be prepared
on the basis of certain assumptions, concepts,
and principles which are known as basic
accounting concepts or principles.
• The fundamental concepts and principles of
accounting are known as Generally Accepted
Accounting Principles (GAAP).
Business
Entity
Concept
• The business and its owner(s)
are two separate entities
The Books Of Accounts
are prepared from the
point of view of the
business

Hence…
Capital (Liability)

Drawings (Asset)
The Personal Transactions of
the
Owner are not recorded.
For Example:
A Car purchased by the owner for
personal use is not Recorded in the Books
Of Account Of the Business.
 Going
Concer
n
 It is assumed that the entity is a
going concern, i.e., it will continue
to operate for an indefinitely long
period in future and transactions are
recorded from this point of view.
 Money
Measurem
ent
 In accounting, a record is
made only of those
transactions or events which
can be measured and
expressed in terms of money.
Non monetary transactions are not
recorded in accounting.

Innovativeness
Attitude Experience
skill Team work
Honesty Passion
Accounting
Period
Concept
Entire life of the firm is divided into
time intervals for ascertaining the
profits/losses are known as
accounting periods.
Accounting period is of two types-
1.Financial year(1st Apr to 31st March)
&
2.Calendar year(1st Jan to 31st Dec).
Cost Concept
An asset acquired by a concern is
recorded in the books of accounts
at historical cost (i.e., at the price
actually paid for acquiring the
asset). The market price of the
asset is ignored.
Dual - Aspect
Concept
 For Every Debit,
there is a Credit

Every transaction should

have a two- sided effect to
the extent of same
amount
This concept states that every business
transaction has two-fold efects.
When the transaction is performed, its
efect is made on two diferent accounts.
If one account is debited; another
account must be credited with the equal
amount.
This concept of duality in transactions
always equalizes the assets and liabilities
in the balance sheet.
 For Example:
Cash Sales Rs. 10,000

Debit • Cash Account Rs. 10,000

Credit • Sales Account Rs. 10,000

This Concept has resulted in

THE
ACCOUNTING
EQUATION
Realisation
Concept
Profit is earned when goods
or services are
provided
/transferred to customers.
Thus it is incorrect to record
profit when order is
received, or when the
customer pays for the goods.
Matching
Concept
This concept is a guideline for determining the
profit or loss of a business.
According to this concept, the revenue earned has
to be compared with the expenses incurred in the
same period to determine the true profit or loss of
the business.
If the amount of revenue is more than expenses,
the result is net profit but if the amount of
revenue is less than expenses, the result is a net
loss
 The matching principle ensures that
revenues and all their associated expenses
are recorded in the same accounting
period.
 For Example

Salary paid in 2012-13 relating

to 2011-12
Such salary is treated as Expenditure for
2011-12 under Outstanding Salaries
Account, not for the year 2012-13
Accounting
Conventions
Accounting Conventions are the
common practices which are
universally followed in recording
and presenting accounting information
of business.
It helps in comparing
accounting data of different business or
of same units for different periods.
Materiality
Only those transactions,
important facts and items
are shown which are useful
and material for the
business. The firm need
record immaterial and
not
insignificant items.
 Full
Disclosu
Financial Statements
and their notes
should present all
information that is
relevant and
material to the
user’s understanding
of the statements.
Conservatism
• Anticipate losses-means Accountant should
provide for future expected losses
• Non Anticipate income/profit- means
Accountant should only considered realized
income and revenue.

•Accountant should
always be on side of
safety.
For Example
Consistency
The accounting practices and
methods should remain consistent
from one accounting period to
another.

Whatever accounting practice is

followed by the business enterprise,
should be followed on a consistent
basis from year to year.
 For Example

Year 2009-10 2010-11 2011-12

Method of • FIFO • LIFO •Weighted

valuation of average
stock
 For Example

Year 2009-10 2010-11 2011-12

Method of • FIFO • FIFO •FIFO

valuation of
stock

• Consistency-important for comparison

LIMITATION/DISADVANTAGE
• Records only monetary transactions –
In accounting, only those transactions are
recorded which can be measured in terms of
money. Qualitative elements like quality of
staf, industrial relations etc. are ignored.
• Recording of assets at historical cost –
In accounting, assets are recorded at their
historical cost and not at their market price. It
does not consider price level changes and
consequently it will not show real worth of the
business.
• Window dressing / based on Personal
Judgment –
Accounts may be manipulated so as to cover
important facts and present the financial
statements in a better situation than what is
actually.
Adoption of various accounting policies
depends on the personal judgment of the
accountant. As a result, financial statements
may not be objective and comparable
• Not a good tool for management –
In accounting past facts are recorded which do not help
the management for decision- making
• Maintaining secrecy
Secrecy cannot be ensured for involvement of many
employees in accounting work although maintaining
secrecy is very important.
• Tendency for secret reserves
Often management creates secret reserves
intentionally by increasing or decreasing assets and
liabilities for which total financial picture of an
organization is not reflected.
Does not provide timely information-
Accounting is designed to supply information in
forms of statements for a period, normally, one
year.
In accounting only post-mortem analysis of the
past can be conducted.
Recommendation of alternative methods
There exists application of alternative methods in
determining depreciation of assets and valuation
of stock etc.
Information regarding activities of business is
expressed in a misleading way if an alternative
method is used to achieve a particular object.
Users of accounting
information
 Internal Users:
1. Owners:
Owners provide funds for the business and therefore they are
having the maximum risk. They need accounting information to
know the profit earned or loss incurred by the business as well as
the safety of the funds invested by them.
2. Management:
Management requires accounting information to operate the
business efficiently. It has to take various decisions such as
determination of selling price, cost controls, new investment
projects etc.
3. Employees:
These are interested in financial statements to claim increase in
wages, bonus and other benefits since these are directly linked to
 External Users:
1.Investors:
Investors are those who want to invest money in the business.
They are interested in financial statements to know the earning
capacity of the enterprise and safety of their investments.
2. Banks and Financial institutions:
They need financial information to know the creditability of
the business enterprise and to know whether their loan will be
repaid in time or not.
3. Creditors and lenders:
Creditors supplies goods to the business enterprise on credit.
They want to know the credit-worthiness of the business
enterprise and to assess the paying capacity of the firm
4. Government authorities:
Govt. has to levy various taxes such as excise
duty, service tax etc. These govt. authorities
assess the correct tax dues from an analysis of
financial statements.
5. Researchers:
Researchers use accounting information in
their research work and to study the financial
operations of a particular firm or company.
 Accountancy:
Accountancy is a systematic knowledge of
accounting. It explain how to deal with
various aspect of accounting.
It educate us
How to maintain the books of account.
How to summaries the accounting
information.
How to communicate it to the users.
Thank you