Accounting Basics ,Objectives, Functions , Need and Users of Accounting

Prof. Chandan Kumar Tripathy

Accounting
Definition : 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 financial character, and interpreting the results thereof.

Objectives of accounting

1. Income determination for rational decision making 2. Financial Reporting by maintaining systematic
records of financial transactions 3. Protection of business assets from unjustified and unwarranted use

Prof. Chandan Kumar Tripathy

The Need for Accounting

Managers, investors, and other external groups want the answers to two important questions:
How well did the organization perform?

Where does the organization stand?

Prof. Chandan Kumar Tripathy

Users of Financial Statements

Investors
Need information about the profitability, dividend yield and price earnings ratio in order to assess the quality and the price of shares of a company Lenders Need information about the profitability and solvency of the business in order to determine the risk and interest rate of loans Management Need information for planning, policy making and evaluation Suppliers and trade creditors Need information about the liquidity of business in order to access the ability to repay the amounts owed to them

Prof. Chandan Kumar Tripathy

Functions of Accounting
Ascertaining the income of the business and its financial
position as on a date by preparation of the final accounts (Profit and loss account and the balance sheet )

Helping the stakeholders in decision making by providing the

relevant information of the business income and financial position

Meeting legal/statutory requirements Accounting

provides the required information for statutory purposes , tax returns , auditing and for evidence purposes in court of law.

Prof. Chandan Kumar Tripathy

Users of Accounting
Stakeholder Group
SHAREHOLDERS,SUPPLIERS CUSTOMERS CUSTOMERS GOVERNMENT STAFF & TRADE UNION CUSTOMERS & SHAREHOLDERS STAFF,SHAREHOLDERS,CUSTOMERS

Interested in
Profitability and share performance the ability of the firm to carry on providing a service or producing a product VAT and other tax liabilities of the firm the potential for salary and bonus payments the ethical or environmental aspects of activities of the firm whether the firm is has a longlongterm future

Prof. Chandan Kumar Tripathy

Accounting Equation
From the large multi-national corporation down to the multistreet corner grocery store, every business transaction will have an effect on a firms financial position. The financial position is measured by the following items:

Assets (resources = what it owns) Liabilities (obligations = what it owes to others) Owners Equity (the difference between resources and
obligations)

Assets = Liabilities + Owner s Equity

Prof. Chandan Kumar Tripathy 7

Assets An asset is anything of value that a company owns including cash. Assets get recorded on the balance sheet in terms of their rupee values. There are several types of assets: Current assets. These are assets with rupee amounts that continually change, for example, cash, accounts receivable, inventory or raw materials a company uses to make a product. They are listed on the balance sheet in order of their liquidity, or how fast they can be converted into cash. Investments. Companies, like individuals, can own securities such as stocks and bonds. Investments, like cash or property, are considered assets. Capital assets. Resources a company owns which gives benefits for a long term like Land, buildings, equipment and vehicles , computers, furniture and appliances and these are not items for selling . Intangible assets. Patents, copyrights and other nonmaterial assets that have value are referred to as intangible.

Prof. Chandan Kumar Tripathy

Liabilities
Anything a company owes to people or businesses other than its owners is considered a liability. There are two types of liabilities:

Current liabilities. In general, if a liability must be paid within a year, it

is considered current. This includes bills, money you owe to your vendors and suppliers, 0utstanding salary and short-term loans. shortLongLong-term liabilities. A long-term liability is any debt that extends longbeyond one year, such as a mortgage. Owners' equity, also called capital, is any debt owed to the business owners. For example, if one has invested Rs.50,000 of his savings to start a business, that amount is recorded in a capital account, also referred to as an owners'-equity account. In publicly traded companies, outstanding owners'preferred and common shares also represents owners' equity. accounts because they relate to how much money the company makes over a period of time. At the end of each accounting cycle, the business' profits get transferred to a capital account.

Owners' Equity

The business's revenues and expenses are also recorded in capital

Prof. Chandan Kumar Tripathy

Transaction
A transaction is an economic activity that affects the financial position of an organisation. They may be quantitative or qualitative.
For example : Quantitative transaction Purchase or Sale of goods where as Qualitative transaction ( Event ) Depreciation of assets .

Prof. Chandan Kumar Tripathy

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Prof. Chandan Kumar Tripathy

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