Lec 1-2

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.

Objectives of Accounting:

• Record Financial Transactions: The primary objective of accounting is to

systematically record and track the financial transactions of a business
entity, ensuring that all monetary activities are accurately documented
and organized.
• Provide Financial Information: Accounting aims to provide relevant and
reliable financial information to stakeholders, such as investors,
creditors, and management. This information helps in making informed
decisions, evaluating the financial health of the business, and assessing
its performance.
• Facilitate Financial Analysis: Accounting helps in analyzing financial data
and generating reports, such as financial statements, which provide
insights into the profitability, liquidity, and solvency of the business.
These reports assist in evaluating the business's performance,
identifying trends, and making future projections.
• Ensure Compliance with Regulations: Accounting plays a crucial role in
ensuring compliance with legal and regulatory requirements. By
maintaining accurate financial records, businesses can meet tax
obligations, adhere to accounting standards, and fulfill reporting
obligations to regulatory authorities.
• Facilitate Business Planning and Control: Accounting aids in business
planning and control by providing information on financial resources,
expenses, and revenues. This helps in setting financial goals, budgeting,
monitoring expenses, and implementing internal controls to manage
resources effectively and achieve organizational objectives.

Functions of Accounting:

• Recording Financial Transactions: Accounting involves systematically

recording and classifying financial transactions to maintain accurate
and reliable financial records.
• Summarizing Financial Information: It summarizes the recorded
transactions into financial statements, such as the balance sheet and
income statement, providing a clear overview of the financial position
and performance of the business.
 • Interpreting Financial Data: Accounting analyzes and interprets
financial data to evaluate the profitability, liquidity, and efficiency of
the business, helping stakeholders make informed decisions.
• Facilitating Decision-Making: Accounting provides relevant financial
information to support decision-making, including investment
decisions, pricing strategies, cost management, and budgeting.
• Ensuring Legal Compliance: Accounting ensures compliance with tax
laws, financial regulations, and accounting standards, helping
businesses fulfill their legal obligations and maintain transparency in
financial reporting.

Advantages of Accounting are as follows:

• Financial Information for Decision-Making: Accounting provides

relevant and reliable financial information that helps businesses analyze
data like income statements and balance sheets, enabling informed
decisions about profitability and liquidity.
• Facilitates Performance Evaluation: It allows organizations to evaluate
financial performance over time by comparing statements and analyzing
financial ratios, identifying strengths and weaknesses for improved
management practices.
• Financial Control and Accountability: Accounting establishes internal
control systems to ensure financial accountability, helping detect errors
and fraud while promoting transparency that builds stakeholder
confidence.
• Compliance with Regulations and Standards: By adhering to guidelines
such as GAAP or IFRS, accounting ensures consistency in financial
reporting, enhancing the credibility and accuracy of financial statements.
• Facilitates Access to Capital: Reliable financial information enables
organizations to attract investors and secure financing, demonstrating
financial stability and transparency necessary for growth and expansion.

Limitations of Accounting:

• Subjectivity and Estimates: Accounting involves making judgments and

estimates, particularly in areas like depreciation and asset valuation.
These subjective elements can introduce uncertainty and bias, affecting
the accuracy of financial statements.
• Historical Perspective: Accounting primarily focuses on past
transactions, providing a historical view of performance. While useful for
analysis, this perspective may not accurately reflect current market
conditions or predict future trends.
 • Limited Non-Financial Information: Critical factors such as customer
satisfaction and employee engagement are essential for long-term
success but are often inadequately represented in financial statements.
• Costly and Time-Consuming: Maintaining accurate records and
preparing financial statements can be resource-intensive, requiring
significant time, effort, and financial resources to comply with
accounting standards.
• Interpretation and Understanding: Accounting information requires
interpretation to derive insights, and stakeholders without a strong
financial background may struggle to comprehend and analyze financial
statements effectively.

The Eight Steps of the Accounting Cycle:

1. Identify and Analyze Transactions: The first step involves identifying and
analyzing all transactions during the accounting period, such as
expenses, sales revenue, and cash received. For example, Picture Perfect
sells a $350 frame, marking the cycle's start.
2. Record Transactions in a Journal: Next, record the details of all
transactions as journal entries in chronological order, using double-entry
accounting. For Picture Perfect, the $350 sale is recorded as a $350 debit
in accounts receivable (AR) and a $350 credit in revenue.
3. Post Transactions to General Ledger: Once journal entries are approved,
they are posted to the general ledger (GL), which serves as the master
record of all financial transactions. Picture Perfect posts the total sales
from the day to the GL.
4. Determine Unadjusted Trial Balance: At the end of the accounting
period, a trial balance reflects the closing balances of all accounts in the
GL. Picture Perfect adds up the debits and credits, ensuring they
balance.
5. Analyze the Worksheet: This step identifies any errors by comparing
debits and credits across accounts in a spreadsheet. If discrepancies
arise, the accountant reviews the transaction data. Picture Perfect finds
a $100 discrepancy.
6. Adjust Journal Entries and Fix Errors: If errors are found, they must be
corrected through adjusting journal entries. For example, Picture
Perfect's bookkeeper realizes the $350 frame sale was incorrectly
entered as $250 and adjusts it by $100.
7. Create Financial Statements: After adjustments, financial statements
can be generated, summarizing the company’s performance over a
specific period. Picture Perfect prepares its income statement, balance
sheet, and cash flow statement.
 8. Close the Books: In the final step, the accounting period is locked in,
resetting temporary accounts like revenue and expenses to zero. Net
income or loss is transferred to the retained earnings account. Picture
Perfect prepares for the next accounting period.

Lec 3
Bookkeeping is the process of recording and organizing financial transactions of a
business. It involves maintaining accurate and up-to-date records of all financial
activities, including sales, expenses, payments, and receipts. Effective bookkeeping
provides a clear financial picture of the organization, aids in budgeting, and ensures
compliance with legal requirements. Accurate bookkeeping is essential for preparing
financial statements and making informed business decisions.

Double Entry Accounting

Double entry accounting is a system where each financial transaction affects at least
two accounts. This method ensures that the accounting equation (Assets = Liabilities
+ Equity) always remains balanced. Each entry involves a debit and a credit of equal
value, which helps prevent errors and provides a more accurate financial picture.
This system is essential for preparing financial statements and conducting thorough
financial analysis.

Single Entry Accounting

Single entry accounting is a simpler system that records only one side of each
transaction, typically focusing on cash transactions. It is less comprehensive than
double entry, as it does not track assets and liabilities separately. This method is
often used by small businesses or individuals due to its simplicity and lower cost.
However, it may lead to inaccuracies and provide limited insights into the overall
financial health of the entity.

Advantages of Double Entry Accounting over Single Entry Accounting:

• Accuracy and Reliability: Double entry ensures greater accuracy by

recording each transaction in multiple accounts, minimizing errors.
• Error Detection and Correction: The system's checks and balances
facilitate detection and correction of discrepancies more easily.
• Comprehensive Financial Reporting: Enables preparation of detailed
financial statements, offering stakeholders a clear understanding of
financial position and performance.
• Better Decision-Making: Provides reliable financial information for
informed management decisions regarding resource allocation and
strategic planning.
• Audit and Compliance: Supports audits and regulatory compliance by
ensuring accuracy and completeness of financial records.
Lec 4

Accounting concepts are fundamental principles that guide the recording, reporting,
and interpretation of financial transactions. These concepts ensure consistency,
transparency, and comparability in financial statements.

Accounting Concepts

1. Entity Concept: Treats the business as a separate entity from its owners,
ensuring that financial transactions are recorded specifically for the
business and not mixed with personal finances.
2. Going Concern Concept: Assumes that a business will continue to
operate indefinitely, allowing for proper evaluation of assets, liabilities,
and financial performance in financial statements.
3. Accrual Concept: Recognizes revenue when earned and expenses when
incurred, ensuring financial statements reflect the economic reality of
transactions regardless of cash flow timing.
4. Monetary Unit Concept: Assumes financial transactions are recorded in
a stable currency, simplifying accounting by ignoring the effects of
inflation or changes in money value over time.

Accounting Principles

1. Money Measurement Principle: Recognizes only transactions that can

be expressed in monetary terms, ensuring only measurable events are
recorded in financial statements.
2. Entity Principle: Treats a business as a separate entity from its owners,
ensuring that financial records are specific to the business and not mixed
with personal affairs.
3. Going Concern Principle: Assumes that a business will continue its
operations indefinitely, allowing for financial statements to reflect
ongoing revenue generation and obligations.
4. Cost Terminology Principle: States that financial transactions should be
recorded at their original acquisition cost, emphasizing the use of
historical cost over current market value.
5. Dual-Aspect Principle: Indicates that every transaction has two
aspects—debit and credit—reflecting the duality of financial
transactions that affect multiple accounts.
6. Accounting Period Principle: Requires financial activities to be reported
in discrete time periods (monthly, quarterly, annually), enabling
systematic measurement and reporting of financial information.
7. Conservatism or Prudence Principle: Suggests exercising caution in
recognizing potential losses over gains, ensuring that uncertain events
are recorded conservatively.
8. Revenue Recognition Principle: States that revenue should be
recognized when it is earned, regardless of when cash is received,
ensuring accurate reflection of financial performance.
9. Matching Principle: Requires that expenses be recognized in the same
accounting period as the revenues they help generate, aligning costs
with associated income.
10.Consistency Principle: Emphasizes that once an accounting method is
adopted, it should be consistently applied in future periods to maintain
comparability in financial statements.
11.Materiality Principle: Suggests that financial information should be
disclosed if its omission could influence the economic decisions of users,
highlighting the importance of relevant information.
Meaning of Accounting Standards

Accounting Standards (AS) refer to a set of principles, rules, and guidelines

established to govern and standardize the preparation, presentation, and
disclosure of financial statements. They provide a framework for consistent
and reliable financial reporting, ensuring that financial information is relevant,
comparable, and transparent. Developed by recognized accounting bodies or
regulatory authorities, Accounting Standards enhance the quality and
credibility of financial statements.

Nature of Accounting Standards

1. Uniformity: Promote uniformity in financial reporting by providing a

consistent framework for preparing and presenting financial statements.
2. Compliance: Serve as mandatory guidelines that entities must follow to
ensure compliance with regulatory requirements and reporting
obligations.
3. Evolving Nature: Continuously updated and revised to keep pace with
changing business practices, economic conditions, and advancements in
accounting principles.
4. Professional Judgment: Allow for the exercise of professional judgment
in applying the standards to unique situations or complex transactions.
5. International Harmonization: Aim to harmonize accounting practices
globally by aligning with international standards such as the
International Financial Reporting Standards (IFRS).

Limitations of Accounting Standards

1. Complexity and Subjectivity: Can be complex, involving judgment calls

and estimates, leading to differences in interpretation and application,
which may impact comparability and reliability.
2. Inflexibility: May not cater to the specific needs of all industries or
entities, as they address general reporting requirements and may not
capture unique characteristics of specialized sectors.