ACCOUNTING

NEED FOR ACCOUNTING

 At the end of each year, all the businessmen want to know how much
they have gained or lost during the year; how much capital is invested
in the business at the end of the year; how much amount they are liable
to pay and to whom they owe it; how much is owed to them and by
whom etc. In order to attain such information, it is essential to keep a
complete and systematic record of each and every business
transaction entered into during the year.
 By keeping a complete and systematic record of every business
dealing, the businessman can know how much is the amount of
purchases; how much is the amount of sales; what are his total expenses
and what is the amount of profit earned or loss incurred during the year.
 The properly maintained accounts are helpful in the assessment of
income tax and sales tax and are accepted as a proof in the court of
law whenever needed. Thus business owners can take important
decisions with the help of informations provided by accounting data.
MEANING OF ACCOUNTING

 “Accounting is the art of recording, classifying and summarising 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.”-American Institute of Certified Public
Accountants
 “Accounting is the science of recording and classifying business
transactions and events, primarily of a financial character, and the
art of making significant summaries, analysis and interpretations of
those transactions and events and communicating the results to
persons who must make decisions or form judgement.”-Smith and
Ashburne
CHARACTERISTICS OF
ACCOUNTING
 Accounting is an Art as well as Science: Accounting is an art of
recording, classifying and summarising business transactions with a
view to ascertain the net profit and financial position of the business
enterprise.
Accountancy is also a science since it is also an organised body of
knowledge based on certain specified principles and accounting
standards.
 Recording of Financial Transactions only: Only those transactions
and events are recorded in accounting which are of financial
character . Transactions and events which cannot be measured
and expressed in terms of money will not be recorded.For example,
the quarrel between the Production Manager and the Sales
Manager, strike by employees etc.
 Recording in terms of money: Each transaction is recorded in the
books in terms of money only. For example, if a businessman
purchases 200 Chairs and 10 Tables, their value in terms of money
will be recorded in the books. When they are expressed in terms of
money, it will provide useful information such as chair 50,000 and
tables 50,000.
 Classifying: After recording the transaction in journal or subsidiary
books, the transactions are classified. Classification is the process of
grouping the transactions of one nature at one place, in a separate
account. The book in which various accounts are opened is called
“Ledger.”
 Summarising: Summarising is the art of presenting the classified data
in a manner which is understandable and useful to management
and other users of such data. This involves the balancing of ledger
accounts and the preparation of Trial Balance with the help of such
balances. Final Accounts are prepared with the help of Trial
Balance.
 Recording, classifying and summarising are also termed as ‘Process
of Accounting’ or ‘Accounting Cycle’:-
Accounting Cycle
 Books of Original Entry or Subsidiary Books
 Cash Book
 Purchase Book
 Sales Book
 Purchase Return Book
 Sales Return Book
 Bills Receivable Book
 Bills payable Book
 Journal Proper
 Interpretation of the results: The results of the business are presented
in such a manner( i.e., by preparing Trading and Profit and Loss
Account and Balance Sheet) that the parties in the business such as
proprietors, managers, banks, creditors etc. can have full
information about the profitability and the financial position of the
business.
 Communicating: Financial data are communicated to the users
who analyse them as per their individual requirements.
Functions of Accounting

 Accounting performs the following major functions:

 1.The main function of accounting is to maintain complete and
systematic records of business transactions, post them to ledger and
to prepare the financial statements i.e., Statement of Profit and Loss
Account and Balance Sheet.
 2.The information regarding net profit(loss), assets, liabilities etc. are
communicated to the interested parties.
 3.It has to maintain proper records of various assets such as Cash in
hand, bank balances, inventory, debtors etc. It enables the
management to keep proper control over them.
 4.Accouning assist the management in the task of planning,
controlling and decision-making.
 5.The management is expected to act as trustee of the Company’s
funds and the accounting assists them to control the resources
properly.
 6. Under the provisions of various laws such as Companies Act,
Income Tax Act, sales tax, Excise laws etc. a business firm has to
submit various statements such as annual accounts, Income Tax,
Sales Tax Returns etc. Accounting performs this functions by
supplying the information to the government agencies.
 Book-keeping: “Book-keeping is an art of recording in books of
accounts the monetary aspects of commercial or financial
transactions.”-Northcott
 Accounting: Accounting starts where book-keeping ends. It includes
the following activities:
 i) Summarising the classified transactions in the form of Profit & Loss
Account and Balance Sheet etc.
 ii) Analysing and interpreting the summarised results.
 iii) Communicating the information to the interested parties.
 Accountancy:
 It refers to a systematic knowledge of accounting concerned with
the principles and techniques which are applied in accounting. It
tells us how to prepare the books of accounts, how to summarize
the accounting information and how to communicate it to the
interested parties.
Types of Accounting

 Various types of information are required by the management to

perform its functions more efficiently.
 1.Finanacial Accounting: The main purpose of this accounting is to
record the business transactions in a systematic manner, to
ascertain the profit or loss of the accounting period by preparing a
Profit and Loss Account and to present the financial position of the
business by preparing Balance Sheet.
 2.Cost Accounting: The main purpose of cost accounting is to
ascertain the total cost and per unit cost of goods produced and
services rendered by a business. It also estimates the cost in
advance and helps the management in exercising strict control
over cost.
 3.Management Accounting: The main purpose of management
accounting is to present the accounting information in such as a
way as to assist the management in planning and controlling the
operations of a business. Techniques like ratio analysis, budgetary
control, fund flow statement, cash flow statement etc.
 4. Tax Accounting: It is used for tax purposes. Income Tax and sales
tax are computed on the basis of Tax Accounting.
 5. Social Responsibility Accounting: It is the process of identifying,
measuring and communicating the contribution of a business to the
society. The contribution of a business to the society consist of
providing employment to under-privileged, providing financial and
manpower support for public programmes, environmental
contribution, product safety, customer satisfaction etc.
Users of Accounting Information
and their Needs
 Users may be classified as a) Internal Users b) External Users
 A) Internal Users: Internal users are those persons who are directly involved in
managing and operating the business enterprise such as directors or the
partners, managers and officers. 'They need accounting information for the
efficient and smooth running of the business enterprise. Most of their needs are
met by unpublished internal reports which are prepared most frequently to meet
the specific requirements of management.Internal reports provide the
informations relating to cost of production, profitability of products, reasons for
decrease or increase in sales and profits, estimates of future sales and profits etc.
 B) External Users:
 Individual or organisations who have present or future interest in the
business enterprise but are not part of the management are called
external users of accounting information.
 1. Owners: want to know about the profitability and financial
soundness of the business.
 2. Potential investors: Those who want to invest in a business
enterprise need information to judge how safe and rewarding the
proposed investment will be.They want information which helps
them estimate how much income they can expect in future if they
invest now.
 3. Creditors: are the persons who supply goods and services on
credit.Before granting credit, creditors want to be satisfied about
the creditworthiness of the business enterprise.Accounting
information help them in assessing the financial capability of the
business enterprise and also the extent upto which the granting of
credit will be safe.
 4.Lenders: Before providing loans to a business, they want to judge
the repaying capacity of the business.
 5. Employees: need information about the profits of a business to
assess the ability of the business to pay higher wages and bonuses.
 6. Government: is interested for the assessment of income tax, sales
tax, excise duty etc. and also to make sure that the accounts are
maintained in a true and fair manner.
 7. Researchers: It is of immense value to the research scholar who
wants to make an indepth study of the financial operations of an
enterprise.
 8.Public: Public might be interested in knowing the trend of
employment opportunities provided by the enterprise and the
measures adopted to control the level of pollution.
THANK YOU