Introduction to Accounting
1. What is Accounting ?
Accounting is the process of collecting, recording, summarizing and communicating financial information to users,
i.e. the proprietors, creditors, investors, government agencies, employees etc. Accounting is called the “language of
business”.
2. Attributes / Aspects / Characteristics of Accounting
Following are the characteristics of Accounting:
i. Identification of Financial Transactions: Accounting records only financial transactions i.e. the transactions that
bring about a change in the resources of a firm. Such transactions are identified with the help of bills and
receipts as evidence of the transactions.
ii. Measuring the Identified Transactions: Financial transactions are measured in terms of money, rupees and paise
as a measuring unit.
iii. Recording: Recording is the process of entering business transactions in the books of original entry, i.e. Journal
or in the subsidiary books such as Cash Book, Purchase Book, Sales Book etc.
iv. Classifying: Classification is the process of grouping transactions of one nature at one place. The transactions
recorded in the Journal or subsidiary books are classified and posted to the Ledger Book. Ledger book contains
individual account heads under which all financial transactions of similar nature are collected. For example:
Purchase A/c contains all transactions related to purchases and Sales A/c contains all transactions related to
sales.
v. Summarising: Summarising is the process that involves the preparation of (a) Trial Balance (b) Trading and Profit
& Loss A/c and (c) Balance Sheet. “Trading and Profit & Loss A/c” and “Balance Sheet” are called the Final
Accounts or Financial Statements.
vi. Analysis and Interpretation: Then the analysis and interpretation of the financial data is done so that it can help
in planning for the future in a better way.
vii. Communicating: Finally the financial data is communicated to the users in time, so that appropriate decisions
may be taken at the right time.
3. What is Accounting Information ?
Accounting Information refers to the financial data and reports generated through the bookkeeping and accounting
process. This information, which includes financial statements like the Trading and Profit and Loss account and the
Balance Sheet, is used by internal and external users to make informed decisions about a business.
4. Qualitative Characteristics of Accounting Information
i. Reliability: Accounting information must be reliable. Reliability of information means it is verifiable, free from
misleading information. The information should be based on facts.
ii. Relevance: The accounting information should be relevant. It must be available in time. It must help the users
make decisions about a company’s financial position, performance and future prospects.
iii. Understandability: The information provided to the users through the financial statements must be presented
to them in such a manner that the users are able to understand it.
iv. Comparability: The users should be able to compare the accounting information of an enterprise of a year with
the accounting information of the previous years of the same enterprise. This is known as intra-firm comparison.
They should also be able to compare the information with the information of other enterprises. This is known as
inter-firm comparison.
5. Users of Accounting Information
Many users need financial information in order to make important decisions. These users can be divided into two
broad categories.
a) Internal Users:
Owners: Owners contribute capital in the business. They are interested in knowing the profit earned or loss
suffered by the business and also financial position of the business. The financial statements give the
information about profit or loss and financial position of the business.
Management: Management uses the business to take important decisions in the business. For example
determination of selling price, cost controlling, investment in new projects etc.
Employees and Workers: Employees and workers are entitled to receive bonus at the end of the year, which is
linked to the profit earned by the business. Therefore they are interested in financial statements.
b) External Users:
Banks and Financial Institutions: Banks and financial institutions provide loans to the business. So they want to
know the performance of the business to ensure the recovery of the loans.
Investors and Potential Investors: Investors are the persons who invested their money in the business. As they
do not have direct control over the business affairs, they rely on the accounting information to know about the
performance of the business.
Creditors: Creditors are the parties who supply goods or services to the business on credit. The business owes
money to them. So they want to know the credit-worthiness of the business through accounting information.
Government and its Agencies: Government uses the accounting information of a business to take the policy
decisions. Government also assesses the tax amount such as Excise Duty, VAT, Service Tax and Income Tax by
analyzing the financial statements.
Consumers: By getting the accounting information the consumers understand the financial health of a business,
which helps them trust the business they are dealing with. They also understand the quality of products offered
by a business.
6. Branches of Accounting
The changing business scenario through centuries has given rise to specialized branches of accounting which could
cater to the changing requirements. These branches are:
a) Financial Accounting: Financial Accounting is that branch of accounting, which records financial transactions,
summarises, interprets and communicates the results to the users. In Financial Accounting, Profit & Loss A/c
and Balance Sheet are prepared to ascertains the profit earned or loss incurred during an accounting period and
the financial position at the end of the accounting period.
b) Cost Accounting: Cost Accounting ascertains the cost of products manufactured or services rendered by the
business and helps the management in decision making regarding price fixation etc.
c) Management Accounting: Management Accounting is concerned with generating accounting information
relating to funds, costs, profits etc. which helps the management in decision making. Management Accounting
addresses the needs of the management.
7. Objectives of Accounting:
i. Maintaining Systematic Records of Transactions: Accounting is used to record financial transactions of the
organization in the books of accounts regularly and in a systematic manner, because it is not possible to
accurately remember the numerous amount transactions made in the business. The recorded information also
acts as an evidence.
ii. Ascertaining Profit or Loss: The owners of the business are keen to know the profit earned or loss incurred
during the accounting period. For this purpose a statement called “Income Statement” or “Trading and Profit &
Loss Account” is prepared in which the revenues and expenses are recorded. The excess of revenue over
expenses represents profit and the excess of expenses over revenue represents loss.
iii. Ascertaining Financial Position: For the owners it is also necessary to know the financial position of the business.
For this purpose a statement called “Balance Sheet” is prepared in which the assets and liabilities are recorded.
iv. Communicating Accounting Information to the Users: The accounting information is communicated to various
users who analyse them as per their requirements.
8. Generally Accepted Accounting Principles (GAAP): Generally Accepted Accounting Principles refer to the rules or
guidelines adopted for recording of business transactions in order to bring uniformity in the preparation of financial
statements. These are also called by various names such as principles, concepts, conventions and assumptions.
These are issued by ‘Financial Accounting Standards Board’ (FASB) and the ‘Governmental Accounting Standards
Board’ (GASB). Examples of GAAP: Going Concern Principle, Matching Principle, Cost Principle etc.
