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Lesson 01
Introduction to Accounting
Contents
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What is accounting?
Definitions and scope of accounting
Book keeping, Accounting and Accountancy
Accounting Environment
Objectives of Accounting
Accounting as an Information System
Contents
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Importance of Accounting
Qualitative factors of Accounting Information
Methods of Accounting
Financial statements
Advantages and Limitations of Accounting
What is Accounting?
• Accounting, as an information system is the process of
identifying, measuring and communicating the
economic information of an organization to its users
who need the information for decision making.
• It identifies transactions and events of a specific
entity.
• A transaction is an exchange in which each
participant receives or sacrifices value (e.g. purchase
of raw material).
What is Accounting? Cont’d….
• An event (whether internal or external) is a
happening of consequence to an entity (e.g.
use of raw material for production).
• An entity means an economic unit that
performs economic activities.
Definition of Accounting
• American Institute of Certified Public Accountants
(AICPA) which defines Accounting as
Scope of accounting
Observing and
Identifying the
Economic Activities
Recording ,Classifying
and Summarizing
Accounting
information
Preparing and
analyzing financial
statements
Book keeping and Accounting
Bookkeeping is,
• is the process of recording daily
activities of the business, including
receipts, payment, purchases, sales and
expenditure.
• A bookkeeper is usually hired in medium
to large companies that is responsible for
recording these transactions.
• Bookkeeping is considered as a small
part of accounting.
Book Keeping Cont’d….
• Bookkeeping involves recording each and
every transaction that happens in the day,
which is then tallied at the end of the day and
the end of the month
• Bookkeeping is done with the help of ledgers,
account books, cash books, etc.
• Originally bookkeeping was done in a book,
that is where the name comes from, but now
it is done on various different programs on the
computer
Accounting / Accountancy is,
• a part of the Finance Department that is
responsible for communicating financial
information about the company to people
such as shareholders, managers, banks, etc.
• The communication takes place in the form of
financial statements such as profit and loss
statements, annual reports and balance
sheets.
• These statements show the amount of
economic resources that is available to the
management.
• Accountancy are divided into three main
segments in medium to large companies such
as accounting, bookkeeping, and auditing.
Accounting Environment
Political
Factors
Socio and
Cultural
Factors
Legal
Factors
Accounting
Information
Economic
Factors
Technological
Factors
Environmental
factors
Objectives of Accounting
• To keeping systematic record
• To ascertain the results of the operation
• To ascertain the financial position of the
business
• To portray the liquidity position
• To protect business properties
• To facilitate rational decision making
• To satisfy the requirements of law
Users of Accounting Information
• Owners
• Management
• Creditors
• Employees
• Investors
• Government
• Consumers
• Research Scholars
Relevance
Reliability
Comparability
Consistency
quality of
the
Accounting
Information
Understandability
Methods of
Accounting
Single
Entry
Double
Entry
Process of Double entry System
Preparation of
Journal
Preparation of
Ledger
Preparation of
Final Accounts
Trial Balance
preparation
Financial Statements
• Income Statement-(Profit and Loss Account)
• Balance Sheet
Advantages of Accounting
• It helps in having complete record of business
transactions.
• It gives information about the profit or loss
made by the business at the close of a year
• It provides useful information form making
economic decisions,
• It facilitates comparative study of current
year’s profit, sales, expenses etc., with those
of the previous years.
Advantages Cont’d….
• It supplies information useful in judging the
management’s ability to utilize enterprise
resources effectively in achieving primary
enterprise goals.
• It provides users with factual and interpretive
information about transactions and other events
• It helps in complying with certain legal
formalities like filing of income tax and sales-tax
returns.
Limitations of Accounting
• Accounting is historical in nature: It does not reflect
the current financial position or worth of a business.
• Transactions of non-monetary mature do not find
place in accounting.
• Accounting is limited to monetary transactions only.
It excludes qualitative elements like management,
reputation, employee morale, labor strike etc.
• Facts recorded in financial statements are greatly
influenced by accounting conventions and personal
judgments of the Accountant or Management.
Limitations cont’d…
• Accounting principles are not static or
unchanging-alternative accounting procedures
are often equally acceptable.
• Cost concept is found in accounting. Price
changes are not considered.
• Money value is bound to change often from
time to time. This is a strong limitation of
accounting.
• Accounting statements do not show the
impact of inflation.