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Lesson 01 Introduction to Accounting Contents • • • • • • What is accounting? Definitions and scope of accounting Book keeping, Accounting and Accountancy Accounting Environment Objectives of Accounting Accounting as an Information System Contents • • • • • 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.