8/11/2019 Unit i a Introduction

1/34

UNIT I

INTRODUCTION TO

ACCOUNTING

Accounting

The Language of Business

8/11/2019 Unit i a Introduction

2/34

2

The Value of Accounting

Why does accounting exist in every

organization?

I explain this question in another way:

what kind of unique value doesaccounting possess?

The value must be fundamental and the

society could not go without;

Without trust, we could not have even afamily, let alone a firm

8/11/2019 Unit i a Introduction

3/34

3

The Value of Accounting

Accounting is proven to be cost-effective; It is suitable to all kinds of firms,

No matter of their size,

No matter of the geographic locations;

No matter of ownership;

Now that accounting is connected with human

nature and trusting issue, we may trace the history

of accounting to the early days of human beings,or ancient Society;

8/11/2019 Unit i a Introduction

4/34

4

The Evolution of Accounting

Why do our ancestors invent Alphabet?

To build trusting via enhanced memory;

This is the right value of Accounting.

Chronology of spelling by Steve Bett(Ancient Egyptian and

the dawn of writing);

Writing developed as an extension of the accounting

system in Babylon;

A British accounting scholar claimed:

Phoenician invented ALPHABET

for the sake of accounting.

http://www.foolswisdom.com/~sbett/chronology.htmhttp://www.foolswisdom.com/~sbett/chronology.htmhttp://www.foolswisdom.com/~sbett/chronology.htmhttp://www.foolswisdom.com/~sbett/chronology.htm

8/11/2019 Unit i a Introduction

5/34

5

The Evolution of Accounting

The primitive stage of accounting;

A tool to help to maintain the trusts;

Alphabet, numeric and organizational

control;

The birth of double-entry bookkeeping

http://images.google.com/imgres?imgurl=http://www.mathsurf.com/problemofday/images/epprd6c.gif&imgrefurl=http://www.mathsurf.com/problemofday/epprd6c.html&h=222&w=287&sz=7&tbnid=2C_ounvTPwoJ:&tbnh=85&tbnw=110&hl=zh-CN&start=7&prev=/images?q=quipu+the+Incas+&svnum=10&hl=zh-CN&lr=&newwindow=1&sa=N

8/11/2019 Unit i a Introduction

6/34

BOOK-KEEPING Is the science and art of correctly recording in the

books of account all those business transactions thatresult in the transfer of money or moneysworth.

The branch of knowledge which tells us how to keep a recordof business transactions.

Advantages: Permanent, Reliable & Arithmetical accuracy

Net Results & Ascertainment of Financial Position & Progress

Calculation of Dues, Taxation and Mgt. Decision making

Control over Assets and borrowings Fixing the selling price & Legality issues

Identifying Dosand Donts

8/11/2019 Unit i a Introduction

7/34

Need and Importance

What has happened to the investment?

What is the result of the business transactions?

What are the earnings and expenses?

How much amount is receivable /Payable from/

to customers

From/To whom goods have been Purchased/ sold on

credit? What are the nature and value of assets & Liabilities

possessed by the business concern?

8/11/2019 Unit i a Introduction

8/34

What are the purpose of Accounting

Purpose of Accounting

i. Planning how you are going to use your money

ii. Recording accounting data.

iii. Keeping specific records of information in specificmanual.

iv. Enabling circulating information.

v. Use accounting data to make decision.

8/11/2019 Unit i a Introduction

9/34

Identifies

Records

CommunicatesRelevant

Reliable

Comparable

Importance of Accounting

Accountingis a

system that

information

that is

about an organizations

business activities.

1-9

8/11/2019 Unit i a Introduction

10/34

Identifying

Business

Activities

Recording

Business

Activities

CommunicatingBusiness Activities

Accounting Activities

1-10

8/11/2019 Unit i a Introduction

11/34

ACCOUNTING

American Accounting Association defines

accounting as the process of identifying,

measuring and communicating economic

information to permit informed judgements anddecision by users of the information

The systematic and comprehensive recording of

financial transactions pertaining to a business.The process of summarizing, analyzing and

reporting these transactions.

11

8/11/2019 Unit i a Introduction

12/34

Objectives

The main objectives of accounting are:

1. To maintain accounting records

2. To calculate the result of operations3. To ascertain the financial position

4. To communicate the information to users

8/11/2019 Unit i a Introduction

13/34

Business

transactions

(monetary

value)

IdentifyingRecording

Classifying

Summarizing

Analyzing

Interpreting

Communicating

Process

Information to

Users

OutputInput

PROCESS OF ACCOUNTING

8/11/2019 Unit i a Introduction

14/34

8/11/2019 Unit i a Introduction

15/34

USERS OF ACCOUNTING INFORMATION

Owners & Management

Employees & Trade Unions

Creditors, Banks & Lending Institutions Potential Investors & Present Investors

Government & Tax Authorities

Regulatory Agencies & Researchers

15

8/11/2019 Unit i a Introduction

16/34

Users of Accounting Information

External Users

Lenders

Shareholders

Governments

Consumer Groups

External Auditors

Customers

Internal Users

Managers

Officers

Internal Auditors

Sales Staff

Budget Officers

Controllers

1-16

8/11/2019 Unit i a Introduction

17/34

BRANCHES OF ACCOUNTING

Financial accounting

Recording business transactions in the books ofaccounts to found the operating result(FP) for a

particular period

Cost accounting

Collection, classification and ascertainment of the costof production or job undertaken by the firm

Management accounting For the purpose of policy formulation, planning,

control and decision making by the management

17

8/11/2019 Unit i a Introduction

18/34

Users of Accounting Information

ExternalUsers

Financial accountingprovides

external users with financial

statements (shareholders, lenders,

etc.).

Internal Users

Managerial accountingprovides

information needs for internal

decision makers (officers, managers,

etc.).

1-18

8/11/2019 Unit i a Introduction

19/34

Basic accounting terms

1. Cash transactionCash receipt or payment

2. Credit transaction

Where cash is not involved immediately but will be paid

or received later3. Proprietor

A person who owns a business

4. Capital

Amount invested by the proprietor in the business

5. Assets

Properties belongings to the business

8/11/2019 Unit i a Introduction

20/34

Cont

6. Liabilities

Financial obligations of a business.

The amounts which a business owes to others.7. Drawings

The amount of cash or value of goods

withdrawn from the business by theproprietor for his personal use

8/11/2019 Unit i a Introduction

21/34

Cont

8. Debtors

A person who receives a benefit without giving

money , but liable to pay in future or in due

course of time is debtor

9. creditors

A person who gives a benefit without receiving

money , but to claim in future is a creditor

8/11/2019 Unit i a Introduction

22/34

Cont

10. Purchases

The amount of goods bought by a business for

resale or for use in the production.

11. Purchases return or returns outward

When goods are returned to the suppliers due

to defective quality or not as per the terms of

purchase

8/11/2019 Unit i a Introduction

23/34

12.Sales

The amount of goods sold that are already

bought or manufactured by the company.

CASH SALES

Sold for Cash

CREDIT SALE

Sold but payment are not received at that time

TOTAL SALES

= Cash Sales + Credit Sales

8/11/2019 Unit i a Introduction

24/34

13.Sales Return

8/11/2019 Unit i a Introduction

25/34

14. Stock

8/11/2019 Unit i a Introduction

26/34

15. REVENUE

Amount receivables or realized from sale of goods

Earnings from Interest, Commission, Dividend etc.

16.EXPENSES

Amount spent in order to produce and sell the goods

and services

17. INCOME

Difference between Revenue and Expenses

= Revenue Expenses.

8/11/2019 Unit i a Introduction

27/34

18. Voucher

8/11/2019 Unit i a Introduction

28/34

19. Invoice

8/11/2019 Unit i a Introduction

29/34

20. Receipt

8/11/2019 Unit i a Introduction

30/34

Assets

Liabilities +

Equity

Accounting Equation

Liabilities EquityAssets = +

1-30

8/11/2019 Unit i a Introduction

31/34

Accounting Equation

Fundamental Accounting Equation:

Assets = Liabilities + Owners Equity This equation is always in balance

In order for this equation to remain in balance,double-entry bookkeepingis employed. That is, the recording of every transaction or event must

have at least two parts

Either an equal impact (increase or decrease) to both sides of theequation or equal and opposite impact to one side.

The recording of every transaction must keep this equationin balance

31

Assets

8/11/2019 Unit i a Introduction

32/34

Land

Equipment

Buildings

Cash

Vehicles

Furnitures

Notes

Receivable

Accounts

Receivable

Resources

owned or

controlled by a

company

Assets

1-32

8/11/2019 Unit i a Introduction

33/34

Taxes

Payable

Wages

Payable

Notes

Payable

Accounts

Payable

Creditors

claims on

assets

Liabilities

1-33

8/11/2019 Unit i a Introduction

34/34

Owners

claim on

assets

Dividends

Contributed

Capital

Retained

Earnings

Equity