Why Accounting - Session 1

8/14/2019 Why Accounting - Session 1

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Why Accounting?

•Record keeping of financial

transactions

•Is it the same as book-keeping?

• No

•Book-keeping = Maintaining all the

records in a proper manner but without

any framework •Accounting = Book-keeping + working

within a given framework



When does financial

transaction begin?• When the business has already been

established

• Commercial activity may not have started

• Beginning of financial transaction =

Finance



What is ‘Finance’?

• Any business for a commercial activity

requires money or funds

• The first dose of finance is from the owners of the enterprise

• The next dose can be from lenders like banks

• Thus finance = Financial resources and their management



Is there no difference between

finance and accounts?• Functionally, there is. We will see this

later.

• For the purpose of financial

accounting, finance = accounts



What is the purpose of

business?• To carry on a commercial activity with

profit motive unlike co-operatives and non-

profit organizations

• Commercial activity = Trading,

manufacturing or services



How does one do business?

• By starting a business enterprise

• Different kinds of business enterprise:

– Sole proprietorship firms – single owner,

– Partnership firms – joint owners and

– Limited companies – permanent legalentity with limited liability for owners



What is the first point for

business?• Capital of the owner/s

• It is called capital in firm categories no. 1

and no. 2

• It is called share capital in firm category no.

3



Need for accounting

• Need to record financial transactions that

involve transfer of financial benefit

• Need to know how much capital of the

owner has grown over a period of time

• Need to know whether the business is in

profit or loss



Financial benefits

• Cash

• Goods

• Services

• Assets

• Difference between goods and assets

Rashmi Paranjpye





Finance and accounting

• Finance brings in funds

• Accounts keeps track of these funds to

ensure proper utilization

• Accounting is the financial language of the

business



Objective of financial

accounting• Recording, classifying, summarizing, and

interpreting the financial information about

the activities of the concern so thatintelligent decisions can be made.

• The basic objective of accounting is to

provide information, which is useful to persons inside & outside the organisation.



Funds

• Capital- Funds introduced by the owners &

permanent or long-term funds in the

business.• Debt-Money owed to external agencies like

loans

• a. Short term – Working capital

• B. Long term – For fixed assets



Definitions

• Liability- Amount owed by the business

enterprise to the outside agencies.

• Asset- The property of the business

enterprise such as land, bldg, plant &

machinery, stock

• Assets split into fixed assets and currentassets.



Fixed Assets

• Fixed Assets- Long term business

assets like land, building, machinery

which act as catalysts in the activity of

the enterprise but do not form part of

the finished goods of the

manufacturing co. or stocks in trade in

case of a trading co.



Current Assets

• Current Assets- Working capital assets

which enable an enterprise to achieve sales

revenue by the process of turnover of thecurrent assets.

• Current assets constantly change form from

cash back to cash through the activity of thefirm i.e. trading or manufacturing or

service.





Users of financial statements

• Owners

• Lenders

• Suppliers

• Customers

• Income-tax authorities• Other statutory authorities like ROC &

• Employees (The list is not exhaustive)



Points to remember

• Assets are what you own

•Liabilities are what you owe

• Revenue is what you get in i.e. income

• Expense is what you pay out

• Difference between revenues &expenses is ‘Profit’



Cash Transactions

• Cash Purchase- When goods \

services are bought by paying cashimmediately, it is a cash purchase.

• Cash Sale- When goods \ services

are sold by receiving cashimmediately, it is a cash sale.



Credit Transactions

• Credit Purchase- When goods\services are bought and payment

is made at a later date , it is a credit purchase.

• Credit Sale- When goods\servicesare sold and payment is received ata later date, it is a credit sale.



Revenues & Receipts

• Revenues occur when money is

earned.• Receipts occur when cash is

received.

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Why Accounting - Session 1

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