Meaning of Accounting

In 1941, The American Institute of

Certified Public Accountants
(AICPA) had defined accounting
as the art of recording, classifying,
and summarising in a significant
manner and in terms of money,
transactions and events which are,
Introduction of in part at least, of financial
character, and interpreting the
Accounting results thereof‟.

With greater economic Accounting is an Art and Science

development resulting in of recording, classifying,
changing role of accounting, its summarising, analysing and
scope, became broader. In 1966, interpreting financial
the American Accounting transactions for the particular
Association (AAA) defined year (Financial Year).
accounting as „the process of
identifying, measuring and Book keeping is an Art and
communicating economic Science of recording and
information to permit informed classifying financial transactions
judgments and decisions by for the particular year (Financial
users of information‟. Year).

Credit transactions include all transactions

A transaction that involves
the immediate exchange of
cash for an asset or anything
which we buy is known as
cash transaction.
involving the purchase of loan of goods,
services or money in the present with a
promise to pay or deliver in the future.
Without a promise to pay or deliver in the
future, there can be no transaction.

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History and Development of Accounting
Accounting enjoys a remarkable heritage. The history of accounting is as
old as civilisation. The seeds of accounting were most likely first sown in
Babylonia and Egypt around 4000 B.C. who recorded transactions of
payment of wages and taxes on clay tablets. Historical evidences reveal
that Egyptians used some form of accounting for their treasuries where
gold and other valuables were kept. The in-charge of treasuries had to
send day wise reports to their superiors known as Wazirs (the
prime minister) and from there month wise reports were sent to kings.
Babylonia, known as the city of commerce, used accounting for business
to uncover losses taken place due to frauds and lack of efficiency. In
Greece, accounting was used for apportioning the revenues received
among treasuries, maintaining total receipts, total payments and balance
of government financial transactions. Romans used memorandum or
daybook where in receipts and payments were recorded and where
from they were posted to ledgers on monthly basis. (700 B.C to 400
A.D).

China used sophisticated form of government accounting as early as

2000 B.C. Accounting practices in India could be traced back to a period
when twenty three centuries ago, Kautilya, a minister in Chandragupta‟s
kingdom wrote a book named Arthashasthra, which also described how
accounting records had to be maintained. Luca Pacioli‟s, a Franciscan
friar (merchant class), book Summa de Arithmetica, Geometria,
Proportion at Proportionality (Review of Arithmetic and Geometric
proportions) in Venice (1494) is considered as the first book on double
entry bookkeeping. A portion of this book contains knowledge of
business and book-keeping. However, Pacioli did not claim that he was
the inventor of double entry book-keeping but spread the knowledge of
it. It shows that he probably relied on then–current book-keeping
manuals as the basis for his masterpiece. In his book, he used the present
day popular terms of accounting Debit (Dr.) and Credit (Cr.). These were
the concepts used in Italian terminology. Debit comes from the Italian
debito which comes from the Latin debita and debeo which means
owed to the proprietor. Credit comes from the Italian credito which
comes from the Latin „credo‟ which means trust or belief (in the
proprietor or owed by the proprietor. In explaining double entry system,
Pacioli wrote that „All entries… have to be double entries, that is if you
make one creditor, you must make some debtor‟. He discussed the
details of memorandum, journal, ledger and specialised accounting
procedures.

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 Journal Ledger
Financial
(Recording)- (Classifying)-
Transactions
Journalizing Posting

Trial Balance Financial

(Summery) Statements

Branches of Accounting

FInancial Cost Management

Accounting Accounting Accounting

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Branches of Accounting
The economic development and technological improvements
have resulted in an increase in the scale of operations and the
advent of the company form of business organisation. This has
made the management function more and more complex and
increased the importance of accounting information. This gave
rise to special branches of accounting. These are briefly
explained below:
Financial accounting:
The purpose of this branch of accounting is to keep a record of
all financial transactions so that:
(a) The profit earned or loss sustained by the business during
an accounting period can be worked out,
(b) The financial position of the business as at the end of the
accounting period can be ascertained, and
(c) The financial information required by the management and
other interested parties can be provided.
Cost Accounting:
The purpose of cost accounting is to analyse the expenditure so
as to ascertain the cost of various products manufactured by
the firm and fix the prices. It also helps in controlling the costs
and providing necessary costing information to management
for decision-making.
Management Accounting:
The purpose of management accounting is to assist the
management in taking rational policy decisions and to evaluate
the impact of its decisions and actions.

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 Objectives of Accounting

As an information system, the basic

objective of accounting is to provide useful
information to the interested group of
users, both external and internal. The
necessary information, particularly in case
of external users, is provided in the form of
financial statements, viz., profit and loss
account and balance sheet. Besides these,
the management is provided with
additional information from time to time
from the accounting records of business.
Thus, the primary objectives of accounting
include the following:

Maintenance of Records of Business

Transactions
Accounting is used for the
maintenance of a systematic record of
all financial transactions in book of
accounts. Even the most brilliant
executive or manager cannot
accurately remember the numerous
amount of varied transactions such as
purchases, sales, receipts, payments,
etc. that takes place in business.
Hence, proper and complete records
of all business transactions are kept
regularly. Moreover, the recorded
information enables verifiability and
acts as evidence.

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 Calculation of Profit and Loss
The owners of business are keen to
have an idea about the net results of
their business operations
periodically, i.e. whether the
business has earned profits or
incurred losses. Thus, another
objective of accounting is to
ascertain the profit earned or loss
sustained by a business during an
accounting period which can be
easily workout with help of record of
incomes and expenses relating to
the business by preparing a profit or
loss account for the period. Profit
represents excess of revenue
(income), over expenses.

Describe Financial Position

Accounting also aims at ascertaining the financial position of
the business concern in the form of its assets and liabilities at
the end of every accounting period. A proper record of
resources owned by business organisation (Assets) and claims
against such resources (Liabilities) facilitates the preparation of
a statement known as balance sheet position statement.

Providing Accounting Information

to its Users
The accounting information
generated by the accounting
process is communicated in the
form of reports, statements,
graphs and charts to the users
who need it in different decision
situations.

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Internal users, mainly management, who needs timely
information on cost of sales, profitability, etc. for planning,
controlling and decision-making and external users who have
limited authority, ability and resources to obtain the necessary
information and have to rely on financial statements (Balance
Sheet, Profit and Loss account).

The external users are interested in the following:

• Investors and potential investors-information on the risks and
returns on investments;
• Unions and employee groups-information on the stability,
profitability and distribution of wealth within the business;
• Lenders and financial institutions-information on the
creditworthiness of the company and its ability to repay loans
and pay interest;
• Suppliers and creditors-information on whether amounts
owed will be repaid when due, and on the continued existence
of the business;
• Customers-information on the continued existence of the
business and thus the probability of a continued supply of
products, parts and after sales service;
• Government and other regulators- information on the
allocation of resources and the compliance to regulations;
• Social responsibility groups, such as environmental groups-
information on the impact on environment and its protection;

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• Competitors-information on the relative strengths and
weaknesses of their competition and for comparative and
benchmarking purposes. Whereas the above categories of
users share in the wealth of the company, competitors require
the information mainly for strategic purposes.

Different Roles of Accounting

� As a language – it is perceived as the language of business
which is used to communicate information on enterprises;
� As a historical record- it is viewed as chronological record of
financial transactions of an organisation at actual amounts
involved;
� As current economic reality- it is viewed as the means of
determining the true income of an entity namely the change of
wealth over time;
� As an information system – it is viewed as a process that links
an information source (the accountant) to a set of receivers
(external users) by means of a channel of communication;
� As a commodity- specialised information is viewed as a
service which is in demand in society, with accountants being
willing to and capable of providing it.

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Assets
Whatever a business owns is an
Asset. Assets are economic
resources of an enterprise that can
be usefully expressed in monetary
terms. Assets can be broadly
classified into following types:
Fixed Assets are assets held on a
long-term basis, such as land,
buildings, machinery, plant,
furniture and fixtures. These assets
are used for the normal operations
of the business.
Current Assets are assets held on a
short-term basis such as debtors
(accounts receivable), stock
(inventory), temporary marketable
securities, cash and bank balances.
Tangible Assets: Which h can be
seen and touched.
Intangible Assets: Which cannot
be seen or touched. E.g. Goodwill,
patent, trademark.
Fictitious Assets: This is not a real
asset but expenditure of big
amount, benefit of which can be
realised for long period.
Wasting Assets:

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 Capital
Amount invested by the owner in the
firm is known as capital. It may be
brought in the form of cash or asset by
the owner for the business entity capital
is an obligation and a claim on the assets
of business. It is, therefore, shown as
capital on the liabilities side of the
balance sheet.

Entity
Entity means a thing that has a
definite individual existence. Business
entity means a specifically identifiable
business enterprise like Super Bazaar,
Hire Jewellers, ITC Limited, etc. An
accounting system is always devised
for a specific business entity (also
called accounting entity).

Transaction
An event involving some value
between two or more entities is
known as transactions. It can be a
purchase of goods, receipt of money,
payment to a creditor, incurring
expenses, etc. It can be a cash
transaction or a credit transaction.

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Contingent Liability: Liability which is
payable on the occurrence of certain
event is known as contingent liability.
For example A Case in the court if
company will lose a case then it has to
pay amount.
Liabilities
Liabilities mean whatever
amount we owe to others.
Liabilities are obligations or debts
that an enterprise has to pay at
some time in the future. Both
small and big businesses find it
necessary to borrow money at
one time or the other, and to
purchase goods on credit.
Long-term liabilities are those
that are usually payable after a
period of one year, for example, a
term loan from a financial
institution or debentures (bonds)
issued by a company.
Short-term liabilities are
obligations that are payable
within a period of one year, for
example, creditors, bills payable,
bank overdraft.

Sales
Sales are total revenues from goods or
services sold or provided to customers.
Sales may be cash sales or credit sales.
Revenues
These are the amounts of the business
earned by selling its products or
providing services to customers, called
sales revenue. Other items of revenue
common to many businesses are:
commission, interest, dividends,
royalties, rent received, etc. Revenue is
also called income.
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Expenses
Costs incurred by a business in the
process of earning revenue are known
as expenses. Generally, expenses are
measured by the cost of assets
consumed or services used during an
accounting period. The usual items of
expenses are: depreciation, rent,
wages, salaries, interest, cost of heater,
light and water, telephone, etc.

Purchases
Purchases are total amount of
goods procured by a business on
credit and on cash, for use or sale.
In a trading concern, purchases
are made of merchandise for
resale with or without processing.
In a manufacturing concern, raw
materials are purchased,
processed further into finished
goods and then sold.
Purchases may be cash purchases
or credit purchases.

Drawings
Withdrawal of money and/or goods by the owner from the
business for personal use is known as drawings. Drawing reduces
the investment of the owners.
Stock
Stock (inventory) is a measure of something on hand-goods,
spares and other items in a business. It is called Stock in hand. In
a trading concern, the stock on hand is the amount of goods
which are lying unsold as at the end of an accounting period is
called closing stock (ending inventory). In a manufacturing
company, closing stock comprises raw materials, semi-finished
goods and finished goods on hand on the closing date.

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 Debtors
Debtors are persons and/or other
entities who owe to an enterprise
an amount for buying goods and
services on credit. The total amount
standing against such persons
and/or entities on the closing date,
is shown in the balance sheet as
sundry debtors on the asset side.

Creditors
Creditors are persons and/or other
entities who have to be paid by an
enterprise an amount for providing
the enterprise goods and services
on credit. The total amount
standing to the favour of such
persons and/or entities on the
closing date, is shown in the
Balance Sheet as sundry creditors
on the liabilities side.

Features of Accounting:
1. Art as well as Science :
It is an Art of correctly recording the day-to-day business
transactions. It is a science of maintaining business record
in regular and proper way. Certain accounting
conventions and principles have to be following while
writing accounts hence we can conclude that Accounting
is an Art and Science.

2. Financial Transaction:

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 Accounting only record transactions and events of
financial nature only, if the transaction cannot be
measured in the terms of money it cannot be recorded in
the books of Account. E.g. Skill of manager certainly effect
the profitability of the business but it will not be recorded
in the book of accounts.

3. Recording:
Accounting involves recording business transaction in a
systematic manner. These recording is done by various
subsidiary books such as Purchase book, Sales book,
Purchase return book, Sales return book, Cash Book, Petty
cash book, General Journal etc… The number of these
subsidiary books to be kept depends on the size and
nature of the business.

4. Classifying:
Classifying means process of grouping the entries or
transactions of one nature at one place. This is done
opening accounts in a book called „Ledger‟ which contains
all the accounts of the firm. Ledgers are available in
printed format in the market. Page numbers are given to
ledgers.

5. Summarising:
It means the process of presenting the classified data in a
manner useful to the user of the accounts. This involves
preparing Trial Balance and Final Accounts (Trading A/c,
Profit and Loss A/c, Balance Sheet).

6. Analysis and Interpretation:

The accounting statements are analysed and interpreted
with the help of ratios. Such analysis helps management
and other to judge the performance of the business.

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 Book Keeping

“Book keeping is the art and science of recording business

transactions in the different set of books”

Bookkeeping and Accountancy are complementary to each

other, as Bookkeeping provides the basis for accountancy
because analysis and interpretation are not possible until
transactions are recorded. But without Accountancy, book
keeping is meaningless because mere recording does not show
the result of the business.

Difference between Accounting and Book keeping :

Basis of Book keeping Accountancy

Difference

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Accounting Systems:
1. Single Entry Bookkeeping System:

It is difficult to define single entry system

because, in fact, there exists no system
like single entry system. Broadly
speaking, it is a defective double entry
system. Any system that falls short of
complete double entry method is called
single entry system. Under this method,
sometimes both the aspects of
transactions are recorded, sometimes
only one aspect is recorded or sometime
no aspects of transactions is recorded in
the books. As a general rule under the
single entry practice only the personal
aspects of the transactions are recorded
and the nominal and real aspects are
omitted altogether. As the name implies,
the single entry system does not take
into account the double effect of every
transaction.

Desi Nama System: It is traditional accounting system followed

and discovered in India. It follows Indian calendar year from
Kartak to Aso into the consideration. The Concept of Godess
laxmi puja on the day of Diwali came from this system as Aso
Vad Amas is the last day of Indian calendarand next day new
year will begin.

Double Entry Bookkeeping System: The double entry theory of

bookkeeping can be defined as the system of recording transactions
having two fundamental aspects - one involving the receiving of a
benefit and the other to giving the benefit - in the same set of books.

In this theory, as the two fold aspects of each transaction are recorded,
the name "double entry" has been given to this system.

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Every transaction involves two fold aspects e.g., an aspect of receiving
and an aspect of giving. One who receives is a debtor (Dr) and one who
gives is a creditor (Cr). Under the double entry system, both the aspects
of giving and receiving are recorded in terms of accounts. The account
which receives the benefit is debited and the account which gives the
benefit is credited. It is the ultimate result of this system that every debit
must have corresponding credit and vice versa and on any particular day
the total of the debit entries and the credit entries on the various
accounts must be equal.

It was invented by an Italian Monk Luca – Di – Pacioli, in his book called

mathematics in 1494.

Difference between Double entry and single entry book

keeping system

Basis Double Entry System Single Entry System

Nature It is a scientific system It is unscientific
of accounting and method and does not
provides complete provide complete and
and detailed records detailed records
of business
Recording Both aspects (Dr and Both aspects (Dr and
Both Cr)of Every Cr)of Every
aspects transactions are transactions are not
recorded in it. recorded in it
Types of All the types Only Personal A/c and
A/c (Personal, Real, Cash book are
Nominal) are maintained…
recorded
Trial TB can be prepared to TB cannot be
Balance check arithmetical prepared to check
accuracy arithmetical accuracy
P/L Trading and P/L Trading and P/L
Account account can be account cannot be
prepared to ascertain prepared to ascertain
true profitability of the true profitability of the
business business

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 Balance Balance sheet is Balance sheet is not
Sheet prepared to ascertain prepared only a
true financial position statement of affairs is
prepared on the basis
of Incomplete records
and estimates.
Legal Books prepared in this Books prepared in this
Proof system are accepted system are not
as an evidence in the accepted as an
court evidence in the court
Reliability Books are completely Not liable as these is
liable under this prepared from
system as these are estimates.. There is
based on scientific Greater chance of
principles errors and frauds..
Cost Relatively more Relatively Less
Expensive Expensive
Rules Strict rules are to be No rules are to be
followed followed
Suitability This system is suitable Suitable only for small
for all types of business
business, large or
small
Tax Dept. Accepts this system Does not Accept

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Computerised Accounting System:
Accounting work requires considerable repetition and routine
work. Computers are widely used in accounting work due to
fast, speedy and accuracy of works.
Large size firms prefer it due to greater storage facility, better
performance and low cost. All the business transaction can be
analyses, classified and summarised with the help of
Computers.
Following type of accounting work can be done with the help
of Computers:
1. Recording business transactions
2. Preparation of individual records
3. Maintenance of stock records
4. Payroll accounting
5. Drawing of Bills and Invoices
6. Maintenance of Purchase and sales ledgers
7. Analysing and summarisation of Transactions
8. Reporting of performance through financial statement.

Please visit the following page to check the history of

Accounting

https://sites.google.com/a/tges.org/accountancy/home/history
-of-accountancy
Visit the following page for Accounting Terminology

https://sites.google.com/a/tges.org/accountancy/terminology

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Questions:
For 2 marks
1. What is accounting?
2. What is bookkeeping?
3. “Accounting is an Art and Science” – Comment.
4. “Bookkeeping is only an Art not a science” – Comment.
5. Name the branches of Accounting.
6. What is Cost Accounting?
7. What is Managerial accounting?
8. What is Single Entry Bookkeeping System?
9. What is Desi Nama System?
10. Mention two features of Single entry book keeping.
11. Mention two features of Double entry book keeping.
12. What is the main difference between Accounting
and Bookkeeping?
13. Name subsidiary books used in place of Journal.
14. Show accounting cycle for a year.
15. Mention 4 uses of computer in accounting.
16. Define: Capital and Drawing.
17. Define: Assets and Liabilities.
18. Define: Debtors and Creditors.
19. Define: Purchase and Sales.
20. In which circumstances goods have to be returned?
21. What is Fictitious Asset? Give one example.
22. What is Wasting Asset? Give one example.
23. Differentiate Tangible and Intangible Assets.

For 5 marks
1. Differentiate Accounting and Book keeping
2. Differentiate Single entry and Double entry book keeping.
3. What is accounting? Explain any 4 features of it.
4. What is bookkeeping? Explain any 4 features of it.
5. Explain the branches of Accounting.
6. Write a brief note on: Single Entry and Desi Nama System.
7. Write a note on Computerised Accounting System.
8. Write a note on: Types of Assets.
9. Write a note on: Types of Liabilities.

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