Chapter-1

Introduction to Accountancy

Meaning of accounting: Accounting is the process of identifying, measuring, recording and communicating the required information relating to the economic evens of an organisation to the interested users of such information. Qualitative Characteristics of Accounts: 1.Reliability: It means the users must be able to depend on the information. The reliability of accounting information is based on proper evidences, a reliable information must be free from error and bias. The information disclosed must be credible and verifiable by independent parties. 2.Relevance: To be relevant, information must be available in time, must help ion prediction and feedback. It should not be over burdened with unnecessary and irrelevant information. All information that will change the result of business should be disclosed. 3.Understandability: Accounting information should be recorded, presented and interpreted in such a way that, it should be easily understood and grasped by its users. 4.Comparability: Accounting information should be comparable with previous year or with similar companies. In order to bring accuracy in comparison methods, practice of recording and presentation should be consistent or same year to year. Objectives of Accounts 1.Maintanence of records of business transactions: Accounting is used for maintenance of a systematic record of all financial transactions.

Even the most brilliant manager cannot accurately remember all the transactions. Hence business transactions are recorded in a proper and complete manner. 2.Calculation of profit or loss: The owners of business are keen to know about the result of their business operations. So the main objective of accounting is to ascertain profit or loss during accounting period. 3.Depiction of financial position: Accounting aims at ascertaining the financial position of a business at the end of every accounting period. It is done by preparing a statement called balance sheet. It shows assets owned by the business and the liabilities transactions. Accounting records these transactions in writing and thus helps in maintaining records. 4.Assist the performance of business: Accounting keeps proper and systematic records of all business transactions. It helps to know profit and loss generated during the year. 5.Preventing and detecting fraud: Proper accounting system and effecting arrangement internal check prevents leakage of goods and cash. Proper accounting enables early detection of fraud embezzlement. 6.Documentary evidences: Accounting records are based on documentary proofs. Every entry is supported by vouchers, invoices, bill, receipts etc. 7.Accessing the financial stages of business : (Refer 3rd point ) Limitations of Accounting 1.Incomplete information: Accounting records only those transactions which are financial in nature. Non financial transactions do not find a place in accounting. Important information like competency of

management, valuation of human resource is not recorded in accounting. Even though they affect the financial soundness of business. 2.Inexactness: while accessing the profit and loss of business accountancy have the basis on real as well as information o risks and returns on investments. 3.Union and suppliers: On the stability, profitability and distribution of wealth. 5.Creditors and suppliers: Information on whether amounts owed till be repaid soon and on continuity of the business. 5.Government and tax authorities: Information on compliance of rules and regulations and profitability and payment of taxes. 6.Social responsibility groups: They need information on the impact business is having on environment. Q.The role of accounting had changed over the period of time do you agree? Explain. Ans. Accounting is regarded as the language of business, it performs the service by providing quantitative financial information that helps the user in various ways. For centuries, the role of accounting has been changing with changes in economic development and increasing societal demands. It analyses date of an enterprise and forms them into reports and statements showing the financial condition of that enterprise. Advantages of Accounting 1.Replacing memory: Business transactions are innumerable and it is quite impossible to memorize every transactions through this subsystem. 2.Fixed asset accounting subsystem: It records the purchase, addition, detection. Usage of fixed assets such as land, building, machinery,

equipment etc. It also generates depreciation reports. 3.Inventory accounting subsystem: It is used to record different items purchased and issued at specific price, quantity and date. It generates inventory valuation records. 4.Cash subsystem: It deals with receipt and payment at cash in physical as well as electronic transfer. 5.Management information subsystem: It deals with sales and debtors, tax accounting etc. It obtains necessary information for decision making. Basic terms in accounting 1.Entity: It means of things that has definite individual existence. Business entity means a specifically identifiable business enterprise. Eg:- ITC Ltd. 2.Transaction: It is an event involved in some value between the two or more entities. It can be purchase of goods, payment to a creditor, etc. Stock, determines depreciation, maintain reserves as per the requirement of the business. It may change from business to business. 3.Showing value less assets: There are certain assets which do not have real value but are still showing in our balance sheet. Eg:-Goodwill, Patent, Preliminary expenses. 4.Manipulation: Accounting results are based upon the information Supplied to it. Management may be biased and feed manipulative information to show its efficiency. Accountants can tell the information as per the needs of the management by underestimating, overestimating etc.

5.Ignorance about the present value of business: While maintaining books of accounts we follow going concern concept. Therefore value of assets in the balance sheet is carried forward each year at the purchase price and not market value. Sometimes assets may be valueless in the market but we still continue to show in accounts. In this way accounts fails to show the present value of business. Accounts as an information system 1.Payroll accounting sub-system: Payment of wages, salary, overtime, leave and cashments are maintained and generated. 2.Assets: They are economic resources of an enterprise that can be usefully expressed in monetary terms. They are items at value used by business in its operations. Eg:- Trucks owned by a super bazaar. 3.Current assets: They are assets held on short term basis. They are utilized within one year. Eg:-Cash balance, bank balance, stock. 4.Fixed assets: They are assets held on long term basis. They are used for more than a year in the normal operations of business. Eg:- Land, building, plants etc. 5.Liabilities: They are obligations or debts that an enterprise has to pay at some time in the future. They represent a lenders or creditors claims on firms assets . 6.Long term liabilities: These are those that are usually payable after a period of one year. Eg:- Debentures, loan from financial institutions.

7.Short term liabilities: They are those obligations which are payable within a period of one year. Eg:- Creditors and Bank overdrafts.