Introduction

• In today’s business world, the resources available are

very scarce.
• Every business unit must strive hard to obtain maximum
output with the available input in order to ensure the
optimum utilization of scarce resources.
• The value of input is measured against the value of
output.
• In the present era of cut-throat competition, the need to
study this subject is growing very fast.
• Every businessman makes a constant effort to improve
his/her business.
Importance of Accounting in Today’s World
• In the business world, accounting is one discipline
of study that all people, regardless of job position,
should have some knowledge of. Accounting is the
backbone of the business financial world.
•In recent years, people in the business world have
been held more accountable for their financial
practices. Eg. Enron, WorldCom, Satyam
In the business world, accounting is utilized in much
greater depth, but each individual encounters some
activities in his/her everyday life that requires
knowledge of accounting principles.

Most basic framework of business. Without

an accounting education, students would
be unprepared for the real world.
EXAMPLE:
This illustration shows two ways in which accounting can be
used:

• First, A used accounting to help plan his business. That is, he

used accounting to project the expected profits.

• Second, after A operated his business for a day, he used

accounting to determine if, in fact, he had made a profit.

In general, accounting is used during all phases

of planning and operating a business.
ACCOUNTING
• Systematic process of
measuring the economic
activity of a business
• To provide useful
information to those who
make economic
decisions.
• Accounting information is
used in many different
situations.
Examples:
•Bankers use accounting information when
deciding whether or not to make a loan.

•Stockbrokers and other financial advisers base

investment recommendations on accounting
information

•Government regulators use accounting

information to determine if firms are complying
with various laws and regulations.
 Financial Accounting
• The functions of financial accounting are
concerned with that of bookkeeping, i.e.
maintenance of records of costs, debtors,
and creditors, etc.
• As per the company law requirements, the
company has to maintain the accounts for
their adoption by the shareholders in the
Annual General Meeting.
 Limitations of Financial Accounting
• Doesn’t aims at continuous reporting of
financial data
• Will not reveal the data by jobs, process,
products, etc.
• Provides only historical data, and it would be
too late for any corrective action.
• Does not provide data for adequate control
over materials, labour, and overheads.
• No system to set predetermined estimates,
standards, or budgets.
Accounting Cycle
Users of Accounting Information
 Transaction

Economic Activity e.g. Purchase of goods; receiving

cash or cheque from debtors etc.

Involves exchange or transfer of values between two

parties (internal and external)

Change may be quantitative or qualitative e.g. Purchase

of goods for cash, depreciation of fixed assets etc.

Change should be financial in nature.

 Entity

The term ‘entity’ means something or someone

having a separate existence.

‘Business entity’ means a specially identifiable

business enterprise, i.e., a business enterprise
having a separate entity or existence from that
of the owners of the enterprise.
 Proprietor or Owner

Proprietor is the person who

invests money or money’s worth
into the business as capital, and
bears all the risks of the business.
Capital
 Net Worth Or Net Assets
• Net worth or net assets means the excess
of the total assets of a business over its
total liabilities at any particular point of
time.
• In short, it means owner’s capital.
 Drawings

Drawing refer to cash,

goods or any other asset
withdrawn by the
proprietor from his
business for his
personal, private or
domestic use or
purpose.
 Assets

Assets means resources, things or rights of value

owned by a business undertaking.

Assets are also defined as properties and possessions

owned by a business which benefit future period or
periods.

Assets include: Tangible assets like lands, buildings,

Plant & machinery, etc; intangible assets, such as
Goodwill, Patent rights, trade marks and copyrights;
Debts or amounts due to a business from others, such
as sundry debtors, bills receivable, accrued incomes,
etc.
 Liabilities

Liabilities means claims of outsiders against a business

concern which bind the business concern to others.

In short, liabilities are outsider’s equity.

Examples of liabilities: - loans borrowed, deposits,

creditors, bank loan, bank overdraft
 Debtor

A debtor is a person who owes money to the

business .

A debtor constitutes an asset for the business.

A debtor may be: (a) a trade debtor, (b) a loan

debtor, (c) a debtor for an asset sold on credit or
(d) a debtor for the service rendered on credit.
 Debt
The amount of a business transaction due from a person
(i.e., debtor) to the business is called a debt.

Book debt is the amount due to the business from a debtor

as per the books of account.

Good debt: fully recoverable debt.

Bad debt: A debt which is irrecoverable.

Doubtful debt: A debt, the realization or recovery of which is

uncertain or doubtful. It is the possible loss to the business.
 Creditor
A creditor is a person to whom the business owes money.

A creditor constitutes a liability for the business

A creditor may be

(a) a trade creditor,

(b) a loan creditor,

(c) a creditor for an asset purchased on credit and

(d) an expense creditor

 Solvent: Insolvent:
A businessman A businessman
is said to be is said to be
solvent when insolvent when
he is able to he is not able
pay his to pay his
liabilities in liabilities in
full. full.
 Goods
refer to merchandise,
commodities, products,
articles or things in which a
trader deals.

Purchases /
Sales
Inventory
 Costs incurred in connection with the
earnings of revenue. E.g. Cost of
goods sold or services rendered,
administration or office expenses,
selling and distribution expenses,
maintenance expenses, financial
expenses, etc

Expenses
 Revenue : is the
Loss: refers to money earning of a business
or money’s worth given from the sale of goods
up without getting any or from the rendering of
benefit in return. e.g. services to customers
loss of goods by fire, during an accounting
loss of cash by theft, period. It also includes
loss of machinery in other earnings like
accident etc. interest and dividends,
rent, discount etc.
 • refers to revenue
which is not generated
Gain through routine or
regular business
activities.

• is the excess of
revenues over the
Profit expenses of a given
period of time, usually
a year.
CONFUSED!

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QUESTIONS?
 THANK YOU

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