INTRODUCTION TO INTRODUCTION TO ACCOUNTINGACCOUNTING

ACCOUNTINGACCOUNTING

Accounting is the language of business. Accounting is the language of business. The affairs and the results of the The affairs and the results of the business are communicated to others business are communicated to others through accounting information, which through accounting information, which has to be systematically recorded and has to be systematically recorded and presented.presented.

Accounting - Accounting - DefinitionDefinition

Accounting can be defined as the

process of identifying, measuring,

recording and communicating the

economic events of an organization to

the interested users of the

information.

Characteristics of Accounting Characteristics of Accounting

Considers monetary terms.Considers monetary terms. Identification, measuring, recording and Identification, measuring, recording and

communicationcommunication Discloses the financial position of the Discloses the financial position of the

business.business. Provides information to various users.Provides information to various users. Meets the legal requirements.Meets the legal requirements.

Economic EventsEconomic Events

An economic event has been defined

as ‘a happening of consequence’ to a

business entity. Economic events are

classified into

• External types

• Internal types.

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An external event which involves the

transfer or exchange of something of

value between two or more entities.

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Sale of goods to customers.

• Payment of monthly rent to the landlord.

Purchase of raw materials by an enterprise from some other business

enterprise.

Rendering of services to customers, etc.

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An internal event is an economic event

that occurs entirely within one

enterprise.

Eg : Supply of raw materials or

equipment by the stores department

to the manufacturing department.

IdentificationIdentification

It means determining what to record, i.e. to identify recordable events. It involves observing activities and selecting those events that are considered to be evidence of economic activity.

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The value of human resources, changes in managerial policies or changes in personnel are important but none of these items is recorded in financial accounts. However, when a company makes a cash sale or purchase, even if the item is small, it is recorded in the books of account.

MeasurementMeasurement

It means quantification, including

estimates of business transactions into

financial terms, i.e. rupees and paise.

If an event cannot be quantified in

monetary terms, it is not considered

for recording in financial accounts.

RecordingRecording

Once the economic events are

identified and measured in financial

terms, they are recorded, i.e. a

chronological diary of these measured

events is kept in an orderly and

systematic manner.

CommunicationCommunication

The economic events are identified, measured and recorded is communicated in some form to management and others for internal and external uses. The information is communicated through the preparation and distribution of accounting reports. The most common reports are in the form of financial statements (Balance Sheet and Profit and Loss Statement).

OrganizationOrganization

It can be a business entity or a non-

business entity, depending upon the

profit or non-profit motive.