What is Accounting

Luca Pacioli (1447-1517) is known as the father of
accounting. He changed the world of accounting, which in
turn revolutionized how business managers were able to
keep track of internal operations, and thereby attain greater
efficiency and profitability.
Accounting may be defined as the collection, compilation
and systematic recording of business transactions in terms of
money, the preparation of financial reports, the analysis and
interpretation of these reports and the use of these reports
for the information and guidance of management”.
What is Accounting

Accounting is the process of recording financial
transactions
pertaining
to
a
business.
The accounting process includes summarizing,
analyzing and reporting these transactions to oversight
agencies, regulators and tax collection entities.
Accounting is a profession whose core responsibility is
to help businesses maintain accurate and timely records
of their finances.
What is Accounting

“Accounting can be defined as the process of recording,
classifying, summarizing and interpretations the financial
transactions of the company”.
Recording
Recording is a basic phase of accounting that is also known as
bookkeeping. In this phase, all financial transactions are recorded
in a systematical and chronological manner in the appropriate
books or databases. Accounting recorders are the documents and
books involved in preparing financial statements. Accounting
recorders include records of assets, liabilities, ledgers, journals and
other supporting documents such as invoices and checks.
What is Accounting

Classifying
The classifying phase of accounting involves sorting and
grouping similar items under the designated name, category
or account. This phase uses systematic analysis of recorded
data in which all transactions are grouped in one place. For
example, "travel expenses" might be a category that
accountants use to classify expenses relating to company
travel. The term “ledger” refers to the book in which
classifications are recorded.
What is Accounting

Summarizing
The summarizing phase of accounting involves summarizing
the data after each accounting period, such as a month,
quarter or year. The data must be presented in a manner
which is easy to understand and use by both external and
internal users of the accounting statements. Graphs and
other visual elements are often used to complement the text
data.
What is Accounting

Interpreting
The interpreting phase of the accounting process in
concerned with analyzing financial data, and is a critical tool
for decision-making. This final function interprets the
recorded data in a manner which allows end-users to make
meaningful judgments regarding the financial conditions of
a business or personal account, as well as the profitability of
business operations. This data is then used to prepare future
plans and frame policies to execute financial plans.
Importance of accounting

 The primary objective of accounting is to provide
information that is useful for decision-making purposes.
 The final product of accounting information is the
decision that is enhanced by the use of that information,
whether the decision is made by owners, management,
creditors, governmental regulatory bodies, labor unions,
or the many other groups that have an interest in the
financial performance of an enterprise
 Because accounting is widely used to describe all types of
business activity, it is sometimes referred to as the
language of business.
Importance of accounting

 Costs, prices, sales volume, profits, and return on
investment are all accounting measurements.
 Investors, creditors, managers, and others who have a
financial interest in an enterprise need a clear
understanding of accounting terms and concepts if they
are to understand and communicate about the enterprise.
Importance of accounting information in
decision making

 Many people think of accounting as simply a highly
technical field practiced only by professional accountants.
 In reality, nearly everyone uses accounting information
daily. Accounting information is the means by which we
measure and communicate economic events.
 Whether you manage a business, make investments, or
monitor how you receive and use your money, you are
working with accounting concepts and accounting
information.
Importance of accounting information in
decision making

External Users








Suppliers
Creditors
Customers
Potential investors
Trade associations
Labor unions
General public
(CSR)
Governmental agencies
(Interest)
(Dividend/Profit)
Importance of accounting information in
decision making

Internal Users






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
Board of directors (BODs)
Business unit managers
Chief executive officer (CEO)
Plant managers
Chief financial officer (CFO)
Store managers
Vice-presidents (information services)
Line supervisors.
Types of Accounts

1)
2)
3)
4)
5)
Assets
Expenses
Revenue
Liabilities
Capital (Equity/ owner’s equity)
 Single Entry System
 Double Entry System
Debit and Credit Rule

Business and its Types

1) Sole proprietorship/ Entrepreneurship
Single person run the business
Advantages




All profit to owner
Low regulations
Total flexibility of running business
Few requirements to start
Disadvantages
 Owner is 100% liable
 Total bearing loss
 Equity is limited to personal resources
Business and its Types

2) Partnership
Two or more person get together and run business.
Partnership act 1932
Advantages
 Shared resources
 Similar low Flexibility like sole proprietorship
 Each partner share profit in business
 Inexpensive to establish
Disadvantages
 Each is 100% liable for loss.
 Selling is difficult to find new partner.
 Partnership end with partner end
Business and its Types
3) Corporation

It is a legal entity which is separate from its owners and operate
business activities.,
Company ordinance 1984
Advantages
 Limited liability of owner loan (debt)
 Profit and loss belongs to corporations
 It can be transfer to other owner
 Personal assets can not be seized to pay debt
Disadvantages
 Operations are costly
 Need complex working to start
 Double taxation in corporations
Accounting Period

Accounting Period
It is the period with reference to which management
accounts and financial statements of the company are
prepared.
It can be month, quarter, semiannual or annual.
Fiscal Year
It is time period used by the government and businesses for
accounting purposes to formulate annual financial
statements.
For example: from 1st July 2019 to 30th June 2020
Accounting Equation

Assets = Liabilities + Owners’ equity (capital)
 Effect of transaction on accounting equation
1)
Business started with capital of 100000
2)
Asim Purchased land of Rs. 200000 from which 150000 is on cash
and remaining is on credit
Assets = Liabilities + Owners’ equity (capital)
100000 =
0
+ 100000
Assets = Liabilities + Owners’ equity (capital)
200000 = 50000
+ 150000
Cash basis and Accrual basis Accounting

Cash basis accounting
The accounting method in which transaction are recording when
the cash of revenue is received or expenses has been paid with
cash.
Accrual basis accounting
The accounting method in which transaction are recording when
the revenue is earned or expenses is incurred rather than paying
with cash
Realization and Matching concept
 To record the revenue once it has been earned by selling goods
or providing services
 To record the expense once it has been incurred.
Cash transactions & Credit Transaction
Cash transactions

1. I have generated revenue of Rs. 5000 by selling products on cash.
Cash a/c
5000
sales a/c
5000
2. I have purchased land for Rs. 300000 on cash.
Land a/c
300000
cash a/c
300000
Credit Transaction
1. I have generated revenue of Rs. 5000 by selling products on credit.
Land a/c
5000
Cash a/c
5000
2. I have purchased land for Rs. 300000 on credit.
Land a/c
300000
Account payable a/c
300000