A clear picture on financial accounting and its concepts. A simple presentation that talks about the objectives of accounting and its applications.

1. What is Accounting?
Accounting may be defined as the art of
recording, classifying and consolidating business
transactions that are financial in nature for audit and
tax purposes.
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2. Objectives of Accounting
 To provide information about the business activities to the
owners , stake holders or investors and creditors
facilitating them to take decisions on investment and
lending.
 To effectively manage the material resources available.
 To facilitate social functions and control.
 To provide information regarding accounting policies.
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3. Various classifications of Accounting
 Financial: The main purpose is to record the business transactions in
the books of accounts enabling businessmen to know the results. In
general, the term accounting refers to financial accounting only.
 Cost Accounting: ICMA London refers to cost accounting as “an
application of accounting and costing principles, methods and
techniques in the ascertainment of cost and analysis of savings as
compared with past or with established standards.
 Management Accounting: Both financial and cost accounting
methods and results contribute to management accounting where the
data is interpreted mainly for arriving at optimal managerial decisions.
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4. Main Accounting Concepts
 B u s i n e s s E n t i t y Co n c e p t
Lets say an entrepreneur starts a business. Though he is
the owner, the business is treated as a separate entity.
It is treated as a distinct feature and therefore it
becomes necessary to record the business transactions
separately to distinguish from the owner’s personal
transactions.
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5. Main Accounting Concepts
 Going Concern Concept
People may come and go, but the business remains forever.
Until and unless the business dies by itself.
 Money Measurement Concept
 Business transactions can only be recorded in terms of
their monetary value. Depreciation, rent, use of clerical
services etc., can be only added up if expressed in terms of
money.
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6. Cost Concept
 The transactions are recorded keeping in mind the
actual cost involved and this concept does not
consider the projected value or appreciation.
 Even if a firm knows that a land purchased for Rs.
2,00,000 will fetch double the amount in the near
future or worth more than the actual cost, the
transaction is recorded only at the actual cost.
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7. Dual Aspect Concept
 Each transaction has two aspects. When a business
acquires an asset, it has to pay money. Acquiring an
asset and paying money are two sides of the coin.
 Similarly, if the asset is acquired through credit, there
arises a liability to that extent. Thus if there is an
increase in asset, there will be increase in liability also.
 Assets = Liabilities+Capital
Or
 Capital = Assets-Liabilities
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8. Realisation Concept
Unless money has been realised, no transaction can said
to have been taken place.
Accounting Period Concept
In order to ascertain the state of the business affairs at
regular intervals, usually a period of 52 weeks or 365
days is considered as the accounting period.
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9. Two methods of Accounting
 Cash System
In this method, entries are made only when cash is
received or paid and no entry being recorded when
there is a payment or receipt due.
 Mercantile System
Here, entries are made on the basis of amount having
become due for payment or receipt.
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10. Book Keeping
 It is the art of recording the business transactions in a set of books
systematically.
 The two systems in book-keeping are
1. Single entry system of book-keeping and
2. Double entry system of book-keeping
 The set of books are
1. Journal
2. Subsidiary books
3. Ledger
4. Trial Balance and
5. Final Accounts.
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