Introduction to Accounting

1. Financial Accounting
An Introduction
Mahesh Chandra Sharma
Associate Professor
Department of Commerce
Shaheed Bhagat Singh Eve. College
(University of Delhi)
India

2. Definition of Accounting
Prof. Mahesh Chandra Sharma
 According to The American Institute of
Certified Public Accountants (AICPA),
“Accounting is the art of recording, classifying
and summarizing in a significant manner and in
terms of money, transactions and events which
are, in part at least, of a financial character, and
interpreting the results thereof.”

3. Characteristics of Accounting
Prof. Mahesh Chandra Sharma
1) Identifying the business transactions and events,
which are of financial nature (to be recorded in
accounting books)
2) Recording the transactions and events in the
primary book – Journal, in terms of money
3) Classifying the transactions into ledger accounts.
4) Summarising – Trial Balance, Income Statement
and Balance Sheet and Cash flow Statement
5) Data is presented in significant manner (as per
rules and principles of accounting)
6) Analysis and interpretation of financial
statements.

4. Accounting as Information System
Prof. Mahesh Chandra Sharma
 A system is a set of elements which operate
together to achieve a predetermined a goal.
 Accounting is referred as a language of
business. Primary aim of a language is a
means of communication.
 Accounting as information system involves
collecting, storing and processing financial
and accounting data that is used
by decision-makers.

5. Accounting as Information System
Prof. Mahesh Chandra Sharma
 Accounting is used to communicate
information of financial character to various
interested parties in proper formats.
 At present, an accounting information
system is generally a computer-based
method for tracking accounting activity in
conjunction with information technology
resources.

6. Accounting as Information System
Prof. Mahesh Chandra Sharma
Input
Business
transactions and
events
(collecting
information)
Process
Recording,
classifying and
summurising
Output
Income Statement
Balance Sheet
Cash Flow
Statement

7. Parties Interested in Financial
Statements
Prof. Mahesh Chandra Sharma
Parties Areas of Interest
1. Owners or Investors (i) Profitability , (ii) Financial position, (iii) Future prospects or
growth potential
2. Management (i) Short term and long term solvency
(ii) Profitability in relation to turnover and investment
(iii)Liquidity of the concern
3. Employees (i) Profitability, (ii) Cash position
4. Suppliers and
other creditors
(i) Financial position
(ii) Profitability
5. Lenders (i) Financial position and (ii) Profitability
6. Government and
their agencies
(i) Profitability
(ii) Growth
(iii)Financial position
(iv)Estimating national income
7. Researchers (i) Profitability, (ii) Growth,
(iii)Financial position and (iv) Future prospects

8. Qualitative Charactistics of Accounting
Information
Prof. Mahesh Chandra Sharma
 Understandability
 Relevance
 Reliability
 Comparability

9. Understandability
Prof. Mahesh Chandra Sharma
 Accounting information should be readily
understandable by the users.
 To have the accounting characteristics of
understandability, the accounting information must
be presented in a manner that users can understand
the same without having expert knowledge in
financial analysis.
 Users are expected to have the reasonable
knowledge of the business and economic activities.

10. Relevance
Prof. Mahesh Chandra Sharma
 Accounting information must be relevant for decision
making.
 The information must have predictive value and feedback
value.
 Relevance of an information is affected by its nature and
materiality. For example, information in respect of
previous year results by a company is relevant since it
would provide a basis to the investors for forecasting
results in future years and also provides a feedback on
past performance.
 Two factors are important in determining relevance.
 Different users may have different opinion as to what is
relevant?
 Whose needs should be given priority. Profitability of a

11. Reliability
Prof. Mahesh Chandra Sharma
 Accounting information must be reliable.
 Reliability of information means that it is verifiable, free
from material error and bias. It can be depended by the
users.
 To be verifiable means that the records can be verified
with the details of information which can be obtained from
the source documents such as cash receipts, bills, cash
memos or invoices or any other supporting voucher.
 Accounting information is considered free from bias if it is
not influenced by personal judgement of the accountant.
 To be reliable information contained in the financial
statements must be complete within the principles of
materiality and cost.

12. Comparability
Prof. Mahesh Chandra Sharma
 Accounting information should be comparable with similar
information either for the same enterprise or for the other enterprises.
 Comparable information will reveal trends and also relative strong
and weak points in a single company.
 Users should be informed of the economic policies employed in the
preparation of financial statements. Comparability is possible when
the different enterprises in the same industry use the same
accounting principles and methods from year to year. This is also
known as uniform practices.
 When accounting information is based on consistency principle or
convention the financial statements permit the meaningful analysis of
the trends within the company.
 Accounting principles and methods can be changed on account of
changes in the accounting environment. In such a case, the change
and its effect on the financial position and performance should be
disclosed.

13. Functions of Accounting
Prof. Mahesh Chandra Sharma
 Maintaining systematic records
 Communicating the financial results
 Meeting legal needs
 Protecting business assets
 Assisting the managers
 Stewardship or trusteeship
 Fixing responsibility

14. Advantages of Accounting
Prof. Mahesh Chandra Sharma
 (1) Replacement of memory
 (2) Assessing the performance and financial position
of the business.
 (3) Comparative study of results
 (4) Planning
 (5) Decision making

15. Advantages of Accounting (Contd.)
Prof. Mahesh Chandra Sharma
 (6) Controlling.
 (7) Provides information to interested parties
 (8) Evidence in courts
 (9) Assessment of tax-liability
 (10) Prevention of errors and fraud
 (11) Assessing value of business
 (12) Raising loans

16. Limitations of Accounting
Prof. Mahesh Chandra Sharma
1) Incomplete information – Non-monetary items
and events are not shown
2) Inexactness – some information is estimated
3) Personal influence of accountant
4) Assets may not be shown at their real value
5) Effect of price level changes not considered
6) Window dressing

17. Branches of Accounting
Prof. Mahesh Chandra Sharma
 Financial Accounting,
 Cost Accounting
 Management Accounting
 Taxation Accounting
 Human Resource Accounting
 National Accounting
 Social Accounting -
 Inflation Accounting
 Forensic Accounting

18. Bases of Accounting
Prof. Mahesh Chandra Sharma
 Cash Basis
 Accrual Basis

19. Cash Basis
Prof. Mahesh Chandra Sharma
 Under the cash basis, revenues are recorded when
cash is received and expenses are recorded when
cash is paid for them.
 No entry is made when revenue or expenses
become due.
 This basis is not compatible with accounting
principles and therefore, is not commonly used.

20. Accrual Basis
Prof. Mahesh Chandra Sharma
 Under accrual basis, revenue and expenses are
recorded in the period in which they becomes due,
rather when they are received or paid.
 Revenues are recorded in the period in which they
are earned rather than in the period in which cash is
actually received.
 Expenses are recorded in the period in which they
have been accrued rather than in the period in which
they are paid.
 This method is compatible with the matching
principle of accounting and more appropriate for the
calculation of profit or loss of the business.