1. Meaning of Accounting
Accounting is a systematic process
of identifying, recording,
classifying, summarising,
interpreting and communicating
the results to the interested users.
2. Step 1) Identification of Financial Transaction
Financial Transaction Non Financial Transaction
Financial transaction means a
transaction entered into by two
parties which brings a change in the
earnings of the business.
AND
These transaction can be expressed in
terms of money.
Non-Financial transaction means a
transaction entered into by two parties
which adversely affects the earnings of
the business .
BUT
These transaction can not be expressed
in terms of money.
Examples:
Sale of goods, purchase of goods,
receipt from customers, payment of
rent
Examples:
Dispute between the production
manager and sales manager,
resignation by an experienced and able
manager, strike by employees, starting
of a new business by the other person
5. Exercise No. 1)
Which of the following transactions are of financial
character and will be recorded in the books ?
Purchase of goods
Strike by employees
Interview of a candidate for employment
Make promise to send the goods
Sale of goods
Receiving an order to send the goods
Dedication of an employee
Money received from customers
Resignation by an employee
Salary paid to employees
6. Step 2) Recording
Only financial transactions are recorded in accounting.
In a small business where the number of transactions is small, all
transactions are first of all recorded in a book called “ Journal”.
Format of Journal Book
DATE PARTICULARS LEDGER
FOLIO
DEBIT (RS.) CREDIT (RS.)
8. In a big business where the number of transactions is large, the
Journal is further sub-divided into various subsidiary books.
9. Subsidiary Books or Books of Original Entry
1) Cash Book : for recording cash transactions
2) Purchase Book : for recording credit purchase of goods
3) Sales Book : for recording credit sale of goods
4) Purchase Return Book : for recording the return of credit
purchases of goods
5) Sales Return Book : for recording the return of credit sales of
goods
6) Journal Proper Book : for recording the remaining transactions
16. Step 3) Classification
Classification is the process of grouping the
transactions of one nature at one place, in a
separate account.
The book in which various account are opened is
called “Ledger”.
18. Step 4) Summarising
This step includes :
1.Trial Balance – to check arithmetical accuracy of accounts
2.Final Accounts
Trading Account – to calculate Gross Profit or Gross Loss
Profit & Loss Account – to calculate Net Profit or Net Loss
Balance Sheet – to present the Financial Position of the Business
25. Step 5) Interpretation of the Results
In accounting, the results of the business
are presented in such a manner that the
parties interested in the business such as
proprietors, managers, banks, creditors,
employees etc. can have full information
about the profitability and the financial
position of the business.