COURSE CODE:: MP102
AND FINANCE FOR
Unit -1:: BASIC CONCEPTS OF
Define the concept of accounting
Discuss various functions of accounting
Explain the difference between bookkeeping and accounting
Describe accounting as a source of information
Identify different users of accounting information
Elaborate on the role of accounting
Describe the three branches of accounting
Define the basic accounting terms
Accounting is an old concept which came into existence with the
beginning of money, business, economics and banking. Generally,
accounting is referred to as a “language of business” and its concepts,
conventions, policies and standards have undergone changes several
times. The concept of accounting is very essential for the managers as it
is applied in the day-to-day working of an organization. Managers of each
department must be well versed with the basic accounting concepts to
understand various costs, revenue, and profit. Accounting concepts help
to understand various financial transactions, methods of recording them,
and evaluating them to get the desired results. These concepts not only
provide information to managers of an organization, but also to other
stakeholders of the organization. Accounting, hence, is the basic
requirement for growth and smooth working of an organization.
According to the American Accounting Association
“Accounting is the process of identifying, measuring, and
communicating economic information to permit informed
judgments and decisions by users of the information.”
As per the Committee on Terminology of 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 parts at least, of a financial character, and
interpreting the results thereof.”
Maintaining the Business Records.
Preparing the financial statement.
Helping in Decision Making.
Providing information to interested groups.
Providing legal evidences and helping in preventing any
misconduct or threats from rival organizations.
Focuses only on financial transactions or events while ignoring the
Leads to wrong conclusions if the assumptions of accounting data
Obtains biased information from the accountant if he/she willing
makes inappropriate estimations.
Shows fixed asset at a particular cost, which would depreciate over
Provides accounting information on a yearly basis only while the
information can also be required for a shorter duration
Role of Language: Involves maintaining and
processing the financial information required by a
business entity for its management and reporting
Role of Information System: Involves collection
and communication of financial information about
an enterprise to the interested parties.
Role of Historical Records: Involves the recording
of information in the form of a profit and loss
account, and balance sheet at the end of the
USERS OF ACCOUNTING
According to Kohler’s Dictionary for Accountants, “Financial
accounting is the accounting for revenues, expenses, assets
and liabilities that is commonly carried on in the general office
of a business.”
The result of the financial accounting process is
communicated to the decision makers through the financial
As per Accounting Standard 3 issued by the Institute of
Chartered Accountants of India, there are mainly three
• Income statements (trading account and profit and loss account)
• Balance sheet (assets and liabilities)
• Cash Flow Statement
According to ICMA, London:
“Cost Accounting is the application of cost accounting principles, methods and
techniques to the science, art and practice of cost control and ascertainment of
profitability. It includes the information derived therefrom for the purpose of
managerial decision making”.
The steps involved in the cost accounting process are as
• Cost determination: Calculation of cost incurred on a particular
product or activity.
• Cost recording: Recording of the determined cost in the cost
journal and posting to the ledger.
• Cost analysis: Evaluation of cost information to assist the
planning and controlling of the business activities
• Cost reporting: Reporting of cost data for internal and external
Management accounting is the process of designing the
accounting system for the management.
Management is primarily concerned with the supply of
information that is useful for- decision-making, planning, and
controlling of the business operations and, thus, maximizing
The Chartered Institute of Management Accountants (CIMA),
London, defines Management Accounting as follows:
“The process of identification, measurement, accumulation, analysis,
preparation, interpretation, and communication of information used by
management to plan, evaluate and control within an entity and to assure
appropriate use of and accountability for its resources. Management
accounting also comprises the preparation of financial reports for non-
management groups such as shareholders, creditors, regulatory agencies and
Assets: Refers to the property or legal rights owned by an individual
• Fixed Assets: Refers to the assets that are purchased for the purpose of
business operations and not for resale.
• Current Assets: Refers to the assets that are kept for short term with the
purpose of converting them into cash or for resale like- debtors, cash,
bank balance and bills receivables.
• Tangible Assets: Refers to the assets that are provided in the physical
form. For example, land, building, plant, and machinery.
• Intangible Assets: Refers to the assets that do not have any physical
form, for example- goodwill, trademarks, patents, and copyrights.
Expenses: Refers to the cost incurred by an organization while
producing products and services for earning revenue.
Income: Refers to the profit earned over a given duration. In other
words, income is the difference between revenue and expenses
Expenditure: Is an amount of money paid by an organization in exchange of
the benefit received.
• Capital Expenditure: Refers to the amount spent on purchasing assets, the
benefit of which lasts for more than a year.
• Revenue Expenditure: Refers to the amount spent on the purchase of goods and
services that are consumed within a short period, say within a year.
Revenue: Refers to the amount earned by an organization from its normal
business operations. It is mainly generated by selling the products or
providing services to customers.
Debtor: Refers to an individual or an entity who owes money to an
individual or organization generally, on account of credit sales.
Creditor: Refers to an individual or an entity to whom an organization owes
money. Creditors provide goods and services to the organization on credit
for which they would be paid later by the organization.