This document provides an overview of basic accounting concepts. It defines accounting as the process of identifying, recording, and communicating financial transactions of an organization. Accounting involves maintaining systematic financial records, calculating profits and losses, and providing information to internal and external users for decision making. The document also outlines the objectives, functions, nature, branches, and users of accounting information.

1. BASIC CONCEPTS OF
ACCOUNTING
CHAPTER-1
AUTHOR:
DR. KAPIL JAIN
RASHMI SOMANI
1

2.  Accounting is the process of identifying, recording,
classifying, summarizing, and analyzing the financial
transactions of an organization in a systematic manner.
 In addition, the accounting process involves interpreting
the results to various interested users, such as
proprietor, creditor, managers, shareholders and investor.
 The information collected from accounting process helps
in the decision-making process of an organization.
 According to the American Accounting Association (AAA),
“Accounting is the process of identifying, measuring, and
communicating economic information to permit informed
judgments and decisions by users of the information.”
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CONCEPT OF ACCOUNTING

3. © 2012, Dreamtech Press :: Chapter 1 3
OBJECTIVES OF ACCOUNTING
 Some of the objectives of accounting are discussed as follows:
 Maintaining records of the business: Implies that accounting enables an
organization to maintain systematic records of all the financial transactions, such
as purchase and sale of goods, cash receipts and cash payments.
 Calculating profit and loss: Implies that with the help of accounting, net results
of the business operations are determined for a particular duration.
 Depicting financial position: Refers to one of the important objectives of
accounting. A proper record of all assets and liabilities helps to determine the
value of the organization’s assets, and the amount that organization owes to
others.
 Providing financial information to users: Implies that the accounting information
is communicated to the proprietors and other interested users.
 Facilitating planning and forecasting: Implies that the accounting information
helps the management to evaluate the viability of the proposed operations, which
in turn, helps them to plan and forecast the future business operations.

4.  The main functions of accounting are as follows:
 Keeping systematic records: Involves recording the business transactions
in the journal and posting the transactions to ledger accounts.
 Protecting properties of the business: Implies that an accountant design
a system of accounting to protect the properties of an organization, such
as tools and machinery, from unjustified and unwarranted use.
 Acting as a source of information: Facilitates dissemination of the
accounting information among the different group of users to help them
in taking various decisions.
 Meeting legal requirements: Act as one of the important functions of
accounting. The accounting system of an organization should fulfill the
requirements of law. Under the provisions of law, a business has to file
various statements, such as income tax returns, and returns for sales tax
purposes.
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FUNCTIONS OF ACCOUNTING

5.  The accounting information can be useful in the following
ways:
 Provides information for taking financial decisions
 Fulfills the requirements of the users who rely on financial
statements as their standard source of information for decision
making
 Provides information for judging managerial efficiency to use
the resources effectively for attaining the business goals and
objectives
 Provides accurate and interpretive information regarding
assumptions taken for evaluation, forecast, and assessment
 Provides historical information to the management to reveal
past events
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NATURE OF ACCOUNTING

6.  Role of Language
 Involves maintaining and processing the financial information required
by a business entity for its management and reporting purposes. The
basic function of a language is to serve as a medium of communication.
Accounting also serves this function by communicating the results of
business operations to the stakeholders of the business.
 Role of Information System
 Involves collection and communication of financial information about an
enterprise to the interested parties. However, accounting information is
related to the past transactions and is quantitative and financial in
nature; it ignores qualitative information and non-financial information.
 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 financial year. Information
provided in this manner serves as a historical record for an organization.
It can be useful for various purposes, such as evaluating performance,
comparing the present performance of the organization with the past
performance.
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ROLE OF ACCOUNTING

7. © 2012, Dreamtech Press :: Chapter 1 7
USERS OF ACCOUNTING INFORMATION
Users of Accounting
Information
Internal Users
Owners
Management
External Users
Banks and Financial
Institutions
Investors and Potential
Investors
Creditors
Government and its
Authorities
Society

8.  Accounting can be classified into three specialized branches, which
are shown in the following figure:
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BRANCHES OF ACCOUNTING
BranchesofAccounting
Financial Accounting
Cost Accounting
Management Accounting

9.  Financial accounting is a process of systematic recording of financial
transactions directed towards the preparation of profit and loss account
and balance sheet.
 It involves recording, classifying, and summarizing the effects of internal
as well as external transactions on the business.
 The result of the financial accounting process is communicated to the
decision makers through the financial statements.
 As per Accounting Standard 3 issued by the Institute of Chartered
Accountants of India, there are mainly three financial statements:
 Income statements (trading account and profit and loss account)
 Balance sheet (assets and liabilities)
 Cash Flow Statement
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FINANCIAL ACCOUNTING

10.  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 follows:
1. Cost determination: Involves the calculation of cost incurred on a
particular product or activity
2. Cost recording: Includes the recording of the determined cost in the
cost journal and posting to the ledger
3. Cost analysis: Involves the evaluation of cost information to assist the
planning and controlling of the business activities
4. Cost reporting: Includes the reporting of cost data for internal and
external reporting purposes
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COST ACCOUNTING

11.  Management accounting is the process of designing the accounting
system for the management.
 The 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 profit.
 Management Accounting deals with drawing the relevant information
from the financial accounting and cost accounting.
 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 tax authorities".
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MANAGEMENT ACCOUNTING

12.  Accounting is the process of identifying, recording, classifying,
summarizing, and analyzing the financial transactions of an
organization in a systematic manner.
 Accounting plays a vital role in managing business by collecting,
classifying, and recording, summarizing, analyzing, and interpreting
financial transactions.
 The users of a financial statement include the present and potential
investors, employees, lenders, suppliers and other trade creditors,
customers, government and their agencies, and common people.
 Accounting can be classified into three specialized branches namely,
Financial Accounting, Cost Accounting, and Management Accounting.
12
RECAP
© 2012, Dreamtech Press :: Chapter 1