Accounting is the process of identifying, measuring, recording, classifying, summarizing, analyzing, interpreting and communicating financial information about an entity. It involves recording economic events which affect the financial position and performance of a business. The key functions of accounting include identifying transactions, measuring transactions in monetary terms, recording transactions methodically in books of accounts, classifying transactions into appropriate accounts, summarizing transactions periodically into financial statements, analyzing trends and relationships, interpreting financial statements for decision making and communicating essential information to users.

1. Financial
Accounting

2. Meaning of Accounting
It istheprocessof identifying,
measuring, recording,
classifying, summarising,
analysing, interpreting and
communicating theeconomic
information of an organisation
to itsuserswho need the
information for decision
making.

3. Definition of Accounting
“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 theresultsthereof”.
American Institute of Certified Public
Accountants (AICPA)

4. Functions orProcess of
Accounting

5. Identifying thetransaction or event
Accounting identifiestransactions
and eventsof aspecific entity. A
transaction isaexchangein which
each participant receiveor sacrifice
value.

6. Measuring theIdentified transaction
& events
Accounting measuresthe
transactionsand eventsin terms
of acommon measurement unit,
that isaruling currency of a
country

7. Recording
Accounting isconcerned with the
recording of identified & measured
financial transactionsin an orderly
manner in theproper booksof
accountssoon after their occurrence.

8. Classifying
Accounting isconcerned with the
classification of recorded transactionsso
asto group thetransactionsof similar
typeat oneplace. Thisfunction is
performed by maintaining the ledger
in which different accountsareopened.

9. Summarising
Accounting isconcerned with the
summarization of theclassified
transactionsin amanner useful to
theusers.
Thisinvolvesthepreparation of
financial statementssuch asIncome
statementsand BalanceSheet.

10. Analysing
Accounting isconcerned with the
establishment of relationship
between thevariouselements
taken from theBalancesheet or
IncomeStatement or both.
Itspurposeisto identify the
financial strength or weaknessof
theenterprise

11. Interpreting
It isconcerned with explaining
themeaning and significanceof
therelationship so established by
theanalysis.
Theaccountantsshould interpret
thestatementsin amanner useful
to theusersso asto enablethe
usersto takereasonabledecisions

12. Communicating
Communication isconcerned with
thetransmission of summarized,
analysed and interpreted
information to theusersto enable
them to makereasonabledecisions.

13. Advantages of Accounting

14. Advantages of Accounting

15. Limitations of Accounting

16. Important Concepts
Accountancy : Accountancy refers to a systematic knowledge of accounting. It tells us how to
prepare books of accounts and how to summarise the accounting information
and communicate it to the interested parties
Accounting : Accounting refers to the actual process of preparing and presenting the
accounts. It is the art of putting the academic knowledge of accountancy into
practice. It covers identifying, measuring, recording, classifying, summarising,
analysing, interpreting and communicating the economic information.
Book Keeping : It is a part of accounting and is concerned with the record keeping or
maintenance of books of accounting which is often routine or clerical in nature.

17. Relationship Between Accountancy, Accounting &
Book Keeping
AccountAncy
Accounting
Book keeping

18. Trader

19. Trader

20. Basis of Accounting
1. Cash Basis of Accounting
2. Accrual Basis of Accounting

21. Cash Basis of Accounting
Cash basis of accounting
is a method of accounting
where transactions are
recorded at the time when
physical cash is actually
received or paid out.

22. Accrual Basis of Accounting
Accrual basis of accounting is a method
of accounting in which transactions are
recorded on the basis of period in which
they happen or accrue.
Under the Companies Act 1956, all
companies are required to maintain the
books of accounts according to the
accrual basis of accounting.

23. Point of Distinction Cash Basis Accrual Basis
Recording of Revenue Revenues are recorded when they are
received, which may be before or
after they are earned.
Revenues are recorded when they are
earned, which may be before or after
they are received.
Recording of Expenses Expenses are recorded when they are
paid, which may be before or after
they are incurred.
Expenses are recorded when they are
incurred, which may be before or after
they are paid
Treatment of Revenue
and Expenses in
Financial statement
Financial statements reflect revenues
and expenses based on when
transactions were entered.
Financial statements match revenues
to the expenses incurred in earning
them
Treatment of
Receivable
No receivables are recorded. A receivable is recorded when payment
is not received at the point of sale.
Treatment of Payable No payables are recorded. Payables are recorded when payment
is not made at the time of purchase.

24. Point of Distinction Cash Basis Accrual Basis
Methods of Tracking
Partial Payment
No method of tracking partial payments
is available.
Revenues and expenses are recorded in
full, even though partial payments may
be made over extended time periods
Recognition under
companies Act 1956
This basis is not recognised under the
companies act 1956
This basis is recognised under the
companies act 1956

25. Point of Distinction Cash Basis Accrual Basis
Presence of
Prepaid/outstanding
expenses and accrued/
un-accrued income in
Balance sheet
Under this method, Items like prepaid
expenses, outstanding expenses,
accrued income, un-accrued income
are not present in Balance sheet
Under this method, Items like prepaid
expenses, outstanding expenses,
accrued income, un-accrued income are
present in Balance sheet
Treatment of income in
case of prepaid
expenses and accrued
income
Income Statement will show Lower
income
Income Statement will show a relatively
higher income
Treatment of income in
case of outstanding
expenses and income
received in advance
Income Statement will show higher
income
Income Statement will show a relatively
Lower income

26. Accounting Terms
S.NO TERMS S.NO TERMS
1 Entity 16 Bills Receivable
2 Event 17 Bills Payable
3 Transaction 18 Receivable
4 Sole Proprietor 19 Payable
5 Voucher 20 Expenses
6 Entry 21 Outstanding Expenses
7 Assets 22 Prepaid Expenses
8 Liabilities 23 Income
9 Capital 24 Accrued Income
10 Drawing 25 Income Received in advance
11 Purchases 26 Revenue
12 Sales 27 Net Profit
13 Stock 28 Net Loss
14 Trade Debtors 29 Goodwill
15 Trade Creditors 30 Debentures

27. Entity
An entity means an economic unit that
performs economic activities .
It can be sole proprietorship concern,
partnership concern or company etc.
Example : Reliance Industries

28. Event
An event is any happening that effect the
financial statement without any transactions
taking place
Accounting events can be either external or
internal.
Example : Depreciation, Loss of goods by Fire

29. Transaction
A Transaction is an exchange in which each
participants receives or sacrifices value
Example : Purchase of Raw Materials

30. Sole Proprietorship
A simple form of business where there is
one owner.
It is a simplest, oldest, and
most common form of business ownership i
n which only one individual acquires all
the benefits and risks of running
an enterprise

31. Voucher
Voucher is a document which serves as an
evidence of a transaction.
The Vouchers act as source document on
the basis of which transactions are
recorded in the books of accounts
Example : Cash Memos for cash purchase

32. Entry
Entry is the record made in the books
of accounts in respect of a transaction
or event.
An entry is passed on the basis of
vouchers

33. Assets
Assets refers to tangible objects or
intangible rights of an enterprise which
carry future probable benefits
TYPES
Tangible Assets and Intangible Assets
Current Assets and Fixed Assets

34. Liabilities
Liabilities refers to the financial
obligations of an enterprise other than
owners funds
TYPES
1.Current Liabilities
2.Long term Liabilities

35. Capital
Capital refers to the amount
invested in the enterprise by the
proprietor or partner. It is the
excess of assets over external
liabilities

36. Drawings
Drawing refers to the total amount of
cash or goods or any other assets
withdrawn by the proprietor or partner
for personal use

37. Purchases
Purchases refers to the total amount
of goods obtained by an enterprises
for resale or for use in production of
goods in the normal course of
business

38. Sales
The term sales refers to the amount for
which the goods are sold or services are
rendered.
The sales may be on cash or credit.
For Example :
In case 60 units are sold @ Rs. 5 per unit.
Sale = Rs. 300

39. Stock
Where Stock refers to tangible
property held for sale in the ordinary
course of business.
It include stock of raw material,
semi-finished goods and finished
goods

40. Trade Debtors
Debtors refers to the person from
whom the amount are due for goods
sold or services rendered on the
credit basis

41. Trade Creditors
Trade creditors refers to the person
to whom the amount are due for goods
sold or services rendered on credit
basis

42. Bills Receivable or Account Receivable
Bill Receivable is money owed by
customers (individuals or corporations)
to another entity in exchange for goods
or services that have been delivered or
used, but not yet paid for.

43. Bills Payable or Account Payable
Bills payable or accounts payable is
money owed by a business to its
suppliers .
It is shown as a liability on a company's
balance sheet.

44. Outstanding Expenses
Expenses which have been incurred but not
been paid for till the end of the accounting year
are known as Accrued expenses or outstanding
expenses.

45. Prepaid Expenses
Holidays
Prepaid expenses are future expenses
that have been paid in advance.
A common prepaid expense is six-month
premium for insurance on company's
vehicles.

46. Income
Income is increases in economic benefits
during the accounting period in the form
of inflows or enhancements of assets or
decreases of liabilities that result in
increases in equity,

47. Accrued Income
Accrued income is income which has been
earned but not yet received. Income must be
recorded in the accounting period in which it
is earned. -

48. Income received in advance
Prepaid income is revenue received in
advance but which is not yet earned.
Income must be recorded in the accounting
period in which it is earned.

49. Net Profit
Net Profit means the excess of
revenue over expenses
Net Profit = Revenue - Expenses

50. Net Loss
Net Loss means the excess of
expenses over revenue
Net Loss = Expenses - Revenue

51. Goodwill
Goodwill is seen as an intangible asset
on the balance sheet .
Goodwill typically reflects the value of
intangible assets such as a strong
brand name, good customer relations,
good employee relations and any
patents or proprietary technology.

52. Debenture
Debentures are the most common
form of long-term loans that can
be taken by a company.
Debentures are usually loans that
are repayable on a fixed date at a
fixed rate of interest.

53. Users of accounting
Internal users External users
Management Potential investors
Workers Present investors
Creditors
Customers and general
public
Tax authorities