ACCOUNTING: Accounting is concerned with the process of recording, sorting an

summarizing data resulting from business operations and events.

Definition by American Institute of Certified Public Accountants: “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”.

Characteristics of Accounting:
(i) Accounting of Art: Accounting classifies as an art, as it helps us in attaining
our aim of ascertaining the financial results. Analysis and interpretation of financial data
are the art of accounting, requiring special knowledge, experience and judgement.

(ii) It involves recording, classifying and summarizing: Recording means

systematically writing down the transactions and events in account books soon after their
occurrence, classifying is the process of grouping transactions or entries of one nature at
one place. This is done by opening accounts in a book called ledger. Summarising
involves the preparation of reports and statements from the classified data understandable
and useful to management and other interested parties. This involves preparation of final
accounts.

(iii) It records transaction in terms of money: This provides a common measure of

recording and increase the understanding of the state of affairs of the business.

(iv) It records only those transactions and events which are of financial
character: Accounting consider only those transaction which are of financial character,
Financial character means all the monetary transaction which can be measure in monetary
terms. Ex. Salary to Employee can be measure through money i.e. 20,000 P.M. but the
Intelligent level of employee is not a transaction because we can not measure it thorough
money.

(v) Financial position of business: through accounting we can understand the

financial position of business and profitability of business for a particular period.

(vi) Accounting involves communication: The results of analysis and interpretation

are communicated to management and to other interested parties (users of Accounting).

BRANCHES OF ACCOUNTING: Accounting has three main forms of branches viz.

Financial Accounting, Cost Accounting and Management Accounting.
(a) Financial Accounting: It is concerned with record-keeping directed towards the
preparations of trial balance, profit and loss account and balance sheet.

(b) Cost Accounting: Cost accounting is the process of accounting for costs. It is a
systematic procedure for determining the unit cost of output produced or services
rendered. The main function of cost accounting is to ascertain the cost of a product and to
help the management in the control of cost.

(c) Management Accounting: Management Accounting is primarily concerned with

the supply of information which is useful to management in the decision making for the
efficient running of the business and thus in maximizing profits.

OBJECTIVES OF ACCOUNTING: The following are the main objectives of

accounting:

(i) Keeping Systematic Records: Accounting is done to keep a systematic record of

financial transactions.

(ii) Protecting and Controlling Business Properties: Accounting helps in seeing to

it that there is no unauthorized use or disposal of any assets or property belonging to the
firm, because proper records are maintained. With the help of proper maintain of
accounting. Business can easily measure whether business is going on right track or not
and the properties is used properly or not.

(iii) Ascertaining the Operational Profit / Loss: Accounting is used to show the
results of the activities in a given period, i.e. to show how much profit has been earned or
how much loss has been incurred. This is done by keeping a proper record or revenues
and expenses of a particular period.

(iv) Ascertaining the Financial Position of the Business: Balance Sheet is prepared
to ascertain the financial position of the firm at the end of a particular period.

(v) Facilitating Rational Decision Making: Accounting collect the information,

analysis and interpret and provide time to time for rational Decision.
TERMINOLOGY USED IN ACCOUNTING:

(a) Capital: it is that amount this is invested by the owner in the business in any
form whether in the form of Cash, Assets or Goods. In the accounting, Owner and
Business both are separate entity so whatever amount is invested by owner it will be
liability on the business and technically it will be called CAPITAL.
Ex. Ram (Proprietor) Invest Cash Rs.10,000, Building of Rs. 50,000 in the
business in this case Capital will be of Rs. 60,000 (10,000+50,000)

(b) Drawing: Drawing is that amount of business which is Drawn or use by the
owner for his personal purpose that amount will be called DRAWING. Ex. If owner pays
his children’s school fees of Rs. 1500 from the business, then Rs. 1500 will be called
Drawing. Drawing Reduces the Capital amount.

(c) Assets: Those resources which are used by the business for running their
operations and which is result of past event and which contribute for future earning .
Assets may be of two types:
1) Current Assets: this is used for a short Period say 1 year
List of Current Assets:
a) Cash
b) Bank
c) Stock
d) Sundry Debtors
e) Bills Receivable (BR)
f) Marketable Securities
g) Prepaid Expense
h) Accrued Income

2) Fixed Assets: This is used for a long Period more than 1 year
Fixed Assets are Two types:
A) Tangible Fixed Assets: this is those assets to which we can touch, see
List of Tangible Fixed Assets:
a) Building
b) Land
c) Plant and Machinery
d) Furniture
e) Fixture and Fitting
f) Computers
g) Vehicles

B) Intangible Fixed Assets: this is those assets to which we can not see, touch
but we can only feel:
 List of Intangible Fixed Assets
a) Goodwill
b) Patent
c) Trade-Mark
d) Copyright

d) Liabilities: Financial Obligation on the Business which have to paid by the

business to other party and which is result of past event. Liabilities may be of two types:
1) Current Assets: this is that liability which will be paid by the business with in
a year
List of Current Assets:
a) Sundry Creditors
b) Bills Payable
c) Bank Overdraft
d) Short Term Loan
e) Outstanding Expenses
f) Unearned Income

2) Long Term Liabilities: This is that liability which will be paid by the business
in a long period we can say after one year

e) Sundry Debtors: Business sold good on cash basis and credit basis if goods are
sold on credit basis, then that party is called Debtor to whom that goods are sold on
credit. Ex. If Business sold goods to A on credit the A will be Debtors for the Business

f) Sundry Creditors: like sales, in the case of purchase business have two options
on is cash purchase and another one is Credit purchase. That party is called creditor to
whom the goods are purchased on credit. Ex. If goods purchased from Z on credit then Z
will be Creditor for Business

g) Goods: Goods are those items which is sale or resale for profit

h) Stock: Stock is those Goods which are not sale by the business and which is
remain with business possession. Ex. If Goods of Rs. 50000 are purchased by the
business during the year and out of which Cost of Rs. 40000 goods sold by the business
and /Cost of Rs. 10,000 goods is remain with business then 10000 goods will be called
Stock.

(i) Outstanding Expenses: That expense which became due but not paid by the
business. Ex. Salary due on 31st January 2006, of Rs. 10,000 and on that date it
will be due and if not paid by the business then Rs. 10,000 will be called
Outstanding Expenses

(j) prepaid Expenses: That Expense which became not due but paid in advance.
(k) Accrued Income: That Income Which became due but not received by the
Business

(l) Unearned Income: That Income which Became not due but received in
Advance

(j) Contingent Liability: that liability which is not in the present but it may be
liability in the future depends on some condition, ex. If there is a case on company then if
company win the case then there will not be any liability, and if company loss the case
then there will be liability on the business.
Ex. Court Case, Bill discounted, and guaranty given by the business.

k) Fictitious Assets: Fictitious assets are those assets which has no value for the
buisiness but due to some technical or legal reasons it has to be shown in the list of assets
Ex. Preliminary Expenses, Discount on issue of share, discount on issue of debenture,
Expenses on issue of share or debenture, underwriter commission etc.