Lesson 1 - Introduction to Accounting
Introduction of the Host
Mrs.Geetha Dasaraty is a commerce graduate with a Masters in Business
Administration specialising
in finance. Her stint with a Coimbatore based company and later with a
consulting firm in Chennai has provided her with a decade of experience
in project finance and appraisals, accounting and tax laws.
She is a freelance writer and money matters are her forte. She is currently
pursuing her final course in Company Secretaryship and is doing a course
on Vaishnavism.
She has a passion for literature and Carnatic music. She is also a violinist.
Class Schedule
Monthly
We shall begin then with Chapter 1.
Chapter 1 - Introduction to Accounting.
- What is Accounting?
- Definition of Accounting.
- Objectives of Accounting.
- Users of Accounting information
- Concepts of Accounting
Individuals and business houses should keep a systematic record of all their financial transactions. This will help them keep track of all their dealings. In addition, it is mandatory under various fiscal laws, for individuals and business houses to maintain accounts.
The systematic recording of transactions to give a true financial picture is Accounting.
Definition of Accounting
According to the American Institute of Certified Public Accountants,
"Accounting is the art of recording, classifying, and summarising in
a significant manner and in terms of money, transactions and events which
are of a financial character and interpreting the results thereof."
Objectives of Accounting
- Accounting helps to show how much profit has been made, or the loss suffered for a particular period.
- It shows the assets and liabilities on any date.
- Helps to find out whether the current income is sufficient to meet the current expenditure.
- It shows the financial state of affairs.
Besides the owners of business establishments there are other parties who are interested in the financial statements.
- Investors: Investors require accounting information to know how safe the investments made are and also to know how safe their proposed investments would be.
- Shareholders: Shareholders get an idea of the operating results of the company through their financial statements.
- Creditors: The suppliers and other lenders require these statements to know whether they will be paid on time.
- Employees: They require this information to find out the stability and growth of the enterprise.These statements are also used in wage negotiations.
- Government and other agencies: They require these statements to regulate the functioning of business for income tax purposes.
- Researchers: These statements are of great value for research in business affairs.
Accounting concepts are the basic assumptions on which the financial statements are prepared. The following are the various accounting concepts:
- Business Entity Concept
A business is treated as a separate entity, distinct from its owner. This distinction enables the accounts to give a true picture of the business. This is an important assumption which has paved the way for responsibility accounting, which helps to ascertain the results of each department or division.
- Going Concern Concept
It is assumed that the business will be in existence for a long period of time. -
Money Measurement Concept
Only transactions that can be expressed in monetary terms are recorded. -
The Accounting Period Concept
Although a business is assumed to be carried on over a long period of time,for the purpose of accounting the time span is broken down into time intervals. The period of accounting is usually one year .The accounting year maybe the financial year or the calendar year. -
Cost Concept
All transactions should be recorded in the books at the amount actually involved. There can be no arbitrary values; especially in the case of assets. -
Dual Aspect Concept
This is based on the fact that there are two sides to any transaction and both have to be recorded.The dual aspect principle results in the accounting equation:
Capital + Liabilities = Assets. We will learn more of this in the forthcoming chapters. -
Realisation Concept
As per the realisation concept, revenue is considered as earned on the date when it is realised. -
Matching Concept
The matching of revenues and cost in a specific period is the matching concept. It helps to determine the profit or loss. -
Accrual Concept
This concept distinguishes between receipt of cash & the right to receive cash,the payment of cash and the obligation to pay cash in relation to income and expenditure respectively.All expenses and prepaid expenses as also the income should be taken into account.