CHAPTER 1

INTRODUCTION TO ACCOUNTING
Contents:
1.0. Aims and Objectives
1.1 Introduction
1.2. Meaning of Accounting
13. Accounting and Book Keeping
1.4. Need for Accounting 1.5. Definition
1.6. Origin of Accounting
1.7. Development in Accounting
1.8. Steps in Accounting
1.9. Objectives of Accounting
1.10.Functions of Accounting
1.11. Classifications of Accounting
1.12. Methods of Accounting
1.13.Types of Accounting
1.14. Groups Interested in Accounting
1.15. Let Us Sum Up
1.16. Lesson End Activities
1.17. Model Answers to check your progress
1.18. References
1.0 Aims and Objectives: In the present chapter we are going to discuss in brief about
Meaning and definition of accounting
Meaning and nature of book keeping
Important of accounting in the modern world
Various objectives and functions of accounting
Classifications, methods and types of accounting

 Various groups interested in the accounting statement

After reading this chapter you should be able to acquire basic working knowledge
about the above mentioned topics

LESSON 1
INTRODUCTION TO ACCOUNTING
1.1 Introduction:
The word "money" is so important to survive in the human society just like as blood
in the human structure It is well said that "Nothing is impossible when money is available
and nothing is possible when the money is not available" The source of money is created by
way of undertaking a job, engaging in agriculture, business or profession etc The availability
of money is depend upon the manner in which money is expended This means if a person or
business concern is careless in spending money, the day may come when he or it does not
have a single rupee.
In other words, the availability of money is not merely depend upon the earning of
income but very much depend upon the manner in which the earned income is expended
Thus the proper management of income and expenditures is quite important to survive as well
as to grow. It requires preparing and maintaining proper records and books in the systematic
manner. For this purpose, a technique or tool named as "accounting" has been in the use since
the ancient period
The paper titled as "Principles of Accountancy" is aimed at educating the students to
maintain, prepare and analysis various records in different situations by using universally
accepted methods and rules The present chapter deals with meaning, need, objectives and
scope of accounting.
1.2. Meaning of Accounting
The modern system of accounting is based what is known as the Double Entry
principle Accounting is a science because it has some definite objects to be fulfilled and is an
art as it prescribes the process through which the object can be achieved Non- financial
transactions cannot be recorded in accounting, i e , only transactions of financial nature is the
subject matter of accounting To be more clear, only those transactions which are expressed
in terms of money are recorded Accounting is an art of recording transactions according to
size, nature and type of business transactions - cash transactions, credit transactions, frequent
transactions etc When the recording in journal or subsidiary books is done, they are to be
classified by grouping the transactions or entries of one nature at place. This is done by
opening accounts in a book called ledger. Then such ledgers are summarized in order to give
useful information to the management or interested parties this is done by preparing trading
and profit and loss account and balance sheet of whole accounting record. Finally, it is an art

of interpreting the result of the financial transactions and communicating the result thereof.
The aspect of interpretation falls under management accounting
1.3 Accounting and Book keeping:
Book keeping may be defined as the art and science of correctly and systematically
recording in the books of account the business transactions of an individual or a concern in a
way to show clearly the monetary effect of each such transactions The work of book-keeping
is usually entrusted to junior employees, who maintain various books of accounts, journal,
subsidiary books, ledgers etc, can be called as book-keepers. The books of original record, by
themselves, do not give an idea of the company's financial position. When one has to make a
judgment regarding the financial position of the firm, the information contained in these
books has to be analysed and interpreted
1.4. Need for Accounting:
It is common experience of all of us that money must be spent carefully. A firm
receives money from certain sources like sale of goods, interest on bank deposits It has to
spend money on a number of items like salary, rent, electricity, water, advertisement. The
firm should manage its affairs in such a way as will enable it to receive more than it spends.
Otherwise, it will have to meet expenses from the original amount invested by the owner for
starting the business.
1.5. Definition:
Accounting is defined as "the art of recording, classifying and summarising in terms
of money transactions and events of a financial character and interpreting the results thereof"
1.6. Origin of Accounting:
Accounting originated to meet the requirements of exchange of goods and
commodities The need for accounting grew in order to serve the transactions of the business
world The origin of accounting cannot be exactly located The value of money or the use of
currency, that now we attach to the goods to-day, was unknown to the people of ancient times
when barter system existed Later, innovation of money facilitated to ease exchange of
commodities. The credit transactions necessitated to maintain accounts, and accounting is as
old as business itself. Accounting was practiced in India, from ancient time, as is clear from
the book Arthahastra written by Kautilya, the Minister of King Chandra Gupta In 1494, the
system of book-keeping was first conceived on scientific line in Venice by Luca Paciolia
Franciscan monk.
1.7. Development in Accounting:
Accounting is as old as money itself. In India, chanakya in his, "Arthashastra" has
emphasised the existence and need of proper Accounting and Auditing, The modem system
of accounting owes its origin to Pacioli who lives in Italy in the 15th century. Accounting at
its initial stage, tried to meet the need of historical and stewardship functions. The

conventional accounting principles and practices prove to be insufficient The advent of

Industrial Revolution has resulted in large scale production, cut- throat competition and
widening market. Today there is greater need for coordination and control. Accounting day
cannot be the same as it used to be about half a century ago It has becomes a very dynamic
subject At present some of the important specialized branches of accounting which are
developed are Cost Accounting, Management Accounting, Responsibility Accounting, Social
Accounting or Macro Accounting, Government Accounting, Inflation Accounting,
Mechanized Accounting, Human Resources Accounting etc. Needless to mention that some
of the said techniques devised are Standard Costing, Marginal Costing, Budgetary Control,
Statistical and Quantitative Techniques, Ratios Accounting, Fund and Cash Flow Analysis
etc.
1.8 Steps in Accounting:
Following are the various steps involved in accounting:
i. Recording: Each and every transaction is recorded as and when it occurs in chronological
order. Every entry recorded has to be supported by reliable documentary evidence. The
method of recording is adjusted according to the size, and nature of business and the type of
transactions.
ii. Classification: The classification takes the form of accounts in a separate book called as
Ledger. Separate ledger accounts are opened for each expenses, income, property and
liability. It useful for the segregation of numerous business transactions into identifiable
groups.
iii. Summarising: Summarising takes place in the form of trial balance, trading account,
profit & loss account and balance sheet which are discussed in detail in the following
chapters.
iv. Interpretation: It is usually done through flow statements. They are useful in evaluating
past performance and providing guidance for future plans and activities
1.9. Objectives of Accounting:
Following are the objectives for which accounting is aimed at:
i. To provides the permanent record
ii. To provides the most effective way to the management for fixing of objectives of the
business
iii. To provides the most vital information to the management to preparing budgets.
iv. To facilitates the business concern to know the profit or loss for a given period
v. To facilitates to know the soundness of a business concern by providing balance sheet

vi. To enables to prepare a list of customers and suppliers to ascertain amount to be received
or paid
vii. To gives opportunities to review the business policies in the light of the past records
viii. To comply with provisions of Companies Act 1956, it is necessary to maintain
accounting records
ix. To be useful for business loss, provision of licenses, assessment of taxes etc,
1.10. Functions of Accounting:
Accounting has the following functions:
i. Function of Book-keeping: The primary functions of accounting relates to recording,
classification and summary of financial transactions - journalisation, posting and preparation
of final statements The purpose of this function is to report regularly to the interested parties
by means of financial statements
ii. Function of Language: Accounting is the language of business. Various transactions are
communicated through accounting. There are many parties Owners, Creditors, Government,
Employees etc, who are interested in knowing the results of the firm and this can be
communicated only through accounting. The accounting shows a real and true position of the
firm on the business.
iii. Function of legality: Auditing is compulsory in case of registered firms Auditing is not
possible without accounting Thus accounting becomes compulsory to comply with legal
requirements Accounting is a base and with its help various returns, documents, statements
etc., are prepared.
iv. Function of management: Decision making programme is greatly assisted by accounting.
The managerial function and decision making programmes, without accounting, may
mislead. The day-today operations are compares with some pre- determined standard. The
several of actual operations with pre - determined standards and their analysis are possible
only with the help of accounting.
1.11. Classification of Accounting:
Accounting can be classified into the following categories:
i. Financial Accounting: The main purpose of this type of accounting is to record business
transactions in the books of accounts in such a way that operating results for a particular
period and financial condition on a particular date can be known for the information of the
various persons
ii. Cost Accounting: It relates to the collection, classification, ascertainment of cost and its
accounting and cost control relating to the various elements of cost, that is, materials, labour
and overheads

iii. Management Accounting: It relates to the use of accounting data collected with the help
of financial accounting and cost accounting for the purpose of policy formulation, planning,
control and decision-making by the management. The accounting which is prepared
exclusively for the use of management is called management accounting.

1.12. Methods of Accounting:

Following are the three methods of accounting:
1.Cash Basis of Accounting: Under this method, all incomes are considered to be earned
when they are actually received in cash Similarly, expenses are deemed to be incurred only
when they are actually paid in cash In other words, importance is attached to cash receipts
and payments but non-cash items, such as outstanding, pre-paid expenses, accrued incomes
or income received in advance are ignored This method is adopted in those concerns where
only cash transactions take place Generally this system is followed by individuals like
Doctors, Lawyers, Auditors, Engineers, Brokers, and Small Traders etc
ii. Accrual Basis or Mercantile Basis of Accounting: This method is commonly adopted by
business concerns Incomes are recorded or credited to the period in which they are earned
irrespective of the fact whether the same has actually been received or not Similarly,
expenses are charged to the period in which they relate irrespective of the fact that they have
actually been paid or not In other words, all items of incomes and expenditures, both cash
items as well as non - cash items such as pre- paid expenses, accrued incomes or income
received in advance etc, are taken into account
iii. Hybrid or Mixed Basis of Accounting: Under this method, both cash basis and accrual
basis are followed Incomes are recorded on cash basis whereas expenses are taken on accrual
basis The net income is ascertained by matching expenses on accrual basis with income on
cash basis This is the most conservative basis of ascertaining income because all possible
expenses relating to the period whether actually paid or not are considered whereas income
only received in cash in taken into consideration This system is followed by professional like
Doctors, Lawyers, and Chartered Accountants etc.,
1.13. Types of Accounting:
There are two systems of accounting namely Single Entry System and Double Entry
System.
1.13.1. Single Entry System: The single entry system is not a really a system because in
some cases record may be one sided, and in some other cases no record is maintained at a11
It is more appropriate to call it an incomplete system of recording transactions Double effect
of every transaction is ignored and only the accounts relating to suppliers and customers an

cash account are found Thus, the system is incomplete, inaccurate and unscientific system of
recording business transactions.
1.13.2. Double Entry System: The modem system of accounting is based on what is known
as double entry principle It refers to that system of book keeping where each transaction is
recorded in both of its aspects viz i receiving of the benefit of the transaction and ii giving
away of the benefit of the transaction For a complete record of transactions, it should be
presented in both the accounts Business transactions affect two aspects of the accounts in the
opposite direction If are account receives a benefit there must be another account to give the
benefit It is like the two sides of a coin Thus, every transaction involves two accounts, one
which gives the benefit of the transactions and another which receives the same.
1.14. Groups Interested in Accounting:
There are a number of parties who are interested in the accounting information relating to
business because, accounting is the language employed to communicate financial information
to the General public. The following are the groups who use the accounting statements
i. Owners: The owners provide funds or capital for the organisation. They possess curiosity
in knowing whether the business is being conducted on sound lines or not and whether the
capital is being employed properly or not Owners, being businessmen, always keep an eye on
the returns from the investments Comparing the accounts of various years helps in getting
good pieces of information Properly kept accounts are good proof in dispute They determine
the amount of goodwill and facilitate in assessing various taxes
ii. Management: The management of the business is greatly interested in knowing the
position of the firm. The accounts are the basis the management can study the merits and
demerits of the business activity. Thus, the management is interested in financial accounting
to find whether the business carried on is profitable or not The financial accounting is the
"eyes and ears of management and facilitates in drawing future course of action, further
expansion etc.,
iii. Creditors: Creditors are the persons who supply goods on credit, or bankers or lenders of
money. It is usual that these groups are interested to know the financial soundness before
granting credit. The progress and prosperity of the firm, to which credits are extended, are
largely watched by creditors from the point of view of security and further credit Profit and
Loss Account and Balance Sheet are nerves centres to know the soundness of the firm
iv. Employees: Payment of bonus depends upon the size of profit earned by the firm. The
more important point is that the worker expects regular income for the food. The demand for
wage rise, bonus, better working conditions etc depend upon the profitability of the firm and
in turn depends upon financial position. For these reasons, this group is interested in
accounting.
v. Investors: The prospective investors, who want to invest their money in a firm, of course
wish to see the progress and prosperity of the firm, before investing their amount, by going
through the financial statements of the firm. This is to safeguard the investments. For this,

this group is eager to go through the accounting which enables them to know the safety of
investments.
vi. Government: Government keeps a close watch on the firms which yield good amount of
profits. The State and Central Governments interested in the financial statements to know the
earnings for the purpose of taxation. To compile national accounts the accounting is essential.
vii. Consumers: These groups are interested in getting the goods at reduced price. Therefore,
they wish to know the establishment of a proper accounting control, which in turn will reduce
to cost of production, in turn less price to be paid by the consumers.
viii. Research Scholars: Accounting information, being a mirror of the financial
performance of a business organisation, is of immense value to the research scholar who
wants to make a study into the financial operations of a particular firm To make a study into
the financial operations of a particular firm, the research scholar needs detailed accounting
information relating to purchase, sales, expenses cost of materials used, current assets, current
liabilities, fixed assets, long term liabilities and share holders funds which is available in the
accounting records maintained by the firm.
1.15. Let Us Sum Up: In this lesson we have discussed
Meaning and objectives of accounting
described functions, types, classification, methods of accounting
learnt about various persons interested in the accounting statement

1.16. Lesson End Activities:

1 What is meant by accounting? Explain objectives and functions of accounting?
2 What are the three methods of accounting?
3 What are the three types of accounting?
4 Who are the persons interested in the accounting statements
5 Write short note on i Accounting and Book keeping ii. Cash basis and mercantile basis
iii. Single entry system and Double entry system
1.17. Model Answers to Check your Progress
Question No. 1. Refer para 1.2. 1.7.1.8.
Question No. 2. Refer para 1.10.
Question No. 3. Refer para 1.12.
Question No 4 Refer para(i) 1.2. 13 (ii) 11011102 (iii) 1.11. 1 1. 11.2

1.8 References:
Financial Accounting - R L Qupta --Sultan
Advanced Accounting S N Mageswari - Vikas Publishers
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