INTRODUCTION TO ACCOUNTING

ACCOUNTING Accounting is the language of business. The affairs and the results of the business are communicated to others through accounting information, which has to be systematically recorded and presented.

Accounting - Definition Accounting can be defined as the process of identifying, measuring, recording and communicating the economic events of an organization to the interested users of the information.

Characteristics of Accounting Considers monetary terms. Considers monetary terms. Identification, measuring, recording and communication Identification, measuring, recording and communication Discloses the financial position of the business. Discloses the financial position of the business. Provides information to various users. Provides information to various users. Meets the legal requirements. Meets the legal requirements.

Economic Events An economic event has been defined as ‘a happening of consequence’ to a business entity. Economic events are classified into External types Internal types.

Economic Events Continue… An external event which involves the transfer or exchange of something of value between two or more entities.

Economic Events Continue…  Sale of goods to customers. Payment of monthly rent to the landlord.  Purchase of raw materials by an enterprise from some other business enterprise.  Rendering of services to customers, etc.

Economic Events Continue… An internal event is an economic event that occurs entirely within one enterprise. Eg : Supply of raw materials or equipment by the stores department to the manufacturing department.

Identification It means determining what to record, i.e. to identify recordable events. It involves observing activities and selecting those events that are considered to be evidence of economic activity.

Identification continue … The value of human resources, changes in managerial policies or changes in personnel are important but none of these items is recorded in financial accounts. However, when a company makes a cash sale or purchase, even if the item is small, it is recorded in the books of account.

Measurement It means quantification, including estimates of business transactions into financial terms, i.e. rupees and paise. If an event cannot be quantified in monetary terms, it is not considered for recording in financial accounts.

Recording Once the economic events are identified and measured in financial terms, they are recorded, i.e. a chronological diary of these measured events is kept in an orderly and systematic manner.

Communication The economic events are identified, measured and recorded is communicated in some form to management and others for internal and external uses. The information is communicated through the preparation and distribution of accounting reports. The most common reports are in the form of financial statements (Balance Sheet and Profit and Loss Statement).

Organization It can be a business entity or a non- business entity, depending upon the profit or non-profit motive.