1. Introduction to Accounting

INTRODUCTION TO ACCOUNTING

By: Prof. Bhavik R. Shah[M.Com ; M.Ed]98 98 46 21 48

Introduction:Innumerable transactions take place in the business everyday.All these transactions can not be remembered.Hence, it is necessary to record them.For this purpose, proper accounts are required to be maintain.Keeping proper accounts help the owner of the businessTo know the profit or loss of the business andIts financial position at the end of the year.For determining income tax payable by the owner of the business.

Users Of Accounting:Accounts provide useful information.To the managers of the business for taking business decisions.To the financial institutions taking the decision for granting a loan to the business unit, and to what extent on the basis of the accounting information.To creditors of the business , to decide whether to sell the goods to the firm on credit.To trade unions.To customer protection associations.To government etc.

History Of Accounting:Accounts are written since ancient times.Many evidences are available that accounts were maintained inAncient ChinaMissarGreek and Italian Culture.Many references are found inThe Vedic literature of the fact that accounts were properly written in ancient india.In the Valmiki Ramayan.

When Bharat met Ram in the forest , Ram asked Bharat about the incomes and expenses of the State and whether the income is more than the expenses or the expenses are more then the income.In the Mahabharat, King Yudhishthir had asked his brother Nakul to Supervise the accounts of his army.During the age of the Maurya Samrajya, Kautilya, the Prime Minister of Chandragupt Maurya , in his book Arthashastra , has given various details instructions about maintaining the accounts.

The Italian Monk Luca Pacioli for the first time in 1494 AD.In his book on Mathematics,Made presentation of the currently in use double entry accounting system.Thereafter, the accounting has become an integral part of each facet of life.The accounts of household expenses are also maintained in many houses.

Meaning of Accounting:Accounting is The process ofIdentifying Measuring in terms of MoneyRecordingClassifyingSummarizingAnalyzing and interpretingThe Business Transactions-ANDCommunicatingThe Accounting Information (Reports)To the users for making correct decisions.

From the above definition,It can be said that:The business transactions, which can be measured in terms of money, are recorded in accounting.After recording the transactions, they are classified:* At the end of accounting period (normally at the end of the year)* Conclusions (profit & loss account and balance sheet) are drawn.* So that, the profit or loss of the business is ascertained And* The financial position of the business can be known.In accounting , the result of business are* Analyzed and * Interpreted.* Thereafter, this information is sent to the user (Specially, members of limited companies and other institutions) in the form of report.

Objective Of AccountingMain Objectives of Accounting can be described as under:1.The aim of Accounting is (Maintenance Of Records)To keep permanent record of all transactions of the business.To show the financial effects of these business transaction on the business.2. The aim of Accounting is (Financial Position = Balance Sheet)To recorded all transactions during the accounting period.To know the true financial position of the business after determining the effect of all the transactions.3. (Calculations of Profit or Loss)To evaluate the profitability (earning capacity) of the business and to provide accounting information during the accounting period.

4. To provide the useful information to know the efficiency of the managers.5. To provide necessary information for preparing budget. Control can be exercised over various activities of the business through budget.6. To provide useful information to the government for taking proper decisions about taxes.From the above objectives it can be said that;Accounting is the language of business.Thus accounts provide useful informationTo the owner and The managers of business andOutside parties.They can take proper decisions on the basis of this information.

Types or Form of Accounting InformationAccounting starts with identification of financial transaction.The transactions which are non-financial are not included in the accounting information.There are TWO types of financial transactions:Financial transactions which can be measured in terms of moneyFinancial transactions which can not be measured in terms of money.Only those transactions, which can be measured in terms of money, are recorded in the accounts.

Advantages Of Accounting:The following are the advantages of Accounting.The owner of the business can get accounting information, whenever required, by maintaining accounts.Profit or loss of the business can be known at the end of accounting period.Financial position of the business can be known at the end of the accounting period.Accounting helps the owner and manager of the business to exercise control based on the information of the assets and liabilities of the business.Accounting provides necessary information for decision making.

Accounting information is necessary to determine the taxes payable to the government. Accounting is also useful in planning about the taxes, e.g. income tax, sales tax etc.It helps in exercising moral control over the employees. Moreover thefts, frauds and manipulations can be found out and controlled.It is useful for determining the price of the business while selling the business.Books af accounts can be produced and accepted as evidence.Current years information can be compared with the information of the previous year and with that of other firms.

Limitations Of Accounting:This part will discuss later on