Accountancy- Basics Prof. Saptarshi Mukherjee ISBR, Bangalore
Introduction to Accounting
The American Accounting Association defines accounting as follows:
"The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information”.
Definition of Accountancy
• The process of recording, classifying, summarizing and Interpretation of financial data and operations in terms of time and money.
Basic Accounting concepts
1. The Accounting Entity
or Business Entity
2. Accounting Period
3. Monetary Concept
4. The Going Concern
5. The Historical Cost
The business exists as a unit by itself.
It is separated from its owner.
Only transactions and events related to the business are recorded in the business books.
Imagine you just set up a new company.
Do you think you want to sell off your business next year?
Assumption: The business entity will continue to operate and it will not close down.
Market Cost changes all the time!
Therefore…
All transactions/assets of a business entity are recorded at the original cost price which is also known as Historical Cost.
Doctrines
1. Doctrine of Materiality
2. Doctrine of Conservatism
3. Doctrine of Full Disclosure
4. Doctrine of Consistency
Need of Accountancy
• Accounting provides information on the (1)resources available to a firm,
(2) the means employed to finance those resources, and
(3) the results achieved through their use.
Branches of Accounting
• Financial Accounting• Management Accounting• Cost Accounting• Tax Accounting
Financial Accounting…
Financial accounting– Primarily prepared for users external to the
company.• Revenues, assets, etc.
Financial accounting is the field of accountancy concerned with the preparation of financial statements for decision makers.
Management AccountingManagement Accounting
Management Accounting is
“The process of identification,
measurement, accumulation,
analysis, preparation, interpretation
& communication of information
used by management to plan,
evaluate & control within an entity &
to assure use of & accountability for
its resources”.
What is management Accounting?What is management Accounting?
Management AccountingManagement Accounting
The object of this accounting is to The object of this accounting is to
communicate the relevant communicate the relevant
information periodically to the information periodically to the
management of the business to management of the business to
enable it to take suitable enable it to take suitable
decisions.decisions.
Core Purpose:Core Purpose:
Focus of Management Accounting
Thus main focus of managerial accounting is to help the managers for making better decisions.
Managerial Accounting Benefits:
Determining performance Dropping or managing costs Examining the prices for products and
services Choosing to approve, change or suspend
a plan or action
Cost Accounting….Cost Accounting….Introduction:Introduction:
Cost accounting deals with the Cost accounting deals with the
recording, classification, allocation, recording, classification, allocation,
and reporting of current and and reporting of current and
prospective costs.prospective costs.
Cost Accounting…Cost Accounting…
Purpose: The main object of cost accounting is to
determine the cost of goods manufactured or produced by the business.
It helps the management of the business in controlling the costs by indicating avoidable losses and wastage
Cost Accounting Benefits Analyze costs relevant to your
business and business model
Powerful allocation schemes
matching your business
model
Plan and calculate future cost
based on budgets and
forecasts
Tax accountingTax accounting
Tax accounting is the branch Tax accounting is the branch
of accounting relating to the of accounting relating to the
preparation and filing of tax preparation and filing of tax
forms with the government forms with the government
agencies. agencies.
Part IIFinancial Accounting– Recording of Transactions
Real Account
Personal Account
Nominal Account
Source Documents
(originals)
Books of Prime Entry
(Journal Entries)
Ledgers
Trial Balance
Adjustments
Reports
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