Accounting-An Introduction

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When your mother asks you to buy items like match box, candle stick, soap cake, coffee, spices etc. You need not pay for these items. After buying these items, the store owner opens the page of a note book on which your father’s name is written. He records the value of items purchased. In end of month, your father goes to Shop keeper. Similarly every business, sole proprietor or a firm keeps record of business transactions. They keep record of transactions. If they not keep the record how will they know how much, when and to whom they are to make payments or from whom how much and when they are to receive payments, what they have earned after particular period. Recording of transactions by a businessman in proper books and in a systematic manner is known as accounting.

Fig.1.0 Chapter Objectives

Image of Chapter Objectives

Image of Chapter Objectives

Image of Chapter Objectives

Book Keeping and Accounting

A business undertakes number of transactions. It depends upon the size of a business. Can a businessman remember all transactions? Not often. So it becomes necessary to record business transactions in details, in a systematic manner. Recording of business transactions in the books of account is called book-keeping. Book-Keeping is concerned with recording of financial data. It is defined as

“The art of keeping a permanent record of business transactions is Book Keeping”

Main objective of business is to earn profits. In order to achieve this objective, only recording of business transactions is not enough. Accounting involves not only book keeping but also many other activities. In 1941, the American Institute of Certified Public Accountants (AICPA) defined as.

“The art of recording, classifying, summarizing, analyzing and interpreting the Business transactions systematically and communicating Business results to users is accounting”

Accounting is identified with a system of recording of business transactions that creates economic information about business to facilitate decision making. Function of accounting is to provide quantitative information, primarily financial in nature, about economic entities.

The American Accounting Association defined accounting as:

“It is the process of identifying, measuring, recording and communicating the required information relating to the economic events of an or organisation to the interested users of such information.”

Economic events: It is occurring of consequence to a business organisation, consists of transactions that are measurable in monetary terms. Purchase of Machinery, installing and keeping it ready for manufacturing is an economic event which consists of a number of financial transactions. These transactions are (a) buying machine, (b) transporting it, (c) preparing site for its installation and (d) incurring expenditure on installing it.