Accountancy- Basics

Prof. Saptarshi MukherjeeISBR, 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 Accounting EntityOr Business Entity

concept

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.

Accounting Period

The life of a business is divided into many equal and fixed periods of time. Eg one year

Monetary Concept

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Monetary Concept-To be measured by Money.

Interpretation possible when measured in monetary terms.

Going Concern

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.

All assets owned by the business are assumed to be used into the unknown future.

Historical Cost

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 AccountingFinancial 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 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.

Contrast of Financial & Management Accounting

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 AccountingCost Accounting

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 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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