BUSINESS

FUNDAMENTALS

MODULE - II
Fundamentals of Accounting
 SYLLABUS
Introduction: Meaning, Definition,
Features, Scope & Objectives of
Accounting, GAAP, Basic Terminology of
Accounting. Books of Original Entry:
Journal, Ledger and Trial Balance - Final
Accounts: Classification of Capital and
Revenue Transactions, Depreciation,
Final Accounts without adjustments
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Need for Accounting
• Records and communicates the financial result of
operations of an organization to various concerned
parties
• Provides information that helps the management of the
organization to plan the future course of action and
other funds related issues.

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Definition of Accounting
• Definition of accounting by American Accounting
Association (AAA):
“Accounting is the process of identifying, measuring
and communicating economic information to permit
informed judgments and decisions by users of the
information”

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Functions of Accounting
• Recording: Accounting helps record all the business
transactions of financial character in an orderly
manner. Recording is done on various Journals.
• Classifying: After the systematic analysis of the
recorded data, the entries of similar nature are
grouped at one place. Transactions are classified on
Ledgers.
• Summarizing: The classified data is displayed in
understandable and easy to use statements such as
balance sheet, trial balance etc.

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Functions of Accounting (Cont..)
• Financial Dealing: Accounting records only
monetary transactions that are of financial nature.
• Analyzing: A methodical classification of recorded
data and presenting in financial statements.
• Interpreting: Accounting helps in explaining the
meaning and significance of the data in simplified
form.
• Communicating: Accounting helps in
communicating the analyzed and interpreted
information in the form of graphs, ratios etc.
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Book Keeping and Accounting
• Accounting refers to designing the system for
recording the financial data and then presenting it in
logical manner to the end users.
• Book-keeping is concerned with recording financial
data in an orderly manner.

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 Book Keeping Definition

“Book-keeping is the art of recording business

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Objectives of Book- keeping
• Book- keeping provides a permanent record of
each transactions.
• Soundness of a firm can be assessed from the
records of assets and abilities on a particular date.
• Entries related to incomes and expenditures of a
concern facilitate to know the profit and loss for a
given period.
• It enables to prepare a list of customers and
suppliers to ascertain the amount to be received or
paid.
• It gives opportunities to review the business
policies in the light of the past records.
• Amendment of business laws, provision of licenses,9
assessment of taxes etc., are based on records.
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 Advantages of Accounting
• It helps in having complete record of business
transactions.
• It gives information about the profit or loss made by the
business at the close of a year and its financial conditions.
• It provides useful information for making economic
decisions.
• It facilitates comparative study of current year’s profit,
sales, expenses etc., with those of the previous years.
• It supplies information useful in judging the management’s
ability to utilise enterprise resources effectively in
achieving primary enterprise goals.
• It provides users with factual and interpretive information.
• It helps in complying with certain legal formalities. 11
Limitations of Accounting
• Accounting is historical in nature.
• Transactions of non-monetary nature do not find
place in accounting.
• Facts recorded in financial statements are greatly
influenced by accounting conventions and personal
judgements of the Accountant or Management.
• Cost concept is found in accounting. Price changes
are not considered. Money value is bound to
change often from time to time.
• Accounting statements do not show the impact of
inflation.

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End Users of Accounting Information
• Proprietors: Profitability and financial health of an
enterprise needs to be communicated to the
proprietors.
• Managers: Financial disclosures communicate the
financial health and help the managers to plan and
manage the enterprise better.
• Employees: Bonus or profit sharing or Employees
Stock Options Plan is prepared using financial
statements. Job security and the future growth
• Creditors: Entities that have extended credit look
into financial statements to ascertain security of
their credit.

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End Users of Accounting Information (Cont..)
• Prospective Investors: Financial statements
communicate profitability and financial health to
attract investment into an enterprise.
• Government: Financial statements serve as the
basis of meeting government liabilities pertaining to
taxation, labour and corporate laws.
• Customers: Loyal customers are interested in the
continuance of business and future plans of the
organization
• Researchers: Need financial information for testing
financial hypothesis and development of theories
and models.
• Foreign agencies and entrepreneurs
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Accounting and Other Disciplines
• Accounting and Economics
• Accounting and Statistics
• Accounting and Mathematics
• Accounting and Law

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Methods of Accounting
Business transactions are recorded in two different
ways.
•Single Entry: It is incomplete system of recording
business transactions.
•Double Entry: It this system every business
transaction is having a two fold effect of benefits
giving and benefit receiving aspects. The recording is
made on the basis of both these aspects.
•Double Entry is an accounting system that records
the effects of transactions and other events in
atleast two accounts with equal debits and credits.

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Steps involved in Double entry
system

• Preparation of Journal
• Preparation of Ledger
• Trial Balance preparation
• Preparation of Final Account

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Advantages of Double Entry System
• Scientific system
• Complete record of transactions
• A check on the accuracy of accounts
• Ascertainment of profit or loss
• Knowledge of the financial position of the business
• Full details for purposes of control
• Comparative study is possible
• Helps management in decision making
• No scope for fraud
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Branches of Accounting
• Financial Accounting
• Management Accounting
• Cost Accounting

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Basic Terminology of Accounting
• Transaction- Cash and Credit • Purchases
• Debtor • Purchase returns
• Creditor • Sales
• Capital • Sales returns
• Liability • Losses
• Asset • Account
• Goods • Invoice
• Revenue • Voucher
• Expense • Proprietor
• Stock • Discount
• Drawings • Solvent
• Insolvent
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