decom INTRODUCTION TO ACCOUNTIN Learning Objectives After studying the chapter, you will beable to: => Explaintheaccounting eycle —> Explain the users of accounting information and their needs > Understand the basic terms used in Accounting, Suggested teaching mehods : Discussion method Meaning of Accounting Accounting is an information system that provides accounting information to the users for conrect decision-making, “Accounting is theart of recording, classifying , and summarising in asignificant ‘manner and in terms of money, transactions and events which ae, in part atleast, of financial character, and interpreting the results thereot..” ‘The American Institute of Certified Public Accountants ACCOUNTING CYCLE Transaction ‘TournalSubsidiary books Tedger (identification) [~ | (Recording) (Classifying) uJ ‘Trial Balance L Final Accounts (Surnmarising) (Results) J [lnterpretation) Objectives of Accounting 1, Toprovide useful information to Various interested parties. 2. ToMaintain systematic and complete Records of Business Transactions 3, ToCaloulate Profitand Loss 4, Toascertain the financial postion ofthe business, Interested Users of Information ‘There are number of users interested in knowing about the financial soundness and the profitability ofthe business Users Classification Information the user want Internal 1. Owner ‘etum on their investment, financial heath of their company/business 2. Management to evaluate the performance, to take vari ows decisionsExternal 1, Investors and safety and growth oftheirinvestments, Potential Investors future ofthe business 2. Creditors assessing the financial capability bility of the business to pay its debis 3. Lenders Repaying capacity, credit worthiness 4. Tax Authorities assessment of due taxes, trueand fair disclosure of accounting information 5. Employees Profitability to claim higher wages and bbanus, whether theirdues (PF, ESL.) deposited regularly 6. Others Customers, Researchers ete, may seek differentinformation for different reasons. Qualitative Characteristics of Accounting Information ‘Accounting information is useful for interested users ony iit posses the following characteristics 1. Reliability Means the information must be based on facts and be verified through source documents by anyone. I mustbe free from bias. 2, Relevanee Tobe relevant, information must be available in time and must influence the decisions of users by helping them form prediction about the outcomes, 3.Understandability ‘The information should be presented in such a manner that users can understand it wll. 4.Comparabili The information should be disclosed in such a manner that itcan be compared with previous years’ figures of business itself and ther firm's data, Limitations of Accounting The accounting information suffers from the following limitations: 1. Based on historical data 2.Biasness 3. Qualitative information not shown, 4. Ignores price level changes BASIC ACCOUNTING TERMS ‘Transaction ‘Aneconomic activity that affects financial position of the business and can be measured in terms of money e.g. sale of goods, paying for expenses ct. Voucher ‘The douementary evidence in support ofa transaction is known as voucher. For example, if we buy goods for cash we get cash memo, if we buy on credit we getan invoice, when we make a payment we get a receipt and soon. 4Capital ‘Amount invested by the owner inthe firm isknown es capital. Itmaybe brought in the form of cash orassets by the owner. Assets Assetsare economic resources of an enterprise useful inits operations. Assets can be broadly classified into two types: 1. Fixed Assets are assets used for normal operations and helelon a long,term basis, uch as land, buildings, machinery, plant, furiture and fixtures et. 2. Current Assets ane assets held fora short-term and converted into cash within one yearsuch as debtors, stock ete Liabilities Liabilities are obligations or debts that an enterprise has to pay at some time in the future. Liabilities can be classified as. 1. Long-term liabilities are those that are usually payable aftera period of one ‘Yeare.g.alongterm loan froma financial institution, 2, Short-term liabilities arc obligations that are payable within period of one year, for example, creditors, bills payable, bank overdraftetc, Sales Sales are total venues from goods sold ar services provided to customers Sales may be cash sales or credit sales. Revenues Revenue means the income from any souree. Itshould be of regular nature For example sales of goods/providing services to customer, commission, interest, dividends ete. Expenses Costs incurred by a business for earning revenue are known as expenses. For example rent, wages, salaries, interest etc. Expenditure Spending money or incurring a lability for acquiring assets, goods or services is called expenditure, The expenditure is clasifiedas 1, Revenueexpenditure : Ifthe benefit of expenditure is received within @ year itis calfed revenue expenditure e.g rent, imterest ete 2. Capital expenditure : Ifany expenditure lass for more than a year, itis treated capital expenditure such as purchase of machinery, furmiture et. Profit The excess of revenues over its related expenses during an accounting yearis profit Profit =Revenue- ExpensesGain A non-recurring profit from events o transactions incidental to business such as sale of fixed assets, appreciation in the value ofan asset et. Loss ‘The excess of expenses ofa period over its related revenues its termed as loss. eg,,cash or goods lostby theftof fire etc. Loss =Expenses- Revenue Discount Discount isthe rebate given by the seller to the buyer. Itcan be classified as = 1. Trade discount : The purpose ofthis discount isto persuade the buyerto buy more goods. Itis Offered at an agreed percentage of list price atthe time of selling goods. This discount ismot recorded in the account books as its deducted in the invoice/eash memo. 2. Cash discount : The objective of providing cash discount is to encourage the debtors to pay the dues promptly. This diseount s recorded in the eecount books. Goods ‘The products in which the business deal in. The items that are purchased for the purpose of resale not for use inthe business are called goods. Drawings tthe owner withdraw money andlor goods from the business for personal useit isknown as drawings Purchases ‘The term Purchases is used only forthe goods procured by a business for resale. Incase of trading concems itis purchase of final goods and in manufacturing concer this is purchase of raw materials. Purchases may be cash purchases or credit purchases. Closing Stock Itis the value of the goods lying unsold at the end of accounting year. Closing stock of one yeur becomes the opening stock of next year Debtors Debtors are persons and/or other entities to whom business has sold goods and services on credit and amount has not received yet. These are asscts of the business. Creditors the business buys goods’ services on credit and amount is stilt be paid to the persons andor other entities, these are called creditors. These are liabilities for the business