• In India, there are several rules which need to be followed
while walking or driving on the road as it enables the smooth
flow of traffic.
• Similarly, there are accounting rules that an accountant
should follow while recording business transactions or
recording accounts. They may be termed as accounting
concepts. Hence, it can be said that:
“The term accounting concepts refer to basic rules, assumptions, and
principles which act as a primary standard for recording business
transactions and maintaining books of accounts”.
3. Accounting definition
• Accounting is a systematic process of identifying recording
measuring classify verifying some rising interpreter and
communicating financial information.
• It reveals profit or loss for a given period and the value and
the nature of a firm’s assets and liabilities and owners’ equity.
• In other words, accounting is a practice and body of
knowledge concerned primarily with
4. Authors Difinition
According to Bierman and Drebin:” Accounting may be
defined as identifying, measuring, recording and
communicating of financial information.”
According to the Committee of Terminology of American
Institute of Certified Public Account:” Accounting is the art of
recording, classifying summarizing in a significant manner and
in terms of money, transaction, and events which are, in part
at least of a financial character and interpreting the results
5. Components of Basic Accounting
Components of Basic Accounting
Recording Summarising Reporting
• 1. Recording : The primary function of accounting is to make
records of all transactions that the firm enters into. For the
purpose of recording, the accountant maintains a set of
books. Their procedures are very systematic. Nowadays, the
computer has been deployed to automatically account for
transactions as they happen.
6. • 2. Summarizing : Recording of transactions creates raw data.
Sentences of road 8000 of little used to in organization for
decision making. Pages and pages of raw data are of little use
to an organization for decision making. For this reason, the
accountant classifies data into categories.
• 3. Reporting: Management is answerable to the investors
about the company’s state of affairs. The operations that are
being financed with the money of owners, it needs to be
periodically updated to them. For this reason, there are
periodic reports annually summarising the performance of all
four quarters which are sent to them.
7. • 4. Analyzing : Lastly, accounting entails conducting an analysis
of the result. After results have been summarized and
reported, a meaningful conclusion needs to be drawn.
Management must find out its positive and negative points.
Accounting helps in doing so by means of comparison. It is
common factors to compare profit, cash, sales, and assets,
etc. with each other to analyze the performance of the
8. Basic Accounting: Science or Art?
• Accounting is a Science: Accounting has its own principles
holes and techniques. On the basis of these principles of
injections recorded systematically in order to know the results
of a business. That’s why it is regarded as a science.
• Accounting is an Art :Every businessman records a business
transaction in the books of accounts as per rules, according to
the nature of the business and determine the results after
analyzing, so it’s an art. Thus it is clear from the above
discussion that accounting has the elements of both science
9. • Q: The first step in the accounting process is_______.
4. None of the above
10. The main objectives of accounting are:
1. To maintain a systematic record of business transactions
• Accounting is used to maintain a systematic record of all
the financial transactions in a book of accounts.
• For this, all the transactions are recorded in chronological
order in Journal and then posted to principle book i.e.
2. To ascertain profit and loss
• Every businessman is keen to know the net results of
business operations periodically.
• To check whether the business has earned profits or
incurred losses, we prepare a “Profit & Loss Account”.
11. 3. To determine the financial position
• Another important objective is to determine the financial
position of the business to check the value of assets and
• For this purpose, we prepare a “Balance Sheet”.
4. To provide information to various users
• Providing information to the various interested parties or
stakeholders is one of the most important objectives of
• It helps them in making good financial decisions.
5. To assist the management
• By analyzing financial data and providing interpretations in
the form of reports, accounting assists management in
handling business operations effectively.
13. Internal User
a) Owners need to assess how well their business is performing.
b) Financial statements provide information to owners about
the profitability of the overall business as well as individual
products and geographic segments.
c) Owners are also interested in knowing how risky their business is.
d) Accounting information helps owners in assessing the level of
stability in business over the years and to what extent have
changes in economic factors affected the bottom line of the
e) Such information helps owners to decide if they should invest any
further in the business or if they should use their financial
resources elsewhere in more promising business ventures.
a) Managers need accounting information to plan, monitor and make
b) Managers need to allocate the financial, human and capital
resources towards competing needs of the business through the
c) Preparing and monitoring budgets effectively requires reliable
accounting data relating to the various activities, processes,
products, services, segments and departments of the business.
d) Management requires accounting information to monitor the
performance of business by comparison against past
performance, competitor analysis, key performance indicators and
e) Managers rely on accounting data to form their business decisions
such as investment, financing and pricing decisions.
a. For the employees operating in the finance department, using
accounting information is usually part of their job description. This
includes for example preparing and reviewing various financial
reports such as financial statement.
b. Employees are interested in knowing how well a company is
performing as it could have implications for their job security and
c. Many employees review accounting information in the annual
report just to get a better understanding of the company’s
d. In recent years, the increase in number of shares and share
options schemes for employees particularly in startups has
fostered a greater level of interest in accounting information by
16. External Users of Accounting
a) Investors need to know how well their investment is
performing. Investors primarily rely on the financial
statements published by companies to assess the
profitability, valuation and risk of their investment.
b) Investors use accounting information to determine whether
an investment is a good fit for their portfolio and whether
they should hold, increase or decrease their investment.
a) Lenders use accounting information of borrowers to assess
their credit worthiness, i.e. their ability to pay back any loan.
b) Lenders offer loans and other credit facilities on terms that
are based on the assessment of financial health of
c) Good financial health is indicated by the borrower’s ability to
pay its liabilities on time, high profitability, substantial
securable assets and liquidity.
d) Poor liquidity, low profitability, lack of assets that can be
secured and an inability to pay liabilities on time
demonstrate poor financial health of borrower
a) Just like lenders, suppliers need accounting information to
assess the credit-worthiness of its customers before offering
goods and services on credit.
b) Some suppliers only have a handful of customers. These
customers could be very large businesses themselves.
Suppliers need accounting information of its key customers
to assess whether their business is in good health which is
necessary for sustainable business growth.
a) Most consumers don’t care about the financial information of its
b) Industrial consumers however need accounting information about
its suppliers in order to assess whether they have the required
resources that are necessary for a steady supply of goods or
services in the future. Continuity in supply of quality inputs is
essential for any business.
20. Tax Authorities
a) Tax authorities determine whether a business declared the
correct amount of tax in its tax returns.
b) Occasionally, tax authorities conduct audits of the tax
returns filed by businesses in order to verify the information
with the underlying accounting records.
c) Tax authorities also cross reference accounting information
of suppliers and consumers in order to identify potential tax
a) External auditors examine the financial statements and the
underlying accounting record of businesses in order to form
an audit opinion.
b) Investors and other stakeholders rely on the independent
opinion of external auditors on the accuracy of financial
a) General public may also be interested in accounting
information of a company.
b) These could include journalists, analysts, academics, activists
and individuals with an interest in economic developments.
23. ACCOUNTING CONCEPTS
• Accounting concepts define the assumptions on the basis of which
financial statements of a business entity are prepared.
• Concepts are those basic assumptions and condition which form
the basis upon which the accountancy has been laid.
Business entity concept
Money measurement concept
Going concern concept
Accounting period concept
Accounting cost concept
Dual aspect concept
24. Business entity concept :Business entity concept is one of the accounting
concepts that states that business and the owner are two separate
entities and therefore, should be considered separate from each other.
Suppose Mr. Birla started a business. He invested Rs 1, 00, 000. He
purchased goods for Rs 50,000, furniture for Rs. 40,000, and plant and
machinery for Rs. 10,000 and Rs 2000 remained in hand.
These are the assets of the business and not of the business owner.
According to the business entity concept, Rs.1,00,000 will be assumed by a
business as capital i.e. a liability of the business towards the owner of the
Now suppose, he takes away Rs. 5000 cash or goods for the same worth
for his domestic purposes. This withdrawal of cash/goods by the owner
from the business is his private expense and not the business expense. It is
termed as Drawings.
25. Money measurement concept: It states that a business should only
record an accounting transaction if it can be expressed in terms of
money. This means that the focus of accounting transactions is on
quantitative information, rather than on qualitative information.
For example, the sale of goods worth Rs. 10000, purchase of raw
material Rs. 5000, rent paid Rs.2000 are expressed in terms of money,
hence these transactions can be recorded in the books of accounts.
Going concern concept: This concept assumes that the business will
continue to operate and will not stop the business activities in the
Due to this reason, the financial statements for a particular financial
period are created as a part of a series and carry the balances to the
next financial period. This assumes that the non-current assets of the
organization will not be sold any time soon and it will meet its
26. • Accounting period concept :It states that all assets are
recorded in the books of accounts at their purchase price,
which includes cost of acquisition, transportation and
installation and not at its market price. It means that fixed
assets like building, plant and machinery, furniture, etc are
recorded in the books of accounts at a price paid for them.
27. • Accounting cost concept :The cost principle is an accounting
principle that records assets at their respective cash amounts at
the time the asset was purchased or acquired. The amount of the
asset that is recorded may not be increased for improvements in
market value or inflation, nor can it be updated to reflect any
Dual aspect concept :The dual aspect concept states that since
every transaction has a dual effect, the accounting records must
reflect the same to show the accurate movement of funds.
For instance, a buyer pays cash in return for a purchased item while
the seller gains cash for the sold item.
Matching concept: Matching principle is especially important in the
concept of accrual accounting. Matching principle states that
business should match related revenues and expenses in the same
period. They do this in order to link the costs of an asset or revenue
to its benefits.
28. Realisation concept : The realization principle is a concept in
accounting that states that revenue should be recognized
once it is earned. This is the point at which a business can
reasonably expect that the customer will pay for the goods or
Accrual concept: A financial accounting method in which
revenues and expenses are recorded when a transaction
occurs rather then when money is exchange .
29. Accounting conventions
Accounting conventions are certain guidelines for complicated
and unclear business transactions. While standardizing the
financial reporting process, these conventions consider
comparison, relevance, full disclosure of transactions, and
application in financial statements.
Types of Convention
d) Full Disclosure:
30. • Conservatism: It tells the accountants to err on the side of caution when
providing the estimates for the assets and liabilities, which means that
when there are two values of a transaction available, then the always
lower one should be referred to.
• Consistency: A company is forced to apply the similar accounting
principles across the different accounting cycles. Once this chooses a
method it is urged to stick with it in the future also, unless it finds a good
reason to perform it in another way. In the absence of these accounting
conventions, the ability of investors to compare and assess how the
company performs becomes more challenging.
• Full Disclosure: Information that is considered potentially significant and
relevant is to be completely disclosed, regardless of whether it is
detrimental to the company.
• Materiality: Similar to full disclosure, this convention also bound
organizations to put down their cards on the table, meaning they need to
totally disclose all the material facts about the company. The aim behind
this materiality convention is that any information that could influence the
person’s decision by considering the financial statement must be included.
31. Accounting Principles
Accounting principles are a set of guidelines and rules issued by
accounting standards like GAAP and IFRS for the companies to
follow while presenting or recording financial transactions in the
books of account. This enables companies to present a true and fair
view of the financial statements.
• Here is the list of the top 6 accounting principles that companies
follow quite often:
• Accrual Principle
• Consistency Principle
• Conservatism Principle
• Going Concern Principle
• Matching Principle
• Full Disclosure Principle