Introduction to Accounting: The Language of Business

1. Chapter 1 Accounting: The Language of Business

2. Learning Objectives After studying this chapter, you should be able to: • Explain how accounting information assists in making decisions. • Application of certain fundamental accounting concepts and conventions . • Gain an insight into the elementary concept of preparation of final accounts. • Identify the major users of accounting information . • Distinguish between financial and management Accounting.

3. Introduction • Accounting - a process of identifying, recording, summarizing, and reporting economic information to decision makers in the form of financial statements Activities covered Identifying Measuring Recording Classifying Summarizing Analyzing Interpretative communication

4. Introduction Financial accounting - focuses on the specific needs of decision makers external to the organization, such as stockholders, suppliers, banks, and government agencies. The accounting system is a series of steps performed to analyze, record, quantify, accumulate, summarize, classify, report, and interpret economic events and their effects on an organization and to prepare the financial statements.

5. The Nature of Accounting • Monetary Transactions • Historical in nature • Legal Requirement • External Use • Disclosure of Financial Status • Interim Reports • Financial Accounting Process

6. Necessity of Accounting

7. Impact of Accounting The impact of accounting information on the user’s behavior are as follows: They are enabled to talk or solve problems that non users do not. They are enabled to perform tasks more rapidly or more completely than non users do. They are more predisposed to different managerial styles or emphases than those who do not.

8. Advantages of Accounting Assists the management Users to take decisions Ascertain net result or operation Facilitates to replace the memory Ascertainment of value of business Acts as legal evidence Helping in raising loans Settlement of tax liability Legal requirements Ascertaining financial position Comparative Study Control over assets The main advantages of Accounting are as under :

9. Limitations of Accounting Danger of window dressing Not free from bias Estimation and not real Ignores qualitative Elements Ignores Price Level Changes Limitations of Accounting

10. is a system that information that is Importance of Accounting Accounting Identifies Records Relevant Communicates Reliable about an organization’s business activities. Comparable 1-10

11. Branches of Accounting Accounting Government Accounting Enterprise Accounting Social Accounting Financial Accounting Management Accounting Cost Accounting

12. Financial and Management Accounting The major distinction between financial and management accounting are as follows:

13. ExternalUsers Financial accountingprovides external users with financial statements (shareholders, lenders, etc.). Users ofFinancial Accounting Management Accounting Internal Users Managerial accounting provides information needs for internal decision makers (officers, managers, etc.). 1-13

14. Internal Users External Users • Managers • Officers • Internal Auditors • Sales Staff • Budget Officers • Controllers • Lenders • Shareholders • Governments • Consumer Groups • External Auditors • Customers Users of Accounting Information

15. Accounting as an Aid toDecision Making • Accounting information is useful to anyone who makes decisions that have economic results. • Managers want to know if a new product will be profitable. • Owners want to know which employees are productive. • Investors want to know if a company is a good investment. • Creditors want to know if they should extend credit, how much to extend, and for how long. • Government regulators want to know if financial statements conform to requirements.

16. Accounting as an Aid toDecision Making • Fundamental relationships in the decision-making process: • Decision making process – Step 1 Step 2 Step 3 Identify the issue Gather Information Identify Alternatives Step 4 Select the option that will result most likely in the desired objective . In Accounting language it will be Accountant’s analysis & recording Users Financial Statements Event

17. Basic Accounting Terminology Entity – an economic unit performing economic activity. Transaction-It involves exchange of goods or services on cash or credit basis Entry –record made in books of accounts . Assets –value of things used in business operations .Assets are further classified as : 1)Fixed Assets-that are held for providing or producing goods and services and not for resale. 2)Current Assets-held in the form of cash or for conversion into cash on a short term basis .

18. Basic Accounting terminology Liabilities-Amount which the firm owes to outsiders that is excepting the proprietors. Liabilities are further classified as : 1)Current liabilities- Fall due for payment in relatively short period 2)Long term liabilities – Do not fall for repayment in short period Capital-Investment made by owner for use in the firm. Proprietor – Individual or group of persons who undertake risk of business.

19. Basic Accounting terminology Drawings-Amount withdrawn by proprietor for private or personal use . Revenue –Amount earned by selling products or services Expenses-Costs incurred in the process of earning revenue Purchases- Goods procured by business on credit or for cash. Sales-Total revenues of goods sold or services provided

20. Basic Accounting terminology Stock-Tangible property held for sale in the ordinary course of business . Debtors- Persons from whom the amounts are due for goods sold or services rendered on credit basis. Entry-Recording of transactions in books of account. Ledger- All accounts kept in the book is called ledger book. Trial balance -Statement of accounts having debit and credit balance .

21. Generally Accepted Accounting Principles (GAAP) GAAP may be defined as those rules of action which are derived from experience and practice and when they prove useful ,they become accepted as principles of accounting. It includes the standards, conventions and rules which the accountants follow in recording and summarizing transactions and in the preparation of financial statements.

22. Features of GAAP Accounting principles are based on general rules. They are launched on the basis of logic and experience. They are widely accepted

23. Limitations of GAAP Lack of Complete set of Principles Lack of general acceptance of Principles Difference in the application of Principles .

24. Classification of GAAP Accounting principles Concepts Conventions Accrual Concept Consistency Matching Concept Full Disclosure Separate Entity Concept Prudence Dual Aspect Concept Materiality Going Concern Concept Money Measurement Concept Accounting Period Concept Cost Concept Realization Concept Objective Evidence Concept