Subject: Financial Accounting-I
Course Code: BBA-104
Lesson: 1 Vetter:
INTRODUCTION TO ACCOUNTING
STRUCTURE
1.0 Objectives
1.1 Introduction
1.2 Development of accounting discipline
1.3 An accountant’s job profile: functions of accounting
1.4 Utility of accounting
1.5 Types of accounting
1.5.1 Financial accounting
1.5.2 Management accounting
1.5.3 Cost accounting
1.5.4 Distinction between financial and management
accounting
1.6 Summary
1.7 Keywords
1.8 Self assessment questions
1.9 References/suggested readings
1.0 OBJECTIVES
After going through this lesson, you will be able to-
· Understand the meaning and nature of accounting.
· Differentiate between various types of accounting.
· Know development of accounting principle.
· Explain the importance of accounting.
,1.1 INTRODUCTION
Accounting is a system meant for measuring business activities,
processing of information into reports and making the findings available
to decision-makers. The documents, which communicate these findings
about the performance of an organisation in monetary terms, are called
financial statements.
Usually, accounting is understood as the Language of Business.
However, a business may have a lot of aspects which may not be of
financial nature. As such, a better way to understand accounting could
be to call it The Language of Financial Decisions. The better the
understanding of the language, the better is the management of financial
aspects of living. Many aspects of our lives are based on accounting,
personal financial planning, investments, income-tax, loans, etc. We have
different roles to perform in life-the role of a student, of a family head, of
a manager, of an investor, etc. The knowledge of accounting is an added
advantage in performing different roles. However, we shall limit our scope
of discussion to a business organisation and the various financial aspects
of such an organisation.
When we focus our thoughts on a business organisation, many
questions (is our business profitable, should a new product line be
introduced, are the sales sufficient, etc.) strike our mind. To answer
questions of such nature, we need to have information generated through
the accounting process. The people who take policy decisions and frame
business plans use such information.
All business organisations work in an ever-changing dynamic
environment. Any new programme of the organisation or of its competitor
will affect the business. Accounting serves as an effective tool for
measuring the financial pulse rate of the company. It is a continuous
,cycle of measurement of results and reporting of results to decision-
makers.
Just like arithmetic is a procedural element of mathematics, book
keeping is the procedural element of accounting. Figure 1 shows how an
accounting system operates in business and how the flow of information
occurs.
People make decision
Business transactions occur
Accountants prepare
reports to show the results
of business operations
FIG 1: THE ACCOUNTING SYSTEM
Source: Liorngren, Harrison and Robinson, Financial and Management
Accounting, Prentice Hall, New Jersey, 1994.
1.2 DEVELOPMENT OF ACCOUNTING DISCIPLINE
The history of accounting can be traced back to ancient times.
According to some beliefs, the very art of writing originated in order to
record accounting information. Though this may seem to be an
exaggeration, but there is no denying the fact that accounting has a long
history. Accounting records can be traced back to the ancient
civilizations of China, Babylonia, Greece and Egypt. Accounting was used
to keep records regarding the cost of labour and materials used in
building great structures like the Pyramids.
During 1400s, accounting grew further because the needs for
information of merchants in the Venis City of Italy increased. The first
known description of double entry book keeping was first published in
, 1994 by Lucas Pacioli. He was a mathematician and a friend of Leonardo
Ileda Vinci.
The onset of the industrial revolution necessitated the development
of more sophisticated accounting system, rather than pricing the goods
based on guesses about the costs. The increase in competition and mass
production of goods led to the rise of accounting as a formal branch of
study.
With the passage of time, the corporate world grew. In the
nineteenth century, companies came up in many areas of infrastructure
like the railways, steel, communication, etc. It led to a rapid growth in
accounting. As the complexities of business grew, ownership and
management of business was divorced. As such, managers had to come
up with well-defined, structured systems of accounting to report the
performance of the business to its owners.
Government also has had a lot to do with more accounting
developments. The Income Tax brought about the concept of ‘income’.
Government takes a host of other decisions, relating to education, health,
economic planning, for which it needs accurate and reliable information.
As such, the government demands stringent accountability in the
corporate sector, which forces the accounting process to be as objective
and formal as possible.
1.3 AN ACCOUNTANT’S JOB PROFILE: FUNCTIONS OF
ACCOUNTING
A man who is involved in the process of book keeping and
accounting is called an accountant. With the coming up accounting as a
specialised field of knowledge, an accountant has a special place in the
structure of an organisation, because he performs certain vital functions.
Course Code: BBA-104
Lesson: 1 Vetter:
INTRODUCTION TO ACCOUNTING
STRUCTURE
1.0 Objectives
1.1 Introduction
1.2 Development of accounting discipline
1.3 An accountant’s job profile: functions of accounting
1.4 Utility of accounting
1.5 Types of accounting
1.5.1 Financial accounting
1.5.2 Management accounting
1.5.3 Cost accounting
1.5.4 Distinction between financial and management
accounting
1.6 Summary
1.7 Keywords
1.8 Self assessment questions
1.9 References/suggested readings
1.0 OBJECTIVES
After going through this lesson, you will be able to-
· Understand the meaning and nature of accounting.
· Differentiate between various types of accounting.
· Know development of accounting principle.
· Explain the importance of accounting.
,1.1 INTRODUCTION
Accounting is a system meant for measuring business activities,
processing of information into reports and making the findings available
to decision-makers. The documents, which communicate these findings
about the performance of an organisation in monetary terms, are called
financial statements.
Usually, accounting is understood as the Language of Business.
However, a business may have a lot of aspects which may not be of
financial nature. As such, a better way to understand accounting could
be to call it The Language of Financial Decisions. The better the
understanding of the language, the better is the management of financial
aspects of living. Many aspects of our lives are based on accounting,
personal financial planning, investments, income-tax, loans, etc. We have
different roles to perform in life-the role of a student, of a family head, of
a manager, of an investor, etc. The knowledge of accounting is an added
advantage in performing different roles. However, we shall limit our scope
of discussion to a business organisation and the various financial aspects
of such an organisation.
When we focus our thoughts on a business organisation, many
questions (is our business profitable, should a new product line be
introduced, are the sales sufficient, etc.) strike our mind. To answer
questions of such nature, we need to have information generated through
the accounting process. The people who take policy decisions and frame
business plans use such information.
All business organisations work in an ever-changing dynamic
environment. Any new programme of the organisation or of its competitor
will affect the business. Accounting serves as an effective tool for
measuring the financial pulse rate of the company. It is a continuous
,cycle of measurement of results and reporting of results to decision-
makers.
Just like arithmetic is a procedural element of mathematics, book
keeping is the procedural element of accounting. Figure 1 shows how an
accounting system operates in business and how the flow of information
occurs.
People make decision
Business transactions occur
Accountants prepare
reports to show the results
of business operations
FIG 1: THE ACCOUNTING SYSTEM
Source: Liorngren, Harrison and Robinson, Financial and Management
Accounting, Prentice Hall, New Jersey, 1994.
1.2 DEVELOPMENT OF ACCOUNTING DISCIPLINE
The history of accounting can be traced back to ancient times.
According to some beliefs, the very art of writing originated in order to
record accounting information. Though this may seem to be an
exaggeration, but there is no denying the fact that accounting has a long
history. Accounting records can be traced back to the ancient
civilizations of China, Babylonia, Greece and Egypt. Accounting was used
to keep records regarding the cost of labour and materials used in
building great structures like the Pyramids.
During 1400s, accounting grew further because the needs for
information of merchants in the Venis City of Italy increased. The first
known description of double entry book keeping was first published in
, 1994 by Lucas Pacioli. He was a mathematician and a friend of Leonardo
Ileda Vinci.
The onset of the industrial revolution necessitated the development
of more sophisticated accounting system, rather than pricing the goods
based on guesses about the costs. The increase in competition and mass
production of goods led to the rise of accounting as a formal branch of
study.
With the passage of time, the corporate world grew. In the
nineteenth century, companies came up in many areas of infrastructure
like the railways, steel, communication, etc. It led to a rapid growth in
accounting. As the complexities of business grew, ownership and
management of business was divorced. As such, managers had to come
up with well-defined, structured systems of accounting to report the
performance of the business to its owners.
Government also has had a lot to do with more accounting
developments. The Income Tax brought about the concept of ‘income’.
Government takes a host of other decisions, relating to education, health,
economic planning, for which it needs accurate and reliable information.
As such, the government demands stringent accountability in the
corporate sector, which forces the accounting process to be as objective
and formal as possible.
1.3 AN ACCOUNTANT’S JOB PROFILE: FUNCTIONS OF
ACCOUNTING
A man who is involved in the process of book keeping and
accounting is called an accountant. With the coming up accounting as a
specialised field of knowledge, an accountant has a special place in the
structure of an organisation, because he performs certain vital functions.
