FINANCIAL ACCOUNING AND REPORTING MBA 102

Module -1 Introduction to Accounting

Meaning and objectives Need and Types of Accounting, Single Entry System, Double
Entry System, Concepts and Conventions of Accounting , Users of accounting
information, Basics of Generally Accepted accounting Principles (GAAP), Indian
Accounting Standards , IFRS (Theory only)

Meaning and Definition of Accounting

Accounting is a systematic method of recording business transactions. It is also called

as „Book Keeping‟.
The American Accounting Association, “Accounting is the process of identifying,
measuring and communication economic information to permit informed judgement and
decisions by users of the information”.

Objectives of Accounting

The following are the main objectives of accounting:

1. To keep the systematic records:

Accounting is a systematic practice of book keeping. It helps an organisation to maintain
the transactions records in a systematic way.
2. It is a language of business:
Accounting helps an organisation to communicate to the external world. So it is called as
language of business.
3. Ascertainment of the financial position of the business:
Ascertainment of the true financial position (i.e., the assets, liabilities and owner‟s
capital) of the business at the end of every accounting year by preparing the balance sheet
or position statement is another important objective of accounting.
4. Ascertaining the profit or loss of the business:
Another important objective of accounting is to ascertain the profit or loss of the business
for an accounting period by preparing the profit and loss account.
5. Prevention of errors and frauds:
Another important objective of accounting is to prevent errors and frauds in the business
by facilitating their quick detection and by introducing suitable measures for their
prevention of future.
6. Making financial information available to various groups of persons:
Accounting communicates the financial results (i.e., profit or loss and the financial
position) and other valuable financial information to various groups of persons, such as

Dr. G P Nagesh , Dr. Kavitha Jane Crasta, Assistant Professor JNNCE, Shivamogga Page 1
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the owners, the lenders, the creditors, employees, potential investors, consumers,
Government, etc.

Need For Accounting

1. To record business transactions in a systematic way
2. It is the language of business
3. It helps to know assets and liabilities of the company
4. It is the obligation of the company to present the financial report of the company to
all the stakeholders
5. It helps to take decision.
Types of Accounting

The following Three are the basic types of Accounting

1. Financial Accounting
2. Cost accounting
3. Management accounting

1. Financial Accounting:
Financial accounting is that branch of accounting which is concerned with the
recording of business transactions in a set of books of accounts and the periodic presentation
of the financial information found in the books of accounts, through financial statements
like the profit and loss account and the balance sheet, to the management and other users of
accounting information.
2. Cost accounting:
Cost accounting is the process of recording, analysing and managing all the expenses a
business incurs to produce goods and services. This branch of accounting provides
information to the company recording micro cost detail which helps the company to take
decisions Example; Cost Sheet.
3. Management accounting:
Management Accounting is concerned with accounting information which is useful to
management. This branch of Accounting provides information to the management to take
the decisions. There are no strong rules for management accounting practices because it
differs from company to company.
Single-entry system of Book Keeping
It is an old method of recording transactions where in only one aspect of the
transactions will be recorded. So it is an incomplete method of book keeping.

Double entry system of Book Keeping

It is a modern method of recording business transactions. It considers both the aspects
of transactions i.e., Debit and Credit. It is a complete method of recording business
transaction.

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 FINANCIAL ACCOUNING AND REPORTING MBA 102

Users of Accounting Information

1. Owners: owners are the people who provide capital for the business. They use accounting
information to look into the financial affairs of the business.

2. Employees: Use information to understand job security, salary potential, and company stability.

3. Management: Uses information for strategic decision-making, planning, and controlling

operations

4. Government & Regulatory Bodies: Use information for tax purposes, to ensure legal
compliance, and for economic assessment.

5. Investors (and potential investors): Use information to evaluate the company's profitability and
potential return on investment.

6. Creditors (lenders, banks): Use information to assess creditworthiness and the ability to
repay loans.
7. General public: The public is interested in accounting information because this informs
them about the financial health of individual businesses. In turn, it is possible to determine
the overall impact on the country‟s economy.

8. Suppliers: In order to understand the business‟s future creditworthiness, they rely on

accounting information to determine whether to continue delivering goods on credit in the
future.

Generally Accepted Accounting Principles (GAAP)

Meaning:

Generally Accepted Accounting Principles may be defined as those rules of action or

conduct which are derived from experience and practice and when they prove useful, they
become accepted as principles of accounting.

According to the American Institute of Certified Public Accountants (AICPA),

“The principles which have substantial authoritative support become a part of the
generally accepted accounting principles.”

The general acceptance of the accounting principles or practices depends upon how
well they meet the following three criteria:

(a) Relevance: A principle is relevant to the extent it results in information that is

meaningful and useful to the user of the accounting information.

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(b) Objectivity: Objectivity connotes reliability and trustworthiness. A principle is

objective to the extent the accounting information is not influenced by personal bias or
judgment of those who provide it. It also implies verifiability which means that there is
some way of ascertaining the correctness of the information reported.

(c) Feasibility: A principle is feasible to the extent it can be implemented without much
complexity or cost.

Classification of Accounting Principles or kinds of Accounting Principles

Traditionally, accounting principles have been classified as

1. Accounting Concepts
2. Accounting Conventions

Accounting Concepts

Accounting concepts are the fundamental ideas or basic assumptions underlying the
theory and practice of accounting.

Important Accounting Concepts:

1. Money measurement concept

2. Separate entity concept
3. Going-concern concept
4. Cost concept
5. Dual aspect concept
6. Accounting period concept
7. Objective evidence concept
8. Realisation concept
9. Accrual concept
10. Matching concept
1. Money measurement concept: The money measurement concept implies that, in
accounting, a record is made only of those transactions or events which can be measured
and expressed in terms of money. Non-monetary events (i.e., events which cannot be
measured and expressed in terms of money) like the retirement of the managing director of a
concern, the good quality of the products produced by the concern, etc. are not recorded,
though they are also material events, as they cannot be measured and expressed in terms of
money.
2. Separate entity concept: This concept also means that, as the business and the
proprietors of the business are two separate entities, the transactions of the business are
distinguished from those of the proprietors, and in the books of the business, only the
transactions of the business, and not the private transactions of the proprietors, are recorded.
3. Going-concern concept: The going-concern concept means that, in accounting, an
enterprise is regarded as a going concern (i.e., a concern that will continue to operate for an

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 FINANCIAL ACCOUNING AND REPORTING MBA 102

indefinitely long period of time). There is neither the intention nor the necessity to wind up
the concern in the foreseeable future. It may be noted that this concept does not mean
permanent continuance of a business. All that it means is that a business enterprise will
continue to operate for a fairly long period of time.
4. Cost concept: The cost concept means that an asset acquired by a concern is recorded in
the books of accounts at cost (i.e., at the price actually paid for acquiring the asset). The
market price of the asset is ignored, and it is its cost price that forms the basis for all
subsequent accounting for that asset.
5. Dual aspect concept: This principle shows that every financial transaction affects at least
two accounts, maintaining the accounting equation. Example: If a business purchases
machinery for Rs.10,000 in cash, assets (machinery) increase, and cash (another asset)
decreases by the same amount.
6. Accounting period concept: Financial statements must be prepared for specific time
periods. These periods are used to evaluate performance, financial health, and compliance
with reporting standards or taxation laws. This Accounting period may be calendar year
(i.e., from 1st January to 31st December, of every year) or the financial year of the
Government (i.e., from 1st April of a year to 31st March of the next year).
7. Objective evidence concept: This principle requires all financial entries to be based on
evidence and supported by source documents or business documents, such as invoices,
vouchers, etc.
8. Revenue Realisation concept: This concept states that revenue should be recorded when
it is earned and realisable, regardless of when cash is received.
9. Accrual concept: It means that when a transaction has been entered into, its
consequences will certainly follow. So, all transactions must be brought into record, whether
they are settled in cash or not. Example: A company delivers goods in December and
receives payment in January; revenue is recorded in December.
10. Matching concept: Expenses must be recorded in the same period as the revenue they
generate. Example: If a company earns Rs.50,000 in sales and pays Rs.5,000 in commission
related to those sales, both revenue and commission expense are recorded in the same
period.

Accounting Conventions
Meaning
Accounting conventions are the customs or practices which have been in force for a long
period and which guide the accountants, while preparing financial statements. In other
words, they are customs, usages or practices followed by accountants as a guide in the
preparation of financial statements.
1. Convention of conservatism: A safe policy is adopted in preparing the financial
statements of a concern. For instance, the market value and book value are two values for
recording a particular asset. Considering the scenario as per the accounting convention,
the lower value of the asset is considered.

2. Convention of Consistency: If a business adopts a particular method for reporting its

transactions, it should maintain the consistency of continuing that method for rest of the

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years. For instance, when once a particular method of depreciation is adopted for a
particular fixed asset, the same method should be followed for that asset year after year.

3. Convention of disclosure: Even after including the accounting convention, full details,
and relevant and essential information related to the financial status of the company must
be mentioned in the financial statements. For instance, contingent liabilities and lawsuits
against the company must be disclosed in the footnotes of the financial statements.

4. Convention of materiality: In accounting, a detailed record is made only those business

transactions which are material (significant) to the users of accounting information.

International Financial Reporting Standards (IFRS)

IFRS standards are International Financial Reporting Standards (IFRS) that consist of a set
of accounting rules that determine how transactions and other accounting events are
required to be reported in financial statements. They are designed to maintain credibility and
transparency in the financial world, which enables investors and business operators to make
informed financial decisions.

IFRS standards are issued and maintained by the International Accounting Standards Board
and were created to establish a common language so that financial statements can easily be
interpreted from company to company and country to country.

Indian Accounting Standards (Ind AS)

Meaning
Ind AS stands for Indian Accounting Standards. Ind AS is a set of uniform accounting
rules that companies must follow when preparing financial statements. These
are accounting standards notified by the Ministry of Corporate Affairs (MCA),
Government of India, and are converged with IFRS (International Financial Reporting
Standards). Ind AS ensures that Indian companies follow globally accepted accounting
principles, improving transparency, comparability, and reliability of financial
statements.

Objective:

 To bring Indian financial reporting in line with global standards (IFRS).

 To provide true and fair financial information to stakeholders.

Ind AS applies to:

 Listed companies
 Certain large unlisted companies (based on net worth criteria)
 Banks, insurance companies, NBFCs (as per specific rules)
Examples of Ind AS

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• Ind AS 1 – Presentation of Financial Statements

• Ind AS 2 – Inventories
• Ind AS 16 – Property, Plant & Equipment
• Ind AS 18 / 115 – Revenue
• Ind AS 109 – Financial Instruments
• Ind AS 116 – Leases

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