Page 8 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes Objectives

After studying this unit, you will be able to:
 Understand needs and objectives of accounting

 Know branches of accounting
 Know users and difference between book-keeping and accounting
 Describe meaning, importance and rules of double entry system

Introduction

Accounting is a business language which elucidates the various kinds of transactions during the
given period of time.
Accounting is broadly classified into three different functions viz.
 Recording
 Classifying and

 Summarizing
American Institute of Certified Public Accountants Association defines the term accounting as
follows “Accounting is the process of recording, classifying, summarizing in a significant manner
of transactions which are in financial character and finally results are interpreted.”
The main object of a business house is to earn profit. Accounting is the medium of recording the
business activities and it considered as a language of business. To find out the results of a
business, the information relating to the cost of the products and revenues from the products is
collected. Then the costs and revenues are compared to find out the profit or loss of the business.
If volume of sales of the products is high and the number of transaction of the business is very
high, it is impossible to keep all these transactions in the mind of a business man. Thus a need of
recording of all these business transactions rose. The recording of business transactions or
activities is done through a process of accounting. There is an old quotation of a well known
author of accounting Prof. R.R. Gupta, First write or record before one deliver the goods or
renders the services and if there is any disagreement in future, use the writing or record as an
evidence to resolve the misunderstanding or rectifying the errors.
Today the business activities are recorded not only to find out the profit or loss of the business,
but are also to judge the financial position of the business. Accounts of the business are prepared
from the point of view of owner and also serve the purpose of outsiders. Creditors and investors
want to know how safe their investment is—Labours in conducting the negotiations for wages
and government to determine the economic policies etc. Thus accounts of a business are the
evidence on the basis of which the financial decisions are taken.

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Caution Accounting is not an equivalent function to book keeping. Accounting is broader
in scope than the book keeping; the earlier cannot be equated to the latter.

1.1 Meaning and Definition of Accounting

Accounting is treated as the language of business. It records all the transactions which can be
measured in money and have occurred in a particular period. Accounts of a business provide
useful information to its users.

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