Summary

Definition & Purpose: Accounting is the process of identifying, measuring, recording, and communicating the economic events of an organisation to permit informed judgments and decisions by users of the information. Its primary purpose is to provide financial information about the business.

Economic Events: Only those events that can be measured in monetary terms are recorded. An event is a happening of consequence to the entity, such as a sale, purchase, or payment of wages.

Identification, Measurement, Recording & Communication: The accounting cycle begins with identifying transactions, measuring them in a common financial unit (rupees), recording them in the books of original entry (journal), and finally communicating the results through financial statements.

Users of Accounting Information: Two broad categories — internal users (owners, management, employees) who need detailed, timely data for planning and control, and external users (investors, creditors, government, customers) who rely on periodic summaries for investment, lending, and regulatory decisions.

Branches of Accounting: Three main branches — Financial Accounting (preparation of general-purpose financial statements), Cost Accounting (determination and control of costs), and Management Accounting (providing information for internal decision-making).

Objectives of Accounting: Systematic recording of transactions, ascertainment of profit or loss (via the Income Statement), depiction of financial position (via the Balance Sheet), and providing information to users for rational decision-making.

Advantages: Provides a permanent, reliable record; facilitates comparison over time and across firms; helps in tax compliance; serves as evidence in legal disputes; and aids in assessing the efficiency of operations.

Limitations: Records only monetary transactions (ignores non-monetary factors like employee morale); based on historical cost (not current market value); subject to personal judgments and estimates; and does not reflect price-level changes. …