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INTRODUCTION TO ACCOUNTING
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GOODS AND SERVICE TAX (GST)
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SOLUTIONS MANUAL Frank Wood’s Business Accounting 1 & 2 ELEVENTH EDITION Frank Wood BSc(Econ), FCA and Alan Sangster BA, MSc, CertTESOL, CA
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Introduction to AccountingAccounting: Overview, Evolution, Development, Meaning and Features
Objectives
After going through this lesson, you shall be able to understand the following concepts.
• Overview of Accounting
• Meaning of Accounting
• Characteristics of Accounting
Till now in the previous classes you all have studied the subjects such as Mathematics,
Science, Social Studies, Hindi, English, etc. Now, in class XI, you are going to be familiar with
some new and fresh subjects such as Accountancy, Economics, Business Studies, etc. All
these subjects come under the purview of one stream named as Commerce. Among all
these subjects our main focus will be on “Accountancy”.
What is the first thing that comes to your mind when you hear the term Accounting?
Something related to business or something related with mathematical calculations or may
be something related to keeping a track of someone’s earnings and spending.
Accounting in very simple sense is maintaining a record of various activities.
,Thus, Accounting is something that is used almost by everyone in their daily lives. In our
daily life, we maintain the record of various transactions or activities. For instance, a
student who gets monthly pocket money may keep a record of his various expenses i.e. how
much he spent on buying books or pens, how much he spent with his friends or how much
he has saved. Similarly, a house wife may keep a track of quantities of various grocery
items such as pulses, rice, vegetables, flour, etc. Thus, the activities related to keeping a
record of some activities or transactions are covered under the head accounting.
Evolution of Accounting
What do you think, accounting is something that is evolved in the modern times? No, it has
been in use from the ancient times.
Roots of Accounting can be traced long back in civilisation. Around 4000 B.C., in Babylonia
and Egypt, payment of wages and taxes were recorded on clay tablets. As history claims
that Egyptians kept the record of gold and valuable deposits and withdrawal from the
treasuries. These records were reported on daily basis by the incharge of treasuries to
the wazir, who used to forward the monthly reports to the king. Babylonia and Egypt used
this method to rectify and remove errors, frauds and inefficiency from the records. Around
2000 B.C., China used sophisticated form of accounting. In Greece, accounting was used to
maintain total receipts and total payments and to balance government accounts. In Rome,
around 700 B.C., receipts and payments were recorded in daybook and were posted in the
ledger at the end of the month. In 1494, Luca Pacioli wrote the book Summa de Arithmetica
Geometria Proportioni et Proportionalita. In this, he explained the term debit and credit,
which are used in accounting till date.
In India, around twenty three centuries ago, Kautilya wrote the book Arthshastra, which
described how accounting records had to be maintained.
Book Keeping emerged during the Barter system when there was no cash system and trade
was carried by exchanging goods and services. At that time, transactions were kept in
individual ledgers and they can be provided as evidence in case of dispute.
Afterwards, when currency and numbers were introduced then the single entry system of
book keeping was evolved, where a single column is maintained and all the transactions
whether paid or received are recorded in that column. In the 15th Century when Luca
Pacioli explained the double entry system, book keeping became more efficient as
transactions were recorded separately in the debit and credit column which provided a
clear image of the financial position of the business firm.
Earlier, Munshi ji or Munim ji used to play the role of accountants. They used to
keep account of various activities of various people which is generally known as Bahi
khata. At that time, number of transactions was not so huge and can be easily recorded in
the books.
,Development of Accounting
In ancient times, around 4000 B.C., accounting was used for recording wages and salaries,
deposits and withdrawals of valuable goods (such as gold and silver) from the treasures of
the king. Afterwards, it was used to record the receipts and payments and balancing of
government financial transactions. During 1500 A.D., accounting was used by business
firms for recording transactions related to business. In 1800 A.D., accounting was used to
record transactions and also to provide information to various users of financial data.
During the ancient times, accounting was merely concerned with recording of the financial
transactions i.e. book keeping. But with the passage of time, the role of accounting has
changed. In today’s world, the role of accounting is extended to provide relevant
information to various users. With the passage of time, as the scope of business increased,
their expenditure on different activities inturn increased which lead to a large number of
transactions. To memorise the huge and complicated transactions is beyond the human
capacity. Therefore, it becomes necessary to record them properly in the books in a
systematic manner so that exact position at the end of the day can be easily ascertained.
For this, there arises a need of a sophisticated system which has been fulfilled by
Accounting. Therefore, in the modern world, the area of accounting has broadened and is
no more limited to the recording of transactions only. Accounting has evolved with the
passage of time.
Thus, Accounting, in simple terms, is recording of various transactions, that took place
during a particular period, in the books of accounts in a systematic and a proper manner.
Accounting, now-a-days, is just not limited to recording transactions in the books but also
to convey useful information to its users.
, Accounting is a process of identifying the events of financial nature, recording them in
Journal, classifying them in their respective ledgers, summarising them in Profit and Loss
Account and Balance Sheet and communicating the results to its users such as proprietors,
government, creditors, investors etc.
According to the American Institute of Certified Public Accountants, 1941, “Accounting is
the art of recording, classifying and summarising in a significant manner and in terms of
money; transactions and events which are, in part at least, of a financial character, and
interpreting the results thereof.”
In the words of Bierman and Derbin, “Accounting may be defined as identifying, measuring,
recording and communication of financial information.”
In the opinion of Smith and Ashburne, “Accounting is the science of recording and classifying
business transactions and events, primarily of a financial character, and the art of making
significant summaries, analysis and interpretations of those transactions and events and
communicating the results to persons who must make decisions or form judgement.”
Accounting is concerned with economic activities of the business. Thus, transactions which
can be measured in terms of money are recorded in Accounting. Transactions like purchase
of machinery, payment of salaries, wages, purchase of raw material, sale of goods etc. all
are examples of economic events. Economic events can be classified as external events and
internal events. If a transaction occurs between an outsider and the organisation it is
termed as external event like purchases made from suppliers, sales made to customers etc.
When transaction occurs internally i.e. from one department to other or within the
organisation then it is termed as internal event like supply of raw material to the other
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