Students,In this lecture we are going to study what is accounting all about what is the accounting process and how we can identify the various economic events related to the business. Right, so the learning outcomes of today's lectures are. First one is explained the meaning of accounting, you should be able to do, you should be able to illustrate the accounting process, and you should be able to identify and classify economic events of the organization with respect to recording in the books of accounts. Right. Generally, it is the human tendency, then whenever we hear certain word, or we look at certain place certain thing. We try to have certain conceptions perceptions about that particular word about that particular thing plays situation. So accounting is not at all exception to it. So whenever any individual hear this term, accounting, it try to have or it develops certain prenotions preconceptions or I must say certain misconceptions related to the accounting, so let us discuss what are some preconceptions, or misconceptions about accounting tech generally most of the individuals have in their mind they are. The first one is accounting yields truth. Is it so that every time, whatever you are reading in the books of accounts to things so that is revealing the true and fair state of affairs of the business. Not at all. It doesn't mean accounting does not reveal or it is not every time the case that whatever is present in the books of accounts, it is going to yield the truth. That is why we have confronted we have seen so many scams and many of the people have been the victims of such scams like its Ketan Mehta , Harshad Parekh, PMC Punjab Maharashtra Cooperative Bank scam Nirav Modi has done it through pnb, recent scams. So because of manipulation of accounting data accounting figures, these persons have been able to fool out, lot of public, right, and public has done the victims of such scams, and they have suffered the losses. Okay, so do not misconceived or do not have this misconception that whatever is present in the books of accounts, it is truth. You have to be financially literate, to know, to understand to analyze that whatever is mentioned, it is correct, it is true or not. Second misconception is accounting is rigid. Yes, it is true that whenever we have to prepare the books of accounts, we have to follow certain rules certain postulates concepts of accounting, there are accounting standards in India, like MC Ministry of Corporate affairs in consultation with Institute of Chartered Accountants of India, they have, or they are being preparing accounting series we have India's according to which books have to be have to be according to which books have to be prepared. Okay. But that doesn't mean that they are rigid, these bodies. Okay. MC also from time to time, they change the accounting standards, so as to meet the current economic situations. Recently due to covid 19 pandemic also there are certain accounting standards, which have been amended the accounting standard related to the business combinations related to the lease. Okay, related to the financial instruments, they have been amended, so as to suit the current present economic or political situation or business environment.Right and When there are accounting standards under each accounting standard there are options available to the accountants for choosing appropriate method related to valuation of particular financial element. So it depends upon the accountants, that what method they are choosing to evaluate certain financial element to serve their own individual purposes so accounting is not rigid. Okay. The next one is accounting is useless. Do you think so.If you're thinking so then you are wrong, because a child is also starts accounting for its income, since his or her childhood accounting is very much important. We know that in a business, finances, the blood, no decision can be taken in a business organization which is not involving finance. Whenever a business has to think that they should expand its business, they should give bonuses, they should give appraisals, they should expand to the new market, they should replace its existing fixed assets. They should come up, or they should apply the new technology. So whatever kind of diseases is taken in the business, they will be involving the process of analyzing the financial health of the organization, whether the company the business has enough amount of funds, so that they can often project they can start a new project whether they can give praises to the business has such amount of finance, they can hike the salaries of various employees. So, accounting is not at all useless rather than it is very much useful because based upon accounting information only. Most of the decisions I must say, all decisions are taken whenever a company or whenever business has to take decision, they have to analyze the impact of that decision on the present and future financial health financial position of the business. Okay. Next is accounting use hard, and some persons some individuals do think this that a person should be very good in mathematics in order to learn accounting. No, it is not the case. accounting is easy. If you are practicing the same if you have good knowledge good conceptual knowledge about this course, then it will be all about this discipline, you will be very happy, and you will be very, you will be feeling very interesting to do, or to perform accounting function. It is not at all hard, it depends upon how much you have practiced it even it depends upon the scale of the business. If the business is of small scale, then accounting function is very easy. However, if you are accountant that you are preparing the books of accounts of a big organization, then definitely, it is going to be hard, but not to worry. Many software's accounting software's are available, which you can use which you can get training for, and you can perform accounting function, with the help of those software's right so accounting is not at all hard. Right. Next is accountants are boring or accounting is boring. No, it is very much interesting subject because it is going to help you to take business strategies based upon accounting information that is produced by this discipline.It translates the theory into practical. It is going to help you to use to apply our knowledge for decision making. So it is very interesting, it will involve What if scenario analysis that if certain thing is going to happen, how it is going to impact the revenues how it is going to impact the cost how it is going to impact the net profit, how it is going to impact the financial position. Right. So now, I believe all these misconceptions have been removed. Now let us understand what is accounting all about is accounting all about debit credit expenses revenue assets liabilities. Oh, just take a break. It is not the case, it has a systematic process. Let us learn what is accounting. As per American Institute of Certified Public Accountants it has given a very comprehensive definition it says accounting is the art of what recording classifying summarizing in a significant manner. And in terms of money what transactions, and events, which are in a part of at least of a finance director or financial character and interpreting the results there of.So what we are in inferring from this definition. It means in accounting, we can record, only those transactions which can be monetized, which can be measured in monetary terms. And then, after recording we have to interpret that financial information so that we can take decisions. Right. So let us say the workflow of accounting, so accounting is a system that identifies records and communicate communicates what the information that is relevant important reliable comparable about an organization's business activities. Right. So let us learn what is accounting process accounting process have different steps that you have to follow to fulfill this accounting process, what are they let us discuss them one by one. The first one is identifying identifying what the business transactions. It is not the case that every event is a business transaction. What is transaction transaction is the exchange of value between two parties. And if you want to say this as a business transaction that means one party should always be business. Okay. that means transaction. If you want to record it in the books of business, it should be related with the business, right, that means one party should always be the business in that transaction. So, in the very first step, you have to identify that particular event that you are talking about that you are analyzing it is related to the business or not. If it is related to the business. That means, then only that particular event that particular transaction will have place in the books of accounts Next is measuring, as in the definition we have discussed that it is very much important that only those transactions can be recorded in the books of accounts that can be monetized, so always remember, if you want to record certain transaction in the books of accounts. This foremost requirement has to be fulfilled at least that transaction should be able to be monetized in the monetary terms, or in the currency, what is the what is the measurement unit for transactions, it is the local currency of the home country. Like, if it is a Indian company, it is going to monetize measure all the transactions in Indian rupee. The US companies will be monetizing each transaction so measuring each transactions in US dollar Japanese companies will be Japanese yen European companies and European dollars. Okay. And the same manner. There are different currencies of each country so the domestic companies of their countries or those countries are going to measure, each transaction in the local currency that the legal tender of that country. So please remember it is very important that you can record, only those transactions in the books of accounts, which can be measured in monetary terms. Okay. Next is recording. After identifying that yes this is the business transaction plus we can monetize this in. In, or we can measure that transaction in monetary units, okay on monetary terms, then we have to decide that where we have to record.P1ease remember the name of the book is journal. We also call it book of original entry or primary entry This is the primary book in which all transactions are recorded in chronological order day wise time wise, okay, this is the book, where the entry will be passed for the first time. So where we record the transactions in the journal. Next is after recording each transaction in the book of journal. The next step is classifying that is grouping the transactions related to one account, because in the business 1000 of transactions to happen, related to different different financial elements. It may be cash, so every day because of some transactions cash will be moved out of the organization cash will be paid or many transactions is going to help company to receive cash to earn cash, if the company is a trading company. So on a regular regular basis. So on a regular basis, it is going to purchase the merchandise or sell the merchandise so purchases and sales are going to happen every time. So, in classifying proceed us there. So, in classifying step we are going to group these transactions of similar type under one head all transactions related to the cash will be grouped under cash account. Okay. Under classifying basically a ledger book is created ledger is nothing but it is a summation or, it is a going to tell you the different accounts that the company has created. So you are going to get balance that how much cash you have on a particular date, how much purchases still today have been made. How much sales has been done till particular date of time. So you are going to group similar type of transactions in the ledgers different Ledger's that you are going to create in classifying step. So where do we classify in the book of ledger so ledger is a secondary book, all the transactions. Once they are recorded in the journal, they are posted in the ledger. Right. And then balances are calculated, so that we want to know how much cash we have, how much is the value of particular asset as a specific date, how much electricity bill has been incurred in last six months, how much worth of stationery has been purchased, how much we have spent on particular expenditure, or maybe advertisement or maybe in form of depreciation. So this you are going to get answer from the book of ledger. Okay, next is summarizing, because maybe a business is incurring 50 types of expenses, and it is earning income from 20 different sources. Okay, it has 20 or 30 or even more than debtors or it has so many creditors. So then, it is very difficult journal and ledger they are very lengthy books, top management, does not have time to go through these bulky books so they want that certain statement should be there, which is going to summarize all the ledgers that we have created the ledger book, so that they can have the balances just so whatever Ledger's we have created in the ledger book we have calculated and balances. It is generally as on the balances are calculated on or at the ending of certain month, or semi annually or annually. Okay, and then trial balances prepared. Trial Balance is a summary of all accounts, and trial balance is prepared. It can be prepared internally for monthly, quarterly semi annually basis but for the purpose of preparing financial statements trial balance will be prepared from annual balances. Okay, so in summarizing step we are going to prepare trial balance, and from trial balance financial statements are prepared. There are three major financial statements that are very much used or they are compulsory to be prepared and published by the companies under companies act of India. Okay, What are they, it is income statement, statement of profit and loss balance sheet and cash flow statement. So, from the trial balance these three financial statements are prepared in the summarizing step so that top management will get to know how much is the profit that has been earned during the last year, that means all the transactions what has happened in the last previous year, how much we have our profit or incur loss because of those transactions, financial statement by the name balance sheet, it is going to tell you the financial position of the business as a specific day it is how much financial resources and how much financial obligations does business have on as an specific data is generally the last date of financial year that the business is following cash flow statement is going to give you the summary of all transactions, because of which either the business has received cash or paid cash, so that is coming under summarizing step. Now after these financial statements have been prepared. That means the work is over. No. Now the top level management, it is going to analyze those financial statements by establishing certain relations, meaningful, meaningful relations among various financial elements of these financial statements. And then that particular analysis will be used for gaining interpretations. Okay, so, after preparing the financial statement the management is going to undertake the next step that is analyzing and interpreting the financial information that is present in the financial statements. And after that, it is, whatever, analysis and interpretations has been drawn. Okay, they will be communicated to the top level management for taking decisions for making strategies. So basically analyzing and interpreting step is what can be performed by the middle management, okay like manage managers, the various heads of all CFO, Chief Financial Officer, and then it is going to present that information that analysis to the next level. next head on to the next level of management in a hierarchy or to the next person who is immediately above him, so that that person that management that top level management can take the right decision at right time can strategize the future course of action. So this is the accounting process. so it is what it is identifying measuring recording classifying summarizing analyzing and interpreting and finally, communicating the financial information to the top level management plus as I've told you that analyzing and interpreting, or when we talk about communication. Okay.So finally, let us recall the accounting processes, identifying measuring recording classifying summarizing analyzing and interpreting. And finally communication the results to the management. Do you think so. Accounting reserves the financial statements that we are preparing okay under fifth step, they are only meant for internal management, no as I've told you these three financial statements are compulsory to be prepared and published by the company and they are available to the external stakeholders also. Okay, so the last step is to communicate the financial reserves of the organization to the various users of accounting information, be it internal management, be it creditors lenders government tax authorities customers public at large, so that they can take informed judgments, they can take decisions at right time, so this is accounting process. Now let us discuss a case. Okay. The case is all about. Epson limited Epson Limited is a dealer of computers and printers. It has extensive range of multifunction printers which is used to buy from HP for resale purpose. It has bought one printer for 5000 rupees and showed this purchase in the financial statement as an expense to the business. Now what happened, a purchasing manager looked into the expense at the year end and recommended the owners of few cheaper alternatives to be considered for all future purchases. Okay, now let's identify the steps involved in accounting process. In this case, about mentioning case that what has been on how accounting process has been implemented in this case. So, the accounting process step number one, identify the transaction so here transaction is what transaction is identified, when the printer was purchased interest purchased for the personal purpose of the company or due to the business purposes, the printer is purchased to resell to the customer definitely it is related to the business this is the purchase, for business this is the business transaction so the first step we have identified that this transaction is not a personal transaction of the owner, rather than it is the business transaction second measure, can we measure this transaction the transaction means purchasing of a printer can we monetize can we measure this transaction into monetary units. Do we have costs at which the printer has been purchased definitely yes we can monetize the printer value. It has been purchased at 5000 rupees so second step, the cost of the printer was measured as rupees 5000 so Second step is also over. Now what is the third step, it is record. Where do we record the transaction for the first time in the book of journal so this transaction was recorded in the book systematically as 5000 rupees right next step will be classified. So in the books of ledger as an Epson is dealing in the printers so that means it must have created the ledger by the name printer account. Right. So in the printers account or transaction related to the purchase and sale of printers will be grouped so that we can get to know how many printers, do we have, and what is their value as a specific date. Okay, so classify and classify step, the transactions from the book of journal will then move into the ledger, and classified with the similar transactions related to the printer. Right. Next is summarize Summarizing here the ledger balance was summarized and converted into trial balance and printers will be the merchandise for that Epson, so it will be shown as a stock in the balance sheet, so then that particular printer that entry that balance will be summarized or would be would have been summarize and converted into trial balance, and this financial statements. Accordingly, right. Now what is the next step, analyze, under analyze what we do we develop, we get certain, or we compute certain relations among the various elements of financial statements. So here in this case, the purchase manager has analyzed by looking at the financial statement that this is the cost of printer .So he has analyzed this is costly. Okay. So, under analyzing step purchase manager, analyze the financial statement at the year end, he has opened the financial statements and he looked into the each financial element, and the value in the financial statements and what he has interpreted in the interpretation. Because of his analysis or based upon the analysis he interpreted that the printer was costly and cheaper alternative of that printer is available in the market. That means the same kind of printer can be purchased at less cost from the different suppliers so this interpretation. He has drawn.And after this, what is the next step communication. So this influence this interpretation was communicated to the owners as a recommendation for the future purchase of this kind, so that overall cost of the business can get down and companies should be able to increase the profits right now let us discuss one more case, it is obviously Mr Salman, who is the owner of a coffee house. The coffee house also has the menu of speciality sandwiches flatbreads veggie wraps, and bakery items for breakfast, lunch, and dinner, along with quality coffee drinks. Okay, let's identify the business events and transactions from ahead given transactions of Mr Salman, we have been given certain transactions. I must say certain events, and we have to identify those transactions and business transactions or their personal transactions they can be recorded in the books of that coffee house or not. So let us discuss that one by one. The first one is on first August 2020. Mr Salman, bought coffee beans Brown bread on first August, 2020, Mr. Sandman bought coffee beans, brown bread and and vegetables for rupees 7000. So is this a business transaction or personal transaction has Mr Salman bought these goods for his personal benefit or personal usage, no. These things have been purchased for the business. That means, this is the business transaction so we have identified this particular event is a business transaction. Okay. Secondly, can we monetize this transaction, can we measure this transaction no monetary on it. Yes, because cost has been given to you that whatever Mr Salman has bought it is worthing 7000 rupees. So that means this transaction can be recorded in the books of accounts of coffee house. Right. Next, on second August, 2020, Mr Salman sold 100 coffee cups for rupees 100 each. So is this a personal transaction of Mr Salman or business transaction of his business. It is a business transaction so we have identified it, it is a business transaction so can we record it before recording it we have to check whether it can be monetized or not, can we measure this in monetary terms, definitely yes, 100 coffee cups has been sold for 100 so 100 into 100 turns to be 10,000, so we can measure this transaction in monetary terms, right. So, it will be recorded in the books of business coffee shop house next transaction. On second August 2020, he went to Chandigarh for a business meeting. Is this a business transaction.Is there an exchange of value between business and any other party. No, though he is going to that to Chandigarh for a business meeting, it is for business cause but there is no exchange of value. We can monetize this transaction. Right. Or we cannot tell that this is the transaction because there is no exchange of value between the business or any other party. So, can this particular event be recorded in the books of accounts. No, it does not have any place in the books of accounts because we cannot measure it in the business. We cannot measure it in monetary terms. Next is he came back on third August, 2020, and on the way he spent 2000 rupees on petrol for official motorcar he is He has gone to Chandigarh through car. And when he's coming back by attending that business meeting he has to incur this expenditure on petrol. 2000 So is this the business transaction.Yes, because he has gone to that place because of business only and whatsoever. Fuel has been incurred to reach that place or to come back from that place, it is the root cause behind that is that behind that. So the root cause behind that expenditure is business transaction business mode. Okay. and can we monetize this expenditure. Yes, definitely. We know that 2000 worth rupees petrol has been consumed. So definitely, this will be recorded in the books of accounts. Right now next on fourth August 2020 he purchased milk coffee powder, icing sugar and other material for. 3000 So again, we have to think. It is a business transaction, it is a personal transaction. Definitely. It is a business transaction plus we can measure it in monetary terms, 3000 value is given. So, this transaction will be recorded in the book of journal of the books of accounts of business. Next is on Fifth August 2020. He received 5000 rupees for coffee and snacks which was served as customers birthday party on the same day. So this basically it is a sale of the business. Right, so it is a business transaction plus value is given 5000 rupees. Sales revenue that he has earned Okay, and he is now receiving it in cash form okay so definitely this transaction will be recorded in the books of accounts. Next is on sixth August 2020, he appreciated his employees for putting their hard work to complete target bill on time. So now it is a business transaction.Can you monetize this transaction.Definitely employees are very much important to run any organization in a profitable or efficient or effective manner. Right but please remember in accounting, we only record those transactions which can be monetized now appreciation to the employees so as to motivate them so that they can work with high efficiency high effectiveness in coming days in coming years ahead. Okay. It is very much important. Okay, for having or attaining the effectiveness in your business operations. But this cannot be monetized. That is why we cannot record this event we cannot say that this activity of Mr Salman is a business transaction because there is no exchange of value. And we cannot monetize it right. Next is on eighth Aug 2020. He got an order to supply 50 sandwiches for rupees 100, each. So, we are getting an order is a transaction. This question should be there in your mind.The answer is no because orders can be cancelled. Also, if a business is just receiving an order. Okay. That cannot be recorded in the books of accounts as transactions, until unless the business has received certain amount in advance, or has delivered certain things in advance. So please remember, until and unless there is exchange of value between the parties. You cannot record that particular transaction. In the books of accounts so in this particular statement, it is written here he has just bought an order and order can be cancelled in future. There is no exchange of value. Neither business has received anything, nor it has delivered anything. So this is not at all transaction, though, we can monetize it. Right.Next is on l0th August 2020, he got another order to supply 70 sandwiches for rupees 100 each, and received 5000 in advance. Now, as here he got the order but received certain thing in advance. Now, when he has received he has a separate 5000 rupees. That means now Mr Salman and his business is liable to deliver that order to fulfill that order.Now this is the business transaction, and will be recorded in the books of accounts by 5000 rupees will be treated as a current liability for Mr Salman, because the business has not delivered its own part it has not fulfilled his performance. Okay, so this is a business transaction, Whosoever customer has paid that 5000 rupees in advance, it will be taken, or he or she will be taken. They as a creditor of the company. Okay.Until unless the Mr Salman is not going to fulfill the order. If the order will be fulfilled, then it will be turned as sales, right. Next is on l2th of August 2020. He went to watch movie with his family and spent rupees 5000.Now this is the business transaction or personal transaction.Personal transaction, please remember in the books of accounts, only business transactions are recorded, not the personal transactions of owners employees or whosoever is the individual or what equipment that is related to the business. Only business related transactions are involved are recorded in the books of accounts, personal transactions are not at all recorded. Okay, so this is the personal transaction of Mr Salman, so it is not a business transaction hence it will not be recorded in the books of accounts of coffee shop. so these are the transactions with the help of which we learned how to identify which transactions are business transactions which are personal transactions and whether the business transactions can be measured in monetary terms If yes, then we are going to record them in the books of accounts. So in this lecture, we have learned the meaning of accounting the accounting process, and you should be able to identify the transactions and and decide whether they will be recorded in the books of accounts or not. So that's all for now. Thank you.