This book is about accounting and, more specifically, accounting for the non-specialist.

Let us begin with a fact that may surprise many readers. Accounting in the present form is at least five centuries old. It has evolved with every change in the organised economic activity. In the recent past it has become well structured with a better theoretical basis with the advent of an era of accounting standards issued by professional bodies.

The first chapter, therefore, deals with the evolution of accounting. We believe that the historical developments that led to the development of accounting are essential to an understanding of its present state and future directions it may take. An insight into the historical development of accounting will also highlight the inherent strength of the basic methodology. Some of the ideas such as capital maintenance run as a core to the accounting practice. Keeping these insights at the back of your mind will lead to better judgment when it comes to taking accounting decisions.

The emphasis here is not so much on the mechanical practice but on the conceptual understanding of the methodology. The objective is to ensure that the study of this book enables the reader to understand accounting numbers in a clearer and better perspective.

There is no dearth of textbooks on accounting. So it may be pertinent to ask why we need another book. This is not a book that has been initially written as a book. It has evolved from the notes prepared for satisfying the needs of students whom the first author taught for nearly a quarter of a century at Indian Institute of Management, Calcutta. The only motivation was to explain accounting in a logical manner, whereby one could master the methodology with the help of a deep insight into the basic structure of accounting.

This book is written primarily with the objective of addressing it to users of accounting information. Accountants may benefit by the logical explanation for most of the ideas taken for granted in practice. It is also targeted towards graduate students of management, as well as anyone dealing with management and investments, who did not have the facility of prior formal training in accounting.

The purpose of the approach followed in this book is also to enable managers to understand and evaluate accounting reports. A deeper insight into the methodology alone can provide the insight required to unravel the complex reports produced by practitioners.

The entire accounting methodology consists of two parts, the form and content. Most people mistake the form for the content. In order to master the methodology one needs to concentrate more on the content and not to get bogged down with the form. The emphasis all along is on the content and the form is used only to familiarise one with the presentation.

The treatment in the book is based on clearer theoretical understanding as a basis for better practice. The method of learning, if effectively followed, could substantially minimise the time required to master the subject. A student may feel comfortable in dealing with any business transaction and its treatment in accounting after completion of this book.

The accounting methodology we deal with today is rooted in reporting. Information about the business is primarily reported to the owners of the business. All others concerned with the business also utilise these reports. The primary concern, therefore, is in reporting on the wealth of the owners, that is, the equity. The whole business is captured in the form of a summarised report, which describes the business as a bundle of assets, or values, and these values are claimed first by the outsiders as liabilities and the residual belong to the owner. This simplification (or complexity) makes the methodology timeless and adaptable. The whole accounting methodology is only an expansion from this basic structure of reporting assets as equal to liabilities plus the owner’s equity.

It is only logical to expand and explain revenue and expenses as nothing but an integral part of the owners’ equity. It will also be interesting to note that this fundamental idea gives the form to accounting. Since business can be viewed only as an equality of two countervailing quantities, all the elements making up this equality should also follow the basic algebraic requirement. This in turn gives the basis for an account as a summarisation of increases and decreases with a matching counterpart.

Various aids have been included in the book to facilitate learning and make it interesting.

If this approach builds confidence in the minds of students about accounting methodology and makes it possible to understand and apply it logically, the authors will have achieved their goals.

Chapter One tries to place the subject matter of the book in proper perspective. It is intended at clarifying the theoretical foundations of accounting and the meaning of accounting numbers.

Chapter Two deals with the balance sheet, its structure and content and develops it as the nucleus of accounting. The basis of balance sheet equation and its significance in understanding accounting is emphasised upon. The expanded multi-item balance sheet is nothing but a simple objective description of a business.

Chapter Three expands upon the balance sheet equation to show that income summary or profit and loss account is the expansion of one of the terms in the balance sheet, namely the owner’s equity.

Chapter Four elaborates upon on the balance sheet and income statement from a dynamic point of view by explaining the process of working capital funds flowing through the system. The logical following through of transactions in an operating cycle enhances the understanding of fund flow analysis and the statement of cash flow. Its treatment in this chapter is unique and highly enhances the understanding of business and its resource needs.

Chapter Five tries to demonstrate that accounting records are nothing but the mechanical part of the conceptual understanding acquired in the previous chapters. Transaction analysis through recording and summarisation, along with trial balance worksheet provides an integrated view of the accounting process to the student. The emphasis is on generic accounts rather than a plethora of accounts, which could be very confusing to a beginner. The approach in this chapter, as well as in the exercises is to give the students a feel of accounting on a completed venture basis.

Chapter Six adapts the accounting knowledge acquired in the previous chapter to the special case of joint stock companies. The objective is to demonstrate that it is the same accounting adapted to a legal entity. The company law and other regulatory framework take prominence in the accounting of joint stock companies due to the need for protecting investor interest.

Chapter Seven covers the analysis and interpretation of the financial statements from a structural and relational point of view. The common size financial statements help in understanding the statements from its structural point of view. It also forms a good basis for inter-unit comparisons. Analysis of relations using ratios and disaggregating of ratios shows the structural relationship among various elements of the financial statement.

Chapter Eight builds on the earlier foundations and takes the reader through the practical hurdles faced in constructing and interpreting the accounting records and the framework of accounting policies. In this chapter, we also look into the common yet complex issues faced by organisations and helps them deal with various items such as bank reconciliation statements, fixed assets, inventories, intangibles, investments, negotiable instruments, and debentures.

Chapter Nine presents the details of the important accounting standards and makes us aware of the framework behind accounting practices in preparing, and presenting financial statements. Among others, accounting standards related to disclosure practices, changes in accounting policies, contingencies, cash flow statements, and revenue recognition are discussed in detail.

This new edition is based on the feedback received from the faculty, reviewers and students. The changes brought about include:

To enable readers to have an enriching and practical exposure we have included four relevant appendices at the end. The first appendix takes the reader across a sample audited financial statements of a company. The second one compares the accounting presentation of an organisation as per Indian standards vis-à-vis international financial reporting standards. The third appendix gives details of a long assignment to have hands on experience of creating, presenting, and understanding financial statements. The fourth appendix presents a comprehensive test in financial accounting for the student using an annual report.

With all these changes and additions we hope that this book will be as much appreciated as the first edition was.

NEELAKANTAN RAMACHANDRAN
RAM KUMAR KAKANI