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

Let us begin with something 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 accounting decisions are to be made.

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 is written as a book. This book is evolved from the notes prepared for satisfying the needs of students whom the first author taught for nearly 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 based on a deeper insight into the basic structure of accounting. Objectives.

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, in fact, any one dealing with management and investments, who did not have the facility of prior formal training in accounting.

The purpose of this approach is also to prepare managers with ability to understand and evaluate accounting reports. A deeper insight into the methodology alone can provide the insight required to unravel complex reporting produced by the practitioners.

Methodology

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

The accounting methodology we deal with today is routed in reporting. Reporting information about the business was primarily 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, 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 claimed first by the outsiders as liabilities and the residual belonging to the owner. This simplification (or complexity!) makes the methodology timeless and adaptable. The whole accounting methodology is only an expansion from this basis 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 owners’ equity. It will also be interesting to note that this basis 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.

(a) Illustrations: They not only make the concept clearer, the presentation leaves a vivid visual impact, which has good recall value.

(b) Cases: The live examples make concepts more real and easier to connect with.

(c) Exercises: They help students recall and test their knowledge and, going a step further, their power to analyse and derive. They need students to seek out what is not obvious from the information provided.

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

Structure of Chapters

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

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

Chapter three expands 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 owner’s equity.

Chapter four elaborates 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. The 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 chapter. 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 than a plethora of accounts, which could be very confusing to a beginner.

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 understand 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 creating and interpreting the accounting records and changes in accounting policies. In this chapter, we look into the existing accounting policies to deal with various items such as fixed assets, inventories, intangibles, investments, negotiable instruments, and debentures.

Chapter nine gives us the details of the important accounting standards and makes us aware of the accounting practices prevalent 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.

To enable readers in having an enriching and practical exposure we have included three relevant appendixes 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 organization as per Indian standards vis-à-vis international accounting standards. The last appendix gives details of a long assignment to have hands on experience of creating, presenting, and understanding financial statements.

We will appreciate and gratefully acknowledge the comments and suggestions from the readers and our fellow teachers of the subject.

Neelakantan Ramachandran
Ram Kumar Kakani