Introduction You may have seen your parents reading published statements in connection with common stock investments they have made or intend to make. The purpose of such attempt is to make investment decision. With growing investment activity and myriad investment avenues, millions of investors today explore financial information contained in financial statements.

Financial statements form the basis for understanding the financial position of businesses and for assessing historical and prospective financial performance. A basic understanding of the accounting process of Generally Accepted Accounting Principles and the traditional accounting assumptions is required to understand better the financial statements and to recognize their limitations.

Accounting is required to account for resources involved in business or non-business activities which require money. In other words, wherever money is involved, it must be accounted for. Accounting in simple words means 'reckoning' or 'recounting' the past events. It requires systematic record keeping on a daily basis and the analyses of this information. Accounting has universal applicability, yet its growth is closely related and associated with the growth in the business world.

DEFINITION OF ACCOUNTING

In general, Accounting can be rightly called the 'Language of the Business'. Learning accounting is similar to learning a new language. Some words and terms we use in our everyday life, are used in accounting too but convey a different sense. Accounting is the means through which all the business information or events are communicated to the users of financial information. It explains the business events in a different and meaningful way. It enables the decision makers to make the right decisions.

In 1941, The American Institute of Certified Public Accountants defined financial accounting as "the art of recording, classifying, and summarizing 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 ".

With the development of economic and technological environment, the scope of accounting became broader. So in 1966, The American Accounting Association (AAA) gave a broader definition to accounting. It defined accounting as, "the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information".

The above definitions bring out the following attributes of accounting:

                     i.It is an art of recording and classifying business transactions. All accounting transactions are analyzed in such a way that it becomes possible to prepare financial statements.

                   ii.Events and transactions of a financial nature are recorded while events of non-financial nature are not.

                  iii.It is an art of summarizing, analyzing and interpreting the business transactions. The summarized information is analyzed and interpreted by calculating ratios and percentages to evaluate the past and present performance. This analysis helps to prepare good financial plans for the future.

                 iv.The basic aim of accounting is to create information in a form useful to the users. Summaries of the transactions and events are reported through Financial Statements. All the information should be provided in time to the users so that they are able to understand and analyze it.

On the basis of the various definitions given, Financial Accounting can be said to involve creation of information and the consequent use of such information.

Creation consists of three steps - recording, classifying and summarization as described below:

Recording: Accounting commences on occurrence of a business transaction, which can be quantified. A systematic record of these transactions is kept in the order in which they occur (chronological order) in the Journal Book. What is to be recorded? When is it to be recorded? How is it to be recorded? At what value should it be recorded? These questions need to be answered.

• What to record? All the events and transactions which affect the results of a business are to be recorded. However, as money is a common unit of measurement, only those events which can be expressed in monetary terms are recorded. On the contrary, events and transactions howsoever important, but which cannot be translated into monetary terms will not be recorded. For instance, Tisco took the decision to implement SAP in 1999. It spent nearly Rs.40 crore on SAP implementation. This decision was a non-financial event, so it was not recorded in financial records whereas money spent on implementation was a financial event, so it was recorded. Distinction has to be maintained between the owner's transactions and that of the business. Transactions which affect the business shall be recorded and the personal transactions of the owner, ignored.

• When to record? Accounting is historical in nature, hence recording is effected only after the occurrence of the subject transaction. For example, sale of goods cannot be recorded in the books of accounts when the goods are merely intended to be sold but only after such sale is complete and the property in the goods has been transferred to the buyer.

• How to record? The double entry system is the practical base of accountancy. All the transactions are recorded systematically based on this system. This technique will be explained in depth in the subsequent part of this chapter.

• At what value to record? All the ingredients of the financial statements are to be assigned appropriate values. Money is the scale of measurement in accounting and we can measure only those transactions which can be translated into monetary terms. Value refers to the benefit derived from objects; and different valuation bases such as historical cost, current cost, realizable value and present value are used in accounting. The most commonly used base in financial accounting is historical cost, which refers to the amount paid/payable to acquire the asset or a benefit.

Classifying: Refers to the rational segregation of the recorded information into related groups so as to make the record useful. For example, all the receipts forming inflows are grouped to ascertain the net cash position of the firm. The arrangement in this case is better known as the cashbook.

Summarizing: After the recording and classification phases are completed, they are summarized for reporting. These summaries are reported through the financial statements.