Accounting

Accounting

Introduction

Ø  Accounting is a process of identifying, recording, summarizing and reporting economic information to decision makers in the form of financial statements.

Ø  It is the process of recording business activities that make changes to accounts.

Attributes of Accounting :

Ø  It is the art of recording business transaction.

Ø  It is the art of classifying business transaction.

Ø  The transaction or events of a business must be recorded in monetary terms.

Ø  It is the art of summarizing financial transaction.

Ø  The result should be communicated to users.

Function :

Ø  Systematic record of business transaction.

Ø  Protecting the property of business.

Ø  Communicating results to users.

Ø  Compliance with legal requirements.

Advantages :

Ø  Replacement of memory

Ø  Evidence in court

Ø  Tax purpose

Ø  Comparative study

Ø  Sale of Business

Ø  Assistance to the insolvent

Ø  For various parties

Limitations :

Ø  Records only monetary transaction

Ø  Effects of price level changes not considered

Ø  No realistic information

Ø  Personal bias of accountant affects the accounting statement

Ø  No real test for managerial performance

Ø  Historical in nature

History of Accounting : The Italian Luca Pacioli, recognized as The Father of accounting and bookkeeping was the first person to publish a work on double-entry bookkeeping, and introduced the field in Europe. Accounting began to transition into an organized profession in the nineteenth century, with local professional bodies in England merging to form the Institute of Chartered Accountants in England and Wales in 1880.

Types of Accounting :

1. Financial Accounting (Preparing Profit and Loss Account and Balance Sheet)
2. Cost Accounting (Analysing Coast fort Control and Maximizing Efficiency).
3. Management Accounting. (Assisting Management for Planning Decision making and Control).

Financial Accounting : Financial Accounting mostly deals with recording business dealings in the records of financial statement for the purpose of giving final accounts. It is mentioned as the art of recording. The information provided by Financial Accounting Definition is actually summarized in the subsequent two statements at the end of the accounting period, generally one year.

1. Loss account and profit showing the loss or net profit during the period.
2. Balance Sheet showing the financial position of the firm at a point of time. The objective of financial accounting is to provide information to external parties such as shareholders, employees, potential investors, government agencies, etc.

Cost Accounting : It provides information for both management accounting and financial accounting. It measures and reports financial and non financial data.

Management Accounting : It measures and reports financial and non financial information that helps managers make decisions to fulfill the goals of an organization.

Financial statements will be useful to the following parties:

ü  Suppliers (Creditors)

ü  Customers

ü  Government

ü  Public

ü  Employees

ü  Banks

ü  Suppliers of equipments, Buildings and other assets

ü  Lenders

ü  Owners

Accounting Terminology

Business : An organization created with the objective of making a profit from the sale of goods or services.

Book Keeping : The act of systematically recording the fanatical transaction affecting a business.

Book Value : The net amount (original value plus or minus any adjustments such as depreciation) showed in the accounts for an assets, liability, or owners equity item.

Calendar Year : An entity’s reporting year, covering 12 months.

Transactions : Exchange of goods or services between businesses or individuals. Can also be other events having an economic impact on business.

Liability : It is something a company owes. (Money, Service, Product)

Revenues: They are amounts received or to be received from customers for sales of products or services. (Sales, Performance of services, Rent, Interest )

Balance sheet: A balance sheet is an itemized statement which lists the total assets and the total liabilities of a given business to show its worth at a given moment in time (like a snapshot).

Capital: Property or money used and owned by a business and used to acquire future income or benefits.