Introduction of Accounting
Definition of accounting:
Accounting means the various technical activities performed by the accountants and financial accounting bookkeeping and accounting management. Accounting is considered as old as money. an Italian Lucas Pacino is universally regarded as the father of the modern accounting system or double entry system of accounting. Accounting is known as the language of the business because of its role in maintaining and processing the relevant financial information that an entity requires for its managing and reporting purposes.
According to an American institute:
Accounting is the art of recording, classifying, and summarising the money transaction in a significant manner which is the character of finance and interpreting the result.
Objectives/Purposes of Accounting:
There are following purposes and objectives of accounting are as follows:
To record the business transaction systematically.
To find the gross profit and gross income of the business in a specific time duration.
To know the financial condition of the firm at the close of the financial firm at the close of the financial year by way of preparing the balance sheet at the end of the year.
To facilitate management control.
To assess the taxable income and the sale tax liability.
To provide the information to the different parties, for example, owners, creditors, employees, management, government, investors, financial institutions, banks, etc.
Functions Of Accounting:
The different functions of accounting are as follows:
Recording: Accounting records the transactions of the business in the form of money.
Classifying: Accounting also classifies all different types of business transactions.
Summarizing: Accounting also summarizes the information which are classified and it is done in such a manner that it is useful to internal and external users.
Interpreting: it analyzes and interprets the financial data embodied in final accounts.
Information System: Accounting also serves as an information system that collects and communicates information to a wide range of internal and external users.
System of Accounting:
These are the following basic systems of accounting to record any business transaction:
Cash Basis Accounting: according to this system of accounting only actual cash receipts and payments are recorded in the books. Until the actual cash is received or paid the credit transactions are not recorded at all.
Accrual System: According to this system of accounting all the business transactions about the specific period whether of cash or credit nature are recorded in the books. This system of accounting is based on the accrual concept which states that revenue is recognized when it is earned and expense is recognized when obligations of payment arise. The actual movement of cash is irrelevant.
Branches Of Accounting:
Some branches of accounting are as follows:
Bookkeeping: Bookkeeping is defined as the science of recording the transaction in money or money’s worth in such a manner that at any subsequent date their nature and effect may be clearly understood. Bookkeeping includes recording in a journal, posting to a ledge,r and balancing accounts. The work of bookkeeping is to start work. Of accounting.
Financial accounting: financial accounting is concerned with the recording and summarizing of financial transactions and preparing financial statements relating to the business.
Cost of accounting: cost accounting is concerned with the determination of the cost of the goods and services manufactured or offered by the business.
Management Accounting: management accounting is related to the use of financial and cost data to evaluate the performance of the business as a whole and of various departments about predetermined targets.
Basic Accounting Concepts: these are the following basic concepts of accounting:
Business entity: under this concept,t it is essential that a business organization is separate and distinct from its owner or proprietors.
Unit of measurement: in the accounting process money is used to express facts and all relevant details about the business effect of inflation on the value of money are not taken into consideration.
Going concerned: in almost all cases the accounting system will treat the values on the assumption that the business will continue operating for an indefinite period.
Objective evidence: all accounting transactions must be properly supported by objective evidence i.e., purchase invoices, bank statements, and various kinds of vouchers. However, in a certain case, we may have to depend upon judgment and estimates, for example,e provision for bad debt, depreciation on fixed assets,s etc.
Cost concept: under this cost concept of accounting all assets acquired by the business are to be recorded at cost. The market value at any moment in time is to be ignored.
Dual aspect: this represents the concept of double-entry bookkeeping. There are two aspects of transactions to enter into the firm. According to the dual aspect concept, at any time, the total assets of a business are equal to its total equities.
Assets= Liabilities+Capital
Accrual principle: according to this concept revenues are recognized as they are earned whether money is received or not, and costs are recognized as they are incurred whether money is paid or not.
Accounting Convention:
Following are the three accounting conventions generally used to interpret the above-mentioned accounting principles:
Conversation (prudence): this takes into account all possible losses but ignores all possible profits unrealized profits) which may arise due to the business activity in the current year.
Consistency: Certain alternatives are acceptable for some suitable alternatives and can be selected and applied consistently year after year.
Materiality: Materiality means that a financial statement should be disclosed to affect evaluation and decision but if the items are immaterial they may not be disclosed. The size and extent of any of the amounts influence its treatment.
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