Meaning of Accounting
Accounting is an art of systematically recording, classifying, summarizing of transactions and events in terms of money which are at least a part of financial character and interpreting (describe) the result there of.
Transactions
It means a financial transactions entered into by two parties and recorded in books of account. It is expressed in terms of money.
They are the economic events which are recorded in the books of account in chronological manner.
Economic Events
An Economic event is a financial transaction that shall definitely have an impact on the company’s financial statement. (Example: Purchase of machinery)
It is of two types:-
- Internal economic event: Events occur within business between various branches or departments. For example supply to raw material by stores departments to manufacturing department.
- External economic event: Financial transaction occurs between business and outside parties are called external economic event. For example: sale to customers, purchase of raw material from suppliers etc.
Organization:
It refers to a business enterprise whether it functions for profit or not for profit motive. On the basis of size and level of business operation it can be of sale proprietorship, partnership, cooperative society, company, local authority, Municipal Corporation or any other group of persons.
Interested users of Information
The financial information that is generated by a business enterprises are used by several parties for making significant decision such parties are of two types:-
- Internal Users: – They are those which are within the organization such as owners, management, employees etc.
- External Users: – They are those that are outside the organization include investors, creditors, tax authorities, customers, labor unions, etc.
Owner:- The owner provide capital or fund to the organization. They are interested in knowing that if they are getting satisfactory return on their investment.
Management:- They are interested in knowing the financial position of the firm so to compare with the previous year and to draw a better plan for future, better resource utilization and to rectify the previous mistakes etc.
Creditors lenders:- They are interested
to knowing accounting information of an enterprise so that they may ascertain
the safety of their investment and chance
of better returns.
Government and Research Scholars:- Government are interested in knowing the earning of enterprise for the purpose of taxation and to compel national account while researchers and interesting in accounting information for interpretation of financial operation of a particular firm.
Characteristics of accounting
- Records only financial Transaction: only those transactions on events that can be measured in terms of money are recorded in books of account. Non monetary transactions are not recorded in books of account no matter how important they are for eg. Change in fashion has adverse effect on sales but not recorded.
- Captures value of transactions in monetary terms: Accounting measures and records transitions in units of money. If such practice in not followed it is very difficult to classify and find the value of each transaction. All resources, Properties, debt etc are recorded in monetary terms.
- Service activity:- Accounting is done with a purpose of providing relevant information to the interested users so that they make decision with the help of such information.
Functions of accounting
- Identification:- It refers to the distinguishing between various transaction that have a financial character and selection of only those transaction which are to be recorded.
- Measurement:- It means quantifying the business transaction in financial term using monetary units. Non-monetary transactions are not recorded in books of accounts.
- Recording:– It refers to the registering of monetary measured transaction in books of account in an chronological order. (Journal or subsidiary books are prepared for this). Chronological Order: – It refers to the way of arranging events or something according to the time they occurs.
- Classifying and summarizing: – Classifying refers to the grouping of financial transaction of same nature at one place in separate accounts and summarizing refers to the compressing the data in such a way that users can understand it easily.
- Communication: – After summarization of data to relevant information is generated from it and communicates in such a manner is most suitable for the management and external as well as internal users to absorb.
Objectives of Accounting
- Maintaining records of business transaction: – The Main objective of accounting is to maintain records of business transaction. Journal and subsidiary book of business transaction. Journal and subsidiary book are maintained for this. The recorded information provides verifiability and act as evidence.
- Calculation of profit and losses of business: – The second objective of accounting is to ascertain the profit earned and loss suffered by a business in and an accounting period with the help of income and expenses relating to business. For this purpose Profit and loss account is prepared at the end of accounting period.
- Depiction of financial position: – Another objective is of accounting is to ascertaining to financial position of the firm in terms of assets/ resources owned and liabilities (or claims/debts taken against resources/ for this purpose balance sheet is prepared at the end of accounting periods.
- Providing Accounting Information: – Accounting Provides information generated from different accounting process to the interested users that helps them in decision making.
Accounting as a source of accounting
Every step of accounting generates information and the main purpose of accounting is to generate information and facilitate it to different interested users which help them in taking significant decision.
The uses of information generated through accounting process are:-
- Provide information for making decisions.
- Shows the interested users who depends upon financial statement as a principal source of information.
- Predicts timing of uncertainty and evaluates the amount of potential cash flows.
- Provide information on activities affecting the society.
Qualitative characteristics of accounting
- Reliability:- It is that characteristics which states that the accounting information provided to the users must be dependable or trustworthy to them.
- Relevance: It means that the information provided to the users must be meaningful and for relevant accounting periods and must influence the decision of users by
- Helping them in prediction about outcomes of past
- Correcting their past evaluations.
- Understandability: The accounting information recorded in books of account must be easy and simple so that users can understand them.
- Comparability: Accounting information provided to the users to the users must be prepared in such a manner so that users can either compare the business within themselves or from its competitors.
Book keeping
Book keeping is the process of recording all the financial transaction of business in a systematic manner in books of account.
Objective of book keeping
1. To maintain a permanent record of all the business transaction.
2. To record efficiently income and expenses so to ascertain profit and losses.
3. To record assets and liabilities so to ascertain financial position of business.
4. To determine the amount due to customers and amount due from customers.
| Sl. no. | Basis | Book-Keeping | Accounting |
| 1 | Meaning | A process of recording financial transaction in a systematic manner. | A process of studying the recorded transactions and interpreting the results there of. |
| 2 | Objective | To develop and maintain records of financial transaction. | To ascertain net results (profit/losses) and financial position of the firm. |
| 3 | Relation | Basis for accounting | Capitalized on book-keeping |
| 4 | Stage | Primary stage | Secondary stage |
| 5 | Nature | Routine and clericals | Analytical and interpretative. |
Accounting Terms
- Assets: Anything which can provide future economic benefit which can be converted into cash or cash equivalent. Assets can be mainly divided into three parts. (i) Non- Current Asset (ii) Current Asset (ii) Fictitious Asset
(i) Non- Current Asset: Those assets which are held by the business from a long term point of view (for more than one year). For example, Machinery, Building, Goodwill, Furniture, Long term Investment etc.
(ii) Current Asset: Those assets which are held by the firm with the purpose of converting them into cash or for using them within a short period (within one year). For example, Stock, Debtors, Bills Receivable, Cash, Bank etc.
(ii) Fictitious Asset:
Fixed Assets: In is part of non-current assets. It can be divided into two parts. (i) Tangible (ii) Intangible assets
- Tangible Assets: Those fixed assets which have their physical existence. It means they can be seen, touched. E.g. Machinery, Building, Furniture etc.
- (ii) Intangible assets: Those fixed assets which do not have their physical existence. They cannot be touch, seen. E.g. Goodwill, Trade mark, Patent, computer software, Brand. Etc.
- Liabilities: They are the obligation or debts that are to be paid in future. The amount invested by person’s other than owner into the business is called liabilities. It is the claim of outsiders into the business. Liabilities are always payable on due date. E.g. Bank loan, Creditor, Bills Payable, mortgage loan etc. liabilities can be divide into two parts. (i) Non–current liabilities (ii) Current liabilities
(i) Non–current liabilities: Those liabilities which are payable after a period of more than one year form the end of accounting year. E.g. Long term loan, Debenture, Mortgage loan, etc.
(ii) Current liabilities: Those liabilities which are payable within period of one year from the end of current accounting year. E.g. Creditors, Bills Payable,
- Capital:- The amount invested by owner / proprietor in to the business.
- Revenues:- Amount received by selling of goods and providing services to customers. It is also known as Income.
- Expenses:- The amount spent in the process of earning revenue.
- Profit:- The excess of revenue over its related expenses.
- Loss:- The excess of expanses over its related revenue.
- Discount:- Any type of concession in payment in order to get payment earlier or to increase sales.
- Cash discount: Concession allowed with a motive to get payment earlier
- Trade discount:- Concession allowed at the time of sells with a motive to increase sales.
- Goods: It is a Physical item of trade in which an enterprise deal. Goods are the physical items of trade.
- Creditors:- The person who supplies goods and services on credit. Creditor is a person (supplier) from whom an enterprise (firm) purchases goods or services on credit.
- Bills Payable: Bills payable means a bill of exchange accepted by from to pay fixed amount on a specified date.
- Trade payable: Creditor + Bills Payable (B/P)
- Debtors:- The person to whom goods and services are sold on credit basis. Debtor is a person to whom form has sold goods or services on credit, in ordinary course of business.
- Bills receivable: It means a bill of exchange accepted by a debtor, the amount of which will be received on a specified date.
- Trade receivable: Debtor + Bills Receivable (B/R)
- Drawings: – The amount or value of goods withdrawn by proprietor for its personal use.
- Account: Account is a brief history of financial transaction particular person or item.
- Debit:- The amount due for that or benefit receiving aspect known as debit
- Credit:- The amount due to that or benefit giving aspect known as credit.
- Purchase a/c: The term ‘purchase’ is used for purchase of goods for resale or for producing finished product which are to be sold. It includes both cash and credit purchases.
- Sales a/c: The term ‘Sale’ is used for sale of goods which are dealt by the firm. The term sales include both, cash and credit sales.
- Stock (also called Inventory): Stock is a tangible assets held by the enterprise (firm) for the purpose of production or sale of goods. Generally we calculate stock at the beginning of year and end of year.
- Opening Stock: Stock held at the beginning of year.
- Closing Stock: Stock held at the end of year.
- Stock may be divided in three parts Raw material, Work in progress (WIP), Finish goods
- WIP: It is a stock that is in the process of being produced. They are partly finish goods.
- Purchases Return a/c: It is also called return outward. Goods purchases may be return for any reason (e.g. Defect in quality). Goods so returned are called purchase return (return outward).
- Sales Return: It is also called return inward. Goods sold when return for any reason (e.g. Defect in quality) by customer are called sales return (return inward).
- Expenditure: It is divided into two parts. (i) Revenue expenditure (ii) Capital expenditure
- Revenue expenditure: It is an amount paid or payable, the benefit of which is consumed within the current accounting period. For example: rent paid or payable, salary paid or payable, interest paid or payable, wages paid or payable, electricity bill paid or payable etc. Note- Revenue expenditure is also called expense.
- Capital expenditure: It is an expenditure incurred, the benefit of which will be consumed in future. It is also called asset. Such expenditures are incurred to acquire assets or to increase the efficiency of the asset.
Branches of Accounting
- Financial Accounting: – The purpose of this branch of accounting is to keep record of all the financial transaction so the ascertain the net profit or losses and also to know the financial position of the business. It also provides financial information to the interested users.
- Cost Accounting:– The purpose of this type of accounting is to analyze all the expenditure so as to ascertain the cost of various products manufactured by the firm and fix its prices. It helps in controlling the costs and providing necessary accounting information to management for decision making.
- Management accounting: – The purpose of management accounting is to assist the management in taking rational policy decisions and to evaluate the impact of its decisions and actions.
What is an Account?
Definition: An account is a record in an accounting system that tracks the financial activities of specific asset, liability, equity, revenue, or expense. These records increase and decrease as the business events occur throughout the accounting period. Each individual account is stored in the general ledger and used to prepare the financial statements at the end of an accounting period.
What does account mean?
Accounts are records of business transactions in categorized on the basis of accounting equation. There are five main types of accounts used in an accounting system. Each of these is represented in the expanded accounting equation.
Assets = Liabilities + Owner’s Equity + Revenues – Expenses.
Let’s take a look at an example of each
Example
Assets: Assets are resources that the company can use to generate revenues in current and future years. Assets Accounts have a debit balance and are always presented on the balance sheet first.
Liabilities: Liabilities represent the debt obligations that the company owes to creditors. This can include bank debt as well as notes from owner. Liability accounts have a credit balance and appear below assets on the balance sheet.
Owner’s Equity: Equity accounts represent the owner’s stake in the business. Equity is often called net assets because it shows the amount of assets that the owners actually own after the creditors have been paid off.
You can calculate this by flipping the accounting equation around to solve for equity instead of assets.
Revenue: Revenue accounts track the income generated by the business. These items have a credit balance and increase total equity.
Expense: Expense accounts represent
the resources used to generate income. These items have a debit balance and
lower total equity.
Note: Revenue and expense accounts are technically both temporary equity accounts, but they are significant enough to mention separately.
