What is accounting
What is accounting?
ACCOUNTING:
DEFINITIONS:
”Accounting is the language of business having two alphabets ‘debit’ and ‘credit'”.
OR
“Providing information about business organization to interested parties”
OR
“The art of recording (journal), classifying (ledger) and summarizing the business transactions and then interpreting the results”
OR
”The process of identifying, measuring and communicating economic information for the purpose of decisions and informed judgments”
SCHEMATICALLY:
Accounting is the process of:
Identifying
Measuring economic information of organizationfor decisions and judgments
Communicating
EXPLANATION:
EARLY HISTORY:
Derives from word ACONTER which means COUNT in old thirteen century(helpful to count sheep etc)
The rulers of china, Babylonia, Greece and Egypt use accounting to keep information of the cost of labor and material used in making great pyramids.
In 19 century managers makes reports to satisfy the owners of business that their business was doing well.
USERS OF ACCOUNTING INFORMATION:
OWNERS AND SHAREHOLDERS, for business performance and calculating the profit or loss.
TAX AUTHORITY, to check the tax liability of business.
INVESTORS, to access the business potential for investment.
AUDITORS, to ensure that internal controls are efficiently working.
BANKS, to ensure that business is a sound Proposition for loan.
TYPES OF ACCOUNTING:
FINANCIAL ACCOUNTING:
MANAGEMENT ACCOUNTING:
This accounting help to take decision for running the enterprise
It is activity which provides financial and non financial information to managers or other internal decision makers.
It help in planning, controlling and decision making activities.
It is SPECIFIC PURPOSE accounting.
It set targets in form of budgets and standards, measuring the actual performance and then checks variance.
Cost accounting and responsibility accounting are two main sub fields of management accounting.
USERS Managers, officers ,board of directors ,partners
TIME FOCUS Future emphasis
FINANCIAL ACCOUNTING:
It describe the financial resources, obligations and activities of a business.
It presents the financial position of a business.
It is concerned with recording and processing the financial transaction which can affect the financial position of a business.
It is also used for the preparation of income tax return.
It is GENERAL PURPOSE ACCOUNTING.
End result of financial accounting is FINANCIAL STATEMENT.
This information is used by both INTERNAM AND EXTERNAL users.
FUNCTIONS OF ACCOUNTING:
Systematic record of business transaction.(JOURNAL)
Classification of transactions.(ledger)
Summarization (trial balance leading to preparation of financial statement).
Analysis and interpretation.
Communicating results to users.
OBJECTIVE OF ACCOUNTING:
To reveal the financial position of a business
To control resources of business.
Ascertain profit and loss.
ADVANTAGES OF ACCOUNTING:
COMPARATIVE STUDY:
Keeping a record provide help to check the current year result of business to previous year.
EVIDANCE IN COURT OF LAW:
Transactions are recorded with evidences in form of vouchers which will be of great help in court of law.
INFORMATION ABOUT FINANCIAL POSITION:
Helping an owner to get in touch with the financial position of his business is only done by going through his accounting records.
DECISION MAKING:
Accounting helps a manger and owner to take decision about expanding business or closing down business due to loss.
REPLACING MEMORIZATION:
Business transactions are complex and many in number, so difficult to memorize. So accounting provides help to record all transaction in books of account so that they can be used next time.
