Accounting Introduction

Accounting is defined by the American Institute of Certified Public Accountants (AICPA) 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 financial character, and interpreting the results thereof."

            Types of Accounts:

There are three types of accounts.

·         Personal Accounts: Personal Accounts are those accounts which are related to any person or any organization are known as personal accounts e.g., Anand's a/c, Ramesh's a/c, bank's a/c etc.         Rule : Debit – The Receiver , Credit – The Giver

·         Real Accounts: Real Accounts are those accounts which are deals with any fixed assets and touchable things which are use in business transaction are known as Real Accounts e.g. cash a/c, machinery building etc. Rule : Debit – What comes in, Credit – What goes out

·         Nominal Accounts: Nominal Accounts is a suspense account. The accounts recording transaction relating to the losses, gains, expenses and income e.g. Rent, salaries, wages, commission, bad debts etc. Rule : Debit – All Expenses and Losses, Credit – All Incomes and Gains

Accounting Cycle is the name given to the collective process of recording and processing the accounting events of a company. The series of steps begin when a transaction occurs and end with its inclusion in the financial statements. The five steps of the accounting cycle are: 

1. Collecting and analyzing data from transactions and events.
2. Putting transactions into the general journal.
3. Posting entries to the general ledger.
4. Preparing a trial balance.
5. Organizing the accounts into the financial statements.  

It is also known as “bookkeeping cycle”.

FUNCTIONS OF ACCOUNTING:
 

Systematic Record of Transactions

The primary function of accounting is to keep a systematic record of financial transaction - journalisation, posting and preparation of final statements. The purpose of this function is to report regularly to the interested parties by means of financial statements.

Protect Business Property:

The second function of accounting is to protect the property of business from unjustified and unwanted use. The accountant thus has to design such a system of accounting which protect its assets from an unjustified and unwanted use.

Legal Requirement Function:

The third function of accounting is to devise such a system as will meet the legal requirements. Under the provision of law, a business man has to file various statements e.g., income tax returns, returns for sales tax purpose etc. Accounting system aims at fulfilling the requirements of law. Accounting is a base, with the help of which various returns, documents, statements etc., are prepared.

Communicating the Results:

Accounting is the language of business. Various transactions are communicated through accounting. There are many parties - owners, creditors, government, employees etc, who are interested in knowing the results of the firm. The fourth function of accounting is to communicate the results to interested parties. The accounting shows a real and true position of the firm of the business.

ADVANTAGES OF ACCOUNTING

It replaces human memory

It helps in knowing profit

It helps in knowing financial position of organisation

It helps in knowing list of creditors and debtors
It helps in paying taxes

It helps in raising more funds by supplying information to investors and creditors

It helps in planning for expansion

It helps in getting bank loans

Users of Accounting Information

Internal Users -

• Owners
• Managers
• employees & their representatives

Externally -

• Government and regulatory authorities
• Shareholders/investors
• General Public
• Creditors & suppliers
• Debtors & customers
• Competitors.

Accounting information and its implications

Accounting is essentially an "information process" that serves several purposes:

·          Providing a record of assets owned, amounts owed to others and monies invested;

·          Providing reports showing the financial position of an organisation and the profitability of its operations

·          Helps management actually manage the organisation

·          Provides a way of measuring an organisation's effectiveness (and that of its separate parts and management)

·          Helps stakeholders monitor an organisations activities and performance

·          Enables potential investors or funders to evaluate an organisation and make decisions

·         There are many potential users of accounting Information, including shareholders, lenders, customers, suppliers, government departments (e.g. Inland Revenue), employees and their organisations, and society at large. Anyone with an interest in the performance and activities of an organisation is traditionally called a stakeholder.

·         For a business or organisation to communicate its results and position to stakeholders, it needs a language that is understood by all in common. Hence, accounting has come to be known as the "language of business"