INTRODUCTION TO ACCOUNTS
Published On : 2018-09-26
Accounting is the art of :
(1) Recording; (in journal)
(2) Classifying and (in ledger)
(3) Summarizing. (Trail Bal, Tarading Account, P/L A/c and Balance Sheet)
- of all the transactions of a financial character.
- in a significant manner.
- and to interpret the results thereof.
BRANCHES OF ACCOUNTING
FINANCIAL ACCOUNTING: It is that branch of accounting which records financial transaction and events (in Journal), summarises them (in ledger), interprets the results and communicates them to the users of accounting.
It helps in ascertaining the profits of the business and also provides information about the financial position of the business as it is mainly concerned with preparation of financial statements.
COST ACCOUNTING: Cost accounting is the branch of accounting which deals with accounting for costs. Cost accounting is a systematic procedure for calculating the unit cost of output produced or services provided. The main function of cost accounting is to ascertain the cost of a product and to help management in the controlling cost. Cost accounting was developed due to limitation of financial accounting to provide information about cost.
MANAGEMENT ACCOUNTING: Main purpose of Management accounting is to supply of information which is useful to the management in decision making this helps in increasing efficiency of business and maximizing profits.
FUNCTIONS OF ACCOUNTING
• Keeping Systematic Records
• Protecting and Controlling Business Properties
• Ascertaining the Operational Profit/Loss
• Ascertaining the Financial Position of the Business
• Facilitating Rational Decision Making
ADVANTAGES OF ACCOUNTING
• Replaces memory
• Provides control over assets
• Facilitates the preparation of financial statements:
• Facilitates a comparative study
• Assists the management in decision making
• Helps in Taxation Matters
• Helps in Valuation of Business
LIMITATIONS OF ACCOUNTING
• Records only financial transactions
• Based on estimates so it is not fully exact
• Fixed assets are recorded at the original cost
• Window dressing
• Records in terms of money but does not considers change in value of money.
Book-keeping is concerned with recording of financial transactions relating to the business operations in a significant and orderly manner and then classifying it. It is concerned with the permanent record of all transactions in a systematic manner to show its financial effect on the business. It covers procedural aspects of accounting work and includes record keeping function.
Recording in done in Journal.
Classifying is done in Ledger.
Book Keeping is
concerned with the recording and classifying of transactions.
concerned with the summarizing of the recorded transactions.
The work of
book-keeping is mainly routine and clerical in nature and is increasingly
being done by computers.
The work of
accountant requires higher level of knowledge, conceptual understanding and
is the base for accounting.
starts where book keeping ends.
is done in accordance to the basic accounting concepts and conventions.
and procedures of accounting for analysis and interpretations for financial
reports may differ from firm to firm.
statements are not the part of Book keeping.
statements are prepared in accounting process from the book-keeping records.
position of the business can not be determined through Book Keeping records.
position of the business can be determined on the basis of accounting reports.
SYSTEMS OF ACCOUNTING
CASH SYSTEM OF ACCOUNTING OR SINGLE ENTRY SYSTEM
Single Entry System does not mean that only one aspect of a transaction is recorded Under this system. Under this system neither all the transactions are recorded nor all the account books are maintained.
In certain cases the two aspects of a transaction are duly recorded while in others only one aspect is recorded and some transactions are not recorded at all. The Single Entry System is thus a mixture of double entry, single entry and no entry. The accounts maintained Cash System or Single Entry System are incomplete and unsystematic and, therefore they are not reliable.
Cash basis of accounting is incompatible with the matching principle for calculating profit and due to this reason the financial statements prepared under this system do not present a true and fair view of operating results and financial position of the organization.
Cash system of accounting is a system in which accounting entries are made only when cash is received or paid and no entry is made when a payment or receipt is merely due. In simple words, cash system is a system of accounting in which revenues and costs and assets and liabilities are reflected on the basis of cash transactions only.
CASH SYSTEM OF ACCOUNTING IS SUITABLE IN THE FOLLOWING CASES:
(i) In organization which are very small or in the case of Sole Proprietorship, where it is difficult to allocate small amounts between accounting periods;
(ii) Where credit transactions are almost nil and most of the business is carried on cash basis only.
ACCRUAL SYSTEM OF ACCOUNTING
• Accrual System of accounting is also known as mercantile system of accounting.
• In Accrual System of accounting transactions are recorded on the basis of amounts having become due for payment or receipt.
• In Accrual basis of accounting, records the financial transactions in the period in which they occur rather than recording them in period in which cash is received or paid by the enterprise.
• Accrual basis of accounting recognizes assets, liabilities or components of revenues and expenses received or paid in cash in past and expected to be received or paid in cash in the future.
THE FOLLOWING ARE THE ESSENTIAL FEATURES OF ACCRUAL BASIS:
– Revenue is recognized as it is earned irrespective of whether cash is received or not;
– Costs is matched against revenues on the basis of relevant time period to determine periodic income,
– Cost which is not charged to income is carried forward and is kept under continuous review. Any cost that appears to have lost its utility or its power to generate future revenue is written off as a loss
Accountancy can be defined as the systematic knowledge of accounting.
Accountancy explains how to deal with various aspects of accounting.
Accountancy also educates us how to maintain the books of accounting and how to summarise,
the accounting information and communicate it to the users of accounting information.
USERS OF ACCOUNTING INFORMATION
1. Owners : Owners want to know Profitability and financial soundness of business.
2. Investors : Investors want to know about their money’s safety.
3. Prospective Investor : Prospective Investor are interested to know how safe it would be to invest.
4. Creditors : To know credit worthiness of business.
5. Employees : To demand Profits/Bonus.
6. Government : For collecting Taxes.
7. Researchers : For researches into business or industry as a whole.
OTHER TERMS OF ACCOUNTING
1. Capital - Amount invested by owner in the business.
2. Liability - Amount to be given to the outsiders.
3. Assets - Things owned by the business.
4. Debtors - Persons from whom business has to take money.
5. Creditors - Persons to whom business has to pay money.
6. Proprietor - Owner of business.
7. Drawings - Money or Goods used by proprietor for personal use.
8. Transaction - Any business event to be recorded.
9. Entry - Record to be made in books for any transaction.
10. Stock - Goods lying unsold with the business on a particular date.
11. Expense - Amount spent to produce and sell the goods.
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