INTRODUCTION TO ACCOUNTING
1- INTRODUCTION TO ACCOUNTING
DEFNITION
Accounting is a process of
identifying, recording, summarizing and reporting financial information to
decision makers in the form of financial statements.
Accounting is the system of
recording, and summarizing business and financial transactions and analyzing,
verifying and reporting the result.
The American Institute of Certified Public Accountants has defined accounting 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". The above mentioned definition shows the following aspects of accounting.
OBJECTIVES OF ACCOUNTING
The following are the main objectives of accounting:
1. To maintain full and systematic records of business transactions:
Accounting is the language of business transactions. Given the limitations of human memory, the main objective of accounting is to maintain ‘a full and systematic record of all business transactions.
2. To ascertain profit or loss of the business:
Business is run to earn profits. Whether the business earned profit or incurred loss is ascertained by accounting by preparing Profit & Loss Account or Income Statement. A comparison of income and expenditure gives either profit or loss.
3. To depict financial position of the business:
A businessman is also interested in ascertaining his financial position at the end of a given period. For this purpose, a position statement called Balance Sheet is prepared in which assets and liabilities are shown.
4. To provide accounting information to the interested parties:
Apart from owner of the business enterprise, there are various parties who are interested in accounting information. These are bankers, creditors, tax authorities, prospective investors, researchers, etc. Hence, one of the objectives of accounting is to make the accounting information available to these interested parties to enable them to take sound and realistic decisions. The accounting information is made available to them in the form of annual report.
TYPES OF ACCOUNTS
These are basically three types
of accounts
1-
Real
Accounts
2-
Personal
Accounts
3-
Nominal
Accounts
Real Accounts:
- Real accounts are accounts relating to properties
and assets, which are owned by the business concern. Real accounts include
tangible and intangible accounts. These are asset accounts that appear in the
balance sheet, they are owned by business and the balances in these accounts at
the end of an accounting period will be carried over to the next period. EX,
Cash Account. Land Account, Building Account.
Personal Accounts:
- Personal Accounts are accounts which are related
to persons. Personal Accounts include Suppliers, Customers, and Lenders. These
are accounts of parties with whom the business is carried on. Personal Accounts
may be …
·
Accounts
of natural persons. Ex. Rama’s Account. Raja’s Accounts.
·
Accounts
of artificial of legal persons. Ex. ABC Representative Persons.
Nominal
Accounts: - Nominal Accounts are accounts which
related to Income or Expenses and gain or loss of a business concern. These are
accounts of expenses and loss which a business incurs and income and gains
which a business earn in the course of business. Ex. Rent Account, Salary
Account, Sales Account.
Accounts can be
broadly classified as,
·
Assets
·
Liabilities
·
Income
·
Expenses
GOLDEN RULES OF ACCOUNTING
·
Real
Accounts: - Debit what comes in,Credit what goes out.
·
Personal
Accounts: - Debit the Receiver, Credit
the Giver.
· Nominal
Accounts: - Debit all Expenses and losses,Credit
all Income and Gains.
NATURE OF ACCOUNTS
|
DEBIT
|
CREDIT
|
Asset
|
Increase
|
Decrease
|
Liabilities
|
Decrease
|
Increase
|
Expenses
|
Increase
|
Decrease
|
Income
|
Decrease
|
Increase
|
ACCOUNTING CONCEPT AND CONVENTIONS
1- Revenue Realization
2- Matching concept :- Expenses should be matched with revenue. The expense is recorded in the time period it is incurred, which means the time period that the expense is used to generate revenue. This means that you can pay for an expense months before it is actually recorded, as the expense is matched to the period the revenue is made.
3- Accrual
4- Going concern
5- Accounting period
6- Accounting entity
7- Money measurement
