When a person starts a business, his main aim to earn profit. He receives money from certain sources like sale of goods and services interest on deposits etc. He has to spend money on certain items like purchases of goods salary rent etc. At the end of year he wants to know the progress of his business.
The following questions arise:
- What has happened to his investment?
- What is the result of the business transactions?
- What are the earning and expenses?
- How much amount is receivable from customers to whom goods have been sold credit?
- How much amount is payable to suppliers on account of credit purchases?
- What are the nature and value of assets possessed by the business concern?
- What are the nature and value of liabilities of the business concern?
Business transactions are numerous so it is not possible to recall his memory and answer these questions. If he had recorded the business transaction in a systematic manner all such questions can be easily answered. Therefore need for recording business transactions in clear and systematic manner is the basis which gives rise to Book-Keeping.
Assets = Liabilities + Capital
Capital = Assets – Liabilites
TERMS IMPORTANT ACCOUNTUNG
To learn the accounting properly understanding of the commonly used terminology is very
important. The terms which are used in business daily are given below:
Anything which is in the possession or in the property of a business of a enterprise including the amounts due to it is called the assets. Thus cash and bank balance stock furniture bills receivable are
the various kinds of assets.
Assets can be classified as follows:
Current Assets = Those assets which are meant for sale of for or use in production, which the
management ulitimely wants to convert them into cash within short period of time, for example
unsold goods, cash bank balance, debtors, bill receivable.
Intangible Assets =Intangible Assets are those assets which don’t have any physical existence and
cannot be seen/touches. Example: goodwill, patents, trademarks etc.
Tangible Assets = Tangible Assets: Tangible assets are those assets are those assets which have
physical existance and can be seen/touched. example: Land building. Plant & Machinery, furniture etc.
Fixed Assets = It refer to those assets which are help for continued use in the business for
The purpose of producing goods and services and are not meant for re-sale. For Example land building Plant & Machinery, Motor vehicles, Furniture etc.
Liabilities means the amount which the business owns to creditors / outsidrs. Business is treated an entity distinct from its owners and therefore the investment in the business by the owners is also a liability but an internal liability. The external liability is payable to the business by the owners. A biability arises out of creditor transaction and can be expressed.
Liability = Assets – Capital
Characteristic of Accounting
- Recording financial Transactions : Accounting is the art of recording business transactions which can be expressed in terms of money. The transactions are recorded in a book called JOURNAL.
- Classifying : It is the process of posting the transactions of one nature in separate accounts opened in the LEDGER.
- Summarizing : The various accounts opened in the ledger are balanced and Trial balance is prepared with help of these accounts. In this process the classified data is presented in a summarized form which is understandable and useful to the management and other users.
- Interpretation of Results : Final accounts which are including Trading and Statement of Profit and Loss and Balance sheet are prepared with the help of Trial Balance. The interested parties can have full information from the results interpreted in the aforesaid manner about the profitability and financial position of the business.
Accounting is the art of recording classifying and summarizing the financial transactions and communicating in form of systematic financial information to the users like owners management creditors investors government agencies etc. is called accounting.
It is the basis of any business as without proper accounting it is almost impossible to have the correct information about the financial status of the business profit or loss, assets, creditors, debtors etc.
As per the American institute of certified public accountants (AICPA) defines accounting as: ‘the art of recording classifying and summarizing in a significant manner and in terms of money transaction and events which are in part at least of financial character and interpreting the results thereof’
Types of Accounting
- Financial Accounting: It is the most important branch of accounting. It deals with recording classifying summarizing and analyzing of business transactions through Final accounts with the help of these financial statements business reults are communicated to the interested parties or users for decisions-making.
- Cost Accounting: It determines the cost of goods manufactured/sold services rendered and help the management in fixing the price for sale of goods or services and exercising controls.
- Management Accounting: Management Accounting is the newest branch of the accounting which deals with generating accounting information relating to the funds costs profits etc. Management accounting enables the management in decision-making.
There are some widely accepted accounting customs\practices
to bring out quality of accounting information such as:
(a)MATERIALITY – It refrs to the relatives important of an item. Whether an item is material or not shall depend upon its nature and /or amount. Financial statement should disclose all items which are material enough to affects evaluations of the present`s financial decisions which are to be taken for implement in future. Accounting ignores to records of such events which are so insignificant that the work involved in recording them is unjustified by their usefulness. FOR EXAMPLE – minor expenditure of RS.40 for the purchase of a pencil and RS.60 for pen may be treated as stationary expenses rather than pencil expenses and pen expanses.
(b)FULL DISCLOSURE– This principal requires that all significant information relating to the economic affairs of the enterprises should be completely disclosed. In other words there should be sufficient disclosure of information which of a material interest to the users of financial statements such as proprietors present and potential creditors investors and other.
(c) CONSISTENCY -According this concepts the same accounting method should be applied in each accounting period when preparing financial reports. This makes it easy to compare result