Accounting means Recounting-It involves recording, classifying and summarizing of the past events and transactions of financial nature .
As an information system is the process of identifying, measuring and communicating the economic information of an organization to take decision.
. As an Information INPUT Economic events in Financial Terms PROCESS Recording Classifying Summarizing Interpreting OUTPUT Information to Users
Steps involved in an Accounting cycle
Meaning of Book keeping
The practice or profession of recording the accounts and transactions of a business.
The systematic recording of a company's financial transactions. The two most common bookkeeping methods are single entry and double entry.
Bookkeeping -The art of recording pecuniary or business transactions in a regular and systematic manner, so as to show their relation to each other, and the state of the business in which they occur; the art of keeping accounts. The books commonly used are a daybook, cashbook, journal, and ledger.
Book keeping and Accounting
Bookkeeping is part of accounting. It is the recording of the day to day transactions of a business
Accounting builds on the bookkeeping information, interpreting it, compiling reports, year-end accounts, tax returns, budgeting and carrying out financial analysis and so on.
Accounting is based on the concept of a financial transaction.
Here are a few examples of financial transactions: A check is written from a bank account. A deposit is made to a bank account. A purchase is made and cash is paid. A purchase is made on credit. A payment is made to an account payable or receivable
Book keeping and Accounting(f)
Object is to prepare books of accounts, trial balance and final accounts
Done by lower level of management.
Does not show the financial position of the business
Record, classify, analyze and interpret it.
Wide scope covers book keeping plus analysis.
Lower level prepare it and top level interpret it.
Analyze the financial position of the business.
Use of Financial Statements
The users of Accounting information and
Potential Investors Employee Groups Short and Long term Creditors Present Investors
Board of Directors
Partners --- accounting
Classification of Accounting Accounting Financial Accounting Cost Accounting Management Accounting
Meaning of Cost Accounting
The object of cost accounting is to find out the cost of goods produced or services rendered by a business. It also helps the business in controlling the costs by indicating avoidable losses and wastes
Meaning of Management Accounting
The object of management accounting is to supply relevant information at appropriate time to the management to enable it to take decision and effect control . Managerial accounting is the branch of accounting designed to provide information to various management levels in the hospitality operation for the purpose of enhancing controls.
Meaning of Financial Accounting
The objects of financial accounting as stated above can be achieved only by recording the financial transactions in a systematic manner according to a set of principles. The recorded information has to be classified, analyzed and presented in a manner in which business results and financial position can be ascertained.
Uses of Accounting
Accounting plays important and useful role by developing the information for providing answers to many questions faced by the users of accounting information.
(1) How good or bad is the financial condition of the business?
(2) Has the business activity resulted in a profit or loss?
3) How well the different departments of the business have performed in the past?
(4) Which activities or products have been profitable?
(5) Out of the existing products which should be discontinued and the production of which commodities should be increased.
(6) Whether to buy a component from the market or to manufacture the same?
7) Whether the cost of production is reasonable or excessive?
(8) What has been the impact of existing policies on the profitability of the business?
(9) What are the likely results of new policy decisions on future earning capacity of the business?
(10) In the light of past performance of the business how it should plan for future to ensure desired results
Objectives of Accounting
To maintain accounting records
To calculate results of operation
To ascertain the financial position
Communicate information to the users
Recording the monetary transactions
Ascertain earnings of the company
To identify the obligations and resources of the organization
Management for taking decisions
Accounting provides key information used by executives in decision making and plays a vital societal role in resource allocation
The knowledge of Accounting is required for everyone in business, regardless of the position they hold, since they are accountable for their actions.
The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information.
GAAP are imposed on companies so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes
GAAP cover such things as revenue recognition, balance sheet item classification and outstanding share measurements.
Companies are expected to follow GAAP rules when reporting their financial data via financial statements. If a financial statement is not prepared using GAAP principles .
There is plenty of room within GAAP for unscrupulous accountants to distort figures. So, even when a company uses GAAP, we need to scrutinize its financial statements.
Rules in GAAP
Financial accounting information must be assembled and reported objectively. Third-parties who must rely on such information and have a right to be assured that the data are free from bias and inconsistency, whether deliberate or not. For this reason, financial accounting relies on certain standards or guides that are called "General Accepted Accounting Principles.
In any report of financial statements (audit, compilation, review, etc.), the preparer/auditor must indicate to the reader whether or not the information contained within the statements complies with GAAP
Principle of regularity
Principle of sincerity
Principle of the permanence of methods
Principle of non-compensation
Principle of prudence
Principle of continuity
Principle of periodicity
Convention of relevance, objectivity and feasibility
Principle of regularity : Regularity can be defined as conformity to enforced rules and laws. This principle is also known as the Principle of Consistency .
Principle of sincerity : According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status.
Principle of the permanence of methods : This principle aims at allowing the coherence and comparison of the financial information published by the company.
Principle of non-compensation : One should show the full details of the financial information and not seek to compensate a debt with an asset, a revenue with an expense, etc.
Principle of prudence : This principle aims at showing the reality "as is" : one should not try to make things look prettier than they are. Typically, a revenue should be recorded only when it is certain and a provision should be entered for an expense which is probable .
Principle of continuity : When stating financial information, one should assume that the business will not be interrupted. This principle is mitigating the previous one about prudence: assets do not have to be accounted at their disposable value, but it is accepted that they are at their historical value (see depreciation ).
Principle of periodicity : Each accounting entry should be allocated to a given period, and split accordingly if it covers several periods. If a client pre-pays a subscription (or lease, etc.), the
Important Concepts of GAAP (f)
Money Measurement Concept
Time period Concept
Business Entity and Going Concern Concept
Duality and Accounting Equivalence concept
Double Entry System of Financial Accounting
It recognizes both cash and credit transactions.
Accounts are maintained on accrual basis.
Transactions are supposed to have dual aspect a debit and a credit.
All records should be maintained, audited, presented to shareholders.
Accounting Concept of Capital and Income
It is the contribution made by the owner and regarded as a liability to business.
It is arrived by matching the revenues with the expenses on accrual basis and cash basis
It includes allocation of past cash cost of permanent loss
Economist’s concept of capital and Income
Assets which are used to produce goods and services for further production of assets.
The inventory of wealth at a point of time.
The relation between capital and income is that of tree and fruits
The benefit derived from wealth is our income
It is computed by deducting the capital at the end of the period and at the beginning
It is the increase in capital and deals with making of trial Balance, P&La/c and b/sheet .
It is the summarized versions of the profit and loss a/c and b/sheet
The true meaning and information is diluted and lost
According to FASB the report should serve as a primary information for the average or non financial