Accounting involves recording business transactions and providing financial information to both internal and external parties. It follows generally accepted accounting principles (GAAP) and involves an accounting cycle of recording, classifying, summarizing, and reporting transactions. The accounting process results in financial statements such as the balance sheet, income statement, statement of cash flows, and statement of retained earnings that are used by managers, investors, creditors, and other stakeholders to understand the company's financial position and performance.

1. Accounting
The process of recording of business transactions is called accounting.
OR
The action or process of keeping financial accounts is called accounting.
Recording provides information about different interested parties such as:
1 - Shareholders
2 - Management
3 - Employees
4 - Investors
5 - Creditors
6 - Government
7 - Owners
8 – Competitors etc
Some of them are internal and some of them are external.
Internal interested parties:
Internal parties of a business mean the management of business. Management prepare the budgets
for the business, in other words we can say that management recognizes the future transaction and
estimates the monitory effect of these transaction, But the management prepares the budgets, only
for internal use for this purpose the management adopts a system which is called management
accounting information system.
OR
Internal interested parties are parties inside the reporting entity or company who are interested in
accounting information.
For example,
1. The-Management helps in planning, decision making and controlling.
2. Employees, who use accounting information to determine a company's profitability and profit
sharing.
Managerial accounting: provides information that is useful in running a company by internal users.
Such reporting is usually accomplished through custom-designed (or managerial) reports.
External interested parties:
External interested parties are parties outside the reporting entity or company who are interested in
the accounting information.
For Example:

2. Investors (i.e., owners), who use accounting information to make buy, sell or keep decisions related to
shares, bonds, etc.
Creditors (i.e., suppliers, banks), who utilize accounting information to make lending decisions.
Taxing authorities (i.e., Internal Revenue Service), who need accounting information to determine a
company's tax liabilities.
Customers, who may need accounting information to decide which products to buy from which
companies.
Financial accounting: provides information that is designed to satisfy the needs of external users.
Such reporting is usually done in the form of financial statements.
Accounting Cycle:
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. There are some steps in accounting cycle which are given below:
1. Recording:
a. Collecting and analyzing data from transactions and events.
b. Putting transactions into the general journal (Chronological record of transactions,
showing an explanation of each transaction).
2. Classifications:
Posting entries to the general ledger.
3. Summarization:
a. Preparing an unadjusted trial balance.
b. Adjusting entries appropriately.
c. Preparing an adjusted trial balance.
4. Financial Reporting:
a. Organizing the accounts into the financial statements.
i. Income Statement: Prepared from revenue, expenses, and gains and losses.
ii. Balance Sheet: Prepared from assets, liabilities, and equity accounts.
iii. Statement of retained earnings: Prepared from net income and dividend
information.
iv. Cash flow statement: Derived from other financial statements using either
direct or indirect method.
b. Closing the books. (Close temporary accounts such as revenues, expenses, gains and
losses and transfer the balances of temporary accounts (e.g revenues and expenses)
to owner’s equity)
c. Post closing entries to ledger accounts and after closing the trial balance, a final trial
balance is calculated after closing entries are made.

3. The accounting cycle is a methodical set of rules to ensure the accuracy and conformity of financial
statements. Computerized accounting systems have helped to greatly reduce mathematical errors in
the accounting process, but the uniform process of the accounting cycle also helps reduce mistakes.
Financial statements:
Internal and External management is known as financial statements. Financial statement gives
information regarding finance.
There are few types of financial statements:
1. Balance Sheet
2. Income Statement
3. Income owner equity
4. Statement of cash flow
Fiscal year of Pakistan: 1st July-30th June.
It is a period in which all the business transactions of a year are classified and analyzed. Normal duration
is from 3-12 months. Months are known as fiscal months and a year is known as fiscal year.
GAAP (Generally Accepted Accounting Principles):
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.
OR
The rules that govern accounting are called GAAP (Generally Accepted Accounting Principles).
Explanation:
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, be very cautious!
That said, keep in mind that GAAP is only a set of standards. There is plenty of room within GAAP for
unscrupulous accountants to distort figures. So, even when a company uses GAAP, you still need to
scrutinize its financial statements.
3 Main Categories of GAAP:

4. 1. Assets: an asset is an item of value owned by a company. Assets may be tangible physical items or
intangible items with no physical form. Assets add value to a company, and are important to a company's
continued success.
As with assets, you may look at the wider world to gain an understanding of what's a liability. No one is
particularly pleased when he or she is described as a "liability". This is so because the liability description is
a negative one.
2. Liabilities: In accounting, liabilities are obligations of the company to transfer something of value (an asset
- see above) to another party. On a company’s balance sheet, a liability may be a legal debt or an accrual,
which is an estimate of an obligation.
3. Equity: Equity is the owner's value in an asset or group of assets.
In accounting, equity is usually defined as the value of the assets contributed by the owners. This is added
to the total income earned and retained by the company to give the company's total equity value. This
description of equity is correct but very simplistic. A more profound description is really that used by the
homeowner, that is, equity is the owner's value in an asset or group of assets.
As an example, a company with total assets valued at $1,000, may have debt (liabilities) valued at $900, in
which case the owner's value in the assets is $100, representing the company's equity.
The following is the Equity equation:
Total Assets minus Total Liabilities (T - A = E). T - A (or Equity) is also referred to as Net Worth, Capital &
Shareholders Equity.
GAAP Principles:
The GAAP principles are divided into two categories:
1. Accounting Concepts: Accounting Concepts are basic assumptions or conditions upon which
science of accounting is based. Accounting Concept includes:
a) Separate Entity Concept: It is helpful in keeping the business affairs strickly free from
the effect of the private affairs of the proprietor(s).
Consequently:
Amount invested by the proprietor is shows as “ Liability”.
Amount paid for the personal expenses of the proprietor are shown as drawings from
the capital of the proprietor.
b) Money Measurement Concept: Only the transactions which can be recorded in terms of
money are recorded.
Many significant events like low morale of work force, production manager’s resignation
etc. are not capable to be expressed in monetary terms are not recorded.
This is being used so as to provide a common yardstick (i.e. money) for measurement.
c) Dual Aspect Concept (IMP): Every business transaction has a dual affect i.e. it affects
two accounts.
This is based on accounting equation:

5. Liabilities = Assets
Owner’s equity + Outsider’s equity = Assets
This equation can be explained as “for every debit there is an equivalent credit”. Double
entry system of book keeping is based on this concept.
d) Matching Concept: It is the basis for recording expenses and includes two steps:
1. Identify all the expenses incurred during the accounting period.
2. Measure the expenses and the match the expenses against the revenues earned.
Revenues – Cost = Net income or Profit.
e) Going Concern Concept: Business would continue to operate indefinitely in the future.
Business will not cease doing business, neither; it will sell its assets to pay off its
liabilities.
f) Cost Concept: Assets and liabilities should be recorded at the historical cost i.e costs on
as acquisition.
g) Accounting Period Concept: Accounting period is the span of time, at the end of which
financial statements are prepared to throw light on the results of the operations at the
end of a relevant period and the financial position at the end of a relevant period.
h) Realization Concept: The Revenue principle governs two things:
1. when to record revenue
2. Amount of revenue to record
To be recognized, revenue must be:
Earned: Goods are delievered or a service is performed.
Realised: Cash or claim to cast (credit) is received in exchange for goods and services
rendered.
2. Accounting Conventions: Accounting Conventions include those customs and traditions which
are followed up by an accounting while preparing a financial statement. Accounting Convention
Includes:
a) Full Disclosure: Financial statements should be honestly prepared and sufficiently,
disclose information which is of material interest to proprietors, present and potential
creditors and investors.
b) Conservatism:
c) Materiality: Only material or significant details are to be recorded leaving the
insignificant or minute details. This is done to prevent overburdening of accounts.
d) Consistency