What and why is accounting ?
Accounting involves identifying, measuring and presenting economic information about a business in such a way that the users of the information can form opinions about the business. Judge its performance and take certain decisions.
Accounting is also said to be the summarizing of business transactions, because it aims at preparing at least two summarized statements :
Trading and Profit and Loss A/C or income and Expenditure A/C (in case of Non-Trading concerns).
Balance Sheet, to make the classified business activities understandable to the proprietors, management and other interested parties, Accounting refers to summarizing in a significant manner. It means that summarizing must be done in such a way as to create a definite sense. In other words, the summarization must suit the purpose for which it is done.
Advantage of Accounting :
Advantages of accounting are as follows :
Accounting keeps a systematic record of such transactions and summarizes them through entries in the various accounts.
The state of the financial health of the organization can be monitored through the preparation of statements such as the Profit and Loss Statement (or income statement) and the Balance Sheet.
The establishment of internal controls and procedures to detect errors and frauds becomes much easier mite a well-designed accounting system.
When money is borrowed from banks and financial institutions, the financial date required by these lenders can be provided only through a sound account system.
Calculation of tax liabilities is facilitated by a good accounting system.
Golden Rules of Accounting :
To ensure a standardized method of recording of transaction, the rules of debit and credit of accounts are involved. The rules that go with the classification of accounts may be stated as :
Personal Accounts :- Debit :- The Receiver.
Credit :- The Giver.
Real Accounts :- Debit :- What comes in.
Credit :- What goes out.
Nominal Accounts :- Debit :- All expenses and losses.
Credit :- All incomes and gains.
Commonly Used Accounting Terms :
Accounts : – Collected but classified statement to represents the economic event
of an Economic Unit in a specific and Significant way is called the
account of unit.
Accounting :- The set of rules and methods by which financial and economic
data are collected and terms formed into useful report for
Asset :- A thing of value owned by an economic enterprise.
Fixed Asset :- Fixed Asset are assets like Land, Building, Plant and Machinery,
Vehicles, Furniture and Fixture and certain kinds of development
expenditure which is used for business operation over a relatively
long period of time.
Current Assets :- Current Asset are assets which are surely converted into
cash within the accounting period.
Example :- Debtors lone, advances, inventories, short term investment.
Sundry Debtors :- This is are userly the amount receivable on A/C of the
goods or services rendered in the course of business
Liability :- It is an obligation to pay this is include accounts payable bond and
Inventories :- Inventories may be in the form of Raw Materials, Work-in-
progress, finished goods or consumable stores.
Capital Expenditure :- Coasts incurred to acquire fixed assets, the benefit from
which spread over several accounting periods.
Carriage Inwards :- Expenses incurred for transporting the goods or materials
purchased by a farm.
Carriage Outwards :- Expenses incurred for transporting the goods in course
Credit Note :– A note sent by the sailor to the purchaser informing the letter of
the reduction in amount due from him.
Creditor :- A person to whom the business owes certain amount.
Debit Note :- A note sent by the purchaser to the sailor informing the letter of
the reduction the amount due him.
Cash Book :- The Cash Book is used for recording Cash transactions.
Journals :- The Journal is used as the book of first entry for all transaction
which can not be recorded in the Cash Book.
General Ledger :- The General Ledger contains all the accounts of an
enterprise. It is only a device for reclassifying and
summarizing all information recorded Cash Book and
Bills receivable Book :- The bills receivable of an enterprise consists of all the
promissory notes given or Bill of Exchange accepted
by the customers in respect of amounts due from them.
Bills Payable :- The Bills Payable consists of all promissory notes given or Bill
of Exchange accepted by the business with respect to amounts
owned to its suppliers.
Prepaid Expenses :- Certain expenses paid may relate to more than one
Accrued income :- An income appearing in the ledger account may not
represent the income that must have been received given the
Bad Debt :- In practice the amount, which can not be recovered, in considered
as a loss called Bad Debt.
Balance Sheet :- The statement the summarizes the assets, liabilities and
owners equity of a business unit as on a specific date.
Profit and Loss Account :- A statement showing all revenue and expenses
items for a given period arranged so that total
expenses are subtracted from total revenue to reveal
the net income earned during that period.