- The process of reporting, recording, evaluating, and summarising economic data is referred to as accounting. By giving information about the company's financial situation, accounting enables a company's decision-makers to take wise decisions.
- Accounting is the "art of recording, classifying, and summarising in a meaningful way and in terms of money, transactions, and events which are, at least in part, of financial character, and interpreting the results thereof," according to the American Institute of Certified Public Accountants (AICPA).
- Everyone uses accounting today, therefore having a solid understanding of it is advantageous to everyone. Accounting serves as a financial language. It's critical to comprehend the components of accounting to understand it effectively.
Fundamentals of Accounting
- To keep a systematic record of all financial transactions in a book of accounts, accounting is used.
- To do this, every transaction is listed in the journal in chronological order, after which it is posted to the ledger, which is the main book.
- Every businessman is curious to see how business operations have fared overall.
- To ascertain whether the company has generated profits or losses, we produce a "Profit & Loss Account."
- Finding out the company's financial situation and assessing its assets and liabilities is another crucial goal.
- We prepare a "Balance Sheet" for this reason.
- to offer data to a range of users
- They can make wise financial judgments because of it.
- To support management
- Accounting helps management run operations efficiently by analyzing financial data and delivering insights in the form of reports.
Characteristics of Accounting:
- Only transactions and events with a financial component are recorded in accounting.
- The transactions and events in question are thus first identified.
(2) Measuring the transactions
- Accounting measures the transactions and events in terms of money which is considered a common unit.
(3) Recording of transactions
- Accounting involves recording the financial transactions of inappropriate books of accounts such as journals or Subsidiary Books.
(4) Classifying the transactions
- Transactions recorded in the books of original entry – Journal or Subsidiary books are classified and grouped according to nature and posted in separate accounts known as ‘Ledger Accounts.
(5) Summarising the transactions
- It involves presenting the classified data in a manner and in the form of statements, which are understandable by the users.
- It includes Trial balance, Trading Account, Profit and Loss Account, and Balance Sheet.
(6) Analysing and interpreting financial data
- Results of the business are analyzed and interpreted so that users of financial statements can make a meaningful and sound judgment.
(7) Communicating the financial data or reports to the users
- Communicating the financial data to the users on time is the final step of Accounting so that they can make appropriate decisions.
What are the Different Branches of Accounting?
The following are the main branches of accounting:
(a) Financial accounting:
Financial Accounting is that branch of accounting that involves identifying, measuring, recording, classifying, and summarising the business transactions, i.e. it involves the steps from Identifying, Recording transactions to Summarisation, and communicating the financial data.
(b) Cost accounting:
Cost Accounting is a branch of accounting that is concerned with the process of ascertaining and controlling the cost of products or services.
(c) Management Accounting
Management accounting refers to that branch of accounting that is concerned with presenting the accounting information in such a way that helps the management in planning and controlling the operations of a business and in decision making.
Steps of the Accounting Process:
The accounting process is the process of collecting, recording, classifying, summarising, and communicating financial information to the users for judgment and decision-making. The following steps are involved in the accounting process:
(1) Identification: It is the process of identifying and analyzing business transactions.
(2)Recording: For recording, we use ‘Journal’ or Subsidiary Books.
(3) Classification of transactions: Classification means segregation of transactions based on nature and posting them in a format known as a Ledger Account.
(4) Summarisation: It includes the preparation of the Trial Balance and financial accounts.
(5) Analysis & Interpretation: It includes an assessment of the financial reports and making some meaningful conclusions.
(6) Communicating information to the users: It includes sharing the financial reports and interpreting results to the users of financial statements.
What is the Difference Between Bookkeeping and Accounting?
| Parameters | Bookkeeping | Accounting |
| Scope | Bookkeeping involves identifying, measuring, recording & classifying financial transactions in the ledger accounts. | In addition to bookkeeping, Accounting also includes summarizing, interpreting, and communicating the financial data to the users of financial statements. |
| Objective | The main aim is to maintain systematic records of financial transactions. | The main aim is to ascertain the profitability and financial position of the business. |
| Stage | It is a primary stage of accounting | It is a second stage and begins where book-keeping ends. |
| Nature of job | This job is routine and repetitive in nature. | This job is analytical in nature. |
| Level of skills | Bookkeeping does not require special skills. It is performed by Junior Staff. | It requires specialized skills to analyze, so it is performed by senior staff. |
What are the Advantages of Accounting?
The following are the main advantages of accounting:
1. Provide information about financial performance
- Accounting provides factual information about financial performance during a given period
- Like, profit earned or loss incurred over a period and financial position at a particular point of time.
2. Provide assistance to management
- Accounting helps management in business planning, decision-making, and exercising control.
- For this, it provides financial information in the form of reports.
3. Facilitates comparative study
- By keeping systematic records and preparation of reports at regular intervals, accounting helps in making a comparison.
4. Helps in settlement of tax liability
- Systematic accounting records help in the settlement of various tax liabilities. Such as – Income Tax, GST, etc.
5. Helpful in raising loan
- Banks and Financial Institutions grant a loan to the firm based on an appraisal of the financial statement of the firm.
6. Helpful in decision making
Accounting provides useful information to the management for taking decisions.What Are the Limitations of Accounting?
Following are the limitations of accounting:
- Accounting is not precise: Accounting is not completely free from personal bias or judgment.
- Accounting is done on historic values of assets: Accounting records assets at their historical cost less depreciation. It does not reflect their current market value.
- Ignore the effect of price level changes: Accounting statements are prepared at historical cost. So changes in the value of money are ignored.
- Ignore the qualitative information: Accounting records only monetary transactions. It ignores the qualitative aspects.
- Affected by window dressing: Window dressing means manipulation in accounting to present a more favorable position of the business than the actual position.
Explain the Users of Accounting Information:
Users may be categorized into internal users and external users.
(A) Internal Users
- Owners: Owners contribute capital to the business and thus they are exposed to maximum risk. So, they are always interested in the safety of their capital.
- Management: Accounting information is used by management for taking various decisions.
- Employees: Employees are interested in the financial statements to assess the ability of the business to pay higher wages and bonuses.
(B) External Users
- Banks and financial institutions: Banks and Financial Institutions provide loans to businesses. So, they are interested in financial information to ensure the safety and recovery of the loan.
- Investors: Investors are interested to know the earning capacity of the business and the safety of the investment.
- Creditors: Creditors provide the goods on credit. So they need accounting information to ascertain the financial soundness of the firm.
- Government: The government needs accounting information to assess the tax liability of the business entity.
- Researchers: Researchers use accounting information in their research work.
- Consumers: They require accounting information for establishing good accounting control, which will reduce the cost of production.
Qualitative Characteristics of Accounting Information
Qualitative characteristics are the attributes of accounting information, which enhance its understandability and usefulness:
- Reliability: Reliability implies that the information must be free from material error and personal bias.
- Relevance: Accounting information must be relevant to the decision-making requirements of the users.
- Understandability: Information should be disclosed in financial statements in such a manner that these are easily understandable.
- Comparability: Both intra-firm and inter-firm comparisons must be possible over different periods.
Explain the System of Accounting
System of accounting
- There are the following two systems of recording transactions in the books of accounts:
- Double Entry System
- Single Entry System
Double-entry system
- The double entry system is based on the Dual Aspect Principle.
- Every transaction has two aspects, a Debit’ and ‘a credit’ of an equal amount.
- This system of accounting recognizes and records both aspects of the transaction.
Single entry system
- Under this system, both aspects are not recorded for all the transactions.
- Either only one aspect is recorded or both the aspects are not recorded for all the transactions.
What Are the Advantages of the Double-entry System of Accounting?
Following are the main advantages of the double-entry system of accounting:
Scientific system
- As compared to the other systems, this system of recording transactions is more scientific and useful to achieve the objective of accounting.
A complete record of the transaction
- Since both aspects of transactions are considered, a complete record of each is maintained.
- With these records, we can easily compute profit or loss.
Checks arithmetical accuracy of accounts
- Under this system, by preparing a Trial Balance we can check the arithmetical accuracy of the records.
Determination of profit/loss and depiction of financial position
- Under this technique, we can determine if a profit was made or a loss was incurred by preparing a "Profit & Loss A/c."
- The financial condition of the company, i.e., the position of assets and liabilities, can be determined by creating a "Balance Sheet."
Helpful in decision making
Administration and management can take decisions based on factual information under the double-entry system of accounting.
