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Introduction to Basic Accounting


Introduction to Basic Accounting:

Basic accounting is easy to understand. We do monetary transactions in our day to day life like earning, spending and saving money. We do many financial transactions everyday. Many of us note it down in plain book, so that monthly expenses in future can be planned effectively. This is the way accounting actually works. Noting down day to day financial activities and using those financial activities for decision making.

So Accounting is the practice or system of  maintaining the financial transactions of a business. General Accounting includes bookkeeping as well as the preparation of Financial statements, business reports and Cost reports which is required in making financial decisions of business. Accounting has been referred to as “the language of Business”.

A)  Definitions and Meaning of Basic Accounting :

Definition of basic accounting as per the American Institute of Certified Public Accountants: “Accounting is the art of recording, classifying and summarizing in significant manner and in terms of money, transactions and events which are, in parts at least of a financial character and interpreting the result thereof.”

So the definition given above shows that Accounting is the process of recording, classifying and summarizing the financial transaction of business  and at the end, It helps to analyze and interpret those summarized data for business decisions.

However, the above-mentioned definition does not reflect the true picture of Modern accounting function. the importance of communicating the accounting results has increased and has also become the part of accounting.

Most accurate definition of accounting in term of modern businesses given by American Accounting Association in 1966 which treated accounting as  “The process of identifying, measuring and communicating economic information to permit   informed judgments and decisions by the users of accounts.”

So as per the above definition, accounting may be defined as the process of recording, classifying, summarizing, analyzing and interpreting the financial transactions and communicating the results thereof to the persons interested in such information.

 

B) Objectives of Accounting :

a) Systematic recording of financial transaction and events for future decision making purpose.

b) Provides reliable information which helps in ascertaining the financial health of the business.

c) Provides reliable information to the external users like investors or creditors, so that they can make appropriate decisions.

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C) Distinction between Accounting and Book keeping :

Some people thinks book keeping and accounting, both are same and both have same functions. But in Reality, Accounting is a broader concept than book keeping. One of the main function of accounting is to systematically record the financial transactions of business i.e. book-keeping. Book-keeping is the recording phase while accounting is concerned with the summarizing phase of an accounting system.

 

             Book-Keeping
               Accounting
1. Recording of Transaction.1. Summarizing of the recorded transactions.
2. Book keeping is the part of accounting.2. Accounting is a broad concept.
3. It is the basis of accounting.3. It is the basis for business decision.
4. No sub field/branch of book keeping.4.It has several sub field/ branches e.g. financial accounting, cost accounting, management accounting etc.
5. Does not require Professional skill.5. Requires Professional skill.
6. Financial health cannot be ascertained through book keeping records.6. Financial position of the business is ascertained on the basis of the accounting reports.
7. Book-Keeping data facilitates preparation of Financial Statements.7. Accounting data facilitates decision making.

 

D) Important Sub-fields of accounting :

Important sub-fields of Accounting are as follows:

i) Financial Accounting :

Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions pertaining to a business. It covers the preparation and interpretation of financial statements and communication to the users of accounts. It is historical in nature as it records transactions which had already been occurred. The final product of financial accounting is the preparation of Financial Statement.

 

ii) Cost Accounting :

Cost accounting is the field of accounting concerned with the accumulation and assignment of historical costs to units of product and departments for the purpose of valuation of stock and measurement of profits mainly focus on the product, processes and department.

The terminology of Cost Accounting published by the Institute of Cost and Management Accountants of England defines cost accounting as:

 “the process of accounting for cost which begins with the recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and controlling costs.”

 

iii) Management Accounting :

Management accounting is the field of accounting concerned with internal reporting to the managers of a business unit. The management needs variety of information to discharge the its functions like planning, control and decision-making.

iv) Tax Accounting :

Tax accounting is the field of accounting concerned with the adjustment of accounting records in order to comply tax laws and find out correct tax liabilities. It focuses on various tax compliance like Tax returns, Tax audit report etc.

E) Users of Accounting Information :

Basically users of accounts are divided into two categories, (a) Internal Users i.e. management and owners  and (b) External users i.e. (i) Management  (ii) Investors  (iii) Employees  (iv) Lender   (v) Suppliers    (vi) Government Agencies    (vii) Customers.

 

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