What is accounting?

The accounting is a process of summarizing, analysing, and reporting and interpreting

financial transactions to oversight agencies, regulators, and tax collection entities. The
financial statements used in accounting are a concise summary of financial transactions over
an accounting period, summarizing a company's operations, financial position, and cash
flows.

How Accounting Works

Accounting is one of the key functions for almost any business. It may be handled by a
bookkeeper or an accountant at a small firm, or by sizable finance departments with dozens
of employees at larger companies. The reports generated by various streams of accounting,
such as cost accounting and managerial accounting, are invaluable in helping management
make informed business decisions.

Types of Accounting

 Financial Accounting:
Financial accounting involves recording and classifying business transactions, and
preparing and presenting financial statements to be used by internal and external users.
In the preparation of financial statements, strict compliance with generally accepted
accounting principles or GAAP is observed.

 Managerial Accounting

Managerial accounting is the process and procedures that create documents and reports
to aid management in the decision-making processes of running the company.
Managerial accounting involves financial analysis, budgeting and forecasting, cost
analysis, evaluation of business decisions, and similar areas.

 Tax Accounting

Tax accounting helps clients follow rules set by tax authorities. It includes tax planning
and preparation of tax returns. It also involves determination of income tax and other
taxes, tax advisory services such as ways to minimize taxes legally, evaluation of the
consequences of tax decisions, and other tax-related matters.

Functions of Accounting
The three major functions of accounting are:
1. The collection and storage of data concerning a business’s financial activities.
2. To supply information that can be used for managerial reports, financial statements,
strategic planning and decision-making.
3. To provide controls that effectively, efficiently and accurately record and process
data.
Objectives of Accounting
The following are the main objectives of accounting:

 To maintain full and systematic records of business transactions

 To ascertain profit or loss of the business

 To depict financial position of the business

 To provide accounting information to the interested parties

What Is the Accounting Equation?

The accounting equation is considered to be the foundation of the double-entry accounting
system. The accounting equation shows on a company's balance sheet whereby the total of
all the company's assets equals the sum of the company's liabilities and shareholders'
equity.

Assets = Liabilities + Owner’s Equity

Based on this double-entry system, the accounting equation ensures that the balance sheet
remains “balanced,” and each entry made on the debit side should have a corresponding
entry (or coverage) on the credit side.

What is book-keeping?
Book keeping includes the recording, storing and retrieving of financial transactions for a
business
Typical financial transactions and tasks that are involved in bookkeeping include:
Billing for goods sold or services provided to clients
 Recording receipts from customers
 Paying suppliers
 Monitoring individual accounts receivable
 Providing financial reports

Accrual and cash basis Accounting:

Most businesses typically use one of two basic accounting methods in their bookkeeping
systems: cash basis or accrual basis. With the accrual method, income and expenses are
recorded as they occur, regardless of whether or not cash has actually changed hands. An
excellent example is a sale on credit. The sale is entered into the books when the invoice is
generated rather than when the cash is collected while the cash basis is a method of
recording accounting transactions for revenue and expenses only when the
corresponding cash is received or payments are made. For example, you record revenue
only when a customer pays for a billed product or service, and you record a payable only
when it is paid by the company

Basic accounting concepts:

There are a number of conceptual issues that one must understand in order to develop a
firm foundation of how accounting works. These basic accounting concepts are as follows:

Conservatism concept: Revenue is only recognized when there is a reasonable certainty

that it will be realized, whereas expenses are recognized sooner, when there is a reasonable
possibility that they will be incurred. This concept tends to result in more conservative
financial statements.

Consistency concept. Once a business chooses to use a specific accounting method, it

should continue using it on a go-forward basis. By doing so, financial statements prepared in
multiple periods can be reliably compared.

Economic entity concept. The transactions of a business are to be kept separate from those
of its owners. By doing so, there is no intermingling of personal and business transactions in
a company's financial statements.

Going concern concept. Financial statements are prepared on the assumption that the
business will remain in operation in future periods. Under this assumption, revenue and
expense recognition may be deferred to a future period, when the company is still
operating.

Matching concept. The expenses related to revenue should be recognized in the same
period in which the revenue was recognized.

Materiality concept. Transactions should be recorded when not doing so might alter the
decisions made by a reader of a company's financial statements. This tends to result in
relatively small-size transactions being recorded, so that the financial statements
comprehensively represent the financial results, financial position, and cash flows of a business.

What Is the Accounting Cycle?

The accounting cycle is a collective process of identifying, analyzing, and recording 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 eight steps to the accounting cycle. An organization begins its accounting cycle
with the recording of transactions using journal entries. The entries are based on the receipt
of an invoice, recognition of a sale, or completion of other economic events. After the
company posts journal entries to individual general ledger accounts, an unadjusted trial
balance is prepared. The trial balance ensures that total debits equal the total credits in the
financial records. At the end of the period, adjusting entries are made. These are the result
of corrections made and the results from the passage of time. For example, an adjusting
entry may accrue interest revenue that has been earned based on the passage of time.

Upon the posting of adjusting entries, a company prepares an adjusted trial balance
followed by the financial statements. An entity closes temporary accounts, revenues, and
expenses, at the end of the period using closing entries. These closing entries transfer net
income into retained earnings. Finally, a company prepares the post-closing trial balance to
ensure debits and credits match.

Important Accounting Terms and concepts:

Double accounting system

The double entry means that every business transaction will involve two accounts (or more).
For example, when a company borrows money from its bank, the company's Cash account
will increase and its liability account Loans Payable will increase.

Business entity:
A business entity is an organization created by one or more natural persons to carry on a
trade or business.

Sole proprietorship:
It is a type of enterprise that is owned and run by one person

Partnership
It is a legal form of business operation between two or more individuals who share
management and profits.

Company (Joint Stock Company)

A company is an incorporated association which is an artificial -person created by law,
having a separate entity, with a perpetual succession, a common seal, capital divided into
transferable shares and carrying limited liability.

Income Statement:
The Income Statement is one of a company’s core financial statements that shows its profit
and loss over a period of time. The profit or loss is determined by taking all revenues and
subtracting all expenses from both operating and non-operating activities.
Balance sheet
It is a financial statement that reports a company's assets, liabilities and shareholders'
equity at a specific point in time, and provides a basis for computing rates of return and
evaluating its capital structure. It is a financial statement that provides a snapshot of what a
company owns and owes, as well as the amount invested by shareholders

Cash flow statement:

It is concerned with the flow of cash in and out of the business. As an analytical tool, it
breaks the analysis down to operating, investing, and financing activities. The statement of
cash flows is useful in determining the short-term viability of a company, particularly its
ability to pay bills.

Gross profit:
Gross profit is the profit a company makes after deducting the costs associated with making
and selling its products and appear on a company's income statement and can be calculated
by subtracting the cost of goods sold (COGS) from revenue (sales).

Operating expenses:
The expenditures that a business incurs to engage in activities not directly associated with
the production of goods or services.

Net Income:
In business and accounting, net income is a measure of the profitability of a venture. It is an
entity's income minus all expenses during the same period

Asset
An asset is a resource with economic value that a corporation owns or controls with the
expectation that it will provide a future benefit. Assets are reported on a company's balance
sheet and are created to increase a firm's value.

Liabilities:
Liabilities are defined as a company's legal financial debts or obligations that arise during
the course of business operations. Recorded on the right side of the balance sheet, liabilities
include loans, accounts payable, mortgages and accrued expenses etc

Journal entry
An accounting journal entry is the written record of a business transaction in a double entry
accounting system. Every entry contains an equal debit and credit along with the names of
the accounts, description of the transaction, and date of the business event.

A ledger is a book containing accounts in which the classified and summarized information
from the journals is posted as debits and credits.

Adjusting entries are journal entries recorded at the end of an accounting period to adjust
income and expense accounts so that they comply with the accrual concept of accounting.
Their main purpose is to match incomes and expenses to appropriate accounting periods.