Introduction to Accounting

Definition of Accounting:

Accounting is the system of recording financial transactions with both numbers and text in

the form of financial statements. It provides an essential tool for billing customers, keeping

track of assets and liabilities (debts), determining profitability, and tracking the flow of cash.

The system is largely self-regulated and designed for the users of financial information, who

are referred to as stakeholders: business owners, lenders, employees, managers,

customers, and others. Stakeholders utilize financial statements to help make business,

lending, and investment decisions.

There are several specialized professions and specializations in accounting. Private

(internal) accounting is the term used to describe accountants who are employed by a single

company. Accountants for small businesses may take on broad responsibilities that need

them to prepare the records (bookkeeping) and conduct bank reconciliations. The three

areas of accounting that accounting professionals often work in are tax, audit, and advice.

Federal, state, and local tax filings are the main emphasis of the tax industry. Internal

controls and financial statements are put to the test by auditors. Consultative services

provide broad financial advice. While private accounting refers to working for one particular

company, public accounting companies serve many distinct customers.

What are types Accounts?

Asset, liability, equity, income, and cost are the five basic categories of accounting.

Subaccounts are available for each type of account to store transaction information. For

instance, many cash and savings accounts may be considered monetary assets.

Asset accounts: include cash and cash equivalents, accounts receivable, inventories,

prepaid expenses, investment, property, plant, and equipment, cumulative depreciation

(contra account), intangible assets, and accumulated amortization (contra account), among

others.

Liability: Accounts for liabilities include long-term bonds payable, notes payable, accruing

costs, delayed revenue, and others.

Equity: Common stock, additional paid-in capital, retained earnings, treasury stock (contra

account), and others are included in equity accounts.

Revenue: Sales revenue and other revenue accounts

Expense: Accounts for expenses include selling, general and administrative, interest,

repairs, non-cash depreciation and amortization, as well as others.

Accounting Equation:
The accounting equation is a formula that shows the sum of a company's liabilities and

shareholders' equity are equal to its total assets (Assets = Liabilities + Equity).

Expanded Accounting Equation

The fundamental accounting formula, Assets = Liabilities + Shareholders' Equity, is

lengthened by the extended accounting formula. The formula displays elements from the

shareholders' equity portion of the balance sheet.

The broadened accounting formula is:

Total Assets = Total Liabilities + CC +/- AOCIL + BRE + R – E – D – SR

Whereas the following phrases are taken from the balance sheet's Shareholder's Equity

section:

CC = Contributed Capital

AOCIL = Accumulated Other Comprehensive Income (AOCIL)

BRE = Beginning Retained Earnings

R = Revenue

E = Expenses

D = (Paid) Dividends

SR = Stock Repurchases
The Purposes of Accounting

Accounting should be created in a way that also satisfies these new goals. When

constructing the accounting system, the management information system should be taken

into consideration.

Consequently, the Need for and Goals of Accounting

1. Transactions should be recorded consistently

2. Calculating profits and losses

3. Putting together tax returns (Income tax, Wealth tax, Sales tax, value-added tax, tax

on dividends, exercise duty, import-export duties, export incentive etc.)

4. Giving the banking institution the necessary information

5. The representation of financial position

6. Effective control over the business

7. Providing information to interested parties

Difference between Bookkeeping and Accounting

Bookkeeping

Bookkeeping is a transactional and administrative role that handles the day-to-day tasks of

recording financial transactions, including purchases, receipts, sales and payments.

Typical bookkeeping tasks: 
 Keeping track of financial transactions

 Debit and credit posting

 Generating invoices

 Controlling payroll

 Keeping ledgers, accounts, and subsidiaries in balance

Accounting

Accounting is more subjective, providing business owners with financial insights based on

information gleaned from their bookkeeping data.

Typically, accounting consists of: 
 Financial reports and statements

 Budgeting

 Tax Filings

 Business Performance Analysis

Branches of Accounting 

The following are a few of the 8 branches of accounting:

1. Financial accounting 5. Accounting information systems

2. Cost accounting 6. Tax accounting

3. Auditing 7. Forensic accounting

4. Managerial accounting 8. Fiduciary accounting

1. Financial Accounting:

Financial accounting uses financial statements to track, compile, and report a

company's commercial activities. These include the cash flow statement, the

statement of retained earnings, the balance sheet, and the income statement. These

financial reports give tax authorities, investors, and creditors information about how a

firm performed. Financial accounting is divided into two categories: accrual

accounting and cash accounting.

- Cash-based business transactions are the main emphasis of cash

accounting. A firm bookkeeper debits and credits the cash account in each

journal entry while using the cash accounting technique. Financial statements

do not contain transactions without a monetary input. The cash account is

debited or credited in each journal entry using this approach, depending on

the transaction. For instance, the bookkeeper debits the cash account and

credits the sales revenue account when recording client payments.

- Transactional data is recorded using accrual accounting. Although the accrual

accounting technique is employed, all transactions that are part of an

organization's operating operations are recorded. When recording income

and costs using the accrual approach, a transaction is documented, not when

a payment is made or received.

- Generally accepted accounting principles, or GAAP, require accrual accounting 

because it presents a more accurate picture of a company's financial condition.

- Because accrual accounting tracks sales as they happen rather than simply

when money is received, it offers a clearer picture of a company's profitability

and actual sales patterns, which is why GAAP favours it.

2. Cost Accounting:

All of a company's production-related expenses, both variable and fixed, are tracked,

analysed, and reported using cost accounting.

3. Auditing:

Accounting auditing is the objective internal or external review and assessment of a

company's financial statements by a government agency, such as the Internal

Revenue Service. Three different audit kinds exist:

Internal auditing: These are employed as managerial tools to enhance internal

controls and procedures.

External audit: An accounting firm frequently conducts this audit. It examines the

internal controls of the business as well as the financial statements. The audit report

contains the auditor's assessment.

IRS audit: This is a study of an organization's financial records to see whether the

data has been recorded accurately and in accordance with tax rules.

4. Managerial Accounting:

Maximizing profit and minimizing losses is the basic goal of managerial accounting. It

gathers, quantifies, examines, deciphers, and relays financial data to management.

Business owners and managers may use this information to make educated choices.

Examples of managerial accounting methods include as follows:

Margin analysis: This method investigates production optimization. It entails figuring

out the break-even point and the best sales mix for the company's goods.
 Study of constraints: This analysis identifies inefficiencies and their effects on a

company's capacity to make a profit.

Capital budgeting: This method examines the data needed to decide what

expenditures are necessary. To assist with budgeting choices, managerial

accountants submit their results to owners and managers.

Trend analysis and forecasting: Trend analysis and forecasting recognizes

exceptional deviations from the anticipated values and discovers patterns and trends

of product costs.

5. Accounting Information Systems:

Accounting activity that has been coupled with information technology resources is

tracked by an Accounting Information System (AIS), a computer-based technique.

AIS is a framework that companies use to gather, organize, process, retrieve, and

report their financial data so that auditors, business analysts, chief financial officers,

accountants, and tax authorities may use it.

The 5 fundamental elements of accounting information systems are as follows:

Hardware: The physical technology used to process and/or store data is known as

computer hardware. It may be a supercomputer or a smartphone. Equipment like

keyboards, external discs, and routers are also included.

Software: Computer software: Software gives the hardware instructions by way of

information. The operating system is the main element of system software. An

example of an operating system is Windows. Application software is yet another

 category of software. This is made to handle particular activities like managing a

spreadsheet or producing documents.

Telecommunications/Network: Telecommunications is what allows your

computer's hardware and software to transfer information to others. Wi-Fi networks

allow for both wired and wireless connections. A local area network connects

computers in a particular space, such an office or school (LAN). A network known as

a wide area network is used to connect computers that are more widely scattered

(WAN).

Databases and Data Warehouses: Your accounting data is kept and retrievable in a

database. All of the data is housed in a data warehouse in any format the company

requires.

Human Resources and Procedures: The last aspect, the human factor, may be the

most crucial. These are the individuals in charge of managing the system; they

gather data and evaluate information found in databases and data warehouses.

6. Tax Accounting:

Instead of emphasizing public financial accounts, tax accounting concentrates on

taxes. It focuses on behaviors that have an effect on a company's tax liability and

how such actions connect to accurate tax calculation and document preparation. The

Internal Revenue Code, which must be scrupulously adhered to when people and

businesses complete their tax returns, governs it.

Due to the complexity and regular changing of tax legislation, tax accounting is

crucial. Tax accounting's primary goal is to establish a company's tax liability and
 submit it on the appropriate tax forms to the federal and state governments. Because

tax regulations are so complicated, hiring a tax professional is advised.

7. Forensic Accounting:

Investigative, auditing, and accounting expertise are used in forensic accounting to

evaluate someone's or a company's financial situation. In judicial procedures,

forensic accountants can convey their conclusions through reports and presentations

after compiling financial data. The use of this style of accounting in fraud and

embezzlement cases is common since it offers a thorough explanation of the

character and scope of a financial crime.

8. Fiduciary Accounting:

The documenting of transactions related to a trust or estate is known as fiduciary

accounting. It is handled using a cash basis. When money is received, it is recorded,

and when it is given out, it is recorded. Then, beneficiaries and frequently the courts

are given access to this information.

Fiduciary accounting regulations differ from state to state and even county to county.

The preferences of the decedent, or grantor, as expressed in a will or trust

agreement, must be honored.

For another person who is the money's owner, a fiduciary opens an account on their

behalf. The principle is referred to as the owner of the funds. A detailed report of trust

activities within a certain time period is provided by fiduciary accounting, which also

includes a list of all receipts and payments handled by the trustee or the trust's

executor.