School of Commercial High Studies

Level: 1st year preparatory classes

Teacher: BELMEHDI Fella

Unit Five: Accounting

The present age is the age of Business, Commerce and Trade.

After Globalization, liberalization, and privatization, business is increasing day by
day and becoming complex also. An organization cannot remember all its dealings
for long. Therefore, it becomes necessary to keep a written record of all business
transactions day by day, this lead to the development of accounting. So, what is
accounting?

I- Definition of accounting: Accounting is understood as the Language of

Business or the Language of Financial Decisions. Accounting is the system of
recording, summarizing, reporting, analyzing, interpreting and communicating
financial and non financial information about economic entities such as businesses
and corporations. It reveals profit or loss for a given period and the value and the
nature of a firm’s assets and liabilities.

II- Components of accounting:

1- Recording: The primary function of accounting is to make records of all

transactions that the firm enters into. For the purpose of recording, the accountant
maintains a set of books such as bank book, Purchase and sales book, etc.

2- Summarizing: Recording of transactions creates raw data. Consequently, pages

and pages of raw data are of little use to an organization for decision making. For this
reason, the accountant classifies data into categories.

1
3- Reporting: The operations that are being financed with the money of owners,
needs to be periodically updated to them. For this reason, there are periodic reports
annually summarizing the performance of all four quarters which are sent to them.

4- Analyzing and interpreting: After results have been summarized and reported, a
meaningful conclusion needs to be drawn. It includes analyzing and then interpreting
the financial data to make a meaningful judgment of the profitability and financial
position of the business (find out its positive and negative points).

5- Communicating: It is concerned with the transmission of analyzed and interpreted

information to the end-users to enable them to make rational decisions. This includes
preparation and distribution of accounting statements and/or Annual Reports.

III- Types of accounting:

1- Financial accounting: Financial accounting is a process of recording,
summarizing, and reporting the myriad of transactions resulting from business
operations over a period of time. Therefore, it deals with the preparation of financial
statements including the balance sheet and income statement for the basic purpose to
provide information to interested users.

2- Managerial accounting: Managerial accounting, also called management

accounting, is a method of accounting that creates statements, reports, and documents
that help management in making better decisions related to their business. It involves
presenting financial information used by management in making key business
decisions. The main objective of managerial accounting is to maximize profit and
minimize losses.

3- Public accounting: Public accounting refers to a business that provides accounting

services to other firms. Public accountants provide accounting expertise, auditing,
and tax services to their clients.

4- Government accounting: Government accounting, also called governmental

accounting, refers to the process of recording and managing of all financial
transactions incurred by the government which includes its income and expenditures.
2
5- Tax accounting: Tax accounting deals with the preparations of tax returns and tax
payments. Tax accounting is used by individuals, businesses, corporations and other
entities. Tax accounting is governed by the Revenue Code, which dictates the specific
rules that companies and individuals must follow when preparing their tax returns
and paying their taxes.

6- Audit accounting: Auditing is an activity of verification and evaluation of

financial statement. It aims at checking and confirming the authenticity of financial
books prepared by the accounting staff of the entity. Thus, it determines the validity
and reliability of accounting information.

IV- Difference between accounting and auditing:

Basis of comparison Accounting Auditing

Accounting means systematically Auditing means inspection of
Meaning keeping the records of the accounts the books of account and
of an organization and preparation financial statements of an
of financial statements at the end organization.
of the financial year.

Governed by Accounting Standards Auditing Standards

Work performed by Accountant Auditor

To show the performance, To reveal the fact, that to

Purpose profitability and financial position which extent financial
of an organization. statement of an organization
gives true and fair view.

Start Accounting starts where Auditing starts where

bookkeeping ends. accounting ends.

Accounting is a continuous Auditing is a periodic process.

Period process, i.e. day to day recording
of transactions are done.