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What is accounting
Accounting is an information
science used to collect, classify,
and manipulate financial data for
.organizations and individuals
Meaning and Important Concepts
Recording •
The primary function of accounting is to make •
records of all the transactions that the firm
enters into. Recognizing what qualifies as a
transaction and making a record of the same is
called bookkeeping. Bookkeeping is narrower in
scope than accounting and concerns only the
.recording part
For the purpose of recording,
accountants maintain a set of books.
Their procedures are very
systematic. Nowadays, computers
have been deployed to
automatically account for
.transactions as they happen
Summarizing

Recording for transactions creates raw data. •

Pages and pages of raw data are of little use to an
organization for decision making. For this
reason, accountants classify data into categories.
These categories are defined in the chart of
.accounts
As and when transactions occur, two things .
happen, firstly an individual record is made
and secondly the summary record is
updated.

For instance a sale to Mr. X for Rs 100

would appear as:

Sale to Mr. X for Rs 100

Increase the total sales (summary) from 500
to 600
Reporting

Management is answerable to the investors •

about the company’s state of affairs. The owners
need to be periodically updated about the
operations that are being financed with their
money. For this reason, there are periodic
reports which are sent to them. Usually the
frequency of these reports is quarterly and there
is one annual report which summarizes the
.performance of all four quarters
Reporting is usually done in the form
of financial statements. These
financial statements are regulated by
government bodies to ensure that
there is no misleading financial
.reporting
Analyzing

Lastly, accounting entails conducting an analysis •

of the results. After results have been
summarized and reported, meaningful
conclusions need to be drawn. Management
.must find out its positive and negative points
Lastly, accounting entails conducting an
analysis of the results. After results have
been summarized and reported, meaningful
conclusions need to be drawn. Management
must find out its positive and negative
.points
Objectives of Accounting

Every activity that a business firm does •

must be done for a reason and accounting
is no exception. Accounting helps the
.company achieve a myriad of objectives
Permanent Record

Any business firm needs a permanent record of •

the transactions that it indulges in. These records
could be required for internal purpose, for
taxation purpose or for any other purpose.
Accounting serves this function. Whenever the
organization commits any resource of monetary
value either within the firm or outside the firm, a
record is made. This permanent record is held on
for years and can be retrieved as and when need
be
Measurement of Outcome
A business firm may indulge in numerous transactions •
every day. It may make profit in some of these
transactions while it may make losses in some other
transactions. However, the effect of all these transactions
needs to be aggregated over a period of time. There must
be daily, weekly and monthly reports which provides
information to the organization about how well it is
performing its activities. Accounting serves this purpose
by providing periodic financial statements which help
the firm adjust their operations accordingly
Creditworthiness

Firms need resources for their functioning. They •

do not have any capital stock at hand and need to
obtain them from investors. Investors will give
money to the firm only if they have reasonable
assurance that the firm will be able to generate
enough profit. Past accounting records help a
great deal in proving this. All kinds of investors
from banks to shareholders ask for past
accounting details before they trust the
management with their money
Projections

Accounting helps management and investors •

look forward. Costs and revenue growths can be
projected after substantial data has been
accumulated. The assumption made is that the
company is likely to behave exactly as it has
done in the past. Thus, analysts can make
reasonable assumptions about the future based
on the past record
Efficient Use of Resources
Firms can also conduct useful internal analysis •
with the help of accounting data. Accounting
records tell the firm what resources were
committed to what activity and what time. These
records also summarize the return that was
obtained from these activities. Management can
then analyze past behavior and draw lessons
about how they could have performed better and
.used resources more efficiently
Basic Accounting Principles

Accrual principle. This is the concept that •

accounting transactions should be recorded in
the accounting periods when they actually occur,
rather than in the periods when there are cash
flows associated with them. This is the
foundation of the accrual basis of accounting. It
is important for the construction of financial
statements that show what actually happened in
an accounting period, rather than being
.artificially delayed by the associated cash flows
Conservatism principle
This is the concept that you should record •
expenses and liabilities as soon as possible, but
to record revenues and assets only when you are
sure that they will occur. This principle tends to
encourage the recordation of losses earlier,
rather than later. This concept can be taken too
far, where a business persistently misstates its
results to be worse than is realistically the case
.Consistency principle
This is the concept that, once you adopt an
accounting principle or method, you should
continue to use it until a demonstrably better
principle or method comes along. Not following
the consistency principle means that a business
could continually jump between different
accounting treatments of its transactions that
makes its long-term financial results extremely
difficult to discern
.Cost principle
This is the concept that a business should •
only record its assets, liabilities, and
equity investments at their original
.purchase costs
.Matching principle
This is the concept that, when you record •
revenue, you should record all related expenses
at the same time. For instance, water and
electricity bills should be recorded and the
.revenue, as well as
.Economic entity principle

This is the concept that the transactions of a •

business should be kept separate from those of
its owners and other businesses. This prevents
intermingling of assets and liabilities among
multiple entities, which can cause considerable
difficulties when the financial statements of a
fledgling business are first audited
.Matching principle
This is the concept that, when you record •
revenue, you should record all related expenses
at the same time. Thus, you charge inventory to
the cost of goods sold at the same time that you
record revenue from the sale of those inventory
items
.Materiality principle
This is the concept that you should record a •
transaction in the accounting records if not
doing so might have altered the decision making
process of someone reading the company's
financial statements. This is quite a vague
concept that is difficult to quantify, which has
led some of the more picayune controllers to
record even the smallest transactions
.Monetary unit principle
This is the concept that a business should only •
record transactions that can be stated in terms of
a unit of currency. Thus, it is easy enough to
record the purchase of a fixed asset, since it was
bought for a specific price, whereas the value of
the quality control system of a business is not
recorded. This concept keeps a business from
engaging in an excessive level of estimation in
deriving the value of its assets and liabilities
Reliability principle
This is the concept that only those transactions . •
that can be proven should be recorded. For
example, a supplier invoice is solid evidence that
an expense has been recorded. This concept is of
prime interest to auditors, who are constantly in
search of the evidence supporting transactions
.Revenue recognition principle
This is the concept that you should only recognize •
revenue when the business has substantially
..completed the earnings process
Time period principle. This is the concept that a •
business should report the results of its operations
..over a standard period of time
These principles are incorporated into a number •
of accounting frameworks, from which accounting
standards govern the treatment and reporting of
business transactions
Elements of Financial Statements

Assets : it is divided in to categories. The first .1 •

one is fixed assets for instance, the company's
office equipment and furniture, buildings and
machinery. The second one is the current
.revenue of the company
Liabilities : for instance, loans that the .2 •
.company should pay to banks
Equities: the capital of the project and .3 •
.outstanding expenses