Table of Contents
Basic Concept of Accounting and Bookkeeping
In this article, explain the important Accounting information, that are given below:-
- The function of Accounting
- Types of Financial Accounting Transaction
- Importance of Accounting
- Parties Interested in Accounting Information
- Objective of Accounting
- Advantages of Accounting
- Limitation of Accounting
- Book keeper
- Book keeping
- Objective of Book Keeping
- Double Entry System
- Approaches of Double Entry System
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Function of Accounting
- Recording
- Classification
- Summarizing
- Reporting
- Analysis
Types of Financial Accounting Transaction:
Transaction:- Based on dealing with other person
Other Events:- Those transaction no dealing need (e.g gain and loss)
Condition:- Depreciation, accrual, Provision
Importance of Accounting and parties interested in accounting information:
The necessity and importance of accounting can be understood by answering the following questions:
- How much we have earned this year ?
- How much was earned during the last year ?
- Is our business improving?
- How much cash do we have?
- How much money we owe?
- How much others owe to us?
Interested Parties of Accounting
- i) Owners: The owners provide funds or capital for the organization. They possess curiosity in knowing whether the business is being conducted on sound lines or not and whether the capital is being employed properly or not. Owners, being businessmen, always keep an eye on the returns from the investment. Comparing the accounts of various years helps in getting good pieces of information.
- ii) Management: The management of the business is greatly interested in knowing the position of the firm. The accounts are the basis; the management can study the merits and demerits of the business activity. Thus, the management is interested in financial accounting to find whether the business carried on is profitable or not. The financial accounting is the “eyes and ears of management and facilitates in drawing future course of action, further expansion etc.”
iii) Creditors: Creditors are the persons who supply goods on credit, or bankers or lenders of money. It is usual that these groups are interested to know the financial soundness before granting credit. The progress and prosperity of the firm, two which credits are extended, are largely watched by creditors from the point of view of security and further credit. Profit and Loss Account and Balance Sheet are nerve centers to know the soundness of the firm.
- iv) Employees: Payment of bonus depends upon the size of profit earned by the firm. The more important point is that the workers expect regular income for the bread. The demand for wage rise, bonus, better working conditions etc. depend upon the profitability of the firm and in turn depends upon financial position. For these reasons, this group is interested in accounting.
- v) Investors: The prospective investors, who want to invest their money in a firm, of course wish to see the progress and prosperity of the firm, before investing their amount, by going through the financial statements of the firm. This is to safeguard the investment. For this, this group is eager to go through the accounting which enables them to know the safety of investment.
- vi) Government: Government keeps a close watch on the firms which yield good amount of profits. The state and central Governments are interested in the financial statements to know the earnings for the purpose of taxation. To compile national accounting is essential.
vii) Consumers: These groups are interested in getting the goods at reduced price. Therefore, they wish to know the establishment of a proper accounting control which in turn will reduce to cost of production, in turn less price to be paid by the consumers. Researchers are also interested in accounting for interpretation.
viii) Research Scholars: Accounting information, being a mirror of the financial performance of a business organization, is of immense value to the research scholar who wants to make a study into the financial operations of a particular firm. To make a study into the financial operations of a particular firm, the research scholar needs detailed accounting information relating to purchases, sales, expenses, cost of materials used, current assets, current liabilities, fixed assets, long-term liabilities and share-holders funds which is available in the accounting record maintained by the firm.
Objectives of Accounting:
The objectives of accounting are two-fold:
- To record permanently, all business transactions, and
- To show the effect of each transaction and also the combined effect of all such transactions for a given period so as to find out the profit the business has earned or loss incurred, and also to know the correct financial position on a particular date.
- To disclose the factors responsible for earning profit or suffering loss in a given period.
- The amount recoverable by the business from others (sundry debtors) and payable to others (sundry creditors)
- Determination of tax-liability of the business.
- Prevention of errors and frauds.
- Protection of assets.
- Measure of exercising a system of control.
The following are the main objectives of accounting:
To keep systematic records:
Accounting is done to keep a systematic record of financial transactions. In the absence of accounting there would have been terrific burden on human memory which in most cases would have been impossible to bear.
To protect business properties:
Accounting provides protection to business properties from unjustified and unwarranted us. This is possible on account of accounting supplying the information to the manager or the proprietor.
To ascertain the operational profit or loss:
Accounting helps is ascertaining the net profit earned or loss suffered on account of carrying the business. This is done by keeping a proper record of revenues and expenses of a particular period. The profit and loss account is prepared at the end of a period and if the amount of revenue for the period is more than the expenditure incurred in earning that revenue, there is said to be a profit. In case the expenditure exceeds the revenue, there is said to be a loss.
To ascertain the financial position of business:
The profit and loss account gives the amount of profit or loss made by the business during a particular period. However, it is not enough. The businessman must know about his financial position i.e., where he stands; what he owes and what he owns? This objective is served by the balance sheet or position statement.
To facilitate rational decision making:
Accounting these days has taken upon itself the task of collection, analysis and reporting of information at the required points of time to the required levels of authority in order to facilitate rational decision making.
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Is Accounting a Science or an Art?
In simple words, science establishes relationship of cause and effect whereas the art is the application of knowledge comprising of some accepted theories, principles and rules. Since accounting docs not establish cause and effect relationship it only provides us with the procedure by which objectives of accounting can be achieved, therefore accounting is an art and not a science. Accounting is an art of recording financial transactions in a set of books; classifying in desired categories and summarizing the information for presentation in a suitable manner to the concerned persons for their benefit.
Advantages of Accounting:
- The following are the advantages of accounting to a business:
- It helps in having complete record of business transactions.
- It gives information about the profit or loss made by the business at the close of a year and its financial conditions. The basic function of accounting is to supply meaningful information about the financial activities of the business to the owners and the managers.
- It provides useful information from making economic decisions,
- It facilitates comparative study of current year’s profit, sales, expenses etc., with those of the previous years.
- It supplies information useful in judging the management’s ability to utilize enterprise resources effectively in achieving primary enterprise goals.
- It provides users with factual and interpretive information about transactions and other events which are useful for predicting, comparing and evaluation the enterprise’s earning power.
- It helps in complying with certain legal formalities like filing of income tax and sales-tax returns. If the accounts are properly maintained, the assessment of taxes is greatly facilitated.
Limitations of Accounting:
- Accounting is historical in nature: It does not reflect the current financial position or worth of a business.
- Transactions of non-monetary mature do not find place in accounting. Accounting is limited to monetary transactions only. It excludes qualitative elements like management, reputation, employee morale, labour strike etc.
- Facts recorded in financial statements are greatly influenced by accounting conventions and personal judgments of the Accountant or Management. Valuation of inventory, provision for doubtful debts and assumption about useful life of an asset may, therefore, differ from one business house to another.
- Accounting principles are not static or unchanging-alternative accounting procedures are often equally acceptable. Therefore, accounting statements do not always present comparable data
- Cost concept is found in accounting. Price changes are not considered. Money value is bound to change often from time to time. This is a strong limitation of accounting.
- Accounting statements do not show the impact of inflation.
- The accounting statements do not reflect those increase in net asset values that are not considered realized.
Summary
The objectives of accounting are two-fold:
- To record permanently, all business transactions, and
- To show the effect of each transaction and also the combined effect of all such transactions for a given period so as to find out the profit the business has earned or loss incurred, and also to know the correct financial position on a particular date.
- To disclose the factors responsible for earning profit or suffering loss in a given period.
- The amount recoverable by the business from others (sundry debtors) and payable to others (sundry creditors)
- Determination of tax-liability of the business.
- Prevention of errors and frauds.
- Protection of assets.
Bookkeeper
Bookkeeper recording of all financial transactions that happen in an entity. Accountant extraction of information from these records and outlining the same in a systematic manner that can be used in decision making and reporting
Book Keeping:-
Book-Keeping may be defined as the art of recording business transactions in books in a regular and systematic manner.
Objectives of Book- Keeping
- Book- keeping provides a permanent record of each transaction.
- Soundness of a firm can be accessed from the records of assets and abilities on a particular date.
- Entries related to incomes and expenditures of a concern facilitate to know the profit and loss for a given period.
- It enables to prepare a list of customers and suppliers to ascertain the amount to be received or paid.
- It is a method gives opportunities to review the business policies in the light of the past records.
- Amendment of business laws, provision of licenses, assessment of taxes etc., are based on records
Double Entry System:-
Under this system both aspects of each transaction are recorded (Dr. and Cr). In this system; Personal, Real and Nominal Accounts are Kept fully. In this system, Cash Book, General Ledger, Debtor’s Ledger and Creditor’s Ledger are maintained.
Approaches to The Double Entry System Of Bookkeeping
There are two different approaches to the double entry system of bookkeeping. They are the Traditional Approach and the Accounting Equation Approach. Irrespective of the approach used, the effect on the books of accounts remain the same, with two aspects (debit and credit) in each of the transactions.
Traditional Approach (British)
Following this approach, accounts are classified as real, personal, or nominal accounts. Real accounts are assets. Personal accounts are liabilities and owners’ equity and represent people and entities that have invested in the business. Nominal accounts are revenue, expenses, gains, and losses.
Transactions are entered in the books of accounts by applying the following golden rules of accounting:
Personal account: Debit the receiver and credit the giver
Real account: Debit what comes in and credit what goes out
Nominal account: Debit all expenses & losses and credit all incomes & gains
Accounting Equation Approach (American)
Under this approach, transactions are recorded based on the accounting equation, i.e., Assets = Liabilities + Capital. The accounting equation is a statement of equality between the debits and the credits. The rules of debit and credit depend on the nature of an account. For the purpose of the accounting equation approach, all the accounts are classified into one of the following five types:
- Assets
- Liabilities
- Income/revenues
- Expenses
- Capital gains/losses