Chapter I: Accounting in Action

Definition of Accounting
Accounting is an information system that identifies records and communicates the economic events of an organization to the interested users. --- Weygandt/Kieso. Accounting is simply the means by which we measure and describe economic activities.Whether someone managing a business, making investments or deciding how to spend their own money, they are working with accounting concepts and accounting information.

Users of Accounting
Accounting communicates financial information, so it also called the language of business. The information that a user of financial information needs depends upon the kinds of decisions the user makes. The differences in the decisions divide the users of financial information into two broad groups: Internal users External users.

Internal Users
Internal Users of accounting information are managers who make plan, organize & Run a business. In running a business, managers must answer many important questions. To answer these and other questions, users need detailed information on a timely basis. For internal users, accounting provides internal reports.Internal users of accounting are- marketing managers, Production supervisors, Finance directors and company officers.

External Users
External users are those who are coming from outside a company and they must have known of a companys accounting information. They are- Investors (owners), creditors such as suppliers and bankers use accounting information to evaluate the risks of granting credit or lending money.Taxing authorities needs and questions of other external users very considerably. They want to know whether the company compiles with the tax law, government may know the companys economical condition.

Distinction between Book-keeping & Accounting

Many individuals think that bookkeeping and accounting is the same. They think it because the accounting process includes the book-keeping function. But in accounting there is much more things included. Bookkeeping usually involves only the recording of economic events. It is the only one part of accounting. On the other hand, accounting involves the entire process of identifying, recording and communicating economic events. Accounting may be further divided into financial accounting and managerial accounting 1 1

Chapter I: Accounting in Action

Role of Accounting
The purpose of accounting is to provide decision makers with useful information about economic events. This includes both information about recent activities and forecasts of what may happen in the future. All types of decision makersmanagers, investors, lenders and consumers----use accounting information as a basis for making economic decisions. Think of accounting as an information system for decision makers. Businesses do not prepare new financial statements after every transaction. Rather, they accumulate the effects of individual business transactions in their accounting records. Then, at regular intervals, the data in these records are used to prepare financial statements, income tax returns and other types of accounting reports. But the need for accounting reports is not only the reason business maintain accounting records. Managers and employees of the business frequently use these records for such purposes as: Establishing accountability for the assets and transactions under an individuals control. Keeping track of routine business activities, such as the amounts of money in company bank accounts, amounts due from credit customers and amounts owed to suppliers. Obtaining detailed information about a particular transaction. Evaluating the efficiency and performance of various departments within the organization. Maintaining documentary evidence of the companys business activities. (For example, tax laws require companies to maintain accounting records supporting the amounts reported in tax returns.)

Accounting Is a Language of Business

Accounting often is called the Language of business because it is so widely used to describe all types of business activities. Costs, prices, sales volume, profits and return on investment- all are accounting measurements. Every investor, creditor (lender), and business manager needs a clear understanding of accounting terms and concepts if he or she is to effectively communicate and participate in the business community.

Double-entry System
Double-entry system is the scientific methods of keeping accounts.

Transaction ---- Dr & Cr.

Journal > Ledger > Trial Balance. It is introduced by Luca Pacioli (1494).

Events
Economic events= Transactions Event has two types. These are: 2 1

Chapter I: Accounting in Action (1)Financial Event (2)Non-financial Event

Transactions and its Characteristics:

Transactions (also called as business transactions) are the economic events of an enterprise that are recorded. Transactions may be identified as external or internal.External transactions involve economic events between the company and dome outside enterprise.Internal transactions are economic events that occur entirely within one company.

Analysis
The ability to analyze transactions in terms of the basic accounting equation is essential for an understanding of accounting. Transactions analyses are given below: Investment by owner, Purchase of equipment for cash, Purchase of supplies on credit, Services provided on cash, Purchases of advertising on credit, Services provided for cash and credit, Payment of expenses, Payment of accounts payable, Receipt of cash on account, Withdrawal of cash by owner.

Journal
In a business everyday transactions are initially recorded in chronological order in journals before being transferred to the accounts. Thus, the journal is referred to as the book of original entry. For each transaction the journal shows the debit and credit effects on specific accounts. Every company may use various kinds of journals but they have the most basic form of journal, which is called general journal. Typically, a general journal has spaces for dates, account titles and explanations, references and two amount columns.

Ledger
An accounting system includes a separate record for each item that appears in the balance sheet. The record used to keep track of the increases and decreases in a single balance sheet item is termed a ledger account or simply an account. The entire group of accounts is kept together in an accounting record is called a ledger.

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Chapter I: Accounting in Action

Trial Balance
A trial balance is a list of accounts and their balances at a given time. A trial balance is prepared at the end of an accounting period. A trial balance desirable to prove that the total of accounts with debit balances is in fact equal to the total of accounts with credit balances. A trial balance is a two-column schedule listing the names and balances of all the accounts in the order in which they appear in the ledger; the debit balances are listed in the left-hand column and the credit balances in the right-hand column. The totals of two columns should agree. If the debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting. In addition, it is useful in the preparation of financial statements.

Balance Sheet
A balance sheet consists of a listing of the assets, the liabilities and the owners equity of a business. It shows financial position at a specific date. The balance sheet date is important, as the financial position of a business may change quickly. In below there are several features of a balance sheet are discussed below: The name of the business entity, The name of the financial statement, The balance sheet date.

The body of the balance sheet also consists of three distinct sections: Assets, liabilities and stockholders equity.

Accounting Equation
Assets= Liabilities + Owners equity This relationship is referred to as the basic accounting system. Assets must equal the sum of liabilities and owners equity. The accounting equation applies to all economic entities regardless of size, nature of business, or form of business organization.

Classification of Accounts and Golden Rules

Capital-----------------Credit. Liabilities-------------Credit. Income/ Gains------- Credit. Assets----------------- Debit Expenses/Losses-----Debit.

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