Accounting in Action

Chapter 1: Accounting in Action
• What is Accounting?
Answer:
Accounting is an information system that identifies, records, &
summarizes and communicates the economic events of an organization
to interested users.
“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.
Md. Mahabub Alam; ID: 082 028 025; Md.Mahabub Hasan; ID: 082003025:MD.Tanvir Hasan; ID: 082070025
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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.
• Who are the users of Accounting?

Answer:
Users of Accounts:
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.
Users of account are two types
 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
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External users are those who are coming from outside a company and
they must have known of a company’s 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 company’s economical
condition.
Users of Accounting
• What are distinguishing between book keeping &

accounting?
Answer:
Distinguishing between Bookkeeping & 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
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involves the entire process of identifying, recording and communicating

economic events. Accounting may be further divided into financial
accounting and managerial accounting
Accounting:
• Accounting is a four stage process of recording, classifying,
summarizing and the interpretation of the financial statements.
• The four stage process is defined below:
• Recording- transactions being recorded in the books of the business
• Classifying- sorting and categorizing into meaningful and orderly
types or manners
• Summarizing- the accounting data are summarized
• Interpreting- financial data are analyzed and used to assist decision
making.
Bookkeeping:
Bookkeeping is a part of Accounting. It is merely a mechanical aspect of
recording, classifying and summarizing transaction.
Therefore, keeping the books of accounts is always the theme in
bookkeeping. The finer aspect of interpreting all these data into
information for management to act upon is excluded.
NO. Bookkeeping Accounting

01 Bookkeeping usually Accounting process includes the
involves only the recording bookkeeping function.
of economic events.
02 It is just one part of the Accounting involves the entire
accounting process to record process of indentifying,
the financial events of recording, & communicating
business. economic events
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03 Its keep transaction by using Accountings process the recorded

double entry system. data of bookkeeping.
04 Accounting includes Bookkeeping is the recording of
bookkeeping also includes economic event one part of
much more. accounting.
• Explain: Accounting is the role of business?

Answer:
Role of Accounting:
The role of any accounting system is to record, classify and report
financial transactions. The role of any accounting system is to provide
managers across the organization with information that facilitates:
• Control of activities and expenditure

• Refinement of operational plans
• Accountability
• Reporting on project outcomes
• The writing of bids for new funds
The role 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 makers-managers, investors, lenders and
consumers--use accounting information as a basis for making economic
decisions. Think of accounting as an information system for decision
makers.
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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.
Also working knowledge of accounting is desirable for virtually
every field of endeavor. Some examples of how accounting is used in
other careers include:
• General management: All general managers need to

understand accounting data in order to make wise business
decisions.
• Marketing: A marketing specialist develops strategies t help the
sales force be successful. So marketing people must be sensitive
to costs and benefits, which accounting helps them quantify and
understand.
• Financial: In financial fields rely heavily on accounting. It is
difficult to get a good job in a financial function without two or
three course in accounting.
• What is Double Entry System?

Answer:
Method of keeping accounting:
Double Entry Transaction Dr.

Scientific method of
keeping accounting System
(Luca Pacioli) Cr.
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• What is event?
Answer:
Event: In business every financial occurrence is called event.
Example: In Business purchase furniture in cash tk. 15000.00
It is a financial event because of cash is flown here.
Economic events= Transactions

Event has two types. These are:
• Financial Event
• Non-financial Event
• What is Transaction & its characteristics?

Answer:
Transactions: is a business’s economic events recorded by
accountants. 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.
• May be external or internal.
• Not all activities represent transactions.
• Each transaction has a dual effect on the accounting
equation.
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TRANSACTION IDENTIFICATION PROCESS
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.
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• What is Golden Rule & Classification of accounts?

Answer:
The golden rules of accounting are as follows:
• Debit the receiver and credit the giver.
• Debit what comes in and credit what goes out.
• Debit all expense and loss and credit all income and gains.
The Classification of accounts:
Credit Increase
Capital Credit
Debit Decrease
Liabilities Credit Credit

Debit
Asset Debit Debit

Credit
Expense/Losses Debit Debit
Credit
Income/Gains Credit Credit
Debit
Cash Purchase
 Purchase
Credit Purchase
{Creditor} Accounts
Payable
Cash Sales
 Sales
Credit Sales Accounts
{Debitor} Receivable
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• Flow chart of accounts?

Answer:
Flow Chart of Accounts
Ledger
Trail
Journal Transaction
Balance
Financial
Statement
Income Change in Balance Cash Flow Necessary

Statement Owner Sheet Statement Notes
Equity
• What is Journal, ledger, trail balance, balance

sheet?
Answer:
• Journal:
Journal means transaction that divided into Dr. & Cr. flowing the
scientific method of keeping accounting. In a business everyday
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transactions are initially recorded in chronological order in journals

before being transferred to the accounts.
“The journal is a book of original entry in which transaction are recorded
in chronological order”
---Wixozn & cox
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.
• Ledger:
Ledger means in Business to separate transaction by nature of
transaction. An accounting system includes a separate record for each
item that appears in the balance sheet.
“The ledger is the permanent storehouse of all the transaction”
---Arther Fieldhouse
The record of Ledger 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.
• Trial Balance:
Trail Balance is an arithmetic accuracy of the list of ledger account. 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.
“The proof of the equality of debit and credit balance of all account is
called trail balance.”
---W.B Meigs & R,F Meigs
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
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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.
Financial Statement:
• Income Statement revenues & expenses & resulting net income or

net loss for a specific period of time.
• Owner’s Equity Statement changes in owner’s equity for a
specific period of time.
• Balance Sheet is a statement of assets, liabilities, & owner’s equity
at a specific date.
• Statement of Cash Flows cash inflows (receipts) & outflows
(payments) for a specific period of time.
• What is the Basic Accounting Equation?

Answer:
The Basic Accounting Equation:
• Resources a business owns.
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• Provide future services or benefits.

• Cash, Supplies, Equipment, etc.
• Claims against assets (debts and obligations).

• Creditors - party to whom money is owed.
• Accounts payable, Notes payable, etc.
•
• Ownership claim on total assets.

• Referred to as residual equity.
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• Capital, Drawings, etc. (Proprietorship or Partnership).

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Accounting in Action

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Chapter 1: Accounting in Action

Accounting is a Language of Business

• Who are the users of Accounting?

• What are distinguishing between book keeping &

involves the entire process of identifying, recording and communicating

NO. Bookkeeping Accounting

03 Its keep transaction by using Accountings process the recorded

• Explain: Accounting is the role of business?

• Control of activities and expenditure

Businesses do not prepare new financial statements after every

• General management: All general managers need to

• What is Double Entry System?

Double Entry Transaction Dr.

Economic events= Transactions

• What is Transaction & its characteristics?

TRANSACTION IDENTIFICATION PROCESS

• What is Golden Rule & Classification of accounts?

Liabilities Credit Credit

Asset Debit Debit

• Flow chart of accounts?

Income Change in Balance Cash Flow Necessary

• What is Journal, ledger, trail balance, balance

transactions are initially recorded in chronological order in journals

• Income Statement revenues & expenses & resulting net income or

• What is the Basic Accounting Equation?

• Resources a business owns.

• Provide future services or benefits.

• Claims against assets (debts and obligations).

• Ownership claim on total assets.

• Capital, Drawings, etc. (Proprietorship or Partnership).

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