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The basis of ACCOUNTING

How to learn Accounting..


• Accounting is an art.
• It has its own rules.
• To someone who does not know anything about it, we can compare it
by
Definition of accounting…
Accounting can be defined as” the process of identifying, measuring,
and communicating economic information to permit informed
judgements and decisions by users of the information”

Accounting may not require a knowledge of mathematics but you do


need to be able to add, subtract, multiply and divide – things you need
to be able to do in your daily life anyway.
The Need for accounting…
Accounting began because people needed to:

record business transactions,


know if they were being financially successful, and
know how much they owned and how much they owed
Aims of Accounting
Accounting has many aims, including letting people and organisations
know if they are making a profit or a loss, then:
what their business is worth?
what a transaction was worth to them?
how much cash they have?
how wealthy they are?
how much they are owed?
how much they owe to someone else?
Do they have enough information so that they can keep a financial
check on the things they do?
Continued..
• The most important objective of accounting is to provide information
for decision making. This information is usually financial but can also
be in volumes eg numbers of cars sold etc
• See notes below for further explanation…
Recording of data..
• When people talk about accounting, they are normally referring to
accounting as used by businesses and other organisations.
• The owners cannot remember all the details so they keep records of
it. Organisations not only record cash received and paid but also
record goods bought and sold, items bought to use rather than to sell,
and so on.
• This part of accounting is usually called the recording of data
Classifying and summarising of data
When the data is being recorded it has to be organised so as to be most
useful to the business.
This is known as classifying and summarising data.

Following such classifications and summaries it will be possible to work


out how much profit or loss has been made by the business during a
particular period. It will also be possible to show
what resources are owned by the business, and what is owed by it, on
the closing date of the period.
Continued..
Therefore accounting is concerned with the following..

recording of data;

classifying and summarising data;

communicating what has been learned from the data.


Communicating of information
When the data is being recorded it has to be organised so as to be most
useful to the business. This is known as classifying and summarising
data.
Following such classifications and summaries it will be possible to work
out how much profit or loss has been made by the business during a
particular period.
It will also be possible to show what resources are owned by the
business, and what is owed by it, on the closing date of the period.
Now what is the meaning of the term “
bookkeeping”
Bookkeeping is that part of accounting which is concerned with recording
data.
Until about one hundred years ago all accounting data was kept by being
recorded manually in hardcopy books, hence the term ‘bookkeeping’ was
used for this purpose and the people who performed this functions were
called bookkepers.
Nowadays, although hand-written books may be used (particularly by
smaller organisations), most accounting data is recorded electronically and
stored electronically using computers.

Bookkeeping is the process of recording data relating to accounting


transactions in the books of Accounts.
Users of accounting information are….
• Managers i.e day to day decision makers
• Owners of the business
• Bank
• Tax officers
• A prospective partner or investor
• A prospective buyer of the business
Now the Accounting equation…
• This is the first lesson of a person who is starting to learn accounting.
• The accounting that we are going to study is called double entry
accounting system.
• There will be a minimum of 2 entries in each transaction or business
deal
• The basic is
The Accounting equation…
• Assets = Liabilities + proprietorship (capital)
• Now
• On the left side we have Assets which are Resources
• On the right side we have liabilities and Proprietorship which are in
fact sources
Now lets apply some algebra to it
• If we are given L and P, we can easily find A
• If we are given A and L, we can easity find P
• If we are given A and P, we can easily find P