Introduction to Accounting
Definition of Accounting:
Accounting is an information system that identifies, records, and communicates the economic
events of an organization to interested users.
“Accounting refers to the process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by users of the information.”
--- American Accounting Association
“Accounting is the art of recording, classifying, summarizing in a significant manner in terms of
money transaction or events which are in part of at least of a financial character and
interpreting thereof.”
---American Institute of Certificate Public Accounting
Three Activities:
Though accounting deals with so many aspects, it basically focuses on three activities, which are
as follows:
1. Identification of transactions
2. Recording of transactions
3. Communication of information to interested users
Again the recording part of accounting deals with three activities, which are:
a. Analyzing transactions
b. Journalizing transactions
c. Posting transactions to ledger
So, we can diagram the three activities of accounting as follows:
Accounting
Identifying transactions
Analyzing transactions
Recording transactions
Journalizing transactions
Communicating information
Posting transactions
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Objectives of Accounting:
The main objective of accounting is to communicate the necessary information to interested
users so that they can take economic decision, and the primary objective of accounting is to
record all the transactions properly. Other objectives include the following:
1.
2.
3.
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5.
6.
To provide information about the financial position of an organization
To provide information about the financial performance of an organization
To provide information about the cash position of an organization
To help an organization to identify the profitable units or segments
To help an organization to add or drop a product line
To help an organization to determine the cost of a product
Book-keeping and Accounting:
It is very common for non-accountants to think that bookkeeping and accounting are of the same
thing. Although they both involve the process of recording the financial transactions of a
business, bookkeeping and accounting are two different topics.
Bookkeeping is the process of recording, in chronological order, the daily transactions of a
business entity. It forms part of the accounting information system.
On the other hand, accounting is an information system – includes the process of recording,
classifying, summarizing, reporting, analyzing and interpreting the financial position and
performance of a business – in order to communicate it to stakeholders for business decision
making.
So, we can say that accounting is the whole process, and bookkeeping is a part of accounting,
which is called the recording part.
Users of Accounting Information:
Accounting information helps users to make better financial decisions. Users of financial
information may be both internal and external to the organization.
Internal Users
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Managers
Directors
Production Managers
Finance Directors
Marketing Managers
Officers
External Users
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Investors/Shareholders
Employees
Suppliers
Customers
Government
Regulatory bodies
Society
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Definition of Transaction:
A transaction is a business event that has a monetary impact on an entity's financial statements,
and is recorded as an entry in its accounting records. Examples of transactions are acquiring
property or paying supplier bills.
Types of Transaction:
Transactions can be classified from various points of view. The general points of view are as
follows:
1. On the basis of event/occurrence:
a. External transactions: External transactions are those that occur outside the
organization. Examples include purchase of goods, sale of goods, payment of
salaries, etc.
b. Internal transactions: Internal transactions are those that occur inside the
organization. Examples include charge of depreciation, use of supplies, recording
bad debts, etc.
2. On the basis of payment:
a. Cash transactions: Cash transactions are those that require immediate exchange
of cash for the settlement. Examples include purchase and sale of goods for cash,
payment to creditors, etc.
b. Accrual transactions: Accrual transactions are those that do not require the
exchange of cash for the settlement at a later date than immediately. Examples
include purchase and sale of goods on credit, incurring expenses on account, etc.
c. Noncash transactions: Noncash transactions are those that do not require any
exchange of cash either immediately or in future for the settlement. Examples
include charge of depreciation, use of supplies, recording bad debts, etc.
3. On the basis of organization:
a. Business transactions: Business transactions are those that occur in a business
organization. Examples include purchase of goods, sale of goods, payment of
salaries, etc.
b. Non-trading transactions: Non-trading transactions are those that occur in a nontrading concern, such as school, college, mosque, etc. Examples include receipt of
subscriptions from members, donation from the government, etc.
c. Personal transactions: Personal transactions are those that occur in one’s
personal life. Examples include purchase of goods from personal fund for
personal use, maintenance of family, etc.
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4. On the basis of visibility:
a. Visible transactions: Visible transactions are those that we can see occurring.
Examples include purchase of goods, sale of goods, payment of salaries, etc.
b. Invisible transactions: Invisible transactions are those that we cannot see
occurring. Examples include charge of depreciation, use of supplies, recording
bad debts, etc.
Account:
An account is a statement that contains the summary of some similar transactions in an organized
way. It has two sides: debit and credit. The elements of an account are title, date, particulars,
amount, and a folio.
Dr.
Sales Account
Date Particulars
F
Amount
Date Particulars
Cr.
F Amount
Types of Accounts:
Accounts can be classified into the following five types:
1. Assets: Assets are the resources owned and controlled by an organization, which will
provide future benefit to the organization. Examples include cash, accounts receivable,
bank deposit, land, equipment, buildings, goodwill, patent etc.
2. Liabilities: Liabilities are the present obligations that occurred as a result of transactions,
which will require future outflow from the organization. Examples include accounts
payable, notes payable, salaries payable, unearned revenue, etc.
3. Owner’s equity: Owner’s equity is the residual claim over assets after deducting
liabilities. Examples include owner’s capital, owner’s drawings, etc.
A=L+OE
OE=A-L
4. Revenue: Revenue is the gross inflow of economic benefits arising from the ordinary
operating activities of an organization in the form of inflow, enhancement of assets, or
decrease of liabilities that result in increase in equity. Examples include sales revenue,
rent revenue, service revenue, etc.
5. Expenses: Expenses are the decreases in economic benefits in the form of outflow,
depletion of assets, or incurrence of liabilities during the accounting period that result in
decrease in equity. Examples include salaries expenses, insurance expenses, etc.
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