Accounting is the process of systematically recording, communicating and measuring the information about the financial transaction. Accounting is also termed as the process of summarising, analysing and reporting the transactions to the external and internal users of information.
Accounting includes the essential functions like:- Identifying the financial transaction, recording them in the books then classifying them into the account after that prepare the financial statements so that the information collected can be represented and communicated to the users of the information.
Accounting can be done on a cash basis or an accrual basis. Cash accounting records only cash inflows and outflows, whereas in Accrual concept, expenses and the incomes incurred in the period are considered irrespective of the fact whether they are paid or received or not.
ADVANTAGES OF STUDY OF ACCOUNTING :-
- It offers information which is useful to the management for decision making.
- It helps the organisation to compare the results on a yearly basis.
- It provides information about the financial position of the business through the balance sheet of the organisation.
- It helps in keeping systematic and complete records of the transactions, which helps in assessing the liabilities such as income tax, sales tax etc.
- It contains the information which are in monetary terms.
- It is based on different concepts and conventions.
There are three types of financial statements produced in accounting which are as follows:-
- Income Statement - This statement considers the income and expenses of the company. It shows the net profit or the net loss of an organisation during a particular accounting period.
- Balance Sheet - It shows the information relating to the financial position of the firm. It shows assets on one side and the Liabilities on another.
- Cash Flow Statement - It shows the cash flows from all the activities.
ACCOUNTING IS HELPFUL IN DIFFERENT AREAS:-
- Cost Accounting
- Financial Accounting
- Management accounting
There are several standards on which the accounting works for recording and preparing financial statements, they are known as GAAP Generally Accepted accounting principles. These principles are classified into two categories:-
- Accounting Concepts
- Accounting Conventions.
THERE ARE THREE ACCOUNTING ASSUMPTIONS:-
- Going concern assumption - This concept assumes that business will continue forever. The enterprise has an indefinite life.
- Consistency assumption - By this assumption, we mean that accounting policies and practices which are adopted are to be followed consistently year after year. The change will only be done if it is mandatory to do as per the change in the government policies or for the better presentation.
- Accrual assumption - As per this concept all revenues and the cost are recognised when they are earned or incurred, it is immaterial whether the cash is paid/ received or not.
Accounting Standards (AS) and the International Financial Reporting Standards (IFRS) - These are the fundamentals or the written statements, issued time to time by the institutions clarifying the rules and practices for the financial statements. IFRS are the financial standards issued by the International Accounting Standards Board (IASB) to provide a common global language across the world to understand the company accounts.
In accounting the financial report is based on consumer receptiveness. In maximum cases accountants use generally accepted Accounting principles (GAAP) at the time of preparing financial statements. GAAP is related to balance sheet identification, sharing measurements and many accounting related issues. There are different fields of accounting those are
Financial Accounting: It can handle bank reconciliation, taxation, financial statements, and many more. In financial accounting money is taken as the company's economic performance.
Managerial Accounting: It is responsible for management unlike the financial accounting. It is used to keep the information about cost of products purchased by the company. Managerial accounting is also known as cost accounting.
Corporate Accounting: It is a branch of accounting which can keep information and for preparing cash flow statement for companies. Corporate accounting is used to the operations for a single firm or company.
International Accounting: It is focused on using accounting standards which is developed by US companies. The AIS or accounting information system provides management with the useful information to aid in informed financial decision making.
The concepts of Accounting
They are the regulations which govern the accounting profession. Where they conflict the users and preparers of Accounting statements can agree on methods of accounting to use.
Money measurement concept - record transactions which can be quantified in monetary terms
Accrual concept - income must be recorded in the accounting statements in the year in which the services for the prepaid income are realized. Accrued incomes must be recorded in the accounts in the period they are occurring rather than when they will be realized.
Duality aspect concept - requires that each transaction is recorded twice, one entry on the debit and the other on the credit side of the ledger accounts. Debit is the part of the transaction which decreases liability, capital (equity) and profits and increases expenses and assets.
Matching concept - Expenses incurred is recorded in the statement for the period in which the revenues matching to those expenses relate.
Accounting period concept - This is the period of operation of the business which is usually one year and does not have to coincide with the calendar year
Realization concept - under this concept revenue is recognized and recorded in the accounting statements in the period it is earned regardless of when it is realized.
Accounting Information System
An accounting information system is a computer aided method of collecting and processing accounting data necessary for providing Accounting information to end users. An accounting information system consists of data, systems, procedures and processes, hardware and software applications and people.
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