Accounting Basics
Meaning of Accounting: According to American Accounting Association Accounting is “the process of identifying, measuring and communicating information to permit judgment and decisions by the users of accounts”.
Users of Accounts: Generally 2 types. 1. Internal management.
2. External users or Outsiders- Investors, Employees, Lenders, Customers,
Government and other agencies, Public.
Sub-fields of Accounting:
Book-keeping: It covers procedural aspects of accounting work and embraces record keeping function.
Financial accounting: It covers the preparation and interpretation of financial statements.
Management accounting: It covers the generation of accounting information for management decisions.
Social responsibility accounting: It covers the accounting of social costs incurred by the enterprise.
Fundamental Accounting equation:
Assets = Capital+ Liabilities.
Capital = Assets - Liabilities.
Accounting elements: The elements directly related to the measurement of financial position i.e., for the preparation of balance sheet are Assets, Liabilities and Equity. The elements directly related to the measurements of performance in the profit & loss account are income and expenses.
Four phases of accounting process:
Journalisation of transactions
Ledger positioning and balancing
Preparation of trail balance
Preparation of final accounts.
Book keeping: It is an activity, related to the recording of financial data, relating to business operations in an orderly manner. The main purpose of accounting for business is to as certain profit or loss for the accounting period.
Accounting: It is an activity of analasis and interpretation of the book-keeping records.
Journal: Recording each transaction of the business.
Ledger: It is a book where similar transactions relating to a person or thing are recorded.
Types: Debtors ledger
Creditor’s ledger
General ledger
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