Accounting Basics

What is Accounting?

• Accounting is the language of business, essential for stakeholders to understand a company's financial status and net worth.
• It allows tracking of income and expenses, assures statutory compliance, and provides financial information for business and financial decisions.

Bookkeeping vs. Accounting

• Bookkeeping is the art of recording business transactions in the books of accounts in an ordinary manner.
• Bookkeeping is a part of accounting, and accounting has a wider scope, including recording, classifying, summarizing, analyzing, and interpreting financial data.

Meaning and Definition of Accounting

• The American Institute of Certified Public Accounts (AICPA) defines accounting as "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof."

Process of Accounting

• Identification of accounting transactions with documentary evidence
• Classification of transactions into assets, liabilities, capital, revenue, and expenses
• Preparation of income statement (profit and loss account) and balance sheet
• Analysis and interpretation of financial statements
• Communication of results to management and stakeholders

Functions of Accounting

• Recording
• Classifying
• Summarizing
• Analyzing
• Interpreting
• Communicating

Differences between Bookkeeping and Accounting

• Bookkeeping: recording business transactions, clerical work, limited scope, and dependent on bookkeeping
• Accounting: includes recording, classifying, summarizing, analyzing, and interpreting, has a wider scope, and is dependent on bookkeeping

Users of Accounting

• Internal users: owners, management, and employees
• External users: investors, creditors, and regulatory authorities

Branches of Accounting

• Financial accounting
• Cost accounting
• Management accounting
• Tax accounting
• Auditing### Importance of Forecasting
• Forecasting is essential for planning and decision-making in business
• It helps to estimate the required production capacity and resources for the next year
• Managers use forecasting to plan for the production department and determine the number of units to produce

Users of Accounting Information

• Internal users: management, employees
  • Management uses accounting information for decision-making and planning
  • Employees use accounting information to know about the company's performance and profitability
• External users: lenders, suppliers, customers, competitors, government, and the public
  • Lenders use accounting information to decide on lending to the business
  • Suppliers use accounting information to decide on credit terms and supplier relationships
  • Customers use accounting information to evaluate the quality and price of products
  • Competitors use accounting information to analyze the market and competition
  • Government uses accounting information for taxation and regulatory purposes
  • The public uses accounting information to evaluate the company's performance and social responsibility

Elements of Accounting

• Assets: resources owned by the business (e.g., plant, machinery, land, building)
• Liabilities: amounts owed by the business (e.g., loans, credit)
• Equity: ownership interest in the business (e.g., shareholders' capital)
• Revenue: income earned by the business (e.g., sales, interest)
• Expenses: costs incurred by the business (e.g., salaries, rent, utilities)

Types of Accounting

• Financial Accounting: focuses on recording, classifying, and reporting financial transactions
• Cost Accounting: focuses on determining the cost of products or services
• Management Accounting: focuses on providing financial information for internal decision-making

Accounting Concepts

• Business Entity Concept: separates business transactions from personal transactions
• Going Concern Concept: assumes the business will continue to operate for the foreseeable future
• Cost Concept: records transactions at their cost value
• Dual Aspect Concept: every transaction affects at least two accounts
• Money Measurement Concept: records transactions in monetary terms
• Accounting Period Concept: divides the business's life into discrete time periods
• Realization Concept: recognizes revenue when earned and expenses when incurred
• Matching Concept: matches revenues with related expenses
• Objectivity Concept: relies on objective evidence to support financial transactions
• Materiality Concept: considers the materiality of transactions when recording and reporting

Accounting Conventions

• Convention of Disclosure: requires transparency and disclosure of financial information
• Convention of Consistency: requires uniformity in accounting methods and procedures
• Convention of Conservatism: requires caution and prudence in accounting estimates and judgments
• Convention of Materiality: requires consideration of the materiality of transactions and events

Golden Rules of Accounting

• Personal Account: debit the receiver, credit the giver
• Real Account: debit what comes in, credit what goes out
• Nominal Account: debit all expenses and losses, credit all incomes and gains### Users of Accounting
• Internal users: owners, management, investors, managers, and employees
• External users: lenders, suppliers, customers, competitors, government, and the public

Elements of Accounting

• Five elements: assets, liabilities, revenue, expenditure (or expenses), and capital

Types of Accounting

• Traditional types: financial accounting, cost accounting, management accounting
• Recent types: tax accounting, human resource accounting, and corporate accounting

Accounting Concepts

• Business entity concept
• Going concern concept
• Cost concept
• Dual aspect concept
• Money measurement concept
• Accounting period concept
• Realization concept
• Matching concept
• Objective evidence concept

Accounting Conventions

• Convention of disclosure
• Convention of consistency
• Convention of conservatism
• Convention of materiality

Golden Rules of Accounting

• Personal account rule: debit is the receiver, credit is the giver
• Real account rule: debit what comes in, credit what goes out
• Nominal account rule: debit all expenses and losses, credit all income and gains

What is Accounting?

• Accounting is the language of business, essential for understanding a company's financial status and net worth.
• It enables tracking of income and expenses, ensures statutory compliance, and provides financial information for business and financial decisions.

Bookkeeping vs. Accounting

• Bookkeeping is the art of recording business transactions in the books of accounts, while accounting has a wider scope, including recording, classifying, summarizing, analyzing, and interpreting financial data.

Meaning and Definition of Accounting

• The American Institute of Certified Public Accounts (AICPA) defines accounting as "the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof."

Process of Accounting

• The process of accounting involves identifying accounting transactions with documentary evidence, classifying transactions into assets, liabilities, capital, revenue, and expenses, and preparing financial statements.
• It also includes analyzing and interpreting financial statements, and communicating results to management and stakeholders.

Functions of Accounting

• The functions of accounting include recording, classifying, summarizing, analyzing, interpreting, and communicating financial information.

Differences between Bookkeeping and Accounting

• Bookkeeping has a limited scope, focusing on recording business transactions, while accounting has a wider scope, including recording, classifying, summarizing, analyzing, and interpreting financial data.

Users of Accounting

• Internal users of accounting information include owners, management, and employees.
• External users include investors, creditors, and regulatory authorities.

Branches of Accounting

• The branches of accounting include financial accounting, cost accounting, management accounting, tax accounting, and auditing.

Importance of Forecasting

• Forecasting is essential for planning and decision-making in business, as it helps estimate the required production capacity and resources for the next year.

Users of Accounting Information

• Internal users of accounting information include management, who use it for decision-making and planning, and employees, who use it to know about the company's performance and profitability.
• External users include lenders, suppliers, customers, competitors, government, and the public, who use accounting information for various purposes such as lending, credit terms, supplier relationships, and taxation.

Elements of Accounting

• The elements of accounting include assets (resources owned by the business), liabilities (amounts owed by the business), equity (ownership interest in the business), revenue (income earned by the business), and expenses (costs incurred by the business).

Types of Accounting

• The types of accounting include financial accounting (recording, classifying, and reporting financial transactions), cost accounting (determining the cost of products or services), and management accounting (providing financial information for internal decision-making).

Accounting Concepts

• The business entity concept separates business transactions from personal transactions, while the going concern concept assumes the business will continue to operate for the foreseeable future.

Learn the fundamentals of accounting, its importance in business, and how it differs from bookkeeping.