Introduction to Accounting

• Accounting involves recording, classifying, summarising, analyzing, and interpreting financial transactions, then communicating the results to users.
• Users of accounting information include owners, creditors, banks, financial institutions, employees, and the government.
• Accounting provides insights into available resources, resource utilization, and achievements.
• Accounting shows profit/loss during a period, book value, and asset/liability nature, which makes it the language of business.

Definitions of Accounting

• Accounting is recording, classifying, and summarizing financial transactions in terms of money and interpreting the results.
• Accounting is recording and classifying financial events and summarizing, analyzing, and interpreting and communicating results.
• Accounting identifies, measures, and communicates economic data for informed decisions.

Attributes (Characteristics) of Accounting

• Identification of financial transactions, measured in monetary terms relating to economic activity.
• Financial transactions are measured in terms of money, meaning non-monetary events are not recorded.
• Accounting involves recording business transactions in accounting books.
• Recording is the process of recording financial transactions in money in the book of original entry or journal.
• Classification groups similar transactions in one place, transferring journal entries to the ledger.
• A ledger contains individual account heads for related transactions posted from the journal, revealing amounts due.
• Summarizing presents classified data understandably for both internal and external financial statement users.
• Summarizing involves preparing a trial balance, trading and profit and loss account (or statement of profit and loss), and a balance sheet.
• Financial statements, or the final accounts includes the balance sheet.
• Analysis relates items from the profit & loss account with the balance sheet.
• Interpretation explains the analysis' meaning.
• Analysis and interpretation enables users to make informed judgements regarding a business' financial position and profitability.
• Communicating involves providing financial statements to users in a timely manner for appropriate decisions.

Objectives of Accounting

• To systematically record financial transactions and events following the principles of accountancy.
• To determine profit or loss by preparing an Income Statement of Trading and Profit & Loss Account showing revenues and expenses.
• Preparing a balance sheet is done to determine an entity's financial position demonstrating the value of assets versus liabilities.
• To have records of assets owned for business, which enables the management to exercise control and protect them.
• To provide accounting information to internal and external users for analysis based on their requirements.
• To give management financial information for effective control, budgeting, forecasting, and for decision-making.

Functions of Accounting

• To keep a record of all financial transactions and events.
• To prepare the income statement (profit & loss account) and balance sheet providing insights to the financial performance and position.
• Accounting records serve as evidence if they're kept up with laws.
• It is essential to convey financial data to internal and external parties such as managers and banks.
• Accounting records give management information that helps in decision-making, asset protection and exercising control.

Advantages of Accounting

• Provides financial performance insights and the financial position at the period's end.
• Enables management to make plans, decisions, and control activities.
• Systematic transaction recording eliminates the need to memorize transactions, by offering organized info.
• Accounting records allow the comparison of results across years to identify factors of change.
• Accounting records assist in settling income tax and GST, serving as accurate transaction documentation.
• Accounting offers performance data and security of loan insights, which facilitates loan applications to banks.
• Transaction records are court-accepted as evidence.
• Accounting enables proper purchase price, which facilitates business sales.
• Accounting records help with insolvency by explaining transactions that occured in the past.
• Accounting provides basis for settlement in partnership, which is crucial for admissions, retirements, deaths, or dissolutions.

Limitations of Accounting

• Accounting is not exact because of estimates for profit/loss like asset lifespan or stock value.
• Assets are recorded at historical cost and depreciated, which gives estimations that result in unrealistic info.
• Accounting is limited to monetary items, which makes qualitative aspects like management skills be ignored.
• Financial statements are based on historical cost.
• Accounting is presumed money value will remain stable however price level changes are not considered can incorrect financial results.
• Window dressing is where financial statements are manipulated by concealing vital insight and improving performance.
• The income statement doesn't show true figures and the balance sheet lacks an accurate financial position.

Role of Accounting in Business

• Accounting maintains systematic data to determine profit or loss and enterprise financial standing when needed.
• Accounting aids the management of financial data for decision-making.
• Accounting enables year-over-year comparisons and reason identification.
• Accounting records are accepted as evidence in court
• Accounting obviates the requirement to memorize transactions by keeping accounting records.
• Accounting aids to raise loans
• Accounting aids business sales by determining purchase price
• Accounting aids in tax liabilities

Accounting Process

• Accounting involves identifying financial transactions, recording, classifying, summarizing, analyzing, interpreting, and communicating.

Branches of Accounting

• Financial accounting deals with maintaining books of accounts to determine financial performance.
• Cost accounting records costs.
• Management accounting delivers data to management.

Financial Accounting

• Involves recording, summarizing, interpreting, and communicating financial data, determining profit/loss and financial position at period end.

Cost Accounting

• It ascertains the cost of products and helps management in decision-making, i.e., price fixing and controls.

Management Accounting

• It gives management data relating to funds, costs, and profits for decision-making.

Bookkeeping

• Part of business accounting, to record all financial transactions and events.
• Book Keeping involves:
• Identifying financial transactions and events
• Measuring them in terms of money
• Recording the identified financial transactions and events in the books of account
• Classifying recorded transactions and events, i.e., posting them into ledger accounts

Book Keeping Definitions

• Book Keeping: "Book Keeping is an art of recording in the books of account the monetary aspect of commercial and financial transactions."
• Book Keeping: "Book Keeping is an art of recording business dealings in a set of books."
• Book Keeping: "Book Keeping is the science and art of recording correctly in the books of account all those business transactions that result in the transfer of money or money's worth."

Accounting Definitions

• Accounting identifies, records, classifies, summarizes, assesses, interprets, then communicates monetary transactions in understandable ways.
• Accounting starts where bookkeeping ends and involves identifying transactions, measuring in money, recording, classifying and summarizing.

Book Keeping vs Accounting

• Accounting involves summarizing, interpreting, and communicating data; bookkeeping focuses on identification, measuring, recording, and classifying.
• Bookkeeping is primary as accounting begins where bookkeeping ends.
• Bookkeeping's main purpose is to keep financial transactions systematically recorded.
• Accounting aims to assess operations' results and finances and communicates data.
• Bookkeeping is a routine job needing little training; accounting needs skilled staff.
• The nature of bookkeeping is mechanical, while accounting has special skills.

Accountancy Definitions

• Accountancy is the orderly knowledge of accounting, to educate the reason to maintain and summarize accounting for users, to communicate it to them.
• Accountancy includes the rules and practice of accounting.
• Accountancy is expertise, whereas accounting uses the rules and principles formed by accountancy.

Double Entry Book Keeping

• Book Keeping refers to primary financial recording.
• Accounting refers to secondary summary and prep of data.
• Accountancy refers to theory that aids accounting practice.

Accounting Information

• Is a service to the economic world.
• The accounting information provides qualitative financial info.
• Collects financial data, records it, classifies and communicates it.
• Accounting produces an end product of information to users, in the financial statements (i.e., Income Statement and Balance Sheet).

Accounting Information types

• Relating to profit or loss: Income Statement indicates results of business operations during the period.
• Relating to financial position: Balance Sheet indicating financial position, i.e., assets, liabilities and owner's capital.
• Information relating to cash flow: Cash Flow Statement showing movements of cash during specific period.

Qualitative Characteristics of Accounting Information

• Accounting information ‘True and Fair" to be useful.
• Reliability to be free from bias and error.
• Relevance to be user relevant for decision-making.
• Understandability to be easy in format.
• Comparability to enable comparative analysis across accounting.

Users of Accounting Information

• Internal users access detailed accounting records for decision-making.
• External users rely on financial statements for pertinent insights.

Internal Users

• Owners provide capital who need to know profit/loss, money safety and decision to invest more or withdraw.
• Management is involved in day to day operations and needs accounting information: strategy, pricing, assess company performance, future etc.

External Users

• Employees and workers gain compensation, to base their decisions on company performance.
• Accounting also shows compliance with labour regulations.
• Banks and financial institutions are the organizations which provide loans to business enterprises, to determine safety of investment by lending money and repayment.
• Potential investors want to know the enterprise investment security and returns.
• Creditors want to know if the enterprise will use their goods or services on credit.
• Government needs financial statements on total tax amount and policy decisions.
• Financial statements show whether the amount of taxes are accurate.
• the Public needs information on the economy's contributions, etc.
• Researchers need accounting.

Systems of Accounting,

• Double entry system.