Introduction to Accounting

• Accounting is a process of recording, summarizing, analyzing, and interpreting financial transactions.
• Provides useful information for decision-making
• Helps businesses track income, expenses, and overall financial performance.

Nature of Accounting

• Systematic process involves recording and organizing financial transactions.
• Quantitative aspect focuses on numbers and financial data.
• Financial communication provides relevant information to stakeholders.
• Acts as a decision-making tool that helps businesses plan, control, and evaluate performance.
• Ensures legal compliance, making sure businesses follow financial regulations and tax laws.

Function of Accounting

• Recording transactions involves keeping a systematic record of all financial activities.
• Classifying & summarizing organizes data into meaningful reports.
• Analyzing & interpreting assists management in making informed decisions.
• Financial reporting prepares financial statements like income statements and balance sheets.
• Taxation & compliance ensures businesses meet legal and tax obligations.
• Budgeting & forecasting assists in future financial planning.

History of Accounting

• Ancient accounting originated over 7,000 years ago in Mesopotamia with record-keeping on clay tablets.
• Luca Pacioli (1494) is known as the "father of accounting" and introduced the double-entry bookkeeping system.
• The industrial revolution led to the need for systematic financial reporting.
• Modern accounting developed with the establishment of accounting principles and standards (GAAP, IFRS).

Branches of Accounting

• Financial accounting records and summarizes financial transactions for external reporting.
• Prepares financial statements
• Follows standardized principles like GAAP or IFRS and is used by external shareholders, investors, and creditors
• Managerial accounting provides financial information to managers.
• Includes budgeting and performance evaluation
• Focuses on internal users
• Government accounting manages public funds and ensures accountability in government finances.
• Complies with specific government standards
• Tracks budgets, expenditures, and revenues
• Auditing examines financial records for accuracy and compliance.
• Aims to detect fraud and errors
• Can be done internally or externally
• Tax accounting focuses on tax-related activities.
• Ensures compliance with tax laws
• Prepares tax returns and plans for tax efficiency
• Cost accounting analyzes costs of production and operations.
• Helps in setting prices and controlling costs
• Used in manufacturing and production industries
• Accounting education involves teaching and learning accounting principles.
• Includes concepts like bookkeeping and financial statement preparation
• Covers specialized areas like tax, cost, and forensic accounting
• Accounting research investigates accounting processes, theories, and policies.
• Analyzes accounting methods and financial reporting standards

Users of Accounting Information

• Internal users are within the organization.
• Owners & management use accounting data to make business decisions.
• Helps in budgeting, planning, and financial control.
• Employees & unions use it to assess the company's financial health and job security.
• Helps in salary negotiations and benefits planning.
• External users are outside the organization.
• Investors & shareholders evaluate financial performance before investing.
• Helps in decision-making regarding buying or selling shares.
• Creditors & lenders, including banks and financial institutions, assess the company's ability to repay loans and determine creditworthiness.
• Government & regulatory agencies ensure compliance with tax laws and financial regulations.
• Used for economic planning and policymaking.
• Customers & suppliers assess the company's financial stability before signing long-term contracts.
• Suppliers evaluate the company's ability to pay for goods and services.
• Public & media, including the general public, analysts, and media, use accounting data to understand business performance.

Types of Businesses

• Sole proprietorship: A business owned and operated by a single individual.
  • Advantages include ease of establishment and management, the owner keeps all profits, full control over decisions, and less government regulation.
  • Disadvantages include unlimited personal liability, limited access to capital, the business ends with the owner's death, and a heavy workload on the owner.
• Partnership: A business owned by two or more individuals who share profits and responsibilities.
  • Advantages include more financial resources, shared responsibilities and expertise, and being simple and easy to establish.
  • Disadvantages include unlimited liability for partners, disagreements between partners, and profits must be shared.
• Corporation: A legal entity separate from its owners, owned by shareholders.
  • Advantages include limited liability for owners, easier to raise capital, and perpetual existence (business continues despite owner changes).
  • Disadvantages include being complex and costly to establish, heavily regulated, and double taxation (corporate and personal tax).

Types of Businesses According to Activities

• Service: provides intangible products, such as professional skills, expertise, advice and other similar products.
• Merchandising: buys products at wholesale prices and sells at retail prices
  • Known as "buy and sell" businesses
  • Makes a profit by selling at higher prices than purchase costs
  • Sells products without changing their form
• Manufacturing: buys materials for creating a new product.
  • Transforms the purchased materials
  • Uses raw materials, labor, and factory overhead in production
  • Sells the finished products to customers