Untitled Quiz

Study Notes

Accounting is the process of collecting, summarizing, analyzing, and reporting business information in monetary terms.
Different types of accounting exist for various purposes.

Financial Accounting is the original type. Its primary function is recording, classifying, summarizing financial transactions and preparing financial statements like the profit and loss statement (profit/loss) and the balance sheet. It aims to provide an overall operational result and furnish valuable information for outsiders like creditors and government authorities. The objective is to determine profit earned and financial position at the end of a year.
Cost Accounting is a specialized branch of accounting that focuses on classifying, accumulating, assigning, and controlling costs. Its major purpose is to determine the cost of production, assist management in setting product prices, and implement cost-reduction strategies. It's frequently used by manufacturing businesses.
Management Accounting focuses on providing information for decision-making within a business. It's used for internal planning, controlling, and evaluating business operations.
Tax Accounting records and reports tax-related information for compliance with tax laws.
Government Accounting maintains records and reports for government bodies, and includes public sector accounting.

Ascertaining Profit/Loss and Financial Position: It helps understand the financial health by determining profits generated and the company's financial position at a given time.
Facilitating Financial Statements: Helps create financial statements like the profit and loss statement and the balance sheet.
Assisting Management in Decision-Making: Provides essential information for management decisions, planning, and controlling business operations.
Recording Business Transactions: Maintains detailed records of the transactions in a systematic and organized manner.
Providing Proof in Court: Accounting records can provide evidence in legal proceedings if necessary.
Assisting with Tax Payments: Records transactions to correctly determine tax liabilities.
Cost Control: Identifying and reducing expenses to increase profitability in a timely and efficient manner.
Auditing Support: Necessary for credible and complete auditing.
Loan/Investment Decisions: Financial institutions use accounting information to assess a company's profitability and financial health.

Monetary Measurement Limitations: Only records transactions that can be measured in monetary terms.
Historic Cost Basis: Records assets at their original cost, not current market value.
Judgemental Accounting Policies: Decisions and judgments by accountants regarding accounting policies impact the final results.
Lack of Full Accuracy: Information may be an estimate, based on assumptions.
Window Dressing: Manipulation of accounting records to present a more favorable financial picture.
Secret Reserves: Some managements might intentionally create secret reserves through misleading financial records.
Maintaining Secrecy: Maintaining secrecy is often difficult and sometimes undesirable, especially in accounting.
Conflict of Accounting Principles: Different accounting principles might conflict, leading to inconsistencies.

Personal Accounts: Debit the receiver, credit the giver.
Real Accounts: Debit what comes in, credit what goes out.
Nominal Accounts: Debit all expenses and losses, credit all incomes and gains.

A trial balance is a statement that records the final balances of accounts in a business.
It's prepared at the end of an accounting period to check for mathematical accuracy in the book-keeping system.
It aids in preparing financial statements like the profit and loss account and balance sheet.