IMPORTANT ACCOUNTING TERMS AND CONCEPTS

IMPORTANT ACCOUNTING TERMS AND CONCEPTS

Profit making organisations are known as businesses. There are three main types of businesses; those selling services (such as dry cleaners, Motor workshops. Beauty salons, airlines etc.); those selling foods (such as food sellers, automobile dealers etc.); those manufacturing goods (such as automobile manufacturers, fans industries, sugar mills etc.).

A business entity is an economic unit, which enters into business transactions that must be recorded, summarised and repotted. The entity (organisation) is regarded as separate from its owner oc owners; the entity owns its own property and has its own debts. The purpose of accounting is to provide weful information about an organisation (an entity) to peofle who need such information but not about the personal affairs of me owner or owners. So it should be remembered that accounting is done for business activities (what is happening in the business organisation) and it is not concerned with the personal or private matters of the owner. For example, the owner purchases furniture for business use(this is a business activity and it should be recorded in books of accounts. But if he purchases furniture for his domestic use, it wilt not be considered as a business activity and will not be recorded in books of accounts. In the same •ay, the owner may have a personal bank account, a car, a house, and other property, but since these things are not a pan of the business, they are not included in the record of the business unit So, each organisation lor which accounting is done is an independent entity, separate from its owners, managers, customers, creditors, and all other persons and entities with which it deals.

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Objects of Accouting

Financial information is necessary, in order to run a business in an efficient manner. Reliable

information will be available only through keeping proper books of accounts.

Proper accounting is essential, if money is to be borrowed for the purpose of business. The tender will only agree to lend money when he is satisfied as to the solvency of the borrower. Information available from books of accounts is the means of measuring such solvency.

[3. Cash in hand can be verified and any defalcation can be detected, if proper books of accounts are maintained.

4. Payment of sales tax and income tax is only possible if books of accounts are maintained.

In case of any dispute, books of accounts can be produced hi the court of law as a documentary evidence.

Government fixes up fair prices, formulates industrial policy, prepares.economic plans, decides import-export quotas and does many other functions on the basis of accounting information available from books of accounts.

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Bracnches of Accounting

BRANCHES OF ACCOUNTING
In order to meet the .ever increasing demands made on accounting by different interested party* (such as owners, management, creditors, taxation authorities etc.) the various branches of accounting come into existence:
1.
FINANCIAL ACCOUNTING:
The main purpose of financial accounting is to ascertain the true result (profit or loss) of business operations during a particular period of time and to state the financial position of the business on particular point of time. Financial accounting produces general purpose reports for use by the great of people who are interested in the organization bu.1 who are not actively engaged in its day operation.
2. COST ACCOUNTING:
The main object of cost accounting is to determine the cost of goods manufactured or produced P the business. It also helps the management of the business in controlling the costs by indicating avoidable losses and wastes.
3. MANAGERIAL ACCOUNTING:
The object of this accounting is to communicate the relevant information periodically to management of the business to enable it to take suitable decisions.
It should be remembered that in this book, we arc concerned only with financial accounting Financial accounting is the oldest and the other branches have developed from it. The objects of financial accounting can only be achieved by recording business transactions in a systematic manner according set of principles.

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ACCOUNTING VERSUS ACCOUNTANCY

ACCOUNTING VERSUS ACCOUNTANCY

The two words "Accounting" and "Accountancy" are often used to mean the same thing. But it not correct Accountancy is the main subject(Accounting is one of its branches. The word "Accountancy tar extensive; i-e. the scope of accountancy is far wide .and extensive compared to Accounting. It covers entire body of theory and practice, e.g. Book-keeping, Accounting, costing, auditing, Taxation etc.

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BOOK-KEEPING VERSUS ACCOUNTING

A great deal of efforts goes into gathering and processing information about a concern before the facts end up in an accounting report. Much of the work required is clerical in nature and can be performed by office workers, machine and computers. The functions of Book-Keeping is to properly record the financial transactions in the books of account. But the function of Accounting is more extensive ( it has many other functions to do except recording transactions, e.g. classification, summarisation and interpretation'of transactions. Thus we see that Book-Keeping is confined to recording aspect of Accounting (It is a small and the simplest part of Accounting. Both .represent two different phases of the main subject "Accountancy". Book-Keeping is the first stage, while Accounting is the final stage, that is why, it is said

that Accounting starts where Book-Keeping ends. The function of Book-Keeping ends with the recording of transactions in the books of account. But the function of Accounting Is to classify the recorded transactions, summarise them, interpret them and collect and communicate necessary information to the management and olhej interested persons. Management performs its function on the basis of mis information, e,g. laying down rules and regulations, taking so many vitaUdecisions etc. Thus we may say that the function of Book-Keeping is primarily of clerical nature, while that of Accounting is concerned with organisational and administrative matters (it is more important and responsible.

Apparently, the functions of Book-Keeping seem to be less important than Accounting, but its necessity can hardly be denied. lust an article cannot be produced without raw material, similarly accounting function cannot be done without obtaining necessary data from Book-Keeping. Again, if there is any defect in raw material the article produced out of it will also be defective. Similarly, if there be any error or mistake in Book-Keeping, the accounting job will also be wrong and create anomalous situation. . Thus we can conclude that "Book-Keepers perform the routine, repetitive tasks of collecting and processing j financial information. Accountants are responsible for designing the systems within which Book-Keepcrs work; supervising the day-to-day work of book-keepers; recording unusual and complex transactions,! preparing, analysing and interpreting accounting reports; auditing the records; *nd -performing a'variety of] other complex accounting activities.

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Accouting major Concepts

1. CONNECTED WITH A MONETARY EVENT OR TRANSACTION:
Accounting must be in relation to a monetary event or transaction and the event or transaction must be measurable in terms of money. In other words, no accounting is possible for an event or transaction which is not measurable in terms of money, e.g. passing an examination, delivering lecture in a meeting, winning a game etc. These are events no doubt, but since these are not measurable in terms of money, there is no question of their accounting..
2. TRANSACTIONS AftE PROCESSED IN THREE DIFFERENT STAGES:
(•) Recording:
' In the first stage the transactions are recorded chronologically in the books of accounts.
(b) Classifying:
In the second stage the transactions of the same or similar nature are classified and recorded separately.
(c) Summarizing:
In the third stage all the necessary date and information are summarized on the basis of classified record of transactions and communicated to management and other interested persons.
(d) Interpretation:
In order to assertion the true position of a concern all the accounting data and information relating to it are analyzed and interpreted.
AH the above functions are performed on the basis of certain welt-defined and well-coordinated
rules and principles. An accountant must be familiar with all these rules and principles. In accounting we
will study all these rules and principles. >
Book-Keeping:
Book-keeping is the art of recording monetary transactions in the books of account in a proper manner. The books of accounts are recorded in such a way as will enable us to ascertain the complete and accurate result in the least possible time with minimum labor and cost.
Many authors have defined the terms "Book-keeping1 in different ways;
1. "Book-keeping means the recording of transactions, the record -making phase of
Accounting (it is only a small part of the field of Accounting and probably the simplest
pan." - Meigs, Johnson and Meigs.
2. "Book-keeping is the recording branch of Accounting."-- Encyclopaedia Britennica.
3. "Book-keeping is die art of recording in books of accounts the monetary aspect of
commercial or financial transactions." Northcot.
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ACCOUNTING: A BUSINESS LANGUAGE

ACCOUNTING: A BUSINESS LANGUAGE

Accounting is a language, a system that •communicates information. It is often referred to as d language of the business, although it is just as important in the operation of government agencies, cmtt colleges and other kinds of organisations.

You probably have some idea already of what the term accounting means. It is frequently used i every day conversation to mean "answering for responsibility," Managers of business concerns a answerable to owners, creditors, labour unions and Government agencies etc. Managers of govenune units are answerable to chief executives, boards, taxpayers and others. In fact, accounting was developed \ people, who were seeking better ways to gather and report useful information about organisations.

Some type of orderly system is needed to account for an organisation of any size and complex!! An accounting system is used to collect, process and report needed data about a business, government am or other type of association. Information* is usually .collected, processed and reported in financial ten which simply means that 'money' is the basis of measurement.

Many authors have defined the term "Accounting" in different ways. There is difference of open among the authors as to its precise definition as'the term 'accounting is so broad that it is difficult to give precise definition. However, several possible definitions are given below:

"The act of collecting, processing, reporting, analyzing, interpreting and projecting financi

information".

-"The system of providing quantified information about an organisation to people who need information."

"The process of identifying, measuring, and communicating economic.

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