1. Meaning and Definition of Accounting
Accounting is systematically recording, classifying, summarizing, analyzing, interpreting, and communicating financial information of an economic entity to interested users.
The American Institute of Certified Public Accountants (AICPA) defines it 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."
2. Attributes (Characteristics) of Accounting
- Identification of Financial Transactions and Events: Accounting records only those transactions and events that can be measured in terms of money. Non-financial events, however important, are ignored.
- Measuring the Identified Transactions: Transactions are quantified into a common measuring unit (rupees, dollars, etc.).
- Recording: The process of entering business transactions of a financial character in the books of original entry, i.e., the Journal.
- Classifying: Grouping similar transactions at one place. It involves transferring entries from the Journal to the Ledger accounts.
- Summarising: Presenting the classified data in an understandable and useful manner. It involves the preparation of Trial Balance, Trading Account, Profit and Loss Account, and Balance Sheet.
- Analysis and Interpretation: Assessing the financial data to help users make meaningful judgments regarding profitability and financial position.
- Communicating: Providing accounting information to internal and external users (e.g., management, banks, investors).
3. Branches of Accounting
- Financial Accounting: Concerned with recording financial transactions, summarizing them, and communicating the financial position and performance to stakeholders.
- Cost Accounting: Concerned with ascertaining the cost of products, operations, or processes, and assisting management in price fixing and cost control.
- Management Accounting: Concerned with presenting accounting information to management in a way that helps them in planning, controlling, and decision making.
4. Book-Keeping vs Accounting vs Accountancy
- Book-Keeping: The mechanical part of accounting focused on identifying, measuring, recording, and classifying financial transactions. It is routine in nature.
- Accounting: Starts where book-keeping ends. It includes summarizing, analyzing, interpreting, and communicating the recorded data.
- Accountancy: The systematic knowledge of accounting. It educates us on how to maintain books of accounts and how to summarize and communicate information.
5. Objectives of Accounting
- To maintain systematic records of business transactions.
- To calculate profit or loss: Done by preparing the Trading and Profit and Loss Account.
- To ascertain the financial position: Done by preparing the Balance Sheet.
- To provide information to various users: Management, banks, creditors, etc.
- To protect business properties: By maintaining proper records of assets.
6. Users of Accounting Information
- Internal Users: Management, Owners (Shareholders/Partners), Employees.
- External Users: Banks and Financial Institutions, Investors, Creditors, Government and Tax Authorities, Consumers, Public.
7. Basic Accounting Terms
- Business Transaction: An economic activity that changes the financial position of an enterprise.
- Capital: The amount invested by the owner in the business.
- Drawings: Amount of cash or value of goods withdrawn by the owner for personal use.
- Liabilities: Obligations or debts that the enterprise has to pay at some time in the future.
- Assets: Economic resources owned by the business, having a future economic value (e.g., Cash, Machinery, Goodwill).
- Debtors: Persons or entities who owe money to the enterprise for goods sold on credit.
- Creditors: Persons or entities to whom the enterprise owes money for goods bought on credit.
- Revenue: The gross inflow of cash, receivables, or other consideration arising in the course of ordinary activities (e.g., sales).
- Expenses: The cost incurred in producing and selling goods and services.
- Voucher: The documentary evidence in support of a transaction (e.g., cash memo, invoice).