BASIC KNOWLEDGE OF ACCOUNTING

 CHAPTER 1

BASIC KNOWLEDGE OF ACCOUNTING

The prime motive for doing business is to earn profit. To know the profit earned or loss incurred in a particular period, it is necessary to record the financial transactions for the same period. Financial accounting is an effective tool to record, classify, summarize financial transactions.

DEFINITIONS OF ACCOUNTING

Accounting maybe defined as;

“the art of recording, classifying, summarizing and interpreting the business transactions systematically and communicating business results to the interested users”

On analyzing the above definition, the following characteristics of counting emerges:

Ø Business transactions are described in monetary terms,

Ø Accounting is the art of recording and classifying different business transactions.

Ø In the accounting process, the business transactions are summarized and analyzed so as to arrive at a meaningful interpretation.

Ø In accounting business results are communicated to the interested users.

OBJECTIVES FINANCIAL ACCOUNTING

Ø Finding out various balances. Systematic recording of business transactions in accounting provides vital information about various balances like cash balance, bank balance, etc.

Ø Knowledge of business transactions. Systematic maintenance of book provides the detail of every transaction.

Ø Net profit or loss. Summarization in front of profit and loss account shows net profit or loss of business during a specified period.

Ø Knowledge of financial position. The balance sheet is prepared to depict the financial position of a business on a particular date. Financial position means what the business owns and what owns to others.

Ø Information to all users. After analysis and interpretation, business results are communicated to the users of financial information.

Ø Fulfilling legal obligations. Vital accounting information helps in fulfilling a legal obligations in time. Ex. Sales tax, income tax, etc.

Functions of financial accounting

Ø Recording business transactions. The first function of accounting is to keep recording of all business transactions.

Ø Communication of the financial position of the business.  The third function of accounting is to communicate the information of business income and financial position to interested parties like proprietors, investors, creditors, employees, etc.

Ø Calculation of business income and ascertaining financial position. In financial accounting, profit and loss account is prepared for the calculation of business income and balance sheet is prepared for ascertaining financial position of business. the balance sheet shows the assets and liabilities of the business.

Feature of financial business transaction.

Ø business transactions are business activities.

Ø Business transaction are monetary in nature.

Ø In business transactions, goods, and services are exchanged for the money.

Ø All business transactions of financial nature are recorded in the books of accountings.

Distinguish between book-keeping and accounting.

Basics of distinction	Book-keeping	Accounting
1.    Objective	The objective of book-keeping is to maintain records of business transactions.	Accounting aims at maintaining business records, calculation of business income, depiction of financial position of business and communicating of business results.
2.    Function	the function of book-keeping is to records business transactions as and when they take place.	The function of accounting is the recording, classifying, summarizing, interpreting business transactions and communicating the results.
3.    Scope	It has a limited scope. It is a part of accounting.	Its scope is wirer. Besides book-keeping, it includes classification, summarization, interpretation and communication.
4.    Level of knowledge	It does not require special knowledge. only elementary knowledge of accounting is sufficient.	In accounting advance and conceptual understanding is required.
5.    Basic	For recording business transactions, vouchers and other supporting documents are prepared.	Accounting works is carried on form records which are available from book-keeping.

Branches of accountings

Accounting has three main forms of branches, viz.., financial accounting, cost accounting and management accounting. These forms of accounting have developed to serve different objectives.

Ø Financial accounting. It is an important branch of accounting. It helps in recording classifying and summarizing business transactions. Financial statements are prepared under financial accounting. These statements are profit and loss account and balance sheet. Profit and loss account show the net profit or net loss and balance sheet shows the financial position of business. with the help of these statements, business results are communication periodically to the interested parties or users.

Ø Management accounting. It is the branch of accounting that seeks to furnished accounting, information to managers, so that they can take appropriate decision for the better management of business.

Ø Cost accounting. This branch of accounting is concerned with ascertaining of costs of various products or services produced by the firm. Cost accounting helps in control as cost incurred and also determining the selling price of products or services. Cost data provided by cost accounting also helps and guides management in making business decisions.