“Accounting is 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 a financial character and interpreting the results there of”. – American Institute of Certified Public Accountants (AICPA).
Importance and Necessity of Accounting:-
- Ascertaining Profit or Loss of a business
- Determining Financial Position
- Comparative Analysis
- Control over Expenses
- Income tax Calculation
- Making proper decision
- Protection of Fund Embezzlement
- Enhancing Financial Solvency
- Sanction of Loan
Accounting Objectives
Accounting serves multiple objectives, such as informing individuals and organizations about:
→ Profit or loss status;
→ The value of their business;
→ The significance of each transaction;
→ Their available cash;
→ Their overall wealth;
→ The amounts they are owed;
→ Their outstanding liabilities;
→ Sufficient information to monitor and manage their financial activities.
However, the primary objective of accounting is recording and organizing all financial transactions systematically and generating financial statements to evaluate the business organization’s financial position.
Users of Accounting Data:-
► Owner of the business
► Investors
► A prospective buyer
► Potential partner
► Managers
► Suppliers
► Tax authorities
Accounting Methods
i) Cash Basis Accounting ii) Accrual Basis Accounting
Accounting Cycle
The accounting cycle encompasses the comprehensive process of recording and managing all financial transactions of a business or company, starting from when the transaction takes place, to its reflection on the financial statements, and finally closing the accounts. A key responsibility of a bookkeeper is to oversee the entire accounting cycle from beginning to end. This cycle is repeated each fiscal year as long as the business or company continues to operate.
Individuals and Businesses
Accounting impacts individuals in their personal lives just as significantly as it affects large corporations. We all apply accounting principles when deciding how to manage our finances. We must determine how much money to spend and how much to save. This planning might be documented as a budget or simply kept in our minds.
Recording
However, when people mention accounting, they typically refer to its use by businesses and other organizations. The owners can’t remember all the details, so they need to maintain records. Organizations not only document cash received and paid out but also track goods purchased and sold, items bought for use rather than resale, and more. This aspect of accounting is often called data recording or Bookkeeping.
Classifying and Summarizing
When recording data, it must be structured to be most beneficial to the business. This process is known as classifying and summarizing data. Through such classifications and summaries, it becomes possible to determine the profit or loss the business has made during a specific period. Additionally, it will be possible to identify the resources owned by the business and its liabilities on the closing date of the period.
Insights
From the data, individuals proficient in accounting should be able to determine whether the business is performing well financially. They should be capable of identifying the strengths and weaknesses of the business. Ultimately, they must be able to convey their findings to the business owners or others authorized to receive this information.
Bookkeeping
Bookkeeping is the systematic recording, organizing, and maintaining of financial transactions of an organization or a company. It involves:
1. Recording Transactions: Documenting all financial activities such as sales, purchases, receipts, and payments in a chronological order.
2. Classification: Categorizing transactions into relevant accounts (e.g., assets, liabilities, revenues, expenses) to facilitate financial reporting and analysis.
3. Ledger Maintenance: Maintaining individual accounts (ledger accounts) for each type of transaction, summarizing all related entries.
4. Reconciliation: Ensuring accuracy by comparing and reconciling recorded transactions with bank statements, invoices, and other documents.
5. Financial Reporting: Providing the basis for preparing financial statements (such as the balance sheet, income statement, and cash flow statement) that reflect the financial position and performance of the organization.
Bookkeeping serves as the foundation for accounting, providing accurate and organized financial data.
Chart of Accounts
The chart of accounts is essential for companies to organize and manage their financial records according to standard accounting principles. It enables stakeholders to analyze a company’s financial performance effectively.
More Resources
Thank you for reading our resources on the Accounting Basic’s. Enhancing your knowledge more and progressing in your career, you may find the following guides helpful: