WHAT ARE THE BASICS OF ACCOUNTING

What Are The Basics Of Accounting
What Are The Basics Of Accounting

Hi Everyone My Name Is Osama Khan, In This Article, I Will Share a lot Of knowledge About The Basics Of accounting. Such as,

  • Definitions Of Accounting.
  • Meanings Of Accounting.
  • Book-keeping The Basis Of Accounting.
  • Functions Of Accounting.
  • Characteristics Of Accounting.
  • Objectives Of Accounting.
  • Advantages Of Accounting. 
  • Disadvantages Of Accounting and Many More About Accounting.
So First Of All We Will Discuss Definitions Of Accounting,

DEFINITIONS OF ACCOUNTING

"The process of collecting, recording, summarizing and communicating financial information".

OR

"Accounting is 'an art of recording, classifying and summarizing in a significant and in terms of money transactions and events which are in part at least, of a financial character, and interpreting the result".

OR

"Accounting is a service activity. its function is to provide quantitative information primarily financial in nature, about economic entities that is intended to be useful in making economic decisions in making reasoned choices among alternative courses of action".

MEANING OF ACCOUNTING

Accounting may be defined as, the process of collecting, recording, summarizing and communicating financial information. According to the American institute of certified public accountants (AICPA),"Accounting is 'an art of recording, classifying and summarizing in a significant and in terms of money transactions and events which are in part at least, of a financial character, and interpreting the result thereof'.

The accounting principles board (APB) defined Accounting in the following words. "Accounting is a service activity. its function is to provide quantitative information primarily financial in nature, about economic entities that is intended to be useful in making economic decisions in making reasoned choices among alternative courses of action".

Accounting includes several branches, e.g., financial accounting, managerial accounting and government accounting'. on this basis keiso and Weygandt observed that accounting is :

  1. A service activity which provides quantitative financial information to help make decisions regarding deployment and use of resources;
  2. A descriptive/analytical discipline which defines, measures, classifies and summarizes data relating to economic transactions.
  3. An information system which collects and communicates economic information about in economic activity to a variety of concerned people.

BOOK KEEPING - THE BASIS OF ACCOUNTING

Bookkeeping is an activity concerned with the recording of financial data relating to business operations in a significant and orderly manner. bookkeeping is the record-making phase of accounting. accounting is based on a careful and efficient bookkeeping system.

The main purpose of accounting for business is to ascertain profit or loss for the accounting period. In an accounting period, there may be numerous financial transactions involved in the business. Without a proper method of recording transactions, it is not possible to remember the various financial receipts and payments taking place during a period of time.

The essential Idea behind maintaining bookkeeping records is to show correct position regarding each head of income and expenditure. a business may sell goods on credit as well as in cash. When the goods are sold on credit, a record must be kept of the person owing money.

The owner of the business may like to know, from time to time. What amount is due on credit sales and from whom. Likewise a business makes several payments on account of various expenses at regular intervals. If proper record is not maintained, it is not possible to get details of the transactions in regard to the expenses.

At the end of the accounting period owner wants to know how much profit has been earned or loss has been incurred during the course of the period. For this, a lot of information is needed which can be gathered from a proper record of the transactions. Therefore bookkeeping the proper maintenance of books of account, is indispensable for any business.

The main objectives of bookkeeping are :

  1. To have a permanent record of each transaction of the business and to show its financial effect on the business.
  2. To ascertain the combined effect of all the transactions made during in accounting period upon the financial position of the business as a whole.

FUNCTIONS OF ACCOUNTING

According to moonitz, the functions of accounting are :

  1. To manage the resources held by specific entities;
  2. To reflect the claims against and the interests in those entities;
  3. To measure the changes in those resources, claims and interests;
  4. To assign the changes to specifiable periods of time; and,
  5. To express the above in terms of money as a common denominator.

CHARACTERISTICS OF ACCOUNTING

Modern accounting possesses the following basic characteristics :

  1. Accounting involves recording of economic activities which accompany the complexity and uncertainty of business. therefore, while preparing timely accounting statements, estimates and professional judgements must be made.
  2. Accounting statements are prepared on (a) cash basis of accounting, which recognizes an event as a transaction only when cash is received are paid, or (b) accrual basis of accounting. which recognizes revenues earned and expenses incurred as transactions.
  3. Accounting is historical in nature - it is the recording of past happenings.

OBJECTIVES OF ACCOUNTING

This includes providing reliable information about :

  1. Changes in financial position resulting from the income-producing efforts of an enterprise;
  2. Earnings of an enterprise, presented in a manner that emphasizes sources and trends of earnings;
  3. Economic resources and obligations of an enterprise;
  4. Changes in net financial resources which result from the financial and investment activities of an enterprise; and,
  5. Any additional information, in the form of disclosures, which is relevant to statement users in assessing a particular enterprise's prospects.

ADVANTAGES OF ACCOUNTING

  1. It provides information useful for making economic decisions.
  2. It service primary those users who have limited authority, ability or resources to obtain information and who rely on financial statement as their principal sources of information about an enterprises economic activities.
  3. It provides information useful to investors and creditors for predicting, comparing and evaluating potential cash flows in terms of amount, timing and related uncertainty.
  4. It supplies information useful in judging the management's ability to utilize enterprise resources effectively in achieving primary enterprise goals.
  5. It provides factual and interpretative information about transactions and other events which are useful for predicting, comparing and evaluating the enterprise's earning power.

DISADVANTAGES OF ACCOUNTING

  1. Accounting is historical in nature, it doesn't reflect the current financial position or worth of a business.
  2. The profit and loss account tends to match current revenues with historical costs (expenses) rather than current costs.
  3. Accounting statements do not show the impact of inflation.
  4. The profit and loss account doesn't reflect those increase in net asset values which are not considered to be realized.
  5. Accounting principles are not static are unchanging alternative accounting procedures are often equally acceptable. therefore, accounting statements do not always present comparable data.