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NOTA UC01902-PERAKAUNAN UNTUK BUKAN AKAUNTAN

Basic Accounting Terminology

Accounting is the method of tracking money transactions in business or for personal

use. It monitors income, expenses and assets. An accountant can have a job as simple

as a bookkeeper running a one-person office or as a cost and analysis accountant in a

large corporation. Accounting has a language all its own, but there are basic terms

everyone who uses accounting must know.

Ledgers and Subledgers

o A ledger is the foundation of the financial records of a business. All money

transactions recorded in a ledger are a permanent record. Subledgers are

used for tracking items such as accounts payable, accounts receivables,

credits and debits. Normally, when one entry is made to one subledger,

another one is posted to a different ledger to create a balance. This is

called balancing the ledger, just as you would a checkbook ledger. A

ledger creates a paper trail for all financial transactions.

Debit and Credits

o Debits and credits are based on the accounting system that every

transaction has two parts. The debit is what you received and is in the

form of money, income or other assets. A credit is applied to where you

got the item from. For example, you buy a new cell phone using your

credit card. Since the cell phone is what you received, it results in a debit

to your assets. The credit will be applied to your credit card for the same

amount, increasing your liabilities or debt. Determining a credit or a debit

is easy if you remember that a debit increases your assets and can be in

the form of money, equipment or accounts receivables; and credit will

increase liabilities and equity and decrease assets.

Assets and Liabilities

o Assets are anything you own and include money, investments and items

of value and can be anything from land to a car or building you own.

Entries into a ledger for assets always post in dollars for its value.

Liabilities are anything you own such as debts including a car payment or

mortgage.

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Income and Expenses

o Income and expenses in simple terms is money earned is income and

money spent is an expense. Income can be money that you have earnedbut not received as well as money you have received. Expenses can be an

expense that has not been paid but that you still owe or money you have

paid.

Accounts Payable and Receivable

o Accounts payable and receivable are money you have earned and not yet

received or money that has to be paid and that you have not paid yet.

Accounts payable is the money you owe but have not yet paid. It can be

for anything, such as mortgage payments, health insurance or for anyother goods or service. Accounts Receivable is money that is owed to you

and not yet received. It can be income, or money from an item you have

sold or service that you have provided.

Equity

o Equity is the amount of ownership value that you have in a home,

business or item, such as car or equipment. For example, if you own a

home but have a mortgage, the equity is the value of the home, minus

your loan amount.

Definition of Accounting

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

is also defined as the process of identifying, measuring and communicating economic

information to permit informed judgment and decision by users of the information.

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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 financial character and

interpreting the results thereo.

Accounting Various Feild

General Accounting or Financial Accounting

- is concerned with the recording of transactions for a business or other economic unit

and the periodic preparation of statements from these records.2..

Auditing

- a service rendered by CPAs in public practice who examine records andstatements and

express an opinion regarding their fairness.3.

Cost Accounting

- emphasizes the determination and the control of costs particularlythe costs of

manufacturing processes and of the manufactured products.4.

Management Accounting

- concerned with the application of appropriate techniquesand concepts in processingthe historical and projected economic data of an entity,to assist management in setting

up reasonable economic objectives and in makingrational decisions towards the

attainment of these objectives.5.

Tax Accounting

- includes the preparation of tax returns and the consideration of thetax consequences

of proposed business transactions.6.

Accounting Systems

- concerned with the creation of accounting and office proceduresfor the accumulation

and the reporting of financial data.7.

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Budgetary Accounting

- represents the plan of financial operations for a period andthrough accounts and

summaries, provides comparisons of actual operations withthe predetermined plan.8.

Government Accounting

- specializes in the transactions of political units with regardto the business aspect of

public administration. It mainly focuses on the proper custody of government funds and

their purposes.9.

Accounting Education

- is perhaps the most obvious field of specialization. In additionto teaching, many

accounting professors engage in auditing, tax accounting or other areas of

accounting.10

Internal Auditing

- deals with determining the operational efficiency of the companyregarding protection

of the companys assets, accuracy and reliability of theaccounting data, and adherence

to prescribed managerial policies.11

International Accounting

- encompasses special accounting for internationaltransactions, comparisons of

accounting principles in different countries, andharmonization of diverse accountingstandards worldwide and tax requirements of all the countries in which the company

does business.12.

Not-for-profit Accounting

- deals with special accounting for charitable organizations, philanthropic foundations,

religious groups, governmental agencies, schools and cooperatives. They may earn

profits but they dont distribute the profits to owners instead it is used for the benefit of

the public which they serve.13.

Socio-economic Accounting

- concerns the measurement of the impact of business or governmental agencys

decision on the public sector. This also includes aspecialized study on environmental

accounting.

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Purpose of Accounting Information

Types

Two types of accounting methods may be used to prepare financial information:

management or financial. Management accounting does not follow any specificguidelines or standards and is usually prepared for internal review during

business decisions. Companies use management accounting to collect internal

business information relating to the company's cost of producing goods or

services. Financial accounting follows national accounting principles and is

prepared for internal and external users interested in information, such as sales

revenues, gross profits, assets, liabilities or other important information.

Function

Accounting information helps individuals understand how well the company usesits economic resources or business inputs to produce goods and services. This

information helps business owners understand their company's profitability and

helps lenders or investors determine if they want to invest money in the

company for a future financial return. Financial accounting information is usually

the best way for companies and investors to determine the overall financial

health of businesses.

Features

Financial accounting prepares the company's information into three basicfinancial statements: the income statement, balance sheet and statement of cash

flows. The income statement lists information regarding the company's sales to

consumers or other businesses, the cost of goods sold, money spent to produce

these sales and the company's net profit. The balance sheet presents a snapshot

of the company's current financial wealth by listing all assets and liabilities

owned by the business. The statement of cash flows shows how well the

company earned cash during specific time periods.

Considerations

Companies may choose to implement a computerized accounting software

system to enhance their financial information reporting capability. Automating

accounting systems can help companies ensure that financial information is

collected in an accurate and timely manner. Accounting software is usually

customizable depending on the size and scope of the company's financial

information and business operations. The ability to transfer accounting

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information electronically can also allow companies to operate multiple locations

in various domestic or international geographic economic markets.

Expert Insight

Financial accounting information is governed by the Financial AccountingStandards Board (FASB), a private sector organization responsible for developing

generally accepted accounting principles (GAAP). GAAP is the national accounting

standards companies are required to use when reporting financial information to

internal and external users in the United States. Publicly held companies are also

required to meet the accounting standards created by the Sarbanes-Oxley Act of

2002 and other requirements issued by the U.S. Securities and Exchange

Commission (SEC).

Users of Accounting Information - Internal & External

Accounting information helps users to make better financial decisions. Users of

financial information may be both internal and external to the organization.

Internal users (Primary Users)of accounting information include the following:

Management: for analyzing the organization's performance and position and

taking appropriate measures to improve the company results.

Employees: for assessing company's profitability and its consequence on theirfuture remuneration and job security.

Owners: for analyzing the viability and profitability of their investment and

determining any future course of action.

Accounting information is presented to internal users usually in the form of

management accounts, budgets, forecasts andfinancial statements.

External users (Secondary Users)of accounting information include the following:

Creditors: for determining the credit worthiness of the organization. Terms of

credit are set by creditors according to the assessment of their customers'

financial health. Creditors include suppliers as well as lenders of finance such as

banks.

Tax Authourities: for determining the credibility of the tax returns filed on

behalf of the company.

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Investors: for analyzing the feasibility of investing in the company. Investors

want to make sure they can earn a reasonable return on their investment before

they commit any financial resources to the company.

Customers: for assessing the financial position of its suppliers which is

necessary for them to maintain a stable source of supply in the long term.

Regulatory Authorities: for ensuring that the company's disclosure of

accounting information is in accordance with the rules and regulations set in

order to protect the interests of the stakeholders who rely on such information in

forming their decisions.

External users are communicated accounting information usually in the form of financial

statements. Thepurpose of financial statementsis to cater for the needs of such

diverse users of accounting information in order to assist them in making sound

financial decisions.

Accounting is a very dynamic profession which is constantly adapting itself to varying

needs of its users. Over the past few decades, accountancy has branched out into

differenttypes of accountingto cater for the different needs of the users.

ACCOUNTING ASSUMPTION

Assumptions are traditions and customs, which have been developed over a period

of time and well-accepted by the profession. Basic accounting assumptions provide a

foundation for recording the transactions and preparing the financial statements

there from. There are four basic assumptions that are considered as cornerstones of

the foundation of accounting.

These are:

1.Accounting entity,

2. Money measurement,

3. Going concern and

4.Accounting period.

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Accounting Entity Assumption

Accounting entity assumption states that the activities of a business entity be kept

separate from its owners and all other entities. In other words, according to this

assumption business unit is considered a distinct entity from its owners and all other

entities having transactions with it. For example, in the case of proprietorship, the

law does not make any distinction between the proprietorship firm and the

proprietor in the event of firm's inability to pay its debts. Hence, in this situation, to

meet the deficit, law requires the proprietor to pay firm's debts from his/ her

personal assets. But, these two are treated as separate entities while recording

business transactions and preparing the financial statements.

This assumption enables the accountant to distinguish between the transactions of

the business and those of the owners. Consequently, the capital brought into the

business and withdrawals from the business by the owners will also be recorded inthe same manner as that of transaction with other entities. For example, if the

owner brings in cash or any other asset, it will result in increase in assets of the

business and capital of the firm. This capital represents firm's liability to the owner.

The expenses of the owner paid by the firm assets are recorded as withdrawals from

the business. This means the profit and loss account will show the revenues and

expenses related to the business entity only. Consequently, balance sheet will show

the assets and liabilities of the business entity only. This assumption is followed in

all organizations irrespective of their form, i.e., sole proprietorship, partnership,

cooperative, or company.

Role of Accounting

Accounting is not an end in itself; it is a means to an end. It performs the service

activity by providing quantitative financial information that helps the users in

making better business decisions....

Accounting Principles

Basic accounting principles are the general decision rules which govern the

development of accounting techniques. These principles, do not violate or

conflict with the four basic assumptions discussed above,...

Basic Terms in Accounting

There are two basic financial statements which are prepared by an enterprise:

Profit & Loss Statement, and Balance Sheet. The three components of a balance

sheet can be stated in the form of following...

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Money Measurement Assumption

This assumption requires use of monetary unit as a basis of measurement, i.e., the

currency of the country where the organization is to report its operations. This

implies that those transactions which can not be measured by monetary unit will not

be recorded in the books ofaccounts. Monetary unit is supposed to provide a

common yardstick to measure the assets, liabilities and equity of the business. The

different items, expressed in varied basis of measurement, like area, volume,

numbers, cannot be added together because of heterogeneity of scales of

measurement. But, once all these are converted into a homogeneous unit ofmoney,

they can be added together or subjected to any arithmetical calculations. It also

indicates that certain information; howsoever important it may be to state the true

and fair picture of the entity, will not be recorded in the financial accounting books if

it can not be expressed in terms of money. For example, the union-management

relations, health of the key manager, quality of its manufacturing facilities, etc. cannot be expressed in monetary value, and hence, are not recorded in books of

accounts.

It is clear from the above that money measurement assumption makes the

accounting records clear, simple, comparable and understandable. The acceptability

of money as a unit of measurement is not free from problems when we compare the

financial statement over a period of time or integrate the financial statements of an

entity having operations in more than one nation. This is to be noted that the

assumption implies stability of measuring unit over a period of time. This may not be

true over a period of time because prices of goods and services may change, hence,

the purchasing power (value) of money may undergo changes. But these changes

are not usually recorded. This affects the comparability of the financial statements

prepared at different time periods.

Going Concern Assumption

The financial statements are prepared assuming that the business will have an

indefinite life unless there is evidence to the contrary. The business is called 'going

concern' thereby implying that it will remain in operation in the foreseeable future

unless it is to be liquidated in the near future. Since, this assumption believes in

continuity of the business over indefinite period, it is also known as continuity

assumption. The going concern assumption facilitates that distinction made

between:

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fixed assets and current assets,

Short term and long term liabilities, and

Capital and revenue expenditure.

Trial Balance

A trial balance is a summary of balances of all accounts recorded in the ledger.

The trial balance is prepared at the end of a chosen period which may either be

monthly, quarterly, half-yearly or annually or...

Suspense Account

In spite of best efforts, locating errors is not an easy task and may take some

time. Unless detected and located, errors cannot be corrected. To avoid delay in

the preparation of financial statements, the...

Accounting Period Assumption

We have stated in the previous paragraph that accountants assume business to be

in activities in the foreseeable future. Therefore, results of business operations

cannot be truly ascertained before the closure of the business operations. But this

period is too long and the users of the accounting information cannot wait for such a

long period of time. Hence, the accountants make the assumption of accounting

period (also known as periodicity assumption). This assumption permits the

accountant to divide the lifespan of the business enterprise into different time

periods known as 'accounting period' (quarterly, half-yearly, annually) for the

purpose of preparing financial statements. Hence, financial statements are prepared

for an accounting period and results thereof are reported on periodic basis.

This assumption requires that the distinction be made between the expenditure

incurred and consumed in the period, and the expenditure, which is to be carried

forward to the future period. The cut off period for reporting the financial results is

usually considered to be twelve months. Usually the same is true for tax purpose.

However, in some cases accounting period may be more or less than 12 monthsdepending on the needs of business enterprises. For example, a company can

prepare its first financial statements for a period of more than or less than one year.

Currently, the interim reports issued by the company, though un-audited are not

less reliable. Such information is considered to be more relevant for decision-makers

because of timeliness and certainty of information.

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This assumption requires deferring of costs that are not related to the revenues of

the current period. The assumption of continuity allows depreciation on fixed assets

to be charged in the profit & loss account and show the assets in the balance sheet

at net book value (cost of acquisition less depreciation). The income measurement is

done on the basis of continuity assumption whereby unexpired costs are carried tonext period as assets and not charged to current years' income. In those cases,

where, it is reasonably certain that the business will be liquidated in the near future,

the resources may be reported on the basis of current realizable values (or

liquidation value). Also, in such a case, this fact needs to be clearly reported in the

financial statements.

Four Types of Financial Statements

Financial statements are the means by which companies and other types oforganizations measure and quantify their financial performance. Financial

statements can provide a trained financial analyst with a great deal of information,

from sales trends to asset allocation. According to the United States Securities and

Exchange Commission, there are four types of financial statements that companies

often prepare to report their financial information.

Income Statement

o An income statement, also known as a profit-and-loss statement, is a

financial document that indicates the sales, expenses and profit of anorganization during a specified time period. The income statement lists

the sales first, then lists direct materials and direct labor incurred while

producing the sales. Direct materials and direct labor, also called cost of

goods sold, are the materials used and the labor costs incurred during

production. The difference of the sales and cost of goods sold is the gross

margin, which is the profit that a company creates before deducting its

nonproduction costs. The net profit, which is calculated by deducting all

nonproduction-related costs, such as office supplies and executive and

administrative labor, is the bottom-line figure that shows how much

money the organization made.

Balance Sheet

o The balance sheet is a financial document that is prepared to show the

asset, liability and equity allocation of the company. The balance sheet is

prepared by listing the assets, which include cash and cash equivalents,

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receivables, prepaid assets and property, the plant, and equipment. The

liabilities follow the assets on the balance sheet, which include payables,

accrued wages and other monies that are owed to another entity.

Shareholder equity, also called owner's equity in an organization that is

privately owned, is the difference between assets and liabilities. Thebalance sheet should have the assets equal to the liabilities and

shareholder/owner's equity.

Statement of Cash Flows

o The statement of cash flows is a financial document that demonstrates

the ability of the organization to raise cash. This document details the

three main ways that an organization raises cash: operations, investing

and financing. The cash flow from operating activities is the amount of

cash that is raised or lost as a result of the net profit or loss createdduring a specified time period. Cash flows from investing activities details

the cash flows created from buying or selling long-term assets or

investment products. Cash flows from financing activities details the cash

flows created from selling company stock or from acquiring funds from a

bank loan.

Statement of Shareholder/Owner's Equity

o The statement of shareholder/owner's equity is a financial document that

is prepared to show the net difference in the equity of the company. Thisstatement is prepared by showing the beginning shareholder equity

amount, the increase or decrease in owner's equity by such activities as

issuing stock, paying dividends, and the net income or net loss. The

ending balance is the amount of equity the shareholders or owners have

in the organization.

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Recording Process in Accounting and Accounting Cycle

Accounting is the recording, analysis and reporting of events that are materially

significant to a company. Accounts contain records of changes to assets, liabilities,

shareholders' equity, revenues and expenses. The usual sequence of steps in the

recording process includes analysis, preparation of journal entries and posting these

entries to the general ledger. Subsequent accounting processes include preparing a

trial balance and compiling financial statements.

Basics: Debits and Credits

o Debits and credits are the basic accounting tools for changing accounts.

Debits increase the asset and expense accounts, and they decrease the

liability, equity and revenue accounts. Credits increase the liability, equity

and revenue accounts, and they decrease the asset and expense

accounts. Debits and credits are on the left and right sides, respectively,

of a T-account, which is the most basic form of representing an account.

Analysis

o The first step in the recording process is to analyze the transaction,

determine the accounting entries and record them in the appropriate

accounts. The analysis includes an examination of the paper or electronic

record of the transaction, such as an invoice, a sales receipt or an

electronic transfer. Common transactions include sales of products,

delivery of services, buying supplies, paying salaries, buying advertising

and recording interest payments. In accrual accounting, companies must

record transactions in the same period they occur, whether or not cash

changes hands. Revenue and expense transactions affect the

corresponding income statement accounts, as well as balance sheet

accounts. Some transactions may affect only the balance sheet accounts.

Journal Entries

o Journal entries are the second step in the recording process. A journal is a

chronological record of transactions. An entry consists of the transaction

date, the debit and credit amounts for the appropriate accounts and a

brief memo explaining the transaction. For example, the journal entries

for a cash sales transaction are to credit (increase) sales and debit

(increase) cash. Journal entries disclose all the effects of a transaction in

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one place. They are also useful in detecting and correcting errors because

the debit and credit amounts must balance at the end of a period.

Posting to Ledger

o The third and final step in the recording process is to post the journalentries to the general ledger, which contains summary records of all

accounts. Each record has fields for transaction date, comments, debits,

credits and outstanding balance. In the earlier sales transaction example,

the posting process involves entering a credit amount for the sales

account, a debit amount for the cash account and updating the respective

balances. The general ledger may be in the form of a binder, index cards

or a software application.

Trial Balance

Accountants define the trial balance as a tool to expose any error in accountbalances. It is an important part of the accounting cycle used to make sure allentries in the company accounts are entered correctly and the accounts are inbalance. All accounts with debit balances must equal all accounts with creditbalances. Trial balances are constructed at the end of an accounting periodbefore and after adjusting entries are made to the general ledger accounts andagain after the closing entries are made. Here's how to define the trial balance.

Closing Entries

Prepare closing entries at the end of the fiscal year to bring temporary accountbalances to zero and transfer these balances to balance sheet accounts.Temporary accounts include revenue, expense and capital withdrawal accounts,such as distributions and dividends. A special account, called the incomesummary, is often used to enter all the revenue and expense accounts tocalculate the company's net income for the period. The closing entries preparethe company books to begin recording the subsequent year's transactions.

Double-Entry Accounting

Double-entry accounting is the foundation of modern-day business recordkeeping. It sets the rules that corporate bookkeepers must follow when postingeconomic events. All accounting standards, including those in effect in thenonprofit arena, recommend that bookkeepers use the double-entry accountingmethod. In this method, each transaction affects two separate accounts, one onthe debit side of the general ledger and another on the credit side. A general

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ledger is a two-faceted accounting form that features credits and debits. Theledger often has subsidiary ledgers, or sub-ledgers, to allow bookkeepers torecord transaction details.

Accounting Cycle

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Debits and Credits

After you have identified the two or more accounts involved in a business transaction,

you must debit at least one account and credit at least one account.

To debit an account means to enter an amount on the left side of the account. To creditan account means to enter an amount on the right side of an account.

TIPS:

Debit means left

Credit means right

Generally these types of accounts are increasedwith a debit:

Dividends (Draws)

Expenses

Assets

Losses

You might think ofD E A L when recalling the accounts that

are increasedwith a debit.

Generally these types of accounts are increasedwith a credit:

Gains

Income

Revenues

Liabilities

Stockholders' (Owner's) Equity

You might think ofG I R L S when recalling the accounts that

are increasedwith a credit.

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To decreasean account you do the opposite of what was done to increase the account.

For example, an asset account is increased with a debit. Therefore it is decreasedwith

a credit.

T-ACCOUNTS

T-accountsAccountants and bookkeepers often use T-accounts as a visual aid for seeing the effectof the debit and credit on the two (or more) accounts. (Learn more about accountantsand bookkeepers in ourAccounting Careersarea.) We will begin with two T-accounts: Cash and Notes Payable.

Cash(asset account)

DebitIncreases an asset

Received $

CreditDecreases an asset

Paid $

Notes Payable(liability account)

DebitDecreases a liability

Repaid loan

CreditIncreases a liability

Borrowed more

Let's demonstrate the use of these T-accounts with two transactions:

1. On June 1, 2012 a company borrows $5,000 from its bank. This causes the company's assetCash to increase by $5,000 and its liability Notes Payable to also increase by $5,000. To increasethe asset Cash the account needs to be debited. To increase the company's liability NotesPayable this account needs to be credited. After entering the debits and credits the T-accountslook like this:

Cash(asset account)

Debit

Increases an assetReceived $

Credit

Decreases an assetPaid $

June 1, 2012 ENTRY 5,000

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Notes Payable(liability account)

DebitDecreases a liability

Repaid loan

CreditIncreases a liability

Borrowed more

5,000 ENTRY June 1, 2012

2. On June 2, 2012 the company repaid $2,000 of the bank loan. This causes the company's assetCash to decrease by $2,000 and its liability Notes Payable to also decrease by $2,000. To reducethe asset Cash the account will need to be credited for $2,000. To decrease the liability NotesPayable that account will need to be debited. The T-accounts now look like this:

Cash(asset account)

DebitIncreases an asset

Received $

CreditDecreases an asset

Paid $

June 1, 2012 ENTRY 5,0002,000 ENTRY June 2, 2012

June 2, 2012 BALANCE 3,000

Notes Payable(liability account)

DebitDecreases a liability

Repaid loan

CreditIncreases a liability

Borrowed more

5,000 ENTRY June 1, 2012June 2, 2012 ENTRY 2,000

3,000 BALANCE June 2, 2012

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