What is Accounting? Answerdocshare04.docshare.tips/files/3552/35523111.pdf · 2017-02-18 · 4 Chapter 1: Accounting in Action involves the entire process of identifying, recording

1Chapter 1: Accounting in Action

• What is Accounting?

Answer:

Accounting is an information system that identifies, records, & summarizes and communicates the economic events of an organization to interested users.

“Accounting is an information system that identifies records and communicates the economic events of an organization to the interested users.”

--- Weygandt/Kieso.

Accounting is simply the means by which we measure and describe economic activities. Whether someone managing a business, making investments or deciding how to spend their own money, they are working with accounting concepts and accounting information.

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Accounting is a Language of Business

Accounting often is called the “Language of business” because it is so widely used to describe all types of business activities. Costs, prices, sales volume, profits and return on investment- all are accounting measurements. Every investor, creditor (lender), and business manager needs a clear understanding of accounting terms and concepts if he or she is to effectively communicate and participate in the business community.

• Who are the users of Accounting?

Answer:

Users of Accounts:

Accounting communicates financial information, so it also called “the language of business”. The information that a user of financial information needs depends upon the kinds of decisions the user makes.

Users of account are two types

Internal Users

External Users

Internal Users

Internal Users of accounting information are managers who make plan, organize & Run a business. In running a business, managers must answer many important questions. To answer these and other questions, users need detailed information on a timely basis. For internal users, accounting provides internal reports. Internal users of accounting are- marketing managers, Production supervisors, Finance directors and company officers.

External Users



External users are those who are coming from outside a company and they must have known of a company’s accounting information. They are- Investors (owners), creditors such as suppliers and bankers use accounting information to evaluate the risks of granting credit or lending money.Taxing authorities’ needs and questions of other external users very considerably. They want to know whether the company compiles with the tax law, government may know the company’s economical condition.

Users of Accounting

• What are distinguishing between book keeping & accounting?

Answer:

Distinguishing between Bookkeeping & Accounting:

Many individuals think that bookkeeping and accounting is the same. They think it because the accounting process includes the book-keeping function. But in accounting there is much more things included.

Bookkeeping usually involves only the recording of economic events. It is the only one part of accounting. On the other hand, accounting



involves the entire process of identifying, recording and communicating economic events. Accounting may be further divided into financial accounting and managerial accounting

Accounting:

• Accounting is a four stage process of recording, classifying, summarizing and the interpretation of the financial statements.

• The four stage process is defined below:

• Recording- transactions being recorded in the books of the business

• Classifying- sorting and categorizing into meaningful and orderly types or manners

• Summarizing- the accounting data are summarized

• Interpreting- financial data are analyzed and used to assist decision making.

Bookkeeping:

Bookkeeping is a part of Accounting. It is merely a mechanical aspect of recording, classifying and summarizing transaction.

Therefore, keeping the books of accounts is always the theme in bookkeeping. The finer aspect of interpreting all these data into information for management to act upon is excluded.

NO. Bookkeeping Accounting01 Bookkeeping usually

involves only the recording of economic events.

Accounting process includes the bookkeeping function.

02 It is just one part of the accounting process to record the financial events of business.

Accounting involves the entire process of indentifying, recording, & communicating economic events



03 Its keep transaction by using double entry system.

Accountings process the recorded data of bookkeeping.

04 Accounting includes bookkeeping also includes much more.

Bookkeeping is the recording of economic event one part of accounting.

• Explain: Accounting is the role of business?

Answer:

Role of Accounting:

The role of any accounting system is to record, classify and report financial transactions. The role of any accounting system is to provide managers across the organization with information that facilitates:

• Control of activities and expenditure

• Refinement of operational plans

• Accountability

• Reporting on project outcomes

• The writing of bids for new funds

The role of accounting is to provide decision makers with useful information about economic events. This includes both information about recent activities and forecasts of what may happen in the future. All types of decision makers-managers, investors, lenders and consumers--use accounting information as a basis for making economic decisions. Think of accounting as an information system for decision makers.



Businesses do not prepare new financial statements after every transaction. Rather, they accumulate the effects of individual business transactions in their accounting records. Then, at regular intervals, the data in these records are used to prepare financial statements, income tax returns and other types of accounting reports. But the need for accounting reports is not only the reason business maintain accounting records.

Also working knowledge of accounting is desirable for virtually every field of endeavor. Some examples of how accounting is used in other careers include:

• General management: All general managers need to understand accounting data in order to make wise business decisions.

• Marketing: A marketing specialist develops strategies t help the sales force be successful. So marketing people must be sensitive to costs and benefits, which accounting helps them quantify and understand.

• Financial: In financial fields rely heavily on accounting. It is difficult to get a good job in a financial function without two or three course in accounting.

• What is Double Entry System?

Answer:

Method of keeping accounting:

Dr.

Cr.


Scientific method of keeping accounting (Luca Pacioli)

Double Entry System

Transaction


• What is event?

Answer:

Event: In business every financial occurrence is called event.

Example: In Business purchase furniture in cash tk. 15000.00

It is a financial event because of cash is flown here.

Economic events= Transactions

Event has two types. These are:

• Financial Event

• Non-financial Event

• What is Transaction & its characteristics?

Answer:

Transactions: is a business’s economic events recorded by accountants. Transactions (also called as business transactions) are the economic events of an enterprise that are recorded. Transactions may be identified as external or internal. External transactions involve economic events between the company and dome outside enterprise. Internal transactions are economic events that occur entirely within one company.

• May be external or internal.

• Not all activities represent transactions.

• Each transaction has a dual effect on the accounting equation.



TRANSACTION IDENTIFICATION PROCESS

Analysis

The ability to analyze transactions in terms of the basic accounting equation is essential for an understanding of accounting. Transactions analyses are given below:

• Investment by owner,• Purchase of equipment for cash,• Purchase of supplies on credit,• Services provided on cash,• Purchases of advertising on credit,• Services provided for cash and credit,• Payment of expenses,• Payment of accounts payable,• Receipt of cash on account,• Withdrawal of cash by owner.



• What is Golden Rule & Classification of accounts?

Answer:

The golden rules of accounting are as follows:

• Debit the receiver and credit the giver.

• Debit what comes in and credit what goes out.

• Debit all expense and loss and credit all income and gains.

The Classification of accounts:

Increase

Decrease

Purchase

Sales


Capital

Liabilities

Expense/Losses

Income/Gains

Asset

Credit

Debit

Credit

Debit

Credit

Credit

Debit

Credit

Credit

Debit

Debit

Debit

Credit

Debit

Credit

Cash Purchase

Credit Purchase {Creditor}

Cash Sales

Credit Sales {Debitor}

Accounts Payable

Accounts Receivable


• Flow chart of accounts?

Answer:

Flow Chart of Accounts

• What is Journal, ledger, trail balance, balance sheet?

Answer:

• Journal:

Journal means transaction that divided into Dr. & Cr. flowing the scientific method of keeping accounting. In a business everyday


Journal

Ledger

Trail Balance

Financial Statement

Transaction

Income Statement

Change in Owner Equity

Balance Sheet

Cash Flow Statement

Necessary Notes


transactions are initially recorded in chronological order in journals before being transferred to the accounts.

“The journal is a book of original entry in which transaction are recorded in chronological order”

---Wixozn & cox

Thus, the journal is referred to as the book of original entry. For each transaction the journal shows the debit and credit effects on specific accounts.

• Ledger:

Ledger means in Business to separate transaction by nature of transaction. An accounting system includes a separate record for each item that appears in the balance sheet.

“The ledger is the permanent storehouse of all the transaction”

---Arther Fieldhouse

The record of Ledger used to keep track of the increases and decreases in a single balance sheet item is termed a ledger account or simply an account. The entire group of accounts is kept together in an accounting record is called a ledger.

• Trial Balance:

Trail Balance is an arithmetic accuracy of the list of ledger account. A trial balance is a list of accounts and their balances at a given time. A trial balance is prepared at the end of an accounting period.

“The proof of the equality of debit and credit balance of all account is called trail balance.”

---W.B Meigs & R,F Meigs

A trial balance desirable to prove that the total of accounts with debit balances is in fact equal to the total of accounts with credit balances. A trial balance is a two-column schedule listing the names and balances of



all the accounts in the order in which they appear in the ledger; the debit balances are listed in the left-hand column and the credit balances in the right-hand column. The totals of two columns should agree.

Financial Statement:

• Income Statement revenues & expenses & resulting net income or net loss for a specific period of time.

• Owner’s Equity Statement changes in owner’s equity for a specific period of time.

• Balance Sheet is a statement of assets, liabilities, & owner’s equity at a specific date.

• Statement of Cash Flows cash inflows (receipts) & outflows (payments) for a specific period of time.

• What is the Basic Accounting Equation?

Answer:

The Basic Accounting Equation:

• Resources a business owns.



• Provide future services or benefits.

• Cash, Supplies, Equipment, etc.

• Claims against assets (debts and obligations).

• Creditors - party to whom money is owed.

• Accounts payable, Notes payable, etc.

•

• Ownership claim on total assets.

• Referred to as residual equity.



• Capital, Drawings, etc. (Proprietorship or Partnership).


Documents

What is Accounting? Answerdocshare04.docshare.tips/files/3552/35523111.pdf · 2017-02-18 · 4 Chapter 1: Accounting in Action involves the entire process of identifying, recording