Accounting is a finance support system that
* Records transactions.
* Classifies transactions and events.
* Expresses transactions in monetary terms.
* Helps to monitor the financial performance and condition of Business. * Helps to evaluate the business.
* Helps to establish controls for the business.
Accounting helps to arrive at the financial position of an organization at any point of time. The organization’s financial status, as on a particular date, is captured in the balance sheet, .while financial performance for the year is summarized in a profit and loss statements.
A transaction is an event that changes the organization Fanacial position and/ or its earnings. For example, when you deposit cash in the bank, your cash balance reduces end bank balance. Increases when you sell goods for cash, your cash balance increases and your, stock reduces. Transactions can be classified as follows
* Receipts - cash or bank
* Payments — cash or bank
The essential function of accounting is to record transactions to ascertain the 'financial status of a company as on a particular date.
The usual transaction of business is
* Purchases of goods either as raw material for further processing or finished goods for resale. * Payment of expenses incurred towards business.
* Sale of goods or services.
* Receipts, in cash or via cheques.
* Other payments, in cash and cheque.
In the course of doing business, the parties dealt with are
* Supplier’s goods and services for cash or on credit.
* Customers buy goods or services for cash or on credit.
* Employees who provides services in exchange of salaries and wages * Banks with whom account are maintained.
* Suppliers of equipment, building and others assets needed to carry on the business. * Lenders from whom you borrow money to finance your business. * Owners who hold a share in the capital of your business.
Parties dealt with in a business process
Types Of Accounts
The three types of accounts maintained for transaction with parties are * Personal Accounts
* Real Accounts
* Nominal Accounts
Personal Accounts are the accounts of persons whom the business is required. Example include
Real Accounts are maintained for assets owned of possessed by the business. Example include
Nominal Accounts are accounts where income and expenses are recorded. Examples include
* Cost of goods sold
* Salary/ Electricity Expenses
Accounts can be broadly classified under the following five groups * Assets
* Capital Revenue
Accounting Principles; Concepts and Conventions
Accounting concepts form the basis for preparation of financial statements. Accounting statements, whether they are external "financial accounts" or Internally' focused "management accounts," should reflect the "true substance" o*" the business and the result of its operation. A number of principles, concepts and conventions are used to ensure that accounting information is presented accurately and consistently. Some of these concepts are briefly described the following sections. Realization
The realization principle deals with how revenue is recognition business. Revenue is recognized only when
* It is realized (when an assets is sold or exchanged)
* It is legally due and reasonably collectible
In an accounting period, the revenue that is reported must be set off against the expenses incurred to generate that revenue, This gives a true picture of the profit earned in that period.