Here are some basics of accounting like its definition, steps involved in it, book-keeping, objectives of accounting, functions and limitations of accounting for the beginners.
It is been tried to explain all these things in a quite easy manner.
Hope that it matches what you were looking for.
2. 1. ACCOUNTING
Accounting is an art of identifying,
recording, classifying, summarizing the
transactions which are of financial
nature then analyzing, interpreting, and
communicating the results there of.
It’s also called as ‘language of business.’
3. 2. STEPS INVOLVED IN ACCOUNTING
Some Steps in accounting are as follows:
(i) Identification of financial transactions
(ii) Recording
(iii) Classifying
(iv) Summarizing
(v) Analyzing
(vi) Interpreting
(vii) Communicating
4. 2. Steps in Accounting: Explanation
(i) Identification: Before anything, first step of
accounting is to identify whether the transaction is of
financial nature or not. It means, only those
transactions which can be measured in terms of
money are further recorded in books.
(ii) Recording: This is a basic function of accounting. All
the financial transactions are now recorded in books of
accounts i.e. journal books like purchase book, sales
book, purchase return book, sales return book, etc.
5. 2. Steps in Accounting: Explanation
(iii) Classifying: It is concerned with the systematic
analysis of the recorded data. Here, the transactions
which are of same nature are put at one place in a
small and easy to carry manner. This book containing
classified information is called a ledger.
Example: Salaries to different employees are paid on
different different dates and are recorded in journal book at
different places also but now we want to know the total
amount of salaries paid till date so for easy access to this
information, salaries account (ledger A/C) is prepared.
6. 2. steps in accounting: Explanation
(iv) Summarizing: Here, data is presented in such a
manner that is useful to internal as well as external
users of financial statements. This process leads to
preparation of financial statements :
(a) Trial Balance
(b) Profit and Loss Account
(c) Balance Sheet
(d) Cash Flow Statement
7. 2. Steps in accounting: Explanation
(v) Analyzing: It means methodical classification of the
data given in financial statements. These figures in
financial statements are to be in a simplified form. Eg:All
current assets at one place and all fixed assets at one
place.
(vi) Interpreting: It is simply concerned with explaining
the meaning and significance of the relationship as
established by the analysis of accounting data which
helps in decision-making about financial condition and
profitability of the business.
8. 2. Steps in accounting: Explanation
(vii) Communicating: It is concerned with revealing
the accounting information presented in financial
statements to the different stakeholders of the
business that will help them in making rational
decisions then.
9. 3. DIFFERENCE BETWEEN A
TRANSACTION AND EVENT
TRANSACTION
• Transaction simply
refers to performance
of an act in a business.
• Example: Sale of
goods.
EVENT
• Event refers to the
result of all the
transactions.
• Example: Closing
stock
10. 4. BOOK KEEPING
Book keeping is an activity concerned with the
recording of financial data relating to business
operations in a significant and orderly manner.
It is basically concerned with:
• Identification of financial transaction
• Measuring their monetary value
• Recording
• Classifying
11. DIFFERENCE BETWEEN BOOK-KEEPING AND
ACCOUNTING
BOOK-KEEPING
• It includes identification,
measurement of financial
transactions in terms of
money, recording and
classifying
• It is a primary stage.
• It is clerical in nature.
• There is no decision making.
ACCOUNTING
• It in addition to book-keeping
includes summarizing
transactions, analyzing,
interpreting and communicating
results .
• It is a secondary stage. It starts
where book-keeping ends.
• It is analytic in nature.
• It further leads in decision
making.
12. 5. OBJECTIVES OF ACCOUNTING
(i) Recording of Transactions: Basic objective of accounting is
to systematically record the financial aspects of business
transactions i.e. book keeping. These recorded transactions
are later on classified and summarized logically for
preparation of financial statements for analysis and
interpretation.
(ii) Ascertaining result of financial transactions: Profit and loss
A/C is prepared by accountant to know the result of
business operations for a particular period of time. It is
ascertained whether the business is profitably or under loss.
13. 5. OBJECTIVES OF ACCOUNTING
(iii) Ascertaining Financial Position of Business: Businessman is
not only interested in knowing the result of business(Profit
and Loss) but also wants to know the financial position of
business i.e. how much he owes to someone (liability) and
how much he owns (assets). For this purpose, Balance Sheet
is prepared that helps in ascertaining financial health of
business.
(iv) Communicating the Financial Results to Different Users:
Accounting as a language of business communicates the
financial results to various stakeholders as per their needs.
14. 6. FUNCTIONS OF ACCOUNTING
Measurement: Accounting measures past performances
of the business and depicts its current financial position.
Decision making: Accounting provides the needed
information be stakeholders to them and help in rational
decision making.
Control: Accounting helps in making analysis and decision
making in order to have a better control on various
aspects of a business.
Forecasting: Accounting helps in forecasting future
performances and financial position using past data and
current working of business.
15. 7. LIMITATIONS OF ACCOUNTING
• Non-Financial Transactions: Accounting only record
those transactions which are of financial nature and do
not record non-monetary transactions even when they
are of great importance to business and affect it.
Example: Inflation.
• Dynamic business Environment: Today’s business
environment is extremely dynamic so it is very difficult
to maintain accounts in this fast changing business
environment.
16. 7. LIMITATION OS ACCOUNTING
• Personal Judgment: Accountant has to exercise
their personal judgment in respect of various
items. For Example: It is difficult to ascertain the
actual useful life of an asset which is needed
while calculating depreciation. Here, different
persons give different opinions which results in
ascertainment of different figures of profit or
loss.
