'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 thereof.

Accounting is an information system which identifies, records and communicates

financial information to interested users.

Branches of accounting
The technological advancement and industrial and economical development have
resulted in the evolution of various types or branches of accounting over time. Some
popular types or branches of accounting are briefly discussed below:
• Financial accounting
• Management accounting
• Cost accounting
• Tax accounting
• Project accounting
• Not-for-profit accounting
• International accounting
• Government accounting
• Social accounting
• Forensic accounting
• Fiduciary accounting
• Auditing
1. Financial accounting: Financial accounting is concerned with the preparation of
periodic financial reports by using historical data of a business enterprise. The basic
purpose of these reports is to provide useful and timely information about an
entity’s financial position and its operating results to owners, managers, investors,
creditors and government agencies etc. Financial position refers to the resources and
obligations of a business at any given point of time and operating results means the net
profit earned or net loss incurred by a business enterprise during a particular period of
time.
There are certain rules known as “generally accepted accounting principles (GAAP)” that
each business enterprise must follow while preparing its financial reports to ensure that
the financial information published by it is useful, reliable and comparable with other
companies.
Financial accounting is also termed as the “general purpose accounting” because the
information generated by it is published for the use of everyone connected with the
business enterprise.
2. Management accounting: Management accounting system uses historical as well as
estimated data to generate useful reports and information to be used by internal
management for decision making purpose. Unlike financial accounting, the information
generated by management accounting is not published for external parties but is used by
managers to perform their core functions such as evaluation of various products and
departments in terms of profitability, selection of the best available alternatives and
making other business decisions to achieve organizational goals. As the reports generated
by management accounting are not used by any external party, the business enterprises
don’t need to take care of GAAP.
3. Cost accounting: The cost accounting is concerned with categorizing, tracing and
collecting manufacturing costs of a business enterprise. The cost data collected so is used
by management in planning and control. A well established cost accounting system is
essential for every business enterprise to have a proper control over costs.
4. Tax accounting: Tax accounting deals with the tax related matters of a business
enterprise. It includes computation of taxable income and presentation of financial or
other information to tax authorities required by tax laws and regulations of a country.
The reports and information generated by financial accounting system satisfy the needs of
external parties to great extent. However, the rules and methods followed by a company
for preparing its financial accounting reports may slightly differ from those required by
tax laws. The work of a tax accountant is to adjust the net operating results and rearrange
the information generated by financial accounting to conform with the tax reporting
requirements of a country. Besides it, tax accountants also help companies minimize their
tax obligations. Because of these functions, tax accountants need to have an updated
knowledge about tax laws and regulations.
Tax accounting is also important for managers because taxes usually have a significant
impact on the expected outcomes of proposed decisions.
5. Project accounting: Project accounting is a component of overall project
management. It is a specially designed accounting system that prepares financial reports
at appropriate intervals of time to track the financial progress of a project. These reports
provide vital information to project managers in performing their project management
function. The use of project accounting is very common among companies involved in
construction contracts.
6. Not-for-profit accounting: Not-for-profit accounting fulfills the accounting needs of
not-for-profit organizations (also known as non-trading concerns). It is concerned with
recording events, preparing reports, and planning operations of not-for-profit
organizations such as charities, churches, educational institutions, hospitals, government
agencies and clubs etc. The basic accounting principles and concepts used while applying
not-for-profit accounting are the same as used in regular or general purpose financial
accounting.
7. International accounting: Intentional accounting deals with the issues and
complications involved in doing trade in world or international markets. Many companies
have expanded their business internationally. Such companies need to employ
accountants who possess detailed knowledge about accounting. custom and taxation laws
applicable in different countries.
8. Government accounting: Government accounting is concerned with the allocation
and utilization of government budgets. It ensures that the central or state government
funds released for various purposes are being utilized efficiently. The proper record
keeping makes the audit of completed projects possible.
9. Social accounting: Social accounting is concerned with analyzing and evaluating
organizational impact on society and its environment. It measures the social costs and
benefits of various organizational activities. For example, accountants in this area might
analyze and evaluate the use of federal and state land or the use of welfare funds in a
large city. Other accountants might analyze and evaluate the environmental impact of
acid rain.
10. Forensic accounting: Forensic accounting deals with legal issues faced by business
enterprises. Accountants in this area use their knowledge, skills and techniques to deal
with legal matters such as dispute resolution, claim settlement, fraud investigation, court
and litigation cases etc.
11. Fiduciary accounting: Fiduciary accounting refers to the management of financial
records by a person to whom the custody and management of some property has been
entrusted for the benefit of another person. Estate accounting, trust accounting, and
receivership are some examples of fiduciary accounting.
12. Auditing: The term auditing generally refers to review, examination, verification,
evaluation or inspection of historical data, records or events belonging to an entity. The
person who performs the work of audit is known as auditor. In accounting and business,
there are two types of auditing – external auditing and internal auditing.
External auditing refers to the independent examination of an entity’s financial
statements and other accounting records that an entity publishes for the use of various
stakeholders. The auditor gives his opinion about the fairness of all accounting
information examined by him. An important element of “fairness” is the compliance of
financial statements with the generally accepted accounting principles (GAAP).
Q. Why Accounting is called the Language of Business?

Many famous writers of Accounting of the world have regarded Accounting as the
language of business.

Man expresses his feelings through language in written and verbal form, similarly,
various information of the business organization are expressed and presented through
accounting statements. In language, efforts are made to express a particular feeling using
words one after another. Similarly, in accounting, financial transactions are recorded in
books of accounts and there from preparing financial statements various financial
information are communicated to concerned persons.

Accounting furnishes all information about past events, current activities and future
possibilities of a business. Recording and analyzing past and present financial events.
Accounting presents and communicates various information in the form of statements
and reports to the interested parties like owners, employees, management, investors,
buyers, sellers etc.

From these accounts, statements, and reports, parties concerned can evaluate their
success-failure, financial solvency/insolvency etc. Of course, having sound command
over accounting language one can understand this information. These financial
statements are meaningless to those who do not have knowledge of accounting, in the
same way as a newspaper is a bundle of papers to an illiterate person. So, Accounting
functions like a language. One may think it is not apt to compare Accounting with
language but actually, it is not so. Shorthand is a language but the persons who are
ignorant of it cannot understand this symbolic language. Similarly, it is not illogical to
term accounting as a language of business. It is meaningless to those who are ignorant of
this discipline. No language in the world is universal. Similarly, accounting language also
is not understandable to all.

With the changes in society and human life languages are changing. Similarly with the
advancement and complexity of business accounting language is changing gradually.
Therefore, it is apt to say, Accounting is the language of business.

Q. What are the Qualitative Characteristics of Accounting Information?

The demand for accounting information by investors, lenders, creditors, etc., creates
fundamental qualitative characteristics that are desirable in accounting information. There
are six qualitative characteristics of accounting information. Two of the six qualitative
characteristics are fundamental (must have), while the remaining four qualitative
characteristics are enhancing (nice to have).

Fundamental (Primary) Qualitative Characteristics

Qualitative characteristics of accounting information that must be present for information
to be useful in making decisions:
• Relevance
• Representational faithfulness
Enhancing (Secondary) Qualitative Characteristics
Qualitative characteristics of accounting information that impact how useful the
information is:
• Verifiability
• Timeliness
• Understandability
• Comparability
We will look at each qualitative characteristic in more detail below.
Relevance: Relevance refers to how helpful the information is for financial decision-
making processes. For accounting information to be relevant, it must possess:
• Confirmatory value – Provides information about past events
• Predictive value – Provides predictive power regarding possible future events
Therefore, accounting information is relevant if it can provide helpful information about
past events and help in predicting future events or in taking action to deal with possible
future events. For example, a company experiencing a strong quarter and presenting these
improved results to creditors is relevant to the creditors’ decision-making process to
extend or enlarge credit available to the company.
Representational Faithfulness: Representational faithfulness, also known as reliability,
is the extent to which information accurately reflects a company’s resources, obligatory
claims, transactions, etc. To help, think of a pictorial depiction of something in real life –
how accurately does the picture represent what you see in real life? For accounting
information to possess representational faithfulness, it must be:
• Complete – Financial statements should not exclude any transaction.
• Neutral – The degree to which information is free from bias. Note that there are
subjectivity and estimation involved in financial statements, therefore information
cannot be truly “neutral.” However, if a company polled 1,000 accountants and
took the average of their answers, that would be considered neutral and free from
bias.
• Free from error – The degree to which information is free from errors.
Verifiability:Verifiability is the extent to which information is reproducible given
the same data and assumptions. For example, if a company owns equipment worth
Tk.100000 and told an accountant the purchase cost, salvage value, depreciation
method, and useful life, the accountant should be able to reproduce the same result.
If they cannot, the information is considered not verifiable.

Timeliness:Timeliness is how quickly information is available to users of accounting

information. The less timely (thus resulting in older information), the less useful
information is for decision-making. Timeliness matters for accounting information
because it competes with other information. For example, if a company issues its
financial statements a year after its accounting period, users of financial statements would
find it difficult to determine how well the company is doing in the present.
Understandability: Understandability is the degree to which information is easily
understood. In today’s society, corporate annual reports are in excess of 100 pages, with
significant qualitative information. Information that is understandable to the average user
of financial statements is highly desirable. It is common for poorly performing companies
to use a lot of jargon and difficult phrasing in its annual report in an attempt to disguise
the underperformance.
Comparability:Comparability is the degree to which accounting standards and policies
are consistently applied from one period to another. Financial statements that are
comparable, with consistent accounting standards and policies applied throughout each
accounting period, enable users to draw insightful conclusions about the trends and
performance of the company over time. In addition, comparability also refers to the
ability to easily compare a company’s financial statements with those of other companies.
The qualitative characteristics of accounting information are important because they
make it easier for both company management and investors to utilize a company’s
financial statements to make well-informed decisions.
Account
An account refers to assets, liabilities, income, expenses, and equity, as represented by
individual ledger pages, to which changes in value are chronologically recorded with
debit and credit entries. These entries, referred to as postings, become part of a book of
final entry or ledger. It is a record in an accounting system that tracks the financial
activities of a specific asset, liability, equity, revenue, or expense. These records increase
and decrease as the business events occur throughout the accounting period. Each
individual account is stored in the general ledger and used to prepare the financial
statements at the end of an accounting period. Examples of common financial accounts
are cash, accounts receivable, mortgages, loans, PP&E, common stock, sales, services,
wages, and payroll. A chart of accounts provides a listing of all financial accounts used
by particular business, organization, or government agency.

Types: There are five main types of accounts used in an accounting system. Each of these
are represented in the expanded accounting equation. Assets = Liabilities + Owner’s
Equity + Revenues – Expenses.

Assets are resources that the company can use to generate revenues in current and future
years. Asset accounts have a debit balance and are always presented on the balance sheet
first. Assets are divided into tangible and intangible. Examples of tangible assets
include desktop computers, laptops, cars, cash, equipment, buildings and more. Your
trademark, logo, copyrights and other non-physical items are considered intangible
assets.
Liabilities represent the debt obligations that the company owes to creditors. This can
include bank debt as well as notes from owners. Liability accounts have a credit balance
and appear below assets on the balance sheet. These can be loans, unpaid utility bills,
bank overdrafts, car loans, mortgages and more.
The equity account defines how much business is currently worth. It's the residual
interest in your company's assets after deducting liabilities. Common stock, dividends
and retained earnings are all examples of equity. After recording these transactions,
accountant will make a balance sheet. This information will provide a snapshot of what
business owns and owes. It reflects your company's financial position and offers
valuable insights into its overall performance.

Revenue, one of the primary types of accounts in accounting, includes the money
company earns from selling goods and services. This term is also used to denote
dividends and interest resulting from marketable securities.

Expense accounts, on the other hand, represent the resources used to generate income.
These items have a debit balance and lower total equity. Any product or service that
your company purchases to generate income or manufacture goods is also considered
an expense. This may include advertising costs, utilities, rent, salaries and others.
Some expenses are deductible and help reduce your taxable income.

Accounting equation
The fundamental accounting equation, also called the balance sheet equation, represents
the relationship between the assets, liabilities, and owner's equity of a person or business.
It is the foundation for the double-entry bookkeeping system. For each transaction, the
total debits equal the total credits. It can be expressed as furthermore:

A=L+P
A=L+(C-D+NP/NL)
A=L+(C-D+I-E)
A+D=L+C+I
A=ASSET
L=LIABILITIES
P=EQUITY/PROPRIETORSHIP
C=CAPITAL
D= DRAWINGS
NP= NET PROFIT
NL= NET LOSS
I= INCOME
E= EXPENSE

In a corporation, capital represents the stockholders' equity. Since every business

transaction affects at least two of a company's accounts, the accounting equation will
always be "in balance", meaning the left side of its balance sheet should always equal the
right side. Thus, the accounting formula essentially shows that what the firm owns (its
assets) is purchased by either what it owes (its liabilities) or by what its owners invest (its
shareholders' equity or capital); note that the profits earned by the company, is ultimately
owned by its owners.

The formula can be rewritten:

Assets - Liabilities = (Shareholders' or Owners' Equity)

Now it shows owners' equity is equal to property (assets) minus debts (liabilities). Since
in a corporation owners are shareholders, owner's equity is called shareholders' equity.
Every accounting transaction affects at least one element of the equation, but always
balances

DEBIT CREDIT ANALYSIS:

A+D: Increase - Debit, Decrease - Credit
L+C+I: Decrease - Debit, Increase - Credit