Implications on Accounting: An In-Depth Analysis from the Perspective

of Organization

Course
Principal Of Accounting
Instructor

Instructor
MD HAZRAT ALI
Assistant Professor, Department of Fashion Design and Technology (FDT)

Submited by
TASMIA YESMIN JOYA
Id: 22233401154

Batch : 33th
Introduction

Accounting is the systematic process of recording, classifying, and summarizing financial

transactions to provide stakeholders with useful information for decision-making. In organizations,
effective accounting practices are vital for tracking performance, ensuring compliance, and
guiding strategic decisions. This assignment explores the implications of accounting from an
organizational perspective, focusing on recording, classification, and summarization.

Accounting is crucial in the fashion design and merchandise industry. It helps organizations track
their financial performance, manage resources efficiently, and comply with regulations. This
assignment explores the implications of accounting from an organizational perspective, focusing
on the processes of recording, classification, and summarization. Understanding these concepts is
vital for fashion professionals to make informed business decisions..

Organizational Accounting

What is an Organization?

 Definition: An organization is any structured group, like a business or nonprofit, with a

specific purpose or goal. In accounting, organizations are entities that perform financial
transactions and need accounting to manage their finances.
Definition and Importance

Organizational accounting is the process of collecting, analyzing, and reporting financial

information within an organization. It encompasses various activities designed to ensure that
financial data is accurately recorded and reported. The importance of organizational accounting
cannot be overstated; it helps stakeholders understand the financial health of the organization,
informs management decisions, and ensures compliance with laws and regulations.

Branches of Accounting

Accounting plays a crucial role in managing financial information, and its various branches cater
to different organizational needs. Below is an overview of the primary branches of accounting:

Financial Accounting

 Definition: Financial accounting focuses on recording, summarizing, and reporting

financial data to external stakeholders such as investors, creditors, and regulatory bodies.
 Examples: Preparing income statements, balance sheets, and cash flow statements.
 Purpose: To provide accurate and reliable financial reports that reflect the financial health
and performance of the organization.
 Importance: Ensures transparency and aids stakeholders in making informed decisions.

Management Accounting

 Definition: Management accounting provides internal reports and analyses to help

managers make strategic decisions. It involves budgeting, cost analysis, and performance
evaluation.
 Examples: Budget forecasts, variance analyses, and profit planning reports.
 Purpose: To guide management in operational and financial planning, ensuring efficient
use of resources.
 Importance: Enhances decision-making capabilities within the organization.

Cost Accounting

 Definition: This branch deals with tracking, analyzing, and controlling the costs associated
with production and operations.
 Examples: Monitoring raw materials, labor, and overhead costs.
 Purpose: To identify cost-saving opportunities and improve profitability.
 Importance: Helps in setting product prices and ensuring efficient resource allocation.

Tax Accounting

 Definition: Tax accounting focuses on preparing tax returns and planning for tax
obligations. It ensures compliance with tax regulations while optimizing tax liabilities.
  Examples: Filing corporate taxes, calculating VAT, and creating tax-saving strategies.
 Purpose: To calculate, prepare, and minimize tax liabilities while adhering to legal
standards.
 Importance: Ensures legal compliance and financial stability by avoiding penalties.

Types of Accounts in Accounting

Primary Types:

1. Assets:
o Definition: Resources that a business owns and expects to use in the future to
generate revenue.
o Examples: Cash, inventory, equipment, buildings, and accounts receivable.
2. Liabilities:
o Definition: Obligations or debts that a business owes to others.
o Examples: Loans, accounts payable, wages payable, and accrued expenses.
3. Equity:
o Definition: The owner’s claim on the assets of the business after all liabilities are
paid off. Also called "owner’s equity" or "shareholders’ equity."
o Examples: Capital, retained earnings, and common stock (for corporations).
4. Revenue:
o Definition: Income generated from the normal operations of a business, like sales
of goods or services.
o Examples: Sales revenue, service revenue, and interest income.
5. Expenses:
o Definition: Costs incurred by the business to earn revenue, including operational
and administrative expenses.
o Examples: Rent, salaries, utilities, and office supplies.

Examples of Accounts by Type:

 Asset: Cash, as it represents money the business owns.

 Liability: Accounts Payable, which is an obligation to pay suppliers or creditors.
 Revenue: Sales Revenue, representing income from selling goods or services.
The Accounting Cycle

The Accounting Cycle is a step-by-step process followed by companies to identify, analyze, and
record financial transactions throughout a specific accounting period. This cycle ensures that
financial statements are accurate and complete. Here’s an overview of each step:

1. Identifying Transactions: Recognize and gather data for every transaction that affects the
business financially.
2. Recording Transactions in the Journal : Each transaction is recorded chronologically in
a journal, also known as the book of original entry, using the double-entry system.
3. Posting to the Ledger : Transfer journal entries to the ledger, which categorizes and
organizes transactions by account.
4. Preparing an Unadjusted Trial Balance: Summarize all accounts to check that debits
equal credits and to verify initial accuracy.
5. Making Adjusting Entries : Adjust entries for accruals, deferrals, and other necessary
updates to reflect accurate financial information.
6. Preparing an Adjusted Trial Balance: Confirm again that debits equal credits after
adjustments, ensuring the books are balanced.
7. Preparing Financial Statements : Compile financial statements, including the income
statement, balance sheet, and cash flow statement.
8. Closing the Books : Close temporary accounts like revenue and expense accounts by
transferring their balances to retained earnings, which resets them for the next period.
9. Preparing a Post-Closing Trial Balance : Confirm the balance in permanent accounts to
ensure everything is set correctly for the next accounting period.
10. Reversing Entries are optional journal entries made at the beginning of an accounting
period. They’re used to simplify the recording of transactions in the new period by
reversing certain adjusting entries made at the end of the previous period
The Accounting Cycle Exploring

Recording Transactions in Journals

What is a Journal?:

A journal is the first place where financial transactions are recorded. It maintains entries in
chronological order.

A journal is the primary record-keeping tool for financial transactions within an organization. It is
designed to capture each transaction in a systematic manner, ensuring that all entries are
documented in chronological order. This chronological arrangement allows for easy tracking of
financial activities over time, facilitating better management, analysis, and reporting of financial
data. The journal plays a critical role in the accounting process, as it serves as the foundation for
later entries in the ledger and helps maintain accurate financial records.

Rules for Journal Entries:

Journal entries are the first step in the accounting process where financial transactions are recorded
systematically. To ensure accuracy, we follow the Debit and Credit Rules, based on the nature
of the accounts involved.

o Debit and Credit Rules:

 Assets: Increase with debits, decrease with credits.
 Liabilities and Equity: Increase with credits, decrease with debits.

Journal Entry Example Table

Let’s say a company made the following transactions:

1. Transaction 1: On January 2, bought office supplies for $500 in cash.

2. Transaction 2: On January 5, provided services worth $1,200 on account (credit sale).
3. Transaction 3: On January 10, paid rent of $700 in cash.

Here’s how these transactions would look in a journal:

Date Account Title & Description Debit Credit

Jan 2, 2024 Office Supplies (Purchased office supplies) $500
Cash $500
(Purchased office supplies with cash)
------------ ---------------------------------------- -------- --------
 Date Account Title & Description Debit Credit
Jan 5, 2024 Accounts Receivable (Service revenue on credit) $1,200
Service Revenue $1,200
(Provided services on account)
------------ ---------------------------------------- -------- --------
Jan 10, 2024 Rent Expense (Paid office rent) $700
Cash $700
(Paid rent in cash)

Explanation:

 Debits and credits are recorded for each transaction to keep the accounting equation in
balance.
 Descriptions provide a brief note about each transaction to clarify its purpose.

Classifying Transactions

What is a Ledger?

 A ledger is a book or digital record where transactions are categorized by accounts. After
entries are recorded in the journal, they’re posted to the ledger to summarize each account’s
activity.
 The ledger provides a detailed history of all the transactions for each account, like cash,
accounts payable, or sales revenue. This helps in tracking the balance of each account at
any given time.

Rules of Ledger Posting

 Here are the basic rules for posting transactions from the journal to the ledger:
o Separate Accounts: Each account (e.g., Cash, Sales, Expenses) has its own ledger.
o Debit and Credit Balances:
 For asset accounts: Debits increase, credits decrease.
 For liability and equity accounts: Credits increase, debits decrease.
 For revenue accounts: Credits increase revenue, debits decrease it.
 For expense accounts: Debits increase expenses, credits decrease them.
o Cross-Referencing: Each ledger entry should reference the original journal entry
for easy tracking.
o Balancing Accounts: Regularly calculate the balance of each ledger account to
know the final position (e.g., total cash available).
Example of a Ledger Entry

Let’s look at a sample Cash Ledger:

Cash Ledger Example

Date Description Debit Credit Balance

Jan 1 Initial Investment 2000 2000

Jan 5 Received from Sales 500 2500

Jan 10 Paid Office Rent 300 2200

Jan 15 Office Supplies Purchase 200 2000

In this example:

 Debits increase the Cash account when cash is received.

 Credits decrease the Cash account when cash is spent.

The balance shows the current amount of cash after each transaction.

Summarizing

What is a Trial Balance, Profit and Loss Account, Balance Sheet, and Financial Statements?

Trial Balance

A trial balance is a financial statement that lists all the ledger accounts and their respective debit
and credit balances at a specific date. It is a crucial step in the accounting process to ensure the
accuracy of financial records.
Key Features of a Trial Balance

1. Balances Listing:
All ledger accounts are listed with their balances, categorized into debits and credits.
2. Mathematical Verification:
The primary purpose is to confirm that the total of debit balances equals the total of credit
balances, verifying the arithmetic accuracy of the bookkeeping.
3. Basis for Financial Statements:
It serves as a preparatory step for creating the financial statements, such as the income
statement and balance sheet.

Purpose of a Trial Balance

1. Error Detection:
It helps identify errors in the ledger, such as:
o Incorrect amounts entered.
o Omissions of transactions.
o Misplacement of debits and credits.
2. Account Balances Overview:
The trial balance provides a snapshot of the company's financial position, showing all
account balances in one place.
3. Preparation for Adjustment:
Before adjusting entries are made, the trial balance ensures that the ledger is ready for
corrections or final adjustments.

Structure of a Trial Balance

Account Name Debit (৳) Credit (৳)

Cash 50,000 -

Accounts Receivable 30,000 -

Accounts Payable - 20,000

Revenue - 80,000

Expenses 60,000 -

Totals 140,000 140,000

Note: The total debits must equal the total credits to ensure the trial balance is balanced.

Profit and Loss Account (Income Statement):

o This account, also called an Income Statement, shows the company’s income,
expenses, and profits or losses over a period (usually a month, quarter, or year).
o Purpose: To calculate the net profit or loss by deducting total expenses from total
revenue.

 Structure:
1. Revenue (Income): Includes all earnings from sales, services, or other sources like
interest and dividends.
2. Expenses: Includes costs such as salaries, rent, utilities, depreciation, and other
operating and non-operating expenses.
3. Net Profit or Loss: Determined by subtracting total expenses from total revenues.
 Purpose:
The main objective is to calculate the net profit or loss, which is critical for stakeholders
to:
o Assess financial performance.
o Make informed decisions about future investments or cost management.
o Understand the company’s profitability and operational efficiency.
 Formula:

Net Profit or Loss=Total Revenue−Total Expenses

 Example Layout:

Particulars Amount (₹) Amount (₹)

Revenue
Sales Revenue 1,00,000
Other Income 5,000
Total Revenue 1,05,000
Less: Expenses
Salaries 20,000
Rent 10,000
Utilities 5,000
Depreciation 2,000
Total Expenses 37,000
Net Profit 68,000
Balance Sheet:

o The balance sheet provides a snapshot of a company’s financial position at a

specific point in time. It lists assets, liabilities, and equity.
o Formula: Assets = Liabilities + Equity.
o Purpose: To show what the business owns (assets), owes (liabilities), and the
owner’s equity.

 Components:
1. Assets: Resources owned by the company, classified into:
 Current Assets: Cash, accounts receivable, inventory, etc.
 Non-Current Assets: Property, plant, equipment, intangible assets, etc.
2. Liabilities: Obligations of the company, classified into:
 Current Liabilities: Accounts payable, short-term loans, etc.
 Non-Current Liabilities: Long-term loans, bonds payable, etc.
3. Equity: The owner’s claim on the company’s resources, including:
 Share capital, retained earnings, and reserves.
 Purpose:
The Balance Sheet helps stakeholders:
o Assess the company’s financial stability.
o Evaluate liquidity and solvency.
o Understand the proportion of debt versus equity financing.
 Example Layout:

Particulars Amount (₹)

Assets
Current Assets:
- Cash 50,000
- Accounts Receivable 30,000
- Inventory 20,000
Total Current Assets 1,00,000
Non-Current Assets:
- Property & Equipment 2,00,000
- Intangible Assets 50,000
Total Non-Current Assets 2,50,000
Total Assets 3,50,000
Liabilities
Current Liabilities:
- Accounts Payable 40,000
- Short-Term Loans 20,000
Total Current Liabilities 60,000
Particulars Amount (₹)
Non-Current Liabilities:
- Long-Term Loans 1,00,000
Total Non-Current Liabilities 1,00,000
Total Liabilities 1,60,000
Equity
- Share Capital 1,50,000
- Retained Earnings 40,000
Total Equity 1,90,000
Total Liabilities + Equity 3,50,000

Financial Statements:

o Financial statements include the Profit and Loss Account, Balance Sheet, and
Cash Flow Statement. They provide an overview of a business’s financial health
and are used by stakeholders to make decisions.
o Purpose: To present a company’s performance and financial position
comprehensively.

Rules for Each Statement

 Trial Balance: Total debits must equal total credits to ensure accuracy.
 Profit and Loss Account:
o Revenues are recorded as credits.
o Expenses are recorded as debits.
 Balance Sheet:
o Assets (debit balance accounts) should equal the sum of liabilities and equity (credit
balance accounts).
 Financial Statements: Each statement must be prepared in accordance with accounting
standards (such as GAAP or IFRS) to ensure consistency and comparability.
Financial Statements

Financial statements are essential tools that provide a comprehensive overview of an organization's
financial performance and position. They serve as critical resources for decision-making by
various stakeholders, including management, investors, creditors, and regulatory bodies.

Key Components of Financial Statements

1. Income Statement
o Definition: Also known as the Profit and Loss Statement, it summarizes an
organization’s revenues and expenses over a specific period.
o Purpose: To determine the company’s profitability by calculating net income (or
loss).
o Key Elements: Revenue, cost of goods sold (COGS), gross profit, operating
expenses, and net income.
o Importance: Helps stakeholders assess operational efficiency and profitability.
2. Balance Sheet
o Definition: A snapshot of an organization’s financial position at a specific point in
time.
o Purpose: To show what the company owns (assets), owes (liabilities), and the net
worth (equity).
o Key Elements:
 Assets: Cash, accounts receivable, inventory, property.
 Liabilities: Loans, accounts payable, accrued expenses.
 Equity: Owner's capital, retained earnings.
o Importance: Reflects the company’s financial stability and liquidity.
3. Cash Flow Statement
o Definition: Tracks the flow of cash into and out of the organization during a
specific period.
o Purpose: To provide insight into the company’s cash management and liquidity.
o Key Sections:
 Operating Activities: Cash flows from core business operations.
 Investing Activities: Cash flows from asset purchases or sales.
 Financing Activities: Cash flows from loans, equity, or dividends.
o Importance: Ensures the organization has enough cash to meet its obligations and
invest in growth.
Purpose of Financial Statements
1. For Stakeholders:

Financial statements provide a comprehensive and detailed overview of the company’s financial
performance and position, enabling stakeholders to make informed decisions.

 Investors:
o Assess the company’s profitability and growth potential.
o Decide whether to buy, hold, or sell shares.
 Creditors:
o Evaluate the company’s ability to meet short-term and long-term debt obligations.
o Determine the risk of lending money or extending credit.
 Management:
o Use the data to monitor and analyze financial performance.
o Make informed strategic and operational decisions to enhance profitability and
efficiency.
 Employees:
o Understand the company’s financial stability and its ability to offer job security,
bonuses, or pay raises.
 Government and Regulatory Authorities:
o Ensure the company complies with taxation laws and financial regulations.

2. For Compliance:

Financial statements are prepared to meet statutory and regulatory requirements:

 Legal Requirements:
o Companies are often mandated by law to prepare financial statements to maintain
transparency.
o Ensures accurate tax calculation and reporting.
 Accounting Standards:
o Align with international or local accounting standards (e.g., IFRS, GAAP) to ensure
consistency and reliability.
 Auditing and Verification:
o Provide a basis for external audits, enhancing credibility and trust with
stakeholders.

3. For Strategic Planning:

 Financial statements serve as the foundation for budgeting, forecasting, and planning future
growth.
 They help identify areas of strength and opportunities for improvement.
Example of Financial Statements:

Include the trial balance, Profit and Loss Account, and Balance Sheet to present a complete
financial picture of the business.

To provide a comprehensive financial overview of the business, it is essential to include the

following documents: the trial balance, the Profit and Loss Account, and the Balance Sheet. The
trial balance will help ensure that the total debits equal the total credits, serving as a preliminary
check on the accuracy of the accounting records. The Profit and Loss Account will detail the
company’s revenues, expenses, and net profit or loss over a specific period, offering insights into
its operational performance. Finally, the Balance Sheet will present the business’s assets,
liabilities, and equity as of a particular date, illustrating its financial position and stability.
Together, these documents will create a complete financial picture of the organization, facilitating
informed decision-making and analysis.

Conclusion

In conclusion, accounting provides a systematic approach to tracking and reporting financial

transactions. Each step in the process—ranging from recording entries in the journal to generating
a trial balance and preparing financial statements—ensures that businesses have access to accurate
and meaningful data for informed decision-making. Financial statements enable stakeholders to
assess the organization's financial health, highlighting the importance of accounting for
transparency, compliance, and strategic planning.