Role of Accounting

Accounting plays a vital role in the decisionmaking process. An accounting system provides information in a form that can be used to make knowledgeable financial decisions. Accounting provides the means for tracking activities and measuring results.

Accounting System
Accounting system can be defined as an information system which helps analyze the transactions that the business is

entering into, handle routine bookkeeping tasks and structure

information so that it can be used to evaluate the performance and health of the business.

accounting system
Organized set of manual and computerized accounting methods, procedures, and controls established to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data for management decisions.

Bookkeeping
Bookkeeping is the recording of financial transactions. Transactions include sales, purchases, income, and payments by an individual or organization. Bookkeeping is usually performed by a bookkeeper. Bookkeeping should not be confused with accounting. The accounting process is usually performed by an accountant. The accountant creates reports from the recorded financial transactions recorded by the bookkeeper.

Bookkeeping ..
Any process that involves the recording of financial transactions is a bookkeeping process A bookkeeper (or book-keeper), also known as an accounting clerk or accounting technician, is a person who records the day-to-day financial transactions of an organization A bookkeeper is usually responsible for writing the daybooks. Suppliers ledger, customer ledger, general ledger & Cash Book examples of daybooks.

Bookkeeping.
The bookkeeper brings the books to the trial balance stage. An accountant may prepare the income statement and balance sheet using the trial balance and ledgers prepared by the bookkeeper.

Financial transaction
A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. In accounting, it is recognized by an entry in the books of account. It involves a change in the status of the finances of two or more businesses or individuals.

Accounting information system

An accounting information system (AIS) is the system of records a business keeps to maintain its accounting system. This includes the purchase, sales, and other financial processes of the business. The purpose of an AIS is to accumulate data and provide decision makers (investors, creditors, and managers) with information. While this was previously a paper-based process, most businesses now use accounting software.

Users of Information
Investors Creditors Managers Employees Customers Suppliers Regulatory Agencies

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Financial accounting is the preparation and communication of financial information to outsiders such as creditors, bankers, government, customers and so on. Another objective of financial accounting is to give complete picture of the enterprise to shareholders.

Management accounting on the other hand aims at preparing and reporting the financial data to the management on regular basis. Management is entrusted with the responsibility of taking appropriate decision, planning, performance evaluation, control, management of costs, cost determination etc.

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Transaction: It is transfer of money or goods or service from one person or account to another person or account. Capital: Funds brought in to start business, by the owner/s. Liability: Obligation to be fulfilled in future with respect to payment towards acquisition of an asset or performance of a service.

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Assets Fixed assets are those which are held for use in the production or supply of goods and services.

Current assets are those which are held or receivable within a year or within the operating cycle of the business.

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Goods: Commodities or articles purchased for resale are called goods. Trade Purchases Sales Debtors Creditors Stock

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Concepts are the basic assumptions or conditions upon which the science of accounting is based. Business Entity Concept: The essence of this concept is that business is a separate entity and it is different from the owner or the proprietor. Going Concern Concept: The fundamental assumption is that the business entity will continue fairly for a long time to come.

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Money Measurement Concept: All transactions of a business are recorded in terms of money. Accrual Concept: It is possible that certain incomes are earned but not received and similarly expenses incurred but not yet paid during an accounting period. But it is relevant to consider them while computing the financial results just because they are related to the specific accounting period. Periodicity Concept: The time interval for which accounts are prepared is an important factor, even though we assume long life for a business.

Dual Aspect Concept

This concept is the most fundamental one for accounting. A business entity is an independent unit and it receives benefits from some and gives benefits to some other. Benefit received and benefit given should always match and balance.

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Basic Principles/conventions are the rules basing on which accounting takes place and these rules are universally accepted. Principle of Income Recognition: Revenue is considered as being earned on the date on which it is realized. Principle of Expense: Expenses are different from payments.

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Principle of Matching Cost and Revenue: Revenue earned during a period is compared with the expenditure incurred to earn that income, whether the expenditure is paid during that period or not. This is matching cost and revenue principle, which is important to find out the profit earned for that period.

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Principle of Historical Costs: All assets are recorded at the cost of acquisition and this cost is the basis for all subsequent accounting for the assets. The expenses and the goods purchased are all shown at the value at which they are incurred.

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Principle of Full Disclosure The business enterprise should disclose relevant information to all the parties concerned with the organization. It means that any information of substance or of interest to the average investors will have to be disclosed in the financial statements.

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Principle of Materiality: What is material and what is not material depends upon the nature of information and the party to whom the information is provided. Ex. For statement to a debtor , all details have to be presented. Same details not required for sending information to the Registrar of companies.

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Principle of Consistency: Consistency is required to help comparison of financial data from one period to another. Ex. Stock valuation / Depreciation Principle of Conservatism or Prudence Accountant follow the rule anticipate no profit but provide for all anticipated losses . Whenever risk is expected, provision should be made.