What is Accounting?

Definition 1
Accountancy or accounting is the art of
communicating financial information about
a business entity to users such as
shareholders and managers. The
communication is generally in the form of
financial statements that show in money
terms that show the economic resources
under the control of management.
 Definition 2
Accounting
The systematic recording, reporting, and analysis of
financial transactions of a business.

Finance concerned with resource allocation as well

as resource management, acquisition and
investment. Simply, finance deals with matters
related to money and the markets. Or To raise
money through the issuance and sale of debt
and/or equity.
Transaction is an agreement between a buyer and a
seller to exchange an asset for payment.
 Definition 3
Practice and body of knowledge concerned
primarily with
(1) methods for recording transactions.
(2) keeping financial records.
(3) performing internal audits.
(4) reporting and analyzing financial
information to the management.
(5) advising on taxation matters.
 Definition 4
It is a systematic process of identifying, recording,
measuring, classifying, verifying, summarizing,
interpreting and communicating financial
information. It reveals profit or loss for a given
period, and the value and nature of a firm's
assets, liabilities and owners' equity. Accounting
provides information on the
(1) resources available to a firm.
(2) the means employed to finance those resources.
(3) the results achieved through their use.
 Definition 5 (Dictionary)
1) The skill or practice of maintaining and
auditing business accounts.
2) System that provides quantitative
information about finances.
3) The occupation of maintaining and
auditing records and preparing financial
reports for a business.
4) A bookkeeper's chronological list of related
debits and credits of a business; forms part
of a ledger of accounts.
 Types of accounting
Financial accounting is "a major branch of accounting involving
the collection, recording and extraction of financial
information, and the summary of it in the form of a periodic
profit and loss account, a balance sheet and a cash flow
statement in accordance with legal, professional, and capital
market requirements“.
Management accounting is another branch of accounting
performed within an organization to provide information only
accessible to its decision-makers.
Open-book accounting is an accounting principle that aims to
improve accounting transparency of organizations.
Tax accounting is the accounting needed to comply with
jurisdictional tax regulations.
 Who is Accountant?
One who is skilled in the practice of
accounting. An accountant is
responsible for reporting financial
results, whether for a company or for
an individual, in accordance with
government and regulatory authority
rules
 Advantages of Accounting
> Accounting replaces human memory
> Accounting helps in knowing profit
> Accounting helps in knowing financial
position of organization
> Accounting helps in knowing list of
creditors and debtors
Advantages of Accounting (Cont)
> Accounting helps in paying taxes.
> Accounting helps in raising more
funds by supplying information to
investors and creditors.
> Accounting helps in planning for
expansion.
> Accounting helps in getting bank
loans.
 Advantages of Accounting (Cont)
> Accounting help to show where is company
standing in competition or in market.
> Accounting help to make future plans for
organization.
> Accounting prevent sources of cheating.
> Accounting help to build stake holder's
confidence on organization.
 Types of accounts
> Asset accounts: represent the different types of
economic resources owned by a business,
common examples of Asset accounts are cash,
cash in bank, building, inventory, prepaid rent,
goodwill, accounts receivable. Asset account
normally have a debit balance.
> Expense accounts: represent the company's
expenditures to enable itself to operate. Common
examples are electricity and water (Utilities
expense), rentals, depreciation, doubtful accounts,
interest, insurance etc.
 Types of accounts (Cont)
> Liability accounts: represent the different types of economic
obligations by a business, such as accounts payable, bank
loan, bonds payable, accrued interest. Liabilities account
normally have a credit balance.
> Revenue accounts or income: represent the company's
gross earnings and common examples include Sales,
Service revenue and Interest Income.
 Equity or Capital accounts: represent the residual equity of
a business (after deducting from Assets all the liabilities)
including Retained Earnings and Appropriations. Owners
equity account normally have a credit balance .
NOTE: 3 are balance sheet accounts (asset, liability and
owners equity accounts) 2 are income statement accounts
(revenue and expense accounts).
 What is an Account
Account or bookkeeping, refers to assets,
liabilities, income, and expenses recorded
on individual book of final entry or ledger.
Changes in account value are made by
chronologically posting debit (DR) and
credit (CR) entries to its page. Examples of
accounts are cash, accounts receivable,
mortgages, loans, land and buildings,
common stock, sales, services provided,
wages, and payroll overhead. Chart of
accounts classifies types of accounts.
 What is Debit & Credit in Accounting
Debit and credit are formal bookkeeping and
accounting terms. They are the most fundamental
concepts in accounting, representing the two sides
of each individual transaction recorded in any
accounting system. Debits are on the left, Credits
are on the right side. Debits and credits are a
system of notation used in accounting to keep
track of money movements (transactions) into and
out of an account.
For Every Transaction
Value of Debits = Value of Credits
(Asset + Expense = Liability + Equity + Revenue )
Account Debit (dr) Credit (cr)
Name
Asset Increase Decrease

Expense Increase Decrease

Liabilities Decrease Increase
Revenue/ Decrease Increase
Income
Capital/ Decrease Increase
Equity
 Two System Of Accounting

1) Single-entry bookkeeping system

2) Double-entry bookkeeping system

 Single-entry bookkeeping system

Many small, simple businesses maintain only a single-entry

system that records the "bare-essentials." In some cases
only records of cash, accounts receivable, accounts
payable and taxes paid may be maintained. Records of
assets, inventory, expenses, revenues and other elements
usually considered essential in an accounting system may
not be kept, except in memorandum form. Single-entry
systems are usually inadequate except where operations
are especially simple and the volume of activity is low.
This type of accounting system with additional information can
typically be compiled into an income statement and
balance sheet by a professional accountant.
 Single-entry bookkeeping system (Cont)
a single-entry system is similar to a
checkbook register and is characterized by
the fact that there is only a single line
entered in the journal for each transaction.
In a simple checkbook, each transaction is
recorded in one column of an account as
either a positive or a negative amount in
order to represent the receipt or
disbursement of cash.
Advantages
Single-entry systems are used in the interest of simplicity. They
are usually less expensive to maintain than double-entry
systems because they do not require the services of a
trained person.

Disadvantages
> Data may not be available to management for effectively
planning and controlling the business.
> Lack of systematic and precise bookkeeping may lead to
inefficient administration and reduced control over the affairs
of the business.
> Single-entry records do not provide a check against clerical
error, as does a double-entry system. This is one of the most
serious defects of single-entry systems.
Disadvantages (Cont)
> Single-entry records seldom make provision for
recording all transactions. In addition, many
internal transactions, such as adjusting entries are
often not recorded.
> Because no accounts are provided for many of the
items appearing in both the Income Statement and
Balance Sheet, omission of important data is
possible.
> In the absence of detailed records of all assets, lax
administration of those assets may occur.
> Theft and other losses are less likely to be
detected.
Example of Single Entry System

Jan 1 Beginning Balance 1,000.00 

Jan 2 Purchased shop supplies (150.00)
Jan 4 Performed repair service 275.00 
Jan 7 Performed repair service 125.00 
Jan 15 Paid phone bill (50.00)

Jan 30 Ending balance 200.00 

 Double-entry bookkeeping system
Double-Entry Bookkeeping is a system that
ensures the integrity of the financial values
recorded in a financial accounting system.
It does this by ensuring that each individual
transaction is recorded in at least two
different (sections) nominal ledgers of the
financial accounting system (debit and
credit).
Advantage
> Accurate calculation of profit and loss in complex
organizations.
> Preparation of financial statements directly from the accounts.
> Easier detection of errors and fraud.
> It provides a specific means of dealing with opening and
closing balances (at the start and end of the year).
> It provides an arithmetic check on your bookkeeping, since the
total amount of debit entries must equal the total amount of
credit entries.
> Using a Sales Ledger and Purchase Ledger means you can
track who owes the business money and who the business
owes money to much more easily. 
> Easily see the financial position of the business much more
clearly, at any given time, using double entry.
 Advantage (Cont)
> Done properly, it can help detect and reduce accounting errors.
> Under this system both the aspects of each and every transaction
are recorded. So, it is possible to keep complete account.
> A balance sheet can be prepared by taking together all the accounts
relating to assets and liabilities and thereby the financial position of
the business can be assessed.
> Under this system necessary statistics are easily available so that the
management can take appropriate decision and run the business
efficiently.
> All the necessary detail about a transaction can be obtained quickly
and easily.
> The total amount owed by debtors and the total amount owed to
creditors can be ascertained easily.
> Easily make adjustment in accounts.
 Disadvantage
> Double entry bookkeeping is harder to understand
> It follows, then that, if you don’t already have the
accounting know-how, you’ll either have to learn or
hire/outsource someone to do it for you.
> It is a bit more time-consuming, not least because
by it’s very definition, every transaction is entered
twice.
> Requires multiple entries for the same transaction.
> More prone to mistakes.
> Finding mistakes can take longer.
Example of Double Entry System
dr
cr
1) Cash 15,000
Sales (Computer)
15,000

2) Cash 20,000
Bank Loan 20,000
Accounting Equation
The basic accounting equation is the foundation for
the double-entry bookkeeping system. It shows
how assets were financed: either by borrowing
money from someone (liability) or by paying your
own money (shareholders' equity).

The accounting equation for a sole proprietorship is:

Assets = Liabilities + Owner’s Equity

The accounting equation for a corporation is:

Assets = Liabilities + Stockholders’ Equity
1,200,000 = 100,000 + 1,100,000

200000 = 90000 + ?

? = 675 + 1025 (lacs)

99 = ? + 72 (lacs)
Accounting Cycle
Description: The Accounting Cycle is
a series of steps which are repeated
every reporting period. The process
starts with making accounting entries
for each transaction and goes through
closing the books. Use this tutorial for
an overview of the accounting cycle,
covering activities required both
during and at the end of the
accounting period.