Introduction to Accounting

Introduction to accounting

Over the decades accounting is known for the financial record keeping function of an accountant. But in this era as the business environment is rapidly changing, accountant needs to reassess their roles and functions within the society and in the organization. Accountants are now giving relevant information for decision making as a member of the organization instead of only recording the financial transactions. Accounting today is not only related to book keeping. Accountants now are working in different areas like e-commerce, web based payment system, financial planning, environmental accounting etc. Accounting now is capable of giving useful information to the managers and member of the company to make decision based on financial reports.

What is an organization?

An organization can be a partnership firm, sole proprietary, company, cooperative society, local authority, Association of persons etc. It refers to a business enterprise, whether for profit or non-profit purpose depending upon the size of activities and level of business operations.

Meaning of Accounting

According to Accounting Principles Board of AICPA “the function of accounting is to provide quantitative information”. Accounting is an art of recording, summarizing and classifying the economic events in a significant manner and in terms of money. It is the process of identifying, measuring and communicating financial information to permit informed judgments and decisions by the users of information.

Accounting can be defined as a process of identifying, measurement, recording and communicating the required information related to the economic events of a company to the users of information. To understand the exact nature of accounting we must need to know the following aspects of the definition:

  • Economic Events
  • Identifying, Measuring, Recording and Communicating
  • Organization/Company
  • Interested Users of Information

Economic Events

A happening of consequences to a business which consist of transactions which are measured in monetary terms or an event which include a number of financial transactions such as buying a machine, transportation of machine, preparation for installation of machinery at site, expenses on installation of machine are examples of economic events involved in an organizations. Events which include outsiders in transactions are known as external events. External events examples are as follows:

  • Rendering services to the customers by a company
  • Payment of rent to landlord
  • Purchase of material from its suppliers
  • Sale of goods to customers

Internal events are happen only within the different department wings of the organization for example supply of raw material from manufacturing department to stores department, payment of any wages to its labour and employees etc.

Identification, Measurement, Recording and Communicating

Identification

Meaning of identification is to determine the transaction which needs to be recorded into the books of accounts of an organization. This includes observation of activities and selecting events that are of financial in nature and relate to the company or organization. Other business and economic transactions are evaluated and decision for the same is taken whether to record in the books of accounts. For example: value of human resources, changes in business policies, miscellaneous appointments are important part of a business but none of them is recorded in the books of accounts. In the other hand when a sale or purchase has been made by the company in cash or on credit, pays expenses or salaries are recorded in the books of accounts of the company.

Measurement

Measurement refers to the units which can be measure in terms of money. it represents the quantification of transactions related to business into financial terms by using measuring units like Rupees and paisa. If any event which a business cannot quantify into financial terms, same has not been recorded in the books of accounts. This is the reason for not recording some events such as appointments of managers, signing contracts, change of employees are not recorded in the books of accounts.

Recording

Recording of transactions in the books of accounts of a company in a chronological order can be done only after economic events has been identified and measured in financial terms. Recording is the process where all the necessary financial information is summarized as per good accounting practice and which is available for important actions to be taken in future time to time.

Communication

After identification, measurement and recording of economic events and with the ability and efficiency of the accountant which is very important for an organization, generates daily, weekly, monthly or quarterly reports through which the important information can be made available for the right users at the right times. These reports provide meaningful results and information about the actual financial situation of a business and communicated in a certain form to its management and other internal and external users to make necessary decisions to improve the financial position.

Interested Users of Information

As the primary motive of accounting is to provide useful financial information for making decisions, In a business or organization many internal and external users need accurate financial reports and information in order to make necessary decisions. These reports which contain the useful financial information of a business is called the language of business and communicated with all the users. There are two broad categories of users:

Internal Users

Internal users include Financial Officer, Chief Executive, Vice president, Managers, Store managers, Supervisors, Plant managers, etc.

External Users

External users include Investors and Shareholders, Creditors including Financial Institutions, Banks, and Debenture holders of the company, Tax Authorities, Company Registrar, Stock Exchanges and customers etc.

These internal and external users want financial information of the company time to time to see if they are getting satisfactory returns from the business and investments. Director and managers of the company use this information to make future decision from current financial situation of the business. They may also compare their company’s financial health with other competitors in the industry. While the creditors of the company need the information to know if they are likely to get paid and if company is able to pay all the debts.

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