Accounting Basics

Accounting Definition

Accounting is the process of identifying, measuring and communicating financial information about an entity to permit informed judgments and decisions by users of the information.

Accounting can thus be said to be a method of providing information to management (and other users) relating to the activities of an organization. In order to do this it relies on the accurate collection of data from sources both internal and external to the organization. The recording of this data is often referred to as bookkeeping.

The business organizations must keep systematic record of what happens from day to day, so that it can know where it stands and so that it can satisfy the ever increasing curiosity of the income tax officer, if nothing else. Most of the businesses these days are run by joint stock companies and these are required by law to prepare financial statements.

These statements are proper form showing the state of financial affairs of business organizations. A systematic record of the daily events of a business leading to presentation of complete financial picture is known as accounting in elementary stages, as bookkeeping.

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Types of Accounting

Accounting is the process of identifying, measuring, recording, and communicating an organization’s economic activities to users of financial statement. Business stakeholders need information for decision making. There are two types of accounting:

• Financial Accounting and
• Management Accounting

Financial Accounting

Financial accounting can be described as the classification and recording of monetary transactions of an entity in accordance with established concepts, accounting  principles, standards and legal requirements, and their presentation, by means of various financial statements, during and at the end of an accounting period. Financial accounting is the area of accounting that focuses on external reporting and meeting the needs of external users.

Management Accounting

Management Accounting is accounting for internal used by organization and an internal part of management concerned with identifying, presenting and interpreting information.

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User of Financial Information

Users need information for decision making. There are two type of user for financial information:

• Internal Users and
• External Users

Internal Users

Internal users of accounting information are managers who plan, organize, and run the business. Internal users of accounting information work for the organization and are responsible for planning, organizing, and operating the entity. The area of accounting known as managerial accounting serves the decision-making needs of internal users. These include marketing managers, production supervisors, finance directors, and company officers. Internal users are associated with management of the organization.

External Users

External Users are individuals and organizations outside a company who want financial information about the company. External users do not work for the organization and include investors, creditors, labor unions, and customers. Investors (owners) use accounting information to make decisions to buy, hold, or sell ownership shares of a company. Creditors (such as suppliers and bankers) use accounting information to evaluate the risks of granting credit or lending money. The external users consist of several explicit groups, which are outside the organization and has interest (financial and non-financial) in an organization.

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Purpose of Accounting

The purpose of accounting is to provide useful information for effective and efficient decision making. Right information for right decision is based on accounting information system. Accounting provides different financial statements for business information. These statements are:

• Income Statement
• Statement of Owner’s Equity
• Balance Sheet
• Cash Flow Statement

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 Financial Statement

End results of financial accounting are financial statement. The financial picture mostly has two parts, one showing how much profit has been earned or loss suffered, and the other showing assets and liabilities and proprietors’ interest in the business. Even institutions which do not have the earning of profit as an objective must know periodically, whether the current income is sufficient to meet the current expenditure and what financial state of affairs is. In fact, wherever the resources are scarce, it is wise to take stock regularly, monthly, six-monthly or annually, of what has happened and where the institution concerned stands.

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