Overview of the Study Note:

This Study note covers the following topics:

1. Definition of Accounting
2. Objectives & Scope
3. Components of Accounting
4. Accounting Process

Introduction of Accounting

Accounting is a business language. We can use this language to communicate financial transactions and their results. Accounting is a comprehensive  system to collect, analyze, and communicate financial information.

Definition of Accounting

The American Institute of Certified Public Accountant has defined Financial Accounting as:

“the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which in part at least of a financial character and interpreting the results thereof.”

Objectives and Scope of Accounting

Let us go through the main objectives of Accounting:

1. To keep systematic records: Accounting is done to keep systematic record of financial transactions. The primary objective of accounting is to help us collect financial data and to record it systematically to derive correct and useful results of financial statements.

2. To ascertain profitability: With the help of accounting, we can evaluate the profits and losses incurred during a specific accounting period. With the help of a Trading and Profit & Loss Account, we can easily determine the profit or loss of a firm.

3. To ascertain the financial position of the business: A balance sheet or a statement of affairs indicates the financial position of a company as on a particular date. A properly drawn balance sheet gives us an indication of the class and value of assets, the nature and value of liability, and also the capital position of the firm. With the help of that, we can easily ascertain the soundness of any business entity.

4. To assist in decision-making: To take decisions for the future, one requires accurate financial statements. One of the main objectives of accounting is to take right decisions at right time. Thus, accounting gives you the platform to plan for the future with the help of past records.

5. To fulfill compliance of Law: Business entities such as companies, trusts, and societies are being run and governed according to different legislative acts. Similarly, different taxation laws (direct indirect tax) are also applicable to every business house. Everyone has to keep and maintain different types of accounts and records as prescribed by corresponding laws of the land. Accounting helps in running a business in compliance with the law.

Components of account

1. ASSETS
2. CAPITAL
3. LIABILITIES

ASSET:.

An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.

Or

Assets are those things which are belonging to the business.

Assets = liabilities +capital

1) Real Assets:The Asset which have market value are called real assets eg Furniture, cash, trademark etc.

I )  Fixed assets :  which assets are refers for long term. Fixed assets are divided into two parts         

a) Tangible fixed assets  : It refers to those fixed assets which can be touched and seen.      For example : furniture, computer etc.

1. Wasting asset :  A wasting asset is an that has a limited life and loses value over its life. During the period of depreciation , the asset is called a "wasting asset. Eg Furniture, Security etc
2. Non wasting asset : A Non wasting asset is an that doesn't has a limited life span eg Land , jewellery etc.

b) Intangible fixed assets  :It refers to those fixed assets which can not be touched and  seen. For example : good will, trade mark etc.                

II) Current assets : Current assets are those which assets are refers for short term.

a)Liquid Asset:  are those assets which are held in the form of cash and other assets that are expected to be converted to cash within a year. For example : cash in hand, bill receivable etc.

b) Floating assets  : which value is constantly change as business proceed. For example : inventory , book debts etc.

2. Fictitious Assets : The assets which have no market value are called fictitious assets. Eg. Deferred Cost such as Preliminary Expenses, Loss on issue of shares Discount on issue of shares, Loss on issue of debentures and Discount on issue of debentures.

Capital:

In its simplest form, capital means the funds brought in to start a business by the owner(s) of a company. It is an investment by the proprietor(s) or partner(s) in the business. Bringing in equity can mean money or assets as well. It is business’ liability towards the owner(s) also referred to as one of the internal liabilities of the business. It is also called Net Worth or Owner’s Equity.

Capital=asset - Liabilities

Liabilities:

Types of Liabilities

1. Current Liabilities – Obligations which are payable within 12 months or within the operating cycle of a business are known as current liabilities. They are short-term liabilities usually arisen out of business activities. Examples of current liabilities are trade creditors, bills payable, outstanding expenses, bank overdraft etc.

2. Non-current or Fixed Liabilities – Second among types of liabilities is non-current or fixed liabilities; they are long-term obligations of a business and are not payable within a year or an accounting period. They are generally used for the purchase of fixed assets. For example, long-term loans, bonds payable, debentures, etc.

3. Contingent liabilities – are those liabilities that may or may not be incurred by a business depending on the outcome of a future occurrence. In case the occurrence does not happen, an organization is not liable to pay anything. They are required to be disclosed as soon the amount can be estimated and are shown as a footnote to the balance sheet. Examples of contingent liabilities are

• Lawsuit proceedings
• Product warranty claims
• Guarantee for loans

Accounting Process

Accounting cycle refers to the specific tasks involved in completing an accounting process. The length of an accounting cycle can be monthly, quarterly, half-yearly, or annually. It may vary from organization to organization but the process remains the same. The following chart shows the basic steps in an accounting cycle:

Accounting Process

The following table lists down the steps followed in an accounting process:

1. Collecting and Analyzing Accounting Documents:
It is a very important step in which you examine the source documents and analyze them. For example, cash, bank, sales, and purchase related documents. This is a continuous process throughout the accounting period.

2. Posting in Journal:
On the basis of the above documents, you pass journal entries using double entry system in which debit and credit balance remains equal. This process is repeated throughout the accounting period.

3. Posting in Ledger Accounts:
Debit and credit balance of all the above accounts affected through journal entries are posted in ledger accounts. A ledger is simply a collection of all accounts. Usually, this is also a continuous process for the whole accounting period.

4. Preparation of Trial Balance:
As the name suggests, trial balance is a summary of all the balances of ledger accounts irrespective of whether they carry debit balance or credit balance. Since we follow double entry system of accounts, the total of all the debit and credit balance as appeared in trial balance remains equal. Usually, you need to prepare trial balance at the end of the said accounting period.

5. Posting of Adjustment Entries:
In this step, the adjustment entries are first passed through the journal, followed by posting in ledger accounts, and finally in the trial balance. Since in most of the cases, we used accrual basis of accounting to find out the correct value of revenue, expenses, assets and liabilities accounts, we need to do these adjustment entries. This process is performed at the end of each accounting period.

6. Adjusted Trial Balance:
Taking into account the above adjustment entries, we create adjusted trial balance. Adjusted trial balance is a platform to prepare the financial statements of a company.

7. Preparation of Financial Statements:
Financial statements are the set of statements like Income and Expenditure Account or Trading and Profit & Loss Account, Cash Flow Statement, Fund Flow Statement, Balance Sheet or Statement of Affairs Account. With the help of trial balance, we put all the information into financial statements. Financial statements clearly show the financial health of a firm by depicting its profits or losses.

8. Post-Closing Entries:
All the different accounts of revenue and expenditure of the firm are transferred to the Trading and Profit & Loss account. With the result of these entries, the balance of all the accounts of income and expenditure accounts come to NIL. The net balance of these entries represents the profit or loss of the company, which is finally transferred to the owner’s equity or capital account. We pass these entries only at the end of accounting period.

9. Post-Closing Trial Balance:
Post-closing Trial Balance represents the balances of Asset, Liabilities & Capital account. These balances are transferred to next financial year as an opening balance.