Definition of Accounting:
Accounting may be defined as the science as well as the art of recording financial transactions under appropriate accounts. The American Institute of Certified Public Accounts has define 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 ” From the above definition, we attribute the following Accounting emerge:
1. It is an art of recording financial transactions.
2. It is an art of making summaries and analyses the financial transactions.
3. It is an art of interpreting the results of the financial transactions and communicating the results to the persons who are interested in it.
Systems of Accounting
There are basically two systems of accounting:
(i) Cash System of Accounting:
It is a system in which accounting entries are made only when cash is received or paid. No entry is made when a payment or receipt is merely due. Certain professional people and small business houses record their income on cash basis, but while recording expenses they take into account the outstanding expenses also. In such a case, the financial statement prepared by them for determination of their income is termed as “Receipts and Expenditure Account”
(ii) Accrual System of Accounting:
It is a system in which accounting entries are made on the basis of amounts having become due for payment or receipt. This system recognizes the fact that if a transaction or an event has occurred; its consequences cannot be avoided and therefore should be brought into record in order to present a meaningful picture of profit earned or loss suffered during a period and also of the financial position of the firm concerned at the end of a period.
Difference between cash and accrual system:
The difference will be clear with the help of the following example:
A firm closes its books on December 31st each year. A sum of Rs.5,000 has become due for payment on account of rent for the year 2000. The amount has, however been paid in January 2001.
In this case, if the firm is following cash system of accounting, no entry will be made for the rent having become due in the books of accounts of the firm in 2000. The entry will be made only in January 2001 when the rent is actually paid. However, if the firm is following accrual system of accounting, two entries will be made:
i. On December 31st 2000, rent account will be debited while the rent payable account will be credited by the amount of outstanding rent.
ii. In January 2001 rent payable account will be debited while the cash account will be credited with the amount of the rent actually paid.
The ‘Accrual system’ is considered to be better since it takes account the effects of all transactions already entered into. This system is followed by most of the industrial and commercial firms.
Fields of Accounting :
Any business needs computation of profit and loss. The process of computing business computing business profit and loss is known as Accounting. Every business and every group of businesses have their own field of accounting. The following are three main fields of Accounting:
I. Financial Accounting.
II. Cost Accounting.
III. Managerial Accounting.
I) Financial Accounting :
All receipts and payments are recorded in a chronological order based on happening of transactions. At the end of a certain period total expenses and loses are deducted from total revenue/ income which results in net gain or loss of the period all other field are also base the same.
II) Cost Accounting/ Manufacturing :
It is also known as manufacturing accounting. In the business of manufacturing or producing the product the profit is fully dependent upon the cost of product. As cost of product in minimum, the profit ratio will be greater.
III) Managerial Accounting :
The financial accounting data is set in order of the management requirement in several dimensions or alternates, which is needed for decision-making and future planning.
Nature of Accounts and its meaning :
We can say that by nature there are only five accounts in the world and thousands of accounts must be related to any one of the following nature:
1. Assets 2. Liabilities
3. Proprietorship 4. Revenue
5. Expenses.
1. Assets mean the resources of the business or the commodities possessed by the business.
2. Liabilities mean the claims of the suppliers of cash or commodities or the obligation of the business to pay at a certain period.
3. Proprietorship means the claims of the owner of the business for his interest up to his investment after finalizing the expenses and revenue up to the date.
4. Revenue means any type of income directly or indirectly of the business.
5. Expense means any type of expense directly or indirectly of the business.
Rules for Debit and Credit :
Debit Nature of Accounts Credit
Increase Assets Decrease
Decrease Liabilities Increase
Decrease Proprietorship Increase
Decrease Revenue/ Income Increase
Increase Expenses Decrease
