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Role of Accounting

Accounting plays a vital role in the decision-making process.

An accounting system provides information in aform that can be used to make knowledgeablefinancial decisions.

Accounting provides the means for trackingactivities and measuring results.

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Accounting System

Accounting system can be defined as an information system

which helps analyze the transactions that the business is

entering into, handle routine bookkeeping tasks and structure

information so that it can be used to evaluate the performance

and health of the business.

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accounting system

Organized set of manual and computerized

accounting methods , procedures , and controls

established to gather, record , classify, analyze ,summarize, interpret, and present accurate and

timely financial data for management decisions .

http://www.businessdictionary.com/definition/organized.htmlhttp://www.businessdictionary.com/definition/manual.htmlhttp://www.businessdictionary.com/definition/accounting-method.htmlhttp://www.businessdictionary.com/definition/procedure.htmlhttp://www.businessdictionary.com/definition/control.htmlhttp://www.businessdictionary.com/definition/record.htmlhttp://www.investorwords.com/210/analyze.htmlhttp://www.businessdictionary.com/definition/accurate.htmlhttp://www.investorwords.com/5572/financial.htmlhttp://www.businessdictionary.com/definition/data.htmlhttp://www.businessdictionary.com/definition/management.htmlhttp://www.businessdictionary.com/definition/decision.htmlhttp://www.businessdictionary.com/definition/decision.htmlhttp://www.businessdictionary.com/definition/management.htmlhttp://www.businessdictionary.com/definition/data.htmlhttp://www.investorwords.com/5572/financial.htmlhttp://www.businessdictionary.com/definition/accurate.htmlhttp://www.investorwords.com/210/analyze.htmlhttp://www.businessdictionary.com/definition/record.htmlhttp://www.businessdictionary.com/definition/control.htmlhttp://www.businessdictionary.com/definition/procedure.htmlhttp://www.businessdictionary.com/definition/accounting-method.htmlhttp://www.businessdictionary.com/definition/manual.htmlhttp://www.businessdictionary.com/definition/organized.html

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BookkeepingBookkeeping is the recording of financial

transactions. Transactions include sales,purchases, income, and payments by anindividual or organization. Bookkeeping is

usually performed by a bookkeeper.Bookkeeping should not be confused withaccounting . The accounting process is usuallyperformed by an accountant . The accountantcreates reports from the recorded financialtransactions recorded by the bookkeeper.

http://en.wikipedia.org/wiki/Accountancyhttp://en.wikipedia.org/wiki/Accountanthttp://en.wikipedia.org/wiki/Accountanthttp://en.wikipedia.org/wiki/Accountancy

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Bookkeeping .. Any process that involves the recording of

financial transactions is a bookkeeping processA bookkeeper (or book-keeper), also known as

an accounting clerk or accounting technician,

is a person who records the day-to-dayfinancial transactions of an organizationA bookkeeper is usually responsible for writing

the daybooks.Suppliers ledger, customer ledger, general ledger

& Cash Book examples of daybooks.

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Bookkeeping.

The bookkeeper brings the books to the trial

balance stage. An accountant may prepare the

income statement and balance sheet using thetrial balance and ledgers prepared by the

bookkeeper.

http://en.wikipedia.org/wiki/Trial_balancehttp://en.wikipedia.org/wiki/Trial_balancehttp://en.wikipedia.org/wiki/Income_statementhttp://en.wikipedia.org/wiki/Balance_sheethttp://en.wikipedia.org/wiki/Balance_sheethttp://en.wikipedia.org/wiki/Income_statementhttp://en.wikipedia.org/wiki/Trial_balancehttp://en.wikipedia.org/wiki/Trial_balancehttp://en.wikipedia.org/wiki/Trial_balancehttp://en.wikipedia.org/wiki/Trial_balance

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Financial transaction

A financial transaction is an event or conditionunder the contract between a buyer and aseller to exchange an asset for payment. Inaccounting, it is recognized by an entry in thebooks of account. It involves a change in thestatus of the finances of two or more

businesses or individuals.

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Accounting information system

An accounting information system (AIS) is the

system of records a business keeps tomaintain its accounting system . This includesthe purchase, sales, and other financial

processes of the business. The purpose of anAIS is to accumulate data and provide decisionmakers (investors, creditors, and managers)with information. While this was previously apaper-based process, most businesses nowuse accounting software .

http://en.wikipedia.org/wiki/Accounting_systemhttp://en.wikipedia.org/wiki/Accounting_softwarehttp://en.wikipedia.org/wiki/Accounting_softwarehttp://en.wikipedia.org/wiki/Accounting_system

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Users of Information

Investors

Creditors

ManagersEmployees

Customers

SuppliersRegulatory Agencies

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10Financial accounting is the preparation and communication of

financial information to outsiders such as creditors, bankers,

government, customers and so on. Another objective of financial accounting is to give complete picture of theenterprise to shareholders.

Management accounting on the other hand aims at preparingand reporting the financial data to the management onregular basis. Management is entrusted with the

responsibility of taking appropriate decision, planning, performance evaluation, control, management of costs, cost determination etc.

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11Transaction: It is transfer of money or goods or

service from one person or account to another person or account.

Capital: Funds brought in to start business, by

the owner/s.Liability: Obligation to be fulfilled in future with

respect to payment towards acquisition of an

asset or performance of a service.

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12Assets

Fixed assets are those which are held for use inthe production or supply of goods andservices.

Current assets are those which are held orreceivable within a year or within the

operating cycle of the business.

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13Goods: Commodities or articles purchased for

resale are called goods.Trade

Purchases

Sales

Debtors

Creditors

Stock

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14Concepts are the basic assumptions or

conditions upon which the science of accounting is based.

Business Entity Concept: The essence of thisconcept is that business is a separate entityand it is different from the owner or theproprietor.

Going Concern Concept: The fundamentalassumption is that the business entity willcontinue fairly for a long time to come.

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15Money Measurement Concept: All transactions of a

business are recorded in terms of money.

Accrual Concept: It is possible that certain incomes areearned but not received and similarly expensesincurred but not yet paid during an accounting

period. But it is relevant to consider them whilecomputing the financial results just because they arerelated to the specific accounting period.

Periodicity Concept: The time interval for whichaccounts are prepared is an important factor, eventhough we assume long life for a business.

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Dual Aspect ConceptThis concept is the most fundamental one for

accounting. A business entity is an independent unit and it receives benefits from some and

gives benefits to some other. Benefit received and benefit given should always match and

balance.

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16Basic Principles/conventions are the rules basing

on which accounting takes place and theserules are universally accepted.Principle of Income Recognition : Revenue is

considered as being earned on the date onwhich it is realized.

Principle of Expense : Expenses are different frompayments.

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17Principle of Matching Cost and Revenue:

Revenue earned during a period is comparedwith the expenditure incurred to earn that

income, whether the expenditure is paid during

that period or not. This is matching cost and

revenue principle, which is important to find

out the profit earned for that period.

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Principle of Historical Costs : All assets arerecorded at the cost of acquisition and this cost

is the basis for all subsequent accounting for the

assets. The expenses and the goods purchased

are all shown at the value at which they are

incurred.

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19Principle of Full Disclosure

The businessenterprise should disclose relevant information

to all the parties concerned with the

organization. It means that any information of

substance or of interest to the average investors

will have to be disclosed in the financial

statements.

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20Principle of Materiality:

What is material and what is not materialdepends upon the nature of information andthe party to whom the information isprovided.

Ex. For statement to a debtor , all details haveto be presented.

Same details not required for sendinginformation to the Registrar of companies.

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21Principle of Consistency:

Consistency is required to help comparison of financial data from one period to another.

Ex. Stock valuation / Depreciation

Principle of Conservatism or Prudence Accountant follow the rule anticipate no profit

but provide for all anticipated losses .

Whenever risk is expected, provision should bemade.