What is Accounting ?
The accounting equation ; Accounting is something that affects people in their personal lives just as much as it affects very large business. We as a whole use accounting thoughts when we plan how we will manage our cash. We have to plan how much of it we will spend and how much we will save. We might record an arrangement, known as a budge, or we may essentially keep it in our brains.
Recording accounting date
However, when people normally talk about accounting it mean the type used by business and other organizations. They cannot keep all the details in their minds so they have to keep records of it.
They will not only record cash received and paid out. They will also record goods bought and sold, means items bought to use rather than to sell, and so on. This part of accounting is usually called the recording data.
Classifying and summarizing
At the point when the information is being recorded it must be figured out in order to be generally valuable to the business. This is known as classifying and summarizing data.
Following such classification and summaries it will be possible to work out how much profit or loss has been made by the business during a particular period. It will also be possible to show what resources are owned by the business, and what is owed by it, or the closing data of the period.
Communicating information
From the data , somebody talented in accountant ought to have the option to tell whether the business is performing well financially . They should be able to ascertain the strengths and weakness of the business.
finally , they ought to have the option to tell or impart their outcomes to the owners of the business, or to others permitted to get this information. Accounting is, therefore, concerned with:
- Recording of data
- Classifying and summarizing data.
- Communicating what has been gained from the date.
What is bookkeeping ?
The piece of accounting that is concerned with recording data is frequently known as bookkeeping. Until about one hundred years ago all accounting data was recorded in books, hence the term bookkeeping.
Nowadays, although books may be used, quality obviously a lot of accounting data is recorded by using computers.
A definition of accounting
It is probably too soon in the book to quote the definition of accounting that is most widely accepted. At this stage it could cause a lot of confusion for many students. Putting it more simply than the usual definition we can say that, first of all, we have to record data. As we have said in 1.2 that is called bookkeeping. Accounting is concerned with the uses with accountants might make of the bookkeeping information given to them.
Users of accounting information
The possible users can be:
- Owner’s of the business; they need to have the option to see whether the business is productive. Furthermore they need to understand what the financial resources of the business are.
- A prospective buyer; when the owner wants to sell their business the buyer will want to see such information.
- The bank; if the owner needs to acquire cash for use in the business, then, at that point, the bank will need such information.
- Tax inspectors; They need it to have the option to calculate the tax payable.
- A prospective partner; if the owner needs to share ownership to another person, then, at that point, the would-be partner will need such information.
- Investors; either existing ones or individuals puzzling over the choice about whether to put their cash in the business.
There could also be other users, one obvious fact is that without properly recorded accounting data a business would have many difficulties, as the needs of the users could not be served.
The accounting equation
The whole of financial accounting is based upon a very simple idea. This is called the accounting equation, which sounds complicated, but in fact is easy to understand.
It can be explained by saying that, if a firm is to be set up and start trading, then it needs resources. Allow us to expect that in any case the owner of the business has provided the entirety of the asset. This can be shown as:
Resources in the business = Resources supplied by the owner
In accounting , terms are utilized to portray things. How much the resources provided by the owner is called capital. The actual assets that are then in the business are called assets. This implies that the accounting equation above, when the owner has provided every one of the resouces, can be displayed as
| Assets = Capital |
For the most part, notwithstanding, individuals other than the proprietor have provided a portion of the resources. Liabilities is the name given to the sum owing from these individuals for these assets. The equation has now changed to:
| Assets= Capital + Liabilities |
It can be seen that the two sides of the equation will have the same totals. This is because we are dealing with the same thing from two different points of view. It is :
| Resources: what they are = Resources who are supplied them ( Assets ) (Capital + Liabilities ) |
It is a fact that the totals of each side will always equal one another, and that this will always be true no matter how many transactions there may be. The actual assets, capital and liabilities may change, but the total of the assets will always equal the total of capital + liabilities.
Assets comprise of property, all things considered, like structures, apparatus, loads of products and engine vehicles. Also benefits such as debts owed by customers and the amount of money in the bank account are included.
Liabilities consist of money owing for goods supplied to the firm and for expenses. Also loans made to the firm are included.
Capital is many times called owner’s value or net worth.
