Accounting is a business language. It is used to record the business transactions in the books to know the profit. Accounting is defined as Recording, Classifying and Summarizing the account information. There is a difference between Book keeping and Accounting. Book keeping means recording the business information datewise whereas Accounting means using the book keeping information to analyse and to know the result of the business ie., profit or loss.
Objectives of Accounting
- To ascertain profitability
- To ascertain the financial position of the business.
Functions of Accounting
- It keeps systematic and permanent record of all financial transactions of business
- It maintains a record of incomes and expenses periodically
- It maintains a record of assets and liabilities to know the financial position at any time
- It protects the property of business
- It communicates the position of the business to Stake holders ie., creditors, employees, Management, Govt etc.,
- It provides information to meet legal requirement
- It records only marketing transactions
- Data is in historical nature
- No Realistic information
Classification of Accounting
Accounting can be classified into Financial accounting, Cost accounting and Management accounting.
- Financial Accounting:Recording the transactions to know the result and position of Business and providing information to Stake-holders of business.
- Cost Accounting: Cost accounting mainly deals with ascertainment of cost and cost control.
- Management Accounting: It provides the information to management in decision making and policy making.
Few basic Accounting terms
- Transaction: The activity related to exchange of goods and services for cash or cash worth is called Business transaction.
- Debtor: Person to whom the goods are sold on credit. If any amount due from any person that person is called debtor. The due amount is called debt.
- Creditor: Person from whom the goods are purchased on credit. If any amount due to any person that person is called creditor.
- Capital: Amount invested in the business or amount kept in business by proprietor or by owner. It represents to the net value of assets in the business ie., total assets minus outside liabilities.
- Goods: Business deals with goods, Goods include articles commodities for trading purpose etc., For eg:- For textiles business, or trader cloth is good and for kirana merchant, rice, dal, oil soaps etc are goods.
- Assets: These are business possessions. Owner invest capital in acquiring buildings, furniture, machinery etc., All these are called assets which are used to run business to earn profits.
- Liability: Liabilities are funds raised for business. Business has to pay amount to others.
- Equity: Equity means owners right. These are two types of rights. One is right of owners and right of creditors. Owners right is capital and creditors right is liabilities. Therefore right of equity is equal to assets ie. Total Assets = Capital + liabilities.
- Income: Anything getting in return through business transaction.
- Expense: Anything spending to do or run the business for eg: Salaries, Rent, lighting etc.
- Drawing: Any cash or goods used by owner for his personal purposes.
- Loss: If any amount spent on business without any return, it is loss.
- Voucher : Any written document in support of a business transaction.
- Turnover: Total trading income i.e., cash and credit sales.