BUSINESS ACCOUNTING

By Nadya Narsidani
 Introduction
What is accounting?
There are different types of business enterprise or organization. Example: Sole
proprietor, partnership firm, limited liability partnership, private limited
company, public limited company etc.
Accounting refers to recording and classification of all financial transactions in
a company/organization.
(example sale of a product, purchase of stationary)
Accounting is important because it makes you aware in what direction your
company is going Hence, accounting is called as the “language of business”.
“Accounting is an information and measurement system that identifies,
records and communicates relevant, reliable and comparable information
of an organization's business activities that are measurable in monetary
terms”.
Definitions of Accounting
“Accounting is the art of recording, classifying, and summarizing in a
significant manner and in terms of money transactions and events which
are, in part at least of a financial character, and interpreting the result
thereof.”
(Committee on Terminology, American Institute of Certified Public
Accountants, 1961).
“The process of identifying, measuring and communicating economic
information to permit informed judgements and decisions by the users of
accounts.”
(American Accounting Association,1966).
Accounting procedure can be basically divided into 2 parts:
a) Generating financial information of business and
b) Using the financial information of business
a) (i) Recording: Recording is concerned with the maintaining of business
transactions of financial nature in an orderly and proper way in the various books of
accounts.
(ii) Classifying: To combine transactions or entries of the same kind at one location.
Classification involves doing a systematic examination of the data that has been
recorded.
The book known as "Ledger" contains the classifying work. Individual account
headings are used in this book to group together all related financial activities.
(iii) Summarizing: This requires organizing and presenting classified information in a
way that internal as well as external users of financial statements can comprehend and
find valuable. Trial balance, Income statement, and Balance sheet are the three
important statements are prepared as a result of this approach.
(iv) Analyzing and Interpreting: The accounting information is used to evaluate
and understand the recorded financial data so that the various consumers of
accounting information may make informed decisions regarding the financial
health and profitability of the business activities.
(v) Communicating: The delivery of examined, summarized, and interpreted
information to the recipient is the focus of communication. Accounting reports
are created and disseminated to accomplish this.
b. There are mainly two users of accounting information - Internal users and
External users
Internal users: are generally the managers at the top-level management. The
accounting information helps them in knowing about the past information and
what can be done to progress and enhance the profitability and financial position
of the business in the future. Budgets like Cash Budget and Sales Budget Reports,
Purchase and Production Budget Reports, Feedback Reports, make or buy
decision report etc.
External users: are basically the outsiders such as banks, creditors etc. who do
not have direct information of an enterprise. They study and analyze the financial
statements to get the accounting information. These external users or outsiders are
mainly interested in the profits and financial position of the business.

Characteristics of Accounting
-Reliability
-Relevance
-Understandability
-Comparability
Branches of Accounting

Financial Accounting:
It is the primary and the basic type/branch of accounting. It deals with the preparation of the
financial statements for the internal as well as external users like equity shareholders,
debenture-holders, creditors of business, banks, and financial institutions. They may see
how the business's activities have been carried out over the period of time by looking at the
financial accounts, which include the company's Profit and Loss Account (A/c) and the
Balance Sheet.

Cost Accounting:
“According to the Chartered Institute of Management Accountants (CIMA), Cost
Accountancy is defined as the application of costing and cost accounting principles,
methods and techniques to the science, art and practice of cost control and the
ascertainment of profitability as well as the presentation of information for the purpose of
managerial decision-making.” It is a branch of accounting that deals with categorizing,
documenting, allocating, summarizing, and reporting present and future expenditures as
well as examining their behavior. Cost accounting typically aids in internal decision-
making and gives management the tools it needs to evaluate performance and manage
operating expenses. It mostly consists of connecting the expenses to the various goods and
services that the company produces and sells.
Management Accounting:
This branch deals with the modern concept of accounts as a tool for the
management. It provides insights and necessary financial information to the
company's management.
“According to the Chartered Institute of Management Accountants, London,
management accounting is the application of professional information in such a
way as to assist the management in the formation of policies and in the planning
and control of the operations of the undertaking.” It uses both Financial
Accounting and Cost Accounting information which helps the managers in
making informed business decisions. Management accounting covers various
areas such as cost accounting, budgetary control, inventory control, statistical
methods, internal auditing etc.
 Objectives of Accounting

•To ascertain the amount of profit or loss made by the business i.e. to
compare the income earned versus the expenses incurred and the net
result thereof.
•To know the financial position of the business i.e. to assess what the
business owns and what it owes.
•To provide a record for compliance with statutes and laws applicable.
•To enable the readers to assess progress made by the business over a
period of time.
•To disclose information needed by different stakeholders.
What is book-keeping?

Book-keeping is that branch of knowledge which tells us how to keep a record

of business transactions.

It is often routine and clerical in nature. It is important to note that only those
transactions related to business which can be expressed in terms of money are
recorded.

The basic record of all transactions is called book-keeping. Simply speaking,

book-keeping is maintenance of all financial transactions in a business.

The activities of book-keeping include recording in the journal, posting to the

ledger and balancing of accounts.
What is Accountancy?

Accountancy is the practice of recording, classifying, and reporting of

business transactions for a business.

Book-keeping is a part of Accounting.

Difference between Book-keeping and Accountancy
Difference between Book-keeping and Accountancy
 Importance of Accounting

•Achieving accuracy in financial transactions is a key factor in the bookkeeping and

the accounting process. In other words, you understand exactly where your money
comes from and where it lands.
•A significant benefit of bookkeeping & accountancy is that they facilitate better
expense management. You can see what products and services are making you
money, and then transfer your expenses from those that are not producing profit
and returns. In addition, this will help minimize additional costs. The goal of the
accountant and the bookkeeper is to ensure that you have a steady cash flow so
you can protect yourself against risks whilst increasing investor and stakeholder
confidence.
•Running a business requires proper tax management. Accurate tax filing will keep
you from violating compliance obligations. By following tax law requirements, a
company will be in compliance with local, state, and federal laws. This will give it an
advantage when it comes to auditing by tax authorities.
•Overall, businesses that work with good bookkeepers and accountants often save
money, reduce risk, comply with regulations, manage growth, and plan ahead.
System of Accounting
There are two systems of accounting, single entry and double entry system.
(i) Single entry system:
It might not be practical for a small firm to maintain books using a complete double
entry method. The proprietor of such a firm might not even be familiar with double
entry bookkeeping. Small businesses, however, do not maintain double entry books of
accounts, merely the basic accounts like cash books and personal accounts.
As per Kohler, “single entry system is a system of book-keeping in which as a rule, only
records of cash and personal accounts are maintained, it is always incomplete double
entry, varying with circumstances.”
(ii) Double Entry System:
The development of diverse accounting systems has led to the emergence of the
double entry bookkeeping system. It is the only accounting system that is based on
science. It states that every transaction has two components a debit and a credit and
that both components must be documented in the books of accounts. As a result,
each business transaction affects atleast 2 accounts.
For e.g., business A sells goods of Rs 1,000 to business B and B pays to A Rs
1,000 in cash. The accountant of A would debit the cash account by Rs 1,000 and
credit the sales account by Rs 1,000.
This system is governed by fundamental accounting equation:
Accounting Equation: Assets= Liabilities + Shareholder's Equity
Or
Owner's equity = Assets - liabilities
Every transaction may be fully documented thanks to the double entry
mechanism. Due to the need that total assets equal total liabilities, it also aids in
providing an automated check on the mathematical correctness of accounting
entries.
Accounting Equation

The system of the double entry system of bookkeeping can very well be
explained by the “accounting equation” given below:
Assets = Equities
Assets are the properties that a firm owns. Equities are the names given to the
property rights. The rights of the owners and the rights of the creditors are the
two main categories into which equity may be separated. Liabilities are the equity
of creditors that reflect the company's debts. Owners’ equity is often referred to as
"capital," "proprietorship," or "owners' equity." Thus:
Assets = Liabilities + Capital
Or
Assets - Liabilities = Capital
 Let us take an example to understand the accounting equation.

Example: Transaction 1
Mr. A commences his business with cash Rs.50,000.

This is an example of investment of asset in the business by the owner. The effect of
this transaction on the accounting equation is that cash asset is increased by
Rs.50,000 and the proprietorship (A’s capital) is also increased by the same amount such
as:

Assets = Liabilities + O.E/ Capital

Cash Capital
+ 50,000 = —- + 50,000

Note that assets and equities increased by equal amounts

 Transaction 2:
Purchased furniture on cash Rs.10,000.

This transaction effected accounting equation as the increase in one new asset furniture and decreases
in assets cash with the same amount. Thus

Assets = Liabilities + O.E / Capital

Cash Furniture Capital

+ 50,000 = —- + 50,000

- 10,000 + 10,000

40,000 + 10,000 = 50,000

Note that this transaction has affected assets side only and no change is made in equities side of the
equation.
Transaction 3:
Purchased goods on credit Rs.5,000.

Assets = Liabilities + O.E / Capital

Cash Furniture Goods Creditors Capital

+ 5,000
+ 40,000 + 10,000 + 5,000 = + 50,000

40,000 +10,000 + 5,000 = + 5,000 + 50,000

Note that this transaction has affected assets side and liabilities. Both the sides of equation has increased with
the same amount.
Summary

The main objective of Accounting is to provide financial information to

stakeholders whereas the basic goal of bookkeeping is to record financial
information about business activities in a meaningful and organised way.

Designing the mechanisms for capturing, categorising, and summarising the

captured data and translating them for internal and external end-users is the main
focus of accounting.