Fundamentals of Accounting

 

Introduction

The record keeping function is done in Journal and subsidiary books also called as primary books. Every proper record keeping system includes suitable classification of transactions and events as well as their summarization for future reference. After the transactions and events are recorded in the books of prime entries, they are transferred to secondary books of account i.e. Ledger. In ledger transactions and events are classified in terms of incomes, expenses, assets and liabilities according to their characteristic and then summarised in the profit and loss account and balance sheet. These are also known as the fundamentals of accounting.

Essentially the transactions and events are to be measured in terms of money. Measurement in terms of money means measuring or recording them in the ruling currency of a country like in Dollar terms/Pound terms/ Rupees term and so on.

However, this definition does not reflect the present day function of accounting. The scope of accounting is much wider than given in the definition.

In 1970, the Accounting Principles Board of American Institute of Certified Public Accountants (AICPA) described the functions of accounting as follows:

“The function of accounting is to provide quantitative information, primarily of financial nature, about economic entities, that is needed to be useful in making economic decisions.”

Fundamentals of Accounting or Procedural Aspects of Accounting

After discussing the definition of accounting, we can divide the procedure of accounting into two parts

  1. Generating financial information and
  2. Using the financial information
  1. Generating Financial Information

Under this following elements are included

  1. Recording – This is the first and foremost function of the accounting. All business transactions having financial nature, as evidenced by some sort of documents like sales bill, purchase bill, bank pay in slip etc. are recorded in the books of account. The recording is done in the prime book of entry i.e. Journal. It may further be categorised in subsidiary books.
  1. Classifying: – Classification is concerned with the systematic analysis of the recorded data, with a view to group transactions of similar nature so as to make the data more comparable and useful. The book containing classified information is called “Ledger.”
  1. Summarising: – Summarising is concerned with the preparation and presentation of the classified data in a manner useful to the internal as well as external users of the financial statement. Under this process following financial statements are prepared:
  • Trial Balance
  • Profit & Loss A/c
  • Balance Sheet
  • Cash –Flow Statement
  1. Analysing: – The figures given in the financial statements do not help anyone unless they are presented in simplified form. For making them useful, some sort of analysis is required. Here analysis refers methodical classification of the data given in the financial statement. For instance, all items relating to fixed assets are given in one place while current assets are shown separately in the Balance Sheet.
  2. Interpreting: – This is the final function of accounting. It is related with explaining the meaning and significance of the relationship established by the analysis of accounting data. Simply it means the presentation of the result in literal terms.
  3. Communicating: – It is directed toward the transmission of summarised, analysed and interpreted information to the end users to make them decisions. This done by preparation and distribution of accounting reports which consist apart from final accounts, the accounting ratios, graphs, charts etc.

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