Accounts For Beginners

Accounting as the language of business

The basic function of language is to serve as a means of communication.

Accounting serves the purpose of communicating the results of business operations to all the interested parties such as proprietors managers, creditors and investors.

First let me say what is proprietor.

They are the owner of business or a holder of property.

And Manager is a person responsible for controlling or administering an organization or group of staff.

Creditors is a person who gives a benefit without receiving money or money's worth immediately but, liable to claim in future is a creditor.

Investor is a person or organization that puts money into financial schemes, property, etc. with the expectation of achieving a profit.

In practice, it is impossible for any businessman to memories and recollect all the business dealings. 

Moreover, he/she will be interested in knowing at the end of the each year

(i). What he/she owns?

(ii). What he/she owes?

(iii). How much profit he/she has earned?

(iv). What his/her financial position is?

To relieve businessmen from the burden of memorizing all the business dealings and for providing necessary information, Accounting was developed.

Importance of accounting in business

Businessmen also require accounting records to submit in courts to prove their claims or to defend in courts against claims made by outsiders.

They are required to produce business records to tax authorities whenever demanded.

Similarly, financiers require accounting records of businessmen to decide about sanctioning of loans.

Thus, transactions relating to business have become so important that their recording has become a necessity.

Definition 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 of a financial character and interpreting the results thereof"

The following detailed explanation makes each of them clear.

Attributes and Steps of Accounting

1.Recording 

Systematic recording of business transactions is the first step in the accounting process.

Each transaction recorded in chronological order.

Every entry recorded has to be supported with documentary evidence.

Recording are done in journal or in subsidiary books which are books of original entry.

Small firm uses Journal system.

Bigger firm uses subsidiary book system.

2. Classification

It is the process of grouping transactions or entries on a predetermined basis.

The classification takes the form of 'accounts' in a separate book known as ledger.

Separate accounts are opened for each of whom business is dealings with.

3. Summarizing 

The classified data in the ledger is presented periodically in a manner which is understandable and useful to the owners and other interested parties.

Summarizing takes place in the form of trial balance, trading account, profit or loss account and balance sheet.

The trial balance ensures the arithmetical accuracy of the recording and classification process.

Each account in the ledger is balanced and the net balance is shown in the trial balance.

The Trading account reveals the gross profit of the business.

Profit or loss shows net profit or loss for accounting period.

The balance sheet portrays the financial position of the business.

4. Significant manner 

The accounting process of recording, classifying and summarizing be carried on in a significant manner.

Each business has its own problems and requirements.

The management of the business needs specific types of information for controlling and decision-making purposes.

'Significant manner' as per the requirement of  the firm has to be include at every stage in the process of recording, classifying and summarizing business transaction.

5. In terms of money 

All business transaction have to be recorded in terms of money.

It is the medium through which all the business transactions are expressed.

'Money measurement' is the basis for accounting.

6. Transactions and events of financial character

All those business transactions and events which are financial in character are recorded in accounts.

All the events, dealings and happenings which have no financial effect are completely ignored in the accounting process.

For example, working conditions, skilled work force, sales policies, employees' morale etc., are omitted from accounting process.

7. Interpreting the results 

Interpretation of the results is needed for various purposes.

The trends observed in sales, purchases, expenses etc., are useful for future planning of operations.

Interpretation is usually done through Ratios and  Flow statements.

They are useful in evaluating past performance and providing guidance for future plans and operations.

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