Introduction to Accounting

Who is the Father of Accounting?

Luca Pacioli is the father of accounting. Luca Pacioli (c.1447 – 1517) was the first person to publish detailed material on the double-entry system of accounting. He was an Italian mathematician and Franciscan friar who also collaborated with his friend Leonardo da Vinci (who also took maths lessons from Pacioli).

What is an Accounting?

Accounting is the process of identifying, measuring, and communicating economic information to various users, including management of the company, stockholders, creditors, financial analysts, and government agencies.

Accounting is not just a procedural record-keeping activity done by people who are "good at math." In fact, accounting is "the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information."

Book-keeping  is  a  part  of  accounting  and  is  concerned  with  the recording of transactions which is often routine and clerical in nature, whereas accounting performs other functions as well.

The accounting has various natures such as service activity, profession, social force, language, science or art, information system etc.

The main purpose of accounting is to ascertain profit or loss and show the financial position of the business on a particular date to control the firm's property. The further objectives of an accounting are listed as bellows:

• To keep the systematic records

• To protect business properties

• To ascertain the operational profit or loss

• To ascertain the financial position of the business

• To facilitate rational decision making

 Attributes of Accounting

The accounting mainly does four activities such as recording (date wise), classifying (similar type transaction), summarizing (preparing financial statements), and interpreting (analyzing the financial statements) the financial data of the business on specific period of time. These activities can be considered as an attributes of accounting.

 Users of Accounting Information

The users are the people who get the information of accounting happened in the business within a particular time period. Mainly the user has divided into two parts as internal and external. The both users could be in the following nature shown in the presented table below:

Table: User of Accounting Information

Types (Branches) of Accounting

Accounting has various branches; mainly the accounting can be categorized by the following categories shown as bellows:

Fig: Branches of Accounting

1. Financial Accounting: It is the process of presenting the financial position and showing the result of profit (loss) of the company as on a date at the end of the period.

2. Management Accounting: It is the process of communicating the financial date to the manager to make the appropriate decision in the company.

3. Cost Accounting: It is a form of management accounting that is used to find out the cost of goods produced or service rendered by the business

4. Government Accounting: It is the process of tracking the incomes and expenses of a particular fund allocated by the Government that is based on Governmental Accounting Standards Board (GASB) system.

5. Public Accounting: It is a process of presenting the financial statements to the various stakeholders of the company such as BOD, Management, Investors, Shareholders and general public to build the trust on the company.

6. Tax Accounting: It is the process of calculating tax due, lower tax liability, tax returns, and file tax forms in a timely manner by the business and individual taxpayer regulated by Inland Revenue Department (IRD) of the country. 

7. Forensic Accounting: It is prepare for the purpose of investing the financial activities of individual and company by the police department, Banks, CID, etc. to track their financial transaction and provide the complete report to the concern party.

8. Auditing: It is the process of cross checking of the financial transaction of the business by the authorized auditor based on following categories such as compliance basis, investigative basis, financial basis, and tax basis.

Scope of Accounting

The scope of accounting indicates field or area where accounting is used. Generally, it covers the following areas such as accounting for business organization, accounting for non-trading organization, accounting for government and non-governmental organization, and accounting for professionals and individuals. 

Importance of Accounting

The accounting provides various benefits some the benefits are Compete record, Availability, Helpful in decision-making, Reduction in errors, Knowledge of profitability, Knowledge of financial position etc. that shows the importance of accounting.

Process of Accounting (Accounting Cycle)

The accounting process starts with positing the journal entries  and ends with closing entries followed by various preparations such as posting ledger accounts, preparing the trial balance, identification of year-end adjustments, preparing the adjusted trial balance, preparing the income statement, balance sheet and cash flow statement.

Fig: Process of Accounting (Accounting Cycle)

 System of Accounting

In the concept of accounting, the systems mainly two types as single entry system and double entry system.

Under single entry system, only cash book is maintained and no other ledgers find a place in this system. This system considers personal nature types of transaction that is recorded in rough book. It rejects the real and nominal nature of transactions.

Under double entry system, all three types of accounts (include personal, real and nominal) natures of transactions are recorded in varieties of accounts based on its nature. This system provides two side effect of the transaction in the form of debit and credit.  This is also known as debit and credit rule of accounting that every credit entry must be a corresponding debit entry.

Bases of Accounting

The bases of accounting refer to the approaches or methodologies of accounting that are used for recording the transactions and presenting the financial statements to interpret the result of financial position of the company.

Mainly there are two broad bases of methodologies of accounting as cash bases and accrual basis. A cash bases of accounting is a method that records only those income and expenses that come in and out by the business at a particular period. Similarly, an accrual bases of accounting is a method that records all income and expenses, cash items and non-cash items that either it come in and out or not by the organization at a particular period.

Theories of Accounting

Accounting theory is the set of assumptions and methodologies used in the study and application of financial reporting principles. It is the conceptual framework that used to prepare the financial statement based on the accounting rules and principles. Generally Accepted Accounting Principle (GAAP) is one of the 'Accounting Theory' which guide about accounting rules and principles. This concept is prepared by International Accounting Standard Committee (IASC) which is commonly used all over the world. Hence, these concepts are called "Generally Accepted Accounting Principles (GAAP)". Some of the basic accounting concepts or assumptions are as follows:

 

• Business Entity Concept: According to this concept, the business organization and the owner of the business are two different entities. So, business transactions are recorded in the books of account of business organization and not in the books of accounts of its proprietor (owner).

• Money Measurement Concept: According to this concept, it explains the facts that accounting records only those activities which can be expressed or measured in money value. In other words, the activities, which cannot be measured in money value, are not included in accounting.

• Going Concern Concept: According to this concept, a business is considered as a going concern. It means the business will continue to operate for a long period of time. It is because of this concept that fixed assets are recorded at their original cost and depreciation is charged on these assets without considering their market value. Similarly, various balances of assets and liabilities are carried forward to the next year assuming that a business is going concern.

• Accounting Period Concept: According to this concept, the concerned parties need to know the results and financial position of the business at a frequent time intervals. So, the whole life of the business is divided into periodic intervals that are known as accounting period or fiscal year. The length of accounting period depends on the nature of the business. It may be three months, six months or twelve months. Generally, a one year period is used for this purpose.

• Cost Concept: According to this concept, the cost of goods and services are recognized when they are incurred and recorded at their costs. Similarly, the fixed assets are recorded in the books of account at the cost price at which they are purchased rather than their market price. 

• Realization Concept: It is also called 'Revenue recognition concept'. According to this concept, revenue is recognized as an earning on the date on which it is realized. It is not considered as being realized when goods are manufactured or order is received or contract is signed or cash is received. It is considered as being realized on the date on which goods or services are transferred to customers and the customers becomes legally liable to pay for it. 

• Matching Concept: It means matching costs with revenue. The expenses incurred for a particular period should be matched with the revenue recognized by the business for that period. If the revenues exceed the expenses, the resultant figure will be profit. But if expenses are more, the difference will be loss. So, according to this concept, profit and loss of the business is determined by comparing revenues earned with the expenses incurred.

• Dual Aspect Concept: According to this concept, every transaction should have two sided effect to the extent of the same amount. It means every transaction is always equal to each other. A dual aspect transaction affects the assets and liabilities and accounting equation too. Assets = Owner's Capital + Liabilities

Conclusion

Luca Pacioli is the father of accounting who first published detailed material on the double-entry system of accounting. An accounting is "the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information. The main purpose of accounting is to ascertain profit or loss and show the financial position of the business. Mainly the user has divided into two parts as internal and external. The accounting process starts with positing the journal entries and ends with closing entries followed by various preparations such as posting ledger accounts, preparing the trial balance etc. Basically there are two systems of accounting as Single Entry System and Double Entry System. These systems are based on two bases of an accounting as Cash Bases and Accrual Bases. There is a GAAP theory of an accounting prepared by International Accounting Standard Committee (IASC) which is commonly used all over the world. Here is a summary report of various accounting that is applicable for the following parties or person followed as bellows:

Table: Users and Accounting Relationship

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