Book-keeping does not present a clear financial picture of the state of
affairs of a business. When one has to make a judgement regarding the financial position of the firm, the information contained in these books of accounts has to be analysed and interpreted. It is with the purpose of giving such information that accounting came into being. Accounting is considered as a system which collects and processes financial information of a business. These informations are reported to the users to enable them to make appropriate decisions. 1.3.1 Definition American Accounting Association defines accounting as “the process of identifying, measuring and communicating economic information to permit informed judgements and decision by users of the information”. 1.3.2 Objectives The main objectives of accounting are i. to maintain accounting records. ii. to calculate the result of operations. iii. to ascertain the financial position. iv. to communicate the information to users. 1.3.3 Process The process of accounting as per the above definition is given below:
Business transactions (monetary value)
Information to Users
Identifying Recording Classifying Summarising Analysing Interpreting Communicating
input Process Output
In order to accomplish its main objective of communicating information to the users, accounting embraces the following functions.
i. Identifying: Identifying the business transactions from the source
documents. ii. Recording: The next function of accounting is to keep a systematic record of all business transactions, which are identified in an orderly manner, soon after their occurrence in the journal or subsidiary books. iii. Classifying: This is concerned with the classification of the recorded business transactions so as to group the transactions of similar type at one place. i.e., in ledger accounts. In order to verify the arithmetical accuracy of the accounts, trial balance is prepared. iv. Summarising : The classified information available from the trial balance are used to prepare profit and loss account and balance sheet in a manner useful to the users of accounting information. v. Analysing: It establishes the relationship between the items of the profit and loss account and the balance sheet. The purpose of analysing is to identify the financial strength and weakness of the business. It provides the basis for interpretation. vi. Interpreting: It is concerned with explaining the meaning and significance of the relationship so established by the analysis. Interpretation should be useful to the users, so as to enable them to take correct decisions. vii. Communicating: The results obtained from the summarised, analysed and interpreted information are communicated to the interested parties. 1.3.4 Meaning of Accounting Cycle An accounting cycle is a complete sequence of accounting process, that begins with the recording of business transactions and ends with the preparation of final accounts. Accounting Cycle
Balance Sheet (Closing)
Balance Sheet (Opening)
Profit & Loss Account
Trading Account
Trial Balance
When a businessman starts his business activities, he records the day-today transactions in the Journal. From the journal the transactions move further to the ledger where accounts are written up. Here, the combined effect of debit and credit pertaining to each account is arrived at in the form of balances. To prove the accuracy of the work done, these balances are transferred to a statement called trial balance. Preparation of trading and profit and loss account is the next step. The balancing of profit and loss account gives the net result of the business transactions. To know the financial position of the business concern balance sheet is prepared at the end. These transactions which have completed the current accounting year, once again come to the starting point – the journal – and they move with new transactions of the next year. Thus, this cyclic movement of the transactions through the books of accounts (accounting cycle) is a continuous process.

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