What, Why and Need of Accounting

Accounting refers to the actual process of preparing and presenting the accounts.

“the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of accounts”.

An accountant is a practitioner of accountancy or accounting.

The word "Accountant" is derived from the French word Compter, which took its origin from the Latin word Computare. The word was formerly written in English as "Accomptant".

Like in comptroller evolved in the 15th century through a blend of the French compte ("an account") and French contreroule "counter-roll, scroll copy", thus who specializes in checking financial ledgers

Why we need

Need and Importance of Accounting

To live we should earn. Earnings comes in many ways. Salary, business income, others like bank interest, etc. salary n others is a direct income which we can spend fully, does not need much FA.

For Business income its little tough to say what we earn is fully available for personal exp. For ex. Sales for Rs.100. Is that 100 fully be taken to our home. Is it our real profit? Yes or no? to decide we have to see the expenses we incurred.

We have to see How much we earned. Do we really earn or not. For that we need FA.

 double-entry bookkeeping first emerged in northern Italy in the 14th century, where trading ventures began to require more capital than a single individual was able to invest. The development of joint-stock companies created wider audiences for accounts, as investors without firsthand knowledge of their operations relied on accounts to provide the requisite information.^[6] This development resulted in a split of accounting systems for internal (i.e.management accounting) and external (i.e. financial accounting) purposes

To get details of the business transactions have to be recorded in a clear and systematic manner to get answers easily and accurately for the following questions at any time:

1.       To maintain accounting records.

2.       To calculate the result of operations.

3.       To ascertain the financial position.

4.       To communicate the information to users.

5.       Taxation

6.       Management decision-making,

7.       Legal requirements

Book-keeping is recording of business transactions, only those transactions related to business which can be expressed in terms of money arerecorded.

Activities of book-keeping are journal, posting to the ledger and balancing of accounts (TB)

Accounting steps:

Journal, posting to the ledger, Bank Reconciliation Statement, Trial Balance and Rectification of Errors, Capital and Revenue Transactions, Final Accounts.

Still to Come...

1. All basic accounts journals / journal entries
2. Basics of How to prepare ledger accounts
3. Basics of How to prepare Trial Balance
4. Basics of How to prepare Manufacturing and Trading account
5. Basics of How to prepare Profit and Loss account
6. Basics of How to prepare Balance sheet

My other Blogs

http://factsaboutindiabharat.blogspot.com/
http://generalelectionsofindia.blogspot.com/
http://taxforall.blogspot.com/
http://caselawstaxation.blogspot.com/
http://managementaccountingbasics.blogspot.com/
http://financialmanagementbasics.blogspot.com/
http://costaccountingbasics.blogspot.com/

Journal Entries, Ledger, TB and Balance Sheet - Examples

1. Start Business with cash Rs. 100,000 on 1.1.2010.

1.1.2010 CASH A/c Dr. 100,000
To CAPITAL. 100,000

How shown in Ledger, Trial balance and in Balance sheet.
Given as image file. Click on the image to enlarge.

Accounting Concepts

• Accrual Concept
  Supports the idea that income should be measured at the time major efforts or accomplishments occur rather than when cash is received or paid.
• Revenue Realization Concept
  The revenue recognition principle requires companies to record revenue when it is realized or realizable and actually earned. In other words, at the time the goods are actually sold or the services are rendered.
• Business Entity Concept
  This assumption requires every business to be accounted for separately from the owner. Personal and business-related transactions are kept apart from each other. In other words, the separate personal transactions of owners and others are not commingled with the reporting of the economic activity of the business. One of the first recommendations almost all accountants tell a client is to at least establish a business checking account and to use it to only record their business transactions.
• Matching Concept
  The Matching Principle goes hand in hand with the Revenue Realization Principle. The matching principle is recording the revenues earned during a period using the revenue realization principle and matching (offsetting) the revenues with the expenses incurred in generating this revenue.
• Money Measurement Concept
  This assumption assumes accounting measures transactions and events in money and only transactions that can be monetized (stated in a monetary unit such as the dollar) are recorded and presented in financial statements. Simply stated, money is the common denominator (measurement unit) used for reporting financial information.
• Accounting Period Concept
  This assumption assumes that business operations can be recorded and separated into different time periods such as months, quarters, and years. This is required in order to provide timely information that is used to compare present and past performance.

• Going Concern Concept
  This assumption assumes that a business will continue operating and will not close or be sold. It assumes that a business will be in operation for a long time. Based on this assumption, actual costs instead of liquidation values are used for presenting financial information. This assumption is abandoned in the event that a business is actually going out of business.
• Cost Concept
  This principle requires that most assets are recorded at their original acquisition cost and except for a relatively few exceptions (marketable securities) no adjustment is made for increases in market value. In other words, the value of an asset is never "written up" even though the asset may actually be worth more than its cost. On the other hand, the cost is sometimes "written down" for example marketable securities and inventory. See Conservatism Concept.

• Consistency Concept
  The same accounting methods should be applied from period to period and all changes to more acceptable methods should be well explained and justified. Deviations in measured outcomes from period to period should be the result of deviations in performance not changes in methods.
• Comparable
  Information must be measured and reported in a similar manner by all types of businesses. This allows comparison of the financial statements of different entities (businesses) or comparisons for the same entity (business) over different periods.
• Conservatism Concept
  Revenues and gains are recognized slower and expenses and losses are recognized quicker. Accountants have a tendency to stray away from painting too rosy a picture. In other words, if in doubt, err to the side of caution. While accountants don't want to misinform users of financial information, they also don't want to be sued.

• Comparable
  Information must be measured and reported in a similar manner by all types of businesses. This allows comparison of the financial statements of different entities (businesses) or comparisons for the same entity (business) over different periods.
• Materiality Concept
  The significance and importance of an item should be considered in order to determine what is reported. Insignificant events need not be measured and recorded.
• Cost-Benefit Convention
  The benefit of providing the financial information should also be weighed against the cost of providing it.
• Industry Practices Convention
  When customary industry practices exists they should be followed and used for financial reporting.

Accounts - Nostro and vostro

Nostro and vostro are accounting terms used to distinguish an account you hold for another entity from an account another entity holds for you. The entities in question need not always be
banks. The origin is: Middle Italian, from Latin, noster and voster; English, ours and yours.

A bank counts a nostro account with a credit balance as a cash asset in its balance sheet. Conversely, a vostro account with a credit balance (i.e. a deposit) is a liability, and a vostro with a debit balance (a loan) is an asset. Thus in many banks a credit entry on an account ("CR") is regarded as negative movement, and a debit ("DR") is positive - the reverse of usual commercial accounting conventions.

With the advent of computerised accounting, nostros and vostros just need to have opposite signs within any one bank's accounting system; that is, if a nostro in credit has a positive sign, then a vostro in credit must have a negative sign. This allows for a reconciliation by summing all accounts to zero (a trial balance) - the basic premise of double-entry bookkeeping.

Nostro accounts are mostly commonly used for currency settlement, where a bank or other financial institution needs to hold balances in a currency other than its home accounting unit.