Introduction to Accounting
INTRODUCTION TO ACCOUNTING
Accounting involves a process of collecting, recording, and reporting a business’s economic activities to users. It is often called the language of business because it uses a unique vocabulary to communicate information to decision-makers. To understand accounting, we first look at the basic forms of business organisations. The concepts and principles that provide the foundation for financial accounting are then discussed. With an emphasis on the corporate form of business organisation, we will examine how we communicate to users of financial information using financial statements. Finally, we will review how financial transactions are analysed and then reported on financial statements.
Accounting practices are guided by GAAP which consist of qualitative characteristics and principles. As already stated, relevance and faithful representation are the primary qualitative characteristics. Comparability, verifiability, timeliness, and understandability are additional qualitative characteristics.
Information that possesses the quality of:
Relevance: has the ability to make a difference in the decision-making process.
Faithful representation is complete, neutral, and free from error.
Comparability tells users of the information that businesses utilize similar accounting practices.
Verifiability means that others are able to confirm that the information faithfully represents the economic activities of the business.
Timeliness is available to decision makers in time to be useful.
Understandability is clear and concise.
Financial accounting focuses on communicating information to external users. That information is communicated using financial statements. There are four financial statements: the income statement, statement of changes in equity, balance sheet, and statement of cash flows. The accounting equation is foundational to accounting. It shows that the total assets of a business must always equal the total claims against those assets by creditors and owners. The equation is expressed as:
When financial transactions are recorded, combined effects on assets, liabilities, and equity are always exactly offsetting. This is the reason that the balance sheet always balances.
Each economic exchange is referred to as a financial transaction — for example, when an organisation exchanges cash for land and buildings. Incurring a liability in return for an asset is also a financial transaction. Instead of paying cash for land and buildings, an organisation may borrow money from a financial institution. The company must repay this with cash payments in the future. The accounting equation provides a system for processing and summarising these sorts of transactions.
Accountants view financial transactions as economic events that change components within the accounting equation. These changes are usually triggered by information contained in source documents (such as sales invoices and bills from creditors) that can be verified for accuracy.
Financial statements are prepared at regular intervals — usually monthly or quarterly
— and at the end of each 12-month period. This 12-month period is called the fiscal year. The timing of the financial statements is determined by the needs of management and other users of the financial statements. For instance, financial statements may also be required by outside parties, such as bankers and shareholders. However, accounting information must possess the qualitative characteristic of timeliness — it must be available to decision makers in time to be useful — which is typically a minimum of once every 12 months.
In the present day, accountants no longer record every transaction of a company or any corporate body with the help of pen and pencils using a ledger book. After the birth of computers and the emergence of digitalization in most professional sectors in India, accounting is also computerised. For the past few decades, computerised data has been used mainly in the field of science and technology. However, as the years go by, computerised accounting systems are also becoming quite common. Several accounting firms still perform book-keeping manually, while most firms comprise financial transactions that can be a lot for a manual accounting process.
Moreover, the complicated financial transactions of a firm are quite difficult to be recorded manually. That led to the introduction of the concept of computerised accounting systems.
Before you learn the meaning of computerised accounting, it is important to know about the various factors to consider before using such a system.
Features of Computerised Accounting Systems
The characteristic features of computerised accounting systems are as follows –
Components of computerised accounting systems are software programs which are installed on a company machine, network server or accessed remotely with the help of the Internet.
Such a system allows accounting professionals to set up income and expense accounts such as purchases and sales accounts, salary distribution account, advertising expenses account, etc.
The process of computerised accounting systems includes programs that can be used to manage and control bank accounts, prepare company budgets, etc.
Depending upon the program and how advanced it is, accountants can also construct tax documents, handle company payroll, and manage project expenses properly.
Programs in this system can be customised as per user demands. This feature helps every accounting professional to meet the requirements of their firm.
However, it is essential for the employees of a firm who are using a computerised accounting system to get proper training so that they can use the system correctly and execute the required programs accurately.
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