What is Balance Sheet

The balance sheet presents the financial position of a business on a certain fixed date, usually at the close of the last day of a month or a year. It lists the liabilities and capital on the one side and the assets on the other side. The totals of the tow sides must always be equal as has been demonstrated by the accounting equation.

What is accounting transaction

A business transaction is the occurrence of an event of a condition that must e recorded. For example, the payment of monthly telephone bill of $50, the purchase of $400 of merchandise on credit. And the acquisition of land and store building for $5000 for which payment is to be made in installments are illustrative of the variety of business transactions. The first two transactions are relatively simple: a payment of money in exchange for a service, and a promise to pay within a short time in exchange for commodities. The purchase of a building and the land on which it is situated allocated between the land and the building, and the agreement usually provides for spreading the payment of a substantial part of the price over a period of years and for the payment of interests on the unpaid balance. There may be other provisions designed to safeguard the seller until the full price has been paid.

It can be readily seen that a particular business transaction may lead to an event or a condition that constitutes another transaction. For example, the purchase of commodity on credit described above will be followed by payment to the creditor, which is another transaction; and each time a portion of the merchandise is sold, another transaction occurs. Each of these events needs to be recorded. Each payment to the seller of the land and the building is a transaction, as is the payment of interest. The fact that the life of the building is limited must also be given recognition in the records.

The wearing-out of the building is not an exchange of goods or services between the business and an outsider, but it is nevertheless a significant event that must be recorded. Transactions of this type, as well as others not directly related to outsiders, are sometimes referred to as internal transactions.

The system of records begins with the recording of each transaction. There are many different methods of recording transactions. For example, a sale of a service for cash may be recorded by a hand written receipt, or it may be recorded by merely depressing the appropriate keys of a cash register. Regardless of the recording system used, the data thus accumulated provide the basis for the preparation of various summarizing reports. In addition, the supporting documents and other forms of evidence furnish a basis for subsequent reviews and verification by internal auditors, external auditors and others.

Role of accounting in business decision

Knowledge of the past performance of an enterprise is of additional value beyond its historical aspects; it is useful in planning future operations. By comparing summaries of the most recent month with the preceding moth and with the comparable month of the preceding year, trends become apparent. Further study and analysis may develop the contributory cause of the trend and point the way to accelerating those that are favorable and to halting those that are undesirable. For example, and increase in the volume of services or merchandise sold is a favorable indication. If the increase is accompanied by increases in cost and expense of such magnitude that net profit in decreased, the end result is, of course, unfavorable. Questions such as the following should be answered : was the increased volume of sales attributable to excessive reductions in selling price. Did the cost of the merchandise increase without a comparable adjustment in selling price? What type of expenses increased and that were the causes of the increases? Which of the increase were unavoidable and which one can be reduced in the future without adverse effects?

A business that is contemplating expansions needs to give careful consideration to the probable effect of the added facilities on the future volume of business and expense. With the return on the additional investment justify the expansion? There may also be problems of financing. If money is to be borrowed, when can it be repaid? These are illustrations o the money problems that constantly confront owner and managers in planning future operations. Business records do not supply all of the answer, nor do they take the place of good judgment. The data obtainable form the records are essential however, as a partial basis for making decision.

There are many other needs of a more routine nature served by record. For example, it is necessary to know the amount owned to each creditor and by each customer and the date each payment is due. Records of property are necessary in determining the amount and type of insurance that should be carried and in ascertaining the amount of any insured loss that may occur. Knowing when to place orders for merchandise and supplies, granting credit to customers, anticipating the amount of cash required at any particular time-theses and many other essential items of information can be obtained in a timely and orderly fashion only if adequate records are maintained.

In addition to manage and owner, there are others who must be supplied with reports based on the business records. Banks customarily require periodic financial statements form businesses that owe them money. It is customary to submit annual reports to parties from whom long term loans have been obtained. Various departments of Government require reports on property, production, foreign exchange earnings, labor welfare, etc. for obtaining permission to issue debentures; a company is required to file detailed reports on business operations and financial position with government agencies. A stock exchange also requires periodic reports from companies whose shares are listed. The forgoing reasons for preparing accounting reports for outsiders are merely illustrative; there are many others.

Thus far attention has been focused on business enterprises. Records are also needed by those engaged in professional pursuits and even by persons who have retired from active participation in a business or profession. Government and semi-Government units must maintain records of their transactions as they are required to report to higher authorities. Records of the past performance also serve as background in the planning for the future. For similar reason, hospitals, educational institutions, labor unions, and other organizations must maintain records and report on their financial transactions.

Basic business operation

The use of property is essential to the conduct of business. A place for the business must be provided in a building that is owned or rented; equipment adapted to the activities of the business must be owned or leased; if commodities are sold, they must be purchased or manufactured and stored prior to sale; of services are rendered, the equipment and the supplies needed to render the services must be available for use. Wherever there is business, property is found.

Through the sale of commodities or services at a profit, a business enterprise increases its property. Such increases, a part of which is ordinarily in the form of cash, may be retained in the business and use for business expansion or deduction of indebtedness, or the property increases may be withdrawn from the business by the owners. Those who organize a new business venture or invest in established business firms do so with the expectations that operations will yield a profit. There is always the risk, of course, that the business will unsuccessful, and the owners may lose all or part of their investment.

Bookkeeping and Accounting

There is some confusion over the distinction between “bookkeeping” and”accounting”.

This is due in part to the fact that the two are related and that there is no universally accepted line of demarcation between bookkeeping and accounting.

In general, bookkeeping is the recording of business data in a prescribed manner. A bookkeeper may be responsible for keeping all the records of a business or only a minor segment, such as a portion of the customers’ accounts in a department store. Much of the work of the bookkeeper is clerical in nature and in large organizations it is increasingly being accomplished through the use of mechanical and electronic equipment.

Accounting is primarily concerned with the design of the system of record, the preparations of reports based on the recorded data, and the interpretation of the reports. Accountants often direct and review the work of bookkeepers. The larger the firm, the greater is the number of gradations in responsibility and authoring. The work of accountants at the beginning levels may include some bookkeeping. In any event, the accountant must possess a much higher level of knowledge, conceptual understanding and analytical skill than is required of the bookkeeper.

Specialized Accounting Fields

As in may other areas of human activity in the twentieth century, a number of specialized fields in accounting have evolved This tendency towards specialization has been caused in larges measure by growth in size of business units, mounting taxes and increasing regulation of business by lay and by governmental agencies. These influences, together with rapid technological advances and accelerated economic growth, have created the need for accountants to acquire high degree of expertness in various specialties. The term financial accounting or general accounting applies to the overall accounting for an economic unit. It is concerned with the recoding of transactions for a business for other economic unit and the periodic and special purpose reports and statements prepared from the accounting records are used to impart useful information to managers, owner, creditors, governmental agencies and the public. The accounting principles and techniques that will be developed in this book are in large part included in financial accounting.Auditing Auditing is classified under two head: external auditing and internal auditing. External auditing service is rendered by practicing accountants as required by law. These accountants examine the accounts and supporting records and express an opinion regarding the fairness and accuracy of the Balance Sheet and the Profit and loss Account. Internal auditors, as their name implies, are generally employed by large companies from amount their own staff. One of the most important duties of internal auditors is to determine the extent to which the various operating divisions observer the policies and procedures prescribed by management.


Cost Accounting

Cost accounting emphasizes the determination and the control of costs. It is concerned primarily with the cost of manufacturing processes and of manufactured products, but increasing attention is being given to selling and distribution cost. In addition, one of the principal functions of the cost accountant is to assemble and interpret cost data, both actual and prospective, for the use of management in controlling current operations an din planning for the future.

Management Accounting

Management accounting employs both historical and estimated daqta in assisting management in day-to-day operations and in planning future operations. It deals with specific problems that confront enterprise managers at various organizational levels. The management accountant is frequently concerned with identifying alternative courses of action and then helping to select the best one. For example, he may assist the finance manager of the company in preparing planning for future financing or he may develop data for the use of the sales manager in determining the selling price to be placed on a new product. In recent years, accountants have come to realize that their training and experience uniquely qualify them to advise management on policies and administration even in matters which might seem to have little relationship to accounting.

Tax accounting

Tax accounting encompasses the preparation of tax returns and the consideration of the tax consequences of proposed business transactions or alternative courses of action. Accountants specializing in this field must be familiar with the tax laws affecting their employer or clients and also must keep up-to-day on charges in tax laws, administrative regulations and court decisions on tax cases.

Accounting System

Accounting system is the special field concerned with the creation of procedures for the accumulation and reporting of financial data. The systems accountant must devise appropriate accounting procedures to safeguard business assets and, to the fullest possible extent, provide for information flow that will be helpful to management. It is essential that he also be knowledgeable about the uses and relative merits of available mechanical and electronic data processing equipment.

Budgetary Accounting

Budgetary accounting presents the plan of financial operations for a period and, through accounts and summaries, provides comparisons of actual operations with the predetermined plan. It is a combination of planning, coordinating, and controlling future operation.Government AccountingGovernment accounting specializes in controlling the expenditure of public funds in accordance with statutory requirements. It also seeks to provide useful accounting information regarding the business aspects of public administration. There is some overlapping among the various specialized fields, and leaders in any particular field are likely to be will versed in related areas. There is also a considerable degree of specializations within the particular specialties. For example, within the field of auditing, one may become an expert in a particular classification such as oil distribution, banking, insurance and public utilities. In tax accounting one may specialize in the problem of oil and gas producing companies; or in systems one may become an expert in electronic data processing equipment.HDMI (2 meter) 6 foot cable HQ 1080P 1.3b

Accounting relationship to other fields

Individuals engaged in such areas of business as production, marketing, personnel, and general management need not be expert accountants, but their usefulness is enhanced and their advancements is more assured if they have a good understanding of accounting principles. Everyone engaged in business activity, form the workman to the manager and owner, comes into contact with accounting. The higher the level of authority and responsibility, the greater is the need for an understanding of accounting concepts and terminology.

Many other person with specialized training in non-business areas who are employed by business organizations also make use of accounting data and need to understand accounting principles. For example, an engineer responsibility for selecting the most desirable solution to a technical manufacturing problem may consider cost accounting data to be the decisive factor. Lawyers use accounting data in cases and in lawsuits involving property ownership and damages from breach of contract. Government agencies rely on accounting data in evaluating the efficiency of government operations and for appraising the feasibility of proposed taxation and spending programs. Finally, every person engages in business transactions and must necessarily be concerned with the financial aspects of his own life, and perhaps of others. Accounting plays an important role in modern society and, broadly speaking, it can be said that all citizens, are affected by accounting. The closer the contact with financial activity, of course, the greater the need for an understanding of an accounting concepts and terminology.Apple iPod touch 32 GB (3rd Generation) NEWEST MODEL

History of Accounting

The accounting system, one of the integral disciplines of accountancy is as old as the civilization itself. The fundamental concepts of classifying, analyzing and interpretation of financial transactions evolved over a period of 7000 years, when trade started in the form of barter system. As the human civilization evolved and started living in a community, they realized, it was not possible for each and every household to produce the daily requirements, all by themselves. They exchanged goods in return of goods and as the scope of exchange widened, it became increasingly necessary to keep a track of the system, rather maintain an account of the goods sold and received.

Pacioli marks the history of accounting distinctly into two parts – an unwritten practice and a written practice of accounting.

The primitive form of accountancy discovered in the civilization of Babylon, Assyria and Sumeria started with keeping a track of the agricultural or the animal produce in the harvesting season and the surplus over a period of time. 10 tokens in 7000 BC primarily created to recognize the different types of produce and the transaction status grew to 350 in 3500 BC, which was increasingly used by urban shops when exchange of goods or redistribution included others forms, like garments, textiles, jewellery. The shapes of tokens – cones, spheres, were used to identify the varied forms of surplus. Complex tokens and clay tablets were made by the Sumerian people who managed the book keeping with the help of these tokens and introduced a systematic approach of accounting by employing the combination of literature and arithmetic skills. They documented financial transactions which preceded the cuneiform writing. It was found that the Neolithic accountants did not just follow the existing book keeping practices but were actively involved in coding and decoding the data and manually moved and removed the counters with the help of mathematical operations like addition, subtraction, multiplication and division.

The Romans brought the bookkeeping and accounting into limelight, they used it not only for business and financial transactions but for administrative purposes as well. They associated a value for each transaction, the expenditure on public, army, temples, religious offerings and distribution of grants. Accounting documents were accessible to the executive authority which equipped them for better planning and decision making. A yearly account of the day to day transaction, sale produce, earnings from production and expenditure helped them operate the cash in the required direction. Luca Pacioli, referred as the father of accounting first documented the rules of book keeping in written form which was widely used by merchants and their off springs to educate them on book keeping and keep a track of the their business spread overseas.

With the industrial revolution and renaissance, accounting got immense prominence, as it saved several firms from bankruptcy. The professional who provides the service of accounting is known as an accountant and his roles and responsibilities grew, and noticed refinement, as trade and business expanded. Auditing became an inevitable part of accountancy to keep out fraud and leakages from the accounting cycle. The accountant’s profession was recognized by Great Britain in 1854 and by the United States, New York in 1887. The major reasons of the systematic accounting were the complex tax laws and regulations and maintenance of uniform account for the government and public disposal. Over a period of time, accountancy was not limited to accounting cycle alone, but played a major role in several managerial decisions of the organization. It helped an entity recognize its areas of improvement and leverage the performance.

What is Accounting?

Accounting is often characterized as “the language of business”. Because of the wide range of accounting activity, as concise yet all-inclusive description of accounting is difficult to devise. Accounting is concerned with processes of recording, sorting, and summarizing data resulting from business transactions and events. The data are to a large extent but not exclusively of a financial nature, and are frequently but not always stated in monetary terms. Accounting is more than this, however, its involvement with preparation of reports and interpretation of the data is of often grater significance. Accounting has been defined rather broadly as:

…the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information.

Implicit in this definition is the necessity of recording the economic information that is to be measured. An understanding of the kinds of information to be accounted for and their manner of recording must be acquired before the student can advance very far into the area of effective communication.

Without exploring in detail the characteristics of economic information, it is sufficient at this point to indicate that it includes financial information about business transaction. Much of the “raw-material” with which accounting deals is composed of business transaction data, expressed in terms of money. The recording of such data may take various forms, such as writing by pen or pencil, printing by various mechanical and electronic devices, or holes or magnetic impressions in cards or tape.

The mere records of transactions are of little use in making “informed judgments and decisions”. The recorded data must be sorted and summarized before significant reports and analyses can be prepared. It is not the single business act but the sum of all the operations of a day, week, month or year that has significance. Some of the reports to enterprise managers and to others issued only at longer intervals. The usefulness of reports is often enhanced by analyses, such as percentages and ratios, and comparisons between different dates or periods of time. The trends and other significant developments in the affairs of an organization set forth in various reports are, in a general sense the “end-product” of accounting.

Need for accounting

Accounting is the “language” employed to communicate financial information. Such information is sought for a variety of reasons. Owners and prospective owners of a business enterprise need to know about its financial status and its prospects for the future. Bankers and suppliers appraise the financial soundness of a business organization and weigh the risk involved before making loans, or granting credit. Government agencies are concerned with the financial activities of business organizations for purposes of taxations and regulation. Employees are also vitally interested in the stability and the profitability of the organization that employs them.

The managers of business enterprises need a wide range of data about every fact of operations, much of which is made available through accounting. The manager of a small business may be thoroughly familiar with all operating and financial details and hence need relatively little accounting information. As the size of a business unit increase, however, the manager becomes farther and farther removed from direct contact with day-t-day operations. He business, be must be supplied with timely financial information about various aspects of the business. The growth of large business units and of the importance of accounting in such organizations has given rise to the expression that accounting provides the “eyes and ears of management”.

The accountant has the responsibility of keeping track of all monetary transactions that affect the organization of interpreting the information in terms of relative success or failure, and of helping to plan the course of future action.

Ratios in Accounting

Accounting ratios are a representation of one value relative to another giving a broader picture of an increasing or decreasing trend of business in an organization. Values taken from the financial statements are shown either in the form of decimal or percentage for simplified study of the performance of an entity, appreciate it, compare it and use it for planning the future of the business. Mangers use these ratios to analyze the strengths and weaknesses of the firm and make important decisions like expanding the business or acquiring other firms after evaluating the financial position of the firm. The business owners and the shareholder get a true summary of the performance of the organization and its net worth in the market. These values are also important for the creditors to analyze, before approving the loan. Ratios expressed as decimal are generally for values more than 1, for example earning yield, while those expressed as percentage are for values smaller than1, for example P/E ratio.

These values are however not absolute and an end figure, but has to be supplemented with other information. Financial statements on one hand are the source of data for these ratios but on the other hand a limitation as well. The ratio has to be studied in the light of a historical record or current record available from other sources, working on the same model. For example a P/E ratio is just a number and would not make sense to the decision makers in an organization unless they compare it with the previous accounting period or against another organization in the same field. The ratios have to define according to the standards set by GAAP or IFRS depending on the extension of the business at national or international level respectively. Also the changing values with respect to time, e.g. price, have to be kept into consideration while referring the ratios.

The ratios are calculated from the following financial statements, based on the methods and standards as defined in accounting.

• Balance sheet

• Income statement

• Statement of cash flows

• Statement of retained earning

General Ledger in Accounting

For a business to identify an accounts detail, it is important to summarize the information of the financial transactions, account wise. Some of the most important financial documents of an organization like balance sheet and profit and loss statement are derived from a general ledger. General ledger also known as nominal ledger, used in double entry book keeping system, represents a collection of all accounts of an organization. Double entry book keeping balances and strengthens the accounting equation in the ledger where assets = liabilities + owner’s equity

The content of information in a general journal is same as that in the ledger, but the difference lies in the format and presentation of the data. While the general journal has financial transactions entered in the chronological order, this data when posted in the ledger, account wise, gives a readable format to the activity and balance associated with an account in a glance. The order of the account names is derived from the chart of accounts. A simpler way to understand is to map the entries in the general journal to the postings in the general ledger. The postings can be done either manually or with the help of automated software. As posting only transfers and rearranges the data from the journal to different fields and columns in a ledger, accounting software can be used for the continuous transfer of data or in batches after a day’s or week’s business. Reference numbers can be used in ledger for reverse calculation and ensuring reconciliation of data with the journal.