MGT101 Important Notes

Accounting definition

Accounting can be defined as the process of collecting, recording, summarizing and communicating the financial information of a business

Accounts are the records in which this financial information is recorded.

Keeping the most basic records is called Book Keeping The Profession responsible for collecting, recording, summarizing and communicating the financial information is known as Accountancy profession. For example an Accountant

Book keeping is the art of recording the financial information. For example keeping the record sale of goods

What’s difference between Accounting and Book Keeping?

Book keeping only involve in recording the financial information while accounting collects, records, summarizes and communicates the financial information

Booking is just one basic phase of accounting the recording phase

Why should we keep Accounts?

Man has been keeping accounts for thousands of years because they help to keep track of money, by showing where did money come from and how we have spent it

Different fields of accounting or branches of accounting

Financial accounting

It is the general accounting field engages in recording and communicating financial information

Cost accounting

It is specialized field of accounting involves in controlling the cost of production and distribution

Management accounting

It concerns in selecting best method of accounting among various alternatives

Government accounting

It is generally single entry system used in recording government transactions e.g. recording revenue, expenditure, taxes and preparing budget

Auditing

It is the examination of accounting records to check the fairness and accuracy

Objectives and functions of accounting

First and the foremost objective of accounting is to maintain accounts to tack inflow and outflow of money and to keep financial information safe By keeping accounts businesses protects their properties because accounts help in tracking misappropriation and frauds Legal requirements of a country for various reasons. For example it serves as a base for income tax calculation Accounting information is helpful in communicating the profitability, financial position or financial results of a business entity to interested parties or Stake holders

Stakeholders, interested parties or parties interested in accounting information

First off, the business owner want to know the financial position of business whether the business is in profit or in loss Investors because they want to invest in the business (e.g they purchase shares, bonds etc.) Loan provider, banks and creditors want to know the business profitability and financial position Management of business needs information for the decision-making Business employees want to know the business stability, future prospects and business scope for their own welfare in the business organization Government for the income tax purpose and government agencies for various other purposes

For recording financial information, an accountant has to enter information in accounts. Entering information about a financial transaction in accounts is called entry-making. There are two main systems for making or passing entries in the accounts: Single entry system and double entry system

Single Entry

Where only one effect or aspect of a financial transaction is recorded

Double Entry

An Entry-making technique or a system of recording financial information where two effects or aspects of every financial transaction are recorded in accounts

Example of Double Entry

Good sold for cash. In this case, the increase in sales (revenue) will be recorded in sales account and increase in cash will be recorded in cash account. Therefore, there are two aspects or effects of this transaction first one is Increase in sales or revenue and second is increase in cash, both will be recorded.

Basic Terms of Accounting

Business

In general term any activity undertaken for purpose of earning profit

Capital

Capital represents cash and resources introduced by the owner(s) of the business to set up or to run the business

Drawing

Drawing represents cash and resources withdrawn by the owner of business for personal use

Owner

The person(s) who starts a business by introducing capital

Transaction

Any dealing between two persons that can be measured in money. For example sale of good by business is a transaction

Account

A record or log used to record the transactions of business

Invoice

Any written evidence of occurrence of a transaction like invoice for purchase of goods on credit

Trade discount

A discount given by seller to buyer on listed price of good

Cash discount

A discount for quick or prompt payment of credit. For example a company has purchased goods on credit and if it makes payment of credit within specific period time, the seller would give the company cash discount on quick payment

Stock

Goods or commodities remaining unsold at the end of accounting period (Generally 1 year)

Creditor or Account payable

A person, business or an organization from which the business has purchased goods or services on credit

Debtor or Account receivable

A person, business or an organization to which the business has sold goods or services on credit