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Important Facts About Accounting

What is accounting?

Meaning :

Accounting is all about the process that helps to record, summarize, analyze, and report data that concerns financial transactions. 
The first and foremost task to be accomplished by accounting is to document the various transactions that are made within the business. This can also be called bookkeeping, which is a method of identifying and documenting transactions.
Book-keeping is only concerned with the recording segment and nothing else. Accounting maintains a few books for the cause of recording. The method is performed in a systematic manner.

Definition of Accounting

Accounting is the recording of financial transactions along with storing, sorting, retrieving, summarizing, and presenting the results in various reports and analyses. Accounting is also a field of study and profession dedicated to carrying out those tasks.

Types of Accounting

There are several forms of accounting, ranging from auditing to tax return planning. Accountants appear to specialize in one of these fields, contributing to the following different career tracks:
  • Financial Accounting, or financial reporting, is the process of producing information for external use usually in the form of financial statements. Financial Statements reflect an entity's past performance and current position based on a set of standards and guidelines known as GAAP (Generally Accepted Accounting Principles). GAAP refers to the standard framework of guideline for financial accounting used in any given jurisdiction. This generally includes accounting standards, accounting guidelines, and rules and regulations to be observed by accountants when preparing financial statements.

  • Management Accounting is concerned with the process of accumulating accounting information for internal operational reporting. It includes such areas as cost accounting and target costing. Cost accounting is a branch of accounting management which includes the use of different techniques to monitor and control costs. This implementation is more applicable to the issues of manufacturing.

  • Tax Accounting is concerned with the proper compliance with tax regulations, tax filings, and tax planning to reduce a company's tax burden in the future. Accordingly, tax accountants adjust the financial statements prepared under the principles of financial accounting to account for differences with the rules prescribed by tax laws.Information is then used by tax professionals to estimate tax liability of a company and for tax planning purposes.

  • Social Accounting, also known as Corporate Social Responsibility Reporting and Sustainability Accounting. Social Accounting is reported primarily in the form of environmental reports that accompany the company's annual reports.

  • Forensic Accounting involves the reconstruction of financial information when a complete set of financial records is not available. This skill set can be used to reconstruct the records of a destroyed business, to reconstruct fraudulent records, to convert cash-basis accounting records to the accrual basis, and so forth. This career tends to attract auditors.  Forensic accountants act as expert witnesses in civil and criminal law courts who require an assessment of the financial effects of a loss or a financial fraud detection.

What is the Accounting Cycle?

The accounting cycle is a collective process of identifying, analyzing, and recording the accounting events of a company. The series of steps begin when a transaction occurs and end with its inclusion in the financial statements.

Steps in the accounting cycle

Accounting cycle involves a systematic process which is as follows :
  • Transaction
  • Journal Entries
  • Posting in General Ledger
  • Trial Balance
  • Worksheets
  • Adjusting Entries
  • Financial Statements
  • Closing the Books

Transactions: Financial transactions start the process. If there were no financial transactions, there would be nothing to keep track of. Transactions may include a debt payoff, any purchases or acquisition of assets, sales revenue, or any expenses incurred.

Journal Entries : A journal is a book – paper or electronic – in which transactions are recorded. Business transactions are recorded using the double-entry bookkeeping system. They are recorded in journal entries containing at least two accounts (one debited and one credited).

To simplify the recording process, special journals are often used for transactions that recur frequently such as sales, purchases, cash receipts, and cash disbursements. A general journal is used to record those that cannot be entered in the special books.
Transactions are recorded in chronological order and as they occur.
Journals are also known as Books of Original Entry.

Posting to the General Ledger : The journal entries are then posted to the general ledger where it is possible to see a summary of all transactions to individual accounts.

Trial Balance: A total balance is calculated for the accounts at the end of the accounting period (which may be quarterly, monthly, or annually, depending on the company).

Worksheet: The bookkeeper must search for errors and make corrective adjustments that are tracked on a worksheet when the debits and credits on the trial balance are not matched.

Adjusting Entries : At the end of the company’s accounting period, adjusting entries must be posted to accounts for accruals and deferrals. Adjusting entries are made for accrual of income, accrual of expenses, deferrals (income method or liability method), prepayments (asset method or expense method), depreciation, and allowances.

Financial Statement : The balance sheet, income statement, and cash flow statement can be prepared using the correct balances.

Closing : The revenue and expense accounts are closed and zeroed out for the next accounting cycle. This is because sales and expense reports are accounts that reflect results for a specific period of time. Balance sheet accounts are not closed because at some point in time they display the financial position of the company.

PROCESS OF ACCOUNTING CYCLE

Accounting cycle involves a systematic process. It begins when an accounting transaction takes place in a company and need arises for its recording. Hence the accounting cycle initiates with the recording of transactions and posting its journal entries in the general ledger. With the completion of the posting of entries in the general ledger, the accounting person prepares an unadjusted trial balance.
The main objective of the trial balance is to verify the total credit debits. After the modification of these entries, other corrections are made. Followed by financial statements, revised trial balance is prepared after filing updated entries.

PURPOSE OF ACCOUNTING CYCLE

The main purpose of the accounting cycle is to record all the transactions systematically without missing an entry. It leads to the accuracy of all financial records. The accountant prepares the financial statements considering accounting records and cycle.
So it serves as a financial statements stepping stone or platform.

Golden Rules of Accounting

One of the most famous and commonly used terms in the field of accounting and finance is “Three golden rules of accounting”. These rules are used to prepare an accurate journal entry which forms the very basis of accounting and act as a cornerstone for all bookkeeping.
To understand the Golden Rules of Accounting we must first understand the types of accounts.
There are three types of accounts:
  • Real Account
  • Personal Account
  • Nominal Account
Real Account is a general ledger account relating to Assets and Liabilities other than people accounts. These are accounts that don’t close at year end and are carried forward.
The example of assets on which the Real Account is applicable:-
Land and Building,
Furniture
Plant and Machine
Vehicles
Cash
Trademarks
Copyright
The accounting rule of real account goes like
“Debit what comes in,
credit what goes out”

Personal account is a General ledger account connected to all persons like individuals, firms and associations.
If the person/ group of persons/ legal body is receiving something from the business then – Debit the receiver
If the person/ group of persons/ legal body is paying something to the business – Credit the payer or giver
Example of accounts on which the Personal Account is applicable: –
Examples of Persons: – Suman, Pooja Shah, Rahul Rao, Aman, Amit . Etc.
Examples of Artificial persons: – Ashok And Sons., Bank A/c (SBI), Reliance Industries Ltd. Etc.
Examples of Representative persons: – Outstanding Salary, Prepaid Expenses, Accrued Income, Pre- received Income, Etc.
The accounting rule of personal account goes like
“Debit the receiver,
Credit the giver”
Nominal account is a General ledger account pertaining to all income, expenses, losses and gains. Some common e.g. are,
Electricity Expenses,
Telephone Expenses,
Interest Received,
Profit on Sale of Machines, etc.

If it’s an expense or loss for the business – Debit
If it’s an income or gain for the business – credit
The accounting rule of nominal account goes like
“Debit all expenses and losses,
credit all incomes and gains”

Golden rules of accounting with examples :

1. Seema Mishra started business with cash Rs. 1,00,000.
2. Purchase goods for cash Rs. 50,000.
3. Sold good to Ankita for Rs. 10,000.
4. Sold goods for cash Rs. 12,000.
5. Paid to Ronak Shah Rs. 25,000.
6. Paid rent of shop Rs. 17,000.

Solution:
Sr. No. Name of Account Type of Account Debit/ Credit Reason
1 Cash Real Dr Cash Come in
Seema Mishra Personal Cr Proprietor is a giver
2 Purchase Nominal Dr Purchase is an expense
Cash Real Cr Cash going out
3 Ankita Personal Dr Ankita is a receiver
Sales Nominal Cr Income if the business
4 Cash Real Dr Cash Come in
Sales Nominal Cr Income if the business
5 Ronak Personal Dr Ronak is a receiver
Cash Real Cr Cash goes out
6 Rent Nominal Dr Rent is an expense 
Cash Real Cr Cash goes out






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