ACCOUNTING - AN INTRODUCTION

B Y :

W A Q A R A H M A D

L E C T U R E R

M A N A G E M E N T S C I E N C E D E P A R T M E N T

R A N A U N I V E R S I T Y

K A B U L , A F G H A N I S T A N

What is Accounting:

A process of recording, classifying, summarizing & interpreting the financial transactions of the business is called as Accounting.

Transaction: When two or more than two persons deal with each other in goods or services for money, it is called as transaction.

e.g., Ali purchase goods from Aslam for $ 5000.

Recording: It means that when any business transaction occurred, it will be record in the books of accounts. This process is called as “book keeping”. For the first time, transaction is recorded in Journal book.

Classifying: After recording the business transactions, they will be classify to group the transactions of same type at one place.

e.g., Transactions of purchases will be recorded under one head.

For this purpose, Ledger book is used & further the Trial Balance is prepared.

Summarizing: The classified information available from the trial balance are used to prepare Trading & Profit & Loss Account (Also known as Income Statement) & Balance Sheet, in such a manner, which is useful to the users of accounting information.

Interpreting: When the information of business are completed after preparing of Income Statement & Balance Sheet, these information are published. These are useful for the users which enable them for future decision making.

Objectives or Functions of Accounting:

The main objectives or functions of accounting are as follow.

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

Meaning of Accounting Cycle

An accounting cycle is a complete sequence of accounting process, that begins with the recording of business transactions and ends with the preparation of final accounts. Accounting Cycle is a continuous process, which begin with every new year.

When a businessman starts his business activities, he records the day-to-day transactions in the Journal. From the journal the transactions move further to the ledger where accounts are written up. To prove the accuracy of the work done, these balances are transferred to a statement called trial balance. Preparation of trading and profit and loss account is the next step. The balancing of profit and loss account gives the net result of the business transactions. To know the financial position of the business concern, balance sheet is prepared at the end.

Users of Accounting Information

The basic objective of accounting is to provide information which is useful for persons and groups inside and outside the organisation.

1. Internal Users: Internal users are those individuals or groups who are within the organisation like owners, management, employees.

2. External Users: External users are those individuals or groups who are outside the organisation like creditors, investors, banks and other lending institutions, present and potential investors, Government, tax authorities, regulatory agencies and researchers.