Accounting

When we say Accounting people usually think that it’s a very difficult or hard thing that only accountants know but that’s not the fact, actually a layman having business does accounting like a grosser or a shopkeeper as he records his sales and earnings but the difference is that they don’t follow the certain principles or standards of accounting and learning those principles is not a hard task every businessman whether his business large or small can learn accounting, actually  its necessary for the success of their business because accounting gives the solutions for cost cutting and cost controlling and maximizing profit.

Basically, Accounting is the language of business. How your business is performing, what is the position of your business, how much are you spending for selling your products to your customers and so on that are all shown by accounting. So technically, accounting is the art of recording, summarizing and analyzing the transaction in terms of money. Transaction is the exchange of goods (products) or services by its monetary value between buyer and seller. We record this exchange and analyze its effect, for recording of such business activities we have to understand the basic heads of accounting because every transaction involves one or more of these. Precisely they are the main components of accounting; there are five heads of accounting:

1.     Assets

2.     Liabilities

3.     Capital

4.     Expenses

5.     Revenue

Assets are the resources that generate value in terms of money means they are the actual source of generating revenue (your earnings). It builds your income like a building of your business, furniture of your office, products that you are selling and the cash in your office drawer. How important are they for your business? These are the requirements of your business; to run your business you need them to be in the market and grab the customers you need a building, for your manufacturing your goods you need a plant and factory and so on. Cash, office or factory building, machines, equipments and Inventory are some major examples of assets.

Liabilities are the obligations on a business i.e. to transfer of some value from business to another party like delivering the goods after receiving amount in advance; the amount received in advance from customer is an obligation on business and the amount taken as loan from another party or goods purchased on account is a liability to pay the amount after a specified time, in accounting language we call it accounts payable. Some common example are bank loan, note payable, accounts payable and advance received from customers.

Capital is the contribution of owner in his business. How much amount has he added to his business? It’s not only the cash but every asset that he owns and has given to his business is his it’s his capital. It could be anything building, vehicles, furniture, inventory and so on. Suppose you have a building, a vehicle and some furniture, you are going to start your business and you will use these things in your business with some investment of cash. The total sum of all these (a building, a vehicle and furniture) is your capital.

Expense is the outflow of assets or resources in order to earn revenue. To run your business and to keep your day to day operations in a smooth pace you have to spend some money like rent of your office building, electricity and water bills and supplies (stationary etc) you use are expenses.

Revenue is the earning that a company gets through its business activities. It is the amount that a business gets from its customer in exchange of its goods or services. Revenue is the main goal of doing a business. Briefly, assets are the economic resources of a business to generate revenue. Liabilities are the obligations on the business and capital is the owner’s contribution in his business while expenses are the economic costs incur in order to earn revenue and revenue is the income received from its customers.

After reviewing these basic components we need to know that what the uses of accounting are. Who uses it and what type of information it provides to the users? To find the answer of this we must know that accounting is used by a large audience like Business management, customers, owners and creditors and every user needs a different type of accounting information that is why accounting is divided into types according to the accounting information as required by the users.

Financial Accounting provides information about the economic resources, obligations, expenses and revenue of an organization. It also provides information about the activities of the entity which is helpful in evaluating and forecasting of future earnings of an economic entity which eventually helps in decision making about investment and credit decision. The main objective of financial accounting is to provide information to the external users of accounting information which is called financial reporting, external users are those users which are not involved in the business activities of an organization but they have a financial interest in the reporting business entity, they can be individuals, external organizations and government. Each of these required different type of information like students who need the introduction of accounting information, owners who are the shareholders of the business and interested in cash flows and profits of the business while creditors are interested on the earnings and future prosperity of the organization, government and regulatory agencies are interested in the faithful presentation of earning and usage of rules and regulations as imposed by regulators so as customers, suppliers, trade associations and general public also use accounting information in making decisions.

Financial accounting mainly provides financial statements which shows financial performance of the organization during a period and financial position of an organization at the specific point of time, statement of cash flows provides the actual cash flow from operations of an organization, it also provides the analysis of the statements like return on investments, return on equity, earning per share, financial leverage position and so on, financial accounting is based on historical data and also called general purpose accounting.  

Managerial Accounting is designed to provide accounting information and interpretation to the internal users those who are employed by the organization, in order to support their decision making for further business activities like cost cutting and controlling, business expansion, new product-line startup, investment in a new venture and so on. This accounting information is generated exclusively use for internal decision makers but they also share some part of it to the external parties like this information is provided to the suppliers for production needs purpose. Internal users includes board of directors, Chief Executive officer (CEO), Chief financial officer (CFO), Plant managers, Line managers and store managers. Every employee have different goals and objectives to meet these objectives they use managerial accounting, the main purpose of managerial accounting is to provide design and interpret accounting information in such a way which supports in decision making of  managers. Managerial accounting information helps in assessing both historical performance of the organization as well as the future prospects of the organization which leads to achieving its goals and objective.

Tax Accounting is another type of information used by the organizations to file their income tax return. It is a specialized accounting field used for tax planning and calculation purposes, tax planning is used to watch the tax effect of economic transactions of the organizations so that they can plan economic activity in that sense which minimize tax obligations on the organization.

Hope that you have got information about the basic concepts and types of accounting, if there any queries please do not resist asking. Please feel free to comment about the article.