What Is Accounting?

Accounting is the process of recording financial transactions pertaining to a business. The accounting process includes
summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities.
The financial statements used in accounting are a concise summary of financial transactions over an accounting period,
summarizing a company's operations, financial position, and cash flows.
What Is the Purpose of Accounting?
Accounting is one of the key functions of almost any business. It may be handled by a bookkeeper or an accountant at a
small firm, or by sizable finance departments with dozens of employees at larger companies. The reports generated by
various streams of accounting, such as cost accounting and managerial accounting, are invaluable in helping
management make informed business decisions.
The financial statements that summarize a large company's operations, financial position, and cash flows over a
particular period are concise and consolidated reports based on thousands of individual financial transactions. As a
result, all professional accounting designations are the culmination of years of study and rigorous examinations
combined with a minimum number of years of practical accounting experience.
What Are the Different Types of Accounting?
Accountants may be tasked with recording specific transactions or working with specific sets of information. For this
reason, there are several broad groups that most accountants can be grouped into.
1. Financial Accounting: Financial accounting refers to the processes used to generate interim and annual
financial statements. The results of all financial transactions that occur during an accounting period are
summarized in the balance sheet, income statement, and cash flow statement. The financial statements of most
companies are audited annually by an external CPA firm. For some, such as publicly-traded companies, audits are
a legal requirement. However, lenders also typically require the results of an external audit annually as part of
their debt covenants. Therefore, most companies will have annual audits for one reason or another.
2. Managerial Accounting : Managerial accounting uses much of the same data as financial accounting, but
it organizes and utilizes information in different ways. Namely, in managerial accounting, an accountant
generates monthly or quarterly reports that a business's management team can use to make decisions about
how the business operates. Managerial accounting also encompasses many other facets of accounting, including
budgeting, forecasting, and various financial analysis tools. Essentially, any information that may be useful to
management falls underneath this umbrella.
3. Cost Accounting: Just as managerial accounting helps businesses make decisions about management, cost
accounting helps businesses make decisions about costing. Essentially, cost accounting considers all of the costs
related to producing a product. Analysts, managers, business owners, and accountants use this information to
determine what their products should cost. In cost accounting, money is cast as an economic factor in
production, whereas in financial accounting, money is considered to be a measure of a company's economic
performance.
4. Tax Accounting: While financial accountants often use one set of rules to report the financial position of
a company, tax accountants often use a different set of rules. These rules are set at the federal, state, or local
level based on what return is being filed. Tax accounts balance compliance with reporting rules while also
attempting to minimize a company's tax liability through thoughtful strategic decision-making. A tax accountant
often oversees the entire tax process of a company: the strategic creation of the organization chart, the
operations, the compliance, the reporting, and the remittance of tax liability.
The Objectives of Accounting
The primary objectives of accounting include systematic maintenance of records of transactions summarising and
analysing business reports to assess the financial standing of the business entity. The following are the various objectives
of accounting –
1. Maintaining systematic financial records: One of the most important accounting objectives is that
accounting helps the business organisation keep a systematic and accurate record of the day-to-day transactions,
which helps to understand the working of the business, payments made, income received, etc.
2. To estimate and ascertain profits or losses: Recording transactions concerning revenues and expenditures
helps us ascertain the profit/ loss at the end of the financial year. Ascertaining profits or losses is important to
make payments, making it one of the important objectives of accounting.
 3. Preparing financial reports to assess the financial position: Accounting involves the preparation of a
balance sheet which is a record of the assets and liabilities of a business entity. This helps in the analysis of the
financial position of the business organisation. Ascertaining profitability can help us understand the strengths
and weaknesses of the business organisation and formulate various policies and strategies to correct the
weaknesses and improve the organization’s strengths.
4. Auditing of financial reports: Another objective of accounting is that it helps in understanding the financial
position of a company in the form of assets, debts, profits and losses, etc. These records are made available to
the auditor, who can then analyses the reports to find any discrepancies and suggest the required corrective
reforms. These reports also help the higher authorities formulate plans and make rational decisions.
5. To forecast future payments, expenditures and budgets: Accounting helps to predict the future
profitability of a business entity. This helps plan future payments, debts, expenditures and budgets accordingly. It
also helps in distributing funds among different departments of the business organisation based on past
allocations and profitability.
Function of Accounting
Accounting functions involve the identification, recording, summarizing of transactions, analyzing and ascertaining the
profit/losses and communication of the necessary information. Here are a few functions of accounting –
1. Preparation of budget and cash control: The most important role of accounting, which also helps explain
the objectives of accounting, is the record of transactions to facilitate the budget and cash control preparation.
Cash control is estimating a standard cost beforehand. Evaluating and comparing the standard and actual costs
incurred can help us analyses and understand the efficiency of the work undertaken and the corrective measures
to be applied to improve efficiency.
2. Prevention of errors and fraud: Accounting helps in estimating and ascertaining the profits or losses
through a systematic record of all transactions. This helps prevent errors and fraud like all the transactions,
including the employee reports, are recorded systematically and accurately.
3. Basis of evaluation of performance: Accounting acts as a basis for the evaluation of performance. It helps us
ascertain whether the pre-planned goals are achieved and provides information regarding the assets and liability
situation of the business, which can be beneficial to evaluate the financial position of the business organisation.
4. Control of fiscal policies of the business: Another important function of accounting is to provide a
detailed summary of reports which ensures strong vigilance, thereby preventing mismanagement of funds and
helps in the control and regulation of the fiscal policies of the business via proper allocation of the funds.

Users of Accounting Information: Accounting is of primary importance to the owners and managers. However,
creditors, bankers, etc. are also interested in the accounting reports of the organization.
Following is the list of Users of Accounting Information
 Owners/Shareholders
 Managers
 Prospective Investors
 Creditors, Bankers, and other Lending Institutions
 Government
 Employees
 Regulatory Agencies
 Researchers
 Customers
Example of Accounting
To illustrate double-entry accounting, imagine a business sends an invoice to one of its clients. An accountant using the
double-entry method records a debit to accounts receivables, which flows through to the balance sheet, and a credit to
sales revenue, which flows through to the income statement.
When the client pays the invoice, the accountant credits accounts receivables and debits cash. Double-entry accounting
is also called balancing the books, as all of the accounting entries are balanced against each other. If the entries aren't
balanced, the accountant knows there must be a mistake somewhere in the general ledger.

What Are Accounting Principles?

Accounting principles are the rules and guidelines that companies and other bodies must follow when reporting financial
data. These rules make it easier to examine financial data by standardizing the terms and methods that accountants must
use. The International Financial Reporting Standards (IFRS) is the most widely used set of accounting principles, with
adoption in 167 jurisdictions. The United States uses a separate set of accounting principles, known as generally
accepted accounting principles (GAAP).
The Purpose of Accounting Principles: The ultimate goal of any set of accounting principles is to ensure that a
company’s financial statements are complete, consistent, and comparable.
This makes it easier for investors to analyze and extract useful information from the company’s financial statements,
including trend data over a period of time. It also facilitates the comparison of financial information across different
companies. Accounting principles also help mitigate accounting fraud by increasing transparency and allowing red flags
to be identified.
What Are the Basic Accounting Principles?
Some of the most fundamental accounting principles include the following:
 Accrual principle
 Conservatism principle
 Consistency principle
 Cost principle
 Economic entity principle
 Full disclosure principle
 Going concern principle
 Matching principle
 Materiality principle
 Monetary unit principle
 Reliability principle
 Revenue recognition principle
 Time period principle
What is journalizing in accounting?
Journalizing is the practice of documenting a business transaction in accounting records. Record-keeping, especially for
accountants, is a detail-oriented skill that requires commitment. Every business transaction is recorded in a journal, also
known as a Book of Original Entry, in chronological order. It is a process initiated each time a transaction occurs.
Types of journalizing transactions
1. Purchase journal: You will use this to record all purchases of inventory made on credit.
2. Sales journal: This is where to record the credit sale of merchandise only
3. Cash receipts journal: You will record all types of cash receipts here. Cash shows cash-only transactions and cash
from accounts receivable.
4. Cash payment/disbursement journal: This is typically payments by check that are often made every month.
5. Purchase return journal: You will use this to show all purchases on credit by your business. This is only necessary
if a business has inventory in the form of trading or manufacturing goods.
6. Sales or purchase return journal: This is traditionally where any returns of merchandise will be documented. A
reason for return will be recorded for future reference.
7. Journal proper/general journal: You will use this journal to record anything not recorded in the other journals.
Something like equipment purchases would be recorded here as would similarly company expenditures.
Ledger Posting: After the transactions are recorded in the journal, it is then posted in the principal book called as
‘Ledger’. The process of transferring the entries from journal to respective ledger accounts is called ledger posting.
Balancing of ledgers is carried to find out differences at the end of the year.
Ledger posting is entering information in the ledger, in respective accounts from the journal for individual records. The
account debited is posted on the debit side and the account credited is posted on the credit side of the same account.
This process is carried throughout the year and at the end of the financial year the ledger accounts are closed and are
totaled and balanced. This process is called the balancing of the ledger accounts.

Rules for posting of entries in the ledger

  A separate account is opened for each account and entries from the journal are posted in respective ledger
account accordingly.
 The words like ‘To’ and ‘By’ are used while posting the entries in the ledger accounts. ‘To’ is used when accounts
are posted in the debit side column of a particular account. ‘By’ is used when accounts are posted in the credit
side column of a particular account. These words may not have meaning but are used to represent the debit and
credit accounts.
 The account which is debited in the journal should also be debited in the ledger book but the reference should
be of respective credit account.
Balancing of Ledger: At the end of every accounting year all the accounts which are operated in the ledger
book are closed, totaled and balanced. Balancing of ledgers means finding the difference between the debit and credit
amounts of a particular account i.e. heavier total and lighter total difference and recording that difference amount on the
lighter total side.
Steps for Balancing Ledger Account
 First of all, calculate the totals of debit and credit columns separately on a rough sheet to avoid mistakes. Find
out the difference between the heavier total and lighter total by subtracting the lower from higher. The
difference is called a Balance amount.
 If the total of the debit side is heavier than that of the credit side, the balance is called as “Debit Balance” and is
written on the credit side (the side with lower amount) of that particular account as “By Balance c/d” or “By
Balance c/FD”. Here, c/d means carried down and c/FD means carried forward.
 Similarly, if the total of the credit side is more than that of debit side total, the balance is called “Credit Balance”.
The difference amount is written on the debit side of the account as “To balance c/d” or “To balance c/fd”
 Once we get the heavier total it should be written in both the columns’ total. Draw double lines across the total
below the amounts which indicates the account is closed and balanced.
 Last year’s closing balance is the opening balance of the current year. So, if there is debit it should be shown on
the debit side of a particular account as “To Balance b/d” or “To Balance b/fd”. Here, b/d means brought down
and b/fd means brought forward.
Trial Balance: A trial balance is a bookkeeping worksheet-like account that reflects all the credit and debit
balances of all the ledger accounts. Once we prepare this statement, we can prepare the final accounts of the company
on the basis of this trial balance. One other important use of the trial balance is that it can determine the arithmetic
accuracy of the accounts. So if both columns of the trial balance tally, we can be reasonably assured of the accuracy of
the accounts. It does not ensure that the accounts are free of all errors but it can at least establish mathematical
accuracy.
Rules for Preparation of Trial Balance
While preparation of trial balances we must take care of the following rules/points
1] The balances of the following accounts are always found on the debit column of the trial balance
 Assets
 Expense Accounts
 Drawings Account
 Cash Balance
 Bank Balance
 Any losses
2] And the following balances are placed on the credit column of the trial balance
 Liabilities
 Income Accounts
 Capital Account
 Profits
Preparation of Trial Balance
Preparation of trial balance is the third step in the accounting process. First, we record the transactions in the journal.
And then we post them in the general ledger. Then we prepare a trial balance to verify that the debit totals equal to the
credit totals. Let us take a look at the steps in the preparation of trial balance.
 1. To prepare a trial balance we need the closing balances of all the ledger accounts and the cash book as well as
the bank book. So firstly, every ledger account must be balanced. Balancing is the difference between the sum of
all the debit entries and the sum of all the credit entries.
2. Then prepare a three-column worksheet. One column for the account name and the corresponding columns for
debit and credit balances.
3. Fill out the account name and the balance of such account in the appropriate debit or credit column
4. Then we total both the debit column and the credit column. Ideally, in a balanced error-free Trial balance these
totals should be the same
5. Once you compare the totals and the totals are same you close the trial balance. If there is a difference we try
and find and rectify errors. Here are some cases that cause errors in the trial balance
 A mistake in transferring the balances to the trial balance
 Error in balancing an account
 The wrong amount posted in the ledger
 Made the entry in the wrong column, debit instead of credit or vice versa
 Mistake made in the casting of the journal or subsidiary book
Financial Statement: Financial statement preparation is a crucial aspect of a company's financial
management, involving the recording and reporting of its financial transactions and activities.
Financial statements provide a comprehensive overview of a company's financial performance, position, and cash flows,
aiding in decision-making and financial analysis.
Proper financial statement preparation requires a thorough understanding of accounting principles, standards, and
regulations, as well as attention to detail and accuracy in recording and reporting financial data.
Steps in Financial Statement Preparation
1. Identifying and Gathering Financial Data: The first step in financial statement preparation is identifying
and gathering relevant financial data from a company's accounting records. This process involves collecting
information on transactions, such as sales, expenses, investments, and borrowings, and organizing it in a
systematic manner.
2. Adjusting and Classifying Transactions: After gathering financial data, accountants must adjust and classify
transactions according to the appropriate accounting principles and standards. Adjusting entries ensure that
revenues and expenses are recorded in the correct accounting period, while classifying transactions involves
grouping similar items into appropriate categories, such as assets, liabilities, revenues, and expenses.
3. Preparing Financial Statement Components: Once the transactions have been adjusted and classified, the
next step is preparing the individual components of the financial statements, including the balance sheet,
income statement, statement of cash flows, and statement of stockholders' equity.
4. Consolidation of Financial Statements: If a company has subsidiaries or other related entities, it may need to
prepare consolidated financial statements. This process involves combining the financial information of the
parent company and its subsidiaries to present a unified view of the entire corporate group's financial position
and performance.
5. Finalizing and Presenting Financial Statements: After preparing the individual components and
consolidating financial statements (if applicable), the final step is to review and finalize the financial statements.
This process ensures that all information is accurate, complete, and compliant with the relevant accounting
standards. Once finalized, the financial statements are presented to the company's management, board of
directors, and other stakeholders.
Types of Financial Statements
1. Balance Sheet: The balance sheet, also known as the statement of financial position, presents a
company's assets, liabilities, and stockholders' equity at a specific point in time. It provides a snapshot of the
company's financial position and is based on the fundamental accounting equation:
Assets = Liabilities + Stockholders' Equity.
2. Income Statement: The income statement, or the statement of comprehensive income, summarizes a
company's revenues and expenses over a specified period. It shows the company's ability to generate profits by
measuring the difference between revenues and expenses. The primary components of the income statement
include revenues, cost of goods sold, gross profit, operating expenses, and net income.
 3. Statement of Cash Flows: The statement of cash flows tracks the cash inflows and outflows during a
specific period. It categorizes cash flows into three main activities: operating, investing, and financing activities.
This statement is essential for understanding a company's liquidity and solvency, as well as its ability to generate
and use cash effectively.
4. Statement of Stockholders' Equity: The statement of stockholders' equity, or the statement of changes in
equity, shows the changes in the components of stockholders' equity over a specified period. It includes
elements such as common stock, preferred stock, additional paid-in capital, retained earnings, and treasury
stock.
IFRS: IFRS stands for International Financial Reporting Standards, It is prepared by the IASB (International Accounting
Standards Board). It is used in around 144 countries and is regarded as one of the most popular accounting standards.
IND AS is also known as Indian Accounting Standards or Indian version of IFRS. Indian AS or IND AS is used in the context
of Indian companies. Let us look at some of the points of difference between the IFRS and IND AS.

IFRS (International Financial Reporting Standards) IND AS (Indian Accounting Standards)

Definition

IFRS stands for International Financial Reporting IND AS stands for Indian Accounting Standards; it is also
Standards, it is an internationally recognized known as India specific version of IFRS
accounting standard

Developed by

IASB (International Accounting Standards Board) MCA (Ministry of Corporate Affairs)

Disclosure

Companies complying with IFRS have to disclose as Such a disclosure is not mandatory for companies
a note that the financial statements comply with complying with Indian Accounting Standards or IND AS
IFRS

Financial Statement Components

It includes the following It includes the following:

1. Statement of financial position 1. Balance Sheet
2. Statement of profit and loss 2. Profit and loss account
3. Statement of changes in equity for the period 3. Cash flow statement
4. Statement of cash flows for the period 4. Statement of changes in equity
5. Notes to financial statements
6. Disclosure of accounting policies

Balance Sheet Format

Companies complying with IFRS need have specific Companies complying with IND AS need have no such
guidelines for preparing balance sheet with assets requirements for balance sheet format, but the guidelines
and liabilities to be classified as current and non- are defined for presenting balance sheet
current