College Books - Chapter 1 - Introduction - Principles of Accounting

Accounting 

Accounting is the language of business. Because accounting is the tool through which we get information about the financial performance and financial position of the business. For a businessman, Partnership or an organization, accounting helps in managing our expenses to generate revenues. Without, proper books of accounts no businesses can succeed.

Definition of Accounting

“Accounting is concerned with recording, classifying, summarizing of the information and interpretation of the results of all the financial statements prepared by the business”.

From the definition of Accounting, following four terms can be taken into account:

ü Recording

ü Classifying

ü Summarizing

ü Interpretation

v Recording

Recording phase is done through Book-Keeping. Recording means recording of transactions in the Journal Chronological (Date-wise) after verifying the transaction through an invoice.

v Classifying

After recording the transactions in the Journal, all the concerned accounts are categorized or classified according to their nature of accounts and posted to their respective Ledgers. For example, Expenses accounts are posted to their respective expense account, i.e., Rent expense account to Rent Ledger account.

v Summarizing

In this phase, we add up all the amounts of concerned accounts and balance them into one place in the form of a Trial Balance. This Trial Balance summarizes the information and provides us information about balances of different accounts at one place.

v Interpretation

All the accounting data provided in various financial statements like, Profit & Loss Account, Balance Sheet, etc., are interpreted and analyzed through Ratio Analysis, Horizontal and Vertical Analysis and other analysis.

Such Interpretation of accounting data is very helpful for the user of financial statements, like, customers, investors, employees, creditors and others.

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