Accounting

Accounting Information System

 All businesses are involved in three types of economic activities:

1.      Financing

2.      Investing, and,

3.      Operating

These business activities are input to the financial accounting and the accounting information system keeps track of the results of each of these. The accounting system provides information about company’s health in term of following measures:

– Amounts of resources

– How resources were financed

– How resources were invested

– Results achieved by using those resources

These reports generated by accounting information system consumed by “decision maker” to decide their economic activities. And so the accounting loop continues.

 Process of accounting

1.       Creating accounting heads viz. Asset, Liability, Equity, Income and Expense

Elements measuring financial position:

•        Assets are probable future economic benefits.

•        Liabilities are probable future sacrifices of economic benefits

•        Equity is the residual interest in the assets of an entity that remains after deducting its liabilities. In business enterprises, the equity is the ownership interest.

Elements measuring financial performance:

•        Revenues or Incomes are the inflows that result from an entity’s central operation or core activities or principal business

•        Expenses are the outflows that result from an entity’s central operations.

2.      Double entry system: Every transaction in business involves at least two accounts i.e. under this system every transaction has two aspects viz. debit aspect and credit aspect.

3.       Accounting equation

Assets = Owner’s equity + Liabilities

Resources financed by = business creditors + lenders + capital provided by owners

Resources Invested in = Fixed asset + Investment + Current assets

4.      Yields financial statements

 Financial Statements

Companies prepare financial statements from the summarized accounting data, which are as below:

1.       Balance sheet: Financial position (or cumulative report) of asset, liability, and equity. It gives the snapshot of financial position on a particular day.

Assets = Liabilities + Owner's equity

2.       Income (Profit & Loss) Statement: Financial performance (or flow report) of income or revenue, expenses  

Net Income = Revenue – Expenses

3.       Retained Earnings Statement:

Retained Earnings = Net Income - Dividend

4.      Cash flow summary

Closing Cash Balance = Opening Cash Balance + Receipts - Payment

Basic accounting assumption

1.       Separate entity concept: It treats business as distinct and separate from its owners.

2.       Money measurement concept:  Every transaction in account must be recorded in terms of money. The things that cannot be expressed in money cannot be recorded in account books.

3.       Going concern concept: It assumes that business is not going to wind-up anytime in foreseeable future

4.       Accounting period concept: The period with reference to which accounting books are prepared