Accounting

Definition, objectives, stakeholders

and classification of accounts.

Definition

According to the Committee on Terminology

of American Institute of Certified Public
Accountants (AICPA), Accounting is the art of
recording, classifying and
summarizing in a significant manner and in terms
of money, transactions and events which are in
part at least, of a financial character, and
interpreting the results thereof.

Characteristics or features of
accounting
It is the art of recording and classifying
business transactions and events
It must be recorded in monetary terms
It is an art of making summaries, analysis and
interpretations
The results of such analysis must be
communicated to the persons who are to make
decisions or form judgements

Accounting cycle

The Accounting Cycle is a series of steps which are

repeated every reporting period. The process starts
with making accounting entries for each transaction
and goes through closing the books.
Accounting Cycle Steps During the Accounting
Period
Identify the transaction
Analyze the transaction
Make Journal entries
Post to ledger

Accounting cycle

Accounting Cycle: Steps at the end of the

accounting period
Trial Balance
Adjusting entries
Adjusted trial balance
Financial Statements
Closing entries
After-Closing trial balance

Objectives of accounting
To ascertain whether the business
operations have been profitable or not
To ascertain the financial position of the
business

Accounting as an information
system

According to Slavin and Reynolds,

Conceptually, accounting is the discipline
that provides information on which
external and internal users of thwe
information may base decisions that result
in the allocation of economic resources in
the society

Stakeholders

Internal users
Employees
Managers
Shareholders
Owners
External users
Suppliers
Competitors
Lenders
Creditors
Government authority

Classification of accounts
1.

2.

Personal accounts
Natural persons personal accounts
Artificial persons personal accounts
Representative persons personal accounts
Impersonal accounts
Real accounts
-Tangible real accounts
- Intangible real accounts
Nominal accounts

Natural persons personal accounts-An account

recording transactions with an individual human
being. e.g., Josephs Account
Artificial persons personal accounts-An account
recording transactions with an artificial person
created by law. e.g., Bank Account, XYZ Co. Ltd
Representative persons personal accounts-An
account indirectly representing a person or
persons. e.g., Salary outstanding Account,
Prepaid insurance Account etc.

Tangible real accounts- Accounts relating to tangible assets.

E.g., Machinery Account, cash Account.

Intangible real accounts- Accounts relating to intangible

assets. Goodwill Account, Patents Account.

Nominal accounts-Accounts of each expense and income.

E.g.,
Salary Account, Discount Account.

Double-entry accounting system

The double entry system of bookkeeping
owes its origin to an Italian merchant
named Lucas Pacioli who wrote the first
book on double entry bookkeeping entitled
"De Computi set Scripturis". It was
published in Venice in 1544. All modern
methods of accounting are simply
adaptation of the system invented by that
ancient pioneer.

Definition and Explanation:

The double entry theory of bookkeeping

can be defined as the system of recording
transactions having two fundamental
aspects - one involving the receiving of a
benefit and the other to giving the benefit in the same set of books.
In this theory, as the two fold aspects of
each transaction are recorded, the name
"double entry" has been given to this
system.

Every transaction involves two fold aspects e.g.,

an aspect of receiving and an aspect of giving.
One who receives is a debtor (Dr) and one who
gives is a creditor (Cr). Under the double entry
system, both the aspects of giving and receiving
are recorded in terms of accounts.
The account which receives the benefit is debited
and the account which gives the benefit is
credited.
It is the ultimate result of this system that every
debit must have corresponding credit and vice
versa and on any particular day the total of the
debit entries and the credit entries on the various
accounts must be equal.

Rules of double entry system

Traditional approach
This approach is also called as the British Approach.
Recording of business transactions under this method
are formed on the basis of the existence of two aspects
(debit and credit) in each of the transactions. Under the
traditional approach, the transactions are entered in the
books of accounts by following the golden rules of
accounting.
Real account: Debit what comes in and credit what
goes out
Personal account: Debit the received and Credit the
giver
Nominal account: Debit all expenses & losses and
Credit all incomes & gains

Rules of double entry system

Accounting equation approach

This approach is also called as the American Approach. Under this
approach transactions are recorded based on the accounting
equation, i.e., Assets = Liabilities + Capital. The accounting
equation is a statement of equality between the debits and the
credits. The rules of debit and credit depend on the nature of an
account.
Assets Accounts: debit- increases in assets and credit- decreases
in assets
Capital Account: credit- increases in capital and debit- decreases in
capital
Liabilities Accounts: credit- increases in liabilities and debitdecreases in liabilities
Revenues or Incomes Accounts: credits- increases in incomes and
gains and debit- decreases in incomes and gains
Expenses or Losses Accounts: debit- increases in expenses and
losses and credit- decreases in expenses and losses

Advantages of Double Entry System:

The main advantages of double entry theory of book
keeping are as follows:
Trial balance can be drawn up on any day to
prove the arithmetical accuracy of record.
The nominal sides of transactions being recorded:
it is possible to prepare Trading and Profit and
Loss Account from which the Gross Profit and Net
Profit made by the business during a particular
period can be easily ascertained.
As all personal accounts of debtors and creditors
as well as real accounts are kept, it is possible to
prepare Balance Sheet.

Advantages of Double Entry

System:

The transactions being recorded in the most scientific

and systematic way gives the most reliable information
of business.
It prevents fraud by rendering any alteration in any
account more difficult.
It enables the trader to compare the different items, such
as sales, purchases, opening stock and closing stock of
one period with similar items of preceding period and the
trader may thus know whether his business is
progressing or not.

Disadvantages of Double Entry System:

The following are the main disadvantages
of this system:
This system requires the maintenance of a
number of books of accounts which is not
practical in small concerns.
The system is costly because a number of
records are to be maintained.
There is no guarantee of absolute
accuracy of the books of accounts inspite
of agreement of the trial balance.