What is Accounting, Accounting Equations and objectives of Accounting 2


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Accounting Definition:

Accounting is a comprehensive system to analyze communication of financial transactions. In other words accounting is a financial language which assists you in measuring your growth year on year.

Accounting language was introduced as soon as paper money was used for exchange. Since initially volume of the transactions was not as huge as today, individuals were able to manage their transaction records. According to Indian history, an scholar Kautilya Pandit (also known as Chanakya or Vishnu Gupta) introduced the concepts of accounts in his Arthashastra book during the period of the Maurya Empire (322-185 BCE) around 23 centuries ago. He defined the art of maintaining accounts and various approaches of checking accounts.

The American Institute of Certified Public Accountant (AICPA) defines Accounting as the art of classifying, recording and summarizing in a significant manner and in terms of money, events and transactions which in part at least of a financial character and interpreting the results thereof. This definition summarizes that:

  • It helps to monitor our success through analyzing and summarizing financial transaction records.
  • All transactions are recorded in terms of money which is based on financial character else it won’t be considered.
  • It is an art of examining operations result to determine financial position of an individual or a business and a progress of it.

What are the Primary Objectives of Accounting?

Individuals or an organisation maintain accounts due to following objectives:

  • Systematic tracking of financial transactions records will help to maintain correct and accurate results of financial reports.
  • Trading Account and Profit / Loss Account will help to summarize profit and loss for a specified period of time.
  • Balance sheet will help to determining financial position of an individual or any of the business entities.
  • Evaluating financial result will assist individual or a company to take right decision for the future growth based on past recorded data.
  • Different business entities have to maintain different types of accounts based on taxation laws which compliance with the law of the country.

Wiki Finance pedia - e-learning course on Accounting wikipedia Chapter - Learn what is AccountingWhat is an Accounting Equation?

There are varieties of book keeping correlation equations tactics for accounting calculation. One of the simplest way to calculate is “Assets = Liabilities + Owners equity”

Assets are collection of tangible and intangible materials owned by business like furniture, buildings, cars, machinery, inventory, etc whereas liabilities are those unsettled payments owned by the business like bank overdraft, loans, creditors, etc.  Mathematical calculation of assets and liabilities gives you the valuation of owners equity. Formula to calculate owners equity is “Owners equity = Total Assets – Total Liabilities”. Owners equity can be further divided into capital invested + reserved capital (i.e. retained earnings). Owners equity can also be calculated as “capital invested + reserved capital = Total Assets – Total Liabilities“. Let us take an example of balance sheet to understand calculation of owners equity.


Sample of Balance Sheet for the Accounting Year

ASSETS

 ParticularsAmount
Current Assets
Cash50,000
Accounts receivable
Inventory
Prepaid expenses
Fixed Assets
Long-term investments1,00,000
Buildings5,00,000
(less accumulated depreciation)(50,000)
Furniture and fixtures
(less accumulated depreciation)
Plant and equipment
(less accumulated depreciation)
Net Total Assets (Current Assets + Fixed Assets)6,00,000

LIABILITIES

 Particulars Amount
Current Liabilities
Accounts payable10,000
Interest payable
Taxes payable30,000
Long-term Liabilities
Mortgage60,000
Other liabilities
Net Total Liabilities (Current Liabilities + Long-Term Liabilities)1,00,000

ASSETS – LIABILITIES

5,00,000

Shareholders Equity

Capital stock4,00,000
Retained earnings1,00,000

TOTAL OWNER’S EQUITY

5,00,000

From the above balance sheet we can conclude that total owners equity for the current year is Rs.5,00,000. This is the primary goal and objective to recruit accountant. Balance sheet provide clear picture to the individuals or an organisation of the growth and profits for the current year and also give them enough time to prepare strategic plans for the next year growth and earnings. Maintaining and filing accounts are also mandatory for taxation purpose.


- Tutorial Course - Basics of Accounting for Beginners -

» Currently Reading: What is Accounting and objectives of Accounting?

» e-Learning Chapter 2: What is Assets and Current Assets?

» e-Learning Chapter 3: What is Liability and Current Liabilities?

» e-Learning Chapter 4: What is Revenue and Expenses?

» e-Learning Chapter 5: What are the Types of Accounts?

» e-Learning Chapter 6: What is a Single Entry System?

» e-Learning Chapter 7: What is Double Entry Accounting System?

» e-Learning Chapter 8: What are the steps involved in Accounting Process Cycle.

» e-Learning Chapter 9: What are Journal Entries? Format and Examples.

» e-Learning Chapter 10: What Is a General Ledger? Format with Example.

» e-Learning Chapter 11: What is a Trial Balance? Examples and Limitations.

» e-Learning Chapter 12: What is a profit and loss statement or Income Statement?

» e-Learning Chapter 13: What is a Balance Sheet? Definition, Format and Examples.

» e-Learning Chapter 14: What are the Different Types of Accounting Methods in Bookkeeping.

» e-Learning Chapter 15: Accounting Quiz – Basics of Accounting for Beginners Module.


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2 thoughts on “What is Accounting, Accounting Equations and objectives of Accounting

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