Accounting

Accounting

What is Accounting?

Accounting is the systematic process of recording, classifying, summarizing, analyzing, and interpreting financial transactions of a business or organization. It helps stakeholders understand the financial health and performance of a business.

Objectives of Accounting

Recording Transactions – Maintain a complete and accurate record of all financial transactions.
Classifying Transactions – Organize transactions under appropriate heads.
Summarizing Data – Prepare financial reports like the Profit & Loss Account and Balance Sheet.
Analyzing & Interpreting – Understand performance and financial position.
Communicating Results – Provide financial information to stakeholders like investors, management, and regulators.

Types of Accounting

1. Financial Accounting
Definition:
Financial Accounting is the process of recording, summarizing, and reporting a company’s financial transactions through financial statements.

Purpose:
To provide financial information to external users such as investors, creditors, and regulators.

Key Features:
Governed by standards like GAAP or IFRS
Produces financial reports such as:
    • Income Statement (Profit & Loss Account)
    • Balance Sheet
    • Cash Flow Statement
Focuses on historical data
Ensures accuracy and transparency

📊 2. Management Accounting
Definition:
Also called Managerial Accounting, it involves the preparation of financial and non-financial information for internal decision-making.

Purpose:
To assist managers in planning, controlling, and decision-making.

Key Features:
Not governed by any external standards
Includes budgeting, forecasting, break-even analysis, and variance analysis
Forward-looking in nature
Focuses on efficiency and strategy

🧮 3. Cost Accounting
Definition:
Cost Accounting deals with the recording, classification, allocation, and analysis of costs associated with a product or service.

Purpose:
To determine the cost of production and help control costs.

Key Features:
Used mainly in manufacturing industries
Techniques include:
    • Standard costing
    • Marginal costing
    • Activity-based costing
Helps in cost control and cost reduction
Supports pricing decisions

🧾 4. Tax Accounting
Definition:
Tax Accounting focuses on matters related to taxes and ensures compliance with tax laws and regulations.

Purpose:
To calculate tax liabilities and file tax returns properly.

Key Features:
Governed by tax laws (e.g., Income Tax Act in India)
Deals with:
    • Income tax
    • GST/VAT
    • Corporate tax
Focused on tax planning and compliance
May differ from financial accounting rules

🔍 5. Forensic Accounting
Definition:
Forensic Accounting involves using accounting skills to investigate fraud, embezzlement, or other financial crimes.

Purpose:
To detect, investigate, and present financial evidence in court cases.

Key Features:
Used in litigation, disputes, and fraud investigations
Combines auditing, investigation, and legal knowledge
Often used by law enforcement agencies and courts
Requires high accuracy and detailed examination of records

Accounting Principles (GAAP)

Accounting follows certain standards called Generally Accepted Accounting Principles (GAAP) or IFRS. Key principles include:
Accrual Principle – Revenue and expenses are recorded when they occur, not when cash is exchanged.
Consistency Principle – Use the same accounting methods every period.
Going Concern Principle – Business will continue to operate in the foreseeable future.
Matching Principle – Match revenues with the expenses incurred to earn them.
Prudence (Conservatism) – Do not overstate income or assets.
Materiality – Only record information that is significant to financial statements.

Accounting Process (Accounting Cycle)

1. Identifying Transactions
2. Recording in Journal (Journal Entry)
3. Posting to Ledger
4. Preparing Trial Balance
5. Adjusting Entries
6. Preparing Financial Statements
    – Profit & Loss Account
    – Balance Sheet
    – Cash Flow Statement
7. Closing the Books

Key Financial Statements

Statement	Purpose
Profit & Loss A/c	Shows income and expenses, and net profit/loss during a period.
Balance Sheet	Shows assets, liabilities, and equity as of a specific date.
Cash Flow Statement	Shows cash inflows and outflows during a period.

Common Accounting Terms

Term	Meaning
Asset	Resources owned by the business (e.g., cash, land, machinery).
Liability	Obligations payable to outsiders (e.g., loans, creditors).
Equity	Owner’s share in the business.
Revenue	Income earned from business operations.
Expense	Cost incurred to earn revenue.
Journal	Book of original entry where transactions are recorded first.
Ledger	Book where journal entries are posted and grouped under relevant heads.