Es-H.M Accounting principle introductory notes

1. Chapter I: Accounting in Action
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Definition of Accounting
Accounting is an information system that identifies records and communicates the economic events of
an organization to the interested users.
--- Weygandt/Kieso.
Accounting is simply the means by which we measure and describe economic activities.Whether
someone managing a business, making investments or deciding how to spend their own money, they are
working with accounting concepts and accounting information.
Users of Accounting
Accounting communicates financial information, so it also called “the language of business”. The
information that a user of financial information needs depends upon the kinds of decisions the user
makes.
The differences in the decisions divide the users of financial information into two broad groups:
 Internal users
 External users.
Internal Users
Internal Users of accounting information are managers who make plan, organize & Run a business. In
running a business, managers must answer many important questions. To answer these and other
questions, users need detailed information on a timely basis. For internal users, accounting provides
internal reports.Internal users of accounting are- marketing managers, Production supervisors, Finance
directors and company officers.
External Users
External users are those who are coming from outside a company and they must have known of a
company’s accounting information. They are- Investors (owners), creditors such as suppliers and
bankers use accounting information to evaluate the risks of granting credit or lending money.Taxing
authorities’ needs and questions of other external users very considerably. They want to know whether
the company compiles with the tax law, government may know the company’s economical condition.
Distinction betweenBook-keeping & Accounting
Many individuals think that bookkeeping and accounting is the same. They think it because the
accounting process includes the book-keeping function. But in accounting there is much more things
included.
Bookkeeping usually involves only the recording of economic events. It is the only one part of
accounting. On the other hand, accounting involves the entire process of identifying, recording and
communicating economic events. Accounting may be further divided into financial accounting and
managerial accounting

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Role of Accounting
The purpose of accounting is to provide decision makers with useful information about economic
events. This includes both information about recent activities and forecasts of what may happen in the
future. All types of decision makers—managers, investors, lenders and consumers----use accounting
information as a basis for making economic decisions. Think of accounting as an information system for
decision makers.
Businesses do not prepare new financial statements after every transaction. Rather, they accumulate the
effects of individual business transactions in their accounting records. Then, at regular intervals, the data
in these records are used to prepare financial statements, income tax returns and other types of
accounting reports. But the need for accounting reports is not only the reason business maintain
accounting records.
Managers and employees of the business frequently use these records for such purposes as:
 Establishing accountability for the assets and transactions under an individual’s control.
 Keeping track of routine business activities, such as the amounts of money in company bank
accounts, amounts due from credit customers and amounts owed to suppliers.
 Obtaining detailed information about a particular transaction.
 Evaluating the efficiency and performance of various departments within the organization.
 Maintaining documentary evidence of the company’s business activities. (For example, tax laws
require companies to maintain accounting records supporting the amounts reported in tax
returns.)
Accounting Is a Language of Business
Accounting often is called the “Language of business” because it is so widely used to describe all types
of business activities. Costs, prices, sales volume, profits and return on investment- all are accounting
measurements. Every investor, creditor (lender), and business manager needs a clear understanding of
accounting terms and concepts if he or she is to effectively communicate and participate in the business
community.
Double-entry System
Double-entry system is the scientific methods of keeping accounts.
Transaction ----Dr & Cr.
Journal > Ledger > Trial Balance.
It is introduced by Luca Pacioli (1494).
Events
Economic events= Transactions
Event has two types. These are:

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(1)Financial Event
(2)Non-financial Event
Transactions andits Characteristics:
Transactions (also called as business transactions) are the economic events of an enterprise that are
recorded. Transactions may be identified as external or internal.External transactions involve economic
events between the company and dome outside enterprise.Internal transactions are economic events that
occur entirely within one company.
Analysis
The ability to analyze transactions in terms of the basic accounting equation is essential for an
understanding of accounting. Transactions analyses are given below:
 Investment by owner,
 Purchase of equipment for cash,
 Purchase of supplies on credit,
 Services provided on cash,
 Purchases of advertising on credit,
 Services provided for cash and credit,
 Payment of expenses,
 Payment of accounts payable,
 Receipt of cash on account,
 Withdrawal of cash by owner.
Journal
In a business everyday transactions are initially recorded in chronological order in journals before being
transferred to the accounts. Thus, the journal is referred to as the book of original entry. For each
transaction the journal shows the debit and credit effects on specific accounts.
Every company may use various kinds of journals but they have the most basic form of journal, which is
called general journal. Typically, a general journal has spaces for dates, account titles and explanations,
references and two amount columns.
Ledger
An accounting system includes a separate record for each item that appears in the balance sheet. The
record used to keep track of the increases and decreases in a single balance sheet item is termed a ledger
account or simply an account. The entire group of accounts is kept together in an accounting record is
called a ledger.

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Trial Balance
A trial balance is a list of accounts and their balances at a given time. A trial balance is prepared at the
end of an accounting period. A trial balance desirable to prove that the total of accounts with debit
balances is in fact equal to the total of accounts with credit balances. A trial balance is a two-column
schedule listing the names and balances of all the accounts in the order in which they appear in the
ledger; the debit balances are listed in the left-hand column and the credit balances in the right-hand
column. The totals of two columns should agree.
If the debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and
posting. In addition, it is useful in the preparation of financial statements.
Balance Sheet
A balance sheet consists of a listing of the assets, the liabilities and the owner’s equity of a business. It
shows financial position at a specific date. The balance sheet date is important, as the financial position
of a business may change quickly.
In below there are several features of a balance sheet are discussed below:
 The name of the business entity,
 The name of the financial statement,
 The balance sheet date.
The body of the balance sheet also consists of three distinct sections: Assets, liabilities and stockholders’
equity.
Accounting Equation
Assets= Liabilities + Owner’s equity
This relationship is referred to as the basic accounting system. Assets must equal the sum of liabilities
and owner’s equity. The accounting equation applies to all economic entities regardless of size, nature of
business, or form of business organization.
ClassificationofAccounts and Golden Rules
 Capital-----------------Credit.
 Liabilities-------------Credit.
 Income/ Gains------- Credit.
 Assets----------------- Debit
 Expenses/Losses-----Debit.