Concepts of Accounting www.AssignmentPoint.com
Meaning Accounting is often called the language of business since people in the business world such as owners, managers, bankers all use accounting terms. Accounting is defined as the art of recording, classifying, summarizing, analyzing, interpreting and communicating the results of transactions and events which are of financial character. The person in charge of accounting is known as an accountant, and this individual is typically required to follow a set of rules and regulations. www.AssignmentPoint.com
Meaning Accounting allows a company to analyze the financial performance of the business, and look at statistics such as net profit. www.AssignmentPoint.com
Elements of Accounting If complete records are to be maintained, all transactions and operations that affect the accounting elements must be recorded. The elements of accounting are- Assets Liability Owner’s equity or proprietorship The relationship among three of these elements of a business can be expressed in the form of simple equation. That is, www.AssignmentPoint.com
Elements of Accounting Asset= Liability+ Owner’s equity. Balance sheet is a detailed statement of this equation. It means that it is a basic principle of accounting that the total of the assets of all types is equal to the sum of the liabilities and proprietorship. www.AssignmentPoint.com
Elements of Accounting Asset: An asset is something (a resource) that the company currently owns and uses to get the business functioning. An asset can be an item without which the company would not operate. For example, for a car rental company, an asset can be the car that a customer comes to rent. Liability: A liability is an obligation that a business has towards an external entity, based on a previous transaction. www.AssignmentPoint.com
Elements of Accounting It is an obligation of the business to pay a debt. The most common liability of business is accounts payable. Proprietorship: The amount by which the business assets exceed this business liability is the proprietorship or owner’s equity of a business. www.AssignmentPoint.com
Users of Accounting Internal users: Owners of the business, board of directors, partners, managers and officers. External users: potential investors, Lenders, Suppliers, government agencies, employees, tax authority and customers. www.AssignmentPoint.com
Basic Assumptions of Accounting Economic entity assumption The economic entity assumption means that economic activity can be identified with a particular unit of accountability. The activity of business enterprise can be kept separate and distinct from its owners and any other business unit. Going concern Most accounting methods are based on the going concern assumption-that the business enterprise will have a long life. Contd. www.AssignmentPoint.com
Basic Assumptions of Accounting Monetary unit The monetary unit assumption means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis. The monetary unit is simple, relevant, universally available, understandable and useful. www.AssignmentPoint.com
Periodicity The periodicity assumption implies that the economic activities of an enterprise can be divided into artificial time periods. www.AssignmentPoint.com