An important and main motive of every firm is to earn a profit. From purchasing to selling commodities, receiving income, incurring expenses and lots more, everything falls under a transaction which is financial in nature. These are the aspects which influence the profit of an organization.
Both monetary transaction and a transaction worth monetary gain combine to form accounting transaction. A transaction worth monetary gain is referred to credit transaction which states that a cash transaction is not just the only financial proceeding in accounting transaction.
Assets, expenses, revenues, and capital liabilities are the ones falling under the category of transactions.To deduce the profit and loss in business, an income statement is composed for it. For the evaluation of commodity and liability values, position statement is composed.To compute a business’s actual performance, different statements are composed, and numerous ratios are enumerated.
To get the desired result or plans for a future business prospect, former performances are compared with the correct or actual performances. It is with the help of all these points; one can state that the art of recognizing, categorizing, recapitulating, recording and understanding the financial nature of a business transaction is known as accountancy.
Accountancy record maintenance procedures
There are certain procedures to maintain accountancy records.
- Documentary proofs are a must in every financial transaction. This recognized evidence is stated as accounting transactions.
- Capital, assets, revenues, liabilities and expenses are the important components categorized under a transaction.
- Records of these transactions are arranged in their respected book of accounts.
- It is during accounting period when to establish any profit or loss in a business, construction of income statement takes place.
- To identify an organization’s liabilities and commodities, position statements are composed.
- After all these steps take place, the final transaction results are recorded.
The process of recognizing, estimating, indicating and finally conveying financial information is defined as accounting.
In another definition, accounting is stated as a method of determining and giving an account of the details related to economic activities.
Accounting,Book-keeping and Accountancy
The combination of book keeping with the comprehension of financial nature transactions, and stating it, in brief, is known as accounting. In the current time, accounting is also stated as a decision-making activity as well as an information system of a business.
As book keeping is an essential part of accounting, it is defined as a completely methodical upkeep of book of accounts. This account book involves recognition of initial records, accounting transactions, trial balance, and ledger account preparation.
Organized knowledge regarding accounting is known as accountancy. It includes a subject’s hypothetical knowledge and its methods to proper application, by communicating it to interested companies. To be stated in specific words, accountancy is the combination of accounting and book keeping, in addition to the explanation and mode of conveying accounting information.
Characteristics of accountancy
There are 4 important characteristics of accountancy.
- Economic events
- Identification, computation, registering and conveyance
- Interested users for information
Any prominent or significant incidents in an organization are stated as an economic event. These events can be categorized as either an internal event or an external one.
Internal events usually take place inside the company. The happenings in these events involve the supply of raw materials from warehouses to manufacturing division.
In case of external events, services and commodities are exchanged between 2 organizations. These commodities and its associated services can be regarding anything as per the requirement of customers.
Economic event is related to commercial activities which have a specific outcome. Any purchase in cash has an outcome of decrease in funds (cash) and increase in commodities.
Identification, computation, registering and conveyance
In case of identification, it implicates an event’s inspection regarding its material. This can be seen displayed in books of accounting. This particular event should be taken as an economic activity and accounting transactions as its application.
Appraisal of business transaction in case of money falls under computation. Any commodity without any economic value is insignificant for any accounting purpose, apart from providing suggestions related to decision making.
It can be easily explained with the help of an example. A manager of a company resigning from his post will not impact the funding, investment or any kind of monetary transaction. But his resignation will definitely make an impact on the company’s decision making regarding the appointment of a future manager. Here, money is just the typical measurement unit which is important for accounting.
An organized presentation involving the amount used in a transaction and its relevant details which are thoroughly highlighted comes under registering or recording. Conveying these economic events in an efficient way helps an organization in correct decision making. When accounting reports are constructed as financial statements, it becomes an indicator, indicating the health of a company.
For a user’s ease, analyses based on daily, monthly and quarterly reports are also composed.To accomplish an effective decision, the analysis report can be created concerning percentages and ratios.
It is with the selection of suitable types of company; a firm can be organized and execute their business activities efficiently. The appropriate form can be anything. It could be:
- Sole proprietorship
It could also be a cooperative society or boards. Its type could include:
- Cricket board
- Municipal board
- Cantonment board or anything.
Interested users for information
As stated earlier, economic events are of two types. In the same way, users associated with accountancy are also of two types.
- External users
- Internal users
These external users are again divided into 2 divisions.
- Users who have a direct financial interest
These users are usually banks, debenture holders,creditors, investors and of similar background.
- Users who have an indirect financial interest
The users, in this case,are generally belonging to Sales tax, Excise departments, and Income tax.
Personnel belonging to lower, mid and higher managerial positions fall into the category of internal users. For their decision making purposes, they require accounting information. Information requirement is different for different categories.
- The high level user requires it for their strategic planning.
- The users in mid-level need it for their operational arrangement.
- Users in the lower level find it important for regulating and accomplishing their business operations.
The information provided to these users is related to cash, sales, and for expenses which are essential for an organization’s future decision-making.
Accountancy explains the subject’s conceptual knowledge as well as its application for effective result. Apart from it, it also states its reason and the method to use the accounting information, in brief, helping to convey the same to the required clients.