Introduction
to
Accounting
At the end of the lesson, the learner
is able to:
define
accounting
describe the nature of accounting
explain the functions of accounting in
business
narrate the history/origin of
accounting
What is accounting?
Accounting
System is a means of COLLECTING,
SUMMARIZING, ANALYZING, and REPORTING in
monetary terms, the information about the
business.
It
is an information system that reports on the
economic activities and financial condition of a
business or other organization.
There
needs to be a system or set of rules so you
are able to compare entities to each other.
What is accounting?
Accounting
is the systematic and comprehensive
recording of financial transactions pertaining to a
business, and it also refers to the process of
summarizing, analyzing and reporting these
transactions to oversight agencies and tax
collection entities.
What is accounting?
Accounting
is one of the key functions for almost
any business; it may be handled by a bookkeeper
and accountant at small firms or by sizable
finance departments with dozens of employees at
large companies.
What is accounting?
Accounting
operates within a broad socioeconomic environment, and so, the knowledge
required of the accountant cannot be sharply
compartmentalized.
Who are stakeholders? anyone or any entity that has an
interest in the economic performance and well-being of a
business
Bankers and other creditors need to ensure that the business has
the ability to repay loans, and on a timely basis
Suppliers need to ensure their customer (the business) will be
around to purchase their supplies and then be able to pay for them
Customers are interested in the business to determine if they will
always be around to provide a constant flow of goods and services
Government need to ensure that the business pays the correct
amount of taxes
Employees and Management need to ensure that the business is
doing well so that they will have a job
7
Nature of Accounting
The
basic features of accounting are as follows:
1. Accounting is a process: A process refers to the
method of performing any specific job step by step
according to the objectives, or target. Accounting is
identified as a process as it performs the specific
task of collecting, processing and communicating
financial information. In doing so, it follows some
definite steps like collection of data recording,
classification summarization, finalization and
reporting.
Nature of Accounting
2. Accounting is an art: Accounting is an art of
recording, classifying, summarizing and finalizing
the financial data. The word art refers to the way
of performing something. It is a behavioral
knowledge involving certain creativity and skill that
may help us to attain some specific objectives.
Accounting is a systematic method consisting of
definite techniques and its proper application
requires applied skill and expertise. So, by nature
accounting is an art.
Nature of Accounting
3. Accounting is means and not an end: Accounting finds
out the financial results and position of an entity and the
same time, it communicates this information to its users.
The users then take their own decisions on the basis of such
information. So, it can be said that mere keeping of accounts
can be the primary objective of any person or entity. On the
other hand, the main objective may be identified as taking
decisions on the basis of financial information supplied by
accounting. Thus, accounting itself is not an objective, it
helps attaining a specific objective. So it is said the
accounting is a means to an end and it is not an end in
itself.
Nature of Accounting
4. Accounting deals with financial information and
transactions: Accounting records the financial
transactions and date after classifying the same and
finalizes their result for a definite period for
conveying them to their users. So, from starting to
the end, at every stage, accounting deals with
financial information. Only financial information is
its subject matter. It does not deal with nonmonetary information of non-financial aspect.
Nature of Accounting
5. Accounting is an information system:
Accounting is recognized and characterized as a
storehouse of information. As a service function, it
collects processes and communicates financial
information of any entity. This discipline of
knowledge has been evolved out to meet the need
of financial information required by different
interested groups.
Functions of Accounting
Recording:
This
is the basic function of accounting. It is
essentially concerned with not only ensuring that
all business transactions of financial character are
in fact recorded but also that they are recorded
in an orderly manner. Recording is done in the
book Journal.
Functions of Accounting
Classifying:
Classification
is concerned with the systematic
analysis of the recorded data, with a view to
group transactions or entries of one nature at one
place. The work of classification is done in the
book termed as Ledger.
Functions of Accounting
Summarizing:
This
involves presenting the classified data in a
manner which is understandable and useful to the
internal as well as external end-users of
accounting statements. This process leads to the
preparation of the following statements: (1) Trial
Balance, (2) Income statement (3) Balance sheet.
Functions of Accounting
Analysis and Interprets:
This
is the final function of accounting. The
recorded financial data is analyzed and
interpreted in a manner that the end-users can
make a meaningful judgment about the financial
condition and profitability of the business
operations. The data is also used for preparing the
future plan and framing of policies for executing
such plans.
Functions of Accounting
Communicate:
The
accounting information after being
meaningfully analyzed and interpreted has to be
communicated in a proper form and manner to
the proper person. This is done through
preparation and distribution of accounting
reports, which include besides the usual income
statement and the balance sheet, additional
information in the form of accounting ratios,
graphs, diagrams, funds flow statements etc.
A Brief History/Origin of Accounting
Ancient
civilizations
Accounting was born before writing or numbers existed,
some 10,000 years ago, in the area known as Mesopotamia,
later Persia, and today the countries of Iran and Iraq. This
area contains the Tigris Euphrates river valley, a large fertile
area 10,000 years ago with a large thriving population and
active trading between towns and cities up and down the
two rivers.
Writing and numbers would be not be invented for about
another 5,000 years. And what happens next will directly
lead to the invention of both writing and number systems.
A Brief History/Origin of Accounting
At that time, merchants faced many of the same problems
businesses face today. They had to ship their merchandise up
and down the rivers, and that meant trusting a boatman with
their goods. Unfortunately, not all boatmen were honest, and
disagreements often arose about how much was shipped
versus what was received at the other end.
Accounting
in Antiquity
(The Period before the Middle Ages)
Egypt
Babylonia
Greece
Rome
A Brief History/Origin of Accounting
Middle
ages (Feudal System)
It is interesting to note that the Mediterranean and
European nations had no concept of the number zero until
the middle ages. They learned the concept of zero from
Middle Eastern mathematicians, who also knew about the
movements of the stars and planets, and had figured out
the earth was round, and revolved around the sun in an
orbit, etc. It took the Europeans another 500 years to figure
that out, largely because those concepts were contrary to
views held by the Roman Catholic church at the time. It's
also hard to do math using Roman numerals, so their math
skills were limited until they started using Arabic numbers.
A Brief History/Origin of Accounting
c. 8500 BC
c. 3500 BC
Merchants begin to use bollae (pronounced "bowleye") - meaning ball and tokens to protect shipments
Making marks onto wet clay replaces use of bollae,
gives rise to writing and number systems
c. 3000 BC
Writing and number systems fully developed
c. Late 1400s
Luca Pacioli documents double entry accounting
A Brief History/Origin of Accounting
Double-entry
Luca
bookkeeping
Pacioli - Father of Modern Accounting
He was a remarkable man. He was one of the best
mathematicians of his time, and was a close friend of
Leonardo DaVinci. They collaborated on many projects.
Pacioli helped DaVinci lay out his painting,The Last
Supper, with mathematical precision. And Leonardo
illustrated Luca's books on mathematics and
accounting. History is full of instances of collaboration
between these two great thinkers and Renaissance
men.
A Brief History/Origin of Accounting
Accounting
& Capitalism
Managerial Cost Accounting
Modern accounting follows the same principles
set down by Luca Pacioli over 500 years ago.
However, today it is a highly organized profession,
with a complex set of rules for the fair disclosure
and presentation of information in financial
statements. Every day trillions of dollars in
transactions are recorded by business, government
and financial institutions world-wide. They all
follow the same general set of rules.
A Brief History/Origin of Accounting
Professional
Accounting Societies
In the United States, we followGenerally Accepted
Accounting Principles (GAAP)as specified by the
Financial Accounting Standards Board(FASB). We use the US
Dollar for all financial statements and transactions. Other
countries use similar accounting rules as the US, but there
are differences from country to country. If you had a business
in France, you would use the French equivalent to our GAAP.
GAAP developed over 500 years from the basic concepts
Luca Pacioli set forth in the 1400s. There is a great deal of
similarity in accounting practices around the world because
they all have a common origin.
Thanks!
