Basic Notes on Accounting

Accounting

Accounting or accountancy is the measurement, processing, and communication of financial information about economic entities such as businesses and corporations. The modern field was established by the Italian mathematician Luca Pacioli in 1494. Accounting, which has been called the "language of business".

Accounting has several subfields or subject areas, including financial accounting, management accounting, auditing, taxation and accounting information systems.

What is the meaning of accounting?

It is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information. It reveals profit or loss for a given period, and the value and nature of a firm's assets, liabilities and owners' equity.

What are the different types of accounting?

• Financial accounting
• Government accounting
• Management accounting
• Tax accounting / taxation
• Internal auditing

What are the golden rules of accounting?

Personal A/c: debit the receiver credit the giver.

Real A/c: debit what comes in credit what goes out.

Nominal A/c: debit all expenses and losses credit all gains and incomes.

Debit and Credit Golden Rule:

Nature of accounts	Decreased	Increased
Liablities	Debit	Credit
Income	Debit	Credit
Assets	Credit	Debit
Expenes	Credit	Debit

Book keeping: It is an occupation of keeping records of the financial transactions of a business.

I.e. Bookkeeping is the recording, on a day-to-day basis, of the financial transactions and information pertaining to a business. It ensures that records of the individual financial transactions are correct, up-to-date and comprehensive.

Book keeping types: there are two common book keeping systems, used by the individual or any company/organisation.   

1. Single Entry System
2. Double Entry System

Single-entry bookkeeping System

Single entry accounting is a simple form of bookkeeping and accounting in which each financial transaction is a single entry in a journal or transaction record. As a result, the accounting system is called a single entry system.

Double-entry bookkeeping System

The double entry system of bookkeeping is based on the fact that every transaction has two parts, which therefore affects two ledger accounts. Every transaction involves a debit entry in one account and a credit entry in another account.

This helps to find the error-detection system: if, at any point, the sum of debits does not equal the corresponding sum of credits, then an error has occurred.

Single Entry System V/s Double Entry System

Followings are some of differences between single entry system and double entry system of bookkeeping:

1.     The bookkeeping system in which only one aspect of a transaction is recorded, i.e. either debit or credit, is known as Single Entry System. Double Entry System is a system of keeping records, whereby both the aspects of a transaction are captured.

2.    Single Entry Transaction is simple and easy whereas Double Entry System is complex as well as it requires expertise in accounting for maintaining records.

3.    In single entry system, incomplete records are maintained while in double entry system complete recording of transactions is there.

4.    In single entry system comparison between two accounting periods is very difficult. Conversely, we can easily compare two accounting periods in the double entry system.

5.    Single Entry System maintains personal and cash accounts. On the other hand, personal, real and nominal accounts are kept in Double Entry System.

6.    The Single Entry system is best suited for small enterprises, but big organisations prefer Double Entry System.

7.     Frauds and misuse are easy to identify in double entry system which cannot be located in single entry system.