Introduction

Definition of accounting?
Accounting is an information system that identifies records and communities the economic events of an
organization to interested users.
 W. Johnson states, “Accounting may be defined as the collection, compilation and systematic
recording of business transactions in terms of money, the preparation of financial reports, the
analysis and interpretation of these reports and the use of these reports for the information and
guidance of management.”
 Accounting Standards Council (ASC),
“Accounting is a service activity. Its function is to provide quantitative information, primarily
financial in nature, about economic entities, that is intended to be useful in making economic
decision.”
 Bierman and Drebin, “Accounting may be defined as identifying, measuring, recording and
communicating of financial information.”
 According to the AICPA(American Institute of Certified Public Accountants), “Accounting is
the art of recording, classifying and summarizing in a significant manner and terms of money,
transactions and events, which are, in part at least, of a financial character and interpreting the result
thereof.”
 According to the AAA (American Accounting Association), “Accounting refers to the process of
identifying, measuring and communicating economic information to permit informed judgments and
decisions by users of the information.”
 Weygandt, Kieso, and Kimmel defined, “Accounting is an information system that identifies,
records and communicates the economic events of an organization to interested users.”

Let’s take a closer look at these three activities ---

1. Identifying economic events involve selecting the economic activities relevant to a particular
organization. Sale of goods, purchase of assets, expenses and revenues received etc are example of economic
events.

2. Once identified economic events are recorded to provide a history of the organization’s
financial activities. Recording consists of keeping a systematic, chronological diary of events, measured in
Dollars and Cents/Taka and Paisa. In recording, economic events are also classified and summarized.

3. The identifying and recording activities are of little use unless the information is communicated
to interested users. Financial information is communicated through accounting reports, the most common of
which also called Financial Statements.

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A vital element in communicating economic events is the accountant’s ability to analyze and interpret the
reported information. Analysis involves the use of use of ratios, percentage, graphs, and charts to highlight
significant financial trend and relationship. Interpretation involves explanting the uses, meaning and
limitations of reported data.

Users of accounting data

Because it communicates financial information, accounting is often called ‘’the language if Business’’.
There are two broad groups of users of accounting information:
1. Internal Users and
2. External Users.

1. Internal Users: Internal Users of accounting information are managers who plan, organize and run a
business. These include marketing managers, production supervisors, financial directors and company
officers. For internal users, accounting provides internal reports. Example: cost information, production data
and projections of income from new sales campaigns and forecasts of cash needs for the next year.

2. External Users: There are several type of external users of accounting information. Investors (owners)
use accounting data to make decisions to buy, hold or sell stock. Creditors such as suppliers and bankers use
accounting data to evaluate the risks of granting credit or lending money. The information need of other
external users very considerably Taxing authorities, such as NBR want to know whether the company
complies with the tax laws.

Regulatory agencies, such as SEC want to know whether the company is operating with in prescribed rules.
Customers are interested in whether a company will continue to product warranties and support its product
lines. Labour Unions want to know whether the owners can pay increased wages and benefits. Economic
planners use accounting information to forecast economic activity.

Origin of Accounting:
The origin of accounting is generally attributed to the work Luca Pacioli, an Italian Renaissance
mathematician. Pacioli was a close friend and tutor to Leonardo da Vinchi and a contemporary of
Christopher Columbus. In his 1494 text ‘’Summa de Arithmetica, Geometria, Proportione et
Proportionalite’’, Pacioli described a system to ensure that financial information was recorded efficiently
and accurately.

Book-keeping and Accounting:

Book-keeping usually involves only the recording of economic events. It is therefore just one part of the
accounting process. In total, accounting involves the entire process of identifying, recording and
communicating economic events.

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 Generally Accepted Accounting Principles:
The accounting profession has developed standards that are generally accepted and universally practiced.
This common set of standards is called generally accepted accounting principles (GAAP).These standards
indicate how to report economic events.

FASB, SEC: Two organizations are primarily responsible for establishing generally accepted accounting
principles. The first is the Financial Accounting Standards Board (FASB) and the second one is the
Securities and Exchange Commission (SEC).

 Capital Expenditure: Capital expenditure consists of all expenditures which result in the
acquisition of permanent assets, employed to run the business for the purpose of earning
revenue, not only in one accounting period, but in several periods. Such as cost of land and
building plant and machinery, tools and fixtures etc.

 Revenue Expenditure: Revenue expenditure consists of those expenditures, which result

in the conduct and administration of the business. It also includes the cost of
maintenance of earning capacity including the upkeep of the fixed assets in
productive condition, e.g. office salaries, rent, taxes, insurance and commission etc.

Accounting Concepts and Conventions :

There is a difference of opinion as to the meaning and significance of the terms "Concepts"
and "Conventions". The term "Concept" is used to connote accounting postulates, i.e. necessary
assumptions or conditions upon which accounting are based. Following is the list of accounting
concepts agreed to by most of author's:

01. Entity concept: It requires that the activities of the entity be kept separate and distinct from the
activities of its owner.

02. Dual aspect concept: Under this assumption every transaction should have double sided
affairs one is debit and another is credit.

03. Going concern Concept: Under this assumption the business will continue for unlimited period.
On the basis of this concept, assets and liabilities are recorded at purchase cost.

04. Accounting period concepts: Under this assumption the organizations determined profit or loss at
the end of each financial year.

05. Money measurement concepts: The organization records all those transactions that are
measurable in terms of monetary value.

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06. Cost concept: Cost principles states that assets should be recorded at their cost. Cost is the value
exchanged at the time something is acquired.

07. Accrual/Matching concept: All incomes and charges relating to the financial year to which the
accounts relate shall be taken into accounts, without regard to the date of receipt or payment.

08. Objective evidence concept: This concept states that every transaction should have
documentary evidence.

Conventions/ Assumptions:
The term "Convention" is used to signify customs or traditions as a guide to the preparation of
accounting statement. Following are the various accounting conventions:

1. Monetary Unit assumption requires that only transaction data that can be expressed in terms of money
and/or money’s worth be included in the accounting records. This assumption enables accounting to quantify
(measure) economic events.

2. Economics Entity Assumption: An economic entity can be any organization or unit in society. It may be
a business enterprise, a governmental unit, a municipality, a school or a church/mosque. The economic
entity assumption requires that the activities of its owner and all other economic entities. Proprietorship,
Partnership, Corporation are examples of economic entity.

3. Disclosure: Accountants are obliged to transmit all significant financial data preferable in the
body of the financial reports but also explanatory foot notes.

4. Materiality: This convention states that the trader should record the transaction which is
material/relevant with the business and which immaterial should be ignore.

5. Consistency: It required that once a company has decided on one of the methods, it will treat all
subsequent events of same character in the same fashion.

6. Conservatism or prudence: Revenue and profits should not be anticipated but recognized only
when they are realized in cash but liabilities and losses which have arisen or likely to arise in
respect of the financial year must be taken into account.

 Basic Accounting Equation:

The two basic elements of a business are what it owns and what it owes. Assets are the resources owned by
a business. Liabilities and owners equity are the rights or claims against these resources. Claims of those to
whom money is owned (creditors) are called liabilities. Claims of owners are called owner’s equity. This
relationship of assets, liabilities and owner’s equity can be expressed as an equation as follows:

Assets = Liabilities + Owner’s Equity

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 This relationship is referred to as the Basic Accounting Equation. Assets must equal the sum of liabilities
and owner’s equality.

Assets are resources owned by a business.

Liabilities are claims against assets. That is, liabilities are existing debts and obligations.

Owner’s Equity- The ownership claim on total assets is known as owner’s equity.

Owner’s equity is increased by owner’s investments and by revenues from business operations. In contrast,
owner’s equity is decreased by an owner’s withdrawals of assets and by expenses. Net income results when
revenues exceed expenses. A net loss occurs when expenses exceed revenues.

Transaction Analysis:

Transaction (often referred to as business transactions) is 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 some outside enterprise.

Internal transactions are economic events that occur entirely within one company. Example : Use of
supplies, depreciation and an assets, etc.,

A company may carry on many activities that do not in themselves represent business transactions. Hiring
employees, answering the telephone, talking with customers, and placing orders for merchandise are not
transactions. Some of these activities however may lead to business transactions: employees will earn wages,
and merchandise will be delivered by suppliers. If an event has an effect on the components of the basic
accounting equation, it will be recorded in the accounting process as business transaction.

The equality of the basic equation must be preserved. Therefore, each transaction must have a dual effect on
the equation.

Financial Statements:

After transactions are identified, recorded and summarized, four financial statements are prepared from the
summarized accounting data:

1) Income Statement- for a specific period of time.

2) Owner’s Equity Statement- for a specific period of time.

3) Balance Sheet- reports the assets, liabilities and owner’s equity at a specific date.

4) Statement of cash flows- summarizes information about the cash inflows (receipts) and

outflows (payments) for a specific period of time.

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Each statement provides management, owners, and other interested parties with relevant financial data. Also,
every set of financial statements is accompanied by explanatory notes and supporting schedules that are an
integral part of the statement.

Branches of Accounting:

With the development of trade and commerce, industry and economy the use of accounting information
increased and the new branches of accounting originated. The main branches of accounting are as follows:

1) Financial Accounting : Deals with financial transactions of an enterprise. It records all economic
events.

2) Cost Accounting : To ascertain cost of production & control costs.

3) Management Accounting : Techniques used to take day to day decisions of business.

4) Tax Accounting : That determines the income tax, sales tax, VAT, wealth tax, etc.

5) Integrated Accounting : Combination of cost & financial accounting.

6) National Income Accounting : That counts the national income, GDP, NNP, per capita income and
standard of living of people of the country.

7) Government Accounting : Accounts maintained in public sector or in different departments of the

government Cash system of Accounting.

8) Human Resources Accounting : Keeping accounting of expenses for development of human

resources, collecting data about human resources, identifying the human resources and supplying the
information about the human resources to the users of the same is the subject matter of HR
accounting.

9) Budgetary Accounting : Preparation of different budgets like cash budget, production budget, sales
budget, master budget and use of accounting information for preparing those budgetary accounting.,

10) Inflationary Accounting : Inflationary accounting refers to the process of adjusting the financial
statements of a company to show the real financial position of the company during inflationary
period.

Assets are recorded at cost price of historical value but due to inflation, the depreciation on these
assets is charged at cost which is less than the current market value resulting in inflation of profit., To
adjust it, inflation accounting is originated and depreciation and profit as per inflation accounting is
shown in financial statements in developed countries.

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11) Social Accounting: Social accounting measures the environmental and social impact of an organization.
Business is a socio-economic activity and it draws its inputs from the society, hence its objective
should be the welfare of the society. When the technique of double aspect of transactions is applied in
socio-economic sectors, then it is called social accounting. Counting national & foreign income, etc.

12) Responsibility Accounting: In govt. private & autonomous organization, functions are delegated to
different executives. To ascertain whether they have performed their functions duly, Responsibility
accounting originated.

The Account and Types of Account

An account is an individual record of increases and decreases in a specific asset, liability or owner’s equity
items. For example, cash a/c, accounts receivable, salaries expenses, service revenue a/c and so on. In its
simplest form an account consists of three parts: (i) The title of the a/c; (ii) A left or debits side and (iii) A
right or credit side. It is called T account as the parts of an account resemble the title-T.

Types of accounts:

Traditionally, Luca Pacioli classified the accounts into three –a) Personal a/c, b) Real a/c, and c) Nominal
a/c.

According to modern concept, the accounts are classified into five (5) types- i)Assets a/c, ii) Liabilities
a/c, iii) Owner’s equity/capital a/c, iv) Expenses a/c, and v) Revenues a/c.

Rules for ascertaining debit & credit:

A) Traditional Method:

Personal A/C - Receiver of the Benefit- Debit

Giver of the benefit- Credit

Real A/C - What comes in- Debit

What goes out- Credit

Nominal A/C - All expenses and losses- Debit

All incomes, revenues, gains & profits-Credit

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B) Modern Concept:

a) Assets A/C- Increase in assets- Debit

Decrease in assets- Credit

b) Liabilities A/C- Decrease in liabilities- Debit

Increase in liabilities- Credit

c) Owner’s equity A/C- Decrease in capital/ Owner’s equity-Debit

Increase in capital/ Owner’s equity- Credit

d) Expenses A/C- Increase in expenses- Debit

Decreases in expenses- Credit

e) Revenue A/C- Decreases in revenue/incomes- Debit

Increases in revenue/incomes- Credit

The Double Entry System of Book-keeping:

Definition: A system that records in appropriate accounts the dual aspect/effect of each transaction. Debits
must equal credits for each transactions.

Other systems of Book – keeping are –

(a) Single Entry System and

(b) Cash system.

The Accounting Cycle – Basic Steps:

Accounting cycle is the procedure/process of recording business transactions step by step in books of
accounts under the double entry system of accounting.

The basic steps of accounting cycle are –

 Identifying the transactions, accounts, evidences.

 Recording the transactions – in Journal.

 Classifying the transactions – in Ledger.

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  Summarizing the accounts – preparation of trial balance.

 Preparation of financial statements.

 Analysis and interpretation – reporting to users.

 Opening entry

Other steps of accounting cycle are –

 Adjusting entries

 Adjusted trial balance

 Closing entries

 Reversing entries

Journal:

The book in which transactions are initially recorded in chronological order, is called a Journal. It is the
book of original entry. For each transaction the journal shows the debit and credit effects on specific
accounts.(In computerized system, ‘Journals’ are now kept as files, and accounts are recorded in computer
databases).

Companies may use various kinds of journals, but every company has the most basic form of journal, a
General Journal. Other journals are – cash book, purchases book, sales book, A/R book, Returns book etc.

Journalizing: Entering transaction data in the journal is called Journalizing. Separate journal entries are
made for each transaction.

The form of a General Journal is as below:

Date Account title & Explanation Ref. Debit Credit

Taka Taka
2006 Cash A/c 1000000
Jan 1 Karim’s Capital A/c 1000000
(Being Capital in cash invested in
business)

Types of entry - a) Simple Entry and

b) Compound Entry

Ledger:

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The entire group of accounts maintained by a company is called the Ledger. The ledger keeps in one place
all the information about changes in specific account balances.

Companies may use various types of ledgers, but every company has a General Ledger. A general ledger
contains all the assets, liabilities and owner’s equity accounts. Other ledgers are Customer’s ledger and
Supplier’s ledger.

Form of ledger - a) T-account from (British System & Traditional form)

b) Three-column form of ledger account

Date Explanation Ref. Debit Credit Balance

Dr Cr

Trial Balance:

A trial balance is a list of accounts and their balances at a given time. Customarily, a trial balance is prepared
at the end of an accounting period. The primary purpose of a trial balance is to prove (check) that the debits
equal the credits after posting. In addition, it is useful in the preparation of financial statements.

Limitations of Trial Balance: A trial balance does not guarantee freedom from recording errors; however,
some errors could not be detected by the trial balance like –

 Errors of omission

 Errors of commission

 Errors of principle and

 Off-setting errors/compensating errors.

Form of Trial Balance:

... … … Co. Ltd.

Trial Balance
For the month of January, 2006

Sl. Account title Ledger Debit Credit

No Folio

*But the ledger folio column is omitted.

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Book Reference:

1. Weygandt, Kieso, Kimmel, Accounting Principles,(12th Edition), John Wiley and Sons,USA.

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