Accounting
Accounting is basically a systematic and scientific process of summarizing, classifying, interpreting financial transaction made by a business firm in an accounting period and to providing relevant information to the various users of a business firm to facilitate in decision making process.
It also can be define as a language of business firm as it communicates with a business firm’s stakeholders.
It is essential for the effective communication between a business firm and its stakeholders for a sustainable growth of a business firm.
Importance of Accounting
For recording a financial transactions and maintaining a journal ledger to keep them all.
For classifying and separate the records and the ledger.
For highlighting strong and weak part in a business firm and to obtained competitive advantage
For analyzing data and records for the various purpose.
For communicating and spreading the obtained financial information to the stakeholders.
For assisting management by helping them to make an appropriate financial decision for a business firm.
For evaluating and employees and their work efficiency.
For preventing frauds and profit risks in an organization.
Concept or Principles of Accounting
Business entity concept: This concept assumes that as far as accounting is concerned, the owner and a business firm are two separate entities or they both have separate existing.
Money measurement concept: Only those transactions will be recorded in accounting which can be measured in monetary value.
Going concern concept: A business firm will not have to sell its assets and terminate anytime soon as it operates indefinitely.
Accounting period concept: Every organization according to its needs have to choose a specific period of time to complete an accounting cycle. Usually, the time chosen is a year is called the accounting period.
Historical cost concept: A business firm should record its financial transactions at original price rather than market price.
Double entry concept: For every credit, there must be a corresponding debit. So that every recorded transaction have a twofold effect.
Realization concept: The revenue is only recorded when it is received not after selling goods.
Matching concept: Income and expenses of transactions should be recorded in the same accounting period.
Full disclosure concept: All the relevant information should be disclosed in the accounting statement.
Consistency concept: Unless there is a statutory requirement, accounting policy should not be frequent changed.
Materiality concept: All the material fact must be a part of the accounting process but immaterial fact i.e. insignificant information should be left out.
Cash basis concept: Only cash based transactions occurred in an accounting period is recorded.
Accrual basis concept: Records all the financial transactions including cash, receivable payable transactions
Single entry transaction: In the absence of debit and credit rule in accounting activities, this concept comes into the force but it is used in household not in business sector.
Conservatism concept: It inclines future losses but not profit until it is realized or recognized.
By following above mentioned principles of accounting, accountants can establish effective communication with its various users. Since, effective communication between business firm and its stakeholders ensures sustainable business growth, it is essential to adopt accounting system to any business firm