How you have received (cash or Bank) and from Whom/why (Income).Towards what you have paid (Expenses) and How (Cash or Bank)?.To Whom you have paid (Vendor, Customer etc.) and How (Cash or Bank)?.These statements will help you understand better. To make it simple, the double entry system of booking requires you to answer two aspects for a given transaction. If you have paid 5,000 towards electricity bill using cash, you will debit electricity expenses and credit cash account. Example of double entry accounting system To sum up, for every benefit you receive, there always an outgoing aspect of the business. Thus, for every accounting transaction, debit will always be equal to the credit. This implies that every accounting transaction should be recognized into two accounts, one debit account and the other credit account. Under the double entry accounting system, every transaction is recorded with two aspects – Debit aspect and Credit aspect. Among the various accounting system, the most common and widely adopted accounting system is ‘Double Entry System’. Accounting systemĪs the definition of accounting states, it is a systematic way of managing the business transactions, there are defined system of recording or accounting the business transactions in the books of the accounts. that business follows in preparing the financial statements. Generally Accepted Accounting Principles (GAAP) can be defined as a set of accepted principles, standards, assumptions, procedures etc. Generally accepted accounting principles’, commonly known as ‘GAAP’, sets the protocol for summarizing and preparing the financial statements. Generally accepted accounting principles (GAAP) in accounting External users: Regulatory, tax authorities, banks, unions etc.Internal users: Internal users of accounting information are management, employees, Owners etc.The following are the primary users of accounting information. The primary source of information to various stakeholders of the business.Īccounting is often coined as the language of the business since accounting considers all the financial transactions in communicating the financial performance of the business to internal stakeholders as well as outside word.Know the financial position of the business.Evaluate the performance of the business in terms of profit.Recording business activities in a systematic manner. The following are some of the reasons why accounting is required. Accounting business transactions provides invaluable information to the people who have a direct or indirect interest in the business. Objective of accountingĪccounting is the steppingstone for business decisions. Hundreds of thousands of these accounting transactions recorded in the books of accounts are summarized to prepare various financial statement such as cash flow statements, balance sheet, income statements etc. Here, financial data or events are nothing, but the financial transactions of the business and these transactions are recorded in the ‘Books of accounts’ This is the bookish definition or meaning of accounting.Ĭonfused! Let us break the meaning of accounting in a simpler way.Īccounting is the process of collecting, classifying, and recording all the financial data or financial events of the business in a book so as to determine the financial performance of the business as an end objective. The term ‘Accounting’ referred as ‘the art of recording, classifying, and summarizing, in a significant manner and in terms of money, transactions, and events which are part of a financial character and interpreting the result thereof’. The history of accounting can be traced back to the dawn of the commerce and with some evidence to claim that accounting existed as early as 2600 BC. Accounting is the language of the business used to communicate to internal stakeholders and external stakeholders. Accounting is essential for almost every business irrespective of the business size. With the growth of trade and commerce, accounting plays is a key role in determining the financial stability of the business.
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