Prepared By- H. R. Sampath Introduction To Accounting Definition for Accounting There are so many definitions for accounting. For example; • American Accounting Association (AAA) has defined accounting as; “The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information” • SBA Administration Loan Terms “Accounting is an art of recording, classifying, summarizing and interpreting financial events and transactions in a significant manner and in terms of money. ” In general Accounting can define as;It is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information.
Function of Accounting Mainly there are two functions of accounting. 1) Information Function Accounting gives information to control of resources or assets of the organization. it means, by accounting it provide information to the management about the status of limited resources.
E. g. : Cash Book – Control of cash transactions. Debtors & Creditors – Control of credit sales and credit purchases of the organization 2) System FunctionAnother function of accounting is to design systems and procedures to control of limited resources. E. g. : Payment system Debtors control system Inventory control system Accounting Assumptions There are mainly four accounting assumptions. 1.
Separate entity assumption Business / firm is considering as a separate accounting entity which is distinct from its owners / share holder or members. For example if owner takes goods or cash from the organization, accounting treats it as drawings. And if an owner / share holders bring capital to the organization, then it will show as a Capital or equity account. 2.
Going ConcernIt is assumed that the company has unforeseeable future. It means, in minimum that the company will be operating trough in next accounting year. 3. Stable monetary assumption It is assume that the value of money will not be change. 4. Fixed time period assumption Accounts are prepared and presented for a fixed or decided time period.
For example accounts may prepare on Annually, Monthly, Weekly or Daily. Accounting Principles Mainly there are four accounting principles; 1. Historical Cost Principle The financial statements are prepared based on original cost and no adjustments are made for changes in market value.
E. g. : Assets are recorded on cost basis on the balance sheet.
2. Matching Principle When determining the profit or loss of the organization for a given period, the income and expenses which are earned and incurred during the period should take into accounts. 3. Revenue Recognition Principle Revenue should report as earned (realized), when everything that should necessary to earn such income has been complete. 4.
Full Disclosure Principle All the information about the business entity that is needed and entitle by users should disclose in the financial statements.