Introduction to Accounting, Concepts and Basic Terms

Introduction to Accounting: Accounting is like the foundation of a building for businesses. It gives people important details about how well a business is doing financially. Whether you're learning about it, starting your own business, or already working in the field, knowing about accounting is important.

Enroll Now for Company Secretary Courses

What Is Accounting?

Accounting is the systematic process of recording, classifying, summarizing, analyzing, and interpreting financial transactions of a business. It helps in understanding how a business is performing and assists stakeholders in making informed decisions. For CS students, understanding accounting is crucial as it forms the foundation of corporate financial compliance and reporting.

Attributes of Accounting

1. Recording: Accounting involves the systematic recording of financial transactions. This is the foundational attribute, ensuring that all monetary transactions are noted in a timely and accurate manner.
2. Classifying: Once recorded, transactions are classified into different categories. This might involve sorting them into various accounts such as revenue, expenses, assets, and liabilities.
3. Summarizing: Accounting summarizes financial data into useful reports and statements, such as income statements, balance sheets, and cash flow statements, which provide an overview of the financial activities over a specific period.
4. Analyzing: Beyond just recording and summarizing, accounting also involves analyzing this data to understand the financial health of the business.
5. Interpreting: The final attribute is the interpretation of the data to help stakeholders make informed decisions.

Bookkeeping vs. Accounting

• Bookkeeping is like the recording secretary of a business. Its main job is to write down every financial transaction that happens, making sure they're all organized neatly.
• Accounting, on the other hand, is like the manager. It's not just about recording transactions; it's also about sorting them into categories, summarizing them, analyzing what they mean for the business, and explaining them to others. This includes not only keeping records but also making financial statements and reports.

Also Check: Interpretation of Statutes for CS Executive

Single Entry vs. Double Entry System

Accounting Concepts

• Accruals Concept: This concept states that transactions should be recorded when they occur, regardless of when the cash is exchanged. It ensures that revenues and expenses are recognized in the period in which they are earned or incurred, not necessarily when the cash is received or paid.
• Conservatism Concept: Also known as the principle of prudence, this concept suggests that when there are multiple acceptable accounting methods, the one that will be least likely to overstate assets or income should be chosen. In other words, it's better to err on the side of caution and anticipate losses rather than gains.
• Consistency Concept: This principle states that once a company chooses an accounting method or principle, it should continue using it consistently in the future. This ensures comparability between financial statements from different periods.
• Economic Entity Concept: According to this concept, the finances of a business should be kept separate from the personal finances of its owners or any other business entities. It means that the activities of the entity should be accounted for separately from those of its owners or other entities.
• Going Concern Concept: This concept assumes that a business will continue to operate indefinitely unless there is evidence to the contrary. It underpins the preparation of financial statements, assuming that the company will remain in operation for the foreseeable future and won't be liquidated.
• Matching Concept: This concept states that expenses should be recognized in the same period as the revenues they help to generate. In other words, costs should be matched with the revenues they helped to produce.
• Materiality Concept: This concept suggests that only significant or material items need to be reported in financial statements. Immaterial items can be disregarded for the sake of efficiency and relevance.

Types of Accounts and the Golden Rule of Accounting

1. Real Accounts: Concerned with assets and liabilities.
2. Personal Accounts: Related to individuals, companies, and other entities.
3. Nominal Accounts: Deal with income, expenses, gains, and losses.

• Real Account: Debit what comes in, Credit what goes out.
• Personal Account: Debit the receiver, Credit the giver.
• Nominal Account: Debit all expenses and losses, Credit all incomes and gains.

Basic Accounting Terms

Check the basic accounting terms in the table below:

Accounting serves as the language of business. For CS aspirants, having a solid grasp of basic accounting principles not only aids in academic success but also enhances practical understanding of corporate compliance. By learning the core concepts, types of accounts, systems, and common terms, you're laying a strong foundation for your journey in corporate governance and financial administration.

Join PW CS Online Courses and build a strong foundation in corporate laws and governance with structured learning and dedicated support.