Which refers to the process of recording the accounts or transactions of an entity?
Defining AccountingAccountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. Show
Learning Objectives Explain the purpose of accounting Key TakeawaysKey Points
Key Terms
IntroductionAccountancy is the process of communicating financial information about a business entity to users such as stakeholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in selecting the information that is relevant to the user. The principles of accountancy are applied to business entities in three divisions of practical art: accounting, bookkeeping, and auditing. Accounting DefinedThe American Institute of Certified Public Accountants (AICPA) defines accountancy as "the art of recording, classifying, and summarizing, in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof. " HistoryThe earliest accounting records were found amongst the ruins of ancient Babylon, Assyria and Sumeria, which date back more than 7,000 years. The people of that time relied on primitive accounting methods to record the growth of crops and herds. Because there is a natural season to farming and herding, it is easy to count and determine if a surplus had been gained after the crops had been harvested or the young animals weaned. Token Accounting in Mesopotamia: The invention of a form of bookkeeping using clay tokens represented a huge cognitive leap for mankind. When medieval Europe moved to a monetary economy in the 13th century, sedentary merchants depended on bookkeeping
to oversee multiple simultaneous transactions financed by bank loans. One important breakthrough took place around that time: the introduction of double-entry bookkeeping, which is defined as any bookkeeping system in which there was a debit and credit entry for each transaction, or for which the majority of transactions were intended to be of this form. The historical origin of the use of the words 'debit' and 'credit' in accounting goes back to the days of single-entry bookkeeping in which the
chief objective was to keep track of amounts owed by customers (debtors) and amounts owed to creditors. Thus, 'Debit,' from the Latin word debere means 'he owes' and 'Credit', from the Latin word credere, means 'he trusts'. Father of Double-Entry Accounting: Portrait of Luca Pacioli, attributed to Jacopo de' Barbari, 1495 (Museo di Capodimonte). In "Summa Arithmetica," Pacioli introduced symbols for plus and minus for the first time in a printed book, symbols that became standard notation in Italian Renaissance mathematics. "Summa Arithmetica" was also the first known book printed in Italy to contain algebra. Although Luca Pacioli did not invent double-entry bookkeeping, his 27-page treatise on bookkeeping contained the first known published work on that topic, and is said to have laid the foundation for double-entry bookkeeping as it is practiced today. Even though Pacioli's treatise exhibits almost no originality, it is generally considered as an important work, mainly because it enjoyed a wide circulation, was written in the vernacular Italian language, and was a printed book. PastEarly accounts served mainly to assist the memory of the businessperson, and the audience for the account was the proprietor or record keeper alone. Cruder forms of accounting were inadequate for the problems created by a business entity involving multiple investors, so double-entry bookkeeping first emerged in northern Italy in the 14th century, where trading ventures began to require more capital than a single individual was able to invest. The development of joint stock companies created wider audiences for accounts, as investors without firsthand knowledge of their operations relied on accounts to provide the requisite information. This development resulted in a split of accounting systems for internal (i.e., management accounting) and external (i.e., financial accounting ) purposes, and subsequently also in accounting and disclosure regulations, following a growing need for independent attestation of external accounts by auditors. Present Today, accounting is called "the language of business" because it is the vehicle for reporting financial information about a business entity to many different groups of people. Accounting that concentrates on reporting to people inside the business entity is called management
accounting and is used to provide information to employees, managers, owner-managers, and auditors. Management accounting is concerned primarily with providing a basis for making management or operating decisions. Accounting that provides information to people outside the business entity is called financial accounting and provides information to both current and potential shareholders, creditors such as banks or vendors, financial analysts, economists, and government agencies. Because these
users have different needs, the presentation of financial accounts is very structured and subject to many more rules than management accounting. The body of rules that governs financial accounting in a given jurisdiction is called Generally Accepted Accounting Principles, or GAAP. Other rules include International Financial Reporting Standards (IFRS), U.S. GAAP, Canadian GAAP, and the GAAP in other specific countries. Inputs to AccountingInputs into accounting include journal entries, the bookkeeping process, and the general ledger. Learning Objectives Classify the inputs to accounting Key TakeawaysKey Points
Key Terms
Inputs to AccountingJournal Entries In accounting, a journal entry is a logging of transactions into accounting journal items. The journal entry can consist of several items,
each of which is either a debit or a credit. The total of the debits must equal the total of the credits or the journal entry is said to be "unbalanced. " Journal entries can record unique items or recurring items such as depreciation or bond amortization. Some data commonly included in journal entries are: journal entry number; batch number; type (recurring vs. nonrecurring); amount of money, name, auto-reversing; date; accounting period; and description. BookkeepingBookkeeping: Bookkeeping is the recording of financial transactions, including sales, purchases, income, receipts and payments by an individual or organization. In
accounting, the two bookkeeping methods are the single-entry and double-entry bookkeeping systems. For modern day purposes, it is most important to know the double-entry bookkeeping system. The General LedgerJournals to Ledgers: The general ledger works as a central repository for accounting data transferred from all sub-ledgers or modules like accounts payable, accounts receivable, cash management, fixed assets, purchasing, and projects. General Ledger is the final repository of the accounting records and data. In modern
accounting softwares or ERP, the general ledger works as a central repository for accounting data transferred from all sub-ledgers or modules like accounts payable, accounts receivable, cash management, fixed assets, purchasing, and projects. General ledger is the backbone of any accounting system which holds financial and non-financial data for an organization. The statement of financial position and the statement of income and comprehensive income are both derived from the general
ledger. Outputs of AccountingAccounting outputs are financial statements that detail the financial activities of a business, person, or other entity. Learning Objectives Describe the four basic financial statements Key TakeawaysKey Points
Key Terms
Financial StatementsA financial statement, or financial report, is a formal record of the financial activities of a business, person, or other entity. For a business enterprise, relevant financial information presented in a structured manner is called a financial statement. Statements typically include four basic financial statements accompanied by a management discussion and analysis. These statements are as follows: Balance SheetThis statement reports on a company's assets, liabilities, and ownership equity at a given point in time. Income StatementThis statement, also referred to as profit and loss statement (or a "P&L"), reports on a company's income, expenses, and profits over a period of time. A profit and loss statement provides information on the operation of the enterprise. These statements include sale and various expenses incurred during the processing state. A Sample Income Statement: Expenses are listed on a company's income statement. Statement of Cash FlowsThis statement reports on a company's cash flow activities—particularly its operating, investing, and financing activities. For large corporations, these statements are often complex and may include extensive notes, an explanation of financial policies, and management analysis. The notes typically provide detail for items on the balance sheet, income statement, and cash flow statement. Notes to financial statements are considered an integral part of the financial statements. Statement of Shareholder's EquityThis statement explains changes in the company's equity throughout the reporting period. Purpose of Financial Statements The objective of financial statements is to provide information about financial position, performance, and changes. Statements are useful to a wide range of users making economic decisions. Financial statements should be understandable, relevant, reliable, and comparable. Reported assets, liabilities, equity, income, and expenses are directly related to an organization's financial position. Uses of Financial ReportsFinancial reporting is used by owners, managers, employees, investors, institutions, government, and others to make important decisions about a business. Learning Objectives Give examples of who uses financials statements and why Key TakeawaysKey Points
Key Terms
Financial statements may be used by different stakeholders for a multitude of purposes
GovernmentGovernment also produces financial reports to stay accountable to the public and people. The rules for recording, measurement and presentation of government financial statements may be different from those required for business and even for non- profit organizations. Not-for-profit OrganizationsThe requirements for non-profit financial statements differ from those of a for profit institution and therefore, will not be discussed. PersonalPersonal financial statements may be required from persons applying for a personal loan or financial aid. Typically, a personal financial statement consists of a single form for reporting personally held assets and liabilities (debts) or personal sources of income and expenses, or both. The form to be filled out is determined by the organization supplying the loan or aid. Audit and LegalAlthough laws differ from country to country, an audit of financial statements of a public company is usually required for investment, financing, and tax purposes. These are usually performed by independent accountants or auditing firms. Results are summarized in an audit report that either provides an unqualified opinion on the financial statements or qualifications as to its fairness and accuracy. The audit opinion on the financial statements is usually included in the annual report. There has been legal debate over who an auditor is liable to. Since audit reports tend to be addressed to the current shareholders, it is commonly thought that they owe a legal duty of care to them. This may not be the case, as determined by common law precedent. In Canada, auditors are liable only to investors using a prospectus to buy shares in the primary market. In the United Kingdom, they have been held liable to potential investors when the auditor was aware of the potential investor and how they would use the information in the financial statements. Nowadays, auditors tend to include in their report liability restricting language, discouraging anyone, other than the addressees of their report, from relying on it. Liability is an important issue: In the UK, for example, auditors have unlimited liability. In the United States, especially in the post-Enron era, there has been concern about the accuracy of financial statements. Corporate officers (the chief executive officer (CEO) and chief financial officer (CFO)) are personally liable for attesting that financial statements "do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report. " Making or certifying misleading financial statements exposes the people involved to civil and criminal liability. For example Bernie Ebbers (former CEO of WorldCom) was sentenced to 25 years in federal prison for allowing WorldCom's revenues to be overstated by billions over five years. Auditing Firm: Auditing firm office building in San Francisco. Licenses and AttributionsCC licensed content, Shared previously
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What is the process of recording the transactions?The process of recording the transactions in a journal is called as journalizing.
What is the recording process in accounting?The eight steps of the accounting cycle are as follows: identifying transactions, recording transactions in a journal, posting, the unadjusted trial balance, the worksheet, adjusting journal entries, financial statements, and closing the books.
What is a record of transactions called?Business transactions are ordinarily summarized in books called journals and ledgers. You can buy them at your local stationery or office supply store. A journal is a book where you record each business transaction shown on your supporting documents.
What is the recording of business and accounting transactions called?The process of recording business transactions is called journalising.
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