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Accounting “The Business Language”

By Haider Ali


The Golden History •

•

It is hard to determine the exact origin and evolution of Accounting because Accounting is old as money itself. Accounting is thousands of years old; the earliest accounting records, which date back more than 7,000 years, were found. The people of that time relied on primitive accounting methods to record the growth of crops and herds. Accounting evolved, improving over the years and advancing as business advanced. Today, accounting is called "the language of business" because it is the art and tool for reporting financial information about a business entity to different groups of people, whose are interesting in knowing the financial position of a concern. Luca Pacioli is often called the "father of accounting". Fra Luca Pacioli was born during 1445 in Sansepolcro, Tuscany. He was a mathematician and friend of Leonardo da Vinci (a famous painter painted Mona Lisa, sculptor, architect and engineer). He wrote and taught in many fields including mathematics, theology, architecture, games, military strategy and commerce. In 1494, Pacioli published his famous book "Summa de Arithmetica, Geometria, Proportioni et Proportionalita" (The Collected Knowledge of Arithmetic, Geometry, Proportion and Proportionality).


One section of this book was dedicated to the description of double-entry accounting. The section was Particularis de Computis et Scripturis, a treatise on accounting. The Summa was one of the first books published on the Gutenberg press, became an instant success and was translated into German, Russian, Dutch, and English. The Summa made Pacioli a celebrity and insured him a place in history, as "The Father of Accounting." There is however controversy among scholars lately that Benedikt Kotruljevic wrote the first manual on a double-entry bookkeeping system in his 1458. The earliest extant copy of the Kotruljević manuscript Libro de l'Arte de la Mercatura (Book on the Art of Trade) is kept in the National Library of Malta and is dated 1475, although the original manuscript was dated 1458. The text of his 1458 manuscript is followed by an appendix containing an inventory and many journal entries.


What is Accounting? • Accounting is defined by the American Institute of Certified Public Accountants (AICPA) 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. • Accounting is the art of analyzing, recording, summarizing, reporting, reviewing, and interpreting financial information. • Accounting is a set of concepts and techniques that are used to measure and report financial information about an economic unit. • The systematic recording, reporting, and analysis of financial transactions of a business. • Accounting includes techniques for recording, calculation, classification and reporting of accounting information


What is book-keeping? • In general bookkeeping is the recording, classifying and summarizing of daily business transactions in the prescribed manner in defined set of books of accounts, this is the first phase. Much of the work of bookkeeper is of the clerical in nature and done by junior staff. The object of Bookkeeping is simply to record and summarize financial transactions into a usable form that provides financial information about a business or an individual.


Bookkeeping vs Accounting •

There is some confusion over the difference between bookkeeping and  accounting. This is due to the fact that two are related and there is no universal accepted line of demarcation between them.

Difference

Bookkeeping

Accounting

Objective/Job

Record, classify and summarize business transactions

Interpret, prepare financial statements, etc.

Results used by

Accountant

Internal (management, employees) and external users (owners, creditor, banks, etc.)

Concepts and  Standards used

Single or Double Entry

GAAP, IFRS etc


Double Entry System •

The earliest extant records that follow the modern double-entry form are those of Amatino Manucci, a Florentine merchant at the end of the 13th century. Some sources suggest that Giovanni di Bicci de' Medici introduced this method for the Medici bank in the 14th century. By the end of the 15th century, the merchant venturers of Venice used this system widely. Luca Pacioli, a Franciscan friar and collaborator of Leonardo da Vinci, first codified the system in a mathematics textbook of 1494. he was the first to publish a detailed description of the double-entry system, thus enabling others to study and use it. The system has been in use since 1300 century and it continues to be the most effective financial accounting system today. Double entry Accounting System is surprisingly simple and is built around only a few concept. The system is called Double Entry because each and every business transaction recorded in two books, initially in journal and primarily in Ledger. Each and every transaction must contain at least one account debited and at least one account credited thus posted in at least two different ledger accounts.


What are Debits and Credits? • To be a professional accountant you must understand the Double Entry Accounting System. To understand double entry system you must know what are debit and credit. These are the real essence of the double entry bookkeeping system. It basically states that every financial transaction has two sides when recording it into the accounting system. The lefthand side of any account is called the debit side and the right-hand side is called the credit side. Amounts entered on the left hand side of an account are called debits and the amounts entered on the right hand side of an account are called credits. To debit (Dr) an account means to make an entry on the left-hand side of an account and to credit (Cr) an account means to make an entry on the right-hand side of an account. The words debit and credit have no other meaning in accounting, unless and until these are followed by any account.


Some important definitions Before we proceed further , it is advisable to learn and understand some basic definitions.

Transaction: •

A business event which can be measured in terms of money and which must be recorded in the books of accounts is know as transaction.

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The original entry into the books of the business that records the debit and credit aspects of the source documents that evidence a financial event.

Account: •

Account is the individual record of an asset, a liability, a revenue, an expense or capital, in a summarized manner. (Sales, Purchases, Cash, Bank, Income, Exp etc).


• Assets: An asset is a resource that a business, or person

owns and utilizes to maintain the functionality and operation of a business.

• Fixed Assets: These are owned to enjoy the long time benefits. such as land, buildings, machinery, plant, furniture and fixtures. These assets are used for the normal operations of the business.

• • •

Current Assets: Current Assets are assets held on a short-

term basis such as cash, bank balances debtors, stock (inventory), etc. Liabilities: Liabilities are obligations or debts that an enterprise has to pay at some time in the future. They represent creditors’ claims on the firm’s assets. Long term Liabilities: Long-term liabilities are those that are usually payable after a period of one year such Term Loan from a bank. Short Term Liabilities: these are payable within a period of one year, for example, creditors, bills payable, bank overdraft.


• • • • • • • • •

Capital (Equity): Amount invested by the owner in the firm is known as capital. Capital is a claim on the assets of business. It is, therefore, shown as capital on the liabilities side of the balance sheet. Sales: Sales are total revenues from goods sold or services provided to customers. Sales may be in cash or on credit. Purchases: It includes goods purchased by the business for resale. We also call it Inventories. Debtors: Debtors are Customers of business who buy from the business on credit. Creditors: Creditors are Vendor of business, from whom business buys goods or services on credit. Accounts Receivable: The amount receivable from customers. Accounts Payable: The amount payable to vendors. Income/Profit: The excess of revenues over expenses. Loss: When expenses excesses over revenues. Expenses: The cost those are of operational nature or administrative are called expenses.


Aivl.org-Accounting Basics