Introduction To Accounting Concepts And Techniques

Hello

As this is my first blog relating to accounting terms and techniques i would try my best and give the most precise point of view and explanation on accounting theories. Starting with the basics the first question that comes to the mind about accounting is firstly

• What exactly is Accounting?
• When and how it became a method of learning?
• What are its use?
• How can we benefit from it?

All these answers are pretty basic and are essential for ones understanding for the subject.
Starting from the first Q.

• What exactly is Accounting?

Accounting is basically the bookkeeping methods which are involved in making a financial record of business transactions
(such as Purchase, Sale, Lending And Borrowing Of Loan. etc)
and in the preparation of statements concerning the assets, liabilities and operating result of a business.

Accounting is defined by the
"AICPA"(American Institute Of Certified Public Accountants) 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."

In another terminology Accounting can be referred as the art of communicating financial information business entity to the users such as managers, directors, executives and shareholders.The information communicated is generally in a form of financial statement in monetary terms.

"It is also considered as a branch of mathematical science that is essential in discovering the success and failure of a business."

Introduction To Accounting Concepts And Techniques

Hello

As this is my first blog relating to accounting terms and techniques i would try my best and give the most precise point of view and explanation on accounting theories. Starting with the basics the first question that comes to the mind about accounting is firstly

• What exactly is Accounting?
• When and how it became a method of learning?
• What are its use?
• How can we benefit from it?

All these answers are pretty basic and are essential for ones understanding for the subject.
Starting from the first Q.

• What exactly is Accounting?

Accounting is basically the bookkeeping methods which are involved in making a financial record of business transactions
(such as Purchase, Sale, Lending And Borrowing Of Loan. etc)
and in the preparation of statements concerning the assets, liabilities and operating result of a business.

Accounting is defined by the
"AICPA"(American Institute Of Certified Public Accountants) 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."

In another terminology Accounting can be referred as the art of communicating financial information business entity to the users such as managers, directors, executives and shareholders.The information communicated is generally in a form of financial statement in monetary terms.

"It is also considered as a branch of mathematical science that is essential in discovering the success and failure of a business."

Accounting is a branch of mathematical science that is useful in discovering the causes of success and failure in business . The principles of accountancy are applied to business entities in three aspects namely

• accounting
• bookkeeping
• auditing

Nowadays Accounting is considered "the language of business" because it is the essential and vital factor for communicating between different users or businesses .

The Field of Accounting that concentrates on reporting to people inside the business entity is called Management accounting and is used to provide information to employees, managers, and auditors. Management accounting is concerned primarily with providing a basis for making management or operating decisions.


The Field of Accounting that provides information to the users outside the business entity is called Financial accounting and provides information to present and potential shareholders, creditors such as banks or vendors,financial analysts , economists , and government agencies.

Why Study Accounting History?

The history of accounting is as old as civilization, key to important phases of history, among the most important professions in economics and business, and fascinating. Accountants participated in the development of cities, trade, and the concepts of wealth and numbers. Accountants invented writing, participated in the development of money and banking, invented double entry bookkeeping that fueled the Italian Renaissance, saved many Industrial Revolution inventors and entrepreneurs from bankruptcy, helped develop the confidence in capital markets necessary for western capitalism, and are central to the information revolution that is transforming the global economy.

There are no household names among the accounting innovators; in fact, virtually no names survive before the Italian Renaissance. It took archaeologists to dig up the early history and scholars from many fields to demonstrate the importance of accounting to so many aspects of economics and culture. The role of accountants in the ancient world is coming into clearer focus with new archaeological discoveries and innovative interpretations of the artifacts. It is now evident that writing developed over at least 5,000 years--by accountants. It is difficult to overestimate the importance of double entry bookeeping. It was central to the success of Italian merchants, necessary to the birth of the Renaissance. Industrial Revolution firms required accountants to provide the information necessary to avoid bankruptcy and their role developed into a profession. Big business required capital markets that depended on accurate and useful information. This was supplied by the expanding accounting profession. Today, a global real-time integrated information system is a near reality, suggesting new accounting paradigms. Understanding history is needed to develop the linkages to predict this future.

by Gary Giroux: A Short History of Accounting & Business

This book is based on the premise that accounting has been significant to civilization and fascinating! Accounting history is summarized in eight chapters. An overview places accounting in perspective. In some ways accounting hasn't changed much since Pacioli wrote the first "textbook" in 1494. On the other hand, accounting has been a leader of the Information Revolution. Many aspects of 21st century accounting will be unrecognizable by today's professional leaders. Understanding the role of financial and managerial needs today and in the future requires an understanding of the past.

Luca Pacioli

• Luca Pacioli and double-entry bookkeeping

Main articles: Luca Pacioli and Double-entry bookkeeping system

Bartering was the dominant practice for traveling merchants during the Middle Ages. 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. ‘Debit,’ is Latin for ‘he owes’ and ‘credit’ Latin for ‘he trusts’.The earliest extant evidence of full double-entry bookkeeping is the Farolfi ledger of 1299-1300. Giovanno Farolfi & Company were a firm of Florentine merchants whose head office was in Nimes who also acted as moneylenders to Archbishop of Arles, their most important customer.[ The oldest discovered record of a complete double-entry system is the Messari (Italian: Treasurer's) accounts of the city of Genoa in 1340. The Messari accounts contain debits and credits journalised in a bilateral form, and contains balances carried forward from the preceding year, and therefore enjoy general recognition as a double-entry system.

It was written primarily for,and sold mainly to,merchants who used the book as a reference text, as a source ofpleasure from the mathematical puzzles it contained, and to aid the education of their sons. It represents the first known printed treatise on bookkeeping; and it is widely believed to be the forerunner of modern bookkeeping practice.

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 of its wide circulation, it was written in vernacular Italian language, and it was a printed book.


According to Pacioli, accounting is an ad hoc ordering system devised by the merchant. Its regular use provides the merchant with continued information about his business, and allows him to evaluate how things are going and to act accordingly. Pacioli recommends the Venetian method of double-entry bookkeeping above all others. Three major books of account are at the direct basis of this system: the memoriale (Italian: memorandum), the giornale (journal), and the quaderno (ledger). The ledger is considered as the central one and is accompanied by an alphabetical index.


Pacioli’s treatise gave instructions in how to record barter transactions and transactions in a variety of currencies – both being far more commonplace than they are today. It also enabled merchants to audit their own books and to ensure that the entries in the accounting records made by their bookkeepers complied with the method he described. Without such a system, all merchants who did not maintain their own records were at greater risk of theft by their employees and agents: it is not by accident that the first and last items described in his treatise concern maintenance of an accurate inventory.

The nature of double-entry can be grasped by recognizing that this system of bookkeeping did not simply record the things merchants traded so that they could keep track of assets or calculate profits and losses; instead as a system of writing, double-entry produced effects that exceeded transcription and calculation. One of its social effects was to proclaim the honesty of merchants as a group; one of its epistemological effects was to make its formal precision based on a rule bound system of arithmetic seem to guarantee the accuracy of the details it recorded. Even though the information recorded in the books of account was not necessarily accurate, the combination of the double entry system's precision and the normalizing effect that precision tended to create the impression that books of account were not only precise, but accurate as well. Instead of gaining prestige from numbers, double entry bookkeeping helped confer cultural authority on numbers.

In the Ottoman Empire, which at its peak ruled over Anatolia, Middle East, North Africa, the Balkans and parts of Eastern Europe, the merdiban (Persian: ladder or stairs) accounting system that had been adopted from the Ilkhanate in the 14th century was used for 500 years until the end of the 19th century. Both the Ilkhanians and the Ottomans used siyakat script (from the Arabic siyak, to lead or herd), which was stenographic writing style of Arabic used only in official documents which prevented ordinary people from reading important state correspondence. The title for each entry is given by extending the last letter of the first word in a straight line, so that the lines between successive entries would be laid out in the style of steps of a ladder.Permission to replace the merdiban accounting system with double-entry accounting was given by Sultan Abdülhamid II to the Ministry of Finance in 1880

Islamic accounting & algebra

As it is mentioned In the Holy Qur’an , the word hesab (In Arabic meaning "Account") is used in its generic sense, relating to one’s obligation to account to God on all matters pertaining to human endeavour. According to the Holy Qur’an, followers are required to keep records of their indebtedness (Sura 2, ayah 282), thus Islam thus provides general approval and guidelines for the recording and reporting of transactions.

The Islamic law of inheritance (Sura 4, ayah 11) defines exactly how the estate is calculated after death of an individual. The power of testamentary disposition is basically limited to one-third of the net estate (ie. the assets remaining after the payment of funeral expenses and debts), providing for every member of the family by allotting fixed shares not only to wives and children, but also to father and mothers.The complexity of this law served as an impetus behind the development of algebra (In Arabic: al-jabr) by Muhammad Ibn Musa Al-Khwarizmi and other medieval Islamic mathematicians. Al-Khwārizmī's Hisab al-jabr w’al-muqabala
(Arabic: "The Compendious Book on Calculation by Completion and Balancing", Baghdad, c. 825) devoted a chapter on the solution to the Islamic law of inheritance using linear equations. In the twelfth century, Latin translations of al-Khwārizmī's Kitāb al-Jamʿ wa-l-tafrīq bi-ḥisāb al-Hind (Arabic: Book of Addition and Subtraction According to the Hindu Calculation) on the use of Indian numerals, introduced the decimal positional number system to the Western world.

The development of mathematics and accounting was intertwined during the Renaissance. Mathematics was in the midst of a period of significant development in the late 15th century. Hindu-Arabic numerals and algebra were introduced to Europe from Arab mathematics at the end of the 10th century by the Benedictine monk Gerbert of Aurillac, but it was only after Leonardo Pisano (also known as Fibonacci) put commercial arithmetic, Hindu-Arabic numerals, and the rules of algebra together in his Liber Abaci in 1202 that Hindu-Arabic numerals became widely used in Italy.
While there is no direct relationship between algebra and bookkeeping, the teaching of the subjects and the books published addressed the same group, namely the children of merchants who were sent to reckoning schools (in Flanders and Germany) or Abacus School (known as abbaco in Italy), where they learned the skills useful for trade and commerce. There is probably no need for algebra in performing bookkeeping operations, but for complex bartering operations or the calculation of compound interest, a basic knowledge of arithmetic was mandatory and knowledge of algebra was very useful

Benefit from Accounting

ACCOUNTING REPLACES HUMAN MEMORY

ACCOUNTING HELPS IN KNOWING PROFIT

ACCOUNTING HELPS IN KNOWING FINANCIAL POSITION OF ORGANISATION

ACCOUNTING HELPS IN KNOWING LIST OF CREDITORS AND DEBTORS
ACCOUNTING HELPS IN PAYING TAXES

ACCOUNTING HELPS IN RAISING MORE FUNDS BY SUPPLYING INFORMATION TO INVESTORS AND CREDITORS

ACCOUNTING HELPS IN PLANNING FOR EXPANSION

ACCOUNTING HELPS IN GETTING BANK LOANS



Perhaps the primary benefit of principles-based accounting rests in its broad guidelines that can be applied to numerous situations. Broad principles avoid the pitfalls associated with precise requirements that allow contracts to be written specifically to manipulate their intent. A 1981 study sponsored by FASB found evidence that managers purposefully try to structure leases as operating leases to avoid incurring additional liabilities. Providing broad guidelines may improve the representational faithfulness of financial statements.
In addition, principles-based accounting standards allow accountants to apply professional judgment in assessing the substance of a transaction. This approach is substantially different from the underlying “box-ticking” approach common in rules-based accounting standards. FASB Chair Robert Herz has stated that he believes the professionalism of financial statements would be enhanced if accountants are required to utilize their judgment instead of relying on detailed rules.

Firstly, the managers of the business will want to know how things are going. They need financial information in order to plan for the future; they then need more up-to-date information in order to check whether actual performance is on target. This process is known as controlling the costs and finances. In accounting it is known as management accounting. So, management accounting is done by the managers, for the managers, for the purposes of planning and control.

Secondly, there are several groups of people who may have an interest in the finances of the business. The law says that they have a legal right to certain information. The whole process of providing this information (and of maintaining a book-keeping system capable providing it) is known as financial accounting.

Application and use of Accounting Techniques

Uses of Accounting

Accounting plays important and useful role by developing the information for providing answers to many questions faced by the users of accounting information.

(1) How good or bad is the financial condition of the business?

(2) Has the business activity resulted in a profit or loss?

(3) How well the different departments of the business have performed in the past?

(4) Which activities or products have been profitable?

(5) Out of the existing products which should be discontinued and the production of which commodities should be increased.

(6) Whether to buy a component from the market or to manufacture the same?

(7) Whether the cost of production is reasonable or excessive?

(8) What has been the impact of existing policies on the profitability of the business?

(9) What are the likely results of new policy decisions on future earning capacity of the business?

(10) In the light of past performance of the business how it should plan for future to ensure desired results ?

Above mentioned are few examples of the types of questions faced by the users of accounting information. These can be satisfactorily answered with the help of suitable and necessary information provided by accounting.

Besides, accounting is also useful in the following respects :-

(1) Increased volume of business results in large number of transactions and no businessman can remember everything. Accounting records obviate the necessity of remembering various transactions.

(2) Accounting record, prepared on the basis of uniform practices, will enable a business to compare results of one period with another period.

(3) Taxation authorities (both income tax and sales tax) are likely to believe the facts contained in the set of accounting books if maintained according to generally accepted accounting principles.

(4) Cocooning records, backed up by proper and authenticated vouchers are good evidence in a court of law.

(5) If a business is to be sold as a going concern then the values of different assets as shown by the balance sheet helps in bargaining proper price for the business.

Every organisation needs to be accountable to its members for the use of funds within the organisation. The members of the organisation place their trust in the executive that funds will be used in an honest way to achieve the goals of the organisation.

In the same way that you need to keep records of meetings, letters and membership you also have to keep the records of the organisation’s money. Accounting is the system for keeping the records [books] of all the money you collect and all the money that you spend

Books have to be properly kept for four reasons:

• To make sure that the organisation’s executive committee and members can understand exactly what has happened to the organisation’s money.
• To help the organisation to make realistic plans of what it can spend and to monitor how the spending compares with the budget.
• For accountability and transparency – most organisations use public or donor money and should be able to show how every cent was spent
• For security to avoid losing money to mismanagement, corruption or theft