What is Financial Accounting?

What is Financial Accounting?

Definition 1:  According to American institute of certified public accountants accounting is the art of recording, classifying, and sum in a significant manner and in terms of money, transactions, and the events which are in part, at least of a financial character and interpreting the result.

Definition 2:  According to the accounting principal board of AICPA accounting is the process of identifying, majoring, and communicating economic information to permit inform judgement and decision by users of the information.  

Definition 3:  Accounting is a means of majoring and reporting the results of economic activities.

What is Accounting or Book Keeping?

Book keeping may be defined as an art as well as science of recording all the financial transactions and dealing systematically in the set of books.

System of Book Keeping:

Under this system every business transaction has two fold effects i.e. it touches to accounts at a time. If one account is debited, the other account will have to be credited with the same amount.

For Example: 

If goods are purchased for cash it means good are coming in the business and cash is going out of the business. Hence, purchase account will be debited and cash account will be credited.

Double entry system is used by most of the accountants as it is the only system that fulfills all objectives of systematic accounting.

Accounting Equations:

Assets = Liabilities + Capital

Liabilities = Assets - Capital

Capital = Assets - Liabilities


What is Single-Entry System?

This system may be turned as an incomplete double entry system. This system has been developed by some small scale business concerns for their convenience. They only keep essential records. This system is not reliable because all the business records are not kept.

According to Kabler, it is the system of book keeping in which has a rule only records of cash and personal accounts are maintained, it is always incomplete double-entry varied with circumstances.

Users of Accounting Information

Users of Accounting Information

Accounting information help users to make better financial decision. Users of financial information may be both internal and external to the organization.


INTERNAL USER ( Primary User ):


1) Management:    For analyzing the organization performance and position and taking appropiate measure to improve the company results.

2) Employees:       For assessing companys profitability and its consequence on their future remuneration and job security.

3) Owners:            For analyzing the viability and profitability of their investment and determining any future course of action.

Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements.


EXTERNAL USER ( Secondary User ):


1) Creditors:    For determining the credit worthiness of the organization. Creditors include suppliers as well as lenders of finance such as banks.

2) Tax Authorities:    For determining the credibility of the tax returns filed on behalf of the company.

3) Investors:    For analyzing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their investment.

4) Customers:    For assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term.

5) Regulatory Authorities:    For ensuring that the companies disclosure of accounting information is in accordance, in order to protect the interest of the stake holders.

External users are communicated accounting information usually in the form of financial statements.

What is Ledger

What is Ledger

A ledger is an accounting book that facilities the transfer of all journal entries in a chronological sequence to individual account.

Types of Ledger:


1) General Ledger:    The general ledger accumulates information from journals. Each month all journals are totalled and posted to the general ledger. The purpose of general ledger is therefore to organise and summarise the individual transactions listed in all the journals.

2) Debtors Ledger:    The debtor ledger accumulates information from the sales journal. The purpose of the debtors ledger is to provide knowledge about which customers owe money to the business and how much.

3) Creditors Ledger:  The creditors ledger accumulates information from the purchases journal. The purpose of the creditors ledger is to provide knowledge about which suppliers the business owes money, and how much.

Importance of Ledger:

* Transactions relating to a particular person, item or heading of expenditure or income are grouped in the concerned account at one place.

* When account is periodically balanced it reflects the net position of that account.

* Ledger is the stepping stone for preparing Trail Balance.

* Ledger is the destination of all entries made in journal or sub journal.

* Ledger is the store house of all information which subsequence is used for preparing final accounts and financial statements.