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Accounting Mid Term Definitions

Accounting is the process of recording, classifying and summarizing financial transactions of a business. It provides information to assess the financial health and performance of a business. The main objectives of accounting are to systematically record transactions, determine profit or loss, ascertain the financial position, and assist management. Financial statements are tools used by investors, creditors, management and others to evaluate the financial status of a business.

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18 views8 pages

Accounting Mid Term Definitions

Accounting is the process of recording, classifying and summarizing financial transactions of a business. It provides information to assess the financial health and performance of a business. The main objectives of accounting are to systematically record transactions, determine profit or loss, ascertain the financial position, and assist management. Financial statements are tools used by investors, creditors, management and others to evaluate the financial status of a business.

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619ahad
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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​_*Definition of Accounting:*_

Accounting is the process of recording, classifying


and summarizing financial transactions. It provides a
clear picture of the financial health of your
organization and its performance, which can serve as
a catalyst for resource management and strategic
growth.

_*The objectives of accounting*_

*1) Recording business transactions systematically:*

Accounting aims to systematically record all financial


transactions of a business or entity in a structured
manner. This involves accurately documenting every
transaction, including sales, purchases, expenses, and
revenues, to maintain a reliable record of the
company's financial activities.

*2) Determining profit earned or loss incurred:*

Accounting figures out if the business made a profit


more money coming in than going out or a loss more
money going out than coming in.
*3) Ascertaining financial position of the firm:*

Accounting prepares financial statements like the


balance sheet to show the company's assets,
liabilities, and equity, giving insight into its financial
health.

*4) Assisting management:*

Accounting provides information for decision-


making, helping managers plan, budget, and evaluate
performance effectively.

*5) Assessing the progress of the business:*

Accounting helps track the company's growth and


performance over time by analyzing financial data.

*6) Detecting and preventing frauds and errors:*

Accounting implements controls and audits to


identify and rectify discrepancies, safeguarding
against fraud and errors.

*7) Communicating accounting information to


various users:*
Accounting communicates financial information
through reports and statements to stakeholders,
enabling them to understand the company's financial
status and make informed decisions.

_*Types of Accounting:*_

*1) Financial Accounting:*

This is like the storyteller of a business's money. It


keeps track of all the money coming in and going out,
and then tells the story of how the business is doing
through financial statements like the income
statement and balance sheet.

*2) Managerial Accounting:*

Think of this as the coach of a business. It helps the


boss make decisions by providing information about
costs, budgets, and performance. It's all about using
numbers to figure out the best strategies for the team
(or business) to win.

*3) Cost Accounting:*

Cost accounting is like the detective of a business. It


investigates and analyzes the costs of making a
product or providing a service. It helps figure out
how much it really costs to do business, from buying
raw materials to paying employees, so the business
can set prices and make a profit.

*4) Tax Accounting:*

Tax accounting is like the translator between a


business and the government. It helps the business
understand and follow all the rules and regulations
related to taxes. It makes sure the business pays the
right amount of tax at the right time, without paying
too much or too little.

_*Users of financial statements*_

Financial statements are crucial tools for various


stakeholders to assess an organization’s financial
health and performance. The main users of financial
statements include:

*1) Investors:*

People or entities who put money into a business


expecting a return on their investment.

*2) Creditors:*

Individuals or institutions that lend money to a


business, expecting repayment with interest.
*3) Management:*

The people responsible for running and making


decisions for a business or organization.

*4) Regulators:*

Government agencies overseeing financial reporting


and compliance.

*5) Employees:*

Individuals who work for a business or organization,


receiving wages or salaries in return for their
services.

*6) Suppliers:*

Individuals or companies that provide goods or


services to a business for its operations.

*7) Customers:*

Individuals or entities that purchase goods or services


from a business.
*8) Analysts:*

Professionals who evaluate financial data and trends


to provide insights and recommendations to investors
or businesses.

*9) Shareholders:*

Individuals or entities that own shares or stocks in a


company.

*10) General Public:*

The broader community or population outside of a


business or organization.

_*What are the elements of financial statements?*_

Consider the main elements in any financial


statement and the below serve as the building blocks.

*1. Assets:* Resources owned and control by a


business are called its resources assets are such as
property, plant, and equipment, and intangible assets,
like patents or trademarks.
*2. Liabilities:* Liabilities denote an organization’s
present obligations arising from past events. For
example, loans and accounts payable denote a
possible future outflow of resources.

*3. Equity:* The amount of money or resources


invested by the owner of the business are called its
assets.

*4. Income:* A company’s income, also known as


revenue or sales, refers to inflows of economic
benefits arising from its ordinary activities.

*5. Expenses:* Expenses represent outflows or


reductions in economic benefits incurred by the
entity while generating revenue or conducting other
operating activities.

*6. Voucher:* Written evidence of business


transactions is called voucher like payment slip,
deposit slip, electricity bill, Agreement of rented
building etc.

*7. Transaction:* Any dealing between two or more


persons is called transaction. It may be cash or credit
as cash transaction. If buying and selling of goods by
paying or receiving cash, it is called cash transaction.
On the other hand, if goods are bought and cash is
paid in future it called credit transaction.
*8. Proprietor:* A person who start a new venture is
called proprietor

*9. Accountant:* A person who maintain the record of


the business and prepare financial statements is
called accountant.

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