Accounting 1 - The Most Comprehensive Guide to Cambridge Accounting 7707 and 9706!

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What is Accounting?
“The process of Identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of information.”
Definition 2:
The process of recording, classifying, summarizing and interpreting financial information in terms of events involving money in order to provide people with necessary information (Reports) for further decision making.
If we analyze this definition, we get the following components:
• It is about recording transactions
• Categorization/classifying transactions in order to make them more meaningful.
• Summarizing results briefly
• Interpreting the financial information in terms of different reports according to the users of information (e.g. Owner – Balance sheet etc.)
• Transactions should be only of financial nature.
• The recorded transactions are then classified according to set rules
• Results are then interpreted for people who are interested in this information

Accountants capture and record all the transactions, operations, and activities that have financial consequences for a business. Accountants are also involved in other activities in finance that impact a business, such as weighing the costs of new ventures, participating in strategies for mergers and acquisitions,quality management, tracking financial performance, as well as tax strategy.

DIFFERENCE BETWEEN BOOK-KEEPING AND ACCOUNTING:
• Book keeping is mainly concerned with record keeping or maintenance of books of account. It includes identifying the financial transactions, measuring them in terms of money, recording them in the books of original entry and then classifying them into ledger.
• Accounting is more than Book-keeping. Apart from the standard practices of Book-keeping it involves summarizing the classified information in the form of Profit and Loss Account and Balance Sheet, drawing meaningful information from them and communicating this information with the interested parties i.e. stakeholders.
• ‘Booking keeping’ is a part of accounting as it only involves recording of economic events.
AIMS & OBJECTIVES OF ACCOUNTING:
Accounting has many objectives including letting people and organizations know:
 To keep a systematic record of business transactions
 To calculate Profit and Loss
 What the business worth
 To ascertain the financial position of the business
 How much they owed?
 How much they borrowed?
 To provide financial information to different users of this information.
WHO ARE USERS OF ACCOUNTING INFORMATION?
STAKEHOLDER:
“A person, group or organization that has interest or concern in an organization and can either affect or be affected by the business.”
These stakeholders or users might include:
• Owner/Shareholders: How much profit?
• Managers: How business performed and how they can improve the performance in future
• Employees: To know the profits so that they could demand better wages?
• Investors: Is it safe and profitable to invest in the business? (Banks or Other interested investors)
• Suppliers: Will the business be able to pay for their supplies?
• Government: How much tax should be collected?
• Lenders: It is safe to lend money to the business?
BRANCHES OF ACCOUNTING:
Financial Accounting: It is about recording business transactions in a systematic manner, to ascertain the profits or losses of the business by preparing Profit and Loss Account and Balance Sheet.
Cost Accounting: It involves finding out the total cost and unit cost of goods and services produced by the business.
Management accounting: Accounting table and formats may not make sense to a person other than an accounting. This is where Management accounting comes in. It is presenting the accounting information in a manner which a layman manager could understand. It involves ratio analysis, budgets, cash flows etc.
We will be covering some parts of Management accounting in Analysis of Final Accounts section.
ACCOUNTING CONCEPTS:
1. CASH VERSUS ACCRUAL ACCOUNTING:
The two principal methods of keeping track of the money that flows in and out of a business are
a) Cash &
b) Accrual Accounting.

CASH METHOD:
Most small businesses use the cash method, in which income is reported in the year it is received, and expenses are deducted in the year they are paid.
Many small businesses, especially retail businesses, use the cash basis method of accounting, which is based on real-time cash flow. On the day a check is received, it becomes a cash receipt.

ACCRUAL METHOD:
Under the accrual method, income is reported when it is earned and expenses deducted when incurred, regardless of whether money has changed hands yet.
In practical terms, this difference in timing is relevant if your company keeps inventory on hand or handles transactions on credit. For example, a consultant completes a project in January but isn’t paid for it at the time. The business that has been serviced recognizes all expenses in relation to that contract when they were incurred, even though the consultant has not been paid. Both the income and expenses are recorded for the current tax year, even if payment is received and bills are paid the following February.

ACCOUNTING PERIOD:
The life a business is considered to be indefinite. But for accounting purposes, the life of the business is divided into specified periods of time. The period may be a month, a half year, a full year or any length of time.

BUSINESS ENTITY CONCEPT:
According to this concept, the business is considered as a separate business entity from its owner(s). Thus the financial information of the business will be recorded and reported separately from its owner’s personal financial information.
CONDITIONS FOR CONSIDERING A MONETARY EVENT AS “TRANSACTION”
1. There must be Two Parties Involved
2. The event must be Measurable in Terms of Money.
3. The Event must result in Transfer of Property and Service.
4. The events must Change the Financial Position of the Business.

CLASSIFICATION OF TRANSACTIONS IN ACCOUNTING:
There are three main categories of transactions in business.
1. Cash Transactions
2. Credit Transactions
3. Paper Transaction

1. CASH TRANSACTIONS:
If the value of a transaction is met in Cash Immediately, Then the transaction is called “Cash Transaction”.
Identification: The Word “Cash” or “For Rs.”Are mentioned in the transaction.
Example: ABC Company bought Goods for Cash Rs. 100.
2. CREDIT TRANSACTION:
If the Value of a transaction is NOT met in cash immediately, rather, the value is promised on a legal paper to meet on a future date.
Identification: The word “On Credit” is mentioned in the transaction.
Example: Aslam Bought Building of Rs. 20000 on Credit.
Credit Transactions are further divided into 2 types.

ACCOUNT PAYABLES/ CREDITORS:
If the business “GETS” something of value from a party but in return the Business “GIVE ITS WORD” on a legal paper stating payment on a future date. Now, It is an obligation (Liability) of the business to fulfill its promise. These kinds of promises are called as “Account Payables/ Creditors”. Account Payables are always treated as “Liability” to a Business.
ACCOUNT RECEIVABLE / DEBTORS:
If the business “GIVES” something of value to a party but in return the Party “GIVE ITS WORD” on a legal paper stating payment on a future date. Now, it is an obligation of the party to fulfill its promise. These kinds of promises are called as “Account Receivables/ Debtors”. Due to their legal identity and conversion ability, Account Receivables are always treated as “Asset” to a Business.
3. PAPER TRANSACTIONS:
When there is no question of meeting the value of a transaction, then those transactions are called Paper Transactions.
For Example, if a business lost goods in theft, due to fire or any other disaster then “in return”, the business does not get anything back. So, those paper transactions (i.e Incident Report) are treated as “Decrease in Capital” of the owner.