Accounting can be defined as a process of reporting, recording, interpreting, and summarizing economic data. The introduction of accounting helps the decision makers of a company to make effective choices, by providing information on the financial status of the business. Today, accounting is used by everyone and a good understanding of it is beneficial to all. Accountancy act as a language of finance. To understand accounting efficiently it is important to understand the aspects of accounting.
- Economic Events- It is a consequence of a company has to undergo when the number of monetary transactions is involved. Such as purchasing new machinery, transportation, machine installation on site, etc.
- Identification, Measurement, Recording, and Communication- The accounting system should be outlined in such a way that the right data is identified, measured, recorded, and communicated to the right individual and at the right time.
- Organization-In refers to the size of activities and level of a business operation.
- Interested Users of Information- It is about communicating important financial information to the customers, according to which they will make the correct decision.
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Fundamentals of Accounting
- Assets- The economic value of an item which is possessed by the enterprise is referred to as Assets. To put it in other words, assets are those items that can be transformed into cash or that generates income for the enterprise shortly. It is useful in paying any expenses of the business entity or debt.
- Liabilities- The economic value of an obligation or debt that is payable by the enterprise to other establishment or individual is referred to liability. To put it in other words, liabilities are the obligations that are rising out of previous transactions, which is payable by the enterprise, through the assets possessed by the enterprise.
- Owner’s Equity- Owner’s equity is one of the 3 vital segments of a sole proprietorship’s balance sheet and one of the main aspects of the accounting equation: Assets = Liabilities + Owner’s Equity. It depicts the owner’s investment in the trade minus the owner’s withdrawal from the trade + the net income since the business concern commenced.
Objectives of Accounting
- Maintaining Records- Unlike the human brain which cannot store unlimited information, accounting can take the charge and keep the records of all the monetary transactions with a company.
- Profit & Loss- In business, the profit and loss statement defines whether the company is in profit and loss. Here, expenditure and income determine profit and loss.
- The utility of Resources- Resources is an important and significant part of any business and for an organization to operate smoothly. It reports the company about the various projects along with its timing. Therefore, it becomes secure for the management to take record of the project before putting in the money.
The above mentioned is the concept, that is elucidated in detail about ‘Introduction to Accounting’ for the Commerce students. To know more, stay tuned to BYJU’S.