Financial Accounting Introduction

Accounting is one of the oldest, structured management information system. Accounting as an information system deals with the identification, measurement and communication of economic information to enable decision making.

Accounting : is the application of various accounting principles and methods of book-keeping.

Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of the information.

Book-keeping : is defined as the science and art of recording business transactions in a systematic manner in a certain set of books known as book of accounts.

Functions of book-keeping :

• Identifying the transactions and events : When goods, services or money is transferred from one person or account to another, it is called a transaction. The first step in the accounting process is to identify transaction with financial character that must be recorded in the book of accounts.
• Measuring : expressing the value of events and transactions in terms of money.
• Recording : recording of identified transactions. The book in which transactions of financial character are first recorded is called Journal.
• Classifying : grouping of transactions of similar nature. The book in which groups of similar transactions are periodically entered is called Ledger. This transfer of recorded transactions to Ledger is also called Posting.
• Summarizing : summarizing all the transactions is required to know if the business has made any profit or loss. This step prepares the income, expense, balance etc statements.
• Analyzing : establishing relationship among various items from the statements produced in above step. This helps to identify the financial strengths and weaknesses of the business.
• Interpreting : the step where end users make judgements about their finanacial positions.
• Communicating : communicating the analyzed and interpreted data in the form of financial statements of reports to users of that information.

Next Topic : Financial Accounting Basic Terminologies