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Accounting and Bookkeeping

Today's finance divisions focus their attention on the ultimate needs of decision makers who use accounting information, whether those decision makers are inside or outside the business.

So, accounting is an information system that measures, records, identifies, summarizes and communicates financial information about an organization or other entity in order to help management to make correct informed decisions. An economic entity is a unit that exists in-dependently - for example, a business, a hospital, or a governmental body. Bookkeeping is the process of recording financial transactions and keeping financial records. Mechanical and repetitive, bookkeeping is only a small, but important, part of accounting. Accounting, on the other hand, includes the design of an information system that meets the users* needs. The major goals of accounting are the analysis, interpretation, and use of information. Accountants were among the earliest and most enthusiastic users of computers, an electronic tools that are used to collect, organize, and communicate vast amounts of information with great speed.

Personal record keeping often uses a simple single-entry system. in which amounts are recorded in column form. Such entries include the date of the transaction, its nature, and the amount of money involved. Record keeping of organizations, however, is based on a double-entry system, where each transaction is recorded on the basis of its dual impact That means that every economic event has two aspects (effort and reward, sacrifice and benefit, source and use) that balance each other. In the double-entry system, each transaction must be recorded with at least one debit and one credit, so that the total money amount of debits and the total money amount of credits equal each other. The whole system is always in balance. All accounting systems, no matter how sophisticated, are based on the principle of duality.

Information relating to the financial position of an enterprise is presented in a balance sheet, while operating results are displayed in an income statement. Data relating to an organization's liquidity and changes in its financial structure are shown in a statement of changes in financial position. Such financial statement are prepared to provide information about past performance, which in turn becomes a basis for readers to try to project what might happen in the future.

Accounting information can be classified into two categories: financial accounting or public information and managerial accounting or private information Financial accounting generates reports and communicates them to external decision makers (stockholders, creditors, customers, suppliers, regulatory commission, financial analysts) so that they can evaluate how well the business has achieved its goals. These reports are called financial statements, they relate to the financial position, liquidity (that is, ability to convert to cash), and profitability of an enterprise.

Managerial accounting provides internal decision makers who are charged with achieving the goals of profitability and liquidity with information about financing, investing, and operating activities. Managers and employees who conduct the activities of the business need information that tells them how they have done in the past and what they can expect in the future.

Of the various specialized areas of accounting that exist, the three most important are auditing, income taxation, and non business organization. Auditing is the examination, by an independent accountant, of the financial data, accounting records, business-documents and other pertinent documents of an organization; in order to attest to the accuracy of its financial statements. Large private and public enterprises sometimes also maintain an internal audit staff to conduct audit like examinations.

The second- specialized area of accounting is income taxation which deal with preparing an income-tax form. It is connected with collecting information and presenting data in a coherent manner. Therefore, both individuals and businesses frequently hire accountants to determine their taxes: although tax rules are not identical with accounting theory and practices, but many techniques of computing are common to both areas.

A third area of specialization in accounting is for non business organizations, such as universities, hospitals, government agencies. These organizations differ from business enterprises in that they receive resources on some non reciprocating basis (that is, without paying for such resources), they do not have a profit orientation, and they have no defined ownership interests as such. As a result, these organizations call for differences in record keeping, in accounting measurements, and in the format of their financial statements.

In the measurement of business transactions, large amounts of data are gathered. These data require a method of storage. This filing system consists of accounts. An accounting system has a separate account for each asset, each liability, and each component of owner's equity, including revenues and expenses. Whether a company keeps records by hand or by computer, management must be able to refer to accounts so that it can study the company's financial history and plan for the future. A very small company may need only a few dozen accounts; a multinational or a big one may need thousands.

In a manual accounting system, each account is kept on a separate page or card. These pages or cards are placed together in a book or file called the general ledger. In the computerized system that most companies have today, accounts are maintained on magnetic tapes or disks, but accountants still refer to the all-inclusive group of company accounts as the general ledger, or simply the ledger. A list of the numbers with corresponding account names is called a chart of accounts.

The people who use accounting information to make decisions fall into three categories:

1) those who manage a business: management;

2) those outside a business enterprise who have a direct financial interest in the business (investors, creditors);

3) those people, organizations, and agencies that have an indirect financial interest in the business (tax authorities, regulatory agencies, and other groups: financial analysts and advisers, brokers, lawyers, economists, customers).

Answer the following questions:

1. Why is accounting considered an information system?

2. What is the role of accounting in the decision-making process, and what broad business goals and activities does it help management to achieve and manage?

3. Distinguish between management accounting and financial accounting,

4. What is the difference between accounting and bookkeeping?

5. Use the terms «business transaction, money measure and separate entity)) in a single sentence that demonstrates their relevance to financial accounting.

6. Can you define assets, liabilities, and owners' equity?

7. Discuss the importance of professional ethics in the accounting profession.

8. Why are three issues (recognition, valuation, and classification)?

9. Can you name the five «accounts» of accounting and give two examples of items that go into those accounts?

10. Can you define accounting to a friend so that he or she would clearly understand what is involved?

11. Describe the chart of accounts and recognize commonly used accounts.

12. What is an account, and how is it related to the ledger?

13 Tell whether each of the following accounts is an assets account, a liability account, or an owner's equity account:

a. Notes Receivable e. Prepaid rent

b. Land f. Insurance Expense

c. Withdrawals g. Service Revenue

d. Bonds Payable h. Cash

14. Why is the system of recording entries called the double-entry system? What is significant about this system?

15. Double-entry bookkeeping refers to entering a transaction in both, the journal and the ledger. Will you comment on this statement?

16. «Debits are bad; credits are good)). Comment on this statement.

17. What are the rules of double-entry for: assets, liabilities, and

owner's equity?

18. Describe each of the following: account, journal, ledger, posting,

footing.

19. What does a trial balance prove?

20. Which specialized areas of accounting that exist are the most important?

21. Distinguish between auditing, income taxation, and non business organizations, the 3 most important specialized areas of accounting.

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