Why accounting??..

As they say that physics is the backbone of engineering, it won't be wrong if anyone says that accounting is the same for commerce as physics is for science. Commerce is meaningless without accounting and accountancy. Accounting is the language of commerce, through which the information regarding transactions within a business firm is transmitted to outsiders and third parties and sometimes for the people inside the business as well. Thus, accounting helps the business to create external links from where it can get various benefits.

WHAT IS ACCOUNTING?
Simply speaking, accounting is nothing but recording of the business transactions by following certain rules and formats. According to the AICPA,i.e, American Institute of Certified and Public Accountants, accounting is,"Recording, Classifying and Summarizing in a significant manner and in terms of money, transactions and events which are, in part, at least of the financial character and interpreting the result thereof". This very statement stands true for the accounting of modern day business firms. Earlier, the accounting was done only to analyse the position of the business and was referred only by the owners and other member constituting the business. Accounting was just a mere tool for the businessmen to assess their position and to bring changes in the plans so as to stand at a higher point in future. But now the situation is different. The rapidly changing business environment has caused the evolution in the field of accounting. It is now realized by people that a business very much depends on its external environment and third parties(people other than the people who are a part of the business). These third party people can be Equity Share holders, Debenture Holders, investors, Banks and other financial institutions. Every business needs credit to raise their capital and to purchase various assets and working capitals and for the same, the business seeks the help from various sources as said earlier. Be it share holders, or debenture holders or any other investors, they invest their money only after realizing the financial health of the business and the expected rate of growth of the business in the years to come, which is very well construed by the accounting tools. The firms get advances and loans from the Banks and other institutions based on their ability to repay on time and accounting gives the statistics for the expected timely repayments. Apart from these issues, the accounting is also carried on in order to show the books of the company to the auditor, who then finishes the process of accounting by disclosing the position of the business. And moreover, revealing of the financial standing of the business is considered as a good business ethic these days.

THE PROCESS

Entries in the journal book.

As said by AICPA, accounting is the recording of the transactions. But, it also has mentioned that the recording should be in terms of money, that means only the transactions involving money and its worth. There are n number of transactions that take place in a business and remembering them will be like counting the stars in the sky! Therefore, in order to keep a record of all those transactions, they are recorded in a book called the Journal Book which is also called as the book of prime entries, where the entries are recorded on the basis of the accounts involved and the effect on them. For example, if the business is buying some assets on cash, the entry thus made in the journal will involve Asset account and Cash account. To be frank to all you readers, I must say that the use of journal is very much reduced these days in business as it is considered to be time consuming. Rather, the transactions are divided into various category and are recorded in a special book called the subsidiary books. Suppose the business has made sales, the amount of sales will be recorded in the Sales book, which is the subsidiary book representing the sales of the business firm.

After the entries are recorded in the journal books, they are shifted to a separate book called Ledger Book. In the ledger book, all accounts are separately shown along with the effect on them. I remember my lecturer saying that it's like you are given a bag full of fishes and you need to separate them and group the similar ones together. Ledger account is maintained by all the business firms and are very essential and indispensable part of the accounting process. 

Specimen of the subsidiary book
showing the details of the purchases.

Soon after the ledger accounts are prepared, the amounts remaining in each account in a ledger book are transferred to the trial balance. Suppose the purchases account shows a debit balance of Rs.5 lacs, then in the trial balance, in front of the 'purchases', Rs.5 lacs is written on the debit side of the amount column. It is compulsory that the total of all the debit balances in a trial balance should tally with the total of all the credit balances. Only then can you take it for granted that there are no mistakes in entries you have made so far.


PREPARATION OF FINAL STATEMENTS AND ANALYZING THE POSITION OF THE FIRM.
The final accounts, which are prepared on the basis of the entries made in trial balance, consist of three major accounts. They are- Trading account, Profit and Loss account and Balance sheet. Trading account is an account where direct expenses and direct incomes are recorded. Direct income and expenditure here refers to the income earned by the sale of the main goods produced by the business firm and the additional charges incurred in producing them. Some of the items in the trading account are Opening stock, Purchases, Wages, Carriage inward, Power and fuel, Closing stock, Sales, etc. Trading account shows only the gross profit earned by the firm.
The Profit and Loss account or shorty called as the P&L A/c is the ledger account where all the indirect expenses and indirect incomes are recorded. Some items that constitutes the P&L a/c are Salaries, Insurance, Depreciations, Advertisement Charges, Provision for doubt full debts, Interest earned, Gross Profit carried down from the trading account and so on. The P&L account shows the net profit.
BALANCE SHEET.

Referred to as the company's snapshot of the financial position, the balance sheet.It is the most important of all the statements. It shows the assets and liabilities of the firm. Based on this very statement, the third parties invest and lend their money to the business.

There are various other statement like Income statement, Cash flow statements, which also display the condition of the business.
This was just a glance of this massive world. Stay connected if you want to learn more!..
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