Nature and Purpose of Accounting explained

Accounting is a language of business that communicates the process of classifying and summarizing money-related matters in a detailed manner in such a way that is easy to understand.

The primary purpose of accounting is to provide accurate and reliable financial status to stakeholders, enabling them to make informed decisions. The purpose of accounting is to help businesses and institutions understand their financial status and make informed decisions.

Accounting involves summarizing recorded events to create financial statements, such as balance sheets and profit and loss accounts. Businesses and institutions keep a systematic record of their financial transactions, including incomes, expenditures, assets, and liabilities, financial performance, and cash flows.

The major components of the Common Accounting System are:

Assets

Assets are the things a company owns that are valuable and help it grow and produce goods and services. Assets can be tangible, like property, equipment, and inventory, or intangible, like patents, royalties, and intellectual property.

Liabilities

Liabilities of a company are the financial obligations it owes to other parties, such as creditors, vendors, or individuals. Liabilities can include money, goods, or services.

 Expenses

The expenses of a company are the costs it incurs to run its operations. Some examples of a company’s expenses include salaries and wages, rent, utilities, advertisement, insurance, employee benefits, and depreciation. Expenses are deducted from revenue to calculate profits or anything that decreases an asset or increases a liability.

Equity

A company’s equity is the total value of its assets minus its total liabilities. It’s also known as shareholders’ equity. It’s a key indicator of a company’s financial health and is used in several financial ratios.

General ledger

A GL is made up of a company’s total financial accounts, including assets, liabilities, equity, expenses, and income or revenue.

IFRS/Ind-AS

IFRS stands for International Financial Reporting Standards. It’s a set of accounting rules and standards that determine how to report accounting events in a business’s financial statements which are primarily used by international companies. Indian Accounting Standard (abbreviated as Ind_AS) is the accounting standard adopted by companies in India.

Accounting conventions

There are four generally accepted accounting conventions viz. materiality, complete disclosure, consistency, and conservatism. Common practices used to record and present accounting information. (i) Applicability of universally accepted basic concepts and principles in the maintenance of accounts by businesses.

(ii) Adoption of standards financial statements, viz. Balance Sheet, P&L A/c. and Trading A/c.

(iii) List of common set of general Ledger Heads of Account Compatible with financial statements; and (iv) Maintenance of minimum essential and Standard Books of Accounts.

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