NOTA UC01902-PERAKAUNAN UNTUK BUKAN AKAUNTAN

Basic Accounting Terminology Accounting is the method of tracking money transactions in business or for personal use. It monitors income, expenses and assets. An accountant can have a job as simple as a bookkeeper running a one-person office or as a cost and analysis accountant in a large corporation. Accounting has a language all its own, but there are basic terms everyone who uses accounting must know. Ledgers and Subledgers
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A ledger is the foundation of the financial records of a business. All money transactions recorded in a ledger are a permanent record. Subledgers are used for tracking items such as accounts payable, accounts receivables, credits and debits. Normally, when one entry is made to one subledger, another one is posted to a different ledger to create a balance. This is called balancing the ledger, just as you would a checkbook ledger. A ledger creates a paper trail for all financial transactions.

Debit and Credits

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Debits and credits are based on the accounting system that every transaction has two parts. The debit is what you received and is in the form of money, income or other assets. A credit is applied to where you got the item from. For example, you buy a new cell phone using your credit card. Since the cell phone is what you received, it results in a debit to your assets. The credit will be applied to your credit card for the same amount, increasing your liabilities or debt. Determining a credit or a debit is easy if you remember that a debit increases your assets and can be in the form of money, equipment or accounts receivables; and credit will increase liabilities and equity and decrease assets.

Assets and Liabilities

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Assets are anything you own and include money, investments and items of value and can be anything from land to a car or building you own. Entries into a ledger for assets always post in dollars for its value. Liabilities are anything you own such as debts including a car payment or mortgage.

Income and Expenses

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Income and expenses in simple terms is money earned is income and money spent is an expense. Income can be money that you have earned but not received as well as money you have received. Expenses can be an expense that has not been paid but that you still owe or money you have paid.

Accounts Payable and Receivable

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Accounts payable and receivable are money you have earned and not yet received or money that has to be paid and that you have not paid yet. Accounts payable is the money you owe but have not yet paid. It can be for anything, such as mortgage payments, health insurance or for any other goods or service. Accounts Receivable is money that is owed to you and not yet received. It can be income, or money from an item you have sold or service that you have provided.

Equity
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Equity is the amount of ownership value that you have in a home, business or item, such as car or equipment. For example, if you own a home but have a mortgage, the equity is the value of the home, minus your loan amount.

Definition of Accounting Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions, in making reasoned choices among alternative courses of action. Accounting is also defined as the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information.

Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of financial character and interpreting the results thereo.

Accounting Various Feild General Accounting or Financial Accounting - is concerned with the recording of transactions for a business or other economic unit and the periodic preparation of statements from these records.2.. Auditing - a service rendered by CPAs in public practice who examine records andstatements and express an opinion regarding their fairness.3. Cost Accounting - emphasizes the determination and the control of costs particularlythe costs of manufacturing processes and of the manufactured products.4. Management Accounting - concerned with the application of appropriate techniquesand concepts in processing the historical and projected economic data of an entity,to assist management in setting up reasonable economic objectives and in makingrational decisions towards the attainment of these objectives.5. Tax Accounting - includes the preparation of tax returns and the consideration of thetax consequences of proposed business transactions.6. Accounting Systems - concerned with the creation of accounting and office proceduresfor the accumulation and the reporting of financial data.7.

Budgetary Accounting - represents the plan of financial operations for a period andthrough accounts and summaries, provides comparisons of actual operations withthe predetermined plan.8. Government Accounting - specializes in the transactions of political units with regardto the business aspect of public administration. It mainly focuses on the proper custody of government funds and their purposes.9. Accounting Education - is perhaps the most obvious field of specialization. In additionto teaching, many accounting professors engage in auditing, tax accounting or other areas of accounting.10 Internal Auditing - deals with determining the operational efficiency of the companyregarding protection of the companys assets, accuracy and reliability of theaccounting data, and adherence to prescribed managerial policies.11 International Accounting - encompasses special accounting for internationaltransactions, comparisons of accounting principles in different countries, andharmonization of diverse accounting standards worldwide and tax requirements of all the countries in which the company does business.12. Not-for-profit Accounting - deals with special accounting for charitable organizations, philanthropic foundations, religious groups, governmental agencies, schools and cooperatives. They may earn profits but they dont distribute the profits to owners instead it is used for the benefit of the public which they serve.13. Socio-economic Accounting - concerns the measurement of the impact of business or governmental agencys decision on the public sector. This also includes aspecialized study on environmental accounting.

Purpose of Accounting Information Types

Two types of accounting methods may be used to prepare financial information: management or financial. Management accounting does not follow any specific guidelines or standards and is usually prepared for internal review during business decisions. Companies use management accounting to collect internal business information relating to the company's cost of producing goods or services. Financial accounting follows national accounting principles and is prepared for internal and external users interested in information, such as sales revenues, gross profits, assets, liabilities or other important information.

Function

Accounting information helps individuals understand how well the company uses its economic resources or business inputs to produce goods and services. This information helps business owners understand their company's profitability and helps lenders or investors determine if they want to invest money in the company for a future financial return. Financial accounting information is usually the best way for companies and investors to determine the overall financial health of businesses.

Features

Financial accounting prepares the company's information into three basic financial statements: the income statement, balance sheet and statement of cash flows. The income statement lists information regarding the company's sales to consumers or other businesses, the cost of goods sold, money spent to produce these sales and the company's net profit. The balance sheet presents a snapshot of the company's current financial wealth by listing all assets and liabilities owned by the business. The statement of cash flows shows how well the company earned cash during specific time periods.

Considerations

Companies may choose to implement a computerized accounting software system to enhance their financial information reporting capability. Automating accounting systems can help companies ensure that financial information is collected in an accurate and timely manner. Accounting software is usually customizable depending on the size and scope of the company's financial information and business operations. The ability to transfer accounting

information electronically can also allow companies to operate multiple locations in various domestic or international geographic economic markets. Expert Insight

Financial accounting information is governed by the Financial Accounting Standards Board (FASB), a private sector organization responsible for developing generally accepted accounting principles (GAAP). GAAP is the national accounting standards companies are required to use when reporting financial information to internal and external users in the United States. Publicly held companies are also required to meet the accounting standards created by the Sarbanes-Oxley Act of 2002 and other requirements issued by the U.S. Securities and Exchange Commission (SEC).

Users of Accounting Information - Internal & External Accounting information helps users to make better financial decisions. Users of financial information may be both internal and external to the organization. Internal users (Primary Users) of accounting information include the following:

Management: for analyzing the organization's performance and position and taking appropriate measures to improve the company results. Employees: for assessing company's profitability and its consequence on their future remuneration and job security. Owners: for analyzing the viability and profitability of their investment and determining any future course of action.

Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and financial statements. External users (Secondary Users) of accounting information include the following:

Creditors: for determining the credit worthiness of the organization. Terms of credit are set by creditors according to the assessment of their customers' financial health. Creditors include suppliers as well as lenders of finance such as banks. Tax Authourities: for determining the credibility of the tax returns filed on behalf of the company.

Investors: for analyzing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company. Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term. Regulatory Authorities: for ensuring that the company's disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such information in forming their decisions.

External users are communicated accounting information usually in the form of financial statements. The purpose of financial statements is to cater for the needs of such diverse users of accounting information in order to assist them in making sound financial decisions. Accounting is a very dynamic profession which is constantly adapting itself to varying needs of its users. Over the past few decades, accountancy has branched out into different types of accounting to cater for the different needs of the users.

ACCOUNTING ASSUMPTION Assumptions are traditions and customs, which have been developed over a period of time and well-accepted by the profession. Basic accounting assumptions provide a foundation for recording the transactions and preparing the financial statements there from. There are four basic assumptions that are considered as cornerstones of the foundation of accounting. These are: 1. Accounting entity, 2. Money measurement, 3. Going concern and 4. Accounting period.

Accounting Entity Assumption Accounting entity assumption states that the activities of a business entity be kept separate from its owners and all other entities. In other words, according to this assumption business unit is considered a distinct entity from its owners and all other entities having transactions with it. For example, in the case of proprietorship, the law does not make any distinction between the proprietorship firm and the proprietor in the event of firm's inability to pay its debts. Hence, in this situation, to meet the deficit, law requires the proprietor to pay firm's debts from his/ her personal assets. But, these two are treated as separate entities while recording business transactions and preparing the financial statements. This assumption enables the accountant to distinguish between the transactions of the business and those of the owners. Consequently, the capital brought into the business and withdrawals from the business by the owners will also be recorded in the same manner as that of transaction with other entities. For example, if the owner brings in cash or any other asset, it will result in increase in assets of the business and capital of the firm. This capital represents firm's liability to the owner. The expenses of the owner paid by the firm assets are recorded as withdrawals from the business. This means the profit and loss account will show the revenues and expenses related to the business entity only. Consequently, balance sheet will show the assets and liabilities of the business entity only. This assumption is followed in all organizations irrespective of their form, i.e., sole proprietorship, partnership, cooperative, or company.

Role of Accounting Accounting is not an end in itself; it is a means to an end. It performs the service activity by providing quantitative financial information that helps the users in making better business decisions.... Accounting Principles Basic accounting principles are the general decision rules which govern the development of accounting techniques. These principles, do not violate or conflict with the four basic assumptions discussed above,... Basic Terms in Accounting There are two basic financial statements which are prepared by an enterprise: Profit & Loss Statement, and Balance Sheet. The three components of a balance sheet can be stated in the form of following...

Money Measurement Assumption This assumption requires use of monetary unit as a basis of measurement, i.e., the currency of the country where the organization is to report its operations. This implies that those transactions which can not be measured by monetary unit will not be recorded in the books ofaccounts. Monetary unit is supposed to provide a common yardstick to measure the assets, liabilities and equity of the business. The different items, expressed in varied basis of measurement, like area, volume, numbers, cannot be added together because of heterogeneity of scales of measurement. But, once all these are converted into a homogeneous unit of money, they can be added together or subjected to any arithmetical calculations. It also indicates that certain information; howsoever important it may be to state the true and fair picture of the entity, will not be recorded in the financial accounting books if it can not be expressed in terms of money. For example, the union-management relations, health of the key manager, quality of its manufacturing facilities, etc. can not be expressed in monetary value, and hence, are not recorded in books of accounts. It is clear from the above that money measurement assumption makes the accounting records clear, simple, comparable and understandable. The acceptability of money as a unit of measurement is not free from problems when we compare the financial statement over a period of time or integrate the financial statements of an entity having operations in more than one nation. This is to be noted that the assumption implies stability of measuring unit over a period of time. This may not be true over a period of time because prices of goods and services may change, hence, the purchasing power (value) of money may undergo changes. But these changes are not usually recorded. This affects the comparability of the financial statements prepared at different time periods. Going Concern Assumption The financial statements are prepared assuming that the business will have an indefinite life unless there is evidence to the contrary. The business is called 'going concern' thereby implying that it will remain in operation in the foreseeable future unless it is to be liquidated in the near future. Since, this assumption believes in continuity of the business over indefinite period, it is also known as continuity assumption. The going concern assumption facilitates that distinction made between:

fixed assets and current assets, Short term and long term liabilities, and Capital and revenue expenditure. Trial Balance A trial balance is a summary of balances of all accounts recorded in the ledger. The trial balance is prepared at the end of a chosen period which may either be monthly, quarterly, half-yearly or annually or... Suspense Account In spite of best efforts, locating errors is not an easy task and may take some time. Unless detected and located, errors cannot be corrected. To avoid delay in the preparation of financial statements, the...

Accounting Period Assumption We have stated in the previous paragraph that accountants assume business to be in activities in the foreseeable future. Therefore, results of business operations cannot be truly ascertained before the closure of the business operations. But this period is too long and the users of the accounting information cannot wait for such a long period of time. Hence, the accountants make the assumption of accounting period (also known as periodicity assumption). This assumption permits the accountant to divide the lifespan of the business enterprise into different time periods known as 'accounting period' (quarterly, half-yearly, annually) for the purpose of preparing financial statements. Hence, financial statements are prepared for an accounting period and results thereof are reported on periodic basis. This assumption requires that the distinction be made between the expenditure incurred and consumed in the period, and the expenditure, which is to be carried forward to the future period. The cut off period for reporting the financial results is usually considered to be twelve months. Usually the same is true for tax purpose. However, in some cases accounting period may be more or less than 12 months depending on the needs of business enterprises. For example, a company can prepare its first financial statements for a period of more than or less than one year. Currently, the interim reports issued by the company, though un-audited are not less reliable. Such information is considered to be more relevant for decision-makers because of timeliness and certainty of information.

This assumption requires deferring of costs that are not related to the revenues of the current period. The assumption of continuity allows depreciation on fixed assets to be charged in the profit & loss account and show the assets in the balance sheet at net book value (cost of acquisition less depreciation). The income measurement is done on the basis of continuity assumption whereby unexpired costs are carried to next period as assets and not charged to current years' income. In those cases, where, it is reasonably certain that the business will be liquidated in the near future, the resources may be reported on the basis of current realizable values (or liquidation value). Also, in such a case, this fact needs to be clearly reported in the financial statements. Four Types of Financial Statements Financial statements are the means by which companies and other types of organizations measure and quantify their financial performance. Financial statements can provide a trained financial analyst with a great deal of information, from sales trends to asset allocation. According to the United States Securities and Exchange Commission, there are four types of financial statements that companies often prepare to report their financial information. Income Statement
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An income statement, also known as a profit-and-loss statement, is a financial document that indicates the sales, expenses and profit of an organization during a specified time period. The income statement lists the sales first, then lists direct materials and direct labor incurred while producing the sales. Direct materials and direct labor, also called cost of goods sold, are the materials used and the labor costs incurred during production. The difference of the sales and cost of goods sold is the gross margin, which is the profit that a company creates before deducting its nonproduction costs. The net profit, which is calculated by deducting all nonproduction-related costs, such as office supplies and executive and administrative labor, is the bottom-line figure that shows how much money the organization made.

Balance Sheet
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The balance sheet is a financial document that is prepared to show the asset, liability and equity allocation of the company. The balance sheet is prepared by listing the assets, which include cash and cash equivalents,

receivables, prepaid assets and property, the plant, and equipment. The liabilities follow the assets on the balance sheet, which include payables, accrued wages and other monies that are owed to another entity. Shareholder equity, also called owner's equity in an organization that is privately owned, is the difference between assets and liabilities. The balance sheet should have the assets equal to the liabilities and shareholder/owner's equity. Statement of Cash Flows
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The statement of cash flows is a financial document that demonstrates the ability of the organization to raise cash. This document details the three main ways that an organization raises cash: operations, investing and financing. The cash flow from operating activities is the amount of cash that is raised or lost as a result of the net profit or loss created during a specified time period. Cash flows from investing activities details the cash flows created from buying or selling long-term assets or investment products. Cash flows from financing activities details the cash flows created from selling company stock or from acquiring funds from a bank loan.

Statement of Shareholder/Owner's Equity

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The statement of shareholder/owner's equity is a financial document that is prepared to show the net difference in the equity of the company. This statement is prepared by showing the beginning shareholder equity amount, the increase or decrease in owner's equity by such activities as issuing stock, paying dividends, and the net income or net loss. The ending balance is the amount of equity the shareholders or owners have in the organization.

Recording Process in Accounting and Accounting Cycle

Accounting is the recording, analysis and reporting of events that are materially significant to a company. Accounts contain records of changes to assets, liabilities, shareholders' equity, revenues and expenses. The usual sequence of steps in the recording process includes analysis, preparation of journal entries and posting these entries to the general ledger. Subsequent accounting processes include preparing a trial balance and compiling financial statements.
Basics: Debits and Credits
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Debits and credits are the basic accounting tools for changing accounts. Debits increase the asset and expense accounts, and they decrease the liability, equity and revenue accounts. Credits increase the liability, equity and revenue accounts, and they decrease the asset and expense accounts. Debits and credits are on the left and right sides, respectively, of a T-account, which is the most basic form of representing an account.

Analysis
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The first step in the recording process is to analyze the transaction, determine the accounting entries and record them in the appropriate accounts. The analysis includes an examination of the paper or electronic record of the transaction, such as an invoice, a sales receipt or an electronic transfer. Common transactions include sales of products, delivery of services, buying supplies, paying salaries, buying advertising and recording interest payments. In accrual accounting, companies must record transactions in the same period they occur, whether or not cash changes hands. Revenue and expense transactions affect the corresponding income statement accounts, as well as balance sheet accounts. Some transactions may affect only the balance sheet accounts.

Journal Entries
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Journal entries are the second step in the recording process. A journal is a chronological record of transactions. An entry consists of the transaction date, the debit and credit amounts for the appropriate accounts and a brief memo explaining the transaction. For example, the journal entries for a cash sales transaction are to credit (increase) sales and debit (increase) cash. Journal entries disclose all the effects of a transaction in

one place. They are also useful in detecting and correcting errors because the debit and credit amounts must balance at the end of a period. Posting to Ledger
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The third and final step in the recording process is to post the journal entries to the general ledger, which contains summary records of all accounts. Each record has fields for transaction date, comments, debits, credits and outstanding balance. In the earlier sales transaction example, the posting process involves entering a credit amount for the sales account, a debit amount for the cash account and updating the respective balances. The general ledger may be in the form of a binder, index cards or a software application.

Trial Balance Accountants define the trial balance as a tool to expose any error in account balances. It is an important part of the accounting cycle used to make sure all entries in the company accounts are entered correctly and the accounts are in balance. All accounts with debit balances must equal all accounts with credit balances. Trial balances are constructed at the end of an accounting period before and after adjusting entries are made to the general ledger accounts and again after the closing entries are made. Here's how to define the trial balance.

Closing Entries Prepare closing entries at the end of the fiscal year to bring temporary account balances to zero and transfer these balances to balance sheet accounts. Temporary accounts include revenue, expense and capital withdrawal accounts, such as distributions and dividends. A special account, called the income summary, is often used to enter all the revenue and expense accounts to calculate the company's net income for the period. The closing entries prepare the company books to begin recording the subsequent year's transactions.

Double-Entry Accounting Double-entry accounting is the foundation of modern-day business record keeping. It sets the rules that corporate bookkeepers must follow when posting economic events. All accounting standards, including those in effect in the nonprofit arena, recommend that bookkeepers use the double-entry accounting method. In this method, each transaction affects two separate accounts, one on the debit side of the general ledger and another on the credit side. A general

ledger is a two-faceted accounting form that features credits and debits. The ledger often has subsidiary ledgers, or sub-ledgers, to allow bookkeepers to record transaction details. Accounting Cycle

Debits and Credits After you have identified the two or more accounts involved in a business transaction, you must debit at least one account and credit at least one account. To debit an account means to enter an amount on the left side of the account. To credit an account means to enter an amount on the right side of an account. TIPS: Debit means left Credit means right

Generally these types of accounts are increased with a debit:

Dividends (Draws) Expenses Assets Losses

You might think of D E A L when recalling the accounts that are increased with a debit.

Generally these types of accounts are increased with a credit: Gains Income Revenues Liabilities Stockholders' (Owner's) Equity

You might think of G I R L S when recalling the accounts that are increased with a credit.

To decrease an account you do the opposite of what was done to increase the account. For example, an asset account is increased with a debit. Therefore it is decreased with a credit.

T-ACCOUNTS

T-accounts
Accountants and bookkeepers often use T-accounts as a visual aid for seeing the effect of the debit and credit on the two (or more) accounts. (Learn more about accountants and bookkeepers in our Accounting Careers area.) We will begin with two Taccounts: Cash and Notes Payable.

Cash (asset account)

Debit Increases an asset Received $ Credit Decreases an asset Paid $

Notes Payable (liability account)

Debit Decreases a liability Repaid loan Credit Increases a liability Borrowed more

Let's demonstrate the use of these T-accounts with two transactions: 1. On June 1, 2012 a company borrows $5,000 from its bank. This causes the company's asset Cash to increase by $5,000 and its liability Notes Payable to also increase by $5,000. To increase the asset Cash the account needs to be debited. To increase the company's liability Notes Payable this account needs to be credited. After entering the debits and credits the T-accounts look like this:

Cash (asset account)

Debit Increases an asset Received $ Credit Decreases an asset Paid $

June 1, 2012 ENTRY

5,000

Notes Payable (liability account)

Debit Decreases a liability Repaid loan Credit Increases a liability Borrowed more

5,000

ENTRY June 1, 2012

2. On June 2, 2012 the company repaid $2,000 of the bank loan. This causes the company's asset Cash to decrease by $2,000 and its liability Notes Payable to also decrease by $2,000. To reduce the asset Cash the account will need to be credited for $2,000. To decrease the liability Notes Payable that account will need to be debited. The T-accounts now look like this:

Cash (asset account)

Debit Increases an asset Received $ Credit Decreases an asset Paid $

June 1, 2012 ENTRY June 2, 2012 BALANCE

5,000 2,000 3,000 ENTRY June 2, 2012

Notes Payable (liability account)

Debit Decreases a liability Repaid loan Credit Increases a liability Borrowed more

5,000 June 2, 2012 ENTRY 2,000 3,000

ENTRY June 1, 2012 BALANCE June 2, 2012