Accounting 4 Business – Basic Concepts
Manual ledgers were used for accounting in good old days
Ever since the man came on planet earth, he had been doing something for living either in the form of business or employment.
In ancient times, barter system was commonly used for exchanging goods and services e.g. a farmer who grew wheat could exchange it for clothes, an arms-maker could exchange arms for food etc. This means goods and services were used as a medium of exchange.
This activity of buying and selling goods (and services) in exchange of other goods (and services) is called trade or business.
Those who didn’t have anything to give in exchange for goods worked for others on agreed terms and made their living. This is called employment.
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“Accounting is also called the language of business.”
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As soon as trade became more organised, the medium of exchange was standardised in the form of money to make the exchange more efficient and comfortable.
An activity of buying or selling something is called a transaction. A buying activity is known as ‘purchase transaction’ and a selling one as ‘sale transaction’.
These transactions when presented in the form of money e.g. dollars or rupees, can be called the financial information of a business.
Every businessman wants to evaluate the financial performance of his business (over a certain period of time e.g. 12 month-period) or its financial position (at a certain point of time e.g. at year-end) with the help of that financial information.
The evaluation of financial information, discussed above, is made on the basis of financial information presented in a particular way, which in accounting terms is known as financial statements or accounts of business.
To produce financial statements, the transactions must be kept or recorded using particular rules, known as accounting principles.
The activity of keeping records of financial affairs of a business using accounting principles is known as bookkeeping, and this whole process of systematic recording, reporting and analysis of financial transactions of a business is known as accounting.
The process of preparing financial statements that disclose an entity’s financial performance and position is also known as financial reporting.
Accounting can be divided into several fields such as financial accounting, management accounting, auditing, taxation, accounting information systems, etc.
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