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Karnataka Class 12 Commerce Accountancy Meaning and Diagrammatic Explanation

Karnataka Class 12 Commerce Accountancy Meaning and Diagrammatic Explanation

Karnataka Class 12 Commerce Accountancy Meaning and Diagrammatic Explanation

Karnataka Class 12 Commerce Accountancy Meaning and Diagrammatic Explanation : Accounting or accountancy is the measurement, processing and communication of financial information about economic entities such as businesses and corporations. The modern field was established by the Italian mathematician Luca Pacioli in 1494. Accounting, which has been called the “language of business”, measures the results of an organization’s economic activities and conveys this information to a variety of users, including investors, creditors, management, and regulators.Practitioners of accounting are known as accountants. The terms “accounting” and “financial reporting” are often used as synonyms.

Accounting can be divided into several fields including financial accounting, management accounting, external auditing, tax accounting and cost accounting. Accounting information systems are designed to support accounting functions and related activities.

Financial accounting focuses on the reporting of an organization’s financial information, including the preparation of financial statements, to external users of the information, such as investors, regulators and suppliers; and management accounting focuses on the measurement, analysis and reporting of information for internal use by management. The recording of financial transactions, so that summaries of the financials may be presented in financial reports, is known as bookkeeping, of which double-entry bookkeeping is the most common system.

Accounting is facilitated by accounting organizations such as standard-setters, accounting firms and professional bodies. Financial statements are usually audited by accounting firms, and are prepared in accordance with generally accepted accounting principles(GAAP). GAAP is set by various standard-setting organizations such as the Financial Accounting Standards Board (FASB) in the United States and the Financial Reporting Council in the United Kingdom. As of 2012, “all major economies” have plans to convergetowards or adopt the International Financial Reporting Standards (IFRS).

Karnataka Class 12 Commerce Accountancy Meaning and Diagrammatic Explanation

Accounting has several subfields or subject areas, including financial accounting, management accounting, auditing, taxation and accounting information systems.

Financial accounting

Financial accounting focuses on the reporting of an organization’s financial information to external users of the information, such as investors, potential investors and creditors. It calculates and records business transactions and prepares financial statements for the external users in accordance with generally accepted accounting principles (GAAP). GAAP, in turn, arises from the wide agreement between accounting theory and practice, and change over time to meet the needs of decision-makers.

Financial accounting produces past-oriented reports—for example the financial statements prepared in 2006 reports on performance in 2005—on an annual or quarterly basis, generally about the organization as a whole.

This branch of accounting is also studied as part of the board exams for qualifying as an actuary. It is interesting to note that these two professionals, accountants and actuaries, have created a culture of being archrivals.

Management accounting

Management accounting focuses on the measurement, analysis and reporting of information that can help managers in making decisions to fulfil the goals of an organization. In management accounting, internal measures and reports are based on cost-benefit analysis, and are not required to follow the generally accepted accounting principle (GAAP). In 2014 CIMA created the Global Management Accounting Principles (GMAPs). The result of research from across 20 countries in five continents, the principles aim to guide best practice in the discipline.

Management accounting produces future-oriented reports—for example the budget for 2006 is prepared in 2005—and the time span of reports varies widely. Such reports may include both financial and non financial information, and may, for example, focus on specific products and departments.

Auditing

Auditing is the verification of assertions made by others regarding a payoff, and in the context of accounting it is the “unbiased examination and evaluation of the financial statements of an organization”.

An audit of financial statements aims to express or disclaim an opinion on the financial statements. The auditor expresses an opinion on the fairness with which the financial statements presents the financial position, results of operations, and cash flows of an entity, in accordance with the generally acceptable accounting principle (GAAP) and “in all material respects”. An auditor is also required to identify circumstances in which the generally acceptable accounting principles (GAAP) has not been consistently observed.

Accounting information systems

An accounting information system is a part of an organisation’s information system that focuses on processing accounting data.

Tax accounting

Tax accounting in the United States concentrates on the preparation, analysis and presentation of tax payments and tax returns. The U.S. tax system requires the use of specialised accounting principles for tax purposes which can differ from the generally accepted accounting principles (GAAP) for financial reporting. U.S. tax law covers four basic forms of business ownership: sole proprietorship, partnership, corporation, and limited liability company. Corporate and personal income are taxed at different rates, both varying according to income levels and including varying marginal rates (taxed on each additional dollar of income) and average rates (set as a percentage of overall income).

Karnataka Class 12 Commerce Accountancy Meaning and Diagrammatic Explanation

The accounting cycle is a complex process that consists of a set of steps occurred in the accounting period. It is called a cycle because the accounting work flow is circular: after execution one accounting period consisting of a sequence of steps of accounting cycle, starts the next accounting period.

The steps of accounting cycle include the processes of identifying, collecting, analyzing documents, recording transactions, classifying, summarizing, posting, and preparing trial balance, making journal entries, closing the books and final reporting financial information of an organization.

The accounting cycle is the name given to the collective process of recording and processing the accounting events of a company. The series of steps begin when a transaction occurs and end with its inclusion in the financial statements. Additional accounting records used during the accounting cycle include the general ledger and trial balance.

The accounting cycle is a methodical set of rules to ensure the accuracy and conformity of financial statements. Computerized accounting systems have helped to reduce mathematical errors in the accounting process, but the uniform process of the accounting cycle also helps reduce mistakes. The accounting cycle is highly automated in accounting software. Most transactions are entered using specific modules — accounts payable modules for invoices received — and the software performs balancing checks.

Karnataka Class 12 Commerce Accountancy Meaning and Diagrammatic Explanation

Accounting cycle is a step-by-step process of recording, classification and summarization of economic transactions of a business. It generates useful financial information in the form of financial statements including income statement, balance sheet, cash flow statement and statement of changes in equity.

The time period principle requires that a business should prepare its financial statements on periodic basis. Therefore accounting cycle is followed once during each accounting period. Accounting Cycle starts from the recording of individual transactions and ends on the preparation of financial statements and closing entries.

Karnataka Class 12 Commerce Accountancy Meaning and Diagrammatic Explanation

Steps of Accounting Cycle

There is a cycle of action in accounting for any business. This cycle is depicted diagrammatically below: 

Karnataka Class 12 Commerce Accountancy Meaning and Diagrammatic explanation

1. SOURCE DOCUMENTS – Source documents are documents, such as cash slips, invoices, etc. that form the source of (and serve as proof for) a transaction. In other words, they are the first documents that exist relating to a transaction.

for example: invoices, cash slips, receipts, check counterfoils, bank deposit slips and even internet payment confirmations.

2. JOURNALS – These are chronological (date-order) records of transactions entered into by a business. Journals are that first basic entry of debit and credit for each transaction. In the examples we have been doing in the previous chapters, where we have debited one account and credited another, we have been doing journals. There are actually a few types of journals, and they don’t all look exactly like the above debit and credit.

3. LEDGER (T-ACCOUNTS) – The ledger is a collective term for the accounts of a business (a ledger of accounts is like a school of fish). The accounts are in the shape of a ‘T’ and thus are often referred to as ‘T-accounts’. In this step we take all the debits and credits (journals) relating to one account – let’s say ‘bank’ – and draw up an account for bank that shows all the transactions relating to it. 

4. TRIAL BALANCE – A sheet displaying all the accounts of a business, drawn up as a trial (test) of whether the total of all the debit balances equal the total of all the credit balances (A balance is the amount of an item at a point in time. For example, The balance in the bank account on the 1st of January was $5,000.). The trial balance is prepared as a final check just before the financial statements are drawn up. 

5. FINANCIAL STATEMENTS – A statement is a reportFinancial statements are the most important reports of a business. These statements are prepared from the information in the trial balance. The purpose of these statements is to show the reader the financial positionfinancial performance and cash flows of a business, as well as other useful information concerning the business. Financial statements are usually prepared once a year.

Karnataka Class 12 Commerce Accountancy Meaning and Diagrammatic Explanation

An organization begins its accounting cycle with the recording of transactions using journal entries. The entries are based on the receipt of an invoice, recognition of a sale or completion of other economic events. After the company posts journal entries to individual general ledger accounts, an unadjusted trial balance is prepared. The trial balance ensures the total debits equals the total credits in the financial records. At the end of the period, adjusting entries are made. These are the result of corrections that need to be made as well as results from the passage of time. For example, an adjusting entry may accrue interest revenue that has been earned based on the passage of time.

Upon the posting of adjusting entries, a company prepares an adjusted trail balance followed by the financial statements. An entity closes temporary accounts — revenues and expenses — at the end of the period using closing entries. These closing entries transfer net income into retained earnings. Finally, a company prepares the post-closing trial balance to ensure debits and credits match.

Karnataka Class 12 Commerce Accountancy Meaning and Diagrammatic Explanation

Timing of Accounting Cycle

The accounting cycle is started and completed within an accounting period. The period is a predetermined range of time including each month, each quarter and each fiscal year. The transactions are added during the accounting cycle, while the remainder of the accounting cycle is typically completed towards the end of the accounting period. Public entities are required to submit financial statements by certain dates. Therefore, their accounting cycle revolves around reporting requirement dates.

Accounting Cycle Vs. Budget Cycle

The accounting cycle is different than the budget cycle. The accounting cycle focuses on historical events and ensures financial transactions that have already been incurred are reported correctly. Alternatively, the budget cycle relates to future operational performance and planning for transactions that are yet to have occurred. The accounting cycle assists in producing information for external users, while the budget cycle is mainly used for internal management purposes.

Karnataka Class 12 Commerce Accountancy Meaning and Diagrammatic Explanation

The Accounting Process is a sequence of organization activities that is used for gaining quantitative information about the finances. This complex process consists of a set of sequential steps.

9 steps in the accounting process:

  • Analysis of Business Transactions
  • Make Journal Entries
  • Post to Ledger Accounts
  • Prepare Trial Balance
  • Make Adjusting Entries
  • Adjusted Trial Balance
  • Prepare Financial Statements
  • Close Accounts
  • Post-Closing Trial Balance

Karnataka Class 12 Commerce Accountancy Meaning and Diagrammatic Explanation

Flow Chart

Karnataka Class 12 Commerce Accountancy Meaning and Diagrammatic explanation

Karnataka Class 12 Commerce Accountancy Meaning and Diagrammatic Explanation

Objectives of accounting.

Karnataka Class 12 Commerce Accountancy Meaning and Diagrammatic explanation

1. Systematic Recording of Business Transactions:

A systematic and complete record helps the management to receive any retrieve information easily and in time. However, in every business there are numerous business transactions and it is not possible for the management to keep in their mind all business transactions. Accounting records all business transactions in books of accounts in such a manner that intended users can use the information for different decision making purposes.

2. Ascertainment of Results:

The main purpose of any business is to earn profit. For the ascertainment of profit earned or loss sustained by the business enterprise, all incomes and expenses are to be worked out and presented in a separate statement which is called Manufacturing, Trading and Profit & Loss Account.

When total expenses are less than the total income of the business concerned, it results in ‘profit’ and when total expenses exceed total income, it leads to ‘loss’. This information can be used for taking effective measures for cost control.

3. Ascertainment of Financial Position:

The aim of showing financial position can be achieved by preparing Balance Sheet of the business enterprise. Balance Sheet is a statement of assets and liabilities. The resources owned by an enterprise (Assets) and claims against such resources (Liabilities) are shown in the Balance Sheet.

4. Communicating Information to Various Users:

In addition to the management, there are a number of other users who may be interested in knowing the information about the financial soundness and the profitability of the enterprise. For example, shareholders are interested to know the amount of dividend declared by the enterprise or earning per share, lenders are interested in the safety of their loan and interest paying capacity of the business etc. Accounting information is also required by different types of users (internal or external), who may need the same for decision making.

In this connection, accounting helps to provide relevant information to all the interested users. Annual Reports, Cash Flow Statements, Graphs and Charts are the various means which can be used to communicate the relevant information to intended users.

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Karnataka Class 12 Commerce Accountancy Meaning and Diagrammatic Explanation

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  • Class 12 Accountancy Text book
  • Need for Maintaining of Accounts books by Non Profit Organisation
 

  • Accounting book 1
 

  • Accounting book 2
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