Introduction to Management Accounting
Financial Accounting is the
recording and reporting of all activities and transactions that affect the money
resources of a business. Accounting is based on basic universal concepts
commonly known as accounting principles to maintain consistency in recording
business transactions.
Basics of Financial
Accounting
Dual Aspect:
The dual aspect concept sets up the basis of accounting equation that derive
financial statements. Accounting rests on the accounting equation Assets =
Capital + Liabilities. Business transactions impact debits and credits of an
account in equal amount.
Business Entity:
The business entity states that a business enterprise is an entity distinct from
its owners. Accounts drawn for the business are separate from owner’s personal
financial dealings. The owner and business are treated as a single entity,
legally. For accounting purposes, they are two separate entities.
Going Concern:
According to this concept, a business is expected to continue for an indefinite
period of time. This assumption enables the business to spread the cost of an
asset over the period of its economic life. It is not essential to calculate the
current costs of assets each time financial statements are prepared. Assets are
disclosed at cost less depreciation and not the current market price.
Accounting Period:
For accounting purposes, the lifetime of the business is divided into arbitrary
periods of fixed length, usually one year. At the end of each period, two main
financial statements are prepared. First, the profit and loss account showing
the profit and loss made during that period. Second, the balance sheet showing
the position of a business as on a particular day.
Cost Concept:
The cost concept states that assets acquired by the organization are recorded at
their cost of acquisition. This value is the basis for subsequent transactions
such as charging depreciation. A balance sheet shows assets valued at their
original cost less accumulated depreciation.
Money Measurement:
The money measurement concept proposes to record transactions that can be
attributed in terms of monetary value. Therefore, transactions such as strike in
the enterprise or good management practices cannot be recorded in the financial
statements.
Matching Concept:
The matching concept ensures that all revenues and costs are recorded in the
appropriate statement at the appropriate time. The income and expenses should be
matched and dealt within the financial statements for the period to which they
relate, irrespective of the period in which the cash was actually received or
paid.
Recording Accounting
Information
Accounting is the process of
recording the incomes and assets of a business to determine profits and analyze
progress. It should be made sure that the recorded information is accurate in
order to do a correct analysis. The basic presumption accounting is based on is
that every business transaction affects two accounts.
Business Transaction Path
The business transaction
path has the following in order to be followed:
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